The Federal Deposit Insurance Corporation (FDIC) recently approved proposed regulations related to the mandatory escrow and detached structure requirements for loans secured by property located in special flood hazard areas. The proposed rule would implement provisions of the Homeowner Flood Insurance Affordability Act of 2014 (HFIAA), which amends some of the changes to the Flood Disaster Protection Act of 1973 (FDPA) mandated by the Biggert-Waters Flood Insurance Reform Act of 2012 (Biggert-Waters). Comments on the proposed rule are due 60 days after publication in the Federal Register.

The proposal was developed jointly by the FDIC, Office of the Comptroller of the Currency, Federal Reserve Board, National Credit Union Administration, and Farm Credit Administration. It would incorporate into the agencies’ rules an exemption in HFIAA for certain detached structures from the mandatory flood insurance purchase requirement. Specifically, the proposed rule creates an exemption for any structure that is a part of any residential property, but is detached from the primary residential structure for such property and does not serve as a residence.

According to the preamble to the proposed rule, "the exemption would address an area of concern for borrowers and lenders by excluding relatively low-value structures, for example, detached sheds and garages, from mandatory flood insurance coverage if they secure a designated loan." However, the agencies acknowledge that some detached structures may be of high value and state that lenders may still require borrowers to maintain flood insurance on these structures, even when the FDPA does not require it.

The proposal will implement the HFIAA exceptions from the provisions requiring the escrow of flood insurance premiums and fees. The exclusion from the escrow requirements covers home equity lines of credit, commercial loans, subordinate lien loans when flood insurance is provided in connection with the superior lien loan, nonperforming loans, loans with a term of no longer than 12 months, and loans for condos or co-ops already covered by a policy.

In addition, the proposed rule will implement the HFIAA requirement that a lender or its servicer offer and make available to a borrower the option to escrow flood insurance premiums and fees for loans outstanding as of January 1, 2016. The proposal also requires that for outstanding loans, a lender or its servicer mail or deliver (or provide electronically if the borrower agrees) a notice informing borrowers of the option to escrow by March 31, 2016. As proposed, lenders may choose to provide the notice as a separate notice or add it to any other disclosures provided to the borrower, such as a periodic statement. For lenders that no longer qualify for the small lender exception, the agencies are proposing that the notice informing the borrowers of the option to escrow be provided by September 30 of the calendar year following the lender's change in status.

The agencies are also proposing to require a lender or its servicer to begin escrowing premiums and fees for flood insurance "as soon as reasonably practicable" after the lender or servicer receives the borrower's request to escrow. 

Finally, the proposal includes new and revised sample notice forms and clauses. Specifically, the proposal amends the current Sample Form of Notice of Special Flood Hazards and Availability of Federal Disaster Relief Assistance to add language regarding the escrow requirement. The proposal also adds an additional sample clause, Sample Clause for Option to Escrow for Outstanding Loans, to help institutions comply with the requirement to inform borrowers of outstanding loans about their option to escrow flood insurance premiums and fees.

In a separate rulemaking, the Agencies plan to address other provisions of Biggert-Waters that have not been affected by HFIAA.

Ballard Spahr's Mortgage Banking Group combines broad regulatory experience assisting clients in both the residential and commercial mortgage industries with formidable skill in litigation and depth in enforcement actions and transactions. It is part of the firm's Consumer Financial Services Group, which is nationally recognized for its guidance in structuring and documenting new consumer financial services products, its experience with the full range of federal and state consumer credit laws, and its skill in litigation defense and avoidance.

For more information, please contact Mortgage Banking Practice Leader Richard J. Andreano, Jr., at 202.661.2271 or andreanor@ballardspahr.com, or Marc D. Patterson at 202.661.7602 or pattersonm@ballardspahr.com.  


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