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Sep 14, 2009
Categories: Home-Secured Lending Board and Governance

Escrow for Flood Insurance; Dividends on Escrow Accounts?

Posted by Steve Van Beek

The new higher-priced mortgage requirements under HOEPA require the escrowing of taxes and mortgage insurance for loans secured by a first lien on a principal dwelling.  This blog post discusses this requirement.  Reminder: the deadline is April 1, 2010 (or October 1, 2010 for manufactured homes).  

So what does this have to do with flood insurance?  NCUA's regulations require credit unions that escrow for taxes and mortgage insurance to also escrow for flood insurance:

"§ 760.5 Escrow requirement.
If a credit union requires the escrow of taxes, insurance premiums, fees, or any other charges for a loan secured by residential improved real estate or a mobile home that is made, increased, extended, or renewed on or after November 1, 1996, the credit union shall also require the escrow of all premiums and fees for any flood insurance required under § 760.3. The credit union, or a servicer acting on behalf of the credit union, shall deposit the flood insurance premiums on behalf of the borrower in an escrow account. This escrow account will be subject to escrow requirements adopted pursuant to section 10 of the Real Estate Settlement Procedures Act of 1974 (12 U.S.C. 2609) (RESPA), which generally limits the amount that may be maintained in escrow accounts for certain types of loans and requires escrow account statements for those accounts, only if the loan is otherwise subject to RESPA. Following receipt of a notice from the Director of FEMA or other provider of flood insurance that premiums are due, the credit union, or a servicer acting on behalf of the credit union, shall pay the amount owed to the insurance provider from the escrow account by the date when such premiums are due."

Note that the section says "if a credit union requires the escrow."  Could you argue that it is not the credit union requiring escrow but, rather, HOEPA which requires the credit union to escrow?  I'm not so sure.  In practice, the credit union would require escrowing of taxes and mortgage insurance to comply with HOEPA and, therefore, would need to escrow for flood insurance as well.

Thanks to Katey from Chevron FCU for bringing this to our attention.  

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The new HOEPA requirements will result in some credit unions escrowing for the first time which will bring some new challenges.  One of them is state law that attempts to require escrow accounts to pay interest (or dividends).  

Do federal credit unions have to pay dividends on escrow accounts?  NCUA says that these state laws are preempted as they attempt to regulate the setting of dividends (an explicit power granted to the FCU Board under the Federal Credit Union Act).  Here is another NCUA opinion from 1991 on a Wisconsin state law.

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