Compliance Blog

Written by Victoria Daka, Regulatory Compliance Counsel

During its June 18th meeting, the NCUA Board approved the final joint rule on flood insurance, which amends regulations pertaining to loans secured by property located in special flood hazard areas. These regulations implement the Homeowner Flood Insurance Affordability Act of 2014 (HFIAA).

More specifically, the final rule establishes requirements for financial institutions with respect to the escrow of flood insurance payments, consistent with changes in the HFIAA.  Additionally, the final rule includes a new exemption no longer requiring separate flood insurance for certain detached structures. Here are some highlights from the final rule.

First, the rule does contain a small lender exemption for many institutions with assets under $1 billion as of December 31 in either of the past two calendar years. However, to qualify for this exemption, the credit union must meet an additional two-part test. As of July 6, 2012, the credit union:

"(A) Was not required under Federal or State law to deposit taxes, insurance premiums, fees, or any other charges in an escrow account for the entire term of any loan secured by residential improved real estate or a mobile home; and

(B) Did not have a policy of consistently and uniformly requiring the deposit of taxes, insurance premiums, fees, or any other charges in an escrow account for any loans secured by residential improved real estate or a mobile home." 

The final rule also exempts from the requirements of this rule any structure that is a part of residential property even if it is detached from the primary residential structure of that property and does not serve as a residence. However, although not required, lenders may require flood insurance on these detached structures for the benefit of the borrower.

Escrow Requirement

760.5(a)(1) – Applicability. The final rule requires that regulated lending institutions escrow premiums and fees for flood insurance for loans secured by residential improved real estate or mobile homes that are made, increased, extended or renewed on or after Jan. 1, 2016, unless the regulated lending institution or a loan qualifies for a statutory exception.

760.5(a)(2) – Exceptions. The final rule provides the following exceptions to the requirements:

• The loan is primarily for business, commercial or agricultural purposes;
• The loan is in a subordinate position to a senior lien secured by the same residential improved real estate or mobile home for which the borrower has obtained flood insurance coverage.
• The flood insurance coverage is provided by a policy that meets the requirements of 760.3(a) and is provided by a condominium association, cooperative, homeowners association, or other applicable group as a common expense;
• The loan is a home equity line of credit;
• The loan is a nonperforming loan that is 90 or more days past due; or
• The loan is a term of less than 12 months.

760.5(b) – Notice. The final rule requires the credit union or servicer to mail or deliver written notice to the borrower using language substantially similar to the model clauses. This writing is intended to put borrowers on notice that the credit union or servicer is required to escrow all the premiums and fees for the required flood insurance.

760.5(c)(2) – Change In Status. This section of the final rule points out that if a credit union previously qualified under the small lender exception (under 760.5(c) of the final rule, credit unions with assets of less than $1 billion as of December 31^st of either of the two previous calendar years) but now has assets that exceed this threshold for two consecutive years, the credit union would have to comply with this rule’s requirements on or after July 1^st of the following year.

760.5(d) – Option to Escrow. This section informs credit unions that are not exempt from this rule to offer, make available and provide notice to borrowers about the option to escrow all premiums and fees for any flood insurance required for any loan secured by residential improved real estate or a mobile home that is outstanding on January 1, 2016.

§ 760.6 Required Use of Standard Flood Hazard Determination Form

The final rule requires credit unions to use the standard flood hazard determination form when determining whether the property used as collateral is located in a flood hazard area.

Note that the HFIAA does not affect the other provisions of the Biggert-Waters Act relating to private flood insurance and force-placed flood insurance.  Those issues are expected to be addressed in a different rule at a later date. 

The Final Joint Flood Insurance Rule can be viewed in its entirety here. NAFCU’s Regulatory Affairs team will also prepare a Final Regulation Alert for our members in the coming weeks which can be found here. 

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