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Regulators Release Modified Proposed Flood Insurance Guidelines

Published on October 24, 2014 by Greg Zagorski
Regulators Release Modified Proposed Flood Insurance Guidelines

Earlier today, five federal agencies released a proposed rule that would amend several regulations pertaining to flood insurance requirements for borrowers living in homes in special flood hazard areas.  Specifically, the proposal would require federally regulated lenders to escrow premiums and fess for borrowers’ flood insurance for all residential loans that are originated or refinanced as of 2016.  In addition, borrowers in special flood hazard areas would not have to purchase flood insurance coverage for structures that are on a residential property but are not attached to the home.

The proposal would implement provisions of the Flood Insurance Affordability Act of 2013 (FIAA), which became law this past March.  This measure made several adjustments to the Biggert-Waters Flood Insurance Act of 2012, which sought to reform the National Flood Insurance Program (NFIP) so as to strengthen its finances.

The agencies that released this proposal include the Federal Reserve Board of Governors, the Federal Deposit Insurance Corporation (FDIC), the Farm Credit Administration (FCA), the Office of the Comptroller of the Currency (OCC), and the National Credit Union Administration (NCUA).

The Biggert-Waters act directed the five agencies to promulgate regulations requiring lenders to escrow borrowers’ flood insurance premiums and fees.  The agencies released their initial proposed rule implementing this mandate in October 2013.  Before the agencies could finalize the rule, Congress passed FIAA, which stated that the escrow requirement should only apply to new loans originated beginning on January 1, 2016.

The new proposed rule incorporates these changes.  It also includes an exemption for small lenders, which are defined as those entities with less than $1 billion in total assets that are not otherwise obligated under state or federal law to escrow for flood insurance costs.  While lenders will not be required to escrow for flood insurance cost for those loans originated before 2016, they will be required to offer the option to borrowers.  Also exempted from this requirement are transactions involving business, agricultural and commercial loans, reverse mortgages, property that is part of a condominium cooperative, and loans that are subordinate to primary loans on the same property for which flood insurance is already being provided.

In addition, the proposed rule also implements a provision in FIAA that would exempt borrowers in special flood hazard areas from having to purchase flood insurance for separate structures on a residential property, provided the structure is detached from the home and is not residential in nature.  Lenders would be allowed to require borrowers to purchase flood insurance coverage for such structures if they so choose.

The proposed rule is expected to be published in the Federal Register shortly, after which parties will have 60 days to submit comments.  NCSHA is still reviewing the rule to determine whether it will submit comments on behalf of all HFAs.  Please contact Greg Zagorski by Wednesday, December 10 with any input you think NCSHA should consider when examining the rule.

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