Taking a Closer Look at the Interagency Statement on Flood Insurance – Part 2: Private Flood Insurance and Escrow of Flood Insurance Payments

Written by Bernadette Clair, Regulatory Compliance Counsel

Last week we blogged about the Interagency Statement on the Impact of the Biggert-Waters Act (Statement) and several provisions of the Biggert-Waters Act (Act) that became effective upon enactment on July 6, 2012 – dealing with civil money penalties and force placement of insurance.

The Statement also addresses provisions that are not yet effective and will require rulemaking by the federal regulatory agencies. These provisions include:

Private Flood Insurance. Currently a lender may, but is not required to, accept private flood insurance that meets the requirements of the Flood Disaster Protection Act (FDPA). The Act amended the mandatory purchase requirement to require lenders to accept private flood insurance policies as satisfaction of the mandatory purchase requirement if the coverage provided by the private flood insurance satisfies the standards specified in the Act.

The Act also requires lenders to disclose to borrowers that:

• Flood insurance under the National Flood Insurance Program (NFIP) is available from private insurance companies or from the NFIP directly;
• Flood insurance that provides the same level of coverage as an NFIP policy may be available from private insurance companies; and
• Borrowers are encouraged to compare policies.

 These provisions of the Act are not effective until implementing regulations are issued.

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Escrow of Flood Insurance Payments: The Act also contains a provision requiring lenders and servicers to escrow flood insurance payments for new and existing residential real estate and mobile home secured loans outstanding or entered into after July 6, 2014.

There is a limited exemption for certain institutions. Except as may be required under state law, an institution with assets less than $1 billion is exempt from the escrow requirement if the institution, as of July 6, 2012, was not required by federal or state law to escrow taxes or insurance for the term of the loan, and the institution did not have a policy of requiring the escrow of taxes and insurance.

This section of the Act also requires implementing regulations and as noted in the Statement, the agencies intend to publish escrow regulations in sufficient time for the industry to implement them prior to July 2014.