To escrow, or not to escrow: new flood insurance rules.

Author:Leonida, Elly
Position:COLUMNS: SERVICING

ACCORDING TO THE FEDERAL EMERGENCY MANAGEMENT AGENCY (FEMA), "Floods are the most common and costly natural disaster in the United States."

In 2011, homeowners throughout the country painfully learned that lesson as they endured overwhelming flooding that resulted in billions of dollars' worth of damage to their properties. That year, Hurricane Irene alone is estimated to have caused between $7 billion and $10 billion in losses, mostly from flooding.

These significant losses translate to a significant volume of flood insurance claims. For example, in 2005 Hurricane Katrina resulted in claim payments of $16.2 billion from the National Flood Insurance Program (NFIP), making it the most expensive flood since the NFIP began in 1968.

These dramatic statistics serve as a harsh reminder to lenders about the importance of understanding and properly complying with federal flood insurance laws and regulations.

On July 21, 2015, the Federal Deposit Insurance Corporation (FDIC), the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency (OCC), the Farm Credit Administration (FCA) and the National Credit Union Administration (NCUA) jointly published a final rule to implement new flood insurance requirements enacted in the Biggert-Waters Flood Insurance Reform Act (BWA) of 2012 and the Homeowner Flood Insurance Affordability Act (HFIAA) of 2014.

And like most legislation, it is not completely clear what the effect on lenders and servicers will be--but it will certainly require them to reconsider how they manage flood issues moving forward.

To ensure they are compliant with the new rules, banks are required to:

* identify for borrowers the initial payment and all monthly payments to the escrow account;

* provide borrowers with an escrow account statement;

* review the escrow account annually to determine if any changes must be made (if the insurance costs or taxes increase or decrease);

* provide the borrower with an annual escrow account statement; and

* correct any errors that are made in escrow calculations, adjust for these errors and notify the borrower of changes that have been made.

The new regulations added an additional layer of requirements for servicers, and some new deadlines are coming up this year regarding escrow accounts. These requirements include:

* Servicers are required to offer and make available the option to escrow to borrowers (this excludes exempted servicers--those with assets of less than $1 billion--and loans already escrowing for flood insurance;

* Escrow notices must be delivered to borrowers by June 30, 2016;

* If exempted status changes, notice must be delivered by Sept. 30 on the first calendar year of the status...

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