Trickle of flood insurance changes coming

Flood insurance regulation is back in the compliance news.

The banking regulators published a proposal, “Loans In Areas Having Special Flood Hazards,” in the Federal Register on Oct. 30 to amend the agencies’ flood regulations to implement just two of the provisions of the Homeowner Flood Insurance Affordability Act of 2014 (HFIAA).

More regulation changes are promised later to address other aspects of Biggert-Waters and HFIAA (unless, of course Congress changes the law before the agencies get around to finalizing the regulations). (An October 2013 proposal never was finalized before Congress passed the HFIAA in March 2014, which changed some of the changes in the October 2013 proposal.)

Generally, the current flood insurance regulation proposal covers:

• Escrow. The requirement to escrow for flood insurance premiums for loans beginning  Jan. 1, 2016 unless an institution has less than $1 billion in assets and did not have a policy of requiring escrows of taxes and insurances as of July 6, 2012.

• Exemptions. Adds other exemptions to the requirement to escrow for flood insurance premiums, namely business- and agriculture-purpose loans, subordinate lien loans, home equity lines, nonperforming loans that are 90 days or more past due, and short-term loans that have terms of 12 months or less.

• Notice requirement. Adds a notice requirement informing borrowers that the lender/servicer is required to escrow for flood insurance premiums that is a part of the Flood Notice to Borrowers (unless that lender or loan is exempt).

• Transition requirement. Adds a requirement that institutions that have a change in status from being an exempt institution to a nonexempt institution (e.g., exceed the $1 billion threshold) offer existing borrowers the option to escrow the flood insurance premiums for their loans

Additional facets

The proposal also includes an exemption from the requirement to purchase flood insurance that is already effective.

The exemption is for structures that are a part of any residential property that is detached from the primary residential structure and does not serve as a residence.

For example, consider a detached garage or shed on a residential property. The exemption for these types of low-value buildings on residential properties was created by HFIAA and became effective upon passage of the act in March 2014.

There is a related disclosure requirement that goes along with the exemption, that has yet to be implemented by the CFPB through RESPA regulations. This would inform consumers that even though flood insurance is not required for these types of buildings, they may still want to obtain flood insurance to protect their property and lenders may still choose to require flood insurance to protect their loans.

It’s important to distinguish residential and nonresidential properties for this exemption. Detached structures on nonresidential properties securing loans primarily for business, commercial, or agricultural purposes are not included in the exemption.

The comment period for the proposal ends Dec. 29. Regulations won’t be finalized until early 2015, at the earliest. Maybe just in time for the spring rainy season?