The agencies announced their final flood insurance regulation amendments this morning. As expected, mandatory flood premium and fee escrow (with exceptions) will be required starting 1/1/16, for non-exempt loans that are made, increased, renewed or extended on or after that date. Non-exempt banks will also have to offer borrowers who have loans on the books on 1/1/16 the option of escrowing their premiums and fees.

The HFIAA exemption is included for a structure that is a part of a residential property if that structure is detached from the primary residence and does not also serve as a residence. The agencies didn't define "residential property," but did define (for this provision) "a structure that is a part of a residential property" and "detached." The definition of "a structure that is part of a residential property" may surprise you: It's "a structure used primarily for personal, family, or household purposes, and not used primarily for agricultural, commercial, industrial, or other business purposes."

That limits somewhat the types of buildings that can be exempted.

I noticed that when I read the rule. So if the detached structure is used to repair small engines for a fee, or perhaps is a small business office, it is not eligible for exemption.

Based on this definition, would this mean that a barn could not be excluded? Or am I overthinking this?

Just wondering what everyone's thoughts are on this.

That's my read. I don't recall that there was any such definition in the HFIAA. My concern is the number of lenders who may have exempted buildings up to now that aren't eligible under the regulations, and will now need to deliver unwelcome news to borrowers.

Looks like the exemption is limited to things like pool houses, detached garages (housing personal vehicles), a barn that houses animals not used for work or a business, and the like.

I agree. It will depend upon the use of the barn. Housing your horse that you ride or your pet goats, ok. Housing animals used in the operation of a farm, not so much.

It depends. What's the barn used for? Personal, family or household purposes? If so, it can be exempted. But if it's used to house animals for hire or otherwise used in a business, not so much. If it's a barn on a working farm, you'd be hard-pressed to fit the definition.

Very interesting. Thanks for the clarification.

Can you direct me as to where I can read these final amendments?
Thanks!

Thank you Kathleen B.

Ok, so if we require escrow on all loans that are HPML, then we would require escrow for all loans secured by property in a special flood hazard area, correct? We currently offer escrow as an option, unless we have a HPML, so we would have to require it the way I am understanding.

"My concern is the number of lenders who may have exempted buildings up to now that aren't eligible under the regulations, and will now need to deliver unwelcome news to borrowers."

For some reason...I had it in my mind that these rules were already final??? What did I miss.

They never defined residential structure - until now. I believe some lenders were exempting buildings that now are not exempt.

I think that is why most of us have recommended that if you weren't dealing with a straight up mortgage loan and you were just dealing with a shed, you might want to take a wait and see attitude.

The law under which the rules were issued was effective, and the exemption from mandatory coverage for a structure that is part of a residential property if that structure is detached from the primary residence and does not itself service as a residence was effective, too. The regulations were not needed to make the law effective. But the regulations now are in place (or will be as of 10.1.15) and add the definition that somewhat limits the structures that qualify for the exemption.

Thatks everyone!

Thankfully we have about a dozen loans with property located in a standard flood hazard area. All we have run into is the home with a detached garage.

For some reason, the escrow exemption and "on or before July 6, 2012, the institution: (i) 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"

continues to cause me headaches. Wasn't every bank in America that made mortgage loans "required under federal or state law" to have escrow accounts prior to July 6, 2012 (i don't remember when the small creditor escrow exemption came in exactly, but i'm pretty sure it was after July 6, 2012)? We've since claimed the escrow exemption...so i'm thinking/hoping we don't have to escrow flood insurance either.

But weren't you required to escrow HPML loans? That is what is catching me.

Not if you didn't make HPML loans. That was the loophole.

So because we have HPML loans we will not be exempt from the escrow requirements of flood insurance correct?

I just don't get it though: not making an HPML didn't mean you were "not required under Federal or state law" to start an escrow account....it just means the bank didn't originate any of those loans because they didn't want to escrow. They were still "required" to had they made such a loan.

That is my thoughts as well raitchjay.

And banks that escrowed only because they had to under HPML; then later claimed the small creditor escrow exemption....will now have to escrow for flood insurance, thus ruining their small creditor HPML escrow exemption? IOW, we will be back to a full-time escrowing bank for all our HPMLs again?

That is how I see it.

Wow.....nice reward for all the banks that wouldn't make an HPML until the escrow exemption came around.....and nice penalty for banks that escrowed only because we had to, then later discontinued escrow accounts when the small creditor exemption allowed it.

We do have about 2 dozen HPML loans, so we have always escrowed them, but because we did, we now have to escrow our flood loans. What are you talking about--there are never rewards for the banks.

There appears to be a reward for banks that wouldn't make HPMLs (because they didn't want to escrow) until the small creditor escrow exemption came around; then resumed making HPMLs once they didn't have to escrow. I'm still struggling to understand this. I've been under the impression for quite some time that we wouldn't have to escrow flood insurance because we have the small creditor escrow exemption.

I had assumed that it was just delayed for two years, which is fast approaching.

I still don't understand that part i quoted....what bank in the U.S. wasn't required to have an escrow account in 2012 if they originated an HPML? The fact that they didn't originate HPMLs doesn't take away the requirement????? That would be the same to me as an exemption for "states that had a 55 mph speed limit" exempting people who refused to own a car during that time period. The fact they didn't own a car didn't mean they weren't subject to the 55 mph speed limit.

raitchjay - this is complicated enough without going to such extremes. The idea is if you never escrowed and potentially don't even have that capability - you don't have to do it. Many banks did not choose to make HPMLs back then for that specific reason.

Randy, i thought when we discussed this a year or so back, that the consensus was if you were claiming the small creditor escrow exemption that we'd be exempt from escrowing for flood insurance as well. That idea seems to be flipped on its head now and i just want to make sure that everyone agrees.....

I'm not trying to go to extremes, i think my example sort of fits....i have a hard time fitting those banks that didn't make HPMLs into "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 the loan".

If they didn't make the loans, they were not required to escrow.

I don't have time to search back through old threads but banks who had made hpmls were stuck on the small creditor exemption, I do believe.

Those banks weren't required to escrow because they were exempt. They were exempt because they didn't make HPML loans. A small servicer enjoys that status because it hasn't grown to be a "growed up" servicer. Two different types of exemptions. But they are exemptions that the exempt party can manage. I don't see the problem.

John, we claimed the small servicer HPML escrow exemption once it became available. If we start escrowing for flood loans, don't we then also lose our HPML escrow exemption, and be back (against our will) to being a full-blown escrowing bank?

Yes, Russ, I believe that is correct, at least as section 1026.35(b)(2)(iii)(D) and section 1026.34(b)(1) are currently worded. It would, of course, be on a going-forward basis, effective with respect to HPMLs closed after the first escrow account is established for flood insurance.

There is one technical "out": a loan with mandatory flood insurance could be made and its servicing transferred before the due date of its second periodic payment and it would not disqualify the creditor for the HPML escrow exemption. See Comment 35(b)(2)(iii)-4.

Wasn't there a discussion last year about the meaning behind "for the entire term of the loan" (in relationship to the wording referenced earlier from the rule...i.e., the argument was that escrow accounts on HPMLs could be ended after 5 years, etc. and therefore might not meet that definition)? Sorry, i just need to exhaust all my resources before i break the news to management that "guess what, we're an escrowing bank again".

If a bank escrows insurance and taxes under the current HPML requirements, that escrow must be in place for a minimum of five years. Beginning 1/1/16, that bank will need to also escrow for any flood insurance premium or fees for that property. After the HPML escrow reaches its fifth anniversary and the borrower requests it be canceled, the lender will be able to cancel the HPML escrow (assuming there are no impediments to cancelation), but the flood escrow will remain in place for the rest of the loan's life unless a new flood map places the insured structures outside the designated flood hazard area and the lender agrees to allow the coverage to be canceled.

John, i should have been more clear. The rule states that creditors with less than $1 billion in assets are exempt from the escrow requirement for flood insurance if, on or before July 6 2012, the institution: in the case of a loan secured by
residential improved real estate or a mobile home, 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 the loan.

Is there any wiggle room (to claim the escrow exemption in this flood rule) in those last 6 words for a bank such as mine that currently claims the HPML small creditor escrow exemption but DID originate and escrow for HPMLs while that was the requirement is my question i guess.

I would only wiggle through that crack with a signed written legal opinion from my own attorney.

I didn't register what you meant awhile ago Kathleen, but now i do. We WERE able to claim the small creditor HPML escrow exemption even though we DID, for a time, escrow for HPMLs. The rule (like you, i don't really have the time to go back and find all the details right now) did give you a loophole by basically saying that escrow accounts opened only to comply with HPML requirements didn't count against you when determining whether the bank "escrowed" or not as a matter of business.

So that's why i guess it's odd to me that these rules are different....the HPML small creditor exemption anticipated that there were banks who were only escrowing because the HPML rules said we had to and gave us the opportunity to get out of escrowing if we chose the exemption; while this rule seems to think that the only people who need the exemption are those who didn't make HPMLs until they could claim the small creditor escrow exemption. It seems as though they would have and could have gone the simpler route of saying "if you currently are exempt from escrowing HPMLs, you don't have to escrow for flood either".....

Randy..thanks for the advice.

After reading through this...I'm glad this bank never escrowed...ever! I'm fairly certain that definitely means we don't have to now.

It would be nice for many of you if the wording should have been on or before after July 6 2012 and it's just a mistake! I could see it happen!

The regulators hands were tied on a lot of this as the wording is straight from the Act. Once again, Congress got way to specific.

Not unless you grow to over a billion bucks in assets, RRJoker. That will take a while unless you acquire another bank.

Well, right...but this one is a LONG way from that so long as it's not scooped up at some point ::shudder::

I'm just bumfuzzled by it: a lot of references seem to be to the HPML escrow rule; so you'd think they'd treat the small creditor escrow exemption the same way the HPML rule did and not discriminate against small creditors who tried their hand at escrowing. But they seem to only want to give relief to banks who never escrowed; thereby ruining the very exemption Reg. Z gave for those banks...it's a double-edged sword.

They really really really want flood insurance to be escrowed so that people are covered in event of a flood. That is the whole essence of this. To keep from giving out disaster funds.

I guess so Kathleen. We have 8 flood loans on the books; my understanding is come January (or is it March?) we have to give those customers (if secured by a dwelling, and nearly every one of those is) the option to escrow. If even one of them says yes, then any HPML we make after that has to be escrowed, and down the tube goes our exemption.

Well, you know that this portion of the proposed regulations have not changed since they were first issued in the October 2013 proposal and then again in the 2014 proposal.

So, my question to all of you that are so flabbergasted over the outcome - did you write your comment letters and bring all of these points to the attention of the drafters of the regulation??

If you read the preamble to both the revised proposal issued in October 2014 and the final regulation, the regulators do not indicate that they received any such comments on this section of the proposed regulations.

Do we just give current flood loans the option to escrow or do we have to set up escrow for them?

I tried to comment once on a proposed regulation and gave up after an hour of no luck navigating the site.

Russ,

(1) Are you currently exempt as a small creditor from HPML escrow? (2) Do you currently have any escrow accounts in your portfolio? (3) Were you subject to an escrow requirement under Reg Z before 7/7/2012 from which you could not claim an exemption? (4) Did you have a policy before 7/7/2012 of requiring escrow?

If you answer "No" to (1) or "Yes" to (2), (3) or (4), or at year-end 2014 or 2015 your total assets are $1 billion or more, you'll have to escrow flood insurance premiums and fees. If you have to escrow flood insurance premiums and fees as of 1/1/16, you will have to notify any borrowers on the books as of 1/1/16 of their option to escrow with you. That notice will be due by 6/30/16.

Well, that is sort of like complaining about who gets elected when you don't vote.......

Even I comment all the time and if I can figure it out, it can't take a rocket scientist. I suggest trying it again in the future.

By "notice will be due by 6/30/16" John do you mean the customer has to notify us by then if they want to escrow? Nevermind...i get it.

John, we are currently exempt as a small creditor, but yes, we have escrow accounts we still maintain (HPMLs established prior to our claiming the small creditor exemption). Yes, we had no exemption before 7/7/2012 as we did originate (and escrow for) HPMLs. Our policy of requiring escrow prior to 7/7/2012 was for those HPMLs....we didn't require escrows for anything but those.

Randy, i understand that. If you'll remember though, i think it was pretty universal that the escrow exemption for this flood rule was going to mirror the HPML escrow exemption.

This caught my attention. If you pay an annual premium initially, you're covered...if you lapse, we are required to cover you...so the only thing I see beneficial is to the consumer as a friendly pay-by-month option. I don't see where it helps keep from giving out disaster funds as it doesn't eliminate all those folks with no mortgage, or in a non-participating community or non-designated zone that don't have insurance and then the worst happens.

Perhaps you should submit a comment/question as to the impact on regulatory cross over.

Did something change with the language between this discussion and the actual published rule?

http://www.bankersonline.com/forum/ubbthreads.php?ubb=showflat&Number=1888190

Oh wait...it looks like the evil "or before" was added...hummm.

That presumes a well thought out law change!

I don't guess i understand why "before" would make a big change. It was after July of 2012 that the HPML escrow exemption came into being wasn't it? I'm thinking it was 2013.

The government could fix this. New rule.....if your home is in a flood zone and you don't buy flood insurance and your house floods, FEMA will help. Rebuild your home, same location, STILL don't buy flood insurance and your house floods....no more money, stupid. I snipped the below comment out of an interesting article about FEMA and flood insurance.

"And what does this teach you... DON'T BE RESPONSIBLE and purchase insurance, because the government will bail out the irresponsible people with taxpayer money. The responsible people who buy insurance can obviously afford to go it alone, so the government won't help them. They only care about the people dependent on government. Their voter base."

Just looked, yeah it was ... I'm not sure what the significance of that date is unless it was a date that was the driving factor for implementing regulations that didn't come out until later?

HFIAA imposed mandatory escrow of flood insurance premiums and fees for loans secured by residential improved real estate or mobile homes that are made, increased, extended or renewed on or after January 1, 2016

So, does this mean existing flood loans have to be escrowed if we renew? Like a balloon loan that we would modify after the initial first term?

They didn't in the proposals so I'm not sure how everyone thought that it would suddenly morph in the final rule. Like I said, they didn't make any significant changes to this section of the proposals. The HMPL rules are a $2 Billion - the flood rules can't be as the $1 Billion is hard coded in the law. Additionally, the July 2012 date came from the date the original BWA was enacted, which is also hard coded in the law.

The regulators can't change the law via regulations.

Randy, did you check out the thread that Joker linked?

$2 billion vs. $1 billion isn't an issue for my bank....we're well below either. Just sayin.

Even then I said:

Well, hopefully enough banks expressed concern with the way that was written in their comment letters and they will clarify.

There is much discussion in this previous thread Previous Thread that also contradicts some interpretations expressed in this thread.

And banks that escrowed only because they had to under HPML; then later claimed the small creditor escrow exemption....will now have to escrow for flood insurance, thus ruining their small creditor HPML escrow exemption? IOW, we will be back to a full-time escrowing bank for all our HPMLs again?
I believe this is correct - although I agree it seems like they "back doored" us. I don't like it either as a consultant that works with hundreds of small banks.

I am just now reading the final rule too & I just honed in on the "entire term of the loan" wording. HPML escrow requirements are only for 5 years. After 5 years, the escrow can be waived if current and 80% LTV, but either way, it's not the entire term of the loan. I think this does get us out of escrowing IF you're:
1) < $1 Billion, and
2) only escrow for HPML's unless there is a state law that requires it for the entire term of the loan.

Bingo.

Sorry, got insanely busy......thanks for chiming in David and Indy Banker. Perhaps hope lives.

Fixed it for you.

The escrow rules under this rule will kick in 1/1/16. I understand that's just over 6 months from now. But digging into the amendments and the prefatory text is going to take a few days for even the most "tuned in" flood insurance experts. So it's a bit soon to panic just yet.

I agree that the small lender exception clearly states as one of the criteria:

(ii) On or before July 6, 2012:

(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;

However, the part that concerns me is that it is not an automatic cancellation but is dependent upon customer request. If the customer does not request cancellation, the escrow stays. (Will you solicit requests? :-) )

It is a very fine line. I like the side of the line that the exception applies.

I don't see "the entire term of the loan" interpreted in the section by section analysis.

After pondering, I have determined that I could support the argument that, because the escrow can be terminated after five years at the customer's request (subject to eligibility), this exception works for HPML escrow...you do not HAVE to maintain it for the full term, there is a way for it to be dropped.

That's good to hear Kathleen.

Yay! For once, something actually (hopefully) makes sense.

Of course, it remains to be seen if that is what was meant. I was hoping the analysis section would address HPML but it is not mentioned.

Regulation can't trump the law. Regulation can add to the law. So, if the law says the regulatory agency can't require an escrow unless..., the reg can't contradict. So here's from the BWA:

(B) LIMITATION.—Except as may be required under applicable State law, a Federal entity for lending regulation may not direct or require a regulated lending institution to deposit premiums or fees for flood insurance under the National Flood Insurance Act of 1968 in an escrow account on behalf of a borrower under subparagraph (A) or

(B), if— ‘‘(i) the regulated lending institution has total assets of less than $1,000,000,000; and

‘‘(ii) on or before the date of enactment of the Biggert-Waters Flood Insurance Reform Act of 2012, the regulated lending institution—

‘‘(I) in the case of a loan secured by residential improved real estate or a mobile home, 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 the loan; and

‘‘(II) 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 loans secured by residential improved real estate or a mobile home.’’.


And also the 2013 interagency guidance to Biggert Waters:

Except as may be required under applicable state law, a lender is exempt from the escrow requirement if: (1) the institution has less than $1 billion in assets; and (2) as of July 6, 2012, the institution was not required by federal or state law to escrow taxes or insurance for the term of the loan, and it did not have a policy to require escrow of taxes and insurance.

I really haven't looked into the new rules but after reading this thread seems like there is still a lot of unknown.

We don't require escrow but we have some loans that want escrow. I was under the impression when the proposed rule came out that we would not qualify for any exemption if you had escrow capabilities and some borrowers had it.

Which is what the agencies said...for the entire term of the loan. I would be happier if the language was clearer but that is nothign new. The escrow CAN be waived after 5 years subject to conditions...so is that enough to not be "for the term of the loan"? That is the question. I think that the argument can be made that you don't have to require for the term of the loan because at 5 years you can let it go.

We are a small creditor and perform HPML QM balloon loans that have a term of five years. Because we set the term at five years, and because the escrow has to remain for five years, will we have to escrow for Flood on these loans?

Also, would we have to escrow for Flood for any loan that requires Flood (currently we only escrow for HPML loans)?

I think you answered your own question, if you never had a policy of requiring the escrow, voluntary escrow shouldn't in itself preclude from the exemption (assuming all the other prerequisites for exemption were met).

All I can say is, "ha, ha, ha, ha" as I run away.

We don't require escrow. All the ones we have are voluntary. I need to go back and find my reference point that I had. I don't remember if it was an article or webinar that said if you have any escrows on the books, then you would not qualify for the exemption.

If you allow but do not require it is not a trigger. What is says under the exception is:

"did not have a policy of consistently and uniformly requiring"

We're in the same boat. I was at first hopeful that we would escape this escrowing stuff, but we had HPML balloons with flood insurance escrowed prior to 7/6/12. So, we'll be escrowing from 1/1/16 on out because those balloons had flood insurance escrows "for the term of the loan."

And, yes, you'll have to escrow for any loan that needs flood insurance, unless it falls under one of the exceptions (commercial purpose, has insurance through the condo association, term of 12 months or less, etc.).

I do believe that if the term is 5 years or less on the HPML you are stuck because you are required to escrow for the entire term of the loan.

Wasn't it 2013 that the requirement for HPML escrow accounts 'life' was moved from 1 year to 5 years? Didn't that also correspond to the date that the escrow exemption was created for rural/underserved banks? So, if a bank did a 5 year HPML with escrow prior to that time (if choosing the R/U escrow exemption, they wouldn't have any escrow accounts with the 5 year requirement i'm thinking), wouldn't it have only been required for 1 year?

Just sort of thinking out loud here.

I agree with that, Russ. If the loan term is 5 years and the loan was a 1-year escrow HPML, you'd be able to use the "not required for entire term of loan" argument.

Thanks John.

Yes, in that limited situation with 1 year escrow, the bank would be able to use the exemption.

I have flip-flopped on whether or not we'll need to escrow more times than I can count in the last 24 hours. Who would have thought there would be so many scenarios to think through?

Suppose prior 7/6/12 that we required the escrow of taxes and insurance for certain loans because the customers had PMI. Secondary market investors require escrowing when PMI is present. I'm guessing somewhere in there we had a PMI loan or two with flood insurance.

339.5. "If an FDIC-supervised institution requires the escrow of taxes, insurance premiums, fees, or any other charges for a loan secured by residential improved real estate or a mobile home that is made, increased, extended, or renewed on or after October 1, 1996, the FDIC-supervised institution shall also require the escrow of all premiums and fees for any flood insurance required under § 339.3."

Looks to me like we will need to escrow going forward since as of 7/6/12 we were 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.”

[edit]
Looks like FNMA allows escrow cancellation when the PMI is cancelled. The FHLB MPF program allows the same. I could not find anything for FHLMC, but I would assume FHLMC follows FNMA and FHLB.
From FNMA servicing guide:
"if the mortgage insurance premiums for a conventional mortgage loan are paid on a monthly basis, the servicer may not waive the escrow deposit account requirement as it relates to those premiums."

So, I'm back to, at least in our shop, the new flood escrow requirements do not apply.

Was it for the entire term? Doesn't PMI drop off at a certain LTV still?

^^^^^
I say yes

I guess that's the one part of all of this i'm not understanding: banks that claimed the R/U exemption stopped escrowing for any new loans in 2013 (they had to, or else they would lose the R/U exemption). HPML escrows they had prior to 2013 only had the 1 year requirement attached. So what bank that is trying to keep their escrow exemption for flood too would have escrowed loans on their books that was required for the entire term of the loan? I'm just not thinking of any scenarios; unless maybe a certain state required it under state law or something?

I guess i'm assuming that banks that claimed the R/U exemption wanted to stop escrowing and therefore wouldn't have been requiring all sorts of escrows on non-HPML loans prior to 2013.

At the point in time where you had no choice but to escrow and there was no such thing as an exemption, you would likely want to escrow as many loans as possible for cost/benefit purposes. I believe the study showed you needed at least 500 as your breaking point between cost/benefit...this was the main driving point of creating the R/U exemption...it was costing banks to handle escrow not only money, but staffing.

So yes...I can see where they would have been requiring all sorts of escrows to make a return.

Ok Joker, that makes sense.

I think we've already spent more time analyzing this and running "what if" scenarios than the highly-compensated legal eagles that wrote the blasted regulation!

So to clarify, detached structure exemption is or is not effective currently?

It is effective currently.

Can you tell me where the new rule refers to this scenario? Thanks !

I just talked to my OCC examiners who are on-site. They checked their blogs and found that because HPML rules did't require the escrow for the entire term of the loan that we are still exempt if we meet the other two requirements.

‘‘(II) 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 loans secured by residential improved real estate or a mobile home.’’.


How do you allow a borrower to "voluntarily" pay their insurance, taxes, etc. through additions to their loan payment without requiring them to establish an escrow account?

I don't think "voluntary escrow account" means what a lot of people thinks it does. I would suggest reading 1024.17's definition of an escrow account. In order for an escrow account to be voluntary the borrower must have total control over the account. IOWs they can deposit to, withdraw from or close the account at any time without the FI's blessing.


I think one needs to address their procedures (requirements) before assuming they do not require escrow accounts. You may not require the borrower to escrow the premiums, but if they want to voluntarily pay those premiums on a monthly basis with their loan payment do you require them to deposit those premiums into an escrow account?

I thought it seemed pretty straightforward in the official preamble analysis in the final rules:

Commenters also requested clarification on whether the small lender exception is available if the lender maintains escrows only on a borrower’s request or if the policy of consistently and uniformly requiring escrow accounts comes at the behest of a third party. Regarding the former situation, the Agencies note that the FDPA and the Agencies’ regulations state that the condition is based on a lender having a policy of requiring the escrow accounts. Therefore, if the lender is only maintaining escrows based on borrowers’ requests, the Agencies do not believe this to be a policy of uniformly or consistently requiring escrow.

That's a paragraph I missed Indy. Thanks for pointing it out and I agree it does address the issue of a "voluntary" escrow when requested by the borrower.

Well we've had to weed through a bazillion pages of rules, regs, guidance, commentary, analysis, opinion, FAQ's, etc., etc., over the last couple of years so I think we should all be forgiven for missing a paragraph or two!

We do not qualify for the small creditor exemption as it relates to HPML. We do not, as a rule, require escrows for our mortgage loans but do offer the option of escrows with one exception: HPML loans which are required to escrow.

We do qualify for the HFIAA small creditor exemption as it relates to Flood insurance escrows.

So, mortgage loan in a flood zone that is not an HPML we offer the option to escrow including flood.

HPML mortgage in a flood zone we mandate the escrow of taxes and all insurances including flood.

Anyone spot a problem with this interpretation?

What matters is what was your escrow policy PRIOR TO 7/6/12. At that time, if you were only escrowing on HPML's and not requiring escrows for the entire term of the loan (the HPML requirement was only for 1 year), then you still qualify for the small bank exception - assuming your assets are less than $1B.

The "option to escrow" is a borrower request, not a lender requirement. That doesn't disqualify you from the exception.

Did anyone respond to this? This is exactly what we do. Is this considered as 'uniformly and consistently' and therefore, allow us to be exempt from the flood escrow part?

Thanks!

There's quite a bit of unknown on this. We can all have our opinions, but we need to hear more from the regulators about what "uniformly and consistently" means as well as the "for the entire term of the loan" issue. Until then, it's just everyone's opinion.

HFIAA and escrow - if a loan secured by residential property (not for business purposese) that is outstanding as of 1/1/2016 and has a policy from the borrower that the borrower does not renew for the 2016-2017 policy period, should an escrow account be established for the force placed premium? Force placing is not a triggering event so the loan would not require escrow.

I was curious if there was any further comments/guidance on this. I went back and re-listened to the October 2015 FRB Consumer Outlook Live webinar covering the new changes but it was pretty vague. Here is our situation:

As of July 6, 2012, we escrowed as required for HPML loans, loans with PMI and offered the option to escrow on all other loans. We are currently well under $1 billion in assets. Do we qualify for the small credit exemption?

As of 7/6/12:
Escrowing for HPMLs: That alone allows you to still qualify for the exemption.
Offering the option to escrow = a voluntary escrow: That alone allows you to still qualify for the exemption.
Escrowing on loans with PMI: Sounds like you won't be able to qualify for the exemption as this is policy of consistently and uniformly establishing escrows.

Does it make a difference if the escrows can be cancelled once the PMI is able to be cancelled (thus not requiring escrows for the entire term of the loan)?

No. See the regulation below. Section (c)(ii)(A) contains wording about "the entire term of the loan" but it also is referring to requirements under Federal or State law. PMI does not fit this exemption because it isn't a Federal or State law issue.



§339.5(c) Small lender exception. (1) Qualification. Except as may be required under applicable State law, paragraphs (a), (b) and (d) of this section do not apply to an FDIC-supervised institution:
(i) That has total assets of less than $1 billion as of December 31 of either of the two prior calendar years; and
(ii) On or before July 6, 2012:
(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.

Bummer....

This falls into the "take it for what it's worth" category. Having been confused and unsure as to whether or not we qualify for the small creditor exemption (to the mandatory escrow rule), I ran our scenario past our regulator. In our situation, we did not require escrow on every loan, in most cases it was voluntary; however, on a case by case basis, we did require a borrower to escrow for taxes and insurance. These situations were basically for safety and soundness reasons - for example, a borrower that was chronically delinquent on real estate taxes, chronically delinquent with us, OR, a loan approved with an exception for high LTV or bad credit. Escrowing for HPML is off the table, because the regulators have stated that making them does not disqualify a lender from the small creditor exemption. I told our regulator we didn't track the number of these loans we made, but they probably represent less than 1% of the loans we originated prior to 2012.

Our regulator came back and said based on those facts, we "should" be able to assume we qualify for the small creditor escrow exemption. We also check with our auditor who said the same thing. Our regulator did say that any loan in which we required escrow should contain documentation as to why it was required. Again, take it for what it's worth, and I don't doubt if you ask a different examiner you'd get a different answer, but at least we have ours. In writing...

So, are we back to the belief that escrowing only for HPMLs (back when it was required) doesn't disqualify the bank from the requirement to escrow for flood insurance? I know several months ago, i ran thru this with my contact at the Fed, and they were good with us not escrowing for flood insurance, but then i heard later that the Fed and OCC were good with it, but the FDIC was not, and that we should all just wait for future developments.

I thought the HPML issue was put to bed at the October Fed Outlook Live webinar.

Put to bed in our (small creditors who want the exemption) favor?

are we back to the belief that escrowing only for HPMLs (back when it was required) doesn't disqualify the bank from the requirement to escrow for flood insurance?
I'm not back. I've always been there and never left. You're right that some reported the FDIC was not "good" with this interpretation. The FDIC was wrong and has now lined up with the other agencies. The Outlook webinar on 10/22/15 made this clear. It was an inter-agency webinar. You can listen to a recording of that webinar if you don't have it.

If you only required escrows on HPML's (and are less than $1B), you qualify for the small creditor exemption.

This quote is from another thread on the topic:

The Interagency Flood Insurance Regulatory Update webinar today provided more information (some out of the blue!) on the Small Lender Exception... specifically concerning the impact of HPML as well as escrows established for the secondary market.

1. The question was asked whether or not a creditor that only escrows for HPMLs will lose the SLE. The answer is NO, because of that "term of the loan" requirement. (Since HPMLs can have escrows cancelled after a certain amount of time.) Further, just because a creditor escrows (only) for HPMLs does NOT put them in the category of "having a policy of consistently and uniformly requiring" an escrow. Bottom line: If you only escrow for HPMLs, you can keep the SLE (assuming you meet the asset size test).

2. Next, the question was asked whether or not a creditor that escrows at the behest of a 3rd party and/or for the secondary market will lose the SLE. This answer got interesting. An FDIC representative answered, and said:

- If the creditor sells the loan AND transfers the servicing, then it can keep the SLE.
- If the creditor sells the loan but KEEPS the servicing, then it loses the SLE. (!) shocked

This answer really surprised me, because this is the first interpretation I've heard to this effect. I've not heard the servicing / not servicing component as a relevant factor to the issue. Wow!!

3. Bonus info: This doesn't have to do with the SLE, but is another surprise... the panel said that forced placed policies can be used to satisfy sufficient flood coverage for new loans! I've always thought a new loan (or any MIRE, for that matter), cannot occur if the loan is under a MPPP / force placed policy. But they said it can. Wow!!!

The archive of this webinar is supposed to be posted this afternoon. I encourage you to check it out too... I plan to do so, to make sure I didn't misunderstand these particular answers. The link for the archive is supposed to be this , although it isn't working right now.

The Q&A about HPML and secondary market escrowing impacts on the Small Lender Exception are around the 45 minute mark, while the force placed coverage sufficiency issue for subsequent MIREs is around the 55 minute mark.

Thanks to you both...that webinar was right during a time that i was out of the bank quite a bit, so i totally missed that good information.

raitchjay: the webinar was recorded. You could still listen to it.

Can we escrow for Flood only and not Hazard & taxes?

Yes.