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.