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