There are many steps in the life cycle of a mortgage loan. Every step has its own unique compliance requirements to consider. One such requirement is escrowing for flood insurance. Say you are making, increasing, renewing or extending a loan secured by residential real estate that is located in a Special Flood Hazard Area. While you will obviously need to require the borrower to purchase sufficient flood insurance coverage, you may also be required to escrow for the flood insurance premium. But, there are exceptions.
David explains more in the video.
Transcript:
Flood insurance has its own set of rules that basically say if you are making, increasing, renewing, or extending, you have to have one of those events, and it's secured by residential real estate, you must escrow, if they're in a special flood hazard area, for that flood insurance. Now, there are some exceptions to this. We'll get there in a minute. But that's what I-A1 is telling us. Make, increase, renew, or extend any loan secured by improved real estate in a special flood hazard area, you have to escrow in for the flood insurance. And you'll notice that box. That's something you tell them when you give them that notice that says, "Congratulations, you got to go buy flood insurance. And oh, by the way, we're going to escrow for that as well."
And so then it says, you basically follow the RESPA rules that we just went through. On page 600, it talks about how you could have to offer this as an option to your customers. That was something back in 2016 when it first came out. Let's go to 601. There are a lot of exceptions to this. Business loans, subordinate lien, short-term loans, et cetera, home equity lines, open-end credit, and non-performing loans. But you've got to watch letter B at the very bottom of 601 says if any of those expire like they were non-performing and they catch up, or it was a subordinate lien and now the first lien gets paid off and now you're in first position, then you would have to start escrowing. And so that page 600 comes into play where you have to not offer it as an option, but now mandate it.
Now, there's one big one that we haven't covered yet, and that's on page 602, and it's the small bank exemption. That probably covers a lot of you. It means you were less than a billion and, this is weird now, prior to July of 2012, you were regularly escrowing. Now, you may have started escrowing after that time, but if that's the line in the sand, if you were not regularly escrowing other than HPMLs, then you're considered to be a non-escrowing bank. I don't know where they come up with this stuff. And then in the sense that if you started escrowing after that, that doesn't make you lose this exemption. You can say, "We're still a small bank and we qualify for the exemption." The only way you lose this is if you grow above a billion in assets, then you cannot hang your hat on this and you'll have to implement this.
And so on page 603, we talk about there, that if your bank status changes because of your asset size growth, then you'll have to start telling people, "We have to escrow for these." Again, residential real estate. And you'll have to notify all existing customers that they have the option. And that's where this might come into play. Maybe you go through a merger, acquisition, or something, or just regular growth, and this becomes a real pain for you.
So be on the lookout for that portion of this change that could occur to you if you cross the billion line that this reg comes into play. So something to watch for, again, in addition to those non-performing or subordinate liens is to keep it in memory that when you go above a billion or have these things, they can catch you.
Published
2023/01/30
