Regulatory Alert Summary

Prepared by NASCUS Regulatory Affairs Department
November, 2015

15-RA-05 Statutory Changes to Flood Insurance Rule
October 2015

NCUA issued Regulatory Alert 15-RA-05 to reemphasize changes to ยง 760 of NCUA’s rules addressing force-placement of flood insurance, exemptions for detached structures, and escrow requirements for flood insurance payments. The Regulatory Alert features Frequently Asked Questions (FAQs) to help credit unions understand the new requirements.

Escrow Requirements
The escrow requirements apply primarily to credit unions with at least $1 billion in assets. Credit unions with less than $1 billion in assets are exempt from the escrow requirements unless:

  • The credit union is required by applicable federal or state law to escrow taxes or insurance for the term of the loan; or
  • The credit union has a policy of consistently and uniformly requiring escrow of taxes and insurance.

The final rule requires covered institutions to escrow flood insurance premiums and fees for designated loans secured by residential improved real estate or mobile homes that are made, increased, extended, or renewed (“triggering events”) on or after January 1, 2016. The rule excepts certain loans from the escrow requirements:

  • Loans that are in a subordinate position to a senior lien secured by the same property for which flood insurance is being provided;
  • Property that is covered by a flood insurance policy provided by a condo, co-op, HOA or other applicable group, provided certain conditions are met;
  • Loans that are extensions of credit primarily for a business, commercial or agricultural purpose, even if secured by residential real estate;
  • Home equity lines of credit;
    • Nonperforming loans (loans that are 90+ days past due that remain nonperforming until permanently modified or until the entire amount past due, including principal, accrued interest, and penalty interest incurred as the result of past due status, is collected or otherwise discharged in full); and
  • Loans with terms not longer than 12 months.

If a change in circumstances causes a previously excepted loan to become a covered loan, the lender must begin escrowing flood insurance premiums and fees for the now covered loan as soon as reasonably practicable. In addition, while a designated loan made before January 1, 2016 is not subject to mandatory escrow, the lender must offer to escrow flood insurance premiums and fees for designated loans that are outstanding as of January 1, 2016.  

The final rule also addresses changes in circumstances that would bring a previously excepted small lender under the coverage of the rule. Per the rules, a credit union that no longer qualifies for the small lender exception must begin to escrow flood insurance premiums and fees for designated loans that have a triggering event on or after July 1 of the first calendar year in which the exception no longer applies, and offer the option to escrow flood insurance premiums and fees for borrowers of any designated loans that are outstanding as of July 1 of the first calendar year in which the exception no longer applies. 

In its guidance, NCUA recommends the following 3 steps for credit unions:

    • Identify the business and process changes needed to comply with the rule, test and implement technology changes, and train staff and management.
    • Determine if the escrow requirements apply, and if so develop policies and procedures to escrow flood insurance payments in time to roll out to borrowers.
    • Identify 3rd party service providers who services to the credit union might be affected by the rule change and work with those vendors to ensure compliance

Force-Placed Insurance
The new final rule made some changes to the statutory force-placement provisions that apply to all federally insured credit unions.  These changes:

  • Clarify that a credit union or its servicer has the authority to charge a borrower for the cost of force-placed flood insurance commencing on the date on which the borrower’s overage lapsed or became insufficient.
  • Provide that, under certain circumstances, a credit union or its servicer must terminate force-placed insurance coverage and refund payments to a borrower for any period of overlap in coverage.
  • Describe the documentary evidence a credit union must accept to confirm that a borrower has obtained an appropriate amount of flood insurance coverage.