President Obama has signed into law a bill (H.R. 3370) amending the Biggert-Waters Flood Insurance Reform Act of 2012. The new law, the Homeowner Flood Insurance Affordability Act of 2014, will ease compliance burdens and will slow the flood insurance rate increases required by the Biggert-Waters Act.

Escrow Requirements

The Biggert-Waters Act required the federal banking regulators to adopt rules requiring the escrowing of amounts to pay flood insurance premiums for most residential mortgage loans. The escrow requirements were scheduled to go into effect on July 6, 2014, but the new law will delay the effective date to January 1, 2016 — meaning that the escrow requirements will apply only to residential mortgage loans that are originated, refinanced, increased, extended or renewed on or after that date. Note that the new law retains the Biggert-Waters Act’s exception for institutions with assets under $1 billion (provided that the institution is not required to escrow and does not have a policy of routinely escrowing for insurance and taxes).

The new law also adds several new exceptions to the escrow requirements. Some of the new exceptions will apply to business purpose loans, home equity lines of credit (HELOCs), junior lien loans (provided that the property is covered by flood insurance procured in connection with a superior lien loan), nonperforming loans, loans with terms no longer than twelve months, and loans secured by property that is covered by flood insurance paid for by a condominium association, cooperative, homeowners association, or other group.

Flood Insurance Premiums

The new law will also slow the dramatic flood insurance rate increases that were required by the Biggert-Waters Act. It sets a 15% cap on annual rate increases averaged over a single class of properties, lowered from 20% under the Biggert-Waters Act. It also adds a new cap of 18% on annual rate increases that impact an individual property. The law also removes the requirement that new property or new flood insurance policy purchasers must pay the full-risk rate for the flood insurance and reinstates the grandfathering of lower rates for existing flood insurance policies covering properties that are subsequently remapped into higher risk zones.

Several sections of the law will enhance Federal Emergency Management Agency (FEMA) transparency and outreach efforts. These sections require FEMA to meet certain affordability goals, to reimburse policyholders who overpaid or successfully appealed a flood map determination, to establish a “Flood Insurance Advocate,” to clearly communicate with policyholders, to report to Congress about the impact of rate increases on small businesses, and more. Read the final version of the law.