Yes, we have confirmed with the CFPB that escrowing flood insurance premiums will disqualify your institution from small creditor status. This is due to an apparent oversight in the interaction between the interagency flood insurance escrow rule and the higher-priced mortgage escrow rule.
Under the CFPB’s higher-priced mortgage escrow rule, small creditors must meet four conditions for an exemption from the escrow requirement for higher-priced mortgage loans. One of those conditions is that the creditor does not maintain escrow accounts “ . . . for mortgage-related insurance required by the creditor, such as insurance against loss of or damage to property . . . .” Because flood insurance insures against loss of or damage to property, a small creditor that escrows for flood insurance premiums would not meet that condition and consequently would be disqualified from the escrow exemption. We confirmed this interpretation with a CFPB attorney, who told us that the CFPB has consistently been providing this answer as informal guidance to other institutions with the same question.
For resources related to our guidance, please see:
-
OCC Flood Insurance Rules, 12 CFR 22.5(c)(1) (Escrow accounts for flood insurance are not required for a national bank “(i) That has total assets of less than $1 billion as of December 31 of either of the two prior calendar years; and (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; and (B) 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 any loans secured by residential improved real estate or a mobile home.”)
-
Regulation Z, 12 CFR 1026.35(b)(2)(iii)(D) (An escrow account for a higher-priced mortgage loans is not required if, among other conditions, “(D) Neither the creditor nor its affiliate maintains an escrow account of the type described in paragraph (b)(1) of this section for any extension of consumer credit secured by real property or a dwelling that the creditor or its affiliate currently services . . . .”)
-
Official Interpretations, Regulation Z, 12 CFR 1026, Paragraph 35(b)(2)(iii), Comment 1(iv) (“Once a creditor or its affiliate begins escrowing for loans currently serviced [other than certain exempt transactions, such as first-lien higher-priced mortgage loans for which applications were received on or after April 1, 2010, and before May 1, 2016], however, the creditor and its affiliate become ineligible for the exemption in § 1026.35(b)(2)(iii) on higher-priced mortgage loans they make while such escrowing continues
-
Regulation Z, 12 CFR 1026.35(b)(1) (“Except as provided in paragraph (b)(2) of this section, a creditor may not extend a higher-priced mortgage loan secured by a first lien on a consumer's principal dwelling unless an escrow account is established before consummation for payment of property taxes and premiums for mortgage-related insurance required by the creditor, such as insurance against loss of or damage to property, or against liability arising out of the ownership or use of the property, or insurance protecting the creditor against the consumer's default or other credit loss. . . .”)