No, we do not believe that being required to escrow for flood insurance premiums under the flood insurance rules obligates a lender to escrow for other charges, such as taxes or insurance.
In an interagency webinar on the flood insurance rules, the federal banking agencies clarified that a lender is not obligated to escrow for taxes and other insurance because it escrows for flood insurance pursuant to the agencies’ flood rule. However, as you have indicated, other regulations, such as Regulation Z’s higher-priced mortgage loan rules, may require your bank to escrow for taxes and insurance.
Also, as a reminder, your bank always may choose to require an escrow even when it is not mandated.
For resources related to our guidance, please see:
- Consumer Compliance Outlook, Interagency Flood Insurance Regulation Update Webinar: Questions and Answers (2016) (“Question: If a lender does not escrow for taxes or homeowner’s insurance, is it still required to escrow for flood insurance under the new rule? If yes, is the lender obligated to escrow for taxes and other insurance because it escrows for flood insurance pursuant to the rule? Answer: If a lender or its servicer is required to escrow for flood insurance under the new rule, it must do so even if it does not escrow for taxes or other insurance. A lender or servicer is not, however, obligated to escrow for taxes and other insurance because it escrows for flood insurance pursuant to the agencies’ flood rule, although other regulations may apply that require the escrow. Furthermore, a lender may always choose to require an escrow even when it is not mandated.”)
- 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. . . .”)