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I am working on an in-house real estate purchase loan, and the borrower does not want an escrow account. We just pulled a flood report, and the property does require flood insurance. In Illinois, must we escrow the flood insurance (using the FFIEC rate spread calculator, the rate is low enough so that it appears we do not have to escrow taxes and insurance)? Also, if we do have to escrow just for the flood insurance, do we need to send out another Loan Estimate?

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In general, a lender must escrow flood insurance premiums for residential mortgage loans that are made, increased, extended or renewed on or after January 1, 2016.

Since your bank is under $1 billion in assets, you might qualify for the small lender exemption from the flood insurance escrow requirement. To qualify for that exemption, you also must confirm that on or before July 6, 2012 (the enactment date of the Biggert-Waters Flood Insurance Reform Act), your bank “was not required under Federal or State law to deposit taxes, insurance premiums, fees, or any other charges in an escrow account” and “did not have a policy of consistently and uniformly requiring” escrow accounts for mortgage loans. Illinois law did not require any escrow accounts related to residential mortgage loans as of that date, but obviously we cannot speak to your bank’s policies as of that time.

There are other exceptions to the escrow requirement as well, such as exceptions for business-purpose loans, subordinate lien loans, and home equity lines of credit. We do not have sufficient information to determine whether any of these exceptions might apply in this case, so we recommend reviewing the FDIC flood insurance rules linked below for the exceptions.

We do not believe that a revised Loan Estimate is required in this situation. However, we still would recommend providing a revised Loan Estimate, since it could protect your bank from a violation of the good faith requirement for estimated loan charges. If the addition of flood insurance premiums causes the disclosed charges from the original Loan Estimate to increase beyond the good faith tolerances, then the revised Loan Estimate would protect your bank from a disclosure violation.

For resources related to our guidance, please see:

  • FDIC Flood Insurance Rules, 12 CFR 339.5(a) (“Except as provided in paragraphs (a)(2) or (c) of this section, an FDIC-supervised institution, or a servicer acting on its behalf, shall require the escrow of all premiums and fees for any flood insurance required under § 339.3(a) for any designated loan secured by residential improved real estate or a mobile home that is made, increased, extended, or renewed on or after January 1, 2016 . . . .”)

  • FDIC Flood Insurance Rules, 12 CFR 339.5(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.”)

  • FDIC Flood Insurance Rules, 12 CFR 339.5(a)(2) (The requirement to escrow flood insurance premiums “does not apply if: (i) The loan is an extension of credit primarily for business, commercial, or agricultural purposessubordinate position to a senior lien secured by the same residential improved real estate or mobile home for which the borrower has obtained flood insurance coverage that meets the requirements of § 339.3(a); (iii) Flood insurance coverage for the residential improved real estate or mobile home is provided by a policy that: (A) Meets the requirements of § 339.3(a); (B) Is provided by a condominium association, cooperative, homeowners association, or other applicable groupa home equity line of creditnonperforming loan, which is a loan that is 90 or more days past due and remains nonperforming until it is 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; or (vi) The loan has a term of not longer than 12 months.”)

  • Regulation Z, 12 CFR 1026.19(e)(iv)(A) (“For the purpose of determining good faith under paragraph (e)(3)(i) and (ii) of this section, a creditor may use a revised estimate of a charge instead of the estimate of the charge originally disclosed under paragraph (e)(1)(i) of this section if the revision is due to . . . . (3) New information specific to the consumer or transaction that the creditor did not rely on when providing the original disclosures required under paragraph (e)(1)(i) of this section.”)

  • CFPB Small Entity Compliance Guide (October 2016), printed page 47 (“Remember, providing a revised Loan Estimate allows creditors to compare the updated figures for charges that have increased due to an event that allows for redisclosure to the amount actually charged for those services. If amounts decrease or increase only to an extent that does not exceed the applicable tolerance, the Loan Estimate is still deemed to be in good faith. Redisclosure is permissible in these circumstances, but will not reset the tolerances, and creditors must continue to measure the tolerances against the original Loan Estimate. (§ 1026.19(e)(4)(i)).”)