IBA Compliance Connection

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We have a first mortgage loan that we originated in 2013, so it was exempt from the escrow requirements for flood insurance that became effective in 2016. We now are planning to extend a home equity line of credit (HELOC) to the borrower secured by a second mortgage on the property. I know HELOCs are exempt from the escrow requirement for flood insurance, but since we are advancing new money to the same borrower, are we required to have the customer escrow funds for flood insurance for the first mortgage?

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No, we do not believe that extending a home equity line of credit secured by residential improved real estate will trigger the flood insurance escrow requirements for this borrower.

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. However, home equity lines of credit (HELOCs) are exempt from these requirements (in addition to other exemptions, such as the exemption for small lenders). Because this loan is a HELOC, and because you are not increasing, extending or renewing the original loan, we do not believe that the flood insurance escrow requirements have been triggered.

For resources related to our guidance, please see:

  • OCC Flood Insurance Rules, 12 CFR 22.5(a)(1) (“Except as provided in paragraphs (a)(2) or (c) of this section, a national bank or a Federal savings association, or a servicer acting on its behalf, shall require the escrow of all premiums and fees for any flood insurance required under § 22.3(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, payable with the same frequency as payments on the designated loan are required to be made for the duration of the loan.”)
  • OCC Flood Insurance Rules, 12 CFR 22.5(a)(2) (“Exceptions. Paragraph (a)(1) of this section does not apply if: . . . (iv) The loan is a home equity line of credit; . . .”)