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Have you heard about recent proposed rule changes that would affect loans secured by property located in special flood hazard areas? These proposed changes would affect detached structures on residential property as well as the escrow of flood insurance premiums and fees.

The Proposed Rule was published in the Federal Register on October 30, 2014 and is currently open for comments until December 29, 2014. It was jointly published by the Comptroller of the Currency, the Federal Reserve System, the Federal Deposit Insurance Corporation, the Farm Credit Administration and the National Credit Union Administration.  The Agencies propose to revise their respective flood insurance regulations to incorporate provisions of the Homeowner Flood Insurance Affordability Act of 2014 (HFIAA) exempting certain detached structures on residential property from the mandatory flood insurance purchase requirement and to implement the statute's provisions requiring the escrow of flood insurance premiums and fees.1

The proposed rule would stipulate that flood insurance is not required for any structure that is part of any residential property but is detached from the primary residential structure of the property and does not serve as a residence.2   Examples of such detached structures could be a garage or shed.

However, some detached structures might be of relatively high value, such as a detached greenhouse. Lenders may still require flood insurance on high value detached structures. For the borrower, obtaining flood insurance on such a structure even when the statute does not mandate it may be smart to consider.

The Agencies are currently open for comment on whether the section concerning detached structures should be clarified. When does a structure serve as a “residence?”  Some structures may not meet certain State or local definitions of “residence.”  What if a detached structure that was not initially a residence becomes a residence?

The Agencies have specifically requested comment on whether or how the Agencies should define “residential property.” For example, the term “residential” may refer not only to the type of property securing the loan, but also to the purpose of the loan. Thus, the Agencies could clarify that the exemption is only available if the detached structure does not secure a loan that is an extension of credit for a primarily business, commercial or agricultural purpose.3

In addition to the detached structure exception, the Agencies' proposal would require regulated lending institutions, or servicers acting on their behalf, to escrow premiums and fees for flood insurance for any loans secured by residential improved real estate or a mobile home that is made, increased, extended, or renewed on or after January 1, 2016. 4

Visit the Federal Register at https://www.federalregister.gov/articles/2014/10/30/2014-25722/loans-in-areas-having-special-flood-hazards to read the full Proposed Rule and instructions for submitting comments. There is much more information in the full Proposed Rule which you may find interesting and helpful. As always, feel free to call our office with any questions.

1Federal Register / Vol. 79, No. 210 / Thursday, October 30, 2014 / Proposed Rules, 64518

2Federal Register / Vol. 79, No. 210 / Thursday, October 30, 2014 / Proposed Rules, 64521

3Federal Register / Vol. 79, No. 210 / Thursday, October 30, 2014 / Proposed Rules, 64523

4Federal Register / Vol. 79, No. 210 / Thursday, October 30, 2014 / Proposed Rules, 64521

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The information provided is for informative purposes only and is not intended to be legal advice or a legal opinion.  For legal advice, please consult an attorney.

 Carl Weinberger

Manager, Geographic Services

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