Q: If we have a residential mortgage on which we’re escrowing taxes and the flood determination finds that the property is located in a flood zone, do we have to start escrowing for flood insurance premiums immediately?
A: This scenario is not directly addressed in the law, regulation, or other applicable guidance. According to FEMA’s Mandatory Purchase of Flood Insurance Guidelines, escrow requirements are subject to the escrow account provisions of Section 10 of the Real Estate Settlement Procedures Act (RESPA) of 1974, which imposes accounting and notice obligations on a lender for consumer loans. Since RESPA allows a lender to perform an escrow analysis at any time, there does not appear to be any reason to delay the escrow of flood insurance premiums. In this scenario, a bank should begin escrowing for flood insurance premiums as soon as flood insurance is obtained. The bank must also comply with accounting and notice requirements under RESPA when initiating the escrow of flood insurance premiums.
– This Q&A was included in the materials from the FDIC New York Region Regulatory Teleconference: “Flood Insurance – Flood Insurance Compliance and an Examiner’s Perspective” which took place on December 3, 2012. These materials may be found here: https://www.fdic.gov/news/conferences/NY/2012-12-03.html