The U.S. House of Representatives and Senate recently passed, and the President is expected to sign into law, amendments to the Biggert-Waters Flood Insurance Reform Act of 2012 (the Act). The legislation seeks to address various negative consequences resulting from the Act, including dramatic increases in flood insurance premiums and broad requirements for the escrowing of funds to pay flood insurance premiums in connection with residential mortgage loans.

The Act directed the federal banking regulators, the National Credit Union Administration, and Farm Credit Administration to adopt rules to require the escrowing of amounts to pay flood insurance premiums for most residential mortgage loans. The requirements originally were scheduled to go into effect on July 6, 2014, and would have applied to most residential mortgage loans outstanding on that date. Institutions with assets of less than $1 billion were excepted from the requirements if, as of July 6, 2012, they were not required by law to escrow for taxes, insurance, or other charges and did not have a policy of escrowing for such items. The exception will remain under the Act, as amended by the reform legislation.

The legislation delays the escrow requirement until January 1, 2016, and the requirement will apply only to residential mortgage loans that are originated, refinanced, increased, extended, or renewed on or after that date. For outstanding loans that would be subject to the escrow requirement if they were originated, refinanced, increased, extended or renewed on or after January 1, 2016, the borrower will have to be offered the option of escrowing for flood insurance premiums.

The reform legislation also expressly excludes a number of loans from the escrow requirements. Among the excluded loans are:

• Home equity lines of credit
• Subordinate lien loans when flood insurance is provided for in connection with the superior lien loan
• Nonperforming loans
• Loans with a term of no longer than 12 months
• Loans secured by property that is part of a condominium, cooperative, or other project development, if the property is covered by flood insurance paid for by the condominium association, cooperative, homeowners association, or other applicable group