A rather unique situation. A Trust account is held in a federally regulated financial institution. Mortgage loans are made from the trust under specified terms of the trust. Trust is the creditor and all documents name the Trust as the lienholder. The creditor or Trust pays all homeowners and flood insurance annually when due by issuing a check from the trust - borrower is not required to pay but does select insurance companies.

Would the mandatory escrow rules require the Trust to make 12 payments/entries into an escrow account to pay the annual premium instead of just making one entry of annual premium. Did not find anything that would except this from escrow although the financial institution is not actually making the loans.

You are saying that the creditor pays all insurance and the borrower is not ever charged for the insurance??

That is correct. Borrowers are responsible for repaying the loan amount (these are 0% interest loans), property taxes and fire fees. Creditor pays hazard and flood insurance, appraisal, flood cert, etc.

What kind of a special loan program is this?

Over 60 years ago, a philanthropist established a trust and by the terms of his will, the income from the trust was to be used to provide funds for home purchase loans for families and to also pay closing costs and the insurances. He established the criteria for the home loans. His generosity has helped many families purchase homes who would not have been able to do so through a conventional mortgage loan.

My original question still remains - Since the loans are made by the Trust and not by a federally regulated financial institution and the borrower does not pay the flood insurance, is an escrow account required to be established?

No. Besides, the trust pays for it and not the borrower.