We have the small lender exemption until the end of this year. Next year we have to start escrowing for flood. We have an older loan that has taxes and hazard insurance escrowed. Due to a map change they are now in a flood zone and the customer would like to pay this premium on his own rather than adding it to the escrow. Can we allow that? Also, if we can allow him to pay on his own this year will we have to roll him into escrow in July next year when our exemption ends?

If there is an existing escrow account, you have no option but to escrow.

Thank you. That was the way I was thinking but it is nice to have a second opinion.

I am now being questioned where it is referenced. Where can I find this under Flood or RESPA?

Let me clarify why you are no longer eligible for the small lender exemption as of the end of the year. Did you grow above $1 billion in 2017? This is from our Flood Insurance training manual:


C. Bank Status Change (Asset Size):
Any bank no longer qualifying for the small bank exemption (asset size) must comply with the requirements to escrow for flood insurance (including optional escrows). In other words, your asset size has exceeded $1 billion for both the prior two calendar year ends.


1. Required Escrows – 6 Month Implementation:
The requirement to escrow will apply to any …loan made, increased, extended, or renewed on or after July 1 of the first calendar year of changed status (i.e. six month implementation)… [§339.5(c)(2)] Refer to the “Mandatory Escrows” section for further details.


2. Optional Escrows Offer – 9 Month Implementation:
The bank must mail or deliver the Escrow Option Notice …to the borrower no later than… September 30 of the first calendar year (i.e. nine month implementation)… that the bank no longer qualifies for the small bank exemption. [§339.5(d)(2)] Unless otherwise exempt (see exceptions), notice must be provided to any loan outstanding as of the date of notification. [§339.5(d)(1)] Refer to the “Mandatory Optional Escrow Offer ” section for further details.

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If you exceed $1 billion as of 12/31/17 (and stay above it on 12/31/18), then you have 6 months to implement escrows on flood insurance. IOW, this won't kick in until 7/1/19. You'll also have to notify existing borrowers of the option to escrow, but not until 9/30/19.

@Randy - Was your answer based on the #52 of the 2009 Flood Q & A. I was doing some extensive research on a similar scenario and it was difficult to tell if the Biggs-Waters Act "stuff" would override the older Q & A, or if it just supplemented it with the new information. In other words, does qualifying for the small servicer exemption stand, or because escrow already exists for taxes and insurance, then you also have to escrow for Flood?

This one: because escrow already exists for taxes and insurance, then you also have to escrow for Flood.

So, the #52 still stands in your understanding.

You can't have an escrow account on a loan and not include required flood insurance in the escrow under any condition.

Based on what proof is pretty much what I am getting at? What is the Regulatory Citation for your statement above?

When the loan moved into the flood zone it became a designated loan. If it didn't, why would you be required to get flood insurance?

12 CFR 208.25(e) Escrow requirement—(1) In general—(i) Applicability. Except as provided in paragraphs (e)(1)(ii) or (e)(3) of this section, a member bank, or a servicer acting on its behalf, shall require the escrow of all premiums and fees for any flood insurance required under paragraph (c) of this section 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.

"Except as provided in paragraphs (e)(1)(ii) or (e)(3) of this section"

(3) Small lender exception—(i) Qualification. Except as may be required under applicable State law, paragraphs (e)(1), (2), and (4) of this section do not apply to a member bank:

(A) That has total assets of less than $1 billion as of December 31 of either of the two prior calendar years; and

(B) On or before July 6, 2012:

(1) Was not required under Federal or State law to deposit taxes, insurance premiums, fees, or any other charges in an escrow account for the entire term of any loan secured by residential improved real estate or a mobile home; and

(2) Did not have a policy of consistently and uniformly requiring the deposit of taxes, insurance premiums, fees, or any other charges in an escrow account for any loans secured by residential improved real estate or a mobile home.

So, in the scenario I am asking about, let's say the remapping occurred with an institution that qualifies for the (e)(3) exemption. Sorry, that wasn't clear before hand. The loan happened to already have escrow for taxes and hazard insurance, although the institution as awhole does not "have a policy of consistently and uniformly . . . " This is what I meant by does the BWA "stuff" override the Q & A #52. Let's say borrower made late payments in the past, so the Bank required escrow for this particular loan, but in general qualifies for the Small Lender exemption. What would be the Regulatory Citation to require escrow of flood insurance in such a situation?