New Regulations Would Change How Flood Insurance Premiums are Collected

This Friday, U.S. bank regulators proposed a new plan for collecting flood insurance premiums from property owners. Under the proposed regulations, those who have flood insurance to protect their homes would be required to have their premiums set aside in escrow accounts.

According to regulators, having residence’ premiums automatically sent to these accounts would help ensure that those living in flood-prone zones keep up with their flood insurance payments.

Because homeowners insurance does not include flood damage coverage, federally regulated lenders must ensure that borrowers in flood-prone zones have flood insurance. Some residence, however, drop the coverage, and lenders can then impose more costly force-placed insurance on these borrowers.   

This new escrow plan – under rules proposed by the Federal Reserve, the Office of the Comptroller of the Currency and other regulators – would affect new and refinanced loans made after the first of January, 2016. The previous deadline for credit unions and banks to set up flood insurance escrow accounts was July of this year, but that deadline was extended.

The U.S. government’s National Flood Insurance Program is by far the most widely-used flood insurance program, covering 5.3 million businesses and consumers in the nation. However, according to Federal Emergency Management Agency statistics, the program has been under financial strain since 2005 due to huge losses from Hurricane Katrina ($16 billion) and Superstorm Sandy ($7.8 billion). In 2012, legislation was passed in order to stabilize the program’s finances, but premium hikes instead caused backlashes from homeowners in coastal zones – this lead to the passing of premium-decreasing legislation in March of this year.