[ldoyle]

If a bank has chosen not to claim the small lender exemption for escrowing on HPMLs and does allow borrowers with non-HPMLs to escrow if they desire, can the bank then claim the small lender exemption for escrowing for flood insurance on non-HPML loans?

[rcooper]

The flood regulation states the following about qualifying for the small lender exception to escrowing for flood insurance:
Small lender exception–(1) Qualification. Except as may be required under applicable State law, paragraphs (a), (b) and (d) of this section do not apply to an FDIC-supervised institution:
(i) That has total assets of less than $1 billion as of December 31 of either of the two prior calendar years; and
(ii) On or before July 6, 2012:
(A) 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
(B) 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.
***
If your bank only offered escrows when requested by the borrower that is not “consistently and uniformly” and does not disqualify you from utilizing the flood escrow small lender exemption. Likewise, if on or before July 6, 2012 you escrowed for HPMLs as required by law, that does not disqualify you from utilizing the flood escrow small lender exemption since escrow was not required for “the life of the loan” and could be cancelled after 1 or 5 years, respectively.

The FDIC has a video on its director resource page titled “Flood Insurance – FAQ” https://www.fdic.gov/regulations/resources/director/technical/flood.html#four. They discuss the small lender exemption around the 28 minute mark.

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