What is a "triggering event" for mandatory Flood escrow? (besides the obvious)
We know that "origination" is an event triggering mandatory Flood escrow under the new Rule. But here's some info on what might not have been so clear ....
Regarding the Flood Insurance Escrow requirements effective January 1, 2016 - the battle isn't over once the loan is originated, certain "triggering events" can occur during the life of the loan, too.
Remember that a "triggering event" means that mandatory flood escrow is required. For example, origination itself is a triggering event. But what else is?
1)Payoff of Superior Lien
As you know, lenders are not required to escrow for Flood insurance when you originate a second-lien loan where the superior lien loan (for the same property) already has Flood insurance. Note: This does not require that the Flood insurance is escrowed, just that Flood insurance exists.
What some might question is this: does this leave lenders with the duty to monitor lien status and to take action if the first lien is paid off?
I guess the answer is Yes and No.
First of all, payoff of the superior lien loan IS a "triggering event" and would require the lender to impose mandatory escrow on the subordinate lien loan. Not a terrible problem if you originate a home equity loan (remember lines are exempt) where you currently service the first mortgage. But what a pain in the neck where a different lender services the first mortgage!
But secondly, the regulators have been very clear that lenders have no duty to monitor lien position on an ongoing basis. Here are a couple of direct quotes from the jointly issued rule (Fed Reserve, FDIC, NCUA, etc.):
As discussed further below, the Agencies do not believe there is an ongoing duty to evaluate the applicability of the subordinate lien exception, or any of the other exceptions. However, similar to the force placement provisions relating to the mandatory flood insurance purchase requirement, the Agencies believe that when a lender makes a determination that the subordinate lien exception no longer applies, for example, when it receives notice that the senior lien has been paid off or when it conducts the required inquiry at a triggering event, then the lender must begin escrowing flood insurance premiums and fees.
[T]he Agencies do not believe this imposes a duty to monitor the [second lien] exception. However, if the regulated lending institution becomes aware that the status of the loan has changed, then the Agencies expect that the lender should take action.
So that's ... not terrible news I guess? You don't need to hire a private investigator to keep track of loan payoffs. But what the rule is very clear about - we can't stick our heads in the sand on this: If the same lender services the first mortgage, could they possibly argue they were not aware of the loan paying off? I don't think so. So while they're not imposing on us any duty to affirmatively monitor for changes, the servicing department will still, as a practical matter, have to keep their eyes peeled.
2)Renewal of Bridge or Construction Loan
Typically, bridge or construction loans of 12 months or less are exempt from the mandatory escrow requirements.
But what if .... the temporary loan is "renewed" or "extended"? Answer: Well the Rule says that this counts as a "triggering event" and, therefore, mandatory escrow must be put in place.
But let's not complicate things -- if you're "renewing" or "extending" the construction loan for an additional term that is also 12 months, the exemption still applies. For example- if you renew a construction loan for an additional 6 months after the initial 9 month period ends, the 6-month renewal does not need to have Flood escrow.
**Final Note**
We know that many institutions believe they are exempt as below a certain threshold. But we again urge those lenders to take a second look at this, as it is extremely unlikely that lenders - even those under $1 billion - are actually exempt from this rule.
In Other News:
According to statistics released by Fannie Mae, the average closing time has increased by 7 days after the implementation of TRID. Many estimated (conservatively) an initial 15-day increase ... but a WEEK is still a serious change!
Underwhelmed by the CFPB's construction loan factsheet? You're not alone, I share the opinion of this article highlighting the deficiencies
Looking for a kick? Check out Tina Fey's impersonation of Governor Palin endorsing The Don .. then compare to the actual endorsement. Scary that it's not THAT different!
The mortgage industry isn't the only one being touched by the CFPB - read a recent consent order against a used car dealer in Colorado financing approximately 500 loans a year.
How often does it prove true that the 'little things' are the key to success? A race-car engineer would love to dream up a new algorithm to get more horsepower while increasing mpg, but they won't win too many races without keeping the oil clean and keeping gas in the tank. Big picture thinking can be fun -- a necessary invigoration to keep a business vibrant and fulfilling -- but the small everyday things can't be forgotten. You know the dreamer draws plans for a railroad through a mountain, but then needs bulldozers to bring that dream to fruition.
For example, it's great to have post-closing dreams of efficiency and safety - of talented people making sure your institution's loan quality is A+. Perhaps a big initiative to go paperless will bring your company into the future! But it's hard for a post-closer to review documents side-by-side without a work station that accommodates this - Today's computer screen is quickly replacing desk space, just like disk space is replacing desk drawers. The benefits of a dual monitor setup are well documented, but here is one particular article that sums it up very well, I think.
Just one example of how big ideas can fall short without attention to detail.
"Intelligence without ambition is a bird without wings."
- Salvador Dali
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