What Is Notice of the Option to Escrow?
Notice of the Option to Escrow informs borrowers of their option to escrow flood insurance premiums and fees for the residential property that is located in an area with special flood hazards and which is used to secure the mortgage loan.
The purpose of the notice is to inform borrowers that have an option to escrow flood insurance premium and fees for residential mortgage outstanding on January 1, 2016. From January 1, 2016 lenders are required to escrow for flood insurance premium and fees for loans where the property is located in an area with special flood hazards. However, loans originated prior to Jan 1, 2016 did not always require escrow for flood insurance premium and fees. Through this notice, the regulation is trying to bridge the gap between the new and existing loans by providing the borrowers an option to escrow for flood insurance premium and fees.
The requirement to send the notice is effective from January 1, 2016.
Content of the Notice of the Option to Escrow
The notice typically contains the following information:
Escrow Option Clause: This is the notice that informs the borrower of the option to escrow flood insurance premiums and fees. Typically, the lenders use the following text:
You have the option to escrow all premiums and fees for the payment on your flood insurance policy that covers any residential building or mobile home that is located in an area with special flood hazards and that secures your loan. If you choose this option:
To choose this option, follow the instructions below. If you have any questions about the option, contact [Insert Name of Lender or Servicer] at [Insert Contact Information].
- Your payments will be deposited in an escrow account to be paid to the flood insurance provider.
- The escrow amount for flood insurance will be added to the regular mortgage payment that you make to your lender or its servicer.
- The payments you make into the escrow account will accumulate over time and the funds will be used to pay your flood insurance policy when your lender or servicer receives a notice from your flood insurance provider that the flood insurance premium is due.
- Instructions for Selecting to Escrow: The specific instructions from the lender or servicer that the borrower must follow in order to escrow flood insurance premiums and fees.
Option to Escrow Loan
The letter informs you of your option to escrow the flood insurance premiums and fees. You do not need to take any action if your existing loan already escrows the flood insurance premiums and fees. If you do not have an escrow account then it is up to you whether or not you would like to escrow.
You need to consider the benefits and drawbacks against your unique circumstances to determine if opening escrow for flood insurance premium and fees is appropriate for your needs.
The notice is required to be sent for residential mortgage loans that are located in an area with special flood hazards. However, the notice need not be sent for loans which qualify for an exemption from escrow requirements. The exempt loans are:
In both cases above, a notice need not be sent in the following cases:
Exceptions from Escrow Requirements: The loan qualifies for an exception to the requirement to escrow for flood insurance premiums and fees.
- Non-Residential Purpose Loans: Loans extended primarily for business, commercial, or agricultural purposes.
- Junior Lien Loans: Loans that are in a subordinate position to a senior lien secured by the same residential improved real estate or mobile home for which the borrower has obtained flood insurance coverage that meets the requirements of the flood regulations.
- HOA, Coop, or Similar Policy: Flood insurance coverage is provided by a policy that:
- Meets the requirements of flood regulations.
- Is provided by a condominium association, cooperative, homeowners association, or other applicable group.
- The premium for which is paid by the condominium association, cooperative, homeowners association, or other applicable group as a common expense.
- HELOCs: Home equity line of credit.
- Delinquent Loans: Nonperforming loan, which are loans that are 90 or more days past due and remains nonperforming until it is permanently modified or until the entire amount past due, including principal, accrued interest, and penalty interest incurred as the result of past due status, is collected or otherwise discharged in full.
- Short Term Loans: Loan that have a term of less than or equal to 12 months.
Small Lender Exception: The lender qualifies for a small lender exception by meeting the following requirements:
- Lender has total assets of less than $1 billion as of December 31 of either of the two prior calendar years.
On or before July 6, 2012:
- The lender 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.
- The lender 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.
- Existing Escrow Account: The borrower is already escrowing all premiums and fees for flood insurance for the loan.
- Loans Required to Escrow under the New Rules: Loans for which the lender is required to escrow flood insurance premiums and fees pursuant to the new rules. In other words, loans in a flood zone are required to have an escrow under the new rules effective from Jan 1, 2016. For these loans the lender would already have opened an escrow and therefore, a Notice of the Option to Escrow would not be required.
Content of the Letter
The Appendix B to Part 760 - Sample Clause for Option to Escrow for Outstanding Loans contains the model language that must use for sending the Notice of the Option to Escrow. It is best to refrain from making changes to model language to avoid any potential for technical violations. However, you may insert additional language that you believe would help a borrower better understand his or her options regarding the escrow of flood insurance premiums and fees.
When to Send the Notice of the Option to Escrow
There are two circumstances when you are required to send the letter:
- Initial Implementation of the Rule: The requirement to send Notice of the Option to Escrow is effective from January 1, 2016. The regulation requires that you mail or deliver the notice to the borrower no later than June 30, 2016 for loans that are in a flood zone and are outstanding on January 1, 2016.
- Loss of Small Lender Exception: You must mail or deliver the notice to the borrower no later than September 30 of the first calendar year in which you lost the small lender exception. The notice must be sent for loans that are outstanding as of July 1 of the first calendar year in which you lost the small lender exception.
Method of Delivery
The notice may be sent either in writing or in an electronic format provided the borrower has agreed to receive notices electronically.
The notice can be provided as a separate notice or added it to another disclosure that you are providing to the borrower such as a periodic statement. When adding the notice to another disclosure, ensure that the notice would be delivered before the due date for sending the notice.
You are not required to provide the in conjunction with any other disclosure or segregate it from any other information provided to the borrower.
The notice informs borrowers of outstanding mortgage loans about their option to escrow flood insurance premiums and fees.
Use in Mortgages
The notice is used by lenders to comply with the new regulations effective from January 1, 2016 which requires lenders to inform the borrowers of their option to escrow flood insurance premium and fees.
- Notice of the Option to Escrow
- Option To Escrow For Outstanding Loan Letter
- Clause for Option to Escrow for Outstanding Loans
- Escrow Option Letter
- Escrow Option Clause
Lender or Servicer
Not required to be signed
Life Cycle Stage
The lender is recommended to retain evidence of delivery of the notice for the period of time the lender owns the loan.
Appendix B to Part 760
- FRB Regulation H, 12 CFR 208.25
- OCC, 12 CFR 22 and 12 CFR 172
- FDIC 12 CFR 339
- FCA 12 CFR 614
- NCUA 12 CFR 760