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My bank has a customer with an existing loan secured by the customer’s primary residence that is not in a designated flood zone. However, the customer has purchased a flood insurance policy just to be safe. Does the bank needs to escrow the premium for the flood policy?

My bank has a customer with an existing loan secured by the customer’s primary residence that is not in a designated flood zone. However, the customer has purchased a flood insurance policy just to be safe. I do not believe that the bank needs to escrow the premium for the flood policy since the bank would be okay with the customer canceling the flood insurance at any time. Am I understanding this correctly?

The escrow requirement only relates to a “designated loan.” Since the loan you describe is not a designated loan, the escrow requirements do not apply.

§ 22.5 Escrow requirement. If a national bank or Federal savings association requires the escrow of taxes, insurance premiums, fees, or any other charges for a loan secured by residential improved real estate or a mobile home that is made, increased, extended, or renewed on or after October 1, 1996, the national bank or Federal savings association shall also require the escrow of all premiums and fees for any flood insurance required under § 22.3.

§ 22.3 Requirement to purchase flood insurance where available. (a) In general. A national bank or Federal savings association shall not make, increase, extend, or renew any designated loan unless the building or mobile home and any personal property securing the loan is covered by flood insurance for the term of the loan. . .

Designated loan means a loan secured by a building or mobile home that is located or to be located in a special flood hazard area in which flood insurance is available under the Act. (July 2017)

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