WASHINGTON - A House banking subcommittee approved legislation. Wednesday that requires lenders in most states to collect flood insurance premiums from mortgage customers as part of their monthly escrow payment.
The provision, which was opposed by the banking industry, makes an exception for states that do not allow lenders to escrow monthly payments for taxes, insurance, and other purposes. The exemption was adopted as an amendment sponsored by Rep. Douglas Bereuter, R-Neb.
However, the escrow requirement is still more stringent than the comparable provision in a Senate bill sponsored by Sen. John F. Kerry, D-Mass. The Kerry bill, which is expected to be voted on later this year, requires lenders to collect flood insurance premiums only if they require escrow accounts for mortgages.
Additional Burden Seen
"We're very concerned about the increase in regulatory burden, particularly in the area of escrow," said Edward L. Yingling, chief lobbyist for the American Bankers Association.
"Some banks don't have the capability to do it," he said. For others, he added, setting up an escrow account is an added cost that's hard to justify for a single item, such as flood insurance.
Lenders were also disturbed by a provision that would require them to certify that a property was covered by flood insurance before a mortgage could be sold in the secondary market. The provision applies to loans in which flood insurance has not been verified within five years.
"It's an easy thing for a big mortgage company to do, but very hard for a small bank or credit union," said David C. John, legislative director for the National Association of Federal Credit Unions.
Still, many of the bill's provisions are likely to prove helpful to banks. One measure permits banks to "force-place" flood insurance for borrowers who refuse to purchase it on their own. The lender has the right to bill the mortgagor for the premium.
In addition, the bill clarifies when flood insurance is required, and permits lenders to charge a "reasonable fee." as determined by the director of the Federal Emergency Management Agency, for the cost of determining if flood insurance is needed.
Other provisions require banks to review any materials submitted by mortgagors contesting the need for flood insurance. However, the panel approved an amendment sponsored by Rep. Alfred A. McCandless, R-Calif., giving FEMA authority to specify what materials must be considered.
"The lender would still be required to review materials submitted by the borrower, but only relevant materials - not Polaroid photographs," said Rep. Joseph P. Kennedy 2d, D-Mass.
Rep. Kennedy, chairman of the House Banking subcommittee on consumer affairs and insurance, sponsored the insurance bill considered by the panel. Much of his bill was patterned after legislation introduced by Rep. Bereuter.