A bill before the Senate Banking Committee Sept. 15 may require lenders to escrow flood insurance premiums if the lenders require escrow accounts as a loan origination condition for any government-backed loan.

"If any institution sells their loans to Fannie Mae or Freddie Mac. or if a loan is otherwise guaranteed by another federal agency, such as the [Federal Housing Administration, Department of Veterans Affairs or Farmers Home Administration], and it requires the escrow of any taxes, insurance premiums. fees or other charges, then it has to escrow flood insurance premiums as well," said Jonathon Weiner, legislative assistant to Sen. John Kerry, D-Mass., creator of the bill.

But the bill's language has some mortgage bankers fretting. While the Mortgage Bankers Association of America believes that requiring escrow accounts is the most effective way to ensure flood insurance is maintained, MBA also believes that the legislation should be modified.

"[The bill] should be amended to clarify that the requirement exists only for the duration or the period during which the lender or servicer maintains an escrow account." said Kenneth L. Austin Jr., an MBA spokesman and executive vice president for Wendover Funding Inc., Greensboro, N.C.

Austin testified before the Senate Banking Subcommittee on Housing and Urban Affairs Sept. 14 that state laws, and a possible federal statute, will allow borrowers to drop their escrow accounts once their loans have been paid down past a stipulated balance or loan-to-value ratio.

Such a requirement, outlined in H.R. 27, the Escrow Accounts Reform Act, introduced by House Banking Committee Chairman Henry B. Gonzales, D-Texas, in January, proposes amending the Real Estate Settlement Procedures Act to allow borrowers to "opt out" of escrow accounts when the loan balance reaches 80%. The bill was referred to the House Ban Committee in May.

That language, Austin said, wouldn't change how bankers do business. "Lenders and servicers would still have the duty to maintain insurance in force," he said.

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