WASHINGTON—Mortgage servicers will be required toescrow premiums and fees for flood insurance under a regulation nowbeing proposed by federal banking agencies.

Don Griffin. vice president, personal lines for the Property andCasualty Insurers Association of America and also chairman of theWYO Flood Insurance Coalition, said most large lenders and theirservicers already allow homeowners required to have flood to spreadout their premium payments over 12 months. This will likely onlyimpact small lenders who do not already do so, and therefore makethe practice uniform, he said.

John Prible, vice president of federal government affairs forthe Independent Insurance Agents and Brokers of America, addedthat, "This will provide an additional payment option forconsumers, which is a good thing as long as the Federal EmergencyManagement Agency gets it right and doesn't make it too cumbersomeon either banks or WYO's."

At the same time, Griffin said action on another key financingprovision, allowing those who have paid off their homes or do nototherwise qualify for escrowing to pay their NFIP on installments,will likely not be implemented for awhile. However, the newproposal will further limit the need for people to use theinstallment provision when it is implemented, he acknowledged.

According to Griffin and insurance industry officials, mostlarge mortgage servicers already allow premiums for the NationalFlood Insurance Program (NFIP) to be paid as part of their monthlymortgage payment, but this will make it uniform.

The rule is being published for comment with a 60-day commentperiod. It would be effective as of Jan. 2016 when published as afinal rule.

The proposal is being published by the Federal Reserve System;the Farm Credit Administration; the Federal Deposit InsuranceCorporation; the National Credit Union Administration; and theOffice of the Comptroller of the Currency. It was mandatedby the Homeowner Flood Insurance Affordability Act of 2014 (HFIAA),which was enacted in March, and lessened the burdens imposed by a2012 law that reauthorized the NFIP until 2017.

The proposed rule would also require mortgage servicers toprovide borrowers of residential loans outstanding on Jan. 1, 2016,the option to escrow flood insurance premiums and fees. Theproposal includes new and revised sample notice forms and clausesconcerning the escrow requirement and the option to escrow.

It impacts residential real estate and mobile homes.

The proposal, if implemented, would also eliminate therequirement to purchase flood insurance for a structure that is apart of a residential property located in a special flood hazardarea if that structure is detached from the primary residentialstructure and does not also serve as a residence.

However, under the proposal HFIAA, lenders may neverthelessrequire flood insurance on the detached structures to protect thecollateral securing the mortgage, federal agency officialssaid.