We are in the process of closing a loan for a borrower and when we pulled the flood determination it said the property was in a flood zone. The appraiser said it was not in a flood zone and the only flood website said it was not either. An employee reached out to FEMA to ask if it was or not on the flood website and they came back and said it was in a flood zone. The bank contacted the appraiser and they are standing firm that it is not. Our borrower is now only able to get 1/4 of the coverage of the loan amount from the insurance agent and my understanding is because of the appraisal. What are our options?

You can't go by what the appraiser says and they are not the ones making the official determination for you. You need to make a determination according to flood rules, and you most likely do this through a flood determination company (you didn't say), so you need to go with what they provided.

As far as options, you have a few. First, you can have your flood determination vendor research the determination for accuracy. Depending on the vendor, I have seen quite a few errors because of how they initially process determinations (erroring on the conservative side). That said, at the end of the day you need to go with what they ultimately say.

Secondly, you could consider a dispute with FEMA. This can take time and doesn't always work out, but my in-laws were able to do this.


I don't really understand this comment. Therefore, the customer might have an option to switch insurance agents, but again, I don't really understand the problem from the information provided.

Unless and until the dispute is settled, you cannot close the loan without borrower-purchased flood insurance coverage in place.

Yes, we used a flood determination company to pull the flood determination. The comment about the coverage appears to not be relevant as the loan officer just said it was 30 acres of land with a home on it and the insurance agent was only going to provide one fourth of the coverage of the loan amount (ie property/appraised value is $400k was only going to give coverage up to $100k)

The appraiser's opinion doesn't count for anything. Your vendor and FEMA both say it is "in." FEMA is the only one that matters. If someone else says that they are wrong, you need to look at the LOMA or LOMR process. Until FEMA says it is "out", it's "in."

This is a HUGE misunderstanding of the flood requirements. You don't get to net out the exposure of the loan. You must go with regulatory requirement of the "lesser of 3" (loan amount, insurable value or max from FEMA).

Could you explain insurable value? I guess for this loan it is 30 acres land and a manufactured home on it. The dwelling is only worth $100k, however with the land it is $400k. My understanding is the borrower has tried 5 different agents and they all say the same as their is concern and possibility of insurance fraud somehow.

From the Flood FAQs #9:

9. What is the ‘‘insurable value’’ of a
building?
Answer: The insurable value of a building is the same as the overall value of a property minus the land on which the property is located. FEMA’s Mandatory Purchase of Flood Insurance Guidelines state that the insurable value of a building is the same as 100 percent replacement cost value (RCV) of the insured building, which is defined as ‘‘[t]he cost to replace property with the same kind of material and construction without deduction for depreciation.’’ 8 FEMA’s guidelines, however, also provide that lenders should avoid creating a situation in which the insured pays for more coverage than the NFIP would pay in the event of a loss.9 Strictly linking insurable value to RCV is not practical in all cases. In cases involving certain residential or condominium properties, insurance policies should be written to, and the insurance loss payout usually would be the equivalent of, RCV.10 However, in cases involving nonresidential properties, and even some residential properties, where the insurance loss payout would normally be based on actual cash value, which is RCV less physical depreciation,11 insurance policies written at RCV may require an insured to pay for coverage that exceeds the amount the NFIP would pay in the event of a loss. Therefore, it is reasonable for lenders, in determining the amount of flood insurance required, to consider the extent of recovery allowed under the NFIP policy for the type of property being insured. This allows the lender to assist the borrower in avoiding situations in which the insured pays for coverage that exceeds the amount the NFIP will pay in the event of a loss. Lenders need to be equally mindful of avoiding situations in which, as a result of insuring at a level below RCV, they underinsure property. In calculating the amount of insurance to require, the lender and borrower (either by themselves or in consultation with the flood insurance provider or other appropriate professional) may choose from a variety of approaches or methods to establish the insurable value. They may use an appraisal based on a cost-value (not market-value) approach, a construction-cost calculation, the insurable value used in a hazard insurance policy (recognizing that the insurable value for flood insurance purposes may differ from the coverage provided by the hazard insurance and that adjustments may be necessary; for example, most hazard policies do not cover foundations), or any other reasonable approach, so long as it can be supported.

As David pointed out, you must require (at a minimum) the lesser of either 1) the insurable value, 2) the maximum amount allowed ($250,000/residential, $500,000/commercial), or 3) the loan amount. To get this number you have to look at all three values. If you have 30 acres of land and the full value of land plus MH is $400,000, your insurable value is going to be less than that (and determined according to FAQ 9 as quoted above). Assuming this is residential, the max you could have under the flood program is $250,000. Finally, you have to consider the loan amount (which you haven't yet provided). If that amount is less than the insurable value (and also less than the $250,000 max allowed), then the loan amount is the amount you must require. If the loan amount is more than the insurable value, then you would need flood insurance for the insurable value. Again, the bottom line is that you must have insurance coverage that is at least in the amount of the lesser of the three.

Where did you come up with the $100,000 value for the manufactured home? FAQ 9 gives a few options like a cost-approach appraisal (sales comparison approach appraisals are not permitted), a builder quote, or some other valuation - like an RCV from an insurance agent.

If the improvements are worth $100,000, then that's the appropriate amount of flood insurance. You can't insure dirt.

The insurable amount of 100k is the RCV amount from the insurance agent.

Thanks. Quite the learning experience, appreciate everyone's help.

We have an appraisal that states property is in a flood zone; the SFHD states it is not. Should we verify the accuracy of our SFHD with the vendor since there is a discrepancy with the appraisal, especially since it could be in a flood zone. The vendor could have made a mistake. Another post states that "the Flood Insurance Act says that if we outsource this we are
still responsible for the accuracy and should verify".

We have resolved discrepancies against an appraisal in the past but it is being questioned as to why we need to do it.

Thanks.

Yes you should ask your vendor to verify and send you a map overlay if they insist they are right. Appraisers are often wrong, but the vendor can be wrong too.

Thank You