Using Cost Value from Appraisal to Determine Flood

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Question:

We are currently completing a review of all of our loans that are in a flood zone to determine if they have adequate coverage. The loan that is in question was originated in 2008 and at that time we used the Cost Value from the appraisal minus the land value to determine the amount of coverage required. We used that same method during our review to determine if they still have adequate coverage. However, our auditor is now saying that since the appraisal is from 2008, we can no longer use that value and must use the RCV from the hazard insurance policy.At this point we would have to go back to our customer and tell them that for the last 4 years you have had sufficient coverage, but now that your appraisal is old we cannot use that value anymore and you need to increase your coverage.Is this the correct method? We have not renewed the loan or done anything that would warrant a new appraisal and I have not read anywhere that says after X amount of years the you can no longer use the Cost Value from the appraisal to determine the amount of coverage required.

Answer:

It might depend on the type of collateral. Replacement cost value only applies to primary residences. Otherwise it would be actual cost value. Unless there is a big discrepancy between what the insurable value might be today versus the insurance amount that you have, I would not change it. There was never a formula that allowed you to subtract the value of the land from the cost basis of a structure, so that statement is a little confusing.

First published on BankersOnline.com 5/13/13