VIDEO: Flood Zone Discrepancy with Appraisal & Determination
In this Compliance Clip (video), Adam gives valuable insights on what to do when there is a discrepancy between appraisal and flood determination forms. In particular, this video uses the example of a commercial building in multiple structures wherein the flood determination says that the structures are not in a high risk flood zone while based on the appraisal, one of the structures is in a high-risk flood zone.
Video Transcript
The following is a transcript of this video.
This Compliance Clip is going to talk about flood zone discrepancies with appraisals and flood determination forms. The question we have here is this: We have a loan for a commercial apartment complex that has multiple buildings and our flood determination says that the structures are not in a high risk flood zone. However, we just received our appraisal back and it says that one of the structures is in a high-risk flood zone. Do we need flood insurance based on the appraisal flood zone designation?
Basically what's happened is you've got a commercial building in multiple structures and your flood zone said it’s not in a high-risk zone, but your appraisal is saying that one of the structures is in a high-risk flood zone. Now, just to be clear, let's just assume you can not use the detached structure exemption, because that is only good for residential structures when there is a residence on the property, but this is a commercial question. So we're going to assume that you would potentially need flood insurance for any structures that are in a high-risk flood zone.
To answer this question, there's a number of considerations we can think about. First and foremost, what I want to say is this, you should never base your flood requirements solely upon the flood designation and the appraisal report. You, as a financial institution, need to make a flood determination and your determination is what should drive whether or not you have flood insurance. You're not going to rely on what the appraisal has, you need to have your own flood determination and that is what you should count on when determining whether or not you require flood insurance on a particular loan.
That said, somebody is wrong and there's an issue. It's either your company, which it happens, or the appraiser, because the appraisers oftentimes have their own company they're getting the flood determinations from. So somewhere along the line, there is a discrepancy and this is a result of how the flood determination companies do their job. Some of them actually will get maps. Some of them just use a general address and they're not always specific and they're not always right, unfortunately. So the way I would view this is that if my appraisal says that one of the structures is in a high-risk flood zone, what I would do is dig into this. I would go back to my flood determination company and ask them to do a review. Ask them to settle this once and for all. If they're not able to do that, whether you escalate it up to somebody who can help you or not, I may even consider going into FEMA's maps and look at it myself. I've done this before, where I go to Google maps, find the address, find the structure, go into FEMA's maps, figure out where the flood zones are and try to figure it out on my own, which you possibly could do if you spend enough time doing that. But at the end of the day, when you have a discrepancy, somebody is right, somebody wrong and as a financial institution, it's in your best interest to make sure you are finding the correct answer so that you have the incorrect flood determination designation and require insurance if it is in fact needed. That is what I would do.
Another consideration, while you're doing this, I would ask your flood vendor this. I would ask them how you should be entering addresses into the flood determination system to pull the determination if there are multiple structures. The reason I bring this up is that some vendors have different requirements. Some just want you to list the address and that's all you need to do. But others actually say that you can provide a legal description if in fact you have multiple structures. So it's important to understand from your flood vendor what they expect you to do as far as entering that address or that legal description or the lot number or the tax ID. Whatever the case is, you need to understand what their expectation is so their system views your property properly. That's kind of mouthful right there in and of itself. It needed to review your property properly.
Also, I did want to say that if you do have a discrepancy with your appraisal and your flood determination, you may have a problem selling this on the secondary market. So make sure that those are aligned. And if your flood determination is correct, and you dig into that, contact your appraiser, see if they will dig them on their side. Because again, somebody’s right. There's never a true discrepancy. Somebody's got to be right and somebody's got to be wrong, and if you can iron that out, that's going to go a long way for compliance requirements.
I just want to note that you can, of course, require flood insurance as a matter of safety and soundness. If your appraiser says it comes right up to the line and you're concerned about your collateral, you, as a matter of safety and soundness, can require flood insurance. Whether or not the insurance company will insure this as a high-risk policy or not, based on the flood insurance company, but you can require flood insurance. And that is something you can do as a matter of safety and soundness.
That's it for this Compliance Clip.