Today’s interview is with Mark C. Green, National Sales Manager for Transamerica Flood Hazard Certification (TFHC). TFHC is part of the Aegon group of companies and has been providing flood information to lenders nationwide for 25 years. Aegon, is an international company offering various financial and insurance products with over $250 billion in assets. We have asked Mr. Green to speak with us regarding the flood data being used and required by lenders and appraisers.

Q. Federal law requires the lender to obtain a certified flood determination and record it on the Standard Flood Hazard Determination Form (SFHDF) for each of their home loans. In fact, providing certified determinations to lenders is a major part of TFHC’s business. This certified determination is a compliance requirement and is used to decide if flood insurance is required for the property. Since the lender has to do this, why do they also require the Appraiser to provide a determination?

R. The lender takes on a financial risk every time they provide a loan. To reduce the risk, they gather data on the property. The more data they have, the better decisions they will make regarding the loan. The first and foremost reason a lender wants a flood determination is to reduce their liability. This is not just based on wanting to "double check", it is because the flood determination could change the value of the home and has the potential to increase the overall cost of the home to the homebuyer. The flood determination in the appraisal report provides the initial red flag to the lender for possible problems in the future. Not to mention, the appraiser has actually seen the property and their determination could be very valuable to the lender in the case of a close call.

Q. How is a certified determination different from a regular determination?

R. A certified determination simply means that the determination provider, hired by the lender, must issue a SFHDF and guarantee the accuracy of the determination. Through this guarantee, the determination provider takes on some of the financial risk if a mistake is made. In the case of a non-guaranteed determination, the determination provider is not agreeing to take on any risk should the determination be wrong. Appraisers are not required to provide a guaranteed flood determination. In both cases, the determination needs to be as accurate as possible to reduce the overall risk to the lender and homebuyer.

Q. If the appraiser’s determination is not guaranteed how important can this really be to the lender?

R. As stated before, the determination is important to the lender because it is the first red flag they have of a potential problem with the property. In addition, a structure in a flood zone may carry a lower value than a similar comparable structure not in a flood zone. Even in the case of property only, the value may be less if part, or all, of the property is in a flood zone. The appraiser’s determination is important and even though it is not guaranteed, the lender is still expecting accurate data. In fact, problems generally arise when the appraiser’s determination does not match the lender’s certification. This discrepancy may cause the loan process to come to a halt, not to mention, it could impact the perception of competence for the parties involved. The appraiser’s initial determination is important!

Q. You have mentioned the need for accurate determinations. There has been significant advertising lately (including your company) telling appraisers what they should use. This is very confusing when trying to decide what products actually work and deliver the most accurate flood determinations. In the ads and on the appraisal forums, it seems to come down to 3 basic choices: original printed FEMA (Federal Emergency Management Agency) paper flood maps, FEMA Q3 digital files and proprietary digital flood maps (like Flood Insights). Would you provide some clarification on these different products?

R. Original printed paper flood maps are created, updated and sold by FEMA. This is the base standard for flood zone determinations. These maps are created by FEMA when a new community joins the program and updated when a major change occurs to the flood zones either manmade or by a natural disaster. Several companies advertise that they provide the actual FEMA printed map as part of their service. The reason an appraiser may purchase these maps from a private company, as opposed to FEMA is because of ease of use, and in some cases, automatic updates. There are two major drawbacks in the use of these paper maps from FEMA, or paper map based products from a private company. First, the maps themselves are hard to use because they generally do not show all the streets and are not always an accurate scale. Second, they do not reflect NON-PRINTED MAP CHANGES. In 2000 and 2001 there were approximately 1,593 and 2,155 non-printed map changes. This means if the appraiser relied only on paper maps, or products that use paper maps, they could be missing a significant amount of changes because they do not appear on a paper map or paper map based system.

These non-printed map changes are made available in letterform to businesses outside of FEMA through a subscription service from FEMA. There are different types of letters generally based on the size of the change, one example is Letter of Map Revision, commonly referred to as a LOMR. These letters reflect changes that may be a street, subdivision, or city.

Q3 data was created by FEMA. The Q3 data is actually a set of digital coordinates that represents flood zones which may not be printed or viewed by itself. You must have GIS mapping software that allows you to overlay these coordinates so that the flood zones are visually represented. There is no such thing as Q3 map, however, there could be a map that uses Q3 data. The good news to this data is that it allows the use of automatic determinations through geocode referencing. The bad news here is that the Q3 data has not been updated, maintained or errors corrected, since being created (no LOMR’s, etc.) and the tolerance levels that were used to create the maps were pretty loose.

With a proprietary digital flood map (like Flood Insights) the paper map flood zones are digitized as an electronic flood layer. This new flood layer is updated using the update letters received from FEMA (LOMR’s, etc.). This process, not only captures flood zones, and flood zone changes, it allows for integration with street mapping software to accurately provide an automated determination. TFHC uses this process because it is the most accurate and comprehensive method of making a flood determination. The only down side here, is that the cost to create and maintain the data is significant.