Map Determination Companies vs. FIRMs - the dispute and resolutions and potential issues

History

Over the past several years, the National Flood Insurance Program has been in the process of updating Flood Insurance Rate Maps (FIRMs) throughout the United States through MapMod and now RiskMAP.   A growing number of concerns have been raised by property owners and Congressional Representatives about the implications of the initiatives regarding the accuracy of the new maps, but especially the mandatory requirement to purchase flood insurance that is imposed by federally backed and regulated lenders for buildings with mortgages within the Special Flood Hazard Areas (SFHA) on the revised maps. 

The Flood Disaster Protection Act of 1973 placed the responsibility to determine a building’s location relative to the SFHA on the federally regulated Lenders. However, lenders often rely on a determination conducted by a third-party map determination company. The requirement is accomplished by the determination company completing the Standard Flood Hazard Determination Form on behalf of the lender. 

The Standard Flood Hazard Determination Form is a standard part of the loan documentation. If a structure is in the SFHA the borrower will be required to sign a Notice of Special Flood Hazard and Availability of Federal Disaster Relief Assistance before the lender will issue the loan.   

Issue: The regulations do not establish a fixed period of time in which a lender must provide the notice in writing. Generally the notice is presented at loan closing which can be a potential problem if there is a flood zone dispute or a requirement to purchase flood insurance.

Determining the Location of a Building issue

The responsibility in determining a building’s location relative to the SFHA is placed on the lender, yet allows for reliance on third parties, such as a determination company, to the extent that the information they provide is guaranteed. 

Issue: It is not clear what constitutes a “guarantee” nor is this defined by FEMA or the National Flood Insurance Program (NFIP) but rather it is the responsibility of the lender to determine if the guarantee is acceptable.

All lenders are required, as outlined by the Mandatory Purchase of Flood Insurance Guidelines, to monitor the flood hazard status of the secured structure for the term of the loan.  

• Lenders may take advantage of a subscription service that provides notice of mapping changes, although the law does not require a lender to subscribe. 
• Most rely on the determination company to provide a notice when a mapping change affects a structure’s flood hazard status. This service is designed to discover a change in flood hazard status, thereby minimizing the administrative burden for the lender. This is normally a contractual requirement by a federally backed loan as a condition to purchasing the loan to ensure that designated loans have flood insurance at the time of origination and at any time during the term of the loan. This generally will discover structures newly designated in the SFHA, as existing structures in the SFHA will already have insurance and will continue to be rated under the grandfathering rule if there have been any changes which may increase the risk and insurance cost.

Issue: If a determination company is conservative and the proximity of the SFHA to the structure is too close to call generally the company will error on the side of caution and determine the structure to be located in the SFHA. The lender is relying upon the determination company’s guarantee not really understanding what that provides.  Each lender will hold a contract for services with the determination company which outlines how an inaccuracy is handled, this includes FEMA administrative procedures. There is no industry license authority or standards to address issues outside FEMA and NFIP procedures.

Why WE have inconsistencies

Some flood zone determinations are made at the parcel level and will incorrectly indicate the property is in the high hazard zone. It is important to point out that the mandatory purchase requirement only applies when the structure is in the high hazard flood zone. 

Some determination companies have converted the effective paper maps, into a digital format using their own proprietary software and methods. Map determination companies often used CAD software to ‘rubber-sheet’, or “stretch” the digitized FIRM over aerial photo imagery to aid in their determination. While this process can be very helpful, and enables the companies to make quick determinations, it does not provide the same level of accuracy as the DFIRMS produced by FEMA using GIS tools and software. The original FIRMs were never geo-referenced, they are simply a ‘picture floating in space’ not a map tightly tied to a coordinate system. 

Little Known FACT: Generally, the flood zone determination company upon joint request by the lender and borrower will provide a mapping Exhibit, which can be shared with the borrower. This exhibit shows the structure’s location using aerial photography overlaid to the SFHA on the FIRM to provide a better illustration why insurance is required.

Flood Zone Dispute Resolution Processes

Prior to Closing – There two options available specific to the loan closing process for property owners when disputing their flood zone designation with the map determination company through the Lender. 

1. Manual Determination or Re-determination: This request will require additional documentation from the property owner such as a plat map, plot plan, survey and require a request for the determination company to make a manual determination. This is the advisable method before contacting FEMA for a final Determination, or requesting a Letter Of Map Amendment (LOMA).
2. Letter of Determination Review (LODR): A borrower may also dispute a lender’s determination that a property is in an SFHA by jointly submitting a Letter of Determination Review (LODR) to the Administrator of FEMA during the 45-day period after the borrower is notified that flood insurance is required or prior to the closing of the loan. If the Administrator of FEMA fails to respond to the review request before the later of 45 days after receipt or the closing of the loan, then there is no obligation for flood insurance coverage until the Administrator provides a determination.   A fee of $80 must be submitted with all LODR requests. The cost is generally shared between the lender and borrower and discussed in-advance. Dispute documentation only includes information used by the determination company, no new information can be used, and this can result in an inconclusive response by the Administrator when a clear decision cannot be made. 

It’s important to remember: The above processes are used for the loan and do not transfer to a new loan or with the property, the only record of the determination is with the loan documents.

After Closing - A property owner may seek resolution using the following methods:

1.   Manual or Re-determination: (same as #1 above) If a manual redetermination is not an option, then
2. Letter Of Map Amendment “Out As Shown” (LOMA OAS): A property owner may request from FEMA an “Out as Shown” LOMA requiring minimal information at NO COST. This method should be used when it is clear, visually, that the structure is not in the SFHA. If successful the process can remove the structure by a FEMA determination, otherwise;
3. LOMA, full application process: If there is belief by the property owner the structure is out of the SFHA due to a rise in terrain, then the property owner will be required to work with a Land Surveyor to complete the full LOMA package at the property owner’s cost. Generally a LOMA will not be granted unless the Lowest Adjacent Grade next to the building and any supporting member of attached structures, such as a deck, to the building are above the BFE.

Special Note: The property owner may need to purchase flood insurance to avoid force placed coverage during the time it takes to secure a LOMA (generally it takes up to 60 days after all required data has been submitted), however once obtained the flood policy may be canceled in accordance with the NFIP cancellation rules and the premium refunded.

 Refund of premiums

FIRST year of the Loan after loan closing where the flood insurance policy is in the initial term.

1. If the request for cancellation is during the initial policy term and does not include a copy of a LOMA or LOMR, cancellation reason #8 is used. 

               The cancellation effective date is the date the cancellation request is received by the insurer (pro-rata).  The required documentation is a copy of the original mandatory purchase document, current mortgagee statement that the policy is not required along with a revised determination showing the building is not in the SFHA. 

Issue: The earned premium retained by the NFIP has to be resolved between the borrower and the lender since the NFIP has provided coverage. The borrower shoulders the cost of the lender’s determination company doing a bad job; since the borrower is under loan contract and law to purchase flood insurance coverage they never become aware they could pursue the guarantee of the determination company to recoup the difference in premium after the pro-rate return is issued.

SUBSEQUENT Loan years (after the first year) and past the initial flood insurance policy term.

2. The insurance cancellation reason #19 will produce a full refund for the current year and, if applicable 1 prior year provided the LOMA became effective within 60 days before the current policy’s effective date when there are no pending claims during the policy year being cancelled.

The lender must provide a statement that flood insurance is no longer required because the property was removed from the SFHA, and a copy of the LOMA/LOMR must be provided. If the LOMA is dated more than 60 days prior to the most recent renewal, no refund is issued.

Issue: this cancellation method does not provide a means for the property owner to recoup insurance costs further back than 2 prior years. 

When the LOMA issue date is older than 60 days prior to the current policy’s effective date, the lender’s determination company may have made an error in preparing the Standard Flood Hazard Determination Form as part of the loan documentation. Once a borrower becomes aware insurance should NOT have been a mandatory purchase condition and it is determined they may not recoup the full cost for the insurance under the NFIP (because it was carried further back than 2 prior years), they generally never become aware they could pursue the guarantee or file an E&O Claim against the determination company to recoup the remaining cost for insurance.

Third-party Map Determination Companies

There have not been any FEMA standards set forth for this industry except the lender by law must be sure the information provided by the flood determination company is “guaranteed”, very broad. 

 It is up to the lender, there is no check list. Here are a few observations regarding the determination companies and areas of concern:

“Guaranteed Amount” the determination company will spell out within a contract-of-services what the amount consists of.  Note: some contract language includes limitations on what the guarantee covers such as, claims which occur as the result of inaccurate determinations, this means only when a structure should be in the SFHA but was not properly identified and suffered a loss not covered by an insurance policy. This does not address other inaccurate determination errors where the borrower incurs expenses not recoverable through the NFIP as result of a poor mapping decision.

Resolution solutions and Products they will provide beyond the Mandatory Purchase requirements.  Each company adopts policies and procedures to address the resolution of customer disputes, some companies offer Exhibits to help the resolution, but are not required.

Financial Viability. Guarantees and Warranties in the form of an errors and omissions insurance policy, or self insurance. Most have a 1 million dollar minimum.  Deferred revenues to an insurance policy or self insurance to keep Solvency from potential threats from a claim against

• E&O insurance
• Life of Loan service
• Re-mapping errors from their own proprietary software and methods

Quality Assurance.

• Training Programs for Research Analysis, continued education, what’s the method of training, test of knowledge, understanding of own business products and services.
•  Life of Loan or tracking service.  What is the time standard for reporting? The only standard set currently is only that the process is being completed.

Performance Standards. How are they measured and how often are they recertified? Note there is no industry license authority or standards committee to address issues.

Business Recovery. To ensure uninterrupted services.

There is an industry group which has been formed under the National Flood Determination Association (NFDA) which has provided some standards, but does not address “decertification” reasons if a company does not meet their minimum standards. If you are interested in reviewing the NFDA’s group standards you can find them on the web at www.NFDAflood.com or you may contact them directly at:

National Flood Determination Association (NFDA) P.O. Box 13846, Denver, CO, 80202 or by phone at (888) 399-4613.