Banks are benefiting as competition lowers the cost of flood-hazard certification and speeds service.
More than 120 companies - twice as many as two years ago - now vie to tell lenders whether a property lies in a flood-hazard area and needs insurance.
"It's just impossible to do accurate determinations yourself," said Richard Schenk, compliance officer at Norwest Bank in Omaha, Neb. "I don't believe you can accurately make a determination using just flood maps. You have to have added data, or you'll miss something."
First American Flood Data Services Inc. of Austin, Tex. - used by such large banks as Wachovia Corp. and First Bank System Inc. - relies mainly on automated systems. So does Richardson & Associates of Myrtle Beach, S.C., along with offering appraisal and title services to its 2,000 customers.
National Research Center looks up the information manually for its approximately 2,500 bank customers. Elmwood Park, N.J.-based Transamerica Flood Hazard Certification combines the two approaches for its more than 2,000 customers.
Elizabeth Safarian, compliance officer at St. Louis-based Mercantile Bancorp, said it decided this year to use First American because it is automated. First American enters an address into its computers, and the system automatically finds the location on a map in its data base to see whether it lies in a flood-hazard area.
Ms. Safarian said bankers lack the time and expertise to track whether a property moves in or out of a flood-hazard area for the entire term of a 30-year loan.
Using an outside firm "makes it easier to track for the life of a loan," said Ms. Safarian. "Through their data bases, they can access things more quickly than a bank ever could."
But Transamerica president Thomas Della Torre said completely automated systems can misjudge a property's flood-zone status. He said a large property such as a farm, can straddle the boundaries of a flood zone. A situation like this might require a phone call to the borrower or even a trip to determine whether the home is in a hazard area.
Because some loans can require such meticulous examination, Transamerica and National Research Center do most of their work by hand. Rather than rely on information entered into a computer, these companies flip through tens of thousands of flood-zone maps, overlay those with more detailed maps that locate new streets or subdivisions, make phone calls, and do whatever else is needed to make sure their determination is accurate.
No method is foolproof, because the government's flood maps are often outdated or incomplete, said Joda F. Fortson, president of Richardson & Associates in Myrtle Beach, S.C. He estimated that the maps are rarely better than 70% accurate, often missing streets or entire housing developments.
Most of the flood-hazard firms guarantee service within 24 hours. Routine loan determinations can be done in a matter of seconds, while rulings for new loans in areas with incomplete maps may take a few hours. In the past, it could take several days to do a difficult determination.
Generally, banks pay around $20 per loan for the initial determination and life-of-the-loan coverage, which means the company keeps track of the flood-hazard status of the property for the entire term of the loan.
Michael Reik, chief executive of National Research Center in Burnsville, N.C., said many of the new firms are slashing prices, forcing veterans like his company to drop their rates.
The bank and thrift regulators are expected to approve new flood insurance rules later this month that permit banks to charge customers for figuring out whether their property lies in a flood zone.
The rules also will require bankers to determine whether every property used for collateral is in a flood-hazard area, as defined by the Federal Emergency Management Administration. Finally, the rules require bankers to force borrowers in flood zones to maintain adequate insurance.
Only about 10% of loans actually require flood insurance, but these flood-zone determination companies remain busy because all properties have to be checked.
Business is expected to surge again when the new rules go into effect, Oct. 1.
Outsourcing the task is a "no-lose" proposition for banks, according to Cliff E. Cook, president of Compliance Services Inc. in Tacoma, Wash. Banks can eliminate costly internal reviews while billing the borrower for the firm's services, he said.
Federal law requires, and bank customers insist, that these companies guarantee their determinations.
"Banks hire us to be careful," said Mr. Reik, whose company opened in the early 1980s and is one of the oldest flood-hazard determination firms. "They hire us to be strict. If something lies in a flood zone, we have to make sure to tell them."