Agencies Issue Statement and Interim Final Rule Regarding Appraisals Because of COVID-19

On April 14, 2020, the federal banking agencies announced an interim final rule that will allow for appraisals and evaluations of homes and other real property to be obtained up to 120 days after closing. The federal banking agencies, along with the National Credit Union Administration (NCUA) and Consumer Financial Protection Bureau (CFPB), also issued an interagency statement addressing existing flexibilities in appraisal standards and regulations with regard to appraisals of homes and other real property. The interim final rule became effective immediately upon publication in the Federal Register (which occurred on April 17, 2020), and applies to transactions closed on or before December 31, 2020, unless the agencies extend the date. Comments on the interim final rule are due June 1, 2020.

Interim Final Rule. The federal banking agencies are the Comptroller of the Currency, Federal Deposit Insurance Corporation, and Federal Reserve Board. The interim final rule provides that the “completion of appraisals and evaluations required [by the appraisal rules of the federal banking agencies] may be deferred up to 120 days from the date of closing.” The deferral applies to all residential and commercial real estate transactions, other than acquisition, development, and construction loans.

In the supplementary information to the interim final rule, the federal banking agencies advise that they expect institutions that defer receipt of an appraisal or evaluation:

• “[T]o conduct their lending activity consistent with the underwriting principles in the agencies’ Standards for Safety and Soundness and Real Estate Lending Standards that focus on the ability of a borrower to repay a loan and other relevant laws and regulations.” (Footnotes omitted.)
• To use best efforts and available information to develop a well-informed estimate of the collateral value of the property.
• To adhere to internal underwriting standards for assessing a borrower’s creditworthiness and repayment capacity, and develop procedures for estimating the collateral’s value for the purposes of extending or refinancing credit.

Of course, deferring an appraisal or evaluation until after closing raises the possibility of an eventual valuation that is lower than expected. Addressing this elephant in the room, the agencies state that they “expect institutions to develop an appropriate risk mitigation strategy if the appraisal or evaluation ultimately reveals a market value significantly lower than the expected market value. An institution’s risk mitigation strategy should consider safety and soundness risk to the institution, balanced with mitigation of financial harm to COVID-19-affected borrowers.”

Interagency Statement. The interagency statement addresses the ability to defer an appraisal or evaluation under the interim final rule with regard to the requirement under the Equal Credit Opportunity Act (ECOA) and Regulation B (ECOA Valuations Rule) for a creditor to provide an applicant for a first lien residential mortgage loan with a copy of written appraisals or valuations developed in connection with the application prior to consummation of the loan. The agencies note that the ECOA Valuations Rule does not contemplate a post-consummation valuation of the property. As a result, the agencies state that they “will not take enforcement actions against institutions under the ECOA Valuations Rule for post-consummation valuations performed pursuant to the … interim final rule. Nevertheless, the agencies encourage institutions to provide borrowers with copies of such post-consummation valuations as promptly as practicable upon completion.”

With regard to existing appraisal flexibilities, the agencies note that:

• While the appraisal rules of the federal banking agencies and NCUA require that appraisals be conducted in compliance with the Uniform Standards of Appraisal Practice (USPAP), the rules do not require that an interior and exterior inspection of the property be performed, although such inspections are common.
• Consistent with USPAP, an appraiser can determine the characteristics of a property through other methods, including asset records, photographs, property sketches, and recorded media.
• Both desktop appraisals and exterior-only appraisals can fulfill the requirements of USPAP, as long as the analysis is credible. However, the agencies note that for certain higher priced mortgage loans an appraisal involving an interior inspection of the property is required.
• The appraisal rules of the federal banking agencies and NCUA except certain transactions from the requirement to have an appraisal performed by a certified or licensed appraiser. Among the excepted transactions are residential real estate transactions with a transaction value of $400,000 or less (federal banking agencies) or less than $250,000 (NCUA). The NCUA has proposed to increase the exception level to a transaction value less than $400,000. The agencies encourage institutions to make use of the various exceptions.

The agencies also note that the use of an existing appraisal or evaluation for a subsequent transaction may be particularly relevant during the COVID-19 emergency. After addressing relevant considerations, the agencies advise that an “institution’s determination of the validity of existing appraisals and evaluations used for subsequent transactions conducted during the COVID-19 emergency will not be subject to examiner criticism if it is consistent with safe and sound practices.”

The agencies also address the temporary flexibility regarding appraisals recently announced by Fannie Mae and Freddie Mac because of COVID-19.

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