April 16, 2020

Banks May Defer Real Estate Appraisals Under Interim Final Rule

3 min

The federal banking agencies, the National Credit Union Administration (NCUA), and the Consumer Financial Protection Bureau (CFPB), in consultation with the state financial regulators, issued a Joint Statement regarding appraisals in real estate transactions. The Joint Statement outlines existing flexibilities in appraisal regulations and industry appraisal standards. The agencies state that banks may use existing appraisals that still reflect the market value of the property, given the COVID-19 pandemic, but "encourage financial institutions to make use of" available exceptions. The agencies also provide 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 Joint Statement also highlights temporary changes to GSE appraisal standards. Guidance issued by the GSEs, summarized in the Joint Statement, states that:

  • For certain qualifying principal or primary residence loans, desktop appraisals and exterior-only appraisals will now be acceptable;
  • For second homes and investment properties with 85 percent or less LTV, desktop appraisals and exterior-only appraisals will now be acceptable; and
  • For limited cash-out refinances where the mortgage being refinanced is owned by the GSE and the LTV is within the currently acceptable range, exterior-only appraisals will now be acceptable.

In conjunction with the Joint Statement, the federal banking agencies issued an interim final rule allowing regulated financial institutions to defer appraisals and evaluations required under the regulators' appraisal rules. The interim final rule will allow banks to temporarily defer certain residential and commercial real estate appraisals and evaluations for up to 120 days after closing due to the COVID-19 emergency. However, "the agencies expect institutions to use best efforts and available information to develop a well-informed estimate of the collateral value of the subject property."

The preamble to the rule explains that this added flexibility will enable "regulated institutions to extend financing to creditworthy households and businesses quickly" despite restrictions imposed by local governments because of the emergency. The temporary relief will expire on December 31, 2020 and does not apply to acquisition, development, or construction transactions. According to the agencies, the rule excludes these transactions due to the heightened risks associated with them.

Title XI requires real estate appraisals for all federally related real estate transactions. Federally related transactions are defined as "real estate-related financial transaction[s] that the agencies or a financial institution regulated by the agencies engages in or contracts for, that requires the services of an appraiser." The agencies generally require that Title XI appraisals for federally related transactions occur prior to closing. The interim rule waives that guidance to allow deferrals of evaluations and appraisals. However, lenders are still required to conduct "their lending activity consistent with the underwriting principles in the agencies' Standards for Safety and Soundness and Real Estate Lending Standards." Financial institutions are also required to develop an appropriate risk mitigation strategy to minimize impact in the event that the appraisal or evaluation returns a value significantly lower than the expected market value – which must balance safety and soundness risk against the mitigation of financial harm to COVID-19-affected borrowers.

According to the agencies, restrictions on non-essential movements and social distancing have led to complications in performing the timely real estate appraisals needed to comply with federal appraisal regulations. As all federally related transactions require Title XI appraisals, this measure is intended to allow regulated lenders to continue to extend financing, while providing borrowers with access to credit. The Joint Statement also notes that the NCUA will consider a similar proposal on April 16.