Federal banking regulators unveil new rules for appraisals
Citing the need to “extend financing to creditworthy households and businesses quickly in the wake of the national emergency declared in connection with COVID-19,” a trio of federal banking regulators announced Tuesday evening that banks will soon be able to delay getting an appraisal on a property for as many as 120 days after a mortgage closes.
The Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corp., and the Office of the Comptroller of the Currency announced the changes Tuesday, stating the rule change will be in effect until the end of this year.
Under the rule change, banks can postpone an appraisal on a residential or commercial property for 120 days after the loan is closed.
It should be noted that the rule only applies to banks under the oversight of the Fed, FDIC and OCC.
More important, the rule change only applies to loans kept in banks’ portfolios.
Loans sold to or guaranteed by the Federal Housing Administration, Department of Housing and Urban Development, Department of Veterans Affairs, Fannie Mae, or Freddie Mac will still require an appraisal before closing, per each agency’s or company’s rules.
Meanwhile, each of those agencies has relaxed their appraisal rules in recent weeks to address social distancing protocols or stay-at-home orders in various states and cities.
In each case, the agencies moved to allow exterior-only appraisals (known as drive-by appraisals) or in some cases, desktop appraisals, where the appraiser doesn’t inspect the property or comparable sales. Instead, the appraiser relies on public records, multiple listing service information, and other third-party data sources to identify the property characteristics.
But the newly announced rules from the banking regulators go several steps beyond that, stating that appraisals may be pushed to 120 days after the mortgage closes.
The rule change is not official yet, however. The rule goes into effect when it is entered into the Federal Register.
When the rule change goes into effect, the rule will apply to “residential and commercial real estate secured transactions, including loans for new money or refinancing transactions.”
However, the rule excludes “transactions for acquisition, development, and construction of real estate.”
In the interim final rule, which can be read here, the regulators note how the current environment is impacting the ability of certain people to buy a home or refinance if they want to or need to.
“Due to the impact of COVID-19, businesses and individuals have a heightened need for additional liquidity,” the regulators state in the rule.
“Being able to quickly access equity in real estate could help address this need. However, government restrictions on non-essential movement and health and safety advisories in response to the National Emergency declared in connection with COVID-19, including those relating to social distancing, have led to complications with respect to performing and completing real property appraisals and evaluations needed to comply with federal appraisal regulations,” they continue. “As a result, some borrowers may experience delays in obtaining funds needed to meet immediate and near-term financial needs.”
But the agencies state that the ability to delay an appraisal does not absolve the lender of needing to conduct prudent lending practices.
“Regulated institutions that defer receipt of an appraisal or evaluation are still expected to 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,” the regulators state. “These deferrals are not an exercise of the agencies’ waiver authority, because appraisals and evaluations are being deferred, not waived.”
The regulators continue:
Under the interim final rule, regulated institutions may close a real estate loan without a contemporaneous appraisal or evaluation, subject to a requirement that institutions obtain the appraisal or evaluation, as would have been required under the appraisal regulations without the deferral, within a grace period of 120 days after closing of the transaction. While appraisals and evaluations can be deferred, 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.
For purposes of risk-weighting of residential mortgage exposures, an institution’s prudent underwriting estimation of the collateral value of the subject property will be considered to meet the agencies’ appraisal and evaluation requirements during the deferral period. In addition, the agencies continue to expect regulated institutions to adhere to internal underwriting standards for assessing borrowers’ creditworthiness and repayment capacity, and to develop procedures for estimating the collateral’s value for the purposes of extending or refinancing credit.
The agencies also note the potential for the value of the property in question to drop during the 120-day delay, and state that banks must be prepared for that scenario.
“The agencies also 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,” the agencies state. “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.”
As stated earlier, the delayed appraisal option does not apply to “transactions for acquisition, development, and construction of real estate.” In the rule, the regulators state that those loans “present heightened risks not associated with financing existing real estate.”
Beyond that, the regulators also state that “repayment of those transactions is generally dependent on the completion or sale of the property being held as collateral as opposed to repayment generated by existing collateral or the borrower.”
Typically, a rule change like this would require a comment period after the rule’s initial proposal, followed by a 30-day delayed effective date to ensure all affected parties have time to prepare.
But in this case, the regulators state that they are bypassing those procedures in order to enact this rule as quickly as possible.
“The agencies believe that the public interest is best served by implementing the interim final rule as soon as possible. As discussed above, recent events have suddenly and significantly affected global economic activity, increasing businesses’ and households’ need to have timely access to liquidity from real estate equity,” the agencies state.
“In addition, the spread of COVID-19 has greatly increased the difficulty of performing real estate appraisals and evaluations in a timely manner,” the agencies continue. “This relief will allow regulated institutions to better focus on supporting lending to creditworthy households and businesses in light of recent strains on the U.S. economy as a result of COVID19, while reaffirming the safety and soundness principle that valuation of collateral is an essential part of the lending decision. For these reasons, the agencies find that there is good cause consistent with the public interest to issue the rule without advance notice and comment.”
The regulators conclude the interim final rule by stating that they believe the change will help ensure credit goes to deserving borrowers and protect all involved.
“The agencies believe that the limited timeframe for the deferral will in some respects help to manage potential risk by balancing the need for immediate relief due to the National Emergency with safety and soundness concerns for risk to lenders,” the agencies state.
The agencies also note that the National Credit Union Association will consider a similar rule later this week that would apply the same standards to credit unions.