Federal Banking Agencies Provide Appraisal and Evaluation Deferrals to Expedite Lending
This post is published on behalf of Lyle Kolosik, Compliance Manager- Financial Institutions.
Federal banking agencies issued an interim final rule this week to temporarily defer real estate related appraisals and evaluations under the agencies’ interagency appraisal regulations. The rule provides temporary relief to allow regulated institutions to extend financing to creditworthy households and businesses quickly during the national emergency declared in connection with COVID-19.
Deferral Period and Effective Date
Certain appraisals and evaluations are being deferred for up to 120 days after closing. The temporary deferrals apply to most residential and commercial real estate secured transactions, including loans for new money or refinancing transactions. However certain transactions for the acquisition, development, and construction of real estate are excluded because those transactions are generally dependent on the completion and sale of the property being held as collateral.
The rule will be effective upon publication in the Federal Register. These temporary provisions will expire on December 31, 2020, unless extended by the federal banking agencies.
The National Credit Union Administration (“NCUA”) will consider a similar proposal on Thursday, April 16.
Alternatives to New Appraisals
In addition, the federal banking agencies, together with NCUA and the Consumer Financial Protection Bureau, in consultation with the Conference of State Bank Supervisors, issued a joint statement to address challenges relating to appraisals and evaluations for real estate related financial transactions affected by COVID-19.
The statement includes the following advice:
The use of an existing appraisal or evaluation for subsequent transactions may be particularly relevant during the COVID-19 emergency. A financial institution can use an existing evaluation or appraisal instead of obtaining a new appraisal for a subsequent transaction in certain circumstances if the institution can confirm that the evaluation or appraisal remains valid.
The passage of time is a criterion that institutions can consider when determining whether an appraisal remains valid. If the institution determines that the appraisal still reflects market value, the institution may rely on the appraisal based on an acceptable level of risk as evidenced by a loan’s LTV ratio and other underwriting criteria.
The agencies understand that it may be appropriate for institutions to have different criteria for assessing the validity of an appraisal or evaluation for purposes of subsequent transactions during major disasters or other emergencies. The 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 interagency statement outlines other flexibilities in industry appraisal standards and in the agencies’ appraisal regulations as well as other temporary changes to Fannie Mae and Freddie Mac appraisal standards that can assist lenders during this challenging time. The agencies will continue to communicate with the industry, as appropriate, as this situation evolves.
Next Steps
Financial institutions will need to determine whether, and how, to incorporate the regulatory relief into their established lending processes. CLA recommends institutions consider modifying their existing lending policies to allow lenders to utilize the relief, as appropriate, while working within the governance framework of the institution.
There are many evolving lending considerations in this environment. CLA is here to help. Please contact us.
Amanda Garnett is a principal in the financial institutions practice of CliftonLarsonAllen (CLA) from Peoria, Illinois. She currently leads the firm’s Midwest financial institution tax team and serves institutions ranging in size from $15 million to $3.5 billion in total assets. In addition to tax compliance, Amanda assists clients in the areas of tax consulting, mergers and acquisitions, and regulatory reporting. She also routinely teaches courses for banking associations across the country.
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