Appraisals for Closed-end Loans During the COVID-19 Times
Section 722.4 of NCUA’s regulations sets forth minimum requirements for appraisals when one is required for a loan. Recently, the compliance team at NAFCU has received some questions from members inquiring about appraisal flexibility amid the COVID-19 outbreak. Many credit unions have internal lending policies requiring appraisals (including an interior inspection) for most real estate secured loans. Credit unions with such policies may want to consider whether they are appropriate under the circumstances.
Although the U.S. Department of Homeland Security issued guidance recognizing “residential and commercial real estate services, including settlement services” as being part of the “Essential Critical Infrastructure” workforce, some states (such as New York and New Jersey) have deemed appraisers non-essential workers or have limited the ability of appraisers to leave their homes to perform an appraisal service. This has created some challenges, especially when it comes to conducting an interior inspection of a property as part of an appraisal.
Is there any flexibility?
As background, NCUA’s rule and relevant guidance does not explicitly require appraisals to include an interior inspection. NCUA expects appraisals to conform to generally accepted appraisal standards as set forth in the Uniform Standards of Professional Appraisal Practice (USPAP) , as evidenced in the 2010 interagency appraisal guidelines and in Section 722.4(a)
The Appraisal Foundation, which issues these standards, published guidance related to COVID-19 and conducting an interior inspection. Among other things, the guidance explains the following:
“…When an interior inspection would customarily be part of the scope of work, a health or other emergency condition may require an appraiser to make an extraordinary assumption about the interior of a property. This is permitted by USPAP as long as the appraiser has a reasonable basis for the extraordinary assumption and as long as its use still results in a credible analysis. Neither the Appraisal Standards Board (ASB) nor The Appraisal Foundation has the authority to suspend interior inspections. Appraisers are encouraged to communicate with their clients and follow public health recommendations…”
As you can see, the guidance provides flexibility during emergency situations (such as a pandemic) by allowing appraisers to make assumptions about the interior of a property when an internal inspection would normally be required, provided certain conditions are met.
NAFCU continues to advocate for greater short and long term flexibility from regulators, including the NCUA. The NCUA Board is set to issue two rules tomorrow related to appraisals (a final rule that would raise the threshold for residential real estate appraisals and an interim final rule to provide other appraisal relief), as well as a temporary final rule to provide regulatory relief in response to the coronavirus pandemic. Late yesterday afternoon, NCUA joined banking regulators in a statement regarding the appraisals rule that somewhat previews what action the Board may take at today's meeting.
"The [banking regulators] are deferring certain appraisals and evaluations for up to 120 days after closing of residential or commercial real estate loan transactions. Transactions involving acquisition, development, and construction of real estate are excluded from this interim rule. These temporary provisions will expire on December 31, 2020, unless extended by the federal banking agencies.
The National Credit Union Administration will consider a similar proposal on Thursday, April 16."
Due to the COVID-19 Pandemic, however, the meeting will be open via live audio webcast only. If your credit union would like to attend, you can visit the agency’s homepage (www.ncua.gov) and access the provided webcast link.
In addition to rulemaking, the agencies also issued a guidance document outlining existing flexibilities in the appraisals, information published by Fannie Mae and Freddie Mac regarding appraisals, and reminders of exceptions in the current rule.
Besides NCUA’s rules and guidelines, there are some other considerations. Section 1026.35(c)(3) of Regulation Z, requires appraisals to include an inspection of the interior of the property for higher-priced mortgage loans.
In addition, secondary market investor guidelines may require interior appraisals, such as those set forth in Fannie Mae’s selling guide and its temporary flexibilities. Freddie Mac may accept either an appraisal with an exterior-only inspection or a desktop appraisal under certain conditions. There could also be additional investor requirements if a loan is to be sold to an entity other than a GSE. Credit unions may consider reaching out to any investors to determine if any flexibilities have been put in place regarding interior inspections.
Credit unions may find useful the following relevant resources issued by various organizations and agencies:
- Yesterday's statement from NCUA;
- Updated guidance issued by the ASB on interior inspections during a national health emergency;
- Guidance issued by the ASB for Personal Property Appraisers;
- Fannie Mae’s Lender letter LL-2020-04 providing temporary guidance on appraisal requirements and completion reports, including allowing exterior-only and desktop appraisals for many transactions;
- Freddie Mac's temporary appraisal flexibilities;
- FAQs issued by the Federal Deposit Insurance Corporation, which answers questions about inspections (Answer # 12) and Appraisals (Answer # 13);
- Mortgagee Letter issued by the Federal Housing Administration announcing guidance for property appraisals that can be done through either exterior-only inspections or desktop-only appraisals; and
- Letter issued by the U.S. Department of Veterans Affairs providing guidance on appraisal requirement for VA loans.