NCUA Adopts Two Rules on Appraisals
At its April 16, 2020 meeting, the NCUA Board adopted two rules relative to the requirement to obtain an appraisal on certain real-estate related transactions. First, the Board amended the appraisal rule to increase the threshold where a formal appraisal may be required from $250,000 to $400,000. Second, the Board adopted an interim final rule defers the requirement for obtaining an appraisal or valuation requirement for up to 120 days after closing. These changes went into effect on April 21, 2020 and are effective through December 31, 2020.
As background, NCUA’s appraisal requirements in Part 722 depend on the risk posed by the loan. The requirements defines two different levels of appraiser credentials: a state licensed appraiser or a state certified appraiser. NCUA’s appraisal regulation requires an appraisal performed by a state certified or state licensed appraiser for real-estate related financial transactions that are not complex, involves residential real estate, and the transaction value not guaranteed under a government agency or government sponsored agency is under the threshold in the rule. An appraisal by a state certified appraiser is required for all transactions of $1,000,000 or more; and “complex” residential real estate transactions where the transaction value not guaranteed under a government agency or government sponsored agency is over the threshold in the rule. For some additional background, check out this NAFCU Compliance Blog post.
Many may recall that a few months ago, federal banking regulators increased the threshold for when certain real estate transactions would require a formal appraisal from $250,000 to $400,00 back in September 2019. In contrast, NCUA still kept the threshold for credit unions at $250,000. NAFCU advocated for parity for credit unions, and NCUA’s final rule does this. This rule will become effective upon publication in the Federal Register. In Letter to Credit Unions 20-CU-10, released yesterday evening, NCUA summarized this change accordingly:
Unless specifically exempted from valuation requirements, the new threshold requires residential real estate transactions of $400,000 or more to obtain an appraisal from a state-certified appraiser if the transaction is complex, and from a state-licensed appraiser if the transaction is not complex. Appraisals must comply with the Uniform Standards of Professional Appraisal Practice (USPAP). Current USPAP standards may be satisfied by a desktop or exterior-only appraisal (also referred to as a “drive-by” appraisal) completed by a properly licensed professional.
With the implementation of this rule, credit unions have the flexibility to obtain either an appraisal or a written estimate of market value for residential transactions below $400,000.
Because written estimates of market value (also referred to as evaluations) are not subject to USPAP and can be less rigorous and formal than an appraisal, they may be more economical and faster to produce than an appraisal. Credit unions that use this flexibility should be aware that written estimates of market value must still comply with safe and sound practices. A written estimate of market value:
Must be conducted by an individual who is qualified and experienced to perform such valuations and is independent of the transaction;
Should contain a reliable estimate of the property’s market value with sufficient information and analysis to support the valuation, including information about the property’s condition supported by a physical inspection; and
Should contain sufficient information for the credit union to make a prudent credit decision.
The rule also amends section 722.4(c) to require that for federally related transactions, an appraisal is “subject to appropriate review for compliance with the [USPAP].” Note, NCUA’s rule already required that appraisals conform to the USPAP.
NCUA also issued an interim final rule to provide credit unions with some flexibility with the appraisals requirement in light of the ongoing COVID-19 situation. This rule is effective as of April 21, 2020 and allows credit unions to defer the appraisal or written valuation required for up to 120 days after closing. This applies to all residential and commercial real estate transactions, except for the “acquisition, development, and construction of real estate.” This provision expires at the end of the year, applying only to transactions that close on or before December 31, 2020.