New Rule Allows Banks to Postpone Appraisals 120 Days for Certain Loans
Due to the involvement of a physical property inspection, government restrictions on non-essential movement and health safety advisories in response to the National Emergency declared in connection with COVID-19 have led to complications with respect to performing and completing property appraisals and evaluations needed to comply with federal appraisal regulations. As a result, it is anticipated that some borrowers may experience delays in obtaining funds needed to meet current and projected financial demands.
The Rule allows regulated institutions to close qualified commercial or residential real estate loans without a contemporaneous appraisal or evaluation, provided that such evaluation or appraisal is completed within a grace period of 120 calendar days following closing. These qualified real estate loans do not include financing in connection with the acquisition, development or construction of real estate, which loans present heightened risks not associated with the financing of existing real estate.
Institutions are instructed to make best efforts to obtain a credible valuation of real property collateral prior to loan closing, consistent with the underwriting principles in the Agencies’ Standards for Safety and Soundness and Real Estate Lending Standards. 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.
These temporary provisions will expire on December 31, 2020 (meaning a transaction closed on or before this date is eligible for deferral) unless extended by the Agencies. The Agencies believe that this 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 the safety and soundness concerns for risk to lenders. The National Credit Union Administration (NCUA) will consider a similar proposal today.
In addition, the Agencies, together with the NCUA and the Consumer Financial Protection Bureau, in consultation with the Conference of State Bank Supervisors, issued a joint statement addressing challenges relating to appraisals and evaluations for real estate-related financial transactions affected by COVID-19. This statement outlines other flexibilities in industry appraisal standards and appraisal regulations and describes temporary changes to Fannie Mae and Freddie Mac appraisal standards that can assist lenders during this difficult time. We will continue to monitor this situation and provide updates as things progress.