On April 14, 2020, in a joint press release, the federal banking agencies issued an interim final rule allowing regulated institutions to temporarily defer real estate-related appraisals and evaluations for up to 120 days after closing of real estate-related loan transactions. The agencies have provided this temporary relief in an effort to allow households and businesses quicker access to financing and liquidity during the COVID-19 crisis by not requiring appraisals or evaluations to be conducted prior to closing.
Under Title XI of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA), financial institutions are typically required to obtain appraisals in real estate-related financial transactions prior to the closing of the transaction. These appraisals almost universally require on-site, physical property inspections. The agencies have exempted certain real estate-related transactions from the appraisal requirement, but still require “evaluations” to be completed in many of these transactions prior to closing. These evaluations also routinely involve physical, on-site inspections. However, the impact of COVID-19 has led to difficulties and delays in obtaining the inspections necessary for both appraisals and evaluations. The interim final rule was promulgated to combat these potentially harmful delays and allow for quicker access to financing and liquidity.
Key Points from the Interim Final Rule:
- The deferrals apply to both residential and commercial real estate-related loan transactions.
- The interim final rule excludes transactions involving the acquisition, development, and construction of real estate.
- The required appraisal or evaluation must still be conducted according to the agencies’ promulgated rules under Title XI of FIRREA within 120 days of the closing of the transaction.
- While not requiring an appraisal or evaluation before closing, financial institutions are still expected to use best efforts and available information to determine an estimate of the value of the property in question.
- The interim final rule does not relieve financial institutions of the responsibility to follow internal underwriting standards for assessing the credit worthiness of borrowers and their ability to repay.
- Financial institutions are expected to develop a risk mitigation strategy if an appraisal or evaluation conducted after closing reveals a market value significantly lower than expected. This strategy should balance safety and soundness risk to the institution with mitigation of financial harm to COVID-19 affected borrowers.
- The National Credit Union Administration (NCUA) has not yet adopted this interim final rule, but will consider a similar proposal on April 16, 2020.
- The interim final rule expires on December 31, 2020, unless extended by the agencies.