Consumer Finance Litigation

On April 14, 2020, the Consumer Financial Bureau (CFPB), Federal Deposit Insurance Corporation (FDIC), National Credit Union Administration (NCUA), Comptroller of the Currency (OCC), and Board of Governors of the Federal Reserve System (FRB) issued an interagency statement advising financial institutions of existing flexibilities and exceptions that may be useful during the COVID-19 pandemic with respect to real estate evaluations and appraisals.

1. Physical Property Inspections

Currently, exterior and interior property inspections are not required by the appraisal regulations implementing Title XI of the Financial Institutions Reform, Recovery, and Enforcement Act (“FIRREA”). Given such and pursuant to the Uniform Standards of Professional Appraisal Practice (“USPAP”), an appraiser may use a number of tools and combinations when determining the characteristics of the property, including but not limited to: property inspection, recorded media, pictures, sketches, and asset records.  According to the “2020-21 USPAP Q&A” issued by the Appraisal Standards Board on March 17, 2020, certain conditions may require an appraiser to make assumptions with regard to the interior of a property which is permitted if the appraiser’s basis for the assumptions is reasonable and doing so still results in a sound analysis. Nevertheless, interior property inspections are still required for some higher-priced mortgage loans.

2. Fannie Mae and Freddie Mac Standards

Freddie Mac and Fannie Mae have also recently issued guidance advising of the temporary appraisal flexibility standards for the loans they purchase:

• Desktop and exterior-only appraisals will now be acceptable for qualifying primary residence loans. Under Fannie Mae’s standards, these loans have a loan to value percentage falling within its eligibility matrix. Under Freddie Mac’s standards, these loans have up to a 97 percent loan to value ratio (LTV).
• Desktop and exterior-only appraisals will now be acceptable for secondary homes and investment properties with an LTV of 85 percent or less.
• Exterior-only appraisals will now be acceptable for certain cash-out refinances where the refinancing has an LTV within an acceptable range and the mortgage is owned by government sponsored enterprise.

Furthermore, appraisal waiver programs allow lenders to sell eligible loans without an appraisal. While Fannie Mae already waives the appraisal requirement for some lenders, Freddie Mac is expanding its appraisal waiver program to include both cash-out and no-cash out refinancing.

3. Useful Exceptions Within Existing Appraisal Regulations

Currently, there are at least 14 exceptions to the existing regulations that require appraisals by a licensed or certified appraiser. Given the current pandemic, the interagency statement reminds lenders of the following exceptions that may be most useful for real-estate transactions during this time:

• Residential transactions with a transaction value ≤ $400,000;
• Commercial transactions with a transaction value ≤ $500,000;
• Business loans with a transaction value ≤ $1 Million where said loan is not dependent upon the sale of real estate or rental income as the principal source of repayment;
• Transactions with an existing extension of credit if:
  • Even with the advancement of new monies, there has been no significant physical changes in the property or market conditions that undermine collateral protection;
  • or there is no advancement of new monies beyond that needed to cover closing costs;
• Transactions insured either wholly or partially by a Government agency or an agency sponsored by the Government;
• Transactions that either qualify for sale to a Government agency or an agency sponsored by the Government or involve residential transactions that conform to Freddie Mac’s or Fannie Mae’s appraisal criteria.

Notably, this month, the FDIC, FRB, and OCC temporarily amended their appraisal regulations to allow completion of appraisals and evaluations to be deferred for up to 120 days post-closing. This deferral applies to both residential and commercial transactions, not including those for acquisition, development, and construction. However, the deferral will end December 31, 2020.

Moreover, the NCUA’s appraisal regulations provide 9 similar exceptions that may be applicable during COVID-19:

• Residential transactions with a value < $250,000;
• Residential transactions with a value more than $250,000 but less than $1 Million, and the transaction value insured/guaranteed by a Government Agency or agency sponsored by the Government is ≥ $250,000;
• Commercial transactions with a value < $1 Million;
• Transactions with an existing extension of credit from the lender if:
  • There is no advancement of new monies beyond that needed to cover closing costs;
  • or even with the advancement of new monies, there has been no significant physical changes in the property or market conditions that undermine collateral protection;
• Transactions that either qualify for sale to a Government agency or an agency sponsored by the Government or involve residential transactions that conform to applicable Freddie Mac or Fannie Mae appraisal criteria.

Given the impact of COVID-19, the agencies are encouraging financial institutions to take advantage of the flexibilities and exceptions outlined above, and use existing evaluations or appraisals in certain situations if they can confirm the evaluations or appraisals remain valid. Recognizing that the criteria for determining the validity of an evaluation or appraisal may be different during disasters and emergencies, the statement advises that determinations of existing evaluations or appraisals conducted during the COVID-19 pandemic will not be subject to criticism if conducted in a safe manner.