Lately, discussions regarding appraisals have been occurring at many financial institutions due to changes in regulation and amendments made to the previous rules. First, the commercial real estate (CRE) appraisal threshold was increased in April 2018 from $250,000 to $500,000. Going forward appraisals are only required on CRE transactions above $500,000. A CRE transaction is any real estate-related transaction that is not secured by a single one- to four-family residential property (including construction loans). If the transaction is at or under $500,000, the lender may obtain an evaluation in lieu of the appraisal. Another change that may not affect many, but is important to point out, is that appraisals for CRE loans over $500,000 must be completed by a state-certified appraiser rather than a state-licensed appraiser.
The second change related to appraisals occurred when Congress passed S. 2155: the Economic Growth, Regulatory Relief and Consumer Protection Act in May 2018, which included appraisal exemptions for certain transactions secured by property located in a rural area. The changes apply to portfolio transactions under $400,000 that are secured by a one- to four-unit dwelling attached to land in a rural area. The act adopted the same definition for rural area as included in Regulation Z found in 12 CFR 1026.35(b)(2)(iv)(A). Although these types of transactions may be eligible for exemption from the requirement for an appraisal, there are still steps a financial institution must complete before the transaction qualifies as exempt. First, the financial institution must attempt to obtain an appraiser by contacting at least three state-certified or state-licensed appraisers on the financial institution’s approved appraiser list. If the contacted appraisers are not available, then the financial institution must document that no appraiser was available within five business days beyond customary and reasonable fee and timeliness standards for appraisal requests on other similar transactions.
There are several unknowns related to this change since all factors of the rule have not yet been defined. The first is the question of how a lender defines a “reasonable” timeliness standard as compared to other transactions. Also, what if a financial institution does not have three approved appraisers on its approved appraiser list? The regulators will be providing further guidance for these unknown factors.
The exemptions listed above may be beneficial to a financial institution by eliminating the requirement for an appraisal by a licensed or certified appraiser; however, it is important to remember that if an evaluation is obtained in place of the appraisal, the lender is required under Regulation B to provide the borrower with a copy of the evaluation completed for one- to four-unit dwellings securing first lien transactions. Often loan files do not contain evidence of when an appraisal or evaluation was provided to the borrower. Documenting how and when the appraisal/evaluation was provided to the applicant will evidence the financial institution’s compliance with Regulation B, Regulation Z, and the E-Sign Act. Regulation B requires the appraisal/evaluation be provided to the borrower promptly upon receipt and no less than three business days prior to consummation. Sometimes a lender relies on the borrower signing an acknowledgement at closing that the appraisal/evaluation was provided three business days prior to closing; however, this practice often does not include documentation of the actual date of receipt of the appraisal to evidence it was delivered promptly upon completion. The applicant may inform the lender that they wish to waive their right to receive a copy of the appraisal/evaluation three business days prior to closing; however, this waiver must be obtained by the lender at least three business days prior to loan closing. Even if a waiver is obtained, the appraisal/evaluation needs to be delivered to the borrower no later than the date of the loan closing, and this delivery should be documented in the loan file.
In addition to receiving a copy of the appraisal or evaluation, under Regulation B, a notice of the applicant’s right to receive a copy of the appraisal is required to be given for loan applications (consumer and commercial) that are secured by a first lien on a one- to four-unit dwelling. This notice is required, even if the loan is not originated. It is important to remember that if an applicant for a closed-end consumer purpose mortgage loan did not receive a Loan Estimate due to the loan being denied within three business days of application, the right to receive a copy of the appraisal notice will need to be provided to the applicant on a separate disclosure.
Regulation Z requires that a copy of an appraisal be provided to applicants of higher priced mortgage loans at least three business days prior to closing or within thirty days of determining a loan will not be consummated. Appraisal requirements for higher priced mortgage loans apply only to loans secured by a principal residence, regardless of lien status. Regulation Z also requires a notice be provided to the applicants of higher priced mortgage loans within three business days of application explaining their rights to a copy of an appraisal. Notice of the applicant’s right to an appraisal provided under Regulation B meets this requirement. Applicants of higher priced mortgage loans are not allowed to waive their timing rights for the receipt of an appraisal.
If any required disclosures or appraisals are provided electronically, the financial institution must ensure compliance with the E-Sign Act. When appraisals are provided in an electronic format different from the disclosures the consumer consented to receive electronically, the consumer may not have demonstrated their ability to open and view the document in the format provided. In order to provide an appraisal electronically, the consumer first needs to demonstrate that they are able to open a document in the applicable format.
The current appraisal requirements are important to keep in mind for all covered loans requiring appraisals. The changes to appraisal requirements for CRE transactions were effective upon publication in April 2018. Look for further guidance from the regulators on the unknown factors related to the rural area appraisal exemptions.
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