Compliance Blog

Greetings compliance friends! In the wake of excessive flooding brought about by the many recent tragic hurricanes, NCUA together with several other agencies have granted temporary exceptions to the current appraisal requirements in major disaster zones. Since we've received quite a few questions on this, I figured it would be a good opportunity to review the NCUA appraisal requirements and un-package this temporary exemption.

NCUA's appraisal requirements depend on the loan value and its terms. NCUA's Rules and Regulations do not require a formal appraisal if the transaction is 250k or less. Generally, any loan with a transactional value of $25,500 or less requires only a written valuation€ that meets FIRREA requirements. A loan with a transactional value between $25,501 and $250,000 only requires a formal appraisal if it is a "higher-priced" mortgage loan; and all loans of $250,001 or more require an appraisal.

For transactions requiring an appraisal, the central requirement is that the appraisal must be "performed by a state certified or licensed appraiser." For transactions requiring a written valuation, it must "be performed by an individual having no direct or indirect interest in the property, and qualified and experienced to perform such estimates of value for the type and amount of credit being considered."  12 C.F.R. §722.3(d). The minimum requirements for written estimates of market value are addressed in Appendix B of the Interagency Appraisal and Evaluation Guidelines.

In addition to the transaction threshold issue, §722.3 outlines the other exceptions to the general requirement to seek an appraisal, including situations in which:

• A lien has been taken out on the property as collateral only through an abundance of caution, and the transaction terms are no more favorable than they would have been in the absence of a lien;
• A lien has been taken out on the property for purposes other than the real estate's value;
• A lease of real estate is entered into, unless the lease is the economic equivalent of a purchase or sale of the leased real estate;
• The transaction involves an existing extension of credit at the lending credit union provided that there is no advancement of new monies and no obvious or material changes to market conditions;
• The transaction involves the purchase, sale, investment in, exchange of, or extension of credit secured by, a loan or interest in a loan, pooled loans, or interests in real property, including mortgage-backed securities;
• The transaction is wholly or partially insured or guaranteed by a United States government agency or United States government sponsored agency;
• The transaction either: 
  • Qualifies for sale to a United States government agency or United States government sponsored agency; or
  • Involves a residential real estate transaction in which the appraisal conforms to the Federal National Mortgage Association or Federal Home Loan Mortgage Corporation appraisal standards applicable to that category of real estate; or
• The regional director has granted a waiver from the appraisal requirement for a category of loans meeting the definition of a member business loan.

Appendix A to the Interagency Appraisal and Evaluation Guidelines, provides additional guidance on these exemptions and describes how institutions can comply with Title XI of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA).The guidance was joined by NCUA, and was attached to Letter to Credit Unions 2010-23.

Higher Priced Mortgages

As referenced in §722.3(f), if a loan is a second mortgage that is closed-end consumer credit secured by the consumer's principal dwelling and qualifies as a higher-priced mortgage loan (HPML), it may require an appraisal under Regulation Z. Â§1026.35(c). An HPML is a closed-end secured residential loan "with an annual percentage rate that exceeds the average prime offer rate for a comparable transaction by a certain number of percentage points.  §1026.35(c)(2) also provides an appraisal threshold exemption which is currently $25,500, along with additional exemptions to the appraisal rule for HPMLs. The threshold is set to increase to $26,000 on January 1, 2018. The CFPB official commentary discusses all these exemptions in further detail and emphasizes that although these types of transactions may be exempt from the CFPB's appraisal rule, the requirements under FIRREA and §722.3 still apply. Thus, an appraisal would be required for HPMLs between $25,500 and $250,000, and a written valuation conforming to the Interagency Appraisal and Evaluation Guidelines would be required for loans that do not require an appraisal under NCUA. An additional written appraisal for HPMLs may be required for recently acquired properties subject to certain conditions found in §1026.35(c)(4).

In summary, it appears any loan with a transactional value of $25,500 or less requires only a written valuation that conforms to Appendix B of the interagency guidance. A loan with a transactional value between $25,500 and $250,000 only requires a formal appraisal if it is a HPML. All loans carrying a value of $250,001 or more require an appraisal.

Loans in Disaster Areas

On October 16, 2017, NCUA, together with several other agencies, released a Letter to Credit Unions (17-CU-06) granting a temporary exemption to the FIRREA appraisal requirements in major disaster areas, as defined by the President. The exemption provides flexibility to credit unions with loans secured by real estate and located in the affected areas, including parts of Florida, Georgia, Puerto Rico, Texas, and the U.S. Virgin Islands. The exemptions will remain in effect for a three-year period from the date of the declaration.

The order specifically requires that the property involved was located within the major disaster area, there is a binding commitment to fund the transaction, the value of the real property supports the institution's decision to enter into the transaction, and the transaction must continue to be subject to review by management in the course of examinations of the institution.

This waiver is an attempt to ensure that any shortage of appraisers would not further delay the recovery process for these regions. We at NAFCU have been saddened to see the extent of the damage and loss of life and have compiled a list of resources to help credit unions in these disaster areas. Our thoughts and prayers go out to all those who have been affected.