A new rule from the federal banking regulators reduces the number of residential mortgage transactions for which an appraisal is required. The rule also incorporates changes to federal appraisal requirements made by the Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018.
On September 27, 2019, the Federal Deposit Insurance Corporation, the Board of Governors of the Federal Reserve System, and the Office of the Comptroller of the Currency (the “Agencies”) issued a much-anticipated Final Rule increasing the threshold below which an appraisal is not required for a residential mortgage transaction from $250,000 to $400,000. (The announcement parallels a similar increase in the de minimis thresholds for commercial transactions that the Agencies announced in April 2018.) The rule takes effect October 9, 2019 (the day after publication in the Federal Register), except as otherwise noted below.
The Agencies first promulgated regulations and guidance required by Title XI of the Financial Institutions Reform, Recovery, and Enforcement Act (“FIRREA”) in 1994. While FIRREA generally requires a regulated lending institution to obtain an appraisal to support any “federally related transaction,” the Agencies have identified more than a dozen categories of appraisals that are exempt. Until the recent rule adoptions, the $250,000 de minimis threshold had remained unchanged since its creation.
Impact of the Rule
The Final Rule does not impact the requirement that a regulated lending institution obtain an evaluation of the property, consistent with the Agencies’ regulations and the Interagency Appraisal and Evaluation Guidelines, for transactions below the de minimis threshold. Notably, broker price opinions and automated valuation models (“AVMs”), which FIRREA separately addresses, among the valuation products that do not meet that standard.
In addition, the Final Rule creates a new exemption from the appraisal requirement. Consistent with the Regulatory Relief Act, effective January 1, 2020, the Agencies will no longer require an appraisal for a rural residential mortgage loan transaction that meet the qualifications set forth in 12 U.S.C. § 3356.
Finally, effective January 1, 2020, the Final Rule requires that appraisals performed in connection with federally related transactions be subject to appropriate review for compliance with the Uniform Standards of Professional Appraisal Practice.
The increased appraisal exemption thresholds are welcome news for the residential and commercial mortgage markets. The augmented exemption will be especially helpful to originators of smaller loans (such as second-lien home equity lines of credit) and fix/flip, non-owner-occupied loans that typically have smaller transaction values. However, lenders should note the requirements for evaluations (still required for exempt transactions) – a topic that is drawing increased attention.