There’s always one question every appraisal department wants to know: Does this qualify for appraisal exemptions? And depending on the answer, there are often many, many questions that follow.
For a little clarity on the finer points about when you should consider appraisal exemptions and how they may affect your appraisal process, we created this list of top things you need to know with help from the OCC.
Referencing multiple relevant materials, including: Title XI of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989, real estate lending standards, December 2010 Interagency Appraisal and Evaluation Guidelines, and March 2016 Interagency Advisory on the Use of Evaluations in Real Estate-Related Financial Transactions, here are four things you may not know about appraisal exemptions, but should consider before processing your next loan.
1. Banks and credit unions can appropriately use the “abundance of caution” appraisal exemption.
Does your loan applicant qualify for an extension of credit based on a strong cash flow or collateral that is not real estate related? It’s possible that neither an appraisal nor an evaluation is required for the transaction.
According to the OCC, a borrower can qualify for an abundance of caution in very rare cases, including when the market value of the collateral is not necessary when making a final credit decision. In the event that a bank or credit union has the full support of detailed repayment sources, such as a sound global cash flow, sufficient debt coverage, or even the value of owned equipment superseding the outstanding balance, a final commitment can be made to the borrower without additional reporting measures.
Despite this, a financial institution should take caution. Banks or credits unions considering this route would be smart to document the final credit report and verify that the abundance of caution exemption has been appropriately applied to their own established appraisal processes.
2. Financial institutions don’t always need to obtain a new appraisal or evaluation for a renewal of an existing loan.
In a market that has not changed dramatically, a bank or credit union is not always required to validate an existing loan with an additional appraisal or evaluation when undergoing a loan renewal. The deciding factor of whether or not additional appraisals or evaluations are needed comes down to value change: Has the property’s total worth changed significantly to call the validation of the existing report into question? If the answer is no, a financial institution is at liberty to forego any additional reporting.
However, a financial institution must do an additional appraisal or evaluation in the event of the advancement of new money associated with a renewed transaction, unless another exemption applies.
3. All existing appraisals or evaluations should be validated in the credit file.
To begin the renewal transaction process, banks and credit unions should focus primarily on providing a detailed analysis of the market value of the transaction. In terms of what kind of facts to include in the report, the varying level of details should directly correlate to the transaction type. For instance, a residential property report will be significantly less robust than a loan for a commercial or industrial project.
4. Some real estate transactions secured by farmland are eligible for the $1 million exemption.
Business loans that include repayment from proceeds of the farm business — think the selling of crops or cattle — are eligible for the $1 million threshold exemption because the repayment is not dependent on the sale or rental of the property. A loan that is secured by farmland and uses rental income as repayment, however, is not eligible for the exemption.
Have additional questions about appraisals, exemptions, and how they apply to the loan process at your financial institution? Check out our blog about the six essential appraisal regulations that you need to prep for, or get in touch with one of our appraisal experts for more in-depth answers to appraisal exemptions and how they apply to your bank or credit union.