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How should financial institutions respond to COVID-19 related issues relative to inspections of real property? What alternative options are available in lieu of obtaining an interior inspection for real estate secured loans?
The federal banking agencies’ appraisal regulations require that appraisals be conducted in compliance with the Uniform Standards of Professional Appraisal Practice (USPAP). While exterior and interior inspections are commonly conducted in preparing appraisals and evaluations and can facilitate high quality valuations, such inspections are not required by the agencies’ appraisal regulations. Rather, as allowed by USPAP, an appraiser can determine the characteristics of a property through, among other things, any combination of property inspection, asset records, photographs, property sketches, and recorded media.
On March 17, 2020, the Appraisal Standards Board issued “2020-21 USPAP Q&A” which indicates that when an interior inspection would customarily be part of the scope of work, a health or other emergency condition may require an appraiser to make an extraordinary assumption about the interior of a property. USPAP permits this approach as long as the appraiser has a reasonable basis for the extraordinary assumption and as long as its use still results in a credible analysis. Both desktop appraisals and exterior-only appraisals can fulfill the requirements of USPAP as long as the analysis is credible. Interior inspections are still required, however, for certain higher-priced mortgage loans.
Q&As from the Appraisal Standards Board https://www.appraisalfoundation.org/imis/TAF/Standards/Q_As/TAF/QAs.aspx
Financial institutions should consult with appraisers and other persons performing real estate inspections about alternative arrangements if the inspector cannot access the interior of a property due to concerns related to COVID-19.
Responses to COVID-19 related questions provided by The Appraisal Foundation note that the USPAP addresses situations where access to the interior of a property may not be feasible. USPAP permits an appraiser to make an extraordinary assumption about the interior of a property due to health concerns or other emergency conditions, such as the COVID-19 pandemic.
Appraisers may have a variety of reasonable bases for an extraordinary assumption, including, but not limited to:
- Determining an interior inspection is not needed because the appraiser has a reasonable basis for an extraordinary assumption and its use still results in a credible analysis.
- Having conducted a prior inspection of the property in the recent past.
- Obtaining an affidavit and/or pictures from the borrower regarding the interior.
The Appraisal Foundation - Coronavirus and Appraisers: Your Questions Answered http://www.appraisalfoundation.org/iMIS/TAF/Coronavirus_and_Appraisers.aspx