Banks, Credit Unions at Odds Over New Evaluation Rule

After a long period of stasis, there has been a cascade of updates to Federal regulations on when real estate appraisals are required by lenders.

The shift began in 2018 when the Office of the Comptroller of the Currency, the Federal Reserve Board, and Federal Deposit Insurance Corporation amended the appraisal threshold for commercial real estate transactions from $250K to $500K. Following suit, the U.S. Small Business Administration (SBA) announced this past March that it would bring its appraisal threshold in line with the rule adopted by bank regulators for loans it guarantees as part of its 7a and 504 lending programs.

NCUA Moves to Up the Threshold to $1 Million

While the National Credit Union Administration (NCUA) had joined its sister banking regulators when the agencies submitted a Joint Letter to Congress requesting the threshold be examined and reconsidered, it later broke away from the FDIC, OCC and FRB to work on its own version of the rule. Now the NCUA has raised the bar even further. Effective July 2019, the NCUA Board approved a proposed rule to amend the agency’s real estate appraisal requirements for non-residential real estate transactions from the current $250,000 to $1 million.

Many throughout the industry, especially traditional banks, their member associations, and those in the appraisal profession, have expressed concern about the NCUA’s move to increase the threshold to a level higher than the bank regulators, noting that the new rule would create inconsistent supervision for financial institutions based on their charter. Others note that the rule could expose credit unions to risks associated with commercial lending as collateral risk management is a fairly new practice for credit unions.

What’s Next

The NCUA’s proposed rule is now in a 60-day period of review. Comments on the proposed rule must be received within 60 days of publication in the Federal Register and the final rule will become effective 90 days after publication, or sometime in fall 2019.

While it is uncertain whether this final public comment period will generate enough opposition to the rule to derail it, most feel that a “meeting of the minds” between the various agencies – the OCC, FDIC FRB and the NCUA – is in order.

Potential Impacts

This potential rule change will likely accelerate credit union growth in commercial real estate lending and will certainly increase the demand for evaluations. The following positive impacts on the small business lending market are possible:

  • May reduce the closing time for smaller loans, primarily for small community banks with a rural footprint
  • Business borrowers, particularly small businesses, could experience a decrease in borrowing costs
  • Given the difference in costs between an evaluation and an appraisal, third-party pricing information suggests a savings of several hundred dollars per transaction
  • The new rule could reduce loan origination costs for borrowers by $1.5M to $4M on average per year

As a result of this change, thousands of commercial real estate loans will be exempt from appraisals but will require evaluations. And in related news, the Appraisal Foundation announced August 1 it intends to examine the concept of creating standards for evaluations.

We’ll stay on top of this issue, so keep an eye on this blog for future updates.

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