In April, federal bank regulators made headlines when they officially raised the threshold above which appraisals are required for commercial real estate transactions from $250,000 to $500,000. It wasn’t a trivial change. For one thing, it was the first change to the appraisal threshold since it was first established 23 years prior. For another, the public comment period yielded more than 200 comments in support of—and opposed to—the change. Much of the support came from those who felt that the $250,000 exemption had not kept pace with price appreciation in the commercial real estate market, and that the time and cost associated with the appraisal process imposed an unnecessary burden on smaller transactions.
Since the new threshold became effective on April 9th, thousands of commercial real estate loans are exempt from appraisals, but require an evaluation of the real property collateral. The revision to a long-standing policy raised many questions for lenders. So many, in fact, that on October 16th, the federal bank regulators (the OCC, the FDIC and the Federal Reserve Board) issued a valuable FAQ to provide clarity on the federal agencies’ appraisal regulations and guidance. If you need answers to any of the following, read the FAQ document:
- Why does a financial institution need a program for establishing the market value of real property?
- What regulations are applicable to appraisal and evaluation programs?
- What types of transactions require an appraisal?
- What is the purpose of the Valuation Guidelines, and do all financial institutions’ valuation programs have to meet every aspect of the Valuation Guidelines?
- Should a financial institution review all appraisals and evaluations?
- What cost-effective actions can a smaller financial institution take to implement an appraisal and evaluation review program that meets the standards for independence in the agencies’ appraisal regulations?
- When is it appropriate for financial institutions to use the “abundance of caution” exemption?
- Does a financial institution always need to obtain a new appraisal or evaluation for a renewal of an existing loan at the financial institution, particularly where the property is located in a market that has not changed materially?
- When engaging in a renewal transaction, how can a financial institution document the validity of an existing appraisal or evaluation?
- Are real estate transactions secured by farmland eligible for the $1 million exemption for certain business loans?
- What information should be contained in an evaluation?
- When would a financial institution be able to use a tax assessment valuation (TAV) in the development of an evaluation?
- If a financial institution engages in a FRT with an intermediate lender, such as a warehouse lender, in which the financial institution extends credit to the intermediate lender collateralized by the intermediate lender’s real estate-related transactions with third parties, can the financial institution accept appraisals ordered by the intermediate lender to support the value of the underlying real estate collateral?
- Can a financial institution approve a residential or commercial real estate loan subject to receipt and review of an appraisal or evaluation, or must the appraisal or evaluation be obtained and reviewed prior to making the final decision?
- The work-out plan on a problem loan calls for a financial institution to receive an assignment of a note secured by a deed of trust on a different property. Is this transaction considered a real-estate-related financial transaction and is an appraisal required on the collateral property?
- A financial institution plans to make a construction loan to a tract developer to build multiple homes.45 Is it permissible for the developer to order appraisals on the properties to support the construction loan request? Could the developer select an appraiser from the lender’s approved appraiser list and in turn submit the appraiser’s name to potential permanent lenders?
- Are appraisers required to disclose whether they have been engaged to appraise a given property in the past?
- Can a staff appraiser or an appraisal company affiliated with the financial institution be considered independent, since the financial institution compensates them?
- May a financial institution accept an appraisal prepared by an appraiser who was engaged by the loan broker for the transaction?
- May an appraisal be routed from one financial institution to another financial institution via the borrower?
- May an appraiser deliver an appraisal report to more than one lender assuming the appraisal has been ordered by one of the lenders?
- May a financial institution accept a transferred appraisal prepared by an appraiser who had an affiliated business relationship with the financial services institution that originally ordered the appraisal?
- How can a financial institution confirm appraiser independence when accepting an appraisal prepared for another financial services institution?
Other Lending Programs Follow the Fed’s Lead
As the industry adjusted to the new federal appraisal threshold, several other loan programs took the steps necessary to update their own appraisal thresholds. Among them:
- U.S. Small Business Administration–Congress is now considering the 7(a) Real Estate Appraisal Harmonization Act (S.3552) that would bring the SBA’s popular 7(a) program in line with the federal appraisal threshold in the first change to the SBA’s threshold in 18 years. On October 11th, a Senate Committee on Small Business passed the bill. A similar bill with the same language (HR 6347) passed the House with full support. The Act now moves to the full Senate for consideration.
- National Credit Union Administration–The NCUA went down a similar path, but with one key difference. Among other changes, the proposal calls for more than doubling the new federal threshold: an increase in the threshold below which appraisals would not be required for non-residential transactions from $250,000 to $1 million. Anyone interested in submitting a public comment has until December 3, 2018. Only two comments have been submitted to date–one in favor, one opposed.
FOR MORE INFORMATION
- Frequently Asked Questions on the Appraisal Regulations and the Interagency Appraisal and Evaluation Guidelines, October 16, 2018, FDIC, Federal Reserve System Board of Governors and Office of the Comptroller of the Currency
- Joint rule by federal bank regulators, April 9, 2018 including a detailed discussion of the public comments received last summer, and the agencies’ responses to them.
- EDR Insight brief: New Appraisal Threshold Effective April 9th
- Interagency Advisory on Use of Evaluations in Real Estate-Related Financial Transactions, March 2016: Addresses public comments and clarifies current supervisory expectations regarding evaluations.
- 7(a) Real Estate Appraisal Harmonization Act
- Proposed Rule by the NCUA