42. A number of commenters disputed that there are appraiser shortages warranting regulatory relief outside of Start Printed Page 53591rural areas, with some offering supporting data from the Appraisal Subcommittee of the Federal Financial Institutions Examination Council and the Appraisal Foundation. which includes both appraisals and evaluations. The agencies already periodically review their regulations to identify outdated or unnecessary regulatory requirements, such as through the EGRPRA process, and can consider any comments concerning the thresholds through that process. 40. See Standard & Poor's CoreLogic Case-Shiller Home Price Indices, available at https://us.spindices.com/​index-family/​real-estate/​sp-corelogic-case-shiller. Summary: The FDIC, the Federal Reserve, and the Office of the Comptroller of the Currency (the Agencies) have jointly issued an amended rule (the Appraisal Rule) that increases the threshold for residential real estate transactions requiring an appraisal from $250,000 to $400,000. [65] As noted in the proposal, a historical review of loss data demonstrates that the net charge-off rate for residential real estate transactions did not increase after the appraisal threshold was raised from $100,000 to $250,000 in June 1994, indicating the 1994 threshold increase did not have a negative impact on the safety and soundness of regulated institutions. The documents posted on this site are XML renditions of published Federal However, because the final rule increases the residential threshold to $400,000 for all residential transactions, institutions will not need to comply with the detailed requirements of the rural residential appraisal exemption in order for such transactions to be exempt from the agencies' appraisal requirement. Another argued that even if an appraisal takes longer to review, the time difference is not significant and would not delay a loan closing. In the proposal, the agencies requested comment on whether the proposed level of $400,000 for the threshold would be appropriate from a safety and soundness perspective, and on what sources of data would be appropriate for the safety and soundness analysis. c. Removing the period at the end of paragraph (a)(13) and adding “; or” in its place; and. FDIC-supervised institutions are set forth in 12 U.S.C. By increasing the residential real estate appraisal threshold, the rule is expected to increase the number of residential real estate loans eligible for an evaluation, instead of an appraisal. Public Law 115-174, Title I, section 103, codified at 12 U.S.C. The final rule increases the threshold level at or below which appraisals are not required for residential real estate transactions from $250,000 to $400,000. However, the threshold exemption does not affect the ability to enter into these arrangements. Effective January 1, 2020, § 323.4 is amended by. 65. These guidelines are meant only to assist the Assessor in meeting his/her responsibilities and in no way are intended to be all-inclusive. in real estate-related transactions by requiring that real estate appraisals used in connection with federally related transactions (Title XI appraisals) be performed in accordance with uniform standards by individuals whose competency has been demonstrated and whose professional conduct will be subject to effective supervision. (ii) The institution may engage a certified appraiser to complete the appraisal. The OCC bases this estimate of the number of small entities on the SBA's size thresholds for commercial banks and savings institutions, and trust companies, which are $600 million and $41.5 million, respectively. The mortgage originator must be subject to oversight by a Federal financial institutions regulatory agency, as defined in Title XI. The Federal Reserve, the central bank of the United States, provides the nation with a safe, flexible, and stable monetary and financial system. Other commenters suggested that the proposal would cause consumers to lose the benefit of appraisers performing a physical inspection and an analysis of specific property features, including property maintenance and repair issues that can affect the property value. The FDIC supervises 3,465 depository institutions,[89] on NARA's archives.gov. • Uniform Standards of Professional Appraisal Practice (USPAP). However, the FDIC assumes that most, if not all, of these cost reductions would be passed on to residential real estate buyers. All real estate-related financial transactions engaged in by financial institutions are FRTs unless the transactions are exempt from the appraisal requirements of the appraisal regulations. obtain an appraisal from a state licensed or certified appraiser. Moreover, although limited in scope, the higher-priced mortgage loan rule (HPML rule),[70] and services, go to Several commenters rejected assertions that there was an appraiser shortage warranting regulatory relief. the federal financial institutions regulatory agencies can require an institution to obtain an appraisal to address safety and soundness concerns. An evaluation provides a market value of the real estate collateral. Other commenters questioned how much relief the proposal would provide. These commenters asserted that the aggregate data could include loans not eligible for the exemption or loans exempted on other grounds. The agencies invited comment on the proposed level for the residential real estate appraisal threshold. In 2018, Congress amended Title XI by adding the rural residential appraisal exemption to provide relief for financial institutions engaging in residential real estate transactions in certain rural areas. October 10, 2019, Transcripts and other historical materials, Quarterly Report on Federal Reserve Balance Sheet Developments, Community & Regional Financial Institutions, Federal Reserve Supervision and Regulation Report, Federal Financial Institutions Examination Council (FFIEC), Securities Underwriting & Dealing Subsidiaries, Regulation CC (Availability of Funds and Collection of Checks), Regulation II (Debit Card Interchange Fees and Routing), Regulation HH (Financial Market Utilities), Federal Reserve's Key Policies for the Provision of Financial Services, Sponsorship for Priority Telecommunication Services, Supervision & Oversight of Financial Market Infrastructures, International Standards for Financial Market Infrastructures, Payments System Policy Advisory Committee, Finance and Economics Discussion Series (FEDS), International Finance Discussion Papers (IFDP), Estimated Dynamic Optimization (EDO) Model, Aggregate Reserves of Depository Institutions and the Monetary Base - H.3, Assets and Liabilities of Commercial Banks in the U.S. - H.8, Assets and Liabilities of U.S. Many commenters opposing the proposal highlighted the benefits that state licensed or state certified appraisers bring to the real estate valuation process. FDIC: Beverlea S. Gardner, Senior Examination Specialist, Division of Risk Management and Supervision, (202) 898-3640, BGardner@FDIC.gov; Benjamin K. Gibbs, Counsel, Legal Division, (202) 898-6726; Mark Mellon, Counsel, Legal Division, (202) 898-3884; or Navid Choudhury, Legal Division, (202) 898-6526, Federal Deposit Insurance Corporation, 550 17th Street NW, Washington, DC 20429. For the reasons set forth in the joint preamble, the OCC amends part 34 of chapter I of title 12 of the Code of Federal Regulations as follows: 1. 3341(b). informational resource until the Administrative Committee of the Federal Based on their supervisory experience with evaluations since 1994, the agencies have found that both appraisals and evaluations can protect consumers by facilitating the informed use of credit and helping to ensure the estimated value of the property supports the purchase price and mortgage amount. These data are also consistent with some commenters' assertions that lenders would continue to use a risk-based approach in determining whether to obtain an evaluation or an appraisal for a particular transaction, regardless of the threshold amount. The FDIC believes that effects in excess of these thresholds typically represent significant effects for FDIC-supervised institutions. During this timeframe, the net charge-off rate for small, FDIC-supervised institutions ranged from 1 basis point to 9 basis points. 32. The agencies also conclude that raising the threshold is likely to reduce the time needed to find appropriate personnel to perform the valuation, particularly in areas experiencing shortages of certified or licensed appraisers. The agencies requested comment on this analysis of the charge-off data. For clarity, the agencies note that under the final rule, creditors operating in rural areas could opt to rely on the more broadly applicable exemption for transactions of $400,000 or less in lieu of the rural residential appraisal exemption and will not need to meet the additional criteria required under the rural residential appraisal exemption. [36] Further, individuals performing evaluations are expected to be independent of the transaction. Based on the agencies' supervisory experience with appraisals and evaluations since 1994, the agencies believe that property inspections done by appropriately trained individuals for either appraisals or evaluations can provide prospective buyers with detailed information regarding a property's condition and features, may provide consumer protection, and can help ensure that appraisals or evaluations are consistent with safe and sound banking practices. [37] 12/22/2020, 145 The requirement that Title XI appraisals be subject to appropriate review for USPAP compliance applies to all small entities regulated by the Board that engage in real estate lending. Institutions are more likely to obtain an evaluation, where permitted, for transactions with a lower dollar value, that are less complex, or that are subsequent to a previous transaction for which a Title XI appraisal was obtained. In general, commenters who supported the proposed increase in the threshold viewed the data presented in the proposed rule as supporting the increase, while commenters opposed to the increase found the data insufficient. The regulatory flexibility analysis otherwise required under the RFA is not required if an agency certifies that the rule will not have a significant economic impact on a substantial number of small entities and publishes its certification and a brief explanatory statement in the Federal Register together with the rule. The Board's rule applies to state chartered banks that are members of the Federal Reserve System (state member banks), as well as bank holding companies and nonbank subsidiaries of bank holding companies that engage in lending. The final rule requires evaluations for these exempt transactions. However, because the final rule increases the residential threshold to $400,000 for all residential transactions, institutions, including small entities, will not need to comply with the detailed requirements of the rural residential appraisal exemption in order for such transactions to be exempt from the agencies' appraisal requirement. Finally, by potentially reducing valuation-related costs associated with residential real estate transactions for properties greater than $250,000 but not more than $400,000, the proposed rule could result in a marginal increase in lending activity of small, FDIC-supervised institutions for properties of this type. on FederalRegister.gov 41. Based on the net charge-off data, which suggest that the increase in the appraisal threshold in 1994 did not have a material effect on the loss experience associated with residential real estate loans, the agencies believe the increase to $400,000 will not lead to increases in charge-off rates. [66] Counts are subject to sampling, reprocessing and revision (up or down) throughout the day. documents in the last year, 309 Federal Deposit Insurance Corporation. The agencies also note that regulated institutions generally need less time to review evaluations than Title XI appraisals because the content of the report can be less comprehensive than an appraisal report. Introduction A. A real estate-related financial transaction is defined as any transaction that involves: (i) The sale, lease, purchase, investment in or exchange of real property, including interests in property, or financing thereof; (ii) the refinancing of real property or interests in real property; and (iii) the use of real property or interests in real property as security for a loan or investment, including mortgage-backed securities. The agencies noted that evaluations have long been required for below-threshold transactions; must be consistent with safe and sound banking practices; [58] By increasing the residential real estate appraisal threshold, the rule is expected to increase the number of residential real estate loans eligible for an evaluation, instead of an appraisal. Each document posted on the site includes a link to the documents in the last year, 72 The agencies have a long history with evaluations as an alternative valuation tool. better and aid in comparing the online edition to the print edition. 5. 17. Call Report data, March 31, 2019. 88. Further, consumers may voluntarily obtain appraisals regardless of whether the regulated institution is required to do so. The SBA has defined “small entities” to include banking organizations with total assets of less than or equal to $600 million. For a transaction that does not require the services of a State certified or licensed appraiser under paragraphs (a)(1), (5), (7), (14), or (15) of this section, the institution shall obtain an appropriate evaluation of real property collateral that is consistent with safe and sound banking practices. Given price appreciation in residential real estate transactions since that time, the change will provide burden relief without posing a threat to the safety and soundness of financial institutions. The agencies have consulted with the Consumer Financial Protection Bureau (CFPB), and, as required by statute, have received its concurrence on the increased threshold. 1376, codified at 12 U.S.C. (k) Residential real estate transaction means a real estate-related financial transaction that is secured by a single 1-to-4 family residential property. The agencies have found that both appraisals and evaluations prepared properly can be credible tools to support real estate lending decisions. The agencies believe rising market prices of residential properties have contributed to increased burden for regulated institutions and consumers in terms of transaction time and costs, given that the threshold has remained the same since 1994. on Board: Anna Lee Hewko, Associate Director, (202) 530-6260; Virginia Gibbs, Manager, Policy Development Section, (202) 452-2521; Carmen Holly, Lead Financial Institution Policy Analyst, (202) 973-6122, Division of Supervision and Regulation; Laurie Schaffer, Associate General Counsel, (202) 452-2272; Matthew Suntag, Counsel, (202) 452-3694; Derald Seid, Counsel, (202) 452-2246; or Trevor Feigleson, Senior Attorney, (202) 452-3274, Legal Division, Board of Governors of the Federal Reserve System, 20th and C Streets NW, Washington, DC 20551. The final rule makes a conforming change to add to the list of exempt transactions those transactions secured by residential property in rural areas that have been exempted from the agencies' appraisal requirement pursuant to the Economic Growth, Regulatory Relief, and Consumer Protection Act. When considering the threshold increase's potential impact on safety and soundness, the agencies considered a loss analysis of aggregate net charge-off rates for residential real estate loans after the last increase in the appraisal threshold in 1994. 3350(5). Based on information available to the Board, the final rule is not expected to impose any significant cost or burden on small entities, and small entities and borrowers engaging in residential real estate transactions could experience cost reductions; however, the overall economic impact on small entities is not expected to be significant. Summary of Proposed Rule C. Overview of Comments II. c. Supervisory Experience. As discussed further below, available data and analysis indicate that, while there is limited information available to compare the cost and time savings related to performing appraisals versus evaluations, raising the residential threshold, and the corresponding increased use of evaluations, will lead to some level of cost savings for consumers and institutions. documents in the last year, by the Education Department [21] One such commenter referred to a survey showing that VA fees are higher than the norm, indicating that the median cost of an appraisal is $450, with 89 percent of those surveyed stating the typical cost of an appraisal is below $600. Setting the threshold level to the low point of the most recent cycle takes into consideration potential price fluctuations to which financial institutions that engage in residential real estate lending could be exposed. For three of these twelve exemptions, in lieu of an appraisal by a licensed/certified appraiser, the lender may obtain an evaluation1. In addition to the additional safety and soundness protection provided by the risk-based approach to valuations, the agencies note that each agency has the ability under the appraisal Start Printed Page 53588regulations to require an appraisal whenever it is necessary to address safety and soundness concerns. with a transaction value [16] 5. In the proposed rule, the agencies specifically asked what challenges, if any, would be posed by requiring lenders to obtain evaluations where the rural residential appraisal exemption under section 103 of EGRRCPA is used. FRB: The RFA [86] 18. As stated in the proposal, the threshold increase will exempt a much smaller percentage of regulated transactions by dollar volume. and the FHFA Index [34] Another indicated that evaluations based on AVMs are generally more objective than appraisals because they are not skewed by knowledge of the contract price. In addition to savings relating to the relative costs associated with appraisals and evaluations, the final rule may also reduce burden for institutions in areas with appraiser shortages. These tools are designed to help you understand the official document [81] Consumer Protection Considerations. Definition of Residential Real Estate Transaction 2. 98. II. Section 722 of the Gramm-Leach-Bliley Act [106] A few commenters recommended that the agencies compare loan-level foreclosure rates for their use of appraisals and evaluations to determine if a correlation exists between the use of evaluations and foreclosures. One commenter in favor of a threshold increase raised concerns that appraisals may provide a false sense of protection to consumers who incorrectly assume their property can be sold for the appraised market value if they encounter financial difficulties. provide that individuals preparing evaluations should be qualified, competent, and independent of the transaction and the loan production function of the institution. The regulated institution shall be responsible for making the final determination of whether the appraisal is complex. The delayed effective date will provide regulated institutions adequate time to implement procedures for obtaining an evaluation for certain residential transactions secured by property in a rural area that are exempt from the appraisal requirements and for subjecting appraisals for federally related transactions to appropriate review for compliance with USPAP. 19. It is expected that the federal financial institutions regulatory agencies will issue rules clarifying whether a transaction that qualifies for this exemption requires an The agencies invited comment on their preliminary finding that the proposed threshold would not pose a threat to the safety and soundness of financial institutions, as well as the data used to support the finding. Financial institutions may refer to the Guidelines for more information to assist them in the appropriate review of appraisals and evaluations.[80]. In the supervisory experience of the agencies, a financial institution may choose to obtain appraisals for exempt transactions based on the risks associated with a particular transaction or to preserve the flexibility to sell residential loans in the secondary market. See OCC: 12 CFR 34.42(d); Board: 12 CFR 225.62(d); FDIC: 12 CFR 323.2(d). on At a minimum, the statute provides that Title XI appraisals must be: (1) performed in accordance with USPAP; (2) written appraisals, as defined by the statute; and (3) subject to appropriate review for compliance with USPAP. Act of 1989 (FIRREA). Many commenters who opposed a threshold increase on consumer protection grounds asserted that evaluations are not subject to uniform standards and are not a meaningful substitute for an appraisal that must be conducted in compliance with USPAP. Dodd-Frank Act, section 1473, Public Law 111-203, 124 Stat. See 59 FR 29482 (June 7, 1994). Many commenters who opposed the increased threshold indicated that evaluations are inadequate substitutes for appraisals and therefore an increased threshold would pose a threat to consumer protection. In addition, one commenter questioned whether evaluations could be used to renegotiate or cancel PSAs under an appraisal contingency clause. The authority citation for part 225 continues to read as follows: Authority: [2] In addition, the agencies asked commenters for specific information about the potential cost and time savings to consumers that may result from the increased use of evaluations versus appraisals and whether information in evaluations would be sufficiently clear to enable the consumer to make an informed decision. Office of the Comptroller of the Currency, Treasury (OCC); Board of Governors of the Federal Reserve System (Board); and Federal Deposit Insurance Corporation (FDIC). One commenter suggested that evaluations may not constitute appraisals for purposes of appraisal contingency clauses and may cause confusion to consumers opting for these contingencies. (3) Complex appraisals for residential real estate transactions of more than $400,000. Effective January 1, 2010, § 225.63 is further amended by revising paragraph (b) to read as follows: (b) Evaluations required. 100-1001, pt. [48] An evaluation should contain sufficient information and analysis to support the regulated institution's decision to engage in the transaction. 73. Title XI defines a federally related transaction as a real estate-related financial transaction [10] In considering the aggregate effect of this rule, the agencies also considered the number of transactions likely to be affected by the increased threshold. However, the FDIC believes that this effect is likely to be negligible given that the potential cost savings of using an evaluation, rather than an appraisal, represents between 0.12-0.29 percent of the median home price.[101]. The FDIC estimates that, on average, the review process for an appraisal would take approximately forty minutes, but only ten minutes, on average, for an evaluation. As previously discussed in the Revisions to the Title XI Appraisal Regulations section,[100] The agencies have provided the Evaluation Guidance to assist institutions in complying with this requirement. More information and documentation can be found in our documents in the last year, 29 Open for Comment, Activities and Operations of National Banks and Federal Savings Associations, Economic Sanctions & Foreign Assets Control, Taking Marine Mammals Incidental to Ice Roads and Ice Trails Construction on Alaska's North Slope, National Oceanic and Atmospheric Administration, The United States of America and El Salvador: Cooperation in the Examination of Protection Claims, Request for Information on Potential Concepts and Approaches for a National Strategic Computing Reserve, Fatigue Risk Management Programs for Certain Passenger and Freight Railroads, Increasing Economic and Geographic Mobility, Providing for the Closing of Executive Departments and Agencies of the Federal Government on December 24, 2020, Office of the Comptroller of the Currency, C. Addition of the Appraisal Review Requirement, PART 34—REAL ESTATE LENDING AND APPRAISALS, PART 225—BANK HOLDING COMPANIES AND CHANGE IN BANK CONTROL (REGULATION Y), https://www.federalregister.gov/d/2019-21376, MODS: Government Publishing Office metadata, https://us.spindices.com/​index-family/​real-estate/​sp-corelogic-case-shiller, https://www.fhfa.gov/​DataTools/​Downloads/​Pages/​House-Price-Index.aspx, https://www.ffiec.gov/​pdf/​2017_​FFIEC_​EGRPRA_​Joint-Report_​to_​Congress.pdf, https://www.benefits.va.gov/​HOMELOANS/​appraiser_​fee_​schedule.asp, https://fred.stlouisfed.org/​series/​MSPUS. Some commenters asserted that the threshold should vary based on market values in specific geographic areas, and that a national threshold level is inappropriate given differences in property values across the country. 95. 1503 & 1507. documents in the last year, by the National Science Foundation In addition, the mortgage originator or its agent, directly or indirectly must have contacted not fewer than three state certified or state licensed appraisers, as applicable, on the mortgage originator's approved appraiser list in the market area, in accordance with 12 CFR part 226, not later than three days after the date on which the Closing Disclosure was provided to the consumer and documented that no state certified or state licensed appraiser, as applicable, was available within five business days beyond customary and reasonable fee and timeliness standards for comparable appraisal assignments. The agencies received five comments suggesting that the agencies hold public hearings regarding the proposed rule. While exempted transactions would not require an appraisal, they would still require an evaluation that is consistent with safe and sound banking practices. Transactions that involve an existing extension of credit at the lending institution are exempt from the agencies' appraisal requirement, but are required to have evaluations, provided that there has been no obvious and material change in market conditions or physical aspects of the property that threatens the adequacy of the institution's real estate collateral protection after the transaction, even with the advancement of new monies; or there is no advancement of new monies, other than funds necessary to cover reasonable closing costs. For complete information about, and access to, our official publications See Supervisory Guidance on Model Risk Management (April 4, 2011), OCC Bulletin 2011-12; Board SR Letter 11-7; FDIC FIL-22-2017 (adopted by the FDIC in 2017 with technical and conforming changes)); Guidelines, Appendix B. • Interagency Appraisal and Evaluation Guidelines (October 7, 1994). For the pooling of loans or interests in real property for resale or purchase, the transaction value is the amount of each loan or the market value of each real property, respectively. The agencies have determined that these categories of transactions do not require appraisals by state certified or state licensed appraisers in order to protect federal financial and public policy interests or to satisfy principles of safe and sound banking. 22. edition of the Federal Register. 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