The agencies are not aware of any such issues regarding the current threshold, which already exempts a significant portion of residential real estate transactions. 24. Consistent with the General Principles of Affiliation, 13 CFR 121.103(a), the OCC includes the assets of affiliated financial institutions when determining whether to classify an OCC-supervised institution as a small entity. The agencies are increasing the threshold from $250,000 to $400,000 at or below which a Title XI appraisal is not required for residential real estate transactions in order to reduce regulatory burden in a manner that is consistent with the safety and soundness of financial institutions. has no substantive legal effect. The agencies have consulted with the Consumer Financial Protection Bureau (CFPB), and, as required by statute, have received its concurrence on the increased threshold. documents in the last year, 988 The agencies have reconsidered this decision based on continued comments received from financial institutions and state bank regulatory agencies that increasing the residential appraisal threshold would provide meaningful burden relief, as well as further analysis regarding safety and soundness and consumer protection factors related to the proposal, as detailed below. in determining the effective date and administrative compliance requirements for new regulations that impose additional reporting, disclosure, or other requirements on IDIs, each Federal banking agency must consider, consistent with principles of safety and soundness and the public interest, any administrative burdens that such regulations would place on depository institutions, including small depository institutions, and customers of depository institutions, as well as the benefits of such regulations. The agencies received several comments from financial institutions, financial institution trade associations, and state regulators asserting that the proposals would particularly reduce delays and costs in rural areas that may be experiencing a shortage of state licensed or state certified appraisers. In addition to costing less than an appraisal, evaluations may require less time to review than appraisals because evaluations typically contain less detailed information than appraisals. 15. For the purposes of the HMDA analysis, a property is considered to be located in a “rural” area if it is in a county that is neither in a metropolitan statistical area nor in a micropolitan statistical area that is adjacent to a metropolitan statistical area, based on 2013 Urban Influence Codes (UIC) published by the United States Department of Agriculture. The 30-day delayed effective date required under the Administrative Procedure Act is waived for all other amendments to the regulation, pursuant Start Printed Page 53593to 5 U.S.C. Several commenters asserted that the increased risk would not be justified by burden relief resulting from a threshold increase. Real estate-related financial transactions that the agencies have exempted from the appraisal requirement are not federally related transactions under the agencies' appraisal regulations. For instance, the Evaluation Guidance states that, generally, evaluations should be performed by persons who are competent, independent of the transaction, and have the relevant experience and knowledge of the market, location, and type of real property being valued. FIRREA allows an exemption from a state licensed or state certified appraisal for business loans of $1M or less that are not dependent upon the sale of, or rental income generated from the collateral real estate as the primary source of repayment. the Federal Register. In contrast, some commenters believed that AVMs could provide valuable information, and that improvements in technology and greater availability of information has improved the quality of evaluations. 4. In proposing the increase in the appraisal threshold for residential transactions, the agencies noted that evaluations can provide consumer protections. As detailed above, data reviewed by the agencies found that lenders often choose to obtain appraisals, even when evaluations are permitted for transactions at or below the current $250,000 threshold. Further, the agencies consulted with the CFPB throughout the development of the proposal and final rule and, as required by Title XI,[62] These commenters represented that those who perform evaluations often do not have the same level of independence from the transaction. documents in the last year, 72 documents in the last year, by the National Science Foundation 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. The requirement in the final rule that institutions obtain an evaluation for transactions that qualify for the rural residential appraisal exemption could be viewed as a new mandate. Several commenters noted that the agencies' loss analysis did not reflect any significant change in the loss history for residential real estate transactions after the threshold was increased from $100,000 to $250,000 in 1994. 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. 10/07/2019 at 8:45 am. 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. Effective January 1, 2020. The estimated reduction in costs would be smaller if lenders opt to not utilize an evaluation and require an appraisal on a residential real estate transaction greater than $250,000 but not more than $400,000. In determining the level of increase, the agencies considered increases in housing prices and general inflation across the economy since the current threshold was established in 1994. on 30. [84] informational resource until the Administrative Committee of the Federal [72] 48. The individual who is performing the evaluation should determine whether a physical property inspection is necessary to support the property's value. In proposing to raise the residential real estate appraisal threshold, the agencies noted that institutions may elect to obtain appraisals for transactions that fall under the threshold, even though an evaluation would also be permitted. 1639h. The SBA has defined “small entities” to include banking organizations with total assets of less than or equal to $600 million. One commenter indicated that HMDA data are the wrong source of information for evaluating the impact of the threshold on rural areas, given that certain low volume originators in rural areas are not required to report HMDA data. Even assuming that a number of transactions fall into this category, the agencies believe the threshold increase will produce burden relief for regulated institutions. Order an appraisal from a certified or licensed appraiser in the state where the property is located and require the appraiser to follow USPAP and Title XI of FIRREA and any implementing regulations in effect at the time the appraiser signs the appraiser’s certification. The authority citation for part 225 continues to read as follows: Authority: 44. These markup elements allow the user to see how the document follows the See OCC: 12 CFR 34.43(b); Board: 12 CFR 225.63(b); FDIC: 12 CFR 323.3(b). Some commenters asserted that first-time homebuyers are among the consumers least able to manage financial risk, and are most in need of consumer protections. [61] Background B. 6. [48] The agencies denied these requests on grounds that holding a public hearing would not elicit relevant information that could not be conveyed through the notice and comment process. One commenter noted that evaluations are often performed by bank employees, in which case the customer is not typically charged for the service, and that when the lender obtains an evaluation from a third-party provider (as opposed to using its own employee), borrowers may still save approximately 50 percent. After considering the comments received, the agencies have decided to implement the requirement for regulated institutions to obtain evaluations when the rural residential appraisal exemption is used. 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. 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. [56] 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]. are not part of the published document itself. The agencies proposed increasing the residential real estate appraisal threshold from $250,000 to $400,000. The purpose of the statute is “...to provide that federal financial and public policy interests in real estate related transactions to publish appraisal regulations for federally related transactions within its jurisdiction. 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. See Real Estate Appraisal Reform Act of 1988, H.R. 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. 4. The regulated institution shall be responsible for making the final determination of whether the appraisal is complex. In response to the comments concerning valuation independence, the agencies have long recognized that evaluations prepared by competent and independent preparers can provide credible valuation information for residential real estate transactions. Under Title XI, the agencies may set a threshold at or below which a Title XI appraisal is not required if they determine in writing that such a threshold level does not pose a threat to the safety and soundness of financial institutions. that would amend the agencies' appraisal regulations promulgated pursuant to Title XI of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (Title XI). This approach also considers that a high percentage of residential real estate transactions is already captured by the existing residential real estate threshold, as reflected below in Table 2. (a) Real estate-related financial transactions not requiring an appraisal under this part. Some of these commenters also asserted that they have adequate programs and policies to ensure that evaluations are used prudently. The FDIC does not expect the rule to have any substantive effects on the safety and soundness of small, FDIC-supervised institutions. Although some commenters expressed concern that raising the threshold would cause financial institutions to feel pressured to use evaluations whenever possible in order to remain competitive, data analyzed by the agencies suggests that financial institutions are generally using caution when determining when evaluations are suitable for a given transaction. The agencies also invited comment on the appropriateness of the data used in the proposal and requested any suggestions for alternative sources of data. While the FDIC does not have definitive data on the cost of evaluations, some of the comments from financial institutions and their trade associations represented that evaluations are less costly than appraisals. should verify the contents of the documents against a final, official The agencies proposed to increase the threshold level at or below which appraisals are not required for residential real estate transactions from $250,000 to $400,000. Introduction A. A residential property that sold for $250,000 as of June 30, 1994, would be expected to sell in March 2019 for $643,750 according to the Case-Shiller Index and $621,448 according to the FHFA Index (see Table 1 below). Costs of appraisals and evaluations may also be passed on to borrowers. The agencies have authority to determine those real estate-related Start Printed Page 53581financial transactions that do not require Title XI appraisals. The agencies also considered the cost savings that IDIs would experience by obtaining evaluations instead of appraisals and set the threshold at a level designed to provide significant burden relief without sacrificing safety and soundness. Many such commenters cited data indicating that the proposed threshold of $400,000 is well above median home prices nationally and would exempt a large majority of residential transactions in specific areas. The proposal would require regulated institutions to obtain evaluations for transactions exempt from the agencies' appraisal requirements due to the increase in the residential real estate appraisal threshold or the rural residential appraisal exemption. This document has been published in the Federal Register. [22] The agencies requested comment on the question of whether and when institutions use appraisals even if not required to do so by the appraisal regulations. For transactions at or below the new residential threshold, regulated institutions will be given the option to obtain an evaluation of the property instead of an appraisal. 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. 13. 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. The Federal and State government currently have ruling authority over appraisal regulations in the United States. 4. Some commenters noted the agencies' acknowledgement that there is limited information on the cost and time burden of evaluations versus appraisals and urged the agencies to obtain additional data to quantify any expected savings. Rec. Finally, the OCC notes that the requirement for appraisal review is statutorily mandated by Title XI. The OCC used December 31, 2018, to determine size because a “financial institution's assets are determined by averaging the assets reported in its four quarterly financial statements for the preceding year.” See footnote 8 of the U.S. Small Business Administration's Table of Size Standards. As noted above, in estimating the impact of the threshold increase on institutions, the agencies attempted to exclude from the HMDA data analysis residential transactions that were already exempt from the appraisal regulations, including those sold to the GSEs. The failure to comply with the independence requirements in the Valuation Independence Rule can result in civil liability.[67]. 16. 1691(e)). corresponding official PDF file on govinfo.gov. 10 Under the Final Rule, a “residential real estate transaction” would mean “a real estate-related financial transaction that is secured by a single 1-to-4 family residential property.”11 As an initial matter, the Bureau notes that FIRREA section 1112(b) pertains to the performance Public Law 106-102, section 722, 113 Stat. Although several commenters were concerned that the agencies had not analyzed the effects on local markets or particular communities, the agencies' supervisory experience with the current threshold since 1994 suggests that this incremental increase will not negatively affect safety and soundness on the local or national level based on loss rates for residential real estate loans as discussed below and observations during examinations. 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. Section 722 of the Gramm-Leach-Bliley Act [106] [90] Agency staff used HMDA data to estimate the number and dollar volume of institutions' residential real estate transactions that would be affected by the increased threshold. Threshold Increase for Residential Real Estate Transactions 1. 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