The agencies did not receive any comments on the proposed effective date. July 15, 2019. Commenters asserted that appraisers serve a necessary function in real estate lending and expressed concerns that bypassing them to create a more streamlined valuation process could lead to fraud and another real estate crisis. Another commenter expressed concern that a requirement for appraisal review would force some financial institutions to outsource the review process, given that many small institutions do not have staff trained in USPAP standards, which would add considerable overhead expense for financial institutions.  The mortgage originator must be subject to oversight by a Federal financial institutions regulatory agency, as defined in Title XI. Removing the word “or” at the end of paragraph (a)(12); c. Removing the period at the end of paragraph (a)(13) and adding “; or” in its place; The revisions and addition read as follows: (1) The transaction is a residential real estate transaction that has a transaction value of $400,000 or less; (14) The transaction is exempted from the appraisal requirement pursuant to the rural residential exemption under 12 U.S.C. and together with the Guidelines, Evaluation Guidance). An Overview of HUD FHA Guidelines for 2019. Federal Register. Some commenters also raised concerns about the use of evaluations on homes that may need repairs, suggesting that evaluations may not uncover these issues. In the proposal, the agencies preliminarily determined that the proposed threshold level for residential real estate transactions would not pose a threat to the safety and soundness of financial institutions. Some of these commenters cited alternative sources for fee data, including several state-specific studies. Effective January 1, 2010, § 225.63 is further amended by revising paragraph (b) to read as follows: (b) Evaluations required. Interagency Advisory on the Use of Evaluations in Real Estate-Related Financial Transactions (March 4, 2016), OCC Bulletin 2016-8; Board SR Letter 16-5; FDIC FIL-16-2016. The .gov means itâs official. 12 U.S.C. An evaluation is required regardless of which of these exemptions is relied upon. As discussed above, the agencies' analysis of 2017 HMDA data suggests that increasing the residential threshold from $250,000 to $400,000 would exempt an additional 214,000 residential real estate originations at regulated institutions from the agencies' appraisal requirement, representing an additional 16 percent of all regulated transactions. rendition of the daily Federal Register on FederalRegister.gov does not The agencies note that many evaluations of residential properties that are a consumer's principal dwelling are covered by the valuation independence requirements of section 1472 of the Dodd-Frank Act and its implementing regulation. and the requirement to subject appraisals to appropriate review for compliance with USPAP (as discussed below) are effective the first day after publication of the final rule in the Federal Register. publication in the future. 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. This table of contents is a navigational tool, processed from the Title XI authorizes the Agencies to establish a threshold level below which an appraisal is not required. 44. 75.  Additionally, the rule prohibits mischaracterizations of property value and conflicts of interest for persons preparing valuations or performing valuation management functions. II. The agencies have provided the Evaluation Guidance to assist institutions in complying with this requirement. Because the final rule does not contain any new recordkeeping, reporting, or significant compliance requirements, the OCC anticipates that costs associated with the final rule, if any, will be de minimis. 1338, 1471 (1999). The official PDF handbook above contains nearly 1,000 pages of FHA guidelines, rules and requirements. The agencies have implemented examination procedures to frame their review of an institution's valuation practices and the sufficiency of the supporting information in evaluations, as appropriate for the size and nature of the institution's residential real estate lending activities. establishing the XML-based Federal Register as an ACFR-sanctioned The agencies received very few comments addressing the appraisal review proposal. Department of Veterans Affairs Circular 26-20-13 (April 10, 2020) Fannie Mae Lender letter LL-2020-04, Impact of COVID-19 on Appraisals (April 14, 2020) information from The Appraisal Foundation on how the coronavirus impacts appraisers. Moreover, although limited in scope, the higher-priced mortgage loan rule (HPML rule), The agencies reviewed the data used in 1994 and determined that the information reviewed by the agencies did not appear to exclude transactions originated by nonbanks or transactions sold to the GSEs or otherwise insured or guaranteed by a U.S. government agency, thus, necessitating the additional analysis. Therefore, the FDIC believes the proposed rule is unlikely to pose significant safety and soundness risks for small, FDIC-supervised entities. The rule is likely to pose relatively larger residential real estate valuation-related transaction cost reductions for rural buyers and small, FDIC-supervised institutions lending in rural areas; however, these effects are difficult to accurately estimate. the Title XI appraisal regulations require regulated institutions to obtain an appropriate evaluation of the real property collateral that is consistent with safe and sound banking practices. The agencies recognize that the scarcity of comparable sales data in rural areas has been a long-standing issue and issued guidance in 2016 to assist institutions in obtaining evaluations in rural areas with few or no recent comparable sales. a. 106. A number of commenters requested that the agencies conduct alternative analyses and pointed out that the agencies did not analyze the local or regional markets affected by the increase nor the impact on particular borrowers or communities. 12/02/2020, 297 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. 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. Finally, the agencies requested comment on challenges, if any, that financial institutions may have in meeting the requirements and standards for independence for evaluations prepared by internal staff or external third parties. documents in the last year, 746 The agencies collectively received over 560 comments regarding the proposal to increase the residential real estate appraisal threshold that addressed a variety of issues. FRB: The RFA  The HPML Rule applies to certain higher-risk transactions. However, appraisers are permitted to be employees of the lender provided that the independence requirements in the agencies' rules are met. 12/02/2020, 382 (ii) The institution may engage a certified appraiser to complete the appraisal. The OCC estimates the UMRA inflation adjustment using the change in the annual U.S. GDP Implicit Price Deflator between 1995 and 2018, which is the most recent available annual data. 3009-414, (1996) (codified at 12 U.S.C. It also provides credit unions parity with their banking peers.1 Unless specifically exempted from valuation requirements,2 the new th… The OCC has analyzed the final rule under the factors in the Unfunded Mandates Reform Act of 1995 (UMRA) (2 U.S.C. As noted in the Guidelines, appraisal reviews should help ensure that an appraisal contains sufficient information and analysis to support the decision to engage in the transaction, as required by the appraisal regulations. The agencies also concluded that automatic adjustments to the threshold or agency commitments to set timetables for future threshold increases would not be appropriate. a. 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. A regulated institution may presume that appraisals for residential real estate transactions are not complex, unless the institution has readily available information that a given appraisal will be complex. 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. 12 U.S.C. The agencies proposed the Guidelines for public comment in 2008, see 73 FR 69647 (November 19, 2008), and adopted the final Guidelines in 2010, see 75 FR 77450 (December 10, 2010). Call Report data, March 31, 2019. of $250,000 or less, certain real estate-secured business loans (qualifying business loans)  Because the final rule does not impose new requirements on IDIs, the agencies are not required by RCDRIA to consider the administrative burdens and benefits of the rule or delay its effective date (other than the evaluation provision for transactions exempted by the rural residential appraisal exemption or and the appraisal review provision, as discussed above). Several commenters asserted that evaluations are usually performed by individuals who, unlike appraisers, are not credentialed valuation professionals subject to standardized training and experience requirements. 16. In addition to analyzing net charge-off rates for residential real estate transactions, the agencies also considered their own supervisory experience with appraisals and evaluations. OCC: 12 CFR 34.43(b); Board: 12 CFR 225.63(b); FDIC: 12 CFR 323.3(b). See 12 U.S.C. that agencies use to create their documents. Single-family properties include 1-to-4 family and manufactured housing property types.  Special Instructions: Advance registration is required by March 25, 2019 . While the net charge-off rate for residential real estate transactions escalated significantly from 2008 through 2013 during the financial crisis, the agencies primarily attribute this to weak underwriting standards in the lead up to the crisis. For loans and extensions of credit, the transaction value is the amount of the loan or extension of credit. 1639c (implemented by the CFPB at 12 CFR 1026.43); reverse mortgages subject to 12 CFR 1026.33; and certain refinancings. Several commenters concurred with the agencies' cost estimates in the proposal. 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. For sales, leases, purchases, investments in or exchanges of real property, the transaction value is the market value of the real property. The final rule requires evaluations for these exempt transactions. Under this requirement, AMCs must register with the state or states in which they do business and must be subject to state supervision. The agencies' appraisal regulations require that all complex 1-to-4 family residential property appraisals rendered in connection with federally related transactions shall have a state certified appraiser if the transaction value is $250,000 or more. Transactions originated by regulated institutions but sold to the GSEs or otherwise insured or guaranteed by a U.S. government agency are separately exempted from the agencies' appraisal requirement. The final rule defines a residential real estate transaction as a real estate-related financial transaction that is secured by a single 1-to-4 family residential property. Public Law 104-208, Div. The 2017 HMDA data suggests that the $250,000 threshold currently exempts approximately 20 percent of the total dollar volume of regulated transactions. Many of these commenters saw evaluations as appropriate substitutes for appraisals and institutions as having appropriate risk management controls in place to manage the proposed threshold change responsibly. 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. Accessed Oct. 27, 2019. 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). The final rule, issue… 57. 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. “The intended user of this appraisal report is the lender/client.  While the precise time and cost reduction per transaction is difficult to determine, the agencies conclude that the increased threshold is likely to result in some level of cost and time savings for regulated institutions that engage in residential real estate lending and for consumers. The agencies also analyzed general measures of inflation by reviewing the Consumer Price Index (CPI).. Public Law 106-102, section 722, 113 Stat. 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. Reducing Burden Associated with Appraisals. 89. In particular, commenters requested that the agencies analyze the effect of the proposed increase in the threshold in dynamic markets and compare its effect in urban versus rural areas. Effective January 1, 2020. Public Law 115-174, Title I, section 103, codified at 12 U.S.C. Therefore, no submissions will be made to OMB for review. generally requires that an agency prepare and make available a final regulatory flexibility analysis in connection with a final rulemaking that the agency expects will have a significant economic impact on a substantial number of small entities.  1813(q)(2). The agencies have found that both appraisals and evaluations prepared properly can be credible tools to support real estate lending decisions. In addition, the proposed rule would have required evaluations for transactions that are exempt from the agencies' appraisal requirement under the rural residential appraisal exemption under section 103 of EGRRCPA. For additional information on evaluations, see infra notes 23 and 24. documents in the last year, 302 One commenter provided survey data suggesting that the majority of lenders in one state often obtain appraisals for loans that fall below the current threshold. However, 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 (defined in regulations promulgated by the Small Business Administration (SBA) to include commercial banks and savings institutions, and trust companies, with assets of $600 million or less and $41.5 million or less, respectively) and publishes its certification and a brief explanatory statement in the Federal Register together with the rule. documents in the last year, 73 The agencies acknowledge that the data presented indicates that a house sold in 1994 would sell for higher than $400,000 today; however, the agencies believe the more conservative approach is appropriate. 2. Similarly, the Evaluations Advisory suggests it would be prudent to obtain an appraisal rather than an evaluation when an institution's portfolio risk increases or for higher-risk transactions.  Some commenters called for further study of home prices by region and metro area and for the agencies to show which markets would be most affected by the threshold increase. In addition, the proposal would add to the list of exempt transactions those transactions that are 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 (EGRRCPA)  The agencies requested comment on use of evaluations instead of appraisals for residential real estate transactions. documents in the last year, 1001 on FederalRegister.gov October 18, 2019 • This chapter has been revised in its entirety. Thus, by using evaluations instead of appraisals a small, FDIC-supervised institution may reduce its total annual residential real estate transaction valuation-related labor hours by 7.5 hours. 31. The Title XI appraisal regulations define “business loan” to mean a loan or extension of credit to any corporation, general or limited partnership, business trust, joint venture, pool, syndicate, sole proprietorship, or other business entity. Some financial institutions commented that they had found evaluations to generally contain sufficient information and analysis to be the basis for lending decisions. could be considered by IDIs to be a new requirement, despite the longstanding requirements for IDIs to obtain evaluations for transactions exempt from agencies' appraisal requirement under a threshold exemption. As discussed earlier, the agencies attribute the increase in the net charge-off rate for loans secured by single 1-to-4 family residential real estate during the recent recession to weak underwriting standards in the lead up to the crisis. Exemptions from the requirements of the HPML Rule include, among others, “qualified mortgages” under 15 U.S.C. The final rule(opens new window) increases the appraisal threshold for residential real estate from $250,000 to $400,000. In addition, one commenter questioned whether evaluations could be used to renegotiate or cancel PSAs under an appraisal contingency clause. Numbers and dollar volumes are based on 2017 HMDA data. 42. Through the review process, the institution should be able to assess the reasonableness of the valuation method, the assumptions, and whether data sources are appropriate and well-supported.. Encroachments. 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. to determine changes in house prices since 1994. 54. OCC: 57 FR 12190-02 (April 9, 1992); Board: 55 FR 27762 (July 5, 1990); FDIC: 57 FR 9043-02 (March 16, 1992). Regarding the impact of the threshold increase on consumers' understanding of and access to valuation information, the agencies note that lenders must provide a copy of all appraisals and written valuations developed in connection with an application for a first-lien loan secured by a dwelling, As shown in table 2 above, the agencies estimate that the increase would exempt an additional 214,000 transactions and thus raise the share of the number of regulated transactions that would be exempt from 56 percent to 72 percent. Ensure lead-based paint is not present. 12/02/2020, 201 These commenters asserted that the aggregate data could include loans not eligible for the exemption or loans exempted on other grounds. 29. Additionally, of the 1,430 small, FDIC-supervised institutions that reported residential loan originations, a total of 163,148 residential real estate loans Start Printed Page 53595were originated, 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. The Office of the Comptroller of the Currency (OCC) has adopted a final rule to increase the appraisal threshold for residential real estate transactions (residential transactions) from $250,000 to $400,000. Similarly, in requiring evaluations for exempted rural transactions and adding the appraisal review requirement, the agencies considered the administrative burden of these requirements on IDIs consistent with principles of safety and soundness and the public interest. Background B. However, even if the average appraisal cost is less than the $375 to $900 range suggested in the proposal, the agencies believe expanding the use of evaluations will produce time and cost savings. 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. In the Dodd-Frank Act, Congress amended the threshold provision to require “concurrence from the Bureau of Consumer Financial Protection that such threshold level [established by the agencies] provides reasonable protection for consumers who purchase 1-4 unit single-family residences.” 12 U.S.C. The failure to comply with the independence requirements in the Valuation Independence Rule can result in civil liability.. FDIC: The RFA generally requires that, in connection with a final rulemaking, an agency prepare and make available a final regulatory flexibility analysis describing the impact of the rule on small entities. Based on supervisory experience and available data, the agencies published the proposed rule to accomplish these goals without posing a threat to the safety and soundness of financial institutions. A number of commenters suggested that inadequate property valuations and undue influence on appraisers contributed to property overvaluation during the most recent financial crisis, with adverse impacts for consumers. stability and public confidence in the nationâs financial edition of the Federal Register. The FDIC does not expect the rule to have any substantive effects on the safety and soundness of small, FDIC-supervised institutions. 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. Further, historical loss information in the Call Reports reflects that the net charge-off rate for residential transactions did not increase after the increase in the appraisal threshold from $100,000 to $250,000 in June 1994, or during and after the recession in 2001 through year-end 2007. Several commenters asserted that the increased risk would not be justified by burden relief resulting from a threshold increase.  with a transaction value  However, a regulatory flexibility analysis is not required if the agency certifies that the rule will not have a significant economic impact on a substantial number of small entities. 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. FHA Appraisal Guidelines 2019. The Reports of Examination data reviewed related to both commercial and residential real estate lending valuations and valuation programs of supervised institutions. OCC: 12 CFR 34.43(a)(10)(i); Board: 12 CFR 225.63(a)(10)(i); FDIC: 12 CFR 323.3(a)(10)(i). For transactions exempted by the $400,000 threshold, the Appraisal Rule requires an evaluation. 83. FDIC Named Receiver for Almena State Bank, Dodd-Frank Wall Street Reform and Consumer Protection Act, Part 323 of the FDIC Rules and Regulations, Residential Appraisal Threshold Final Rule. Originations with loan amounts greater than $20 million are excluded. 3311). The agencies recognize that they decided against proposing a residential appraisal threshold increase during the EGRPRA process. One commenter indicated that AVMs are more predictive of default than appraisals. 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. Costs of appraisals and evaluations may also be passed on to borrowers.
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