[Federal Register Volume 83, Number 68 (Monday, April 9, 2018)]
[Rules and Regulations]
[Pages 15019-15036]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-06960]
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Rules and Regulations
Federal Register
________________________________________________________________________
This section of the FEDERAL REGISTER contains regulatory documents
having general applicability and legal effect, most of which are keyed
to and codified in the Code of Federal Regulations, which is published
under 50 titles pursuant to 44 U.S.C. 1510.
The Code of Federal Regulations is sold by the Superintendent of Documents.
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Federal Register / Vol. 83, No. 68 / Monday, April 9, 2018 / Rules
and Regulations
[[Page 15019]]
DEPARTMENT OF THE TREASURY
Office of the Comptroller of the Currency
12 CFR Part 34
[Docket No. OCC-2017-0011]
RIN 1557-AE18
FEDERAL RESERVE SYSTEM
12 CFR Part 225
[Docket No. R-1568; RIN 7100 AE-81]
FEDERAL DEPOSIT INSURANCE CORPORATION
12 CFR Part 323
RIN 3064 AE-56
Real Estate Appraisals
AGENCY: Office of the Comptroller of the Currency, Treasury (OCC);
Board of Governors of the Federal Reserve System (Board); and Federal
Deposit Insurance Corporation (FDIC).
ACTION: Final rule.
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SUMMARY: The OCC, Board, and FDIC (collectively, the agencies) are
adopting a final rule to amend the agencies' regulations requiring
appraisals of real estate for certain transactions. The final rule
increases the threshold level at or below which appraisals are not
required for commercial real estate transactions from $250,000 to
$500,000. The final rule defines commercial real estate transaction as
a real estate-related financial transaction that is not secured by a
single 1-to-4 family residential property. It excludes all transactions
secured by a single 1-to-4 family residential property, and thus
construction loans secured by a single 1-to-4 family residential
property are excluded. For commercial real estate transactions exempted
from the appraisal requirement as a result of the revised threshold,
regulated institutions must obtain an evaluation of the real property
collateral that is consistent with safe and sound banking practices.
DATES: This final rule is effective on April 9, 2018.
FOR FURTHER INFORMATION CONTACT:
OCC: G. Kevin Lawton, Appraiser (Real Estate Specialist), (202)
649-7152, Mitchell E. Plave, Special Counsel, Legislative and
Regulatory Activities Division, (202) 649-5490, or Joanne Phillips,
Attorney, Bank Activities and Structure Division, (202) 649-5500,
Office of the Comptroller of the Currency, 400 7th Street SW,
Washington, DC 20219. For persons who are deaf or hearing impaired, TTY
users may contact (202) 649-5597.
Board: Constance Horsley, Deputy Associate Director, (202) 452-
5239, or Carmen Holly, Senior Supervisory Financial Analyst, (202) 973-
6122, Division of Supervision and Regulation; or Gillian Burgess,
Senior Counsel, (202) 736-5564, Matthew Suntag, Counsel, (202) 452-
3694, or Kirin Walsh, Attorney, (202) 452-3058, Legal Division, Board
of Governors of the Federal Reserve System, 20th and C Streets NW,
Washington, DC 20551. For the hearing impaired only, Telecommunications
Device for the Deaf (TDD) users may contact (202) 263-4869.
FDIC: Beverlea S. Gardner, Senior Examination Specialist, Division
of Risk Management and Supervision, (202) 898-3640, Mark Mellon,
Counsel, Legal Division, (202) 898-3884, or Lauren Whitaker, Senior
Attorney, Legal Division, (202) 898-3872, Federal Deposit Insurance
Corporation, 550 17th Street NW, Washington, DC 20429. For the hearing
impaired only, TDD users may contact (202) 925-4618.
SUPPLEMENTARY INFORMATION:
I. Background and Summary of the Proposed Rule
In July 2017, the agencies invited comment on a notice of proposed
rulemaking (proposal or proposed rule) \1\ 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).\2\ Specifically, the proposal would have increased the
monetary threshold at or below which financial institutions that are
regulated by the agencies (regulated institutions) would not be
required to obtain appraisals in connection with commercial real estate
transactions (commercial real estate appraisal threshold) from $250,000
to $400,000. The proposal followed the completion in early 2017 of the
regulatory review process required by the Economic Growth and
Regulatory Paperwork Reduction Act (EGRPRA).\3\ During the EGRPRA
process, the agencies received numerous comments related to the Title
XI appraisal regulations, including recommendations to increase the
thresholds at or below which transactions are exempt from the Title XI
appraisal requirements. Among other proposals developed through the
EGRPRA process, the agencies recommended increasing the commercial real
estate appraisal threshold to $400,000.\4\
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\1\ 82 FR 35478 (July 31, 2017).
\2\ 12 U.S.C. 3331 et seq.
\3\ Public Law 104-208, Div. A, Title II, section 2222, 110
Stat. 3009-414, (1996) (codified at 12 U.S.C. 3311).
\4\ See FFIEC, Joint Report to Congress: Economic Growth and
Regulatory Paperwork Reduction Act, (March 2017), (EGRPRA Report),
available at https://www.ffiec.gov/pdf/2017_FFIEC_EGRPRA_Joint-Report_to_Congress.pdf.
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Title XI directs each federal financial institutions regulatory
agency \5\ to publish appraisal regulations for federally related
transactions within its jurisdiction. The purpose of Title XI is to
protect federal financial and public policy interests \6\ 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.\7\
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\5\ ``Federal financial institutions regulatory agency'' means
the Board, the FDIC, the OCC, the National Credit Union Association
(NCUA), and, formerly, the Office of Thrift Supervision. 12 U.S.C.
3350(6).
\6\ These interests include those stemming from the federal
government's roles as regulator and deposit insurer of financial
institutions that engage in real estate lending and investment,
guarantor or lender on mortgage loans, and as a direct party in real
estate-related financial transactions. These federal financial and
public policy interests have been described in predecessor
legislation and accompanying Congressional reports. See Real Estate
Appraisal Reform Act of 1988, H.R. Rep. No. 100-1001, pt. 1, at 19
(1988); 133 Cong. Rec. 33047-33048 (1987).
\7\ 12 U.S.C. 3331.
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[[Page 15020]]
Title XI directs the agencies to prescribe appropriate standards
for Title XI appraisals under the agencies' respective
jurisdictions,\8\ including, at a minimum, that appraisals be: (1)
Performed in accordance with the Uniform Standards of Professional
Appraisal Practice (USPAP); \9\ (2) written appraisals, as defined by
the statute, by licensed or certified appraisers; \10\ and (3) subject
to appropriate review for compliance with USPAP. All federally related
transactions must have Title XI appraisals.
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\8\ 12 U.S.C. 3339. The agencies' Title XI appraisal regulations
apply to transactions entered into by the agencies or by
institutions regulated by the agencies that are depository
institutions or bank holding companies or subsidiaries of depository
institutions or bank holding companies. See OCC: 12 CFR 34, subpart
C; Board: 12 CFR 225.61(b); 12 CFR part 208, subpart E; and FDIC: 12
CFR part 323.
\9\ USPAP is written and interpreted by the Appraisal Standards
Board of the Appraisal Foundation. USPAP contains generally
recognized ethical and performance standards for the appraisal
profession in the United States, including real estate, personal
property, and business appraisals. See http://www.appraisalfoundation.org/imis/TAF/Standards/Appraisal_Standards/Uniform_Standards_of_Professional_Appraisal_Practice/TAF/USPAP.aspx?hkey=a6420a67-dbfa-41b3-9878-fac35923d2af.
\10\ Title XI defines ``written appraisal'' as ``a written
statement used in connection with a federally related transaction
that is independently and impartially prepared by a licensed or
certified appraiser setting forth an opinion of defined value of an
adequately described property as of a specific date, supported by
presentation and analysis of relevant market information. 12 U.S.C.
3350(10).
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Title XI defines a ``federally related transaction'' as a real
estate-related financial transaction that is regulated or engaged in by
a federal financial institutions regulatory agency and requires the
services of an appraiser.\11\ 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.\12\
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\11\ 12 U.S.C. 3350(4).
\12\ 12 U.S.C. 3350(5).
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The agencies have authority to determine those real estate-related
financial transactions that do not require the services of a state
certified or state licensed appraiser and are therefore exempt from the
appraisal requirements of Title XI. These real estate-related financial
transactions are not federally related transactions under the statutory
or regulatory definitions, because they do not require the services of
an appraiser.\13\
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\13\ See 59 FR 29482 (June 7, 1994).
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The agencies have exempted several categories of real estate-
related financial transactions from the Title XI appraisal
requirements.\14\ 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.
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\14\ See OCC: 12 CFR 34.43(a); Board: 12 CFR 225.63(a); and
FDIC: 12 CFR 323.3(a).
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In 1992, Congress amended Title XI, expressly authorizing the
agencies to establish a threshold level at or below which an appraisal
by a state certified or state licensed appraiser is not required in
connection with federally related transactions if the agencies
determine in writing that the threshold does not represent a threat to
the safety and soundness of financial institutions.\15\ As noted above,
transactions at or below the threshold level are exempt from the Title
XI appraisal requirements and thus are not federally related
transactions.
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\15\ Housing and Community Development Act of 1992, Pub. L. 102-
550, section 954, 106 Stat. 3894 (amending 12 U.S.C. 3341).
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Under the current thresholds, established in 1994,\16\ all real
estate-related financial transactions with a transaction value \17\ of
$250,000 or less, as well as certain real estate-secured business loans
(qualifying business loans or QBLs) with a transaction value of $1
million or less, do not require Title XI appraisals.\18\ QBLs are
business loans \19\ that are real estate-related financial transactions
and that are not dependent on the sale of, or rental income derived
from, real estate as the primary source of repayment.\20\
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\16\ See 59 FR at 29482. The NCUA has promulgated similar rules
with similar thresholds. See 60 FR 51889 (October 4, 1995) and 66 FR
58656 (November 23, 2001).
\17\ For loans and extensions of credit, the transaction value
is the amount of the loan or extension of credit. For sales, leases,
purchases, investments in or exchanges of real property, the
transaction value is the market value of the real property. 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. See OCC: 12 CFR
34.42(m); Board: 12 CFR 225.62(m); and FDIC: 12 CFR 323.2(m).
\18\ See OCC: 12 CFR 34.43(a)(1) and (5); Board: 12 CFR
225.63(a)(1) and (5); and FDIC: 12 CFR 323.3(a)(1) and (5).
\19\ 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.'' OCC: 12
CFR 34.42(d); Board: 12 CFR 225.62(d); and FDIC: 12 CFR 323.2(d).
\20\ See OCC: 12 CFR 34.43(a)(5); Board: 12 CFR 225.63(a)(5);
and FDIC: 12 CFR 323.3(a)(5).
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For real estate-related financial transactions that are exempt from
the Title XI appraisal requirement because they are at or below the
applicable thresholds or qualify for the exemption for certain existing
extensions of credit,\21\ the Title XI appraisal regulations require
regulated institutions to obtain an evaluation of the real property
collateral that is consistent with safe and sound banking
practices.\22\ An evaluation should contain sufficient information and
analysis to support the financial institution's decision to engage in
the transaction.\23\
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\21\ Transactions that involve an existing extension of credit
at the lending institution are exempt from the Title XI appraisal
requirements, 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. See OCC: 12 CFR 34.43(a)(7) and (b);
Board: 12 CFR 225.63(a)(7) and (b); and FDIC: 12 CFR 323.3(a)(7) and
(b).
\22\ See OCC: 12 CFR 34.43(b); Board: 12 CFR 225.63(b); and
FDIC: 12 CFR 323.3(b).
\23\ Evaluations are not required to be performed in accordance
with USPAP or by state certified or state licensed appraisers. The
agencies have provided supervisory guidance for conducting
evaluations in a safe and sound manner in the Interagency Appraisal
and Evaluation Guidelines (Guidelines) and the Interagency Advisory
on the Use of Evaluations in Real Estate-Related Financial
Transactions (Evaluations Advisory, and together with the
Guidelines, Evaluation Guidance). See, 75 FR 77450 (December 10,
2010); OCC Bulletin 2016-8 (March 4, 2016); Board SR Letter 16-5
(March 4, 2016); and Supervisory Expectations for Evaluations, FDIC
FIL-16-2016 (March 4, 2016).
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The agencies proposed to increase the commercial real estate
appraisal threshold from $250,000 to $400,000. The proposal would have
defined commercial real estate transaction to include all real estate-
related financial transactions, except for those secured by a 1-to-4
family residential property,\24\ but including loans that finance the
construction of 1-to-4 family properties and that do not include
permanent financing.\25\ Under the proposal, regulated institutions
would have been required to obtain evaluations consistent with safe and
sound banking
[[Page 15021]]
practices in connection with commercial real estate transactions at or
below the proposed $400,000 threshold. The agencies did not propose
increasing the thresholds for other types of real estate-related
financial transactions, but solicited comment on the appropriateness of
raising the threshold for residential real estate transactions and
QBLs.
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\24\ A 1-to-4 family residential property is a property
containing one, two, three, or four individual dwelling units,
including manufactured homes permanently affixed to the underlying
land (when deemed to be real property under state law). See OCC: 12
CFR part 34 subpart D, Appendix A; Board: 12 CFR 208, Appendix C;
and FDIC: 12 CFR part 365, subpart A, Appendix A.
\25\ The second part of the definition was intended to clarify,
not be an exception to, the first part.
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The comment period closed on September 29, 2017. The agencies
collectively received over 200 comments from appraisers, appraiser
trade organizations, financial institutions, financial institutions
trade organizations, and individuals.
As noted in the proposal, increases in commercial property values
over time have required regulated institutions to obtain Title XI
appraisals for a larger proportion of commercial real estate
transactions than in 1994 when the current $250,000 threshold was
established. This increase in the number of appraisals required may
have contributed to increased burden for regulated institutions in
terms of time and cost. The proposal was intended to reduce regulatory
burden consistent with federal financial and public policy interests in
real estate-related financial transactions. Based on supervisory
experience and available data, the agencies published the proposal to
accomplish these goals without posing a threat to the safety and
soundness of financial institutions.
II. Revisions to the Title XI Appraisal Regulations
Overview of Changes
After carefully considering the comments and conducting further
analysis, the agencies are adopting a final rule that increases the
commercial real estate appraisal threshold with three modifications
from the proposal. First, the agencies have decided to increase the
commercial real estate appraisal threshold to $500,000 rather than
$400,000 as proposed. Second, the final rule also makes a conforming
change to the section requiring state certified appraisers to be used
for federally related transactions that are commercial real estate
transactions above the increased threshold.
Third, the final rule also reflects a change to the proposed
definition of commercial real estate transaction, which no longer
includes construction loans secured by a single 1-to-4 family
residential property, regardless of whether the loan is for initial
construction only or includes permanent financing. Thus, under the
final rule, a loan that is secured by a single 1-to-4 family
residential property, including a loan for construction, will remain
subject to the $250,000 threshold.\26\ The agencies made this change in
the final rule after consideration of the comments, which suggested
that including 1-to-4 family constructions loans that do not include
permanent financing in the definition, but excluding those that do not,
would not significantly reduce burden.
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\26\ Residential construction loans secured by more than one 1-
to-4 family residential property will be considered commercial real
estate transactions subject to the higher threshold.
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These changes are discussed in more detail below, in the order in
which they appear in the rule. As described in more detail below, the
effective date for the rule will be the date of its publication in the
Federal Register. In the Dodd-Frank Wall Street Reform and Consumer
Protection Act (the Dodd-Frank Act),\27\ Congress amended the threshold
provision to require ``concurrence from the Consumer Financial
Protection Bureau (CFPB) that such threshold level provides reasonable
protection for consumers who purchase 1-4 unit single-family
residences.'' \28\ The agencies have received concurrence from the CFPB
that the commercial real estate appraisal threshold being adopted
provides reasonable protection for consumers who purchase 1-4 unit
single family residential properties.
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\27\ Public Law 111-203, 124 Stat.1376.
\28\ Dodd-Frank Act, Sec. 1473, 124 Stat. 2190 (amending 12
U.S.C. 3341(b)).
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Comments on the Proposed Increase to the Commercial Real Estate
Appraisal Threshold
The agencies received a range of comments regarding the proposal to
increase the commercial real estate appraisal threshold. Comments from
financial institutions and financial institutions trade associations
generally supported an increase, although many requested a higher
increase than proposed. Comments from appraisers and appraiser-related
trade associations generally opposed an increase.
Commenters supporting a threshold increase stated that an increase
would be appropriate, given the increases in real estate values since
the current threshold was established, the cost and time savings to
lenders and borrowers the higher threshold would provide, and the
burden relief it would provide to financial institutions in rural and
other areas where there are reported shortages of state licensed or
state certified appraisers, which may have caused transaction delays
and increased lending costs. Commenters supporting a threshold increase
also asserted that it would provide burden relief for financial
institutions, without sacrificing sound risk management principles or
safe and sound banking practices, and that an increase would help
justify the cost and return of originating smaller and less complex
commercial real estate loans. Several commenters asserted the higher
threshold could be implemented easily and would result in burden
relief, for example, by reducing loan costs and minimizing delays in
loan processing. One commenter asserted that the proposed increase
would support local and regional economies, and another represented
that it would assist small builders. This same commenter asserted that
reducing burden on lenders would facilitate financing to builders
generally, as they rely heavily on commercial banks for financing.
Commenters opposing an increase to the commercial real estate
appraisal threshold asserted that an increase would elevate risks to
financial institutions, the banking system, borrowers, small business
owners, commercial property owners, and taxpayers. Several of these
commenters asserted that the increased risk would not be justified by
burden relief. Other commenters asserted that the proposed increase
contradicts publicly stated concerns of the agencies relating to the
state of the commercial real estate market and the quality of
evaluation reports. Another commenter asserted that the inclusion of
construction loans extended to consumers as commercial real estate
transactions would magnify risk, as the commenter viewed such loans as
particularly risky. One commenter expressed concern that the proposal
would lead to increased use of automated valuations, which the
commenter asserted are not adequate substitutes for appraisals, or
would eliminate collateral verifications altogether.
Some commenters opposing the threshold raised issues unrelated to
risk. A few asserted that appraisals are relatively inexpensive and,
thus, that the proposed increase would not materially reduce costs. One
commenter expressed the view that an increase in the commercial real
estate appraisal threshold would be contrary to consumer protection
objectives. Another commenter asserted that the agencies are required
by Title XI to receive concurrence from the CFPB for a threshold
change. In support of its opposition to the proposal, a commenter cited
a 2012 U.S. Government Accountability Office (GAO) report, contending
that the report found no
[[Page 15022]]
support for raising the threshold.\29\ Another commenter asserted that
the proposed threshold increase is contrary to Congressional intent and
also asserted that most commenters during the EGRPRA process were
against a threshold increase.
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\29\ See GAO, ``Real Estate Appraisals: Appraisal Subcommittee
Needs to Improve Monitoring Procedures,'' GAO-12-147 (January 2012).
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Several commenters rejected assertions that there was an appraiser
shortage warranting regulatory relief, some asserting that any shortage
is caused by appraisers' unwillingness to work for appraisal management
companies (AMCs) at the reduced fees being offered to appraisers by
AMCs. Two commenters questioned the impact of the proposed commercial
real estate appraisal threshold on appraiser shortages, one asserting
that the number of commercial real estate appraisers has remained
relatively steady in recent years and the other asserting that
appraiser shortages are primarily related to residential property
valuations.
Many commenters opposing the proposal highlighted the benefits that
state licensed or state certified appraisers bring to the process of
valuing real estate collateral. One of these 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.
Several commenters highlighted that appraisers are the only unbiased
party in the valuation process, in contrast to buyers, agents, lenders,
and sellers, who each have an interest in the underlying transactions.
One commenter asserted that appraisers have a unique vantage point
during the property inspection process to provide lenders with
information, in addition to a valuation, that may be critical to the
lending decision and help to avoid bad loans and fraud.
Some commenters who were supportive of the proposal also discussed
the role of appraisals and appraisers. One of these commenters asserted
that appraisals are an integral part of the safety and soundness of the
real estate industry, but believed that certain transactions are well
served by alternative valuation methods. Some other commenters
expressed skepticism about the value of appraisals prepared by
independent appraisers. In this regard, one commenter asserted that
banks have a better understanding of property values in their
communities than appraisers from other areas, while another expressed
concern for the reliability of appraisals and whether appraisers'
valuations are keeping up with property growth trends. Another
commenter expressed concern that appraisers' access to sales contracts
can lead to an over-abundance of appraised values at or above the
amounts in the contracts.
After carefully considering the comments received, the agencies
have decided to increase the commercial real estate appraisal
threshold. As discussed in the proposal and further detailed below,
increasing the commercial real estate appraisal threshold will provide
regulatory relief for financial institutions by removing the appraisal
requirement for a material number of transactions without threatening
the safety and soundness of financial institutions.
The agencies are increasing the threshold based on express
statutory authority to do so if they determine in writing that the
threshold does not represent a threat to the safety and soundness of
financial institutions.\30\ The agencies have made this safety and
soundness determination and a detailed analysis is provided below.
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\30\ 12 U.S.C. 3341(b).
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Regarding consumer protection concerns, the agencies do not expect
that this increase will affect a significant number of consumer
transactions. As discussed in more detail below, the final rule is only
raising the threshold for commercial real estate transactions. This
definition was revised to exclude construction loans secured by a
single 1-to-4 family residential property, which would have included
construction loans to consumers. As a result of this change, the final
rule will not affect a material number of consumer transactions.
Regarding the efficacy of Title XI appraisals, the agencies
recognize and are supportive of the role that appraisers play in
ensuring a safe and sound real estate lending process, regardless of
whether it is in connection with an appraisal or an evaluation. Indeed,
the Title XI appraisal regulations, appraiser independence
requirements, and the Guidelines emphasize the importance of an
independent opinion of collateral value in the process of real estate
lending. Through the agencies' supervisory experience with loans that
were exempted by the current thresholds and an analysis of loan losses
over prior credit cycles for such loans, the agencies have found that
evaluations can be an effective valuation method for lower-risk
transactions. Even when the transaction amount is at or below the
threshold, the Evaluation Guidance encourages regulated institutions to
obtain Title XI appraisals when necessary for risk management and to
preserve the safety and soundness of the institution.
A. Threshold Increase for Commercial Real Estate Transactions
Definition of Commercial Real Estate Transaction
The commercial real estate appraisal threshold increase applies
only to transactions defined as ``commercial real estate
transactions.'' Under the proposed definition, a commercial real estate
transaction would have included construction loans for 1-to-4 family
residential units, but not those providing permanent financing.
Accordingly, the proposed definition would have included a loan
extended to finance the construction of a consumer's dwelling, but
would have excluded construction loans that provide both the initial
construction funding and permanent financing.
The agencies received several comments related to the proposed
definition. Most comments were not supportive of the proposed treatment
of loans to finance the construction of 1-to-4 family residential
properties. The one commenter in support of the proposal to include 1-
to-4 family construction-only loans in the definition of a commercial
real estate transaction asserted that these loans are underwritten
similar to commercial real estate transactions.
Some commenters supported excluding all loans to finance the
construction of 1-to-4 family residential properties from the
definition. Some commenters maintained that it would be safer from a
risk perspective to keep construction loans for 1-to-4 family
properties in the residential loan category subject to the $250,000
threshold. These commenters asserted that 1-to-4 family construction
loans are riskier than conventional residential lending, and maintained
that evaluations lack the market analysis needed for a phased
construction project. One commenter asserted that there may be limited
benefit to including transactions to finance the construction of 1-to-4
family residential properties without permanent financing in the
definition of commercial real estate transaction, because an appraisal
would be required prior to the permanent financing phase and prudent
risk management would dictate obtaining the appraisal prior to initial
funding. Another commenter asserted that the implementation of two
thresholds for 1-to-4 family residential construction loans would cause
[[Page 15023]]
confusion and increase regulatory burden on financial institutions.
A few commenters expressed the view that all residential
construction loans should be included in the definition and subject to
the higher threshold. One commenter noted that an increasing percentage
of 1-to-4 family properties are rental properties and that the proposed
definition would have excluded a class of rent-dependent real estate
that should be classified as commercial real estate. Another commenter
recommended that ``construction-to-permanent'' loans be included in the
definition of commercial real estate transaction to increase the
financing available for new home construction, indicating that strict
underwriting and active engagement among the bank, home builder, and
home buyer alleviate risks for these loans. This commenter supported
subjecting all construction loans to the same treatment, and asserted
that doing so would reduce regulatory burden, provide consistency, and
allow for more efficient processes. Another commenter indicated that
including all 1-to-4 family construction loans in the definition would
avoid creating additional complications by distinguishing such loans
into two different classes.
After carefully considering the comments, the agencies have adopted
a definition of commercial real estate transaction that excludes
construction loans secured by single 1-to-4 family residential
properties. Specifically, the final rule defines commercial real estate
transaction as a real estate-related financial transaction that is not
secured by a single 1-to-4 family residential property. This definition
eliminates the distinction between construction loans secured by a
single 1-to-4 family residential property that only finance
construction and those that provide both construction and permanent
financing. Under the definition in the final rule, neither of these
types of loans will be commercial real estate transactions; they will
both remain subject to the $250,000 threshold.
This approach addresses the potential confusion from subjecting two
classes of construction loans secured by a single 1-to-4 family
residential property to different threshold levels. The revised
definition also reflects comments stating that Title XI appraisals are
typically conducted for loans for construction of a single 1-to-4
family residential property regardless of whether the loan provides
only financing for construction or provides ``construction-to-
permanent'' financing.
The agencies have included the term ``single'' in the definition to
clarify that only transactions secured by one 1-to-4 family residential
property are excluded from the definition of ``commercial real estate
transaction,'' whether financing construction or for other purposes.
This change addresses potential confusion about whether a loan for the
construction of multiple residential properties would meet the
definition of ``commercial real estate transaction;'' a loan that is
secured by multiple 1-to-4 family residential properties (for example,
a loan to construct multiple properties in a residential neighborhood)
would meet the definition of commercial real estate transaction and
thus be subject to the higher threshold.
This approach addresses concerns about consumer protection, because
a large portion of loans to finance the purchase or initial
construction of a single 1-to-4 family residential property that are
secured by the property are likely to be extended to consumers who will
use the property as their dwelling. By contrast, transactions secured
by multiple 1-to-4 family properties are more likely to be transactions
to real estate developers or investors in rental properties.
The agencies note that they proposed to treat construction-only
loans to consumers as commercial real estate transactions to maintain
consistency with agency reporting standards and other regulations and
guidance that address construction loans to consumers in other
contexts. As in the proposal, the definition being adopted generally
aligns with the categories of commercial real estate transactions under
the Call Report \31\ and other agency guidance,\32\ with the exception
that construction loans secured by a single 1-to-4 family property
would not be considered a commercial real estate transaction for
purposes of this rule.
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\31\ The following four categories of real-estate secured loans
in the Consolidated Reports of Condition and Income (Call Report)
(FFIEC 031; RCFD 1410) are largely captured in the definition of
commercial real estate transaction in the rule: (1) For
construction, land development, and other land loans; (2) secured by
farmland; (3) secured by residential properties with five or more
units; or (4) secured by nonfarm nonresidential properties. As
discussed in the proposal, loans that provide construction funding
and are secured by a single 1-to-4 family residential property are
typically reported as ``for construction, land development, and
other land loans.'' The definition applies to corresponding
categories of real estate-secured loans in the FFIEC 041 and FFIEC
051 forms of the Call Report.
\32\ Other interagency guidance includes all construction loans
in one category: Real Estate Lending: Interagency Statement on
Prudent Risk Management for Commercial Real Estate Lending, OCC
Bulletin 2015-51 (December 18, 2015); Statement on Prudent Risk
Management for Commercial Real Estate Lending, Board SR Letter 15-17
(December 18, 2015); Statement on Prudent Risk Management for CRE
Lending, FDIC FIL-62-2015 (December 18, 2015); Guidance on Prudent
Loan Workouts, OCC Bulletin 2009-32 (October 30, 2009); Policy
Statement on Prudent Commercial Real Estate Loan Workouts, Board SR
Letter 09-07 (October 30, 2009); Policy Statement on Prudent
Commercial Real Estate Loan Workouts, FDIC FIL-61-2009 (October 30,
2009); Concentrations in Commercial Real Estate Lending, Sound Risk
Management Practices, 71 FR 74580 (December 12, 2006).
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The agencies have determined that, on balance, the benefits of
adopting this definition of commercial real estate transaction outweigh
the drawbacks of the limited inconsistency with other agency issuances
relating to commercial real estate lending. Those issuances are for
different purposes than the Title XI appraisal regulations, and a
different set of considerations is relevant for determining what types
of transactions are appropriately exempt from the Title XI appraisal
requirement on the basis of transaction size. The definition of
commercial real estate transaction in the final rule ensures that loans
made to consumers are largely treated consistently, remaining subject
to the $250,000 threshold. In addition, by categorizing residential
construction loans more clearly, the definition of commercial real
estate transaction being adopted can facilitate compliance and enhance
the burden reduction benefits of the rule.
Threshold Increase
The agencies proposed increasing the commercial real estate
appraisal threshold from $250,000 to $400,000. In determining the level
of increase, the agencies considered the change in prices for
commercial real estate measured by the Federal Reserve Commercial Real
Estate Price Index (CRE Index). As described in the proposal, the CRE
Index \33\ is a direct measure of the changes in commercial real estate
prices in the United States.\34\
[[Page 15024]]
The CRE Index is comprised of data from the CoStar Commercial Repeat
Sale Index,\35\ which uses repeat sale regression analysis of 1.7
million commercial property sales records to compare the change in
price for the same property between its most recent and previous sale
transactions.\36\ The data incorporated into this index covers
properties across the country and across all price ranges,\37\ from
before 1994 through the present.
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\33\ The Board publishes data on the flow of funds and levels of
financial assets and liabilities, by sector and financial
instrument; full balance sheets, including net worth, for households
and nonprofit organizations, nonfinancial corporate businesses, and
nonfinancial noncorporate businesses; Integrated Macroeconomic
Accounts; and additional supplemental detail. See Board of Governors
of the Federal Reserve System, Financial Accounts of the United
States, https://www.federalreserve.gov/releases/z1/current/default.htm.
\34\ The CRE Index is quarterly and not seasonally adjusted. See
Board of Governors of the Federal Reserve System, Series analyzer
for FL075035503.Q, https://www.federalreserve.gov/apps/fof/SeriesAnalyzer.aspx?s=FL075035503&t=&bc=:FI075035503,FL075035503&suf=Q; Board of Governors of the Federal Reserve System, Series
Structure, https://www.federalreserve.gov/apps/fof/SeriesStructure.aspx.
\35\ Board of Governors of the Federal Reserve System, Series
analyzer for FL075035503.Q, https://www.federalreserve.gov/apps/fof/SeriesAnalyzer.aspx?s=FL075035503&t=&bc=:FI075035503,FL075035503&suf=Q. Data for years prior to 1996 are comprised of a weighted average
of three appraisal-based commercial property series from National
Real Estate Investor. Id.
\36\ CoStar, Federal Reserve's Flow of Funds to Incorporate
CoStar Group's Price Indices, CoStar (June 4, 2012), http://www.costar.com/News/Article/Federal-Reserves-Flow-of-Funds-To-Incorporate-CoStar-Groups-Price-Indices/138998.
\37\ See id.
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According to the CRE Index, a commercial property that sold for
$250,000 as of June 30, 1994, would be expected to sell for
approximately $760,000 as of December 2016.\38\ However, because the
price of commercial real estate can be particularly volatile, the
agencies proposed to base the increased threshold on the value of the
CRE Index when commercial real estate prices were at their lowest point
in the most recent downturn, which was $423,000 in March 2010. The
agencies invited comment on the proposed level for the commercial real
estate appraisal threshold.
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\38\ Since the proposal was published, the CRE Index data points
for some of the recent quarters were revised. The numbers in this
document reflect the revised CRE Index.
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Most of the commenters, who supported increasing the threshold to
at least $400,000, supported a higher amount. Some of these commenters
also advocated for automatically increasing or reevaluating the level
more frequently than every ten years as real estate prices rise and
valuation technology changes. Some commenters urged the agencies to
conduct further analysis to determine whether the threshold could be
increased to a higher amount, but did not specify an amount. Some
commenters supported increasing the threshold to $500,000 and suggested
that this higher figure would avoid the need for additional changes to
the threshold in the near-term due to expected increases in prices. A
few commenters supported raising the threshold to $750,000 or higher,
claiming the methodology in the proposal was unnecessarily
conservative.
Some commenters supported lowering the commercial real estate
appraisal threshold to unspecified amounts. Some of those commenters
specifically objected to the methodology used by the agencies in the
proposal, asserting that adjusting the previous $250,000 level for
changes in prices was inappropriate because that level was not itself
the result of an inflation adjustment.
After careful consideration of the comments, the agencies have
increased the commercial real estate appraisal threshold to $500,000,
rather than the proposed $400,000 level. The proposed $400,000
threshold was based on the value of the CRE Index in March 2010, when
commercial real estate prices were at their lowest point in the most
recent downturn. The agencies proposed this conservative approach, due
to the volatility of commercial real estate prices over time. The
agencies based the beginning point of this analysis on $250,000,
because supervisory experience with the $250,000 threshold has
confirmed that this threshold level did not threaten the safety and
soundness of financial institutions. Based on the CRE Index, a
commercial property that sold for $250,000 as of June 30, 1994, would
be expected to sell for $423,600 in March 2010, which was the trough of
the CRE price cycle. Following this trend, that property would be
expected to have a conservative value of approximately $509,000 as of
December 2017 (as shown below). Based on the comments received and this
further review of the CRE Index, as well as the safety and soundness
analysis discussed below, the agencies have decided to finalize the
threshold at $500,000.
[GRAPHIC] [TIFF OMITTED] TR09AP18.006
[[Page 15025]]
Regarding the suggestion to raise the commercial real estate
appraisal threshold to $750,000 or higher, the agencies also note that
$750,000 was close to the high point on the volatile CRE Index, as
discussed above. Given the volatility in commercial real estate prices,
raising the threshold to this amount or higher would raise safety and
soundness concerns. Finally, a possible threshold increase to $750,000
or higher may pose too great a risk to smaller institutions, as such
transactions may represent a higher percentage of capital for such
firms than has historically been permitted under the 1994 threshold.
In the proposal, the agencies also invited comment on how having
three threshold levels ($250,000 for all transactions, $400,000 for
commercial real estate transactions, and $1 million for QBLs) rather
than the two threshold levels applicable to Title XI appraisals ($1
million for QBLs and $250,000 for all other transactions) would affect
burden on regulated institutions. Three commenters supported the
proposal, noting that having three thresholds would have minimal impact
on operations. One commenter opposed having three thresholds, asserting
that it will increase complexity, particularly for small community
banks with less rigorous compliance operations. The agencies have
determined that the burden reduction associated with a higher threshold
for commercial real estate transactions outweighs the potential burden
of implementing three thresholds.
Safety and Soundness Considerations for Increasing the Threshold for
Commercial 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.\39\ The analysis of supervisory
experience and available data presented in the proposal indicated that
the proposed threshold level of $400,000 for commercial real estate
transactions would not have posed a threat to the safety and soundness
of financial institutions. The agencies invited comment on their
preliminary finding and the data used. Taking into consideration those
comments and updated analysis, discussed below, the agencies determined
that the threshold level of $500,000 for commercial real estate
transactions does not pose a threat to the safety and soundness of
financial institutions.
---------------------------------------------------------------------------
\39\ 12 U.S.C. 3341(b).
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Multiple financial institutions trade associations, financial
institutions, individuals, and home builder and realtor associations
supported the agencies' analysis showing that an increase to the
appraisal threshold for commercial real estate would not have a
significant impact on the safety and soundness of financial
institutions. A few commenters noted that appraisals are only one part
of the underwriting process, one asserting that loans are primarily
underwritten on borrowers' ability to repay, with collateral as a
secondary consideration. Another commenter asserted that commercial
borrowers tend to be larger entities, with the capital to withstand
detrimental financial events and shifts in the market. This commenter
also indicated that the proposal would not increase safety and
soundness risk, given that the increased threshold would affect a
relatively small number of transactions in the commercial real estate
lending market.
Some commenters noted that evaluations would be required where
appraisals were not obtained, and some asserted that the increased use
of evaluations with these less complex loans would not increase risk if
prepared with adequate analysis. One of these commenters asserted that
evaluations for smaller transactions provide more targeted and precise
data than appraisals performed by someone from another area.
The agencies received comments from appraisers, appraiser-related
groups and individuals opposing the proposed increase, many of whom
asserted that appraisals are key to preserving the safety and soundness
of financial institutions and the economy. Several of these commenters
claimed that evaluations were not an appropriate substitute for
appraisals, some suggesting that they are less reliable and prepared by
individuals that are not held to the same standards as appraisers. One
commenter asserted that the increase would pose safety and soundness
risks because commercial loans are riskier than residential loans.
Another commenter suggested that entry-level properties that are lower
in price and close to the threshold are more likely to have performance
issues compared to more expensive properties. One commenter raised
concerns that the rule focused on time and cost savings to financial
institutions in selecting an appropriate valuation method, rather than
risk.
Several commenters voiced concerns about recent price increases,
increasing delinquencies, or volatility in the commercial real estate
market, which, some asserted, may be indicative of a market ``bubble.''
Some commenters suggested that it is the wrong time to relax valuation
standards, given their view that past market bubbles have been preceded
by loosening of underwriting and appraisal standards, and that poor
valuation practices contributed to losses during past financial crises.
One of these commenters asserted that there is increasing risk in
commercial real estate lending, particularly among smaller community
and regional banks, which the commenter believed are less likely to
have robust collateral risk management policies, practices and
procedures.
Multiple commenters noted a 2015 appraiser trade association survey
of appraisal industry professionals, including chief appraisers and
appraisal managers at financial institutions, which showed that the
majority of those surveyed opposed increasing the current $250,000
threshold and believed that increases to the threshold could increase
risk to lenders.
The agencies received a limited number of comments in response to
the request for comment on the data sources used for the agencies'
safety and soundness analysis from financial institutions, financial
institution trade associations and appraiser trade associations.
Multiple commenters asserted that the data in the proposal supports the
increase in the commercial real estate threshold, and indicated that
they did not know of other sources of data that the agencies should
consider. A number of commenters asserted that the agencies' analysis
was too conservative, that past housing crises do not imply current
volatility, and that the data suggest the threshold could be increased
further than proposed without threatening safety and soundness of
financial institutions. One commenter opposing the proposal suggested
that the data used in the agencies' safety and soundness analysis was
weak and questioned why the agencies did not provide specific numbers
to support the assertion that the data related to charge-offs from
2007-2012 is ``no worse than'' those from the years 1991-1994, except
for marked increases in construction loan charge-offs.\40\ This
commenter also
[[Page 15026]]
asserted that the agencies' analysis of the CoStar data should have
considered that newly exempted loans under the higher threshold would
more likely be extended to small businesses, which by nature are more
vulnerable to market volatility and the potential for business failure.
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\40\ During the 1991-1994 credit cycle, the net charge-off rate
for commercial real estate loans reached a high of about 4.5
percent. During the 2007-2012 credit cycle, net charge-off rates
reached a high of about 3.5 percent. These are the numbers the
agencies used to support their conclusion that the data related to
charge-offs from 2007 to 2012 was no worse than that from the years
1991 to 1994. Federal Reserve Bank of San Francisco: Aggregate Net
Charge-Off Rate Database as derived from the Federal Financial
Institutions Examination Council Consolidated Reports of Condition
and Income, FFIEC031 4Q 2016: http://www.frbsf.org/banking/data/aggregate-data/.
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Based on their supervisory experiences, the agencies disagree that
increasing the commercial real estate appraisal threshold would
increase risks to financial institutions, including smaller
institutions. As outlined earlier, the agencies closely examined a
variety of data and metrics indicating that the relative risks
associated with the new threshold in terms of the scope of covered
transactions were similar to those presented by the 1994 threshold. The
agencies specifically examined the information from smaller insured
depository institutions (IDIs) from Call Reports to assess the
concentration risk for institutions and concluded that these risks were
similar to those presented for larger IDIs. The agencies also note that
smaller IDIs are often better positioned than larger institutions to
understand and quantify local real estate market values since they
serve a smaller, more defined market area.
Regarding comments concerning evaluations as a valuation method, in
the agencies' views, evaluations are an effective valuation method for
smaller commercial real estate transactions and other transactions
under the thresholds. As provided in the Title XI appraisal
regulations, evaluations for each transaction must be consistent with
safe and sound banking practices. The Evaluation Guidance provides
guidance on appropriate evaluation practices. In adopting the increased
threshold for commercial real estate transactions, the agencies note
that regulated institutions have the flexibility to choose to obtain a
Title XI appraisal when markets are volatile or when an appraisal is
warranted for other reasons.\41\
---------------------------------------------------------------------------
\41\ 75 FR 77450, 77460.
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The agencies have no evidence that increasing the appraisal
threshold to $500,000 for commercial real estate transactions will
materially increase the risk of loss to financial institutions.
Analysis of supervisory experience concerning losses on commercial real
estate transactions suggests that faulty valuations of the underlying
real estate collateral since 1994 have not been a material cause of
losses in connection with transactions at or below $250,000.\42\ In the
last three decades, the banking industry suffered two crises in which
poorly underwritten and administered commercial real estate loans were
a key feature in elevated levels of loan losses and bank failures.
Supervisory experience and an examination of material loss reviews
covering those decades suggest that larger acquisition, development,
and construction transactions pose greater credit risk, due to the lack
of appropriate underwriting and administration of issues unique to
larger properties, such as longer construction periods, extended
``lease up'' periods (the time required to lease a building after
construction), and the more complex nature of the construction of such
properties.\43\
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\42\ See 82 FR at 35484.
\43\ See id.
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In addition to considering the agencies' supervisory experience
since 1994, the agencies reviewed how the coverage of transactions
exempted by the threshold would change, both in terms of number of
transactions and aggregate value, in order to consider the potential
impact on safety and soundness of increasing the commercial real estate
appraisal threshold to $500,000. In the proposal, the agencies used
three different metrics to estimate the overall coverage of the
existing threshold and the proposed threshold: (1) The number of
commercial real estate transactions at or under the threshold as a
share of the number of all commercial real estate transactions; (2) the
dollar volume of commercial real estate transactions at or under the
threshold as a share of the total dollar volume of all commercial real
estate transactions; and (3) the dollar volume of commercial real
estate transactions at or under the threshold relative to IDIs' capital
and the allowance for loan and lease losses, which act as buffers to
absorb losses, as explained below. The agencies examined data reported
on the Call Report and data from the CoStar Comps database to estimate
the volume of commercial real estate transactions covered by the
existing threshold and increased thresholds.
The Call Report data shows that the scope of the exemption in 1994,
in terms of the number of transactions impacted, decreased
significantly over time, and implies that raising the commercial real
estate appraisal threshold to $500,000 will not involve a greater
number of transactions than when the thresholds were established in
1994.
Due to the manner in which IDIs report information on nonfarm
nonresidential (NFNR) loans in the Call Report, this data set does not
enable the agencies to calculate the percentage of loans that would
fall under any threshold amount between $250,000 and $1 million.\44\
The percentage of the total dollar volume of loans that fall beneath
the $250,000 threshold is now less than one third of what it was when
the threshold was established in 1994.\45\ This is true even for
institutions under $1 billion in assets, who are more likely to hold
smaller loans. Based in part on this analysis, the agencies conclude
that the exposure of financial institutions will remain at acceptable
levels with a $500,000 commercial real estate appraisal threshold.
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\44\ As described in the proposal, IDIs annually report
information on NFNR loans in the Call Report by three separate size
categories: (1) Loans with original amounts of $100,000 or less; (2)
loans with original amounts of more than $100,000, but $250,000 or
less; and (3) loans with original amounts of more than $250,000, but
$1 million or less. They also annually report the dollar amount of
all NFNR loans, including those over $1 million. Using this data,
the agencies calculated the dollar amount of NFNR loans at or under
the current $250,000 threshold as a percentage of the dollar amount
of all NFNR loans.
\45\ In the proposal, the agencies explained that 18 percent of
the dollar volume of all NFNR loans reported by IDIs had original
loan amounts of $250,000 or less when the current appraisal
threshold was established in 1994, but as of the fourth quarter of
2016, approximately 4 percent of the dollar volume of such loans had
original loan amounts of $250,000 or less. 82 FR at 35485.
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The CoStar Comps database provides sales value data on specific
commercial real estate transactions and allows for an analysis of the
estimated coverage at any potential threshold level. As described in
the proposal, the agencies used this dataset to analyze the impact of
increasing the commercial real estate appraisal threshold to $400,000,
and have recently updated this analysis to evaluate the impact of a
$500,000 threshold. An analysis of the CoStar Comps database for the
most recent year available suggests that increasing the amount to
$500,000 would significantly increase the number of commercial real
estate transactions exempted from the Title XI appraisal requirements,
but the portion of the total dollar volume of commercial real estate
transactions that would be exempted by the threshold would be
comparatively minimal.
At the existing $250,000 threshold and the proposed $400,000
threshold, the percentage of commercial properties with loans in the
CoStar Comps database that would be exempted from the Title XI
appraisal regulations would have been 16.1 percent and 26.3
[[Page 15027]]
percent, respectively.\46\ The $500,000 threshold that the agencies are
adopting will increase the percentage of transactions affected by
another 5.5 percent, resulting in 31.9 percent of loans in the CoStar
database being exempt from the appraisal requirement, or 15.7 percent
more transactions than under the $250,000 threshold. The proposed
$400,000 threshold would have increased the percentage of exempted
transactions by dollar volume from 0.5 percent, under the current
threshold, to 1.2 percent. Increasing the threshold to $500,000 would
increase the dollar volume by an additional 0.5 percent, so that a
total of 1.8 percent of the dollar volume of loans in the CoStar
database will be exempt from the appraisal requirement, or 1.3 percent
more of the dollar volume than under the $250,000 threshold. Thus, this
analysis indicates that the increased threshold will affect a low
aggregate dollar volume, but a material number of transactions.
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\46\ Certain percentages shown here differ from the values
presented in the proposal because of ongoing refinements to the
database and filters used to extract the information. The
methodology was further refined to improve its ability to reflect
the relevant population of commercial real estate transactions.
Also, values presented here may not sum due to rounding.
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The agencies have used this analysis and the Call Report analysis
to determine that increasing the commercial real estate appraisal
threshold to $500,000 does not pose a threat to safety and soundness.
In reaching this determination, the agencies also considered the fact
that evaluations would be required for such transactions. The
Guidelines provide regulated institutions with guidance on establishing
parameters for ordering Title XI appraisals for transactions that
present significant risk, even if those transactions are eligible for
evaluations under the regulation.\47\ Regulated institutions are
encouraged to continue using a risk-focused approach when considering
whether to order an appraisal for real estate-related financial
transactions.
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\47\ See Guidelines, Section XI.
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B. Use of Evaluations
Overview
The Title XI appraisal regulations require regulated institutions
to obtain evaluations for three categories of real estate-related
financial transactions that the agencies have determined do not require
a Title XI appraisal, including commercial and residential real-estate
related financial transactions of $250,000 or less and QBLs with a
transaction value of $1 million or less.\48\ Accordingly, the agencies
proposed to require that regulated institutions entering into
commercial real estate transactions at or below the proposed commercial
real estate appraisal threshold obtain evaluations that are consistent
with safe and sound banking practices unless the institution chooses to
obtain an appraisal for such transactions.\49\
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\48\ See OCC: 12 CFR 34.43(a)(1) and (5); Board: 12 CFR
225.63(a)(1) and (5); and FDIC: 12 CFR 323.3(a)(1) and (5).
\49\ An evaluation is not required when real estate-related
financial transactions meet the threshold criteria and also qualify
for another exemption from the appraisal requirements where no
evaluation is required by the regulation.
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The agencies are adopting this aspect of the proposal in the final
rule without change.\50\ An evaluation estimates the market value of
real estate, but is not subject to the same requirements as a Title XI
appraisal. For example, a Title XI appraisal must be performed by a
state certified or state licensed appraiser and must conform to USPAP
standards, whereas evaluations are not required to be performed by
individuals with specific credentials or to conform to USPAP standards.
As noted above, the agencies have issued guidance on the preparation of
evaluations.\51\
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\50\ The agencies are adopting the commercial real estate
appraisal threshold at $500,000, which is higher than proposed.
Financial institutions will be required to obtain evaluations for
commercial real estate transactions with transaction values of
$500,000 or less.
\51\ See Evaluation Guidance.
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The agencies requested comment on the proposed requirement that
regulated institutions obtain evaluations for commercial real estate
transactions at or below the proposed commercial real estate appraisal
threshold. The agencies also asked related questions concerning whether
additional guidance is needed by institutions to support the increased
use of evaluations as well as questions concerning burden and costs
related to the use of evaluations.
Evaluations Required at or Below the Threshold
Several commenters generally supported the proposal that regulated
institutions obtain evaluations for commercial real estate transactions
at or below the threshold. Other commenters expressed concern regarding
the competency and credentialing of persons performing evaluations, as
well as concerns regarding difficulty in locating persons qualified to
perform evaluations.\52\ Some of these commenters also expressed
concern over the lack of standards for evaluations and the lack of
oversight and regulation for persons performing evaluations. One
commenter urged the agencies to increase the qualification requirements
for those completing evaluations if the commercial real estate
appraisal threshold were increased.
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\52\ A commenter highlighted two sentences in the proposal that
appeared to conflict with the requirements of the appraisal
regulations. First, the commenter disagreed with the following
statement in the proposal: ``Unlike appraisals, evaluations may be
performed by a lender's own employees and are not required to comply
with USPAP.'' The agencies agree with the commenter that regulations
do not prohibit employees of regulated institutions from preparing
appraisals if they are so qualified and independent of the real
estate-related financial transaction.
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As discussed in the proposal, institutions must obtain evaluations
that are consistent with safe and sound banking practices. The agencies
have provided guidance to regulated institutions on evaluations.\53\
The Guidelines state that evaluations should be performed by persons
who are competent and have the relevant experience and knowledge of the
market, location, and type of real property being valued. An evaluation
is not required to be completed by a state licensed or state certified
appraiser, but may be completed by an employee of the regulated
institution or by a third party, as addressed in the Evaluations
Advisory.\54\ However, the agencies' final rule does not prohibit
regulated institutions from using state licensed or state certified
appraisers to prepare evaluations. A Title XI appraisal would satisfy
the requirement for an ``appropriate evaluation of real property
collateral that is consistent with safe and sound banking practices;''
thus, regulated institutions that choose to obtain Title XI appraisals
for real estate-related financial transactions that require evaluations
are not in violation of the Title XI appraisal regulations.
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\53\ See Evaluation Guidance.
\54\ OCC Bulletin 2016-8 (March 4, 2016); Board SR Letter 16-05
(March 4, 2016); and Supervisory Expectations for Evaluations, FDIC
FIL-16-2016 (March 4, 2016).
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Evaluation Guidance
The agencies also requested comment on the type of additional
guidance, if any, regulated institutions need to support the increased
use of evaluations. In response, the agencies received comments
indicating concern regarding the clarity of, and the burden produced
by, the existing guidance on evaluations. A few commenters requested
that the agencies provide additional guidance, such as guidance
relating to the adequacy of evaluation products available on the market
or examples of acceptable industry practices for evaluations. Some
other
[[Page 15028]]
commenters requested that the agencies revisit and relax the current
guidance pertaining to evaluations and ensure examiners accept
evaluations when permissible. One commenter expressed the view that a
simplification would make the current existing guidance for evaluations
less time consuming and complex for lower value transactions. Another
commenter suggested there should be no need for a review of internal
evaluations where the direct lender did not complete the evaluation.
The Evaluation Guidance provides information to help ensure that
evaluations provide a credible estimate of the market value of the
property pledged as collateral for the loan. The current Evaluation
Guidance provides flexibility to regulated institutions for developing
evaluations that are appropriate for the type and risk of the real
estate financial transaction and does not prescribe specific valuation
approaches or products to use tools in the development of evaluations.
Also, in addition to various valuation approaches, the Guidelines
discuss the possible use of several analytical methods and
technological tools in the development of evaluations, such as
automated valuation models and tax assessment values. The agencies will
continue to assess the adequacy of agency guidance on evaluations.
Cost and Burden of Evaluations
The agencies invited comment regarding whether the use of
evaluations reduces burden and cost as compared to the use of Title XI
appraisals. The agencies also invited comment on whether evaluations
are currently prepared by in-house staff or outsourced to appraisers or
other qualified professionals.
The agencies received several comments indicating that the proposed
increase in the commercial real estate appraisal threshold and the
increased use of evaluations would provide cost and time savings for
consumers and institutions, because evaluations tend to cost less that
appraisals and take less time to prepare. One commenter asserted that
third-party evaluations are approximately 25 percent of the cost of an
appraisal. Another commenter indicated noted that some financial
institutions prefer to conduct them in-house to maintain consistency of
the product and because of staff knowledge of the marketplace. One
commenter asserted that appraiser-developed evaluations are
unnecessarily expensive, necessitating evaluations to be conducted in-
house. Another commenter indicated that increasing the threshold would
provide cost savings for portfolio loans but would not address issues
related to secondary market requirements, which are outside the
agencies' purview.
On the other hand, some commenters asserted that the agencies had
overstated how much the proposal would reduce burden for regulated
institutions, and questioned the agencies' methods for estimating the
reduction in burden. Some commenters expressed concern regarding the
length of time required to review an evaluation. A few commenters
suggested that the agencies' cost analysis reflected a lack of
precision and absence of detailed research to determine the cost
differential of appraisals and evaluations between the current and
proposed threshold. This same commenter asserted that evaluations lack
the detail of appraisals, and, as a result, lenders are often required
to perform additional research in determining whether evaluations are
credible, which reduces cost and time savings produced by the proposal.
One commenter implied that the limited guidance for performing
evaluations creates confusion, which results in added costs. One
commenter asserted that it is not true that evaluations contain less
detailed information or take less time to review than appraisals.\55\
Another commenter asserted that, because evaluations provide less
detail than appraisals, lenders may be required to do more research to
determine whether the value conclusion is credible.
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\55\ Two commenters disagreed with the agencies' use of the term
``loan officer'' relative to the estimated time for reviewing an
appraisal or evaluation, and asserted that the usage of the term
could be perceived to imply that originators are permitted to be
involved in the appraisal review process, which is contrary to the
agencies' appraiser independence requirements. The agencies were
using the term ``loan officer'' in its broadest context, and did not
intend to imply that the officer originating the credit may conduct
appraisal or evaluation reviews relating to that credit. The use of
the term ``loan officer'' was not intended to change standards
established on appraiser independence or any implementing guidance.
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The agencies carefully considered these comments in evaluating the
rule's impact on the time to obtain and review Title XI appraisals and
evaluations. The agencies conclude that there may be less delay in
finding appropriate personnel to perform an evaluation than to perform
a Title XI appraisal, particularly in rural areas, because evaluations
are not required to be prepared by a certified or licensed appraiser.
Requiring regulated institutions to procure the services of a state
licensed or state certified appraiser to prepare evaluations for
commercial real estate transactions at or below the threshold could
impose significant additional costs on lenders and borrowers without
materially increasing the safety and soundness of the transactions. The
agencies' data and analysis reflect that the increase in the commercial
real estate appraisal threshold and corresponding increased use of
evaluations could result in a cost savings of several hundred dollars
for each commercial real estate transaction, as discussed below.
Based on supervisory experience the agencies conclude 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. Transactions permitting the use
of an evaluation typically have a lower dollar value, often are less
complex, or are subsequent to previous transactions for which Title XI
appraisals were obtained. Therefore, a consolidated analysis is more
likely to be used in an evaluation. The agencies estimate that, on
average, the time to review an evaluation for an affected transaction
under the final rule will be approximately 30 minutes less than the
time to review an appraisal.\56\
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\56\ The agencies recognize some evaluations take longer to
review than some appraisals; yet, on average, evaluations are likely
to take less time to review than appraisals. This view is based on
supervisory experience as well as discussions with regulated
institutions.
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In evaluating this rule, the agencies considered the impact of
obtaining evaluations instead of Title XI appraisals on regulated
institutions and borrowers. As noted in the proposal, based on
information from industry participants, the cost of third-party
evaluations of commercial real estate generally ranges from $500 to
over $1,500, whereas the cost of appraisals of such properties
generally ranges from $1,000 to over $3,000. Commercial real estate
transactions with transaction values above $250,000, but at or below
$500,000, are likely to involve smaller and less complex properties,
and appraisals and evaluations on such properties would likely be at
the lower end of the cost range. This third-party pricing information
suggests a savings of several hundred dollars per transaction affected
by the proposal. Comments from financial institutions generally
affirmed similar information presented in the proposal.
In considering the aggregate effect of this rule, the agencies
considered the number of transactions affected by the increased
threshold. As previously discussed, the agencies estimate that the
number of commercial real estate transactions that would be exempted by
[[Page 15029]]
the threshold is expected to increase by approximately 16 percent under
the rule. Thus, while the precise number of affected transactions and
the precise cost reduction per transaction cannot be determined, the
rule is expected to lead to significant cost savings for regulated
institutions that engage in commercial real estate lending.
Competitive Disadvantage of Evaluations
The agencies received comments from financial institutions,
individuals, and a trade association representing valuation
professionals, indicating concern that the proposal would put smaller
banks that do not have in-house expertise to prepare evaluations at a
competitive disadvantage to larger banks. Commenters asserted that
these banks hire outside parties to prepare evaluations and pass the
cost along to borrowers, making their loans more expensive than
comparable loans at larger financial institutions.
In evaluating the final rule, the agencies considered these
concerns. In response, the agencies note that the cost for completing
an evaluation would be less than the cost for completing a Title XI
appraisal for the same property, which thereby reduces burden. The goal
of the agencies with this increase is to provide flexibility to
regulated institutions in approaching property valuation. Some
institutions may not currently be in a position to take advantage of
this flexibility. However, raising the threshold will help those
regulated institutions that choose to train in-house staff to perform
evaluations and would reduce costs for those institutions that choose
to outsource evaluations.
C. State Certified Appraiser Required
As described in the proposal, the current Title XI appraisal
regulations require that ``[a]ll federally related transactions having
a transaction value of $250,000 or more, other than those involving
appraisals of 1-to-4 family residential properties, shall require an
appraisal prepared by a State certified appraiser.'' \57\ In order to
make this paragraph consistent with the other proposed changes to the
appraisal regulations, the agencies proposed to change its wording to
introduce the $400,000 threshold and use the term ``commercial real
estate transaction.'' The agencies did not receive any comments on this
proposed change.
---------------------------------------------------------------------------
\57\ OCC: 12 CFR 34.43(d); Board: 12 CFR 225.63(d)(2); and FDIC:
12 CFR 323.3(d)(2).
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Given the change from the proposed rule from a $400,000 threshold
to a $500,000 threshold, the final rule makes a corresponding change to
this section. The amendment to this provision is a technical change
that does not alter any substantive requirement.
III. Effective Date
The agencies proposed to make the final rule, if adopted, effective
upon publication in the Federal Register. The agencies reasoned that a
delayed effective date was not required by applicable law because the
proposal exempted additional transactions from the Title XI appraisal
requirements and did not impose any new requirements on regulated
institutions.\58\ The agencies requested comment on whether the
proposed effective date was appropriate.
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\58\ See 82 FR at 35482.
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The agencies received three comments on the proposed effective
date. One commenter supported the proposed effective date and did not
think it would pose challenges to financial institutions. The other two
commenters disagreed with an immediate effective date, asserting that
financial institutions required time to adjust policies and procedures
to implement the proposed changes. One commenter recommended a six-
month to one-year implementation period, while the other suggested an
effective date 180 days after the final rule is published.
The agencies have retained the proposed effective date, which is
the date of publication in the Federal Register.\59\ In doing so, the
agencies balanced the need for some financial institutions to update
policies and procedures to incorporate evaluations for transactions
exempted by the revised threshold with the benefit of an immediate
effective date, which will enable institutions to benefit from lower
costs and regulatory relief upon or shortly after the effective date of
the final rule. The agencies note that an effective date immediately
upon publication in the Federal Register is the approach used in
adopting the 1994 amendments to the Title XI appraisal regulations. The
agencies are not aware of any evidence that using an immediate
effective date in connection with the 1994 amendments caused a
competitive disadvantage or hardship to regulated institutions. The
agencies also note that regulated institutions have the discretion to
use Title XI appraisals in lieu of evaluations for any exempt
transaction.
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\59\ As discussed in Section V.A of the SUPPLEMENTARY
INFORMATION, the 30-day delayed effective date required under the
Administrative Procedure Act (APA) is waived pursuant to 5 U.S.C.
553(d)(1), which provides a waiver when a substantive rule grants or
recognizes an exception or relieves a restriction. Additionally, the
Riegle Community Development and Regulatory Improvement Act of 1994,
Public Law 103-325, 108 Stat. 2163 (Riegle Act) provides that rules
imposing additional reporting, disclosures, or other new
requirements on IDIs generally must take effect on the first day of
a calendar quarter that begins on or after the date on which the
regulations are published in final form. 12 U.S.C. 4802(b). As
discussed further in the Section V.D of the SUPPLEMENTARY
INFORMATION, the final rule does not impose any new requirements on
IDIs, and, as such, the effective date requirement of the Riegle Act
is inapplicable.
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IV. Other Efforts To Relieve Burden
Residential and Qualifying Business Loan Thresholds
The agencies explained in the proposal that they were not proposing
any threshold increases for transactions secured by a single 1-to-4
family residential property (residential transactions) or QBLs in
connection with this rulemaking. The agencies requested comment on
whether there are other factors that should be considered in evaluating
the current appraisal threshold for residential transactions. The
agencies also invited comment and supporting data on the
appropriateness of raising the current $1 million threshold for QBLs
and posed a number of specific questions related to regulated
institutions' experiences with QBLs.
Numerous commenters, particularly financial institutions and their
trade associations, encouraged the agencies to consider increasing the
threshold for residential transactions, though few introduced new
factors for the agencies' consideration. Many of these commenters
asserted that an increase would produce cost and time savings that
would benefit regulated institutions and consumers without threatening
the safety and soundness of financial institutions. In support of its
position that an increase would not threaten safety and soundness, one
of these commenters asserted that there is less risk in the homogenous
loan pool of 1-to-4 family residential loans than there is in
commercial real estate. One commenter asserted that the consumer
benefits of appraisals have been overstated, that appraisals are
primarily for the benefit of financial institutions, and that consumers
could always order their own appraisals.
Several commenters supporting an increase in the threshold for
residential transactions noted that an increase in the threshold would
be justified by increases in residential property values since the
current threshold was established. Some commenters represented that
relief would be particularly beneficial for lending in
[[Page 15030]]
rural communities that often have shortages in state licensed and state
certified appraisers. One of these commenters cited feedback from
several state bank supervisory agencies indicating that access to
appraisers, particularly for residential transactions, is limited in
rural areas within their states and that federal appraisal regulations
are causing significant burden. A few commenters noted that the
government sponsored enterprises (GSEs) waive appraisal requirements
for certain residential mortgage loans that they purchase and they
expected the GSEs to expand eligibility for such waivers. In this
regard, they asserted that increasing the threshold in the appraisal
regulations would provide burden relief. One of these commenters
asserted that as the GSEs expand their appraisal waiver programs,
regulated institutions that hold residential mortgage loans in
portfolio will be at a competitive disadvantage if the current
threshold in the appraisal regulations is not increased. Another
commenter asserted that, even if inconsistent GSE requirements would
negate some of the burden reduction, the agencies should raise the
residential threshold now if, by doing so, safety and soundness would
not be jeopardized. A separate commenter suggested that the agencies
should provide a de minimis exemption from appraisal requirements for
residential mortgage loans that are retained in portfolio by regulated
institutions. This same commenter urged the agencies to consider more
regional data in deciding whether to make future changes to the
threshold for residential transactions.
Many commenters, particularly appraisers and appraiser trade
associations, supported with the agencies' decision not to propose an
increase in the threshold for residential transactions. Several
commenters pointed to the safety and soundness and consumer protection
benefits of obtaining appraisals in connection with residential
transactions. Several commenters also asserted that the appraisal
regulations already exempt a significant percentage of residential
mortgage loans. One commenter suggested that the agencies should not
rely on policies of other federal entities, such as the GSEs, in making
decisions about the appraisal regulations. Another commenter expressed
concern that the potential negative consequences of raising the
threshold could be exacerbated by the loosening of appraisal standards
by the GSEs for some transactions. Another commenter asserted that
increasing the threshold for residential transactions could discourage
entrance into the appraisal profession and cause further appraiser
shortages.
Regarding an increase to the appraisal threshold for QBLs, the
majority of comments received opposed an increase. These commenters,
who were appraisers or their trade associations, cautioned against a
loosening of standards that could raise safety and soundness concerns.
Commenters supporting an increase in the QBL threshold asserted that
the value of real estate offered as collateral on a QBL is a secondary
consideration, because the primary source of repayment is not the
income from or sale of that collateral. Some commenters also supported
an increase in the threshold due to limited availability of appraisers
in their states. Commenters advocated a range of increases from $1.5
million to $3 million.
Few commenters specifically addressed the agencies' questions
regarding unique risks that may be posed by QBLs, data regarding QBLs,
and regulated institutions' experiences in applying the current QBL
threshold. Regarding risks posed by QBLs, one financial institutions
trade association commented that its members consider QBLs to be
higher-risk loans. An appraiser trade association that was opposed to
an increase asserted that small business loans are riskier than others
and that lenders with concentrations in such loans are at greater risk.
The commenter also noted that such loans are usually held in portfolio,
thus increasing risk. Regarding the agencies' requests for data on
QBLs, a commenter expressed surprise that the agencies lack data on QBL
concentrations, and asserted this lack of data further supports not
increasing the threshold. In response to the agencies' question
regarding regulated institutions' experiences in applying the QBL
threshold, a commenter asserted that many loan officers are poorly
trained in classifying loans as either real estate or business. The
commenter recommended that the agencies provide examples of these types
of loans. In addition, two commenters asked the agencies to clarify the
QBL threshold relative to transactions secured by farmland.
The agencies appreciate the issues raised by the commenters
relating to the thresholds for residential transactions and QBLs. As
discussed in the proposal, the agencies decided not to propose any
change to these thresholds in connection with this rulemaking.
Nevertheless, the comments reflect a variety of issues that the
agencies would consider if they decide to propose changes to the
residential or QBL thresholds in the future.
Regarding the requests for clarification of the QBL threshold, the
Title XI appraisal regulations have established a $1 million threshold
that is applicable to any business loans that are not dependent on the
sale of, or rental income derived from, real estate as the primary
source of repayment.\60\ For example, a loan secured by a farm, which
could include a situation where one or more affiliated limited
liability companies own the farmland securing the loan, could be
treated as a QBL subject to the $1 million threshold, if repayment is
primarily from the proceeds from the farm business (e.g., sale of crops
and related payments). However, a real estate-related financial
transaction secured by farmland whose repayment is primarily from
rental income from renting or leasing the farmland to a non-affiliated
entity would be subject to the final rule's $500,000 threshold.
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\60\ See OCC: 12 CFR 34.43(a)(5); Board: 12 CFR 225.63(a)(5);
and FDIC: 12 CFR 323.3(a)(5).
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Other Proposals and Clarifications
The agencies received several comments suggesting additional ways
the agencies could reduce burden under the Title XI appraisal
regulations. One commenter urged the agencies to review the appraisal
requirements of other federal agencies and pursue ways to make
appraisal requirements across agencies more consistent. The agencies
have publically articulated their interest in seeking ways to
coordinate appraisal standards across various government agencies that
are involved in residential mortgage lending.\61\ The agencies have
begun conducting outreach to government agencies to implement this goal
and will continue to consider opportunities to do so.
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\61\ See EGRPRA Report at 36; 82 FR at 35482.
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Another commenter asserted that the agencies should focus on
allowing the use by appraisers of products that streamline the
valuation process, instead of exempting additional transactions from
the appraisal requirements. Several commenters, including a financial
institution and a financial institutions trade association, suggested
that certain transactions could be added to the list of exemptions from
the appraisal requirements to further reduce regulatory burden without
sacrificing safety and soundness. These suggestions included exemptions
for transactions secured by real estate outside the United States;
loans below a threshold that a bank originates and
[[Page 15031]]
retains ``in-house;'' transactions involving mortgage-backed securities
and pools of mortgages; and loans made to certain community development
organizations. An association of state bank supervisors requested that
the agencies release further guidance on the Title XI process for
temporary waivers of appraiser certification and licensing requirements
and also requested that the education requirements for appraiser
qualifications be relaxed. A financial institution suggested
establishing an additional threshold of $50,000, below which certain
transactions would not require appraisals or evaluations.
These comments concerning additional potential exemptions from the
appraisal regulations and additional burden relieving measures are
outside the scope of this rulemaking. However, the agencies appreciate
the suggestions for ways to expand burden relief beyond what was
proposed.
V. Regulatory Analysis
A. Waiver of Delayed Effective Date
This final rule is effective on April 9, 2018. The 30-day delayed
effective date required under the APA is waived pursuant to 5 U.S.C.
553(d)(1), which provides for waiver when a substantive rule grants or
recognizes an exemption or relieves a restriction. The amendment
adopted in this final rule exempts additional transactions from the
Title XI appraisal requirements, which has the effect of relieving
restrictions. Consequently, the amendment in this final rule meets the
requirements for waiver set forth in the APA.
B. Regulatory Flexibility Act
OCC: The Regulatory Flexibility Act (RFA), 5 U.S.C. 601 et seq.,
generally requires that, in connection with a rulemaking, an agency
prepare and make available for public comment a regulatory flexibility
analysis that describes the impact of the rule on small entities.
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 $550 million or less
and $38.5 million or less, respectively) and publishes its
certification and a brief explanatory statement in the Federal Register
together with the rule.
The OCC currently supervises approximately 956 small entities. Data
currently available to the OCC are not sufficient to estimate how many
OCC-supervised small entities make commercial real estate loans in
amounts that fall between the current and final thresholds. Therefore,
we cannot estimate how many small entities may be affected by the
increase threshold. However, because the final rule does not contain
any new recordkeeping, reporting, or compliance requirements, the final
rule will not impose costs on any OCC-supervised institution.
Accordingly, the OCC certifies that the final rule will not have a
significant economic impact on a substantial number of small entities.
Board: The Board is providing a regulatory flexibility analysis
with respect to this final rule. The RFA 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.
The commercial real estate appraisal threshold increase applies to
certain IDIs and nonbank entities that make loans secured by commercial
real estate.\62\ The SBA establishes size standards that define which
entities are small businesses for purposes of the RFA.\63\ The size
standard to be considered a small business is: $550 million or less in
assets for banks and other depository institutions; and $38.5 million
or less in annual revenues for the majority of non-bank entities that
are likely to be subject to the final rule.\64\ Based on the Board's
analysis, and for the reasons discussed below, the final rule may have
a significant positive economic impact on a substantial number of small
entities.
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\62\ For its RFA analysis, the Board considered all Board-
regulated creditors to which the proposed rule would apply.
\63\ U.S. SBA, Table of Small Business Size Standards Matched to
North American Industry Classification System Codes, available at
https://www.sba.gov/sites/default/files/files/Size_Standards_Table.pdf.
\64\ Asset size and annual revenues are calculated according to
SBA regulations. See 13 CFR 121 et seq.
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The Board requested comment on all aspects of the initial
regulatory flexibility analysis it provided in connection with the
proposal. The comments received are addressed below.
A. Reasons for the Threshold Increase
In response to comments received in the EGRPRA process and in
connection with the proposal, the agencies are increasing the
commercial real estate appraisal threshold from $250,000 to $500,000.
Because commercial real estate prices have increased since 1994, when
the current $250,000 threshold was established, a smaller percentage of
commercial real estate transactions are currently exempted from the
Title XI appraisal requirements than when the threshold was
established. This threshold adjustment is intended to reduce the
regulatory burden associated with extending credit secured by
commercial real estate in a manner that is consistent with the safety
and soundness of financial institutions.
B. Statement of Objectives and Legal Basis
As discussed above, the agencies' objective in finalizing this
threshold increase is to reduce the regulatory burden associated with
extending credit in a safe and sound manner by reducing the number of
commercial real estate transactions that are subject to the Title XI
appraisal requirements.
Title XI explicitly authorizes the agencies to establish a
threshold level at or below which a Title XI appraisal is not required
if the agencies determine in writing that the threshold does not
represent a threat to the safety and soundness of financial
institutions and receive concurrence from the CFPB that such threshold
level provides reasonable protection for consumers who purchase 1-to-4
unit single-family homes.\65\ Based on available data and supervisory
experience, the agencies tailored the size and scope of the threshold
increase to ensure that it would not pose a threat to the safety and
soundness of financial institutions or erode protections for consumers
who purchase 1-to-4 unit single-family homes.
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\65\ 12 U.S.C. 3341(b).
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The Board's final 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. There are approximately 601 state
member banks and 35 nonbank lenders regulated by the Board that meet
the SBA definition of small entities and would be subject to the
proposed rule. Data currently available to the Board do not allow for a
precise estimate of the number of small entities that will be affected
by the final rule because the number of small entities that will engage
in commercial real estate transactions at or below the commercial real
estate appraisal threshold is unknown.
[[Page 15032]]
C. Projected Reporting, Recordkeeping and Other Compliance Requirements
The final rule would reduce reporting, recordkeeping, and other
compliance requirements for small entities. For transactions at or
below the threshold, regulated institutions will be given the option to
obtain an evaluation of the property instead of an appraisal.
Evaluations may be performed by a lender's own employees and are not
required to comply with USPAP. As discussed in detail in Section II.B
of the SUPPLEMENTARY INFORMATION, the cost of obtaining appraisals and
evaluations can vary widely depending on the size and complexity of the
property, the party performing the valuation, and market conditions
where the property is located. Additionally, the costs of obtaining
appraisals and evaluations may be passed on to borrowers. Because of
this variation in cost and practice, it is not possible to precisely
determine the cost savings that regulated institutions will experience
due to the decreased cost of obtaining an evaluation rather than an
appraisal. However, based on information available to the Board, it is
likely that small entities and borrowers engaging in commercial real
estate transactions could experience significant cost reductions.
In addition to costing less to obtain than appraisals, evaluations
also require less time to review than appraisals because they contain
less detailed information. As discussed further in Section II.B of the
SUPPLEMENTARY INFORMATION, an evaluation takes approximately 30 minutes
less to review than an appraisal. Thus, the agencies believe that the
final rule will alleviate approximately 30 minutes of employee time per
affected transaction for which the lender obtains an evaluation instead
of an appraisal. As discussed above, some commenters provided anecdotal
evidence to show that the agencies' estimate of time savings was
incorrect. The agencies recognize that certain evaluations may take
longer to review than others; however, this variation was taken into
account in the agencies' estimate of the average time savings that are
expected to occur.
As previously discussed, the Board estimates that the percentage of
commercial real estate transactions that would be exempted by the
threshold is expected to increase by approximately 16 percent under the
final rule. The Board expects this percentage to be higher for small
entities, because a higher percentage of their loan portfolios are
likely to be made up of small, below-threshold loans than those of
larger entities. Thus, while the precise number of transactions that
will be affected and the precise cost reduction per transaction cannot
be determined, the final rule is expected to have a significant
positive economic impact on small entities that engage in commercial
real estate lending.
D. Identification of Duplicative, Overlapping, or Conflicting Federal
Regulations
The Board has not identified any federal statutes or regulations
that would duplicate, overlap, or conflict with the final rule.
E. Discussion of Significant Alternatives
The agencies considered additional burden-reducing measures, such
as increasing the commercial threshold to an amount higher than
$500,000 and increasing the residential and business loan thresholds,
but did not implement such measures for the safety and soundness and
consumer protection reasons discussed in the proposal. For transactions
exempted from the Title XI appraisal requirements under the commercial
real estate appraisal threshold, the final rule requires regulated
institutions to get an evaluation if they do not choose to obtain a
Title XI appraisal. The agencies believe this requirement is necessary
to protect the safety and soundness of financial institutions, which is
a legal prerequisite to the establishment of any appraisal threshold.
The Board is not aware of any other significant alternatives that would
reduce burden on small entities without sacrificing the safety and
soundness of financial institutions or consumer protections.
FDIC: The RFA generally requires that, in connection with a
rulemaking, an agency prepare and make available for public comment an
initial regulatory flexibility analysis describing the impact of the
proposed rule on small entities.\66\ A regulatory flexibility analysis
is not required, however, if the agency certifies that the rule will
not have a significant economic impact on a substantial number of small
entities. The SBA has defined ``small entities'' to include banking
organizations with total assets less than or equal to $550 million.\67\
For the reasons described below and pursuant to section 605(b) of the
RFA, the FDIC certifies that the final rule will not have a significant
economic impact on a substantial number of small entities.
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\66\ 5 U.S.C. 601 et seq.
\67\ 13 CFR 121.201 (as amended, effective December 2, 2014).
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The FDIC supervises 3,675 depository institutions,\68\ of which
2,950 are defined as small banking entities by the terms of the
RFA.\69\ According to the Call Report 2,950 small entities reported
holding some volume of real estate-related financial transactions that
meet the final rule's definition of a commercial real estate
transaction.\70\ Therefore, 2,950 small entities could be affected by
the final rule.
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\68\ FDIC-supervised institutions are set forth in 12 U.S.C.
1813(q)(2).
\69\ FDIC Call Report, September 30, 2017.
\70\ The definition of ``commercial real estate transaction''
would largely capture the following four categories of loans secured
by real estate in the Call Report (FFIEC 031; RCFD 1410), namely
loans that are: (1) For construction, land development, and other
land loans; (2) secured by farmland; (3) secured by residential
properties with five or more units; or (4) secured by NFNR
properties. However, loans secured by a single 1-to-4 family
residential property would be excluded from the definition. The
definition applies to corresponding categories of real estate-
secured loans in the FFIEC 041 and FFIEC 051 forms of the Call
Report.
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The final rule will raise the appraisal threshold for commercial
real estate transactions from $250,000 to $500,000. Any commercial real
estate transaction with a value in excess of the $500,000 threshold is
required to have an appraisal by a state licensed or state certified
appraiser. Any commercial real estate transaction at or below the
$500,000 threshold requires an evaluation.
To estimate the dollar volume of commercial real estate
transactions the change could potentially affect, the FDIC used
information on the dollar volume and number of loans in the Call Report
for small institutions from two categories of loans included in the
definition of a commercial real estate transaction. The Call Report
data reflect that 3.92 percent of the dollar volume of NFNR loans
secured by real estate has an original amount between $1 and $250,000,
while 10.19 percent have an original amount between $250,000 and $1
million. The Call Report data also reflect that 7.30 percent of the
dollar volume of agricultural loans secured by farmland has an original
amount between $1 and $250,000, while 6.05 percent have an original
amount between $250,000 and $500,000.\71\ Assuming that the original
amount of NFNR loans secured by real estate and the original amount of
agricultural loans secured by farmland are normally distributed, the
FDIC estimates that 6.28 and 13.35 percent of loan volume is at or
below the $500,000 threshold for these categories, respectively.
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\71\ FDIC Call Report, September 30, 2017.
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Therefore, raising the appraisal threshold from $250,000 to
$500,000 for commercial real estate transactions
[[Page 15033]]
could affect an estimated 2.36 to 6.05 percent of the dollar volume of
all commercial real estate transactions originated each year for small
FDIC-supervised institutions. This estimate assumes that the
distribution of loans for the other loan categories within the
definition of commercial real estate transactions is similar to those
loans secured by NFNR properties or farmland.
The final rule is likely to reduce valuation review costs for
covered institutions. The FDIC estimates that it takes a loan officer
an average of 40 minutes to review an appraisal to ensure that it meets
that standards set forth in Title XI, but 10 minutes to perform a
similar review of an evaluation, which does not need to meet the Title
XI standards for appraisals. The final rule increases the number of
commercial real estate transactions that would require an evaluation by
raising the appraisal threshold from $250,000 to $500,000. Assuming
that 15 percent of the outstanding balance of commercial real estate
transactions for small entities gets renewed or replaced by new
originations each year, the FDIC estimates that small entities
originate $31.8 billion in new commercial real estate transactions each
year. Assuming that 2.36 to 6.05 percent of annual originations
represent loans with an origination amount greater than $250,000 but
not more than $500,000, the FDIC estimates that the proposed rule will
affect approximately 2,003 to 5,138 loans per year,\72\ or 0.68 to 1.74
loans on average for small FDIC-supervised institutions. Therefore,
based on an estimated hourly rate, the final rule would reduce loan
review costs for small entities by $67,391 to $172,868, on average,
each year.\73\ If lenders opt to not utilize an evaluation and require
an appraisal on commercial real estate transaction greater than
$250,000 but not more than $500,000 any reduction in costs would be
smaller.
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\72\ Multiplying $31.8 billion by 2.36 percent then dividing the
product by an average loan amount of $375,000 equals 2,003 loans and
multiplying $31.8 billion by 6.05 percent then dividing the product
by an average loan amount of $375,000 equals 5,138 loans.
\73\ The FDIC estimates that the average hourly compensation for
a loan officer is $67.29 an hour. The hourly compensation estimate
is based on published compensation rates for Credit Counselors and
Loan Officers ($43.40). The estimate includes the September 2017
75th percentile hourly wage rate reported by the Bureau of Labor
Statistics, National Industry-Specific Occupational Employment and
Wage Estimates for the Depository Credit Intermediation sector. The
reported hourly wage rate is grossed up by 155.0 percent to account
for non-monetary compensation as reported by the 3rd Quarter 2017
Employer Costs for Employee Compensation Data. Based on this
estimate, loan review costs would decline between $67,391 (2,003
loans multiplied by 30 minutes and multiplied by $67.29 per hour)
and $172,868 (5,138 loans multiplied by 30 minutes and multiplied by
$67.29 per hour).
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Any associated recordkeeping costs are unlikely to change for small
FDIC-supervised entities as the amount of labor required to satisfy
documentation requirements for an evaluation or an appraisal is
estimated to be the same at about five minutes for either an appraisal
or evaluation.
The final rule also is likely to reduce the loan origination costs
associated with real estate appraisals for commercial real estate
borrowers. The FDIC assumes that these costs are always paid by the
borrower for this analysis. Anecdotal information from industry
participants indicates that a commercial real estate appraisal costs
between $1,000 to over $3,000, or about $2,000 on average, and a
commercial real estate evaluation costs between $500 to over $1,500, or
about $1,000 on average. Based on the prior assumptions, the FDIC
estimates that the final rule will affect approximately 2,003 to 5,138
transactions per year,\74\ or 0.68 to 1.74 loans on average for small
FDIC-supervised institutions. Therefore, the final rule could reduce
loan origination costs for borrowers doing business with small entities
by $2.0 to $5.1 million on average per year.\75\
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\74\ Multiplying $31.8 billion by 2.36 percent then dividing the
product by an average loan amount of $375,000 equals 2,003 loans and
multiplying $31.8 billion by 6.05 percent then dividing the product
by an average loan amount of $375,000 equals 5,138 loans.
\75\ Multiplying 2,003 loans by $1,000 savings equals $2.0
million and multiplying 5,138 loans by $1,000 savings equals $5.1
million.
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By lowering valuation costs on commercial real estate transactions
greater than $250,000 but less than or equal to $500,000 for small
FDIC-supervised institutions, the final rule could marginally increase
lending activity. As discussed previously, commenters in the EGRPRA
review noted that appraisals can be costly and time consuming. By
enabling small FDIC-supervised institutions to utilize evaluations for
more commercial real estate transactions, the final rule will reduce
transaction costs. The reduction in loan origination fees could
marginally increase commercial real estate lending activity for loans
with an origination value greater than $250,000 and not more than
$500,000.
C. Paperwork Reduction Act
Certain provisions of the final rule contain ``collection of
information'' requirements within the meaning of the Paperwork
Reduction Act (PRA) of 1995.\76\ In accordance with the requirements of
the PRA, the agencies may not conduct or sponsor, and the respondent is
not required to respond to, an information collection unless it
displays a currently-valid Office of Management and Budget (OMB)
control number. The OMB control number for the OCC is 1557-0190, the
Board is 7100-0250, and the FDIC is 3064-0103, which will be extended,
without revision. The agencies have concluded that the final rule does
not contain any changes to the current information collections;
however, the agencies are revising the methodology for calculating the
burden estimates. There were no comments received regarding the PRA.
---------------------------------------------------------------------------
\76\ 44 U.S.C. 3501-3521.
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The OCC and the FDIC submitted the information collection
requirements to OMB in connection with the proposal under section
3507(d) of the PRA \77\ and section 1320.11 of the OMB's implementing
regulations.\78\ OMB filed a comment pursuant to 5 CFR 1320.11(c)
instructing the agencies to examine public comment in response to the
proposal and describe in the supporting statement of its next
collection (the final rule) any public comments received regarding the
collection as well as why (or why it did not) incorporate the
commenter's recommendation and include the draft final rule in its next
submission. The OCC and the FDIC have resubmitted the collection to OMB
in connection with the final rule. The Board reviewed the final rule
under the authority delegated to the Board by OMB.
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\77\ 44 U.S.C. 3507(d).
\78\ 5 CFR 1320.
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Information Collection
Title of Information Collection: Recordkeeping Requirements
Associated with Real Estate Appraisals and Evaluations.
Frequency of Response: Event generated.
Affected Public: Businesses or other for-profit.
Respondents:
OCC: National banks, federal savings associations.
Board: State member banks (SMBs) and nonbank subsidiaries of bank
holding companies (BHCs).
FDIC: Insured state nonmember banks and state savings associations,
insured state branches of foreign banks.
General Description of Report: For federally related transactions,
Title XI requires regulated institutions \79\ to
[[Page 15034]]
obtain appraisals prepared in accordance with USPAP promulgated by the
Appraisal Standards Board of the Appraisal Foundation. Generally, these
standards include the methods and techniques used to estimate the
market value of a property as well as the requirements for reporting
such analysis and a market value conclusion in the appraisal. Regulated
institutions are expected to maintain records that demonstrate that
appraisals used in their real estate-related lending activities comply
with these regulatory requirements. For commercial real estate
transactions exempted from the Title XI appraisal requirements by the
final rule, regulated institutions will still be required to obtain an
evaluation to justify the transaction amount. The agencies estimate
that the recordkeeping burden associated with evaluations is the same
as the recordkeeping burden associated with appraisals for such
transactions.
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\79\ National banks, federal savings associations, SMBs and
nonbank subsidiaries of BHCs, insured state nonmember banks and
state savings associations, and insured state branches of foreign
banks.
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Current Action: The threshold change in the final rule will result
in lenders being able to use evaluations instead of appraisals for
certain transactions. It is estimated that the time required to
document the review of an appraisal or an evaluation is the same. While
the rulemaking described in this final rule will not change the amount
of time that institutions spend complying with the Title XI appraisal
regulation, the agencies are using a more accurate methodology for
calculating the burden of the information collections based on the
experience of the agencies. Thus, the PRA burden estimates shown here
are different from those previously reported. The agencies are (1)
using the average number of loans per institution as the frequency and
(2) using 5 minutes as the estimated time per response for the
appraisals or evaluations.
PRA Burden Estimates
Estimated average time per response: 5 minutes.
OCC
Number of Respondents: 1,200.
Annual Frequency: 1,488.
Total Estimated Annual Burden: 148,800 hours.
Board
Number of Respondents: 828 SMBs; 1,215 nonbank subsidiaries of
BHCs.
Annual Frequency: 419; 25.
Total Estimated Annual Burden: 28,911 hours; 2,531 hours.
FDIC
Number of Respondents: 3,675.
Annual Frequency: 143.
Total Estimated Annual Burden: 43,794 hours.
These collections are available to the public at www.reginfo.gov.
The agencies have an ongoing interest in public comments on its
burden estimates. Comments on the collection of information should be
sent to:
OCC: Because paper mail in the Washington, DC area and at the OCC
is subject to delay, commenters are encouraged to submit comments by
email, if possible. Comments may be sent to: Legislative and Regulatory
Activities Division, Office of the Comptroller of the Currency,
Attention: 1557-0190, 400 7th Street SW, Suite 3E-218, Mail Stop 9W-11,
Washington, DC 20219. In addition, comments may be sent by fax to (571)
465-4326 or by electronic mail to [email protected]. You may
personally inspect and photocopy comments at the OCC, 400 7th Street
SW, Washington, DC 20219. For security reasons, the OCC requires that
visitors make an appointment to inspect comments. You may do so by
calling (202) 649-6700. Upon arrival, visitors will be required to
present valid government-issued photo identification and submit to
security screening in order to inspect and photocopy comments.
All comments received, including attachments and other supporting
materials, are part of the public record and subject to public
disclosure. Do not include any information in your comment or
supporting materials that you consider confidential or inappropriate
for public disclosure.
Board: Nuha Elmaghrabi, Federal Reserve Clearance Officer, Office
of the Chief Data Officer, Mail Stop K1-148, Board of Governors of the
Federal Reserve System, Washington, DC 20551, with copies of such
comments sent to the Office of Management and Budget, Paperwork
Reduction Project (7100-0250), Washington, DC 20503.
FDIC: You may submit comments, which should refer to ``Real Estate
Appraisals, 3064-0103'' by any of the following methods:
Agency website: http://www.fdic.gov/regulations/laws/federal/. Follow the instructions for submitting comments on the FDIC
website.
Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments.
Email: [email protected]. Include ``Real Estate
Appraisals, 3064-0103'' in the subject line of the message.
Mail: Jennifer Jones, Attn: Comments, Federal Deposit
Insurance Corporation, 550 17th Street NW, MB-3105, Washington, DC
20429.
Hand Delivery: Comments may be hand delivered to the guard
station at the rear of the 550 17th Street Building (located on F
Street) on business days between 7 a.m. and 5 p.m.
Public Inspection: All comments received will be posted without
change to http://www.fdic.gov/regulations/laws/federal/ including any
personal information provided.
Additionally, commenters may send a copy of their comments to the
OMB desk officer for the PRA Agencies by mail to the Office of
Information and Regulatory Affairs, U.S. Office of Management and
Budget, New Executive Office Building, Room 10235, 725 17th Street NW,
Washington, DC 20503; by fax to (202) 395-6974; or by email to
[email protected].
D. Riegle Act
The Riegle Act requires that each of the agencies, in determining
the effective date and administrative compliance requirements for new
regulations that impose additional reporting, disclosure, or other
requirements on IDIs, 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.\80\ In
addition, in order to provide an adequate transition period, new
regulations that impose additional reporting, disclosures, or other new
requirements on IDIs generally must take effect on the first day of a
calendar quarter that begins on or after the date on which the
regulations are published in final form.\81\
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\80\ 12 U.S.C. 4802(a).
\81\ 12 U.S.C. 4802(b).
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The final rule reduces burden and does not impose any reporting,
disclosure, or other new requirements on IDIs. For transactions
exempted from the Title XI appraisal requirements by the proposed rule
(i.e., commercial real estate transactions between $250,000 and
$500,000), lenders are required to get an evaluation if they chose not
to get an appraisal. However, the agencies do not view the option to
obtain an evaluation instead of an appraisal as a new or additional
requirement for purposes of the Riegle Act. First, the process of
obtaining an evaluation is not new since IDIs already get evaluations
for transactions at or below the current $250,000 threshold. Second,
for commercial real estate transactions between $250,000 and $500,000,
IDIs
[[Page 15035]]
can continue to get appraisals instead of evaluations. Because the
final rule imposes no new requirements on IDIs, the agencies are not
required by the Riegle Act to consider the administrative burdens and
benefits of the rule or delay its effective date.
Because delaying the effective date of the rule is not required,
the agencies are making the threshold increase effective on the first
day after publication of the final rule in the Federal Register.
Additionally, although not required by the Riegle Act, the agencies did
consider the administrative costs and benefits of the rule while
developing the proposal and finalizing the rule. In designing the scope
of the threshold increase, the agencies chose to largely align the
definition of commercial real estate transaction with industry
practice, regulatory guidance, and the categories used in the Call
Report in order to reduce the administrative burden of determining
which transactions were exempted by the rule. 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. In the proposal, the agencies invited comments on
compliance with the Riegle Act, but no such comments were received.
E. Solicitation of Comments on Use of Plain Language
Section 722 of the Gramm-Leach-Bliley Act \82\ requires the
agencies to use plain language in all proposed and final rules
published after January 1, 2000. The agencies invited comment on how to
make the rule easier to understand, but no such comments were received.
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\82\ Public Law 106-102, section 722, 113 Stat. 1338 1471
(1999).
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F. OCC Unfunded Mandates Reform Act of 1995 Determination
The OCC has analyzed the final rule under the factors in the
Unfunded Mandates Reform Act of 1995 (2 U.S.C. 1532). Under this
analysis, the OCC considered whether the final rule includes a federal
mandate that may result in the expenditure by state, local, and tribal
governments, in the aggregate, or by the private sector, of $100
million or more in any one year (adjusted annually for inflation).
The final rule does not impose new requirements or include new
mandates. Therefore, we conclude that the final rule will not result in
an expenditure of $100 million or more by state, local, and tribal
governments, or by the private sector, in any one year.
List of Subjects
12 CFR Part 34
Appraisal, Appraiser, Banks, Banking, Consumer protection, Credit,
Mortgages, National banks, Reporting and recordkeeping requirements,
Savings associations, Truth in lending.
12 CFR Part 225
Administrative practice and procedure, Banks, banking, Federal
Reserve System, Capital planning, Holding companies, Reporting and
recordkeeping requirements, Securities, Stress testing.
12 CFR Part 323
Banks, banking, Mortgages, Reporting and recordkeeping
requirements, Savings associations.
Office of the Comptroller of the Currency 12 CFR Part 34
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:
PART 34--REAL ESTATE LENDING AND APPRAISALS
0
1. The authority citation for part 34 continues to read as follows:
Authority: 12 U.S.C. 1, 25b, 29, 93a, 371, 1462a, 1463, 1464,
1465, 1701j-3, 1828(o), 3331 et seq., 5101 et seq., and
5412(b)(2)(B), and 15 U.S.C. 1639h.
0
2. Section 34.42 is amended by redesignating paragraphs (e) through (m)
as paragraphs (f) through (n), respectively, and by adding a new
paragraph (e) to read as follows:
Sec. 34.42 Definitions.
* * * * *
(e) Commercial real estate transaction means a real estate-related
financial transaction that is not secured by a single 1-to-4 family
residential property.
* * * * *
0
3. Section 34.43 is amended by:
0
a. Removing the word ``or'' at the end of paragraph (a)(11);
0
b. Revising paragraph (a)(12);
0
c. Adding paragraph (a)(13); and
0
d. Revising paragraphs (b) and (d)(2).
The revisions and addition read as follows:
Sec. 34.43 Appraisals required; transactions requiring a State
certified or licensed appraiser.
(a) * * *
(12) The OCC determines that the services of an appraiser are not
necessary in order to protect Federal financial and public policy
interests in real estate-related financial transactions or to protect
the safety and soundness of the institution; or
(13) The transaction is a commercial real estate transaction that
has a transaction value of $500,000 or less.
(b) Evaluations required. For a transaction that does not require
the services of a State certified or licensed appraiser under paragraph
(a)(1), (a)(5), (a)(7), or (a)(13) of this section, the institution
shall obtain an appropriate evaluation of real property collateral that
is consistent with safe and sound banking practices.
* * * * *
(d) * * *
(2) Commercial real estate transactions of more than $500,000. All
federally related transactions that are commercial real estate
transactions having a transaction value of more than $500,000 shall
require an appraisal prepared by a State certified appraiser.
* * * * *
Federal Reserve Board
12 CFR Part 225
For the reasons set forth in the joint preamble, the Board amends
part 225 of chapter II of title 12 of the Code of Federal Regulations
as follows:
PART 225--BANK HOLDING COMPANIES AND CHANGE IN BANK CONTROL
(REGULATION Y)
0
4. The authority citation for part 225 continues to read as follows:
Authority: 12 U.S.C. 1817(j)(13), 1818, 1828(o), 1831i, 1831p-1,
1843(c)(8), 1844(b), 1972(l), 3106, 3108, 3310, 3331-3351, 3906,
3907, and 3909; 15 U.S.C. 1681s, 1681w, 6801 and 6805.
0
5. Section 225.62 is amended by redesignating paragraphs (e) through
(m) as paragraphs (f) through (n), respectively, and by adding a new
paragraph (e) to read as follows:
Sec. 225.62 Definitions.
* * * * *
(e) Commercial real estate transaction means a real estate-related
financial transaction that is not secured by a single 1-to-4 family
residential property.
* * * * *
0
6. Section 225.63 is amended by:
0
a. Removing the word ``or'' at the end of paragraph (a)(12);
0
b. Revising paragraph (a)(13);
0
c. Adding paragraph (a)(14);
0
d. Revising paragraph (b); and
0
e. Revising paragraph (d)(2).
The revisions and addition read as follows:
[[Page 15036]]
Sec. 225.63 Appraisals required; transactions requiring a State
certified or licensed appraiser.
(a) * * *
(13) The Board determines that the services of an appraiser are not
necessary in order to protect Federal financial and public policy
interests in real estate-related financial transactions or to protect
the safety and soundness of the institution; or
(14) The transaction is a commercial real estate transaction that
has a transaction value of $500,000 or less.
(b) Evaluations required. For a transaction that does not require
the services of a State certified or licensed appraiser under paragraph
(a)(1), (a)(5), (a)(7), or (a)(14) of this section, the institution
shall obtain an appropriate evaluation of real property collateral that
is consistent with safe and sound banking practices.
* * * * *
(d) * * *
(2) Commercial real estate transactions of more than $500,000. All
federally related transactions that are commercial real estate
transactions having a transaction value of more than $500,000 shall
require an appraisal prepared by a State certified appraiser.
* * * * *
Federal Deposit Insurance Corporation
12 CFR Part 323
For the reasons set forth in the joint preamble, the FDIC amends
part 323 of chapter III of title 12 of the Code of Federal Regulations
as follows:
PART 323--APPRAISALS
0
7. Revise the authority citation for part 323 to read as follows:
Authority: 12 U.S.C. 1818, 1819(a)(Seventh'' and ``Tenth),
1831p-1 and 3331 et seq.
0
8. Section 323.1 is amended by revising paragraph (a) to read as
follows:
Sec. 323.1 Authority, purpose, and scope.
(a) Authority. This subpart is issued under 12 U.S.C. 1818,
1819(a)(Seventh and Tenth), 1831p-1 and title XI of the Financial
Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA)
(Pub. L. 101-73, 103 Stat. 183, 12 U.S.C. 3331 et seq. (1989)).
0
9. Section 323.2 is amended by redesignating paragraphs (e) through (m)
as paragraphs (f) through (n), respectively, and by adding a new
paragraph (e) to read as follows:
Sec. 323.2 Definitions.
* * * * *
(e) Commercial real estate transaction means a real estate-related
financial transaction that is not secured by a single 1-to-4 family
residential property.
0
10. Section 323.3 is amended by:
0
a. Removing the word ``or'' at the end of paragraph (a)(11);
0
b. Revising paragraph (a)(12);
0
c. Adding paragraph (a)(13);
0
d. Revising paragraph (b); and
0
e. Revising paragraph (d)(2).
The revisions and addition read as follows:
Sec. 323.3 Appraisals required; transactions requiring a State
certified or licensed appraiser.
(a) * * *
(12) The FDIC determines that the services of an appraiser are not
necessary in order to protect Federal financial and public policy
interests in real estate-related financial transactions or to protect
the safety and soundness of the institution; or
(13) The transaction is a commercial real estate transaction that
has a transaction value of $500,000 or less.
(b) Evaluations required. For a transaction that does not require
the services of a State certified or licensed appraiser under paragraph
(a)(1), (a)(5), (a)(7), or (a)(13) of this section, the institution
shall obtain an appropriate evaluation of real property collateral that
is consistent with safe and sound banking practices.
* * * * *
(d) * * *
(2) Commercial real estate transactions of more than $500,000. All
federally related transactions that are commercial real estate
transactions having a transaction value of more than $500,000 shall
require an appraisal prepared by a State certified appraiser.
* * * * *
Dated: March 16, 2018.
Joseph M. Otting,
Comptroller of the Currency.
By order of the Board of Governors of the Federal Reserve
System, March 23, 2018.
Ann E. Misback,
Secretary of the Board.
Dated at Washington, DC on March 20, 2018.
By order of the Board of Directors.
Federal Deposit Insurance Corporation.
Valerie J. Best,
Assistant Executive Secretary.
[FR Doc. 2018-06960 Filed 4-6-18; 8:45 am]
BILLING CODE 4810-33-P; 6210-01-P; 6714-01-P