[Federal Register Volume 84, Number 195 (Tuesday, October 8, 2019)]
[Rules and Regulations]
[Pages 53579-53598]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-21376]
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DEPARTMENT OF THE TREASURY
Office of the Comptroller of the Currency
12 CFR Part 34
[Docket No. OCC-2019-0038]
RIN 1557-AE57
FEDERAL RESERVE SYSTEM
12 CFR Part 225
[Docket No. R-1639]
RIN 7100-AF30
FEDERAL DEPOSIT INSURANCE CORPORATION
12 CFR Part 323
RIN 3064-AE87
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 residential real estate transactions from $250,000 to
$400,000. The final rule defines a residential real estate transaction
as a real estate-related financial transaction that is secured by a
single 1-to-4 family residential property. For residential 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. The final rule makes a conforming change to add to
the list of exempt transactions those transactions secured by
residential property in rural areas that have been exempted from the
agencies' appraisal requirement pursuant to the Economic Growth,
Regulatory Relief, and Consumer Protection Act. The final rule requires
evaluations for these exempt transactions. The final rule also amends
the agencies' appraisal regulations to require regulated institutions
to subject appraisals for federally related transactions to appropriate
review for compliance with the Uniform Standards of Professional
Appraisal Practice.
[[Page 53580]]
DATES: This final rule is effective on October 9, 2019, except for the
amendments in instructions 4, 5, 9, 10, 14, and 15, which are effective
on January 1, 2020.
FOR FURTHER INFORMATION CONTACT:
OCC: G. Kevin Lawton, Appraiser (Real Estate Specialist), (202)
649-7152; Mitchell E. Plave, Special Counsel, (202) 649-5490; or Joanne
Phillips, Counsel, Chief Counsel's Office (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: Anna Lee Hewko, Associate Director, (202) 530-6260; Virginia
Gibbs, Manager, Policy Development Section, (202) 452-2521; Carmen
Holly, Lead Financial Institution Policy Analyst, (202) 973-6122,
Division of Supervision and Regulation; Laurie Schaffer, Associate
General Counsel, (202) 452-2272; Matthew Suntag, Counsel, (202) 452-
3694; Derald Seid, Counsel, (202) 452-2246; or Trevor Feigleson, Senior
Attorney, (202) 452-3274, Legal Division, Board of Governors of the
Federal Reserve System, 20th and C Streets NW, Washington, DC 20551.
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, [email protected];
Benjamin K. Gibbs, Counsel, Legal Division, (202) 898-6726; Mark
Mellon, Counsel, Legal Division, (202) 898-3884; or Navid Choudhury,
Legal Division, (202) 898-6526, Federal Deposit Insurance Corporation,
550 17th Street NW, Washington, DC 20429. For the hearing impaired
only, TDD users may contact (202) 925-4618.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Introduction
A. Background
B. Summary of Proposed Rule
C. Overview of Comments
II. Revisions to the Title XI Appraisal Regulations
A. Threshold Increase for Residential Real Estate Transactions
1. Definition of Residential Real Estate Transaction
2. Threshold Level
3. Safety and Soundness Considerations for Raising the
Residential Real Estate Threshold
4. Consumer Protection Considerations
5. Reducing Burden Associated With Appraisals
B. Incorporation of the Rural Residential Appraisal Exemption
Under Section 103 of the Economic Growth, Regulatory Relief, and
Consumer Protection Act
C. Addition of Appraisal Review Requirement
D. Conforming and Technical Amendments
III. Effective Date
IV. Regulatory Analysis
A. Regulatory Flexibility Act Analysis
B. Paperwork Reduction Act
C. Riegle Community Development and Regulatory Improvement Act
of 1994
D. Solicitation of Comments on Use of Plain Language
E. OCC Unfunded Mandates Reform Act of 1995 Determination
Regulatory Text
I. Introduction
A. Background
In December 2018, 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 increase the
monetary threshold at or below which financial institutions that are
subject to the agencies' appraisal regulations (regulated institutions)
would not be required to obtain appraisals in connection with
residential real estate transactions (residential real estate appraisal
threshold) from $250,000 to $400,000. In addition, the proposal would
add to the list of exempt transactions those transactions that are
secured by residential property in rural areas that have been exempted
from the agencies' appraisal requirement pursuant to the Economic
Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA) \3\
(rural residential appraisal exemption). The proposal would require
regulated institutions to obtain evaluations for transactions exempt
from the agencies' appraisal requirements due to the increase in the
residential real estate appraisal threshold or the rural residential
appraisal exemption. Finally, the proposal would amend the agencies'
appraisal regulations to require regulated institutions to subject
appraisals for federally related transactions to appropriate review for
compliance with the Uniform Standards of Professional Appraisal
Practice (USPAP), as required under section 1473(e) of the Dodd-Frank
Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act).\4\
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\1\ 83 FR 63110 (December 7, 2018).
\2\ 12 U.S.C. 3331 et seq.
\3\ Public Law 115-174, 132 Stat. 1296, Title I, section 103,
codified at 12 U.S.C. 3356.
\4\ Public Law 111-203, 124 Stat. 1376, codified at 12 U.S.C.
3339(3).
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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\ The term ``Federal financial institutions regulatory
agencies'' means the Board, the FDIC, the OCC, the National Credit
Union Administration (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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Title XI directs the agencies to prescribe appropriate standards
for Title XI appraisals under the agencies' respective
jurisdictions.\8\ At a minimum, the statute provides that Title XI
appraisals must be: (1) performed in accordance with USPAP; (2) written
appraisals, as defined by the statute; and (3) subject to appropriate
review for compliance with USPAP.\9\
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\8\ 12 U.S.C. 3339.
\9\ The third minimum requirement was added to Title XI by
section 1473(e) of the Dodd-Frank Act, as noted supra, and is being
implemented by this rulemaking. See infra, Section II.C.
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All federally related transactions must have Title XI appraisals.
Title XI defines a federally related transaction as a real estate-
related financial transaction \10\ that the agencies or a financial
institution regulated by the agencies engages in or contracts for, that
requires the services of an appraiser under Title XI and the
interagency appraisal rules.\11\ The agencies have authority to
determine those real estate-related
[[Page 53581]]
financial transactions that do not require Title XI appraisals.\12\ The
agencies have exercised this authority by exempting several categories
of real estate-related financial transactions from the agencies'
appraisal requirement, including transactions at or below certain
designated thresholds.\13\
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\10\ 12 U.S.C. 3350(5). 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.
\11\ 12 U.S.C. 3350(4).
\12\ Real estate-related financial transactions that the
agencies have exempted from the appraisal requirement are not
federally related transactions under the agencies' appraisal
regulations.
\13\ See OCC: 12 CFR 34.43(a); Board: 12 CFR 225.63(a); FDIC: 12
CFR 323.3(a). 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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Title XI expressly authorizes the agencies to establish thresholds
at or below which Title XI appraisals are not required if: (1) The
agencies determine in writing that the threshold does not represent a
threat to the safety and soundness of financial institutions; and (2)
the agencies receive concurrence from the Consumer Financial Protection
Bureau (CFPB) that such threshold level provides reasonable protection
for consumers who purchase 1-to-4 unit single-family residences.\14\
Under the current thresholds, residential real estate transactions \15\
with a transaction value \16\ of $250,000 or less, certain real estate-
secured business loans (qualifying business loans) \17\ with a
transaction value of $1 million or less, and commercial real estate
(CRE) transactions with a transaction value of $500,000 or less do not
require Title XI appraisals.\18\ The appraisal threshold applicable to
residential real estate transactions has not been changed since
1994.\19\
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\14\ 12 U.S.C. 3341(b).
\15\ While the $250,000 threshold explicitly applies to all real
estate-related financial transactions with transaction values of
$250,000 or less, it effectively only applies to residential real
estate transactions because all other real estate-related financial
transactions are subject to higher thresholds.
\16\ 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); FDIC: 12 CFR 323.2(m).
\17\ Qualifying business loans are business loans 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. 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. See OCC: 12 CFR 34.42(d); Board: 12 CFR 225.62(d);
FDIC: 12 CFR 323.2(d).
\18\ See OCC: 12 CFR 34.43(a)(1), (5), and (13); Board: 12 CFR
225.63(a)(1), (5), and (14); and FDIC: 12 CFR 323.3(a)(1), (5), and
(13).
\19\ See 59 FR 29482 (June 7, 1994). The OCC, Board, and FDIC
had previously set the appraisal threshold at $100,000. OCC: 57 FR
12190-02 (April 9, 1992); Board: 55 FR 27762 (July 5, 1990); FDIC:
57 FR 9043-02 (March 16, 1992).
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For real estate-related financial transactions at or below the
applicable thresholds and for certain existing extensions of credit
exempt from the agencies' appraisal requirement,\20\ the Title XI
appraisal regulations require regulated institutions to obtain an
appropriate evaluation of the real property collateral that is
consistent with safe and sound banking practices.\21\ An evaluation
should contain sufficient information and analysis to support the
regulated institution's decision to engage in the transaction.\22\ The
agencies have provided supervisory guidance for conducting evaluations
in a safe and sound manner in the Interagency Appraisal and Evaluation
Guidelines (Guidelines) \23\ and the Interagency Advisory on the Use of
Evaluations in Real Estate-Related Financial Transactions (Evaluations
Advisory,\24\ and together with the Guidelines, Evaluation Guidance).
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\20\ Transactions that involve an existing extension of credit
at the lending institution are exempt from the agencies' appraisal
requirement, but are required to have evaluations, provided that
there has been no obvious and material change in market conditions
or physical aspects of the property that threatens the adequacy of
the institution's real estate collateral protection after the
transaction, even with the advancement of new monies; or there is no
advancement of new monies, other than funds necessary to cover
reasonable closing costs. See OCC: 12 CFR 34.43(a)(7) and (b);
Board: 12 CFR 225.63(a)(7) and (b); FDIC: 12 CFR 323.3(a)(7) and
(b).
\21\ See OCC: 12 CFR 34.43(b); Board: 12 CFR 225.63(b); FDIC: 12
CFR 323.3(b). An evaluation is not required when real estate-related
financial transactions meet the threshold criteria and also qualify
for another exemption from the agencies' appraisal requirement where
no evaluation is required by the regulation.
\22\ Evaluations are not required to be performed in accordance
with USPAP or by state certified or state licensed appraisers by
federal law. For additional information on evaluations, see infra
notes 23 and 24.
\23\ The agencies proposed the Guidelines for public comment in
2008, see 73 FR 69647 (November 19, 2008), and adopted the final
Guidelines in 2010, see 75 FR 77450 (December 10, 2010).
\24\ Interagency Advisory on the Use of Evaluations in Real
Estate-Related Financial Transactions (March 4, 2016), OCC Bulletin
2016-8; Board SR Letter 16-5; FDIC FIL-16-2016.
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In 2018, Congress amended Title XI by adding the rural residential
appraisal exemption to provide relief for financial institutions
engaging in residential real estate transactions in certain rural
areas. The exemption provides that residential transactions in certain
rural areas do not require Title XI appraisals if the financial
institution documents that appraisers are not available for the
transaction within reasonable time and cost parameters.\25\ The statute
does not specifically require that real estate evaluations be performed
when financial institutions utilize this exemption.
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\25\ Public Law 115-174, Title I, section 103, codified at 12
U.S.C. 3356. Effective May 24, 2018, section 103 provides that a
Title XI appraisal is not required if the real property or interest
in real property is located in a rural area, as described in 12 CFR
1026.35(b)(2)(iv)(A), and if the transaction value is $400,000 or
less. In addition, the mortgage originator or its agent, directly or
indirectly must have contacted not fewer than three state certified
or state licensed appraisers, as applicable, on the mortgage
originator's approved appraiser list in the market area, in
accordance with 12 CFR part 226, not later than three days after the
date on which the Closing Disclosure was provided to the consumer
and documented that no state certified or state licensed appraiser,
as applicable, was available within five business days beyond
customary and reasonable fee and timeliness standards for comparable
appraisal assignments.
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B. Summary of Proposed Rule
As noted in the proposed rule, residential property values have
increased over time, but the appraisal threshold has not been adjusted
since 1994. The agencies believe rising market prices of residential
properties have contributed to increased burden for regulated
institutions and consumers in terms of transaction time and costs,
given that the threshold has remained the same since 1994. The proposed
rule was intended to reduce regulatory burden consistent with federal
financial and public policy interests in residential real estate-
related financial transactions. Based on supervisory experience and
available data, the agencies published the proposed rule to accomplish
these goals without posing a threat to the safety and soundness of
financial institutions.
The agencies proposed to increase the threshold level at or below
which appraisals are not required for residential real estate
transactions from $250,000 to $400,000. Residential real estate
transaction would be defined as a real-estate related financial
transaction that is secured by a single 1-to-4 family residential
property. For residential real estate transactions exempted from the
appraisal requirement as a result of the revised threshold, regulated
institutions would be required to obtain an evaluation of the real
property collateral that is consistent with safe and sound banking
practices.
The agencies also proposed to make conforming changes to add the
rural residential appraisal exemption to the appraisal regulations. The
agencies proposed that evaluations be required
[[Page 53582]]
for these transactions. In addition, the agencies proposed to amend the
agencies' appraisal regulations to require regulated institutions to
subject appraisals for federally related transactions to appropriate
review for compliance with USPAP, pursuant to Title XI, as amended by
the Dodd-Frank Act.\26\ The agencies also proposed several conforming
and technical amendments to their appraisal regulations. The agencies
invited comment on all aspects of the proposal.
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\26\ Public Law 111-203, 124 Stat. 1376.
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C. Overview of Comments
The agencies collectively received over 560 comments regarding the
proposal to increase the residential real estate appraisal threshold
that addressed a variety of issues. Comments from financial
institutions, financial institution trade associations, and state
banking regulators generally supported the proposed increase. Comments
from appraisers, appraiser trade organizations, individuals, and
consumer advocate groups generally opposed the proposal to increase the
threshold. The agencies also received a few comments that are addressed
separately below concerning the proposed requirement to obtain
evaluations for transactions that qualify for the rural residential
appraisal exemption or to subject certain appraisals to appropriate
review for compliance with USPAP.\27\
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\27\ The agencies received five comments suggesting that the
agencies hold public hearings regarding the proposed rule. The
agencies denied these requests on grounds that holding a public
hearing would not elicit relevant information that could not be
conveyed through the notice and comment process.
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Commenters supporting the proposed threshold increase asserted that
an increase would be appropriate given the increases in real estate
values since the current threshold was established as well as the cost
and time savings to lenders and borrowers that the higher threshold
would provide. Supportive commenters also indicated that a threshold
increase would provide burden relief for financial institutions without
sacrificing safe and sound banking practices. Many of these commenters
saw evaluations as appropriate substitutes for appraisals and
institutions as having appropriate risk management controls in place to
manage the proposed threshold change responsibly. Some commenters in
support of the proposal indicated that the proposed threshold increase
would benefit consumers, arguing that costs and delays due to
appraisals could be reduced. These commenters asserted that expedited
valuations could make the residential mortgage market more efficient
and lower closing costs.
Commenters opposing an increase to the residential real estate
appraisal threshold asserted that the proposal would elevate risks to
borrowers, financial institutions, the financial system, and taxpayers.
Several commenters asserted that the increased risk would not be
justified by burden relief resulting from a threshold increase. As
described in more detail below, many commenters in opposition asserted
that the proposal would negatively impact consumers. Many of these
comments focused on views that evaluations are inadequate substitutes
for appraisals.
Many commenters opposing the proposal highlighted the benefits that
state licensed or state certified appraisers bring to the real estate
valuation process. 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. Many commenters asserted
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. Several commenters rejected
assertions that there was an appraiser shortage warranting regulatory
relief.
Several commenters questioned the proposal in light of the
agencies' previous decision not to propose an increase to the
residential real estate appraisal threshold during the regulatory
review process required by the Economic Growth and Regulatory Paperwork
Reduction Act (EGRPRA).\28\ A few commenters also questioned whether
the proposed threshold increase is consistent with Congressional
intent, given that the rural residential real estate exemption was made
available only to transactions meeting certain criteria, while the
proposed threshold increase would exempt all residential transactions
at or below $400,000.
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\28\ Public Law 104-208, Div. A, Title II, section 2222, 110
Stat. 3009-414, (1996) (codified at 12 U.S.C. 3311).
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II. Revisions to the Title XI Appraisal Regulations
After carefully considering the comments and conducting further
analysis, the agencies are adopting the final rule as proposed, and are
increasing the residential real estate appraisal threshold from
$250,000 to $400,000. As discussed in the proposal and further detailed
below, increasing the residential real estate appraisal threshold will
provide meaningful regulatory relief for financial institutions without
threatening the safety and soundness of financial institutions.
The agencies are authorized to increase the threshold based on
express statutory authority to do so upon making a determination in
writing that the threshold does not represent a threat to the safety
and soundness of financial institutions and receiving concurrence from
the CFPB that the threshold level provides reasonable protection for
consumers who purchase 1-to-4 unit single-family residences.\29\
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\29\ The agencies note the rural residential appraisal exemption
does not require a safety and soundness determination by the
agencies or a concurrence by the CFPB. 12 U.S.C. 3341(b).
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As detailed below, the agencies have determined that a residential
real estate appraisal threshold of $400,000 will not threaten the
safety and soundness of financial institutions and have received
concurrence from the CFPB that this threshold level provides reasonable
protection for consumers who purchase 1-4 unit single-family
residences.
The agencies recognize that they decided against proposing a
residential appraisal threshold increase during the EGRPRA process. The
agencies have reconsidered this decision based on continued comments
received from financial institutions and state bank regulatory agencies
that increasing the residential appraisal threshold would provide
meaningful burden relief, as well as further analysis regarding safety
and soundness and consumer protection factors related to the proposal,
as detailed below. The agencies also recognize that Congress recently
amended Title XI to provide a narrow, self-effectuating appraisal
exemption for rural transactions meeting certain requirements. However,
the agencies also observe that Congress did not amend the agencies'
long-standing authority in Title XI to establish a threshold level at
or below which a certified or licensed appraiser is not required to
perform an appraisal in connection with federally related transactions.
Through the EGRRCPA amendment, Congress mandated that rural
transactions meeting specific statutory criteria be exempted from the
appraisal regulations; however, there is no indication that Congress
intended to restrict the agencies' authority to provide additional
exemptions pursuant to their existing statutory authority.
[[Page 53583]]
The agencies are also finalizing as proposed the requirement to
obtain an evaluation for transactions that qualify for the rural
residential appraisal exemption and the requirement that appraisals for
federally related transactions be subject to appropriate review for
compliance with USPAP. The final rule also makes several technical and
conforming changes to the appraisal regulations. These changes are
discussed in more detail below, in the order in which they appear in
the rule. The effective date for the rule will be the first day after
its publication in the Federal Register, other than the evaluation
requirement for transactions exempted by the rural residential
appraisal exemption and the appraisal review provision, which will
become effective on January 1, 2020.
A. Threshold Increase for Residential Real Estate Transactions
1. Definition of Residential Real Estate Transaction. The agencies
proposed to define a residential real estate transaction as a real
estate-related financial transaction secured by a single 1-to-4 family
residential property and specifically asked commenters whether the
proposed definition is appropriate. The agencies received one comment
generally supporting the proposed definition and one comment generally
opposing the definition, neither of which included any detail regarding
the reasoning for the position. This definition is consistent with
current references to appraisals for residential real estate in the
agencies' appraisal regulations and in Title XI, and the definition of
commercial real estate transaction that was created in the recent
rulemaking to increase the appraisal threshold for commercial real
estate (CRE) transactions (CRE rulemaking).\30\ Adding this definition
does not change any substantive requirement, but provides clarity to
the regulation.\31\ Therefore, the agencies are adopting the definition
of a residential real estate transaction as proposed.
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\30\ 83 FR 15019-01 (April 9, 2018) (``commercial real estate
transaction'' is defined as a ``real estate-related financial
transaction that is not secured by a single 1-to-4 family
residential property'').
\31\ The agencies believe that federally related transactions
secured by single 1-to-4 family residential properties are currently
the only real estate transactions subject to the $250,000 appraisal
threshold.
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2. Threshold Level. The agencies proposed increasing the
residential real estate appraisal threshold from $250,000 to $400,000.
In determining the level of increase, the agencies considered increases
in housing prices and general inflation across the economy since the
current threshold was established in 1994. The agencies also considered
comments received during the EGRPRA process and in response to
questions posed about the residential threshold in the CRE
rulemaking.\32\ As discussed in the proposal, the agencies analyzed the
Standard & Poor's Case-Shiller Home Price Index (Case-Shiller Index)
\33\ and the FHFA Index \34\ to determine changes in house prices since
1994. The agencies also analyzed general measures of inflation by
reviewing the Consumer Price Index (CPI).\35\
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\32\ 82 FR 35478, 35482 (July 31, 2017); 83 FR at 15029-15030.
\33\ The Case-Shiller Index reflects changes in home prices from
a base of $250,000 in June 1994, based on the Standard & Poor's
Case-Shiller Home Price Index. See Standard & Poor's CoreLogic Case-
Shiller Home Price Indices, available at https://us.spindices.com/index-family/real-estate/sp-corelogic-case-shiller.
\34\ The FHFA Index reflects changes in home prices from a base
of $250,000 in June 1994, based on the FHFA House Price Index. See
FHFA House Price Index, available at https://www.fhfa.gov/DataTools/Downloads/Pages/House-Price-Index.aspx.
\35\ The CPI, which is published by the Bureau of Labor
Statistics, is a measure of the average change over time in the
prices paid by urban consumers for a market basket of goods and
services. See https://www.bls.gov/cpi/.
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A residential property that sold for $250,000 as of June 30, 1994,
would be expected to sell in March 2019 for $643,750 according to the
Case-Shiller Index and $621,448 according to the FHFA Index (see Table
1 below). The agencies also considered housing prices over the most
recent financial cycle which were generally at a low point in 2011.
During the low point of the cycle, in December 2011, a house that sold
for $250,000 in 1994 would have been expected to sell for $445,152 in
December 2011, according to the Case-Shiller Index and $414,629
according to the FHFA Index.
Table 1--House Price and Inflation Adjustments of $250,000 at June 30,
1994, for the Case-Shiller Index and the FHFA Index, and July 1, 1994
for the CPI Index
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Case-
Table 1 year Shiller FHFA CPI
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1994................................... 250,000 250,000 250,000
2006................................... 578,813 511,636 341,109
2011................................... 445,152 414,629 379,997
2019................................... 643,750 621,448 429,240
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The agencies adopted a conservative approach and proposed a
threshold of $400,000 to approximate housing prices based on the low
point during the most recent cycle. The proposed threshold level is
also consistent with general measures of inflation across the economy
reflected in the CPI since 1994. The agencies invited comment on the
proposed level for the residential real estate appraisal threshold.
The agencies received a number of comments agreeing that the
proposed threshold level would be justified by changes in real estate
prices, inflation, and the data presented by the agencies in the
proposal. Other commenters supporting a threshold increase supported a
higher threshold, such as $500,000. These commenters generally asserted
that doing so would be more consistent with the data presented. Some
commenters also cited consistency with the CRE appraisal threshold as a
justification for increasing the residential real estate threshold to
$500,000. One commenter supporting a higher threshold questioned why
the agencies did not adjust from the lowest point in the most recent
cycle to account for price appreciation up to a more recent date, as
was done in the CRE rulemaking. Several commenters supportive of
increasing the threshold recommended that the agencies either commit to
adjusting the threshold periodically, or automatically adjust the
threshold periodically, to reflect changes in housing values, market
conditions or inflation.
Some commenters opposing the increase asserted that inflationary
changes are inadequate justifications for increasing the appraisal
threshold. Some opposing commenters suggested the agencies should
either maintain the current $250,000 threshold or lower the threshold,
with suggested ranges from $100,000 or under to $275,000. Some
commenters suggested eliminating the residential appraisal threshold
exemption entirely and requiring appraisals for all residential real
estate transactions. A few commenters suggested lower thresholds and
that transactions under the current and proposed thresholds often pose
risk to financial institutions and to consumers. Some of these
commenters asserted that many transactions involving defaults or
foreclosures are transactions below $400,000.
Some commenters asserted that the threshold should vary based on
market values in specific geographic areas, and that a national
threshold level is inappropriate given differences in property values
across the country. Some commenters suggested doing so by basing the
threshold on the GSE conforming loan limits for specific geographic
areas. Several commenters asserted that inflationary measures such as
the CPI are inappropriate measures
[[Page 53584]]
on which to base the threshold because they are not accurate indicators
of housing prices. One of these commenters suggested that the threshold
be based on wage growth and housing affordability. Two commenters
asserted that adjusting the $250,000 threshold based on changes in
prices would be inappropriate because that level was not itself the
result of an inflation adjustment and was either arbitrary or improper.
After carefully considering the comments received, and for the
reasons discussed previously, the agencies have decided to increase the
residential real estate appraisal threshold to $400,000, as proposed.
Increasing the appraisal threshold for residential real estate
transactions to $400,000 approximates more recent house prices and
provides an inflation adjustment to a threshold that has not been
increased since 1994. The agencies based the beginning point for this
analysis on $250,000 because, as discussed below, supervisory
experience with the $250,000 threshold indicates that this threshold
level did not threaten the safety and soundness of financial
institutions.
The agencies acknowledge that the data presented indicates that a
house sold in 1994 would sell for higher than $400,000 today; however,
the agencies believe the more conservative approach is appropriate.
Setting the threshold level to the low point of the most recent cycle
takes into consideration potential price fluctuations to which
financial institutions that engage in residential real estate lending
could be exposed. This approach also considers that a high percentage
of residential real estate transactions is already captured by the
existing residential real estate threshold, as reflected below in Table
2.
The agencies also concluded that automatic adjustments to the
threshold or agency commitments to set timetables for future threshold
increases would not be appropriate. The agencies already periodically
review their regulations to identify outdated or unnecessary regulatory
requirements, such as through the EGRPRA process, and can consider any
comments concerning the thresholds through that process. In addition,
the agencies are required by Title XI to weigh safety and soundness
implications regarding any proposed threshold increase and obtain CFPB
concurrence. The other alternative proposals suggested, such as varying
the threshold based on local housing prices or wages, would add
unnecessary regulatory burden and complexity by introducing numerous
threshold levels across the country.
3. Safety and Soundness Considerations for Raising the Residential
Real Estate. Threshold. 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.\36\ In
the proposal, the agencies preliminarily determined that the proposed
threshold level for residential real estate transactions would not pose
a threat to the safety and soundness of financial institutions. The
preliminary determination was based on supervisory experience regarding
causes of losses at financial institutions, analysis of available Home
Mortgage Disclosure Act (HMDA) data, and the fact that evaluations
would be required for transactions below the proposed threshold.\37\
The agencies invited comment on their preliminary finding that the
proposed threshold would not pose a threat to the safety and soundness
of financial institutions, as well as the data used to support the
finding. After taking into account the comments, discussed below, and
analyzing a range of data and information, the agencies have determined
that the threshold level of $400,000 for residential real estate
transactions does not represent a threat to the safety and soundness of
financial institutions.
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\36\ 12 U.S.C. 3341(b).
\37\ 83 FR at 63116-63119.
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Agency staff used HMDA data to estimate the number and dollar
volume of institutions' residential real estate transactions that would
be affected by the increased threshold. Table 2 below shows the number
and dollar volume of transactions in 2017 that: (i) Would have been
exempted under the current threshold; (ii) would be newly exempted
under the proposed threshold increase; (iii) in total would be exempted
as a result of the proposed threshold increase; and (iv) would not be
exempted following the proposed threshold increase. The data are
limited to first-lien, single-family mortgage originations \38\ on
residential properties by FDIC-insured institutions and affiliated
institutions that are not sold to the GSEs or otherwise insured or
guaranteed by a U.S. government agency (``regulated
transactions'').\39\
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\38\ Single-family properties include 1-to-4 family and
manufactured housing property types.
\39\ Transactions originated by regulated institutions but sold
to the GSEs or otherwise insured or guaranteed by a U.S. government
agency are separately exempted from the agencies' appraisal
requirement. See OCC: 12 CFR 34.43(a)(9); Board: 12 CFR
225.63(a)(9); FDIC: 12 CFR 323.3(a)(9). As described in the
proposal, the 214,000 additional exempted transactions represent
only three percent of total HMDA originations in 2017 and, as also
reflected in Table 2, 16 percent of regulated transactions.
Table 2--2017 HMDA \40\
----------------------------------------------------------------------------------------------------------------
Total not
Exempted by Newly exempted Total exempted exempted by
Regulated transactions by current by proposed by proposed proposed
transaction amount threshold of increase to increase to increase to
$250,000 $400,000 $400,000 $400,000
----------------------------------------------------------------------------------------------------------------
Number of Transactions.............. 750,000 214,000 965,000 379,000
% of Total.......................... 56% 16% 72% 28%
Dollar Volume ($billions)........... 96 68 164 305
% of Total.......................... 20% 14% 35% 65%
----------------------------------------------------------------------------------------------------------------
The 2017 HMDA data suggests that the $250,000 threshold currently
exempts approximately 20 percent of the total dollar volume of
regulated transactions. Raising the threshold to $400,000 will exempt
an additional estimated 14 percent of the dollar volume, thus
increasing the share of the dollar volume of regulated transactions
that are exempt to approximately 35 percent.
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\40\ Numbers and dollar volumes are based on 2017 HMDA data.
Originations with loan amounts greater than $20 million are
excluded. Subtotals may not add to totals due to rounding.
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The agencies reviewed HMDA data to measure the percent of regulated
transactions exempted in 1994 when the
[[Page 53585]]
threshold was raised from $100,000 to $250,000 as compared to raising
the threshold from $250,000 to $400,000. The data show that increasing
the threshold from $100,000 to $250,000 in 1994 resulted in an
estimated 77 percent of the total dollar volume of regulated
transactions being exempt.\41\ By comparison, as referenced above in
Table 2, 2017 HMDA data indicates that increasing the threshold from
$250,000 to $400,000 will result in an estimated 35 percent of the
total dollar volume of regulated transactions being exempt. As stated
in the proposal, the threshold increase will exempt a much smaller
percentage of regulated transactions by dollar volume.
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\41\ In both the 1994 and 2017 HMDA analyses, the agencies
excluded transactions originated by nonbanks or transactions sold to
the GSEs or otherwise insured or guaranteed by a U.S. government
agency because those transactions are already subject to other
exemptions in the appraisal regulations. When discussing the impact
of the threshold increase from $100,000 to $250,000, the preamble to
the 1994 rule noted that information from the National Association
of Realtors, the Census Bureau, and the Department of Housing and
Urban Development indicated that 85 percent of the dollar volume of
mortgages financing new homes and 82 percent of the volume of
mortgages financing purchases of existing homes would fall below the
$250,000 threshold. See 59 FR at 29486. The agencies reviewed the
data used in 1994 and determined that the information reviewed by
the agencies did not appear to exclude transactions originated by
nonbanks or transactions sold to the GSEs or otherwise insured or
guaranteed by a U.S. government agency, thus, necessitating the
additional analysis.
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In the proposal, the agencies requested comment on whether the
proposed level of $400,000 for the threshold would be appropriate from
a safety and soundness perspective, and on what sources of data would
be appropriate for the safety and soundness analysis. In general,
commenters who supported the proposed increase in the threshold viewed
the data presented in the proposed rule as supporting the increase,
while commenters opposed to the increase found the data insufficient.
A number of commenters noted that the scope of the threshold had
decreased significantly since it was established in 1994 due to
inflation in home values. As such, they argued that an increase in the
threshold would be justified to align the threshold with its 1994
scope. Other commenters expressed concern that the proposed threshold
level would exempt too high a percentage of residential transactions
from the protections provided by appraisals. These commenters focused
on the percentage of residential transactions that would be affected,
either on a national basis or based on specific geographic areas. Many
such commenters cited data indicating that the proposed threshold of
$400,000 is well above median home prices nationally and would exempt a
large majority of residential transactions in specific areas. One
commenter indicated that only 17 metropolitan statistical areas have a
median sales price for single-family homes that exceeds $400,000.
Several commenters cited to sources of data that indicated lower median
home prices than the sources cited in the proposal.
A number of commenters requested that the agencies conduct
alternative analyses and pointed out that the agencies did not analyze
the local or regional markets affected by the increase nor the impact
on particular borrowers or communities. Some commenters called for
further study of home prices by region and metro area and for the
agencies to show which markets would be most affected by the threshold
increase. In particular, commenters requested that the agencies analyze
the effect of the proposed increase in the threshold in dynamic markets
and compare its effect in urban versus rural areas. One commenter
indicated that HMDA data are the wrong source of information for
evaluating the impact of the threshold on rural areas, given that
certain low volume originators in rural areas are not required to
report HMDA data.
Based on the agencies' supervisory experience and analysis, as
discussed in more detail below, the current threshold has not
negatively impacted safety and soundness, and the agencies do not
believe raising the threshold to $400,000 will present a safety and
soundness concern. Although several commenters were concerned that the
agencies had not analyzed the effects on local markets or particular
communities, the agencies' supervisory experience with the current
threshold since 1994 suggests that this incremental increase will not
negatively affect safety and soundness on the local or national level
based on loss rates for residential real estate loans as discussed
below and observations during examinations.
Moreover, the 2017 HMDA data also suggests that, though the impact
on the total dollar volume of exempted transactions would be somewhat
limited, the number of exempted transactions would increase materially
and provide cost savings and regulatory burden relief for financial
institutions. As shown in table 2 above, the agencies estimate that the
increase would exempt an additional 214,000 transactions and thus raise
the share of the number of regulated transactions that would be exempt
from 56 percent to 72 percent. This analysis of the 2017 HMDA data
indicates that the increased threshold will affect a low aggregate
dollar volume but a material number of transactions, suggesting the
potential for financial savings and burden relief with limited
additional risk.\42\
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\42\ As noted above, in estimating the impact of the threshold
increase on institutions, the agencies attempted to exclude from the
HMDA data analysis residential transactions that were already exempt
from the appraisal regulations, including those sold to the GSEs.
The agencies recognize that the analysis may not have excluded all
GSE-related transactions exempted from the appraisal regulations, as
the regulations exempt not just transactions sold to the GSEs, but
all transactions that qualify for sale to a GSE or U.S. government
agency. OCC: 12 CFR 34.43(a)(10)(i); Board: 12 CFR 225.63(a)(10)(i);
FDIC: 12 CFR 323.3(a)(10)(i). The agencies do not currently have the
ability to accurately determine which transactions not sold to a GSE
or U.S. government agency actually qualified for sale. Even assuming
that a number of transactions fall into this category, the agencies
believe the threshold increase will produce burden relief for
regulated institutions.
---------------------------------------------------------------------------
Further, as covered in the proposal, the 2017 HMDA data show that
the rule would provide significant burden relief in rural areas. The
agencies estimate that increasing the appraisal threshold to $400,000
would potentially increase the share of exempted transactions from 82
percent to 91 percent of the number, and from 43 percent to 58 percent
of the dollar volume, of regulated transactions that were secured by
residential property located in a rural area.\43\
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\43\ For the purposes of the HMDA analysis, a property is
considered to be located in a ``rural'' area if it is in a county
that is neither in a metropolitan statistical area nor in a
micropolitan statistical area that is adjacent to a metropolitan
statistical area, based on 2013 Urban Influence Codes (UIC)
published by the United States Department of Agriculture. Any loans
from Census tracts that are missing geographical identifiers or
undefined in the 2013 UIC have been excluded from the analysis of
burden relief in rural areas.
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a. Use of Evaluations. The Title XI appraisal regulations require
regulated institutions to obtain evaluations for several categories of
real estate-related financial transactions that the agencies have
determined do not require a Title XI appraisal, including transactions
at or below the current thresholds.\44\ Accordingly, the agencies
proposed to require that regulated institutions entering into
residential real estate transactions at or below the proposed
residential 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. The agencies
requested comment on use of evaluations instead of appraisals for
residential real estate transactions.
---------------------------------------------------------------------------
\44\ See OCC: 12 CFR 34.43(b); Board: 12 CFR 225.63(b); FDIC: 12
CFR 323.3(b).
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In general, commenters who supported the increase in the threshold
[[Page 53586]]
also viewed evaluations as providing sufficient valuation information
and analysis for financial institutions and consumers to engage in safe
and sound residential real estate transactions. Those opposed to the
increase in the threshold generally argued that evaluations would not
provide enough support for these transactions and would pose a threat
to financial institutions and consumers.
Commenters in support of the proposal asserted that there would be
little impact to safety and soundness by relying on evaluations instead
of appraisals. Some financial institutions commented that they had
found evaluations to generally contain sufficient information and
analysis to be the basis for lending decisions. Several commenters
noted that financial institutions are only allowed to use evaluations
when doing so is consistent with safety and soundness and that the
institution always retains the discretion to seek an appraisal. Some of
these commenters also asserted that they have adequate programs and
policies to ensure that evaluations are used prudently.
Many commenters opined that appraisals are more accurate and
reliable sources of valuation information than evaluations because they
are done by professionals with strict training requirements and who are
subject to state credentialing and disciplinary review for poor quality
work. In contrast, commenters noted there are no standardized
requirements for those who perform evaluations. Commenters also noted
that appraisals are required to follow established requirements as
provided by USPAP, which guarantees a certain level of information and
quality, whereas evaluations lack standard requirements for information
or structure. Some of these commenters expressed particular concern
about homes in rural areas that tend to have unusual features or fewer
comparable properties and thus are harder to value. Some commenters
also raised concerns about the use of evaluations on homes that may
need repairs, suggesting that evaluations may not uncover these issues.
Many commenters argued that appraisers are the only independent
third party in a real estate transaction and that only appraisers'
opinions are independent and unbiased. These commenters represented
that those who perform evaluations often do not have the same level of
independence from the transaction. Some commenters asserted that
appraisals provide more accuracy than evaluations because they include
a physical inspection of the property. In contrast, some commenters who
were providers of evaluation services indicated that they typically
include a physical inspection of the property in their product. A few
commenters suggested that evaluations are subject to less regulatory
scrutiny than appraisals.
Commenters also opined about the use of automated valuation models
(AVMs) in the performance of evaluations. Many commenters felt that
AVMs are unreliable and expressed concern that raising the threshold
could lead to greater reliance on AVMs. Some of these commenters
asserted that it would be inappropriate for the agencies to expand the
residential real estate transaction threshold before issuing quality
control standards for AVMs, as required by Title XI.\45\ In contrast,
some commenters believed that AVMs could provide valuable information,
and that improvements in technology and greater availability of
information has improved the quality of evaluations. One commenter
indicated that AVMs are more predictive of default than appraisals.
Another indicated that evaluations based on AVMs are generally more
objective than appraisals because they are not skewed by knowledge of
the contract price.
---------------------------------------------------------------------------
\45\ 12 U.S.C. 3354(b).
---------------------------------------------------------------------------
The agencies are adopting this aspect of the final rule without
change. As is the case currently for transactions under the threshold
exemptions, evaluations will be required for transactions exempted by
the new threshold that do not receive appraisals.\46\ Although the
agencies recognize, as many commenters noted, that evaluations are not
subject to the same uniform standards as appraisals in terms of
structure and content or the preparer's training and credentialing
requirements, evaluations must be consistent with safe and sound
banking practices.\47\ The agencies have provided the Evaluation
Guidance to assist institutions in complying with this requirement.\48\
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. For instance, the
Evaluation Guidance states that, generally, evaluations should be
performed by persons who are competent, independent of the transaction,
and have the relevant experience and knowledge of the market, location,
and type of real property being valued.
---------------------------------------------------------------------------
\46\ An evaluation is not necessary if the transaction qualifies
both for the new threshold and for another exemption that does not
require an evaluation.
\47\ OCC: 12 CFR 34.43(b); Board: 12 CFR 225.63(b); FDIC: 12 CFR
323.3(b).
\48\ See supra notes 23 and 24. See also Frequently Asked
Questions on the Appraisal Regulations and the Interagency Appraisal
and Evaluation Guidelines (October 16, 2018), OCC Bulletin 2018-39;
Board SR Letter 18-9; FDIC FIL-62-2018.
---------------------------------------------------------------------------
Although some commenters expressed concern that raising the
threshold would cause financial institutions to feel pressured to use
evaluations whenever possible in order to remain competitive, data
analyzed by the agencies suggests that financial institutions are
generally using caution when determining when evaluations are suitable
for a given transaction. A five-year review of supervisory information
on the use of appraisals and evaluations by large financial
institutions found larger lenders obtained appraisals on 74 percent of
portfolio residential real estate originations at or below the current
$250,000 threshold.\49\ These data suggest that financial institutions
are often exercising discretion in determining when to use evaluations
and are not automatically using evaluations whenever permitted.
---------------------------------------------------------------------------
\49\ Y-14 data. Bank holding companies and intermediate holding
companies with $50 billion or more in total consolidated assets are
required to submit a quarterly Capital Assessments and Stress
Testing (FR Y-14M) reports and schedules, which collect granular
data on institutions' various asset classes, including residential
real estate loans.
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Further, individuals performing evaluations are expected to be
independent of the transaction. The agencies note that many evaluations
of residential properties that are a consumer's principal dwelling are
covered by the valuation independence requirements of section 1472 of
the Dodd-Frank Act and its implementing regulation.\50\ Among other
requirements, this regulation prohibits conflicts of interest and
coercion in the preparation of any opinion of value and prohibits
preparers of opinions of value from materially misrepresenting the
value of the property.\51\ In addition, the agencies have issued
guidance to help institutions ensure that they have the proper controls
to fulfill independence expectations.\52\
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\50\ 15 U.S.C. 1631; 12 CFR 226.42.
\51\ 12 CFR 226.42.
\52\ Guidelines, Section V.
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Regarding concerns about AVM use, the agencies note that, while
financial institutions may use AVMs in preparing evaluations, any
evaluation in which they are used must be consistent with safe and
sound practices. The agencies have published guidance to help ensure
that financial institutions' use of AVMs is consistent with this
requirement.\53\
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\53\ See Supervisory Guidance on Model Risk Management (April 4,
2011), OCC Bulletin 2011-12; Board SR Letter 11-7; FDIC FIL-22-2017
(adopted by the FDIC in 2017 with technical and conforming
changes)); Guidelines, Appendix B. The agencies note that many
commenters suggested that appraisers, unlike those who perform
evaluations, cannot be employees of the financial institution making
the loan. However, appraisers are permitted to be employees of the
lender provided that the independence requirements in the agencies'
rules are met. OCC: 12 CFR 34.45(a); Board: 12 CFR 225.65(a); FDIC:
12 CFR 323.5(a).
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[[Page 53587]]
b. Analysis of Loss Rates. When considering the threshold
increase's potential impact on safety and soundness, the agencies
considered a loss analysis of aggregate net charge-off rates for
residential real estate loans after the last increase in the appraisal
threshold in 1994. The agencies' analysis of the charge-off rates
offered no evidence that increasing the appraisal threshold to $400,000
for residential real estate transactions would materially increase the
risk of loss to financial institutions. The agencies requested comment
on this analysis of the charge-off data.
Several commenters noted that the agencies' loss analysis did not
reflect any significant change in the loss history for residential real
estate transactions after the threshold was increased from $100,000 to
$250,000 in 1994. Other commenters requested alternative analyses of
charge-off rates, specifically data on foreclosures and losses based on
loan amount, as opposed to aggregate net charge-off data. These
commenters asserted that the aggregate data could include loans not
eligible for the exemption or loans exempted on other grounds. A few
commenters recommended that the agencies compare loan-level foreclosure
rates for their use of appraisals and evaluations to determine if a
correlation exists between the use of evaluations and foreclosures.
As noted in the proposal, a historical review of loss data
demonstrates that the net charge-off rate for residential real estate
transactions did not increase after the appraisal threshold was raised
from $100,000 to $250,000 in June 1994, indicating the 1994 threshold
increase did not have a negative impact on the safety and soundness of
regulated institutions. The historical loss information in the Reports
of Condition and Income (Call Reports) also shows that the net charge-
off rate for residential real estate transactions remained relatively
unchanged after the increase in the threshold in 1994 through year-end
2007. While the net charge-off rate for residential real estate
transactions escalated significantly from 2008 through 2013 during the
financial crisis, the agencies primarily attribute this to weak
underwriting standards in the lead up to the crisis.
Based on the net charge-off data, which suggest that the increase
in the appraisal threshold in 1994 did not have a material effect on
the loss experience associated with residential real estate loans, the
agencies believe the increase to $400,000 will not lead to increases in
charge-off rates.
c. Supervisory Experience. In addition to analyzing net charge-off
rates for residential real estate transactions, the agencies also
considered their own supervisory experience with appraisals and
evaluations. The agencies' experience in supervising appraisal and
evaluation programs and practices since the enactment of FIRREA
indicates that increasing the threshold would not threaten the safety
and soundness of financial institutions. The agencies have found that
both appraisals and evaluations prepared properly can be credible tools
to support real estate lending decisions.
As part of the agencies' consideration of the safety and soundness
implications of the proposed threshold increased, the agencies reviewed
safety and soundness Reports of Examination. Regarding examination
experience, the agencies reviewed Reports of Examination of their
respective supervised institutions from January 2017 to December 2018
for examiner findings regarding appraisals and evaluations.\54\ Both
appraisals and evaluations were cited in examiner findings, however,
the overall amount and nature of valuation-related examination findings
support a conclusion that the proposed threshold increase would not
threaten the safety and soundness of financial institutions.
---------------------------------------------------------------------------
\54\ The Reports of Examination data reviewed related to both
commercial and residential real estate lending valuations and
valuation programs of supervised institutions.
---------------------------------------------------------------------------
The agencies have a long history with evaluations as an alternative
valuation tool. The agencies have implemented examination procedures to
frame their review of an institution's valuation practices and the
sufficiency of the supporting information in evaluations, as
appropriate for the size and nature of the institution's residential
real estate lending activities. The agencies have used these procedures
to assess the use of evaluations and ensure that they are prepared
according to safety and soundness principles and will continue to
examine institutions' evaluation policies and practices. The fact that
evaluations, which will continue to be subject to supervisory
oversight, will be required for transactions at or below the increased
threshold supports the conclusion that increasing the residential real
estate appraisal threshold to $400,000 will not pose a threat to safety
and soundness.
d. Additional Protections. In proposing to raise the residential
real estate appraisal threshold, the agencies noted that institutions
may elect to obtain appraisals for transactions that fall under the
threshold, even though an evaluation would also be permitted. In the
supervisory experience of the agencies, a financial institution may
choose to obtain appraisals for exempt transactions based on the risks
associated with a particular transaction or to preserve the flexibility
to sell residential loans in the secondary market. The agencies
requested comment on the question of whether and when institutions use
appraisals even if not required to do so by the appraisal regulations.
Several commenters indicated that institutions follow risk-based
internal policies to determine whether to obtain an appraisal,
including for transactions that fall under one of the exemptions from
the appraisal regulations. One commenter provided survey data
suggesting that the majority of lenders in one state often obtain
appraisals for loans that fall below the current threshold. On the
other hand, some commenters asserted that lenders would feel
competitive pressure to use more evaluations if the threshold were
raised and that the agencies lacked data on how often lenders use
evaluations when permitted.
The agencies expect regulated institutions to continue using a
risk-focused approach when considering whether to order an appraisal
for transactions that fall below the threshold. The Guidelines
encourage institutions to establish appropriate policies and procedures
for determining when to obtain an appraisal in connection with
transactions for which an evaluation is permitted.\55\ Similarly, the
Evaluations Advisory suggests it would be prudent to obtain an
appraisal rather than an evaluation when an institution's portfolio
risk increases or for higher-risk transactions.\56\ As detailed above,
data reviewed by the agencies found that lenders often choose to obtain
appraisals, even when evaluations are permitted for transactions at or
below the current $250,000 threshold.
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\55\ Guidelines, Section XI.
\56\ Evaluations Advisory at 2.
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In addition to the additional safety and soundness protection
provided by the risk-based approach to valuations, the agencies note
that each agency has the ability under the appraisal
[[Page 53588]]
regulations to require an appraisal whenever it is necessary to address
safety and soundness concerns.\57\ This authority allows the agencies
to require appraisals for exempt transactions, for example, where an
institution demonstrates weakness in the safe and sound use of
evaluations for exempt transactions.
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\57\ OCC: 12 CFR 34.43(c); Board: 12 CFR 225.63(c); FDIC: 12 CFR
323.3(c).
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4. Consumer Protection Considerations. In proposing the increase in
the appraisal threshold for residential transactions, the agencies
noted that evaluations can provide consumer protections. The agencies
noted that evaluations have long been required for below-threshold
transactions; must be consistent with safe and sound banking practices;
\58\ and should contain sufficient information and analysis to support
the decision to engage in the transaction,\59\ although they may be
less structured than appraisals. In the proposal, the agencies also
highlighted that the Guidelines and the Evaluations Advisory \60\
provide that individuals preparing evaluations should be qualified,
competent, and independent of the transaction and the loan production
function of the institution.\61\ For these reasons, the agencies
posited that evaluations could provide a level of consumer protection
for transactions at or below the proposed appraisal threshold.
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\58\ OCC: 12 CFR 34.43(b); Board: 12 CFR 225.63(b); FDIC: 12 CFR
323.3(b).
\59\ Guidelines, Section XIII.
\60\ Evaluations Advisory at 2.
\61\ Guidelines, Section V.
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The agencies requested comment generally regarding any implications
of the proposed rule on consumer protection. In addition, the agencies
asked commenters for specific information about the potential cost and
time savings to consumers that may result from the increased use of
evaluations versus appraisals and whether information in evaluations
would be sufficiently clear to enable the consumer to make an informed
decision. The agencies also requested comment on the availability of
valuation information to consumers through public sources and whether
information from those sources help provide consumers with additional
protection in residential transactions. Finally, the agencies requested
comment on challenges, if any, that financial institutions may have in
meeting the requirements and standards for independence for evaluations
prepared by internal staff or external third parties.
In general, commenters that supported the proposed threshold and
commented on consumer protection issues indicated that evaluations
provide consumers with sufficient protection in a residential real
estate transaction. Many commenters who opposed the increased threshold
indicated that evaluations are inadequate substitutes for appraisals
and therefore an increased threshold would pose a threat to consumer
protection.
Many commenters opposed to an increase in the threshold argued that
appraisers are the only objective and unbiased party in a transaction
and bring checks, balances, and oversight to the mortgage lending
process. Some of these commenters based this assertion on the legal
requirement for appraiser independence and the professional standards
to which appraisers are held. These commenters also argued that
individuals preparing evaluations are often not disinterested third
parties because they are employed by the lender. Several commenters
asserted that evaluations are usually performed by individuals who,
unlike appraisers, are not credentialed valuation professionals subject
to standardized training and experience requirements.
A number of commenters suggested that inadequate property
valuations and undue influence on appraisers contributed to property
overvaluation during the most recent financial crisis, with adverse
impacts for consumers. They indicated that the Dodd-Frank Act
strengthened protections regarding appraisals, including federal
oversight provisions, and that a number of these protections do not
apply to evaluations that are not conducted by appraisers. On the other
hand, commenters who supported the proposed increase in the threshold
argued that evaluations are a safe alternative to appraisals, with some
noting that individuals who prepare evaluations are also required to be
independent under federal law, as discussed further below.
Many commenters who opposed a threshold increase on consumer
protection grounds asserted that evaluations are not subject to uniform
standards and are not a meaningful substitute for an appraisal that
must be conducted in compliance with USPAP. A number of commenters
questioned the reliability of valuation methods other than appraisals,
particularly AVMs and evaluations. Other commenters suggested that the
proposal would cause consumers to lose the benefit of appraisers
performing a physical inspection and an analysis of specific property
features, including property maintenance and repair issues that can
affect the property value.
Some commenters in favor of a threshold increase asserted that
evaluations protect consumers by helping to ensure the property's value
supports the purchase price. In this regard, one commenter indicated
that evaluations must be consistent with safe and sound banking
practices and, according to agency guidelines, they should provide
supporting information and an estimate of market value. One commenter
in favor of a threshold increase raised concerns that appraisals may
provide a false sense of protection to consumers who incorrectly assume
their property can be sold for the appraised market value if they
encounter financial difficulties. A few commenters that supported an
increase argued that neither appraisals nor evaluations are consumer
protection tools for homebuyers, asserting that both are received after
prospective buyers have entered into a purchase and sale agreement
(PSA) to purchase the residential property at a specified price.
Some commenters that opposed an increase in the residential
threshold argued that, unlike for faulty appraisals, consumers do not
have any recourse for faulty evaluations. Some commenters noted that
consumers may file an official complaint with a state's appraiser board
to address an inaccurate appraisal, which is not an option for
addressing an inaccurate evaluation performed by a non-appraiser. In
addition, one commenter questioned whether evaluations could be used to
renegotiate or cancel PSAs under an appraisal contingency clause.
A number of commenters opposed to a threshold increase asserted
that appraisals are easier for consumers to understand than
evaluations. Some commenters noted the standardized requirements of a
USPAP-compliant appraisal report provide information in a consistent
manner and ensure that the user has enough information to understand
the conclusions in the report. Some commenters opposed to an increase
raised concerns that free online valuation information and tools may be
flawed due to, for example, their reliance on public records with data
entry errors.
One commenter in favor of an increased threshold indicated that
evaluations are often easier for consumers to read and understand,
asserting that they typically explain the comparisons with other recent
sales in ``plain English.'' Some commenters generally in favor of an
increase noted that consumers have access to a wide array of readily
available valuation information, and may also voluntarily obtain
appraisals.
[[Page 53589]]
Numerous commenters opposed to a threshold increase asserted that
an increase to the appraisal threshold would have a disproportionately
negative impact on more at-risk consumers, such as low-income
individuals, members of certain minority groups, or first-time
homebuyers, because at-risk borrowers are more likely to purchase homes
priced in lower ranges and, therefore, are more likely to enter into
residential transactions without the benefit of an appraisal. Some
commenters asserted that first-time homebuyers are among the consumers
least able to manage financial risk, and are most in need of consumer
protections. According to several of these commenters, this is because
first-time homebuyers typically use a substantial portion of their
savings for the down payment or obtain mortgages with high loan-to-
value ratios.
In adopting the threshold increase for residential mortgage loans
as proposed, the agencies appreciate and have considered the consumer
protection issues and concerns raised by the commenters. Based on their
supervisory experience with evaluations since 1994, the agencies have
found that both appraisals and evaluations can protect consumers by
facilitating the informed use of credit and helping to ensure the
estimated value of the property supports the purchase price and
mortgage amount. Further, the agencies consulted with the CFPB
throughout the development of the proposal and final rule and, as
required by Title XI,\62\ have received concurrence from the CFPB that
the residential real estate appraisal threshold being adopted provides
reasonable protection for consumers who purchase 1-4 unit single-family
residences.
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\62\ In the Dodd-Frank Act, Congress amended the threshold
provision to require ``concurrence from the Bureau of Consumer
Financial Protection that such threshold level [established by the
agencies] provides reasonable protection for consumers who purchase
1-4 unit single-family residences.'' 12 U.S.C. 3341(b).
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In response to the comments concerning valuation independence, the
agencies have long recognized that evaluations prepared by competent
and independent preparers can provide credible valuation information
for residential real estate transactions. In addition, the Dodd-Frank
Act contained provisions that addressed independence requirements
applicable to ``valuations'' for consumer-purpose mortgages secured by
a consumer's principal dwelling. The Valuation Independence Rule,\63\
which implements the Dodd-Frank Act independence provisions, states
that ``no covered person shall or shall attempt to directly or
indirectly cause the value assigned to the consumer's principal
dwelling to be based on any factor other than the independent judgment
of a person that prepares valuations, through coercion, extortion,
inducement, bribery, or intimidation of, compensation or instruction
to, or collusion with a person that prepares valuations or performs
valuation management functions.'' \64\ Additionally, the rule prohibits
mischaracterizations of property value and conflicts of interest for
persons preparing valuations or performing valuation management
functions.\65\ These independence requirements extend to appraisals,
evaluations, and other estimations of value and encompass not only
individuals preparing such valuations but also those performing
valuation management functions.\66\ The failure to comply with the
independence requirements in the Valuation Independence Rule can result
in civil liability.\67\
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\63\ See Interim Final Rule for Valuation Independence, 75 FR
66554 (October 28, 2010) and 75 FR 80675 (December 23, 2010), Board:
12 CFR 226.42; CFPB: 12 CFR 1026.42 (implementing valuation
independence amendments to the Truth in Lending Act (TILA), 15
U.S.C. 1601 et seq., by Dodd-Frank Act section 1472, 15 U.S.C.
1639e).
\64\ Board: 12 CFR 226.42(c)(1); CFPB: 12 CFR 1026.42(c)(1).
\65\ See Board: 12 CFR 226.42(c)(2), (d); CFPB: 12 CFR
1026.42(c)(2), (d).
\66\ Valuation management functions include: ``Recruiting,
selecting, or retaining a person to prepare a valuation'';
``contracting with or employing a person to prepare a valuation'';
``managing or overseeing the process of preparing a valuation,
including by providing administrative services such as receiving
orders for and receiving a valuation, submitting a completed
valuation to creditors and underwriters, collecting fees from
creditors and underwriters for services provided in connection with
a valuation, and compensating a person that prepares valuations'';
and ``reviewing or verifying the work of a person that prepares
valuations.'' 12 CFR 1026.42(b)(4).
\67\ See 15 U.S.C. 1640.
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In response to comments concerning on-site inspections of real
estate, the agencies note that USPAP does not require appraisers to
inspect the subject property and that some appraisers use third parties
to conduct inspections. As such, not all appraisals include
inspections. As with appraisals, the agencies note that when financial
institutions obtain an evaluation, the evaluation will often include a
physical property inspection, which can provide a prospective buyer
with relevant information about a property's condition. Evaluations,
like appraisals, should contain sufficient information and analysis to
support the institution's decision to engage in a credit decision,
including information relating to the actual physical condition and
characteristics of the property, as discussed in the Guidelines.\68\
The individual who is performing the evaluation should determine
whether a physical property inspection is necessary to support the
property's value. Based on the agencies' supervisory experience with
appraisals and evaluations since 1994, the agencies believe that
property inspections done by appropriately trained individuals for
either appraisals or evaluations can provide prospective buyers with
detailed information regarding a property's condition and features, may
provide consumer protection, and can help ensure that appraisals or
evaluations are consistent with safe and sound banking practices.
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\68\ Guidelines, Section XII.
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The agencies recognize that some consumers may seek to include
appraisal contingency clauses in PSAs. However, the threshold exemption
does not affect the ability to enter into these arrangements. One
commenter suggested that evaluations may not constitute appraisals for
purposes of appraisal contingency clauses and may cause confusion to
consumers opting for these contingencies. The agencies are not aware of
any such issues regarding the current threshold, which already exempts
a significant portion of residential real estate transactions. In this
regard, the agencies do not have reason to believe that the incremental
increase in exempted transactions will create consumer protection
concerns related to PSAs. With respect to consumer recourse for faulty
evaluations, available information from entities that use or provide
evaluations indicates that lenders often order appraisals when disputes
arise with evaluations, so the agencies do not expect the proposal to
materially affect options for consumer recourse.
Regarding the impact of the threshold increase on consumers'
understanding of and access to valuation information, the agencies note
that lenders must provide a copy of all appraisals and written
valuations developed in connection with an application for a first-lien
loan secured by a dwelling,\69\ which includes both appraisals and
evaluations. In addition, although all sources of publicly available
valuation information might not always accurately
[[Page 53590]]
reflect the market value of a particular property, consumers can use a
variety of available information to learn more about the availability
of and the potential range of values for properties in a particular
area or market. Moreover, although limited in scope, the higher-priced
mortgage loan rule (HPML rule),\70\ as adopted by the agencies,
requires lenders for certain HPMLs secured by a consumer's principal
dwelling to obtain an appraisal--and in some cases two appraisals--that
include an interior property visit, and provide free copies to the
consumer. The HPML Rule applies to certain higher-risk transactions.
Thus, for a select group of loans, the HPML Rule assures that the
information in an appraisal will be available for some of the consumers
who might be more likely to fall into the at-risk categories mentioned
by commenters as being most affected by the threshold increase.
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\69\ See 12 CFR 1002.14, 78 FR 7216 (January 31, 2013)
(implementing amendments to the Equal Credit Opportunity Act (ECOA),
15 U.S.C. 1691 et seq., by Dodd-Frank Act section 1474, 15 U.S.C.
1691(e)).
\70\ OCC: 12 CFR part 34, subpart G; Board: 12 CFR 226.43; FDIC
(through adoption of CFPB rule): 12 CFR 1026.35(c). The FDIC adopted
the HPML Rule as published in the CFPB's regulation. See 78 FR
10368-01, 10370 (December 26, 2013). Exemptions from the
requirements of the HPML Rule include, among others, ``qualified
mortgages'' under 15 U.S.C. 1639c (implemented by the CFPB at 12 CFR
1026.43); reverse mortgages subject to 12 CFR 1026.33; and certain
refinancings. See OCC: 12 CFR 34.203(b); Board: 12 CFR 226.43(b);
FDIC (through adoption of CFPB rule): 12 CFR 1026.35(c)(2).
Exemptions from the requirement for two appraisals for certain
transactions include, among others, extensions of credit that
finance a consumer's acquisition of property located in a rural
county, as defined in 12 CFR 1026.35(b)(2)(iv)(A). See OCC: 12 CFR
34.203(d)(7)(H); Board: 12 CFR 226.43(d)(7)(H); FDIC (through
adoption of CFPB rule): 12 CFR 1026.35(c)(4)(vii)(H).
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Finally, the agencies note that even when the transaction amount is
at or below the threshold, the Guidelines \71\ encourage regulated
institutions to establish policies and procedures for obtaining Title
XI appraisals when necessary for risk management. As discussed above,
the FR Y-14M data reviewed by the agencies found that lenders included
in the data obtained appraisals on 74 percent of residential real
estate loans of $250,000 and below that were held in portfolio. These
empirical data indicate that lenders generally obtain appraisals for a
majority of residential real estate transactions for which the
agencies' appraisal regulations permitted an evaluation. These data are
also consistent with some commenters' assertions that lenders would
continue to use a risk-based approach in determining whether to obtain
an evaluation or an appraisal for a particular transaction, regardless
of the threshold amount. Further, consumers may voluntarily obtain
appraisals regardless of whether the regulated institution is required
to do so.
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\71\ See Guidelines, Section XI.
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5. Reducing Burden Associated with Appraisals. In proposing the
increase in the residential appraisal threshold, the agencies
considered that the increased use of evaluations would likely reduce
the time and costs associated with residential real estate
transactions, which in turn would reduce burden for financial
institutions and consumers. The agencies invited comment on the cost
and time associated with performing and reviewing evaluations as
compared to Title XI appraisals. The agencies also invited comment on
the appropriateness of the data used in the proposal and requested any
suggestions for alternative sources of data.
The agencies received a number of comments indicating that the
proposed increase in the residential real estate appraisal threshold
would result in cost and time savings for consumers and regulated
institutions. Several commenters concurred with the agencies' cost
estimates in the proposal. One commenter indicated that evaluation
tools provide accurate valuation information at approximately half the
cost of an appraisal. Another commenter estimated that an evaluation
could cost between 20 and 50 percent of the price of a comparable
appraisal, and that an evaluation can generally be delivered in one to
five days while an appraisal may take between five and twenty-one days.
Another commenter asserted that evaluations typically cost about $100
less than appraisals. One commenter noted that evaluations are often
performed by bank employees, in which case the customer is not
typically charged for the service, and that when the lender obtains an
evaluation from a third-party provider (as opposed to using its own
employee), borrowers may still save approximately 50 percent. Some
commenters also asserted that the proposed threshold increase would
reduce the time needed for appraisal review. The agencies received
several comments from financial institutions, financial institution
trade associations, and state regulators asserting that the proposals
would particularly reduce delays and costs in rural areas that may be
experiencing a shortage of state licensed or state certified
appraisers. Two of these commenters specifically asserted that a
broadly applicable threshold increase to $400,000, rather than the more
limited rural residential appraisal exemption, is appropriate because
it would provide additional burden relief by eliminating unnecessary
qualifying criteria. One of these commenters, a financial institution
trade association from a large state, asserted that the rural
residential appraisal exemption would not apply to transactions in
areas representing 86 percent of the state's population, and that the
proposed threshold increase thus would provide additional burden relief
in the state beyond what was provided by the rural residential
appraisal exemption.
Other commenters questioned how much relief the proposal would
provide. Some commenters noted the agencies' acknowledgement that there
is limited information on the cost and time burden of evaluations
versus appraisals and urged the agencies to obtain additional data to
quantify any expected savings. Several commenters noted that the cost
of an appraisal is relatively small compared to other financing costs
in the transaction such as the fees charged by banks and brokers. Some
of these commenters also suggested that any cost savings to consumers
would be outweighed by the financial harm that could result from
purchasing a home without an estimate of value provided by an
appraiser. One commenter indicated that evaluations may take longer to
review than appraisals. Another argued that even if an appraisal takes
longer to review, the time difference is not significant and would not
delay a loan closing. Some commenters questioned the need for, and
appropriateness of, the proposed threshold increase in light of the
rural residential appraisal exemption.
Several commenters challenged the agencies use in the proposal of
the Department of Veterans Affairs (VA) appraisal fee schedule as
support for their analysis of potential cost savings, arguing that the
$600 average cost noted in the proposal based on the VA fee schedule
likely overstates the cost of appraisals. One commenter noted the VA's
underwriting requirements exceed USPAP standards, which increases
costs. Some of these commenters cited alternative sources for fee data,
including several state-specific studies. One such commenter referred
to a survey showing that VA fees are higher than the norm, indicating
that the median cost of an appraisal is $450, with 89 percent of those
surveyed stating the typical cost of an appraisal is below $600. This
commenter also questioned whether the cost and time to receive an
appraisal were burdensome, as its survey reflected that appraisals
represented less than 0.2 percent of the total transaction cost and
that the typical wait time for an appraisal in 2018 was only 7 days.
A number of commenters disputed that there are appraiser shortages
warranting regulatory relief outside of
[[Page 53591]]
rural areas, with some offering supporting data from the Appraisal
Subcommittee of the Federal Financial Institutions Examination Council
and the Appraisal Foundation. Several commenters identified appraisal
management companies (AMCs) as a significant source of unnecessary
costs and delays, and suggested that appraiser shortages are due to the
low appraisal fees AMCs offer, resulting in appraisers being unwilling
to work for AMCs.
The agencies considered these comments in evaluating the rule's
potential impact. As discussed further below, available data and
analysis indicate that, while there is limited information available to
compare the cost and time savings related to performing appraisals
versus evaluations, raising the residential threshold, and the
corresponding increased use of evaluations, will lead to some level of
cost savings for consumers and institutions. The agencies also conclude
that raising the threshold is likely to reduce the time needed to find
appropriate personnel to perform the valuation, particularly in areas
experiencing shortages of certified or licensed appraisers.
As noted in the proposal, and according to data submitted by
commenters, the cost of obtaining an evaluation can be substantially
less than the cost of obtaining an appraisal, with estimates ranging
from evaluations costing $100 less than the cost of an appraisal or
less than half (with one estimate of 20 percent) of the cost of an
appraisal. The agencies acknowledge the limitations in relying on the
VA appraisal fee schedule, which may reflect appraisal fees that are
higher than average across the industry. However, even if the average
appraisal cost is less than the $375 to $900 range suggested in the
proposal, the agencies believe expanding the use of evaluations will
produce time and cost savings. Some commenters indicated that, while
the cost of an appraisal is generally passed on to the borrower, an
evaluation performed by in-house staff may be provided at no cost to
the borrower. When a borrower pays for an evaluation outsourced to a
third-party, the cost may still be significantly less than for a
comparable appraisal.
The agencies also note that regulated institutions generally need
less time to review evaluations than Title XI appraisals because the
content of the report can be less comprehensive than an appraisal
report. Institutions are more likely to obtain an evaluation, where
permitted, for transactions with a lower dollar value, that are less
complex, or that are subsequent to a previous transaction for which a
Title XI appraisal was obtained. As a result, evaluations are often
simpler and take less time to review than appraisals. Based on
supervisory experience, the agencies have previously estimated that, on
average, the time to review evaluations takes approximately 30 minutes
less than the time to review appraisals. While the precise time and
cost reduction per transaction is difficult to determine, the agencies
conclude that the increased threshold is likely to result in some level
of cost and time savings for regulated institutions that engage in
residential real estate lending and for consumers.
In considering the aggregate effect of this rule, the agencies also
considered the number of transactions likely to be affected by the
increased threshold. As discussed above, the agencies' analysis of 2017
HMDA data suggests that increasing the residential threshold from
$250,000 to $400,000 would exempt an additional 214,000 residential
real estate originations at regulated institutions from the agencies'
appraisal requirement, representing an additional 16 percent of all
regulated transactions. While the supervisory data discussed above
suggest that use of evaluations is lower than it could be, the agencies
expect that raising the residential appraisal threshold will still
provide burden relief because it will provide flexibility in those
situations where obtaining an appraisal would significantly delay the
transaction and the financial institution determines that an evaluation
would be sufficient for the safety and soundness of the particular
transaction.
B. Incorporation of the Rural Residential Appraisal Exemption Under
Section 103 of the Economic Growth, Regulatory Relief, and Consumer
Protection Act
As discussed above, in section 103 of EGRRCPA, Congress amended
Title XI in 2018 to add a rural residential appraisal exemption.\72\
Under this new exemption, a financial institution need not obtain a
Title XI appraisal if the property is located in a rural area; the
transaction value is less than $400,000; the financial institution
retains the loan in portfolio, subject to exceptions; and not later
than three days after the Closing Disclosure Form is given to the
consumer, the financial institution or its agent has contacted not
fewer than three state certified or state licensed appraisers, as
applicable, and has documented that no such appraiser was available
within five business days beyond customary and reasonable fee and
timeliness standards for comparable appraisal assignments.\73\
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\72\ Public Law 115-174, Title I, section 103, codified at 12
U.S.C. 3356.
\73\ 12 U.S.C. 3356. The mortgage originator must be subject to
oversight by a Federal financial institutions regulatory agency, as
defined in Title XI. Further, the exemption does not apply to loans
that are high-cost mortgages, as defined in section 103 of TILA, or
if a Federal financial institutions regulatory agency requires an
appraisal because it believes it is necessary to address safety and
soundness concerns.
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The proposed rule would have amended the agencies' appraisal
regulations to reflect the rural residential appraisal exemption under
section 103 of EGRRCPA in the list of transactions that are exempt from
the agencies' appraisal requirement. The amendment to this provision
would have been a technical change that would not alter any substantive
requirement, because the statutory provision is self-effectuating and
the proposed threshold increase to $400,000 would encompass loans that
would otherwise qualify for the section 103 rural residential appraisal
exemption. In addition, the proposed rule would have required
evaluations for transactions that are exempt from the agencies'
appraisal requirement under the rural residential appraisal exemption
under section 103 of EGRRCPA. The agencies proposed that financial
institutions obtain evaluations for these transactions because
evaluations protect the safety and soundness of financial institutions.
In the proposed rule, the agencies specifically asked what
challenges, if any, would be posed by requiring lenders to obtain
evaluations where the rural residential appraisal exemption under
section 103 of EGRRCPA is used. The agencies received very few comments
on the proposed evaluation requirement. A few commenters asserted that
the preparation of both appraisals and evaluations on properties
located in rural areas may be affected by the limited comparable sales
data available in rural areas.
After considering the comments received, the agencies have decided
to implement the requirement for regulated institutions to obtain
evaluations when the rural residential appraisal exemption is used. The
agencies recognize that the scarcity of comparable sales data in rural
areas has been a long-standing issue and issued guidance in 2016 to
assist institutions in obtaining evaluations in rural areas with few or
no recent comparable sales.\74\ Since the early 1990s, the agencies'
appraisal regulations have required that regulated institutions obtain
evaluations for certain other exempt residential real
[[Page 53592]]
estate transactions (which in practice are generally retained in their
portfolios). Requiring evaluations for transactions exempted by the
rural residential appraisal exemption reflects the agencies' long-
standing view that safety and soundness principles require institutions
to obtain an understanding of the value of real estate collateral
underlying most real estate-related transactions they originate.
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\74\ Evaluations Advisory at 3.
---------------------------------------------------------------------------
For clarity, the agencies note that under the final rule, creditors
operating in rural areas could opt to rely on the more broadly
applicable exemption for transactions of $400,000 or less in lieu of
the rural residential appraisal exemption and will not need to meet the
additional criteria required under the rural residential appraisal
exemption. This is because the broader exemption for transactions of
$400,000 or less adopted in this final rule encompasses the more narrow
exemption under EGRRCPA section 103. An evaluation is required
regardless of which of these exemptions is relied upon. By specifying
that an evaluation is required for transactions in which all of the
criteria under EGRRCPA section 103 are met, the agencies seek to
streamline the exemption rules and eliminate confusion for creditors
operating in rural areas.
C. Addition of the Appraisal Review Requirement
Section 1473(e) of the Dodd-Frank Act amended Title XI to require
that the agencies' appraisal regulations include a requirement that
Title XI appraisals be subject to appropriate review for compliance
with USPAP.\75\ The proposed rule would have made a conforming
amendment to add this statutory requirement for appraisal review to the
appraisal regulations. The agencies proposed to mirror the statutory
language for this standard. The agencies also indicated in the proposal
that the Guidelines provide more information to assist financial
institutions in the appropriate review of appraisals and
evaluations.\76\
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\75\ Dodd-Frank Act, section 1473, Public Law 111-203, 124 Stat.
1376.
\76\ See Guidelines, Section XV.
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In the proposal, the agencies specifically asked what concerns, if
any, would be posed by requiring lenders to conduct appropriate reviews
of Title XI appraisals for compliance with USPAP. The agencies received
very few comments addressing the appraisal review proposal. One
commenter indicated that appraisal review provides significant consumer
and lender safeguards. Another commenter expressed concern that a
requirement for appraisal review would force some financial
institutions to outsource the review process, given that many small
institutions do not have staff trained in USPAP standards, which would
add considerable overhead expense for financial institutions. This
commenter also requested clarification of whether evaluations must be
reviewed for compliance with USPAP.
In response to these comments, the agencies note that the appraisal
review proposed is statutorily required by Title XI. In addition, the
agencies have long recognized that appraisal review is consistent with
safe and sound banking practices, as outlined in the Guidelines, and
should be employed as part of the credit approval process to ensure
that appraisals comply with USPAP, the appraisal regulations, and a
financial institution's internal policies.\77\ As noted in the
Guidelines, appraisal reviews should help ensure that an appraisal
contains sufficient information and analysis to support the decision to
engage in the transaction, as required by the appraisal
regulations.\78\ Through the review process, the institution should be
able to assess the reasonableness of the valuation method, the
assumptions, and whether data sources are appropriate and well-
supported.\79\
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\77\ See id.
\78\ See OCC: 12 CFR 34.44(b); Board: 12 CFR 225.64(b); FDIC: 12
CFR 323.4(b).
\79\ See Guidelines, Section XV.
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As a reflection of the long-standing guidance on appraisal review,
many financial institutions may already have review processes in place
for these purposes. With respect to the question concerning evaluations
and appraisal review, the agencies note that evaluations need not
comply with USPAP. While financial institutions should continue to
conduct safety and soundness reviews of evaluations to ensure that an
evaluation contains sufficient information and analysis to support the
decision to engage in the transaction, the USPAP review requirement in
Title XI does not apply to such a review.
After carefully considering the comments received, the agencies
have decided to implement the requirement that financial institutions
review appraisals for federally related transactions for compliance
with USPAP. The agencies encourage regulated institutions to review
their existing appraisal review policies and incorporate additional
procedures for subjecting appraisals for federally related transactions
to appropriate review for compliance with USPAP, as needed. Financial
institutions may refer to the Guidelines for more information to assist
them in the appropriate review of appraisals and evaluations.\80\
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\80\ See id.
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D. Conforming and Technical Amendments
The agencies' appraisal regulations require that all complex 1-to-4
family residential property appraisals rendered in connection with
federally related transactions shall have a state certified appraiser
if the transaction value is $250,000 or more.\81\ In order to make this
paragraph consistent with the other proposed changes to the agencies'
appraisal regulations, the agencies proposed changes to its wording to
incorporate the proposed definition of ``residential real estate
transaction,'' to introduce the $400,000 threshold, and to make other
technical and conforming changes. The agencies also proposed to amend
the definitional term ``complex 1-to-4 family residential property
appraisal'' to ``complex appraisal for a residential real estate
transaction'' to conform to the definition of residential real estate
transaction. The proposed amendments to these provisions would have
been conforming changes that would not alter any substantive
requirements.
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\81\ OCC: 12 CFR 34.43(d)(3); Board: 12 CFR 225.63(d)(3); FDIC:
12 CFR 323.3(d)(3).
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The agencies received one comment on these conforming changes
seeking clarification as to whether certified appraisers would be
required for complex appraisals for residential real estate
transactions above $400,000 or transactions at or above $400,000. As
provided in the rule text, the requirement will only apply to
transactions above $400,000. The agencies did not receive further
comment on these proposed technical and conforming changes and are
adopting the proposed technical changes as final.
III. Effective Date
All provisions of the rule, other than the evaluation requirement
for transactions exempted by the rural residential appraisal exemption
\82\ and the requirement to subject appraisals to appropriate review
for compliance with USPAP (as discussed below) are effective the first
day after publication of the final rule in the Federal Register. The
30-day delayed effective date required under the Administrative
Procedure Act is waived for all other amendments to the regulation,
pursuant
[[Page 53593]]
to 5 U.S.C. 553(d)(1), which provides an exception to the 30-day
delayed effective date requirement when a substantive rule grants or
recognizes an exemption or relieves a restriction. The amendments to
increase the residential appraisal threshold exempts additional
transactions from the agencies' appraisal requirement, which would have
the effect of relieving restrictions. Consequently, all provisions of
this rule, except the evaluation requirement for transactions exempted
by the rural residential appraisal exemption and the appraisal review
provision, meet the criteria to waive the 30-day delayed effective date
requirement set forth in the Administrative Procedure Act.
---------------------------------------------------------------------------
\82\ See supra note 3.
---------------------------------------------------------------------------
The provisions for the evaluation requirement for transactions
exempted by the rural residential appraisal exemption and for the
appraisal review will be effective on January 1, 2020. The delayed
effective date will provide regulated institutions adequate time to
implement procedures for obtaining an evaluation for certain
residential transactions secured by property in a rural area that are
exempt from the appraisal requirements and for subjecting appraisals
for federally related transactions to appropriate review for compliance
with USPAP.\83\ The agencies did not receive any comments on the
proposed effective date.
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\83\ As discussed below, new requirements on insured depository
institutions (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. See 12 U.S.C. 4802(b).
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IV. Regulatory Analysis
A. 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 $600 million or less
and $41.5 million or less, respectively) and publishes its
certification and a brief explanatory statement in the Federal Register
together with the rule.
The OCC currently supervises 1,211 institutions (commercial banks,
trust companies, federal savings associations, and branches or agencies
of foreign banks) of which approximately 782 are small entities.\84\
The OCC estimates that the final rule may impact approximately 734 of
these small entities. The final rule to increase the residential
threshold may result in cost savings for impacted institutions.
---------------------------------------------------------------------------
\84\ The OCC bases this estimate of the number of small entities
on the SBA's size thresholds for commercial banks and savings
institutions, and trust companies, which are $600 million and $41.5
million, respectively. Consistent with the General Principles of
Affiliation, 13 CFR 121.103(a), the OCC includes the assets of
affiliated financial institutions when determining whether to
classify an OCC-supervised institution as a small entity. The OCC
used December 31, 2018, to determine size because a ``financial
institution's assets are determined by averaging the assets reported
in its four quarterly financial statements for the preceding year.''
See footnote 8 of the U.S. Small Business Administration's Table of
Size Standards.
---------------------------------------------------------------------------
For transactions at or below the new residential threshold,
regulated institutions will be given the option to obtain an evaluation
of the property instead of an appraisal. While the cost of obtaining
appraisals and evaluations can vary and may be passed on to borrowers,
evaluations generally cost less to perform than appraisals, given that
evaluations are not required to comply with USPAP. In addition to
costing less than an appraisal, evaluations may require less time to
review than appraisals because evaluations typically contain less
detailed information than appraisals. In addition to savings relating
to the relative costs associated with appraisals and evaluations, the
final rule may also reduce burden for institutions in areas with
appraiser shortages. In the course of the agencies' most recent EGRPRA
review, commenters contended that it can be difficult to find state
certified and licensed appraisers, particularly in rural areas, which
results in delays in completing transactions and sometimes increased
costs for appraisals.\85\ For this reason, substituting evaluations for
appraisals may reduce burden for institutions in areas with appraiser
shortages. While the increased residential threshold may decrease costs
for institutions, the extent to which institutions will employ
evaluations instead of appraisals is uncertain, given that institutions
retain the option of using appraisals for below-threshold transactions.
---------------------------------------------------------------------------
\85\ See EGRPRA Report, available at https://www.ffiec.gov/pdf/2017_FFIEC_EGRPRA_Joint-Report_to_Congress.pdf.
---------------------------------------------------------------------------
The requirement in the final rule that institutions obtain an
evaluation for transactions that qualify for the rural residential
appraisal exemption could be viewed as a new mandate. However, because
the final rule increases the residential threshold to $400,000 for all
residential transactions, institutions will not need to comply with the
detailed requirements of the rural residential appraisal exemption in
order for such transactions to be exempt from the agencies' appraisal
requirement. Therefore, complying with the evaluation requirement for
below-threshold transactions will be significantly less burdensome than
complying with the requirements of the rural residential appraisal
exemption.
The requirement that Title XI appraisals be subject to appropriate
review for USPAP compliance could also be viewed as a new mandate. The
OCC does not believe, however, that this requirement will impose a
significant burden or economic impact on regulated institutions because
Title XI and the agencies' appraisal regulations already require that
Title XI appraisals be performed in compliance with USPAP. In addition,
many financial institutions already have review processes in place to
ensure that appraisals comply with USPAP. Finally, the OCC notes that
the requirement for appraisal review is statutorily mandated by Title
XI.
Because the final rule does not contain any new recordkeeping,
reporting, or significant compliance requirements, the OCC anticipates
that costs associated with the final rule, if any, will be de minimis.
Therefore, the OCC certifies that the final rule will not have a
significant economic impact on a substantial number of small entities.
FRB: The RFA \86\ generally requires that an agency prepare and
make available a final regulatory flexibility analysis in connection
with a final rulemaking that the agency expects will have a significant
economic impact on a substantial number of small entities. The
regulatory flexibility analysis otherwise required under the RFA is not
required if an agency certifies that the rule will not have a
significant economic impact on a substantial number of small entities
and publishes its certification and a brief explanatory statement in
the Federal Register together with the rule.
---------------------------------------------------------------------------
\86\ 5 U.S.C. 601 et seq.
---------------------------------------------------------------------------
The agencies are increasing the threshold from $250,000 to $400,000
at or below which a Title XI appraisal is not required for residential
real estate transactions in order to reduce regulatory burden in a
manner that is consistent with the safety and soundness of financial
institutions. To ensure that the safety and soundness of
[[Page 53594]]
regulated institutions are protected, the agencies will require
evaluations for transactions that are exempted by the increased
residential appraisal threshold. The final rule also requires
evaluations for transactions exempted by the rural residential
appraisal exemption. In order to fulfill the agencies' statutory
responsibility under the Dodd-Frank Act, the agencies are also adding
to the appraisal regulations a requirement that appraisals be subject
to appropriate review for compliance with USPAP.
The Board's rule applies to state chartered banks that are members
of the Federal Reserve System (state member banks), as well as bank
holding companies and nonbank subsidiaries of bank holding companies
that engage in lending. There are approximately 529 state member banks
and 232 nonbank lenders regulated by the Board that meet the SBA
definition of small entities and are subject to the final rule. Data
currently available to the Board do not allow for a precise estimate of
the number of small entities that are affected by the threshold
increase or the evaluation requirement for transactions exempted by the
rural residential appraisal exemption, because the number of small
entities that engage in residential real estate transactions qualifying
for these exemptions is unknown.
The increased threshold level for residential transactions is
expected to produce cost and time savings for financial institutions
without imposing any burden, since it will permit institutions to use
evaluations instead of appraisals for a greater number of transactions,
and evaluations generally cost less and take less time to conduct and
review than appraisals. The cost and time savings produced for
institutions by obtaining evaluations versus appraisals is difficult to
quantify because of limited available data and variation based on the
type and complexity of the transaction. Costs of appraisals and
evaluations may also be passed on to borrowers.
With respect to transactions that qualify for the rural residential
appraisal exemption, the requirement that institutions obtain
evaluations for such transactions could be viewed as an additional
burden. However, because the final rule increases the residential
threshold to $400,000 for all residential transactions, institutions,
including small entities, will not need to comply with the detailed
requirements of the rural residential appraisal exemption in order for
such transactions to be exempt from the agencies' appraisal
requirement. Complying with the evaluation requirement for transactions
below the residential appraisal threshold is likely to be less
burdensome than complying with the requirements of the rural
residential appraisal exemption. Overall, the Board does not believe
this requirement will have a significant economic impact on small
institutions.
The requirement that Title XI appraisals be subject to appropriate
review for USPAP compliance applies to all small entities regulated by
the Board that engage in real estate lending. However, the Board does
not believe this requirement would impose a significant burden or
economic impact on such institutions because the agencies' appraisal
requirements already require that Title XI appraisals be performed in
compliance with USPAP. Further, many financial institutions already
have review processes in place to ensure that appraisals comply with
USPAP.
The final rule does not contain any new recordkeeping, reporting,
or significant compliance requirements. Based on information available
to the Board, the final rule is not expected to impose any significant
cost or burden on small entities, and small entities and borrowers
engaging in residential real estate transactions could experience cost
reductions; however, the overall economic impact on small entities is
not expected to be significant. The Board certifies that the final rule
will not have a significant economic impact on a substantial number of
small entities supervised by the Board.
FDIC: The RFA generally requires that, in connection with a final
rulemaking, an agency prepare and make available a final regulatory
flexibility analysis describing the impact of the rule on small
entities.\87\ However, a regulatory flexibility analysis is not
required if the agency certifies that the rule will not have a
significant economic impact on a substantial number of small entities.
The SBA has defined ``small entities'' to include banking organizations
with total assets of less than or equal to $600 million.\88\ Generally,
the FDIC considers a significant effect to be a quantified effect in
excess of 5 percent of total annual salaries and benefits per
institution, or 2.5 percent of total non-interest expenses. The FDIC
believes that effects in excess of these thresholds typically represent
significant effects for FDIC-supervised institutions. For the reasons
described below and under section 605(b) of the RFA, the FDIC certifies
that this rule will not have a significant economic effect on a
substantial number of small entities.
---------------------------------------------------------------------------
\87\ 5 U.S.C. 601 et seq.
\88\ The SBA defines a small banking organization as having $600
million or less in assets, where an organization's ``assets are
determined by averaging the assets reported on its four quarterly
financial statements for the preceding year.'' See 13 CFR 121.201
(as amended by 84 FR 34261, effective August 19, 2019). In its
determination, the ``SBA counts the receipts, employees, or other
measure of size of the concern whose size is at issue and all of its
domestic and foreign affiliates.'' See 13 CFR 121.103. Following
these regulations, the FDIC uses a covered entity's affiliated and
acquired assets, averaged over the preceding four quarters, to
determine whether the covered entity is ``small'' for the purposes
of RFA.
---------------------------------------------------------------------------
The FDIC supervises 3,465 depository institutions,\89\ of which
2,705 are defined as small entities by the terms of the RFA.\90\ In
2017, 1,139 small, FDIC-supervised institutions reported originating
residential real estate loans. However, beginning in 2017, FDIC-
supervised institutions ceased reporting residential loan origination
data in compliance with HMDA if they originated less than 25 loans per
year. Therefore, in order to more accurately assess the number of
institutions that could be affected by this rule we counted the number
of existing institutions who reported any residential loan originations
in 2015, 2016, or 2017. By that measure, 1,430 (52.9 percent) are
estimated to be affected by this rule.\91\
---------------------------------------------------------------------------
\89\ FDIC-supervised institutions are set forth in 12 U.S.C.
1813(q)(2).
\90\ Call Report, March 31, 2019.
\91\ HMDA data, December 2015-2017.
---------------------------------------------------------------------------
The final rule is likely to reduce loan valuation-related costs for
small, covered institutions. By increasing the residential real estate
appraisal threshold, the rule is expected to increase the number of
residential real estate loans eligible for an evaluation, instead of an
appraisal. The FDIC estimates that, on average, the review process for
an appraisal would take approximately forty minutes, but only ten
minutes, on average, for an evaluation. Therefore, the FDIC estimates
that the rule would reduce loan valuation-related costs for small,
FDIC-supervised institutions by 30 minutes per transaction, on average.
According to 2017 HMDA data, 13.3 percent of residential real estate
loans originated by small, FDIC-supervised institutions and affiliated
institutions are subject to the Title XI appraisal requirements and
have loan amounts between $250,000 and $400,000.\92\ Additionally, of
the 1,430 small, FDIC-supervised institutions that reported residential
loan originations, a total of 163,148 residential real estate loans
[[Page 53595]]
were originated,\93\ and the average number of originations per year
was approximately 128. Assuming that 13.3 percent of originations by
small, FDIC-supervised institutions fall in the $250,000 to $400,000
range and are subject to the Title XI appraisal requirement,
approximately 21,699 originations per year, or an average of 15 per
small, FDIC-supervised institution, would have the option of an
evaluation rather than an appraisal as a result of this rule. Thus, by
using evaluations instead of appraisals a small, FDIC-supervised
institution may reduce its total annual residential real estate
transaction valuation-related labor hours by 7.5 hours.\94\ The FDIC
estimates this will result in a potential cost savings for small, FDIC-
supervised institutions of $519.15 per year, per institution.\95\ The
estimated reduction in costs would be smaller if lenders opt to not
utilize an evaluation and require an appraisal on a residential real
estate transaction greater than $250,000 but not more than $400,000.
These estimated savings would not exceed 5 percent of annualized salary
expense or 2.5 percent of annualized noninterest expense for any small,
FDIC-supervised institutions.\96\
---------------------------------------------------------------------------
\92\ HMDA data, December 2017.
\93\ Id.
\94\ 0.5 hours *15 originations = 7.5 hours.
\95\ 7.5 hours * $69.22 per hour = $519.15 The FDIC estimates
that the average hourly compensation for a loan officer is $69.22 an
hour. The hourly compensation estimate is based on published
compensation rates for Credit Counselors and Loan Officers ($44.30).
The estimate includes the May 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. These wage rates have been
adjusted for changes in the Consumer Price Index for all Urban
Consumers between May 2017 and December 2018 (3.59 percent) and
grossed up by 50.8 percent to account for non-monetary compensation
as reported by the December 2018 Employer Costs for Employee
Compensation Data.
\96\ Call Report, March 31 2019.
---------------------------------------------------------------------------
This rule is likely to reduce residential real estate transaction
valuation-related costs for the parties involved. By increasing the
residential real estate appraisal threshold, the rule is expected to
increase the number of residential real estate loans eligible for an
evaluation, instead of an appraisal. As discussed in the proposal, the
United States Department of Veterans Affairs' appraisal fee schedule
\97\ for a single-family residence generally ranges from $375 to $900,
depending on the location of the property. While the FDIC does not have
definitive data on the cost of evaluations, some of the comments from
financial institutions and their trade associations represented that
evaluations are less costly than appraisals. Making more residential
real estate transactions eligible for evaluations rather than
appraisals is likely to reduce transaction valuation-related costs.
However, the FDIC assumes that most, if not all, of these cost
reductions would be passed on to residential real estate buyers.
Therefore, this aspect of the rule is likely to have little or no
effect on small, FDIC-supervised entities.
---------------------------------------------------------------------------
\97\ See https://www.benefits.va.gov/HOMELOANS/appraiser_fee_schedule.asp.
---------------------------------------------------------------------------
The FDIC does not expect the rule to have any substantive effects
on the safety and soundness of small, FDIC-supervised institutions.
Analysis of HMDA data shows that the rule would newly exempt from
appraisal requirements an estimated 13.3 percent of transactions, and
23 percent of the dollar volume of transactions, among small, FDIC-
supervised institutions. Assuming that loans secured by residential
properties with values from $250,000 to $400,000 represent the same
percentage of the residential real estate loan portfolios of small,
FDIC-supervised institutions as they do of the dollar volume of new
originations, such loans do not represent more than 19.5 percent of
total assets for any small, FDIC-supervised institutions.\98\ The
aggregate value of such loans for all small, FDIC-supervised
institutions represents approximately four percent of assets, assuming
that 23 percent of each institution's portfolio of loans secured by
first liens on one- to four-family residential mortgages is made up of
loans with a value at origination of $250,000 to $400,000.\99\ While
exempted transactions would not require an appraisal, they would still
require an evaluation that is consistent with safe and sound banking
practices. As previously discussed in the Revisions to the Title XI
Appraisal Regulations section,\100\ supervisory experience indicates
that appraisals and evaluations are both credible tools to support real
estate lending decisions, so the FDIC does not expect that increasing
the threshold for appraisals will affect the safety and soundness of
small, FDIC-supervised institutions. Further, historical loss
information in the Call Reports reflects that the net charge-off rate
for residential transactions did not increase after the increase in the
appraisal threshold from $100,000 to $250,000 in June 1994, or during
and after the recession in 2001 through year-end 2007. During this
timeframe, the net charge-off rate for small, FDIC-supervised
institutions ranged from 1 basis point to 9 basis points. However, the
net charge-off rate for residential transactions increased
significantly from 2008-2013, which was during and immediately after
the recent recession, ranging from 3 basis points to 55 basis points.
As discussed earlier, the agencies attribute the increase in the net
charge-off rate for loans secured by single 1-to-4 family residential
real estate during the recent recession to weak underwriting standards
in the lead up to the crisis. Therefore, the FDIC believes the proposed
rule is unlikely to pose significant safety and soundness risks for
small, FDIC-supervised entities.
---------------------------------------------------------------------------
\98\ Call Report data, March 31, 2019.
\99\ Id.
\100\ See supra, Section II.
---------------------------------------------------------------------------
The rule is likely to pose relatively larger residential real
estate valuation-related transaction cost reductions for rural buyers
and small, FDIC-supervised institutions lending in rural areas;
however, these effects are difficult to accurately estimate. Home
prices in rural areas are generally lower than those in suburban and
urban areas. Therefore, residential real estate transactions in rural
areas are likely to utilize evaluations more than appraisals, under the
proposed rule. Additionally, there may be less delay in finding
qualified personnel to perform an evaluation than to perform a Title XI
appraisal, particularly in rural areas.
Finally, by potentially reducing valuation-related costs associated
with residential real estate transactions for properties greater than
$250,000 but not more than $400,000, the proposed rule could result in
a marginal increase in lending activity of small, FDIC-supervised
institutions for properties of this type. However, the FDIC believes
that this effect is likely to be negligible given that the potential
cost savings of using an evaluation, rather than an appraisal,
represents between 0.12-0.29 percent of the median home price.\101\
---------------------------------------------------------------------------
\101\ Median home price in the United States as of January 2019
is estimated at $307,700 by the Federal Reserve Bank of St. Louis.
See https://fred.stlouisfed.org/series/MSPUS. $375/$307,700 =
.001218, $900/$307,700 = .002925.
---------------------------------------------------------------------------
For the reasons described above and under section 605(b) of the
RFA, the FDIC certifies that the proposed rule will not have a
significant economic impact on a substantial number of small entities.
B. Paperwork Reduction Act
In accordance with the requirements of the Paperwork Reduction Act
of 1995 \102\ (PRA), the agencies may not conduct or sponsor, and a
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
[[Page 53596]]
agencies have reviewed this final rule and determined that it would not
introduce any new or revise any collection of information pursuant to
the PRA. In addition, the agencies received no comments on the PRA
analysis in the proposal. Therefore, no submissions will be made to OMB
for review.
---------------------------------------------------------------------------
\102\ 44 U.S.C. 3501-3521.
---------------------------------------------------------------------------
C. Riegle Community Development and Regulatory Improvement Act of 1994
Pursuant to section 302(a) of the Riegle Community Development and
Regulatory Improvement Act (RCDRIA),\103\ in determining the effective
date and administrative compliance requirements for new regulations
that impose additional reporting, disclosure, or other requirements on
IDIs, each Federal banking agency must consider, consistent with
principles of safety and soundness and the public interest, any
administrative burdens that such regulations would place on depository
institutions, including small depository institutions, and customers of
depository institutions, as well as the benefits of such regulations.
In addition, section 302(b) of RCDRIA requires new regulations and
amendments to regulations that impose additional reporting,
disclosures, or other new requirements on IDIs generally to 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.\104\
---------------------------------------------------------------------------
\103\ 12 U.S.C. 4802(a).
\104\ Id. at 4802(b).
---------------------------------------------------------------------------
The agencies recognize that the requirement to obtain an evaluation
for transactions exempted by the rural residential appraisal exemption
\105\ could be considered by IDIs to be a new requirement, despite the
longstanding requirements for IDIs to obtain evaluations for
transactions exempt from agencies' appraisal requirement under a
threshold exemption. The agencies also recognize that the requirement
for an appraisal review could be considered by IDIs to be a new
requirement, despite the longstanding practice of many financial
institutions to conduct appraisal reviews. Accordingly, with respect to
the requirement that financial institutions obtain evaluations for
transactions exempted by the rural residential appraisal exemption and
the requirement for appraisal review, the effective date will be
January 1, 2020, which is the first day of a calendar quarter which
begins on or after the date on which the regulations are published in
final form, consistent with RCDRIA.
---------------------------------------------------------------------------
\105\ See supra note 25.
---------------------------------------------------------------------------
Otherwise, the final rule reduces burden and does not impose any
reporting, disclosure, or other new requirements on IDIs. For
transactions exempted from the agencies' appraisal requirement by the
final rule (i.e., residential real estate transactions between $250,000
and $400,000), 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 RCDRIA. First, the process of obtaining an
evaluation is not new since IDIs already obtain evaluations for
transactions at or below the current $250,000-threshold. Second, for
residential real estate transactions between $250,000 and $400,000,
IDIs could continue to obtain appraisals instead of evaluations.
Because the final rule does not impose new requirements on IDIs, the
agencies are not required by RCDRIA to consider the administrative
burdens and benefits of the rule or delay its effective date (other
than the evaluation provision for transactions exempted by the rural
residential appraisal exemption or and the appraisal review provision,
as discussed above).
Because delaying the effective date of the final rule's threshold
increase is not required and would serve no purpose, the threshold
increase and all other provisions of the final rule, other than the
evaluation requirement for the rural residential appraisal exemption
and the requirement that appraisals be subject to appropriate review
for compliance with USPAP, are effective on the first day after
publication of the final rule in the Federal Register.
Additionally, although not required by RCDRIA, the agencies did
consider the administrative costs and benefits of the residential
appraisal threshold increase while developing the proposal. In
designing the scope of the threshold increase, the agencies chose to
align the definition of residential 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 final 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. Similarly, in requiring evaluations for exempted
rural transactions and adding the appraisal review requirement, the
agencies considered the administrative burden of these requirements on
IDIs consistent with principles of safety and soundness and the public
interest.
D. Solicitation of Comments on Use of Plain Language
Section 722 of the Gramm-Leach-Bliley Act \106\ requires the
Federal banking agencies to use plain language in all proposed and
final rules published after January 1, 2000. The agencies have sought
to present the final rule in a simple and straightforward manner and
did not receive any comments on the use of plain language.
---------------------------------------------------------------------------
\106\ Public Law 106-102, section 722, 113 Stat. 1338, 1471
(1999).
---------------------------------------------------------------------------
E. 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 (UMRA) (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,
currently $154 million).\107\ As discussed in the OCC's Regulatory
Flexibility Act section, the costs associated with the final rule, if
any, would be de minimis. Therefore, the OCC concludes that the final
rule will not result in an expenditure of $154 million or more annually
by state, local, and tribal governments, or by the private sector.
---------------------------------------------------------------------------
\107\ The OCC estimates the UMRA inflation adjustment using the
change in the annual U.S. GDP Implicit Price Deflator between 1995
and 2018, which is the most recent available annual data. The
deflator was 71.868 in 1995, and 110.382 in 2018, resulting in an
inflation adjustment factor of 1.54 (110.382/71.868 = 1.54, and $100
million x 1.54 = $154 million).
---------------------------------------------------------------------------
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
[[Page 53597]]
12 CFR Part 323
Banks, banking, Mortgages, Reporting and recordkeeping
requirements, Savings associations.
DEPARTMENT OF THE TREASURY
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:
0
a. Revising paragraph (f);
0
b. Redesignating paragraphs (k) through (n) as (l) through (o),
respectively; and
0
c. Adding a new paragraph (k).
The revision and addition read as follows:
Sec. 34.42 Definitions.
* * * * *
(f) Complex appraisal for a residential real estate transaction
means one in which the property to be appraised, the form of ownership,
or market conditions are atypical.
* * * * *
(k) Residential real estate transaction means a real estate-related
financial transaction that is secured by a single 1-to-4 family
residential property.
* * * * *
0
3. Section 34.43 is amended by:
0
a. Revising paragraph (a)(1);
0
b. Removing the word ``or'' at the end of paragraph (a)(12);
0
c. Removing the period at the end of paragraph (a)(13) and adding ``;
or'' in its place;
0
d. Adding paragraph (a)(14); and
0
e. Revising paragraph (d)(3).
The revisions and addition read as follows:
Sec. 34.43 Appraisals required; transactions requiring a State
certified or licensed appraiser.
(a) * * *
(1) The transaction is a residential real estate transaction that
has a transaction value of $400,000 or less;
* * * * *
(14) The transaction is exempted from the appraisal requirement
pursuant to the rural residential exemption under 12 U.S.C. 3356.
* * * * *
(d) * * *
(3) Complex appraisals for residential real estate transactions of
more than $400,000. All complex appraisals for residential real estate
transactions rendered in connection with federally related transactions
shall require a State certified appraiser if the transaction value is
more than $400,000. A regulated institution may presume that appraisals
for residential real estate transactions are not complex, unless the
institution has readily available information that a given appraisal
will be complex. The regulated institution shall be responsible for
making the final determination of whether the appraisal is complex. If
during the course of the appraisal a licensed appraiser identifies
factors that would result in the property, form of ownership, or market
conditions being considered atypical, then either:
(i) The regulated institution may ask the licensed appraiser to
complete the appraisal and have a certified appraiser approve and co-
sign the appraisal; or
(ii) The institution may engage a certified appraiser to complete
the appraisal.
* * * * *
0
4. Effective January 1, 2020, Sec. 34.43 is further amended by
revising paragraph (b) to read as follows:
Sec. 34.43 Appraisals required; transactions requiring a State
certified or licensed appraiser.
* * * * *
(b) Evaluations required. For a transaction that does not require
the services of a State certified or licensed appraiser under
paragraphs (a)(1), (5), (7), (13), or (14) of this section, the
institution shall obtain an appropriate evaluation of real property
collateral that is consistent with safe and sound banking practices.
* * * * *
0
5. Effective January 1, 2020. Sec. 34.44 is amended by:
0
a. Republishing the introductory text;
0
b. Redesignating paragraphs (c), (d), and (e) as (d), (e), and (f),
respectively; and
0
c. Adding a new paragraph (c).
The addition reads as follows:
Sec. 34.44 Minimum appraisal standards.
For federally related transactions, all appraisals shall, at a
minimum:
* * * * *
(c) Be subject to appropriate review for compliance with the
Uniform Standards of Professional Appraisal Practice;
* * * * *
Federal Reserve Board
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
6. 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 et seq.,
3906, 3907, and 3909; 15 U.S.C. 1681s, 1681w, 6801 and 6805.
0
7. Section 225.62 is amended by:
0
a. Revising paragraph (f);
0
b. Redesignating paragraphs (k) through (n) as (l) through (o),
respectively; and
0
c. Adding a new paragraph (k).
The revisions and addition read as follows:
Sec. 225.62 Definitions.
* * * * *
(f) Complex appraisal for a residential real estate transaction
means one in which the property to be appraised, the form of ownership,
or market conditions are atypical.
* * * * *
(k) Residential real estate transaction means a real estate-related
financial transaction that is secured by a single 1-to-4 family
residential property.
* * * * *
0
8. Section 225.63 is amended by:
0
a. Revising paragraph (a)(1);
0
b. Removing the word ``or'' at the end of paragraph (a)(13);
0
c. Removing the period at the end of paragraph (a)(14) and adding ``;
or'' in its place;
0
d. Adding paragraph (a)(15); and
0
e. Revising paragraph (d)(3).
The addition and revisions read as follows:
Sec. 225.63 Appraisals required; transactions requiring a State
certified or licensed appraiser.
(a) * * *
(1) The transaction is a residential real estate transaction that
has a transaction value of $400,000 or less;
* * * * *
(15) The transaction is exempted from the appraisal requirement
pursuant to the rural residential exemption under 12 U.S.C. 3356.
* * * * *
(d) * * *
(3) Complex appraisals for residential real estate transactions of
more than $400,000. All complex appraisals for
[[Page 53598]]
residential real estate transactions rendered in connection with
federally related transactions shall require a State certified
appraiser if the transaction value is more than $400,000. A regulated
institution may presume that appraisals for residential real estate
transactions are not complex, unless the institution has readily
available information that a given appraisal will be complex. The
regulated institution shall be responsible for making the final
determination of whether the appraisal is complex. If during the course
of the appraisal a licensed appraiser identifies factors that would
result in the property, form of ownership, or market conditions being
considered atypical, then either:
(i) The regulated institution may ask the licensed appraiser to
complete the appraisal and have a certified appraiser approve and co-
sign the appraisal; or
(ii) The institution may engage a certified appraiser to complete
the appraisal.
* * * * *
0
9. Effective January 1, 2010, Sec. 225.63 is further amended by
revising paragraph (b) to read as follows:
Sec. 225.63 Appraisals required; transactions requiring a State
certified or licensed appraiser.
* * * * *
(b) Evaluations required. For a transaction that does not require
the services of a State certified or licensed appraiser under
paragraphs (a)(1), (5), (7), (14), or (15) of this section, the
institution shall obtain an appropriate evaluation of real property
collateral that is consistent with safe and sound banking practices.
* * * * *
0
10. Effective January 1, 2020, Sec. 225.64 is amended by:
0
a. Republishing the introductory text;
0
b. Redesignating paragraphs (c), (d), and (e) as (d), (e), and (f),
respectively; and
0
c. Adding a new paragraph (c).
The addition reads as follows:
Sec. 225.64 Minimum appraisal standards.
For federally related transactions, all appraisals shall, at a
minimum:
* * * * *
(c) Be subject to appropriate review for compliance with the
Uniform Standards of Professional Appraisal Practice;
* * * * *
Federal Deposit Insurance Corporation
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:
0
11. The authority citation for part 323 continues to read as follows:
Authority: 12 U.S.C. 1818, 1819(a) (``Seventh'' and ``Tenth''),
1831p-1 and 3331 et seq.
0
12. Section 323.2 is amended by:
0
a. Revising paragraph (f);
0
b. Redesignating paragraphs (k) through (n) as (l) through (o),
respectively; and
0
c. Adding a new paragraph (k).
The revision and addition read as follows:
Sec. 323.2 Definitions.
* * * * *
(f) Complex appraisal for a residential real estate transaction
means one in which the property to be appraised, the form of ownership,
or market conditions are atypical.
* * * * *
(k) Residential real estate transaction means a real estate-related
financial transaction that is secured by a single 1-to-4 family
residential property.
* * * * *
0
13. Section 323.3 is amended by:
0
a. Revising paragraph (a)(1);
0
b. Removing the word ``or'' at the end of paragraph (a)(12);
0
c. Removing the period at the end of paragraph (a)(13) and adding ``;
or'' in its place; and
0
d. Adding paragraph (a)(14); and
0
e. Revising paragraph (d)(3).
The revisions and addition read as follows:
Sec. 323.3 Appraisals required; transactions requiring a State
certified or licensed appraiser.
(a) * * *
(1) The transaction is a residential real estate transaction that
has a transaction value of $400,000 or less;
* * * * *
(14) The transaction is exempted from the appraisal requirement
pursuant to the rural residential exemption under 12 U.S.C. 3356.
* * * * *
(d) * * *
(3) Complex appraisals for residential real estate transactions of
more than $400,000. All complex appraisals for residential real estate
transactions rendered in connection with federally related transactions
shall require a State certified appraiser if the transaction value is
more than $400,000. A regulated institution may presume that appraisals
for residential real estate transactions are not complex, unless the
institution has readily available information that a given appraisal
will be complex. The regulated institution shall be responsible for
making the final determination of whether the appraisal is complex. If
during the course of the appraisal a licensed appraiser identifies
factors that would result in the property, form of ownership, or market
conditions being considered atypical, then either:
(i) The regulated institution may ask the licensed appraiser to
complete the appraisal and have a certified appraiser approve and co-
sign the appraisal; or
(ii) The institution may engage a certified appraiser to complete
the appraisal.
* * * * *
0
14. Effective January 1, 2020. Sec. 323.3 is further amended by
revising paragraph (b) to read as follows:
Sec. 323.3 Appraisals required; transactions requiring a State
certified or licensed appraiser.
* * * * *
(b) Evaluations required. For a transaction that does not require
the services of a State certified or licensed appraiser under
paragraphs (a)(1), (5), (7), (13), or (14) of this section, the
institution shall obtain an appropriate evaluation of real property
collateral that is consistent with safe and sound banking practices.
* * * * *
0
15. Effective January 1, 2020, Sec. 323.4 is amended by
0
a. Republishing the introductory text;
0
b. Redesignating paragraphs (c), (d), and (e) as (d), (e), and (f),
respectively; and
0
c. Adding a new paragraph (c).
The addition reads as follows:
Sec. 323.4 Minimum appraisal standards.
For federally related transactions, all appraisals shall, at a
minimum:
* * * * *
(c) Be subject to appropriate review for compliance with the
Uniform Standards of Professional Appraisal Practice;
* * * * *
Dated: August 8, 2019.
Joseph M. Otting,
Comptroller of the Currency.
By order of the Board of Governors of the Federal Reserve
System, September 23, 2019.
Ann E. Misback,
Secretary of the Board.
Federal Deposit Insurance Corporation.
By order of the Board of Directors.
Dated at Washington, DC, on August 20, 2019.
Valerie J. Best,
Assistant Executive Secretary.
[FR Doc. 2019-21376 Filed 10-7-19; 8:45 am]
BILLING CODE 4810-33-P 6210-01-P; 6714-01-P