Real Estate Appraisals, 35478-35493 [2017-15748]
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and interaction of the public during the
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rulemaking process. Interactions with
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Issued in Washington, DC, on July 14,
2017.
Kathleen B. Hogan,
Deputy Assistant Secretary for Energy
Efficiency, Energy Efficiency and Renewable
Energy.
[FR Doc. 2017–15848 Filed 7–28–17; 8:45 am]
BILLING CODE 6450–01–P
DEPARTMENT OF THE TREASURY
Office of the Comptroller of the
Currency
12 CFR Part 34
[Docket No. OCC–2017–0011]
RIN 1557–AE18
FEDERAL RESERVE SYSTEM
12 CFR Part 225
[Docket No. R–1568; RIN 7100 AE–81]
FEDERAL DEPOSIT INSURANCE
CORPORATION
12 CFR Part 323
RIN 3064 AE–56
Real Estate Appraisals
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: Notice of proposed rulemaking
and request for comment.
AGENCY:
The OCC, Board, and FDIC
(collectively, the agencies) are inviting
comment on a proposed rule to amend
the agencies’ regulations requiring
appraisals of real estate for certain
transactions. The proposal would
increase the threshold level at or below
which appraisals would not be required
for commercial real estate transactions
from $250,000 to $400,000. This
proposed change to the appraisal
threshold reflects comments the
SUMMARY:
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agencies received through the regulatory
review process required by the
Economic Growth and Regulatory
Paperwork Reduction Act (EGRPRA)
and completed in early 2017. For
commercial real estate transactions with
a value at or below the proposed
threshold, the amended rule would
require institutions to obtain an
evaluation of the real property collateral
that is consistent with safe and sound
banking practices if the institution does
not obtain an appraisal by a state
certified or licensed appraiser.
DATES: Comments must be received by
September 29, 2017.
ADDRESSES: Interested parties are
encouraged to submit written comments
jointly to all of the agencies.
Commenters should use the title ‘‘Real
Estate Appraisals’’ to facilitate the
organization and distribution of
comments among the agencies.
Interested parties are invited to submit
written comments to:
Office of the Comptroller of the
Currency: Because paper mail in the
Washington, DC area and at the OCC is
subject to delay, commenters are
encouraged to submit comments by the
Federal eRulemaking Portal or email, if
possible. Please use the title ‘‘Real
Estate Appraisals’’ to facilitate the
organization and distribution of the
comments. You may submit comments
by any of the following methods:
• Federal eRulemaking Portal—
Regulations.gov: Go to
www.regulations.gov. Enter ‘‘Docket ID
OCC–2017–0011’’ in the Search Box and
click ‘‘Search.’’ Click on ‘‘Comment
Now’’ to submit public comments.
• Click on the ‘‘Help’’ tab on the
Regulations.gov home page to get
information on using Regulations.gov,
including instructions for submitting
public comments.
• Email: regs.comments@
occ.treas.gov.
• Mail: Legislative and Regulatory
Activities Division, Office of the
Comptroller of the Currency, 400 7th
Street SW., Suite 3E–218, Mail Stop
9W–11, Washington, DC 20219.
• Fax: (571) 465–4326.
• Hand Delivery/Courier: 400 7th
Street SW., Suite 3E–218, Mail Stop
9W–11, Washington, DC 20219.
Instructions: You must include
‘‘OCC’’ as the agency name and ‘‘Docket
ID OCC–2017–0011’’ in your comment.
In general, OCC will enter all comments
received into the docket and publish
them on the Regulations.gov Web site
without change, including any business
or personal information that you
provide such as name and address
information, email addresses, or phone
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numbers. Comments received, including
attachments and other supporting
materials, are part of the public record
and subject to public disclosure. Do not
enclose any information in your
comment or supporting materials that
you consider confidential or
inappropriate for public disclosure.
You may review comments and other
related materials that pertain to this
proposed rule by any of the following
methods:
• Viewing Comments Electronically:
Go to www.regulations.gov. Enter
‘‘Docket ID OCC–2017–0011’’ in the
Search box and click ‘‘Search.’’ Click on
‘‘Open Docket Folder’’ on the right side
of the screen and then ‘‘Comments.’’
Comments can be filtered by clicking on
‘‘View All’’ and then using the filtering
tools on the left side of the screen.
• Click on the ‘‘Help’’ tab on the
Regulations.gov home page to get
information on using Regulations.gov.
Supporting materials may be viewed by
clicking on ‘‘Open Docket Folder’’ and
then clicking on ‘‘Supporting
Documents.’’ The docket may be viewed
after the close of the comment period in
the same manner as during the comment
period.
• Viewing Comments Personally: You
may personally inspect and photocopy
comments at the OCC, 400 7th Street
SW., Washington, DC. For security
reasons, the OCC requires that visitors
make an appointment to inspect
comments. You may do so by calling
(202) 649–6700 or, for persons who are
deaf or hard of hearing, TTY, (202) 649–
5597. Upon arrival, visitors will be
required to present valid governmentissued photo identification and to
submit to security screening in order to
inspect and photocopy comments.
Board of Governors of the Federal
Reserve System: You may submit
comments, identified by [Docket No. R–
1568 and RIN 7100 AE–81], by any of
the following methods:
• Agency Web site: https://
www.federalreserve.gov. Follow the
instructions for submitting comments at
https://www.federalreserve.gov/
generalinfo/foia/ProposedRegs.cfm.
• Federal eRulemaking Portal: https://
www.regulations.gov. Follow the
instructions for submitting comments.
• Email: regs.comments@
federalreserve.gov. Include the docket
number and RIN number in the subject
line of the message.
• Fax: (202) 452–3819 or (202) 452–
3102.
• Mail: Address to Ann E. Misback,
Secretary, Board of Governors of the
Federal Reserve System, 20th Street and
Constitution Avenue NW., Washington,
DC 20551.
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All public comments will be made
available on the Board’s Web site at
https://www.federalreserve.gov/
generalinfo/foia/ProposedRegs.cfm as
submitted, unless modified for technical
reasons. Accordingly, comments will
not be edited to remove any identifying
or contact information. Public
comments may also be viewed
electronically or in paper form in Room
3515, 1801 K Street NW. (between 18th
and 19th Streets NW.), Washington, DC
20006 between 9:00 a.m. and 5:00 p.m.
on weekdays.
Federal Deposit Insurance
Corporation: You may submit
comments, identified by RIN 3064–
AE56, by any of the following methods:
• Federal eRulemaking Portal: https://
www.regulations.gov. Follow the
instructions for submitting comments.
• Agency Web site: https://
www.FDIC.gov/regulations/laws/
federal/propose.html.
• Mail: Robert E. Feldman, Executive
Secretary, Attention: Comments/Legal
ESS, Federal Deposit Insurance
Corporation, 550 17th Street NW.,
Washington, DC 20429.
• Hand Delivered/Courier: The guard
station at the rear of the 550 17th Street
Building (located on F Street) on
business days between 7:00 a.m. and
5:00 p.m.
• Email: Comments@FDIC.gov.
Comments submitted must include
‘‘FDIC’’ and ‘‘Real Estate Appraisals.’’
Comments received will be posted
without change to https://www.fdic.gov/
regulations/laws/federal/propose.html
including any personal information
provided.
FOR FURTHER INFORMATION CONTACT:
OCC: G. Kevin Lawton, Appraiser
(Real Estate Specialist), (202) 649–7152,
Mitchell E. Plave, Special Counsel,
Legislative and Regulatory Activities
Division, (202) 649–5490, for persons
who are deaf or hard of hearing, TTY,
(202) 649–5597, or Christopher
Manthey, Special Counsel, or Joanne
Phillips, Attorney, Bank Activities and
Structure Division, (202) 649–5500,
Office of the Comptroller of the
Currency, 400 7th Street SW.,
Washington, DC 20219.
Board: Anna Lee Hewko, Associate
Director, (202) 530–6260, or Carmen
Holly, Senior Supervisory Financial
Analyst, (202) 973–6122, Division of
Supervision and Regulation; or Gillian
Burgess, Senior Counsel, (202) 736–
5564, Matthew Suntag, Senior Attorney,
(202) 452–3694, or Kirin Walsh,
Attorney, (202) 452–3058, Legal
Division, Board of Governors of the
Federal Reserve System, 20th and C
Streets NW., Washington, DC 20551.
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FDIC: Beverlea S. Gardner, Senior
Examination Specialist, Division of Risk
Management and Supervision, at (202)
898–3640, Mark Mellon, Counsel, Legal
Division, at (202) 898–3884, Kimberly
Stock, Counsel, Legal Division, at (202)
898–3815, Benjamin K. Gibbs, Counsel,
at (202) 898–6726, or Lauren Whitaker,
Senior Attorney, at (202) 898–3872,
Federal Deposit Insurance Corporation,
550 17th Street NW., Washington, DC
20429.
SUPPLEMENTARY INFORMATION:
I. Introduction
A. Background
Title XI of the Financial Institutions
Reform, Recovery, and Enforcement Act
of 1989 (Title XI) 1 directs each federal
financial institutions regulatory agency 2
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 3 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.4
Title XI directs the agencies to
prescribe appropriate standards for Title
XI appraisals under the agencies’
respective jurisdictions,5 including, at a
minimum, that Title XI appraisals be:
(1) Performed in accordance with the
Uniform Standards of Professional
Appraisal Practice (USPAP); 6 (2)
1 12
U.S.C. 3331 et seq.
financial institutions regulatory
agency’’ means the Board, the FDIC, the OCC, the
National Credit Union Association (NCUA), and,
formerly, the Office of Thrift Supervision. 12 U.S.C.
3350(6).
3 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).
4 12 U.S.C. 3331.
5 12 U.S.C. 3339. The agencies’ Title XI appraisal
regulations apply to transactions entered into by the
agencies or by institutions regulated by the agencies
that are depository institutions or bank holding
companies or subsidiaries of depository institutions
or bank holding companies. OCC: 12 CFR part 34,
subpart C; Board: 12 CFR 225.61(b); 12 CFR part
208, subpart E; FDIC: 12 CFR part 323.
6 USPAP is written and interpreted by the
Appraisal Standards Board of the Appraisal
Foundation. Adopted by Congress in 1989, USPAP
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2 ‘‘Federal
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written appraisals, as defined by the
statute; and (3) subject to appropriate
review for compliance with USPAP. All
federally related transactions must have
Title XI appraisals.
Title XI defines a ‘‘federally related
transaction’’ as a real estate-related
financial transaction that is regulated or
engaged in by a federal financial
institutions regulatory agency and
requires the services of an appraiser.7 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.8
The agencies have authority to
determine those real estate-related
financial transactions that do not
require the services of a certified or
licensed appraiser and are therefore
exempt from the appraisal requirements
of Title XI. These real estate-related
financial transactions are not federally
related transactions under the statutory
or regulatory definitions because they
are not required to have Title XI
appraisals.9
The agencies have exercised this
authority by exempting several
categories of real estate-related financial
transactions from the appraisal
requirements.10 The agencies have
determined that these categories of
transactions do not require appraisals by
state certified or licensed appraisers in
order to protect federal financial and
public policy interests or to satisfy
principles of safe and sound banking.
In 1992, Congress amended Title XI,
expressly authorizing the agencies to
establish a threshold level at or below
which an appraisal by a state certified
or licensed appraiser is not required in
connection with federally related
transactions if the agencies determine in
writing that the threshold does not
represent a threat to the safety and
contains generally recognized ethical and
performance standards for the appraisal profession
in the United States, including real estate, personal
property, and business appraisals. See https://
www.appraisalfoundation.org/imis/TAF/Standards/
Appraisal_Standards/Uniform_Standards_of_
Professional_Appraisal_Practice/TAF/
USPAP.aspx?hkey=a6420a67-dbfa-41b3-9878fac35923d2af.
7 12 U.S.C. 3350(4) (defining ‘‘federally related
transaction’’).
8 12 U.S.C. 3350(5).
9 See 59 FR 29482 (June 7, 1994).
10 See OCC: 12 CFR 34.43(a); Board: 12 CFR
225.63(a); FDIC: 12 CFR 323.3(a).
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soundness of financial institutions.11 In
the Dodd-Frank Wall Street Reform and
Consumer Protection Act (the DoddFrank Act),12 Congress amended the
threshold provision to require
concurrence ‘‘from the Bureau of
Consumer Financial Protection that
such threshold level provides
reasonable protection for consumers
who purchase 1–4 unit single-family
residences.’’ 13 As noted above,
transactions at or below the threshold
level are exempt from the Title XI
appraisal requirements and thus are not
federally related transactions.
Under the current thresholds, which
were established by rulemaking in
1994,14 all real estate-related financial
transactions with a transaction value 15
of $250,000 or less, as well as certain
real estate-secured business loans
(qualifying business loans) with a
transaction value of $1 million or less,
do not require appraisals.16 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.17
For real estate-related financial
transactions that are exempt from the
appraisal requirement because they are
within the applicable thresholds or
qualify for the exemption for certain
existing extensions of credit,18 the
11 Housing and Community Development Act of
1992, Public Law 102–550, sec. 954, 106 Stat. 3894
(amending 12 U.S.C. 3341).
12 Public Law 111–203, 124 Stat.1376.
13 Dodd-Frank Act, sec. 1473, 124 Stat. 2190
(amending 12 U.S.C. 3341(b)).
14 See 59 FR 29482 (June 7, 1994). The NCUA
promulgated a similar rule with similar thresholds
in 1995. 60 FR 51889 (October 4, 1995).
15 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 such loan or the market
value of each such real property, respectively. See
OCC: 12 CFR 34.42(m); Board: 12 CFR 225.62(m);
FDIC: CFR 323.2(m).
16 See OCC: 12 CFR 34.43(a)(1) and (5); Board: 12
CFR 225.63(a)(1) and (5); FDIC: 12 CFR 323.3(a)(1)
and (5).
17 OCC: 12 CFR 34.43(a)(5); Board: 12 CFR
225.63(a)(5); FDIC: 12 CFR 323.3(a)(5).
18 Transactions that involve an existing extension
of credit at the lending institution are exempt from
the Title XI appraisal requirements, but are required
to have evaluations, provided that there has been
no obvious and material change in market
conditions or physical aspects of the property that
threatens the adequacy of the institution’s real
estate collateral protection after the transaction,
even with the advancement of new monies; or there
is no advancement of new monies, other than funds
necessary to cover reasonable closing costs. See
OCC: 12 CFR 34.43(a)(7) and (b); Board: 12 CFR
225.63(a)(7) and (b); FDIC: 12 CFR 323.3(a)(7) and
(b).
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appraisal regulations require financial
institutions to obtain an evaluation of
the real property collateral that is
consistent with safe and sound banking
practices.19 An evaluation should
contain sufficient information and
analysis to support the financial
institution’s decision to engage in the
transaction. However, evaluations need
not be performed in accordance with
USPAP or by certified or licensed
appraisers. The agencies have provided
supervisory guidance for conducting
evaluations in a safe and sound manner
in the Interagency Appraisal and
Evaluation Guidelines (Guidelines).20
B. The EGRPRA Process
sradovich on DSKBCFCHB2PROD with PROPOSALS
In early 2017, the agencies completed
a review of their regulations pursuant to
EGRPRA, which requires that, not less
than once every 10 years, the Federal
Financial Institutions Examination
Council (FFIEC), Board, OCC, and FDIC
conduct a review of their regulations to
identify outdated or otherwise
unnecessary regulatory requirements
imposed on insured depository
institutions (IDIs).21
As part of the EGRPRA review, the
agencies received numerous comments
from bankers, banking trade
associations, associations of appraisers,
and other commenters related to the
Title XI appraisal regulations. These
comments included recommendations
to increase the thresholds at or below
which real estate-related financial
transactions are exempt from the Title
XI appraisal requirements. Some
commenters noted that the current
thresholds have not been adjusted since
they were established in 1994, even
19 See OCC: 12 CFR 34.43(b); Board: 12 CFR
225.63(b); FDIC: 12 CFR 323.3(b).
20 75 FR 77450 (Dec. 10, 2010). See also
Interagency Advisory on the Use of Evaluations in
Real Estate-Related Financial Transactions, OCC
Bulletin 2016–8 (March 4, 2016); Board SR Letter
16–5 (March 4, 2016); Supervisory Expectations for
Evaluations, FDIC FIL–16–2016 (March 4, 2016).
21 Public Law 104–208, Div. A, Title II, sec. 2222,
110 Stat. 3009–414, (1996) (codified at 12 U.S.C.
3311). The FFIEC is an interagency body comprised
of the Board, OCC, FDIC, NCUA, Bureau of
Consumer Financial Protection (CFPB) and State
Liaison Committee. Of these, only the Board, OCC
and FDIC are statutorily required to undertake the
EGRPRA review. The FFIEC does not issue
regulations that impose burden on financial
institutions and therefore its regulations were not
included in the EGRPRA review. The NCUA is not
required to participate in the EGRPRA review, but
elected to review its regulations pursuant to the
goals of EGRPRA, as it did during the agencies’ first
EGRPRA review 10 years ago. Accordingly, the
NCUA participated in the recent EGRPRA review
process with the Board, OCC and FDIC. The results
of the NCUA’s review are included in Part II of the
EGRPRA Report, described below. The CFPB is
required to review its significant rules and publish
a report of its review no later than five years after
the rules takes effect. See 12 U.S.C. 5512(d).
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though property values have increased,
and that the time and cost associated
with the appraisal process impose an
unnecessary burden in the completion
of smaller-dollar amount real estaterelated transactions. Some commenters
also argued that the time and financial
costs attributed to meeting the appraisal
requirements at the current threshold
levels particularly affect banks in rural
markets. These commenters contended
that it is often difficult to find state
certified and licensed appraisers to
complete assignments for properties in
rural areas.22
In March 2017, the agencies
submitted a joint EGRPRA report to
Congress (EGRPRA Report) that
identified potential initiatives to reduce
regulatory burden.23 In the EGRPRA
Report, the agencies addressed
comments received concerning the
appraisal thresholds and stated that the
agencies would propose an increase to
the threshold for commercial real estate
transactions from $250,000 to
$400,000.24 Section II of this
SUPPLEMENTARY INFORMATION invites
comments on this proposed increase.
The agencies also stated their intention
to gather more information about the
appropriateness of increasing the $1
million threshold for qualifying
business loans, which is being done
through a request for comment in
Section III of the SUPPLEMENTARY
INFORMATION.
In the EGRPRA Report, the agencies
also addressed whether it would be
appropriate to increase the current
$250,000 threshold for transactions
secured by residential real estate. The
agencies determined that it would not
be appropriate to increase the threshold
for this category of transactions at this
time based on three considerations.
First, the agencies observed that any
increase in the threshold for residential
transactions would have a limited
impact on burden, as appraisals would
still be required for the vast majority of
these transactions pursuant to rules of
other federal government agencies and
the government-sponsored enterprises
22 Earlier this year, the agencies and the NCUA
issued an advisory on appraiser availability that
points to alternatives that may help in areas facing
a shortage of appraisers. Interagency Advisory on
the Availability of Appraisers. See OCC Bulletin
2017–19 (May 31, 2017); Board SR Letter 17–4 (May
31, 2017); FDIC FIL–19–2017 (May 31, 2017).
23 FFIEC, Joint Report to Congress: Economic
Growth and Regulatory Paperwork Reduction Act,
(March 2017), (EGRPRA Report), available at
https://www.ffiec.gov/pdf/2017_FFIEC_EGRPRA_
Joint-Report_to_Congress.pdf.
24 The $250,000 threshold in the current Title XI
appraisal regulations applies, by its terms, to all real
estate-related financial transactions, whether or not
the borrower is a consumer.
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(GSEs).25 As reflected in the 2015 Home
Mortgage Disclosure Act (HMDA)
data,26 at least 90 percent of residential
mortgage loan originations had loan
amounts at or below the threshold, were
eligible for sale to GSEs, or were insured
by the Federal Housing Administration
or the United States Department of
Veterans Affairs. Those transactions are
not subject to the Title XI appraisal
regulations, but the majority of those
transactions are subject to the appraisal
requirements of other government
agencies or the GSEs. Therefore, raising
the appraisal threshold for residential
transactions in the Title XI appraisal
regulations would have limited impact
on burden.
Second, appraisals can provide
protection to consumers by helping to
assure the residential purchaser that the
value of the property supports the
purchase price and the mortgage
amount.27 The consumer protection role
of appraisals is reflected in amendments
made to Title XI and the Truth in
Lending Act (TILA) 28 through the
Dodd-Frank Act governing the scope of
transactions requiring the services of a
certified or licensed appraiser. These
include the addition of the CFPB to the
group of agencies assigned a role in the
appraisal threshold-setting process for
Title XI,29 and a new TILA provision
requiring appraisals for loans involving
‘‘higher-risk mortgages.’’ 30
25 Other Federal Government agencies involved
in the residential mortgage market include the U.S.
Department of Housing and Urban Development
(HUD), the U.S. Department of Veterans Affairs, and
the Rural Housing Service of the U.S. Department
of Agriculture. These agencies, along with the GSEs
(which are regulated by the Federal Housing
Finance Agency (FHFA)), have the authority to set
separate appraisal requirements for loans they
originate, acquire, or guarantee, and generally
require an appraisal by a certified or licensed
appraiser for residential mortgages regardless of the
loan amount.
26 See FFIEC, Home Mortgage Disclosure Act,
www.ffiec.gov/hmda/.
27 The agencies posited in the 1994 amendments
to the Title XI appraisal regulations that the timing
of the appraisal may provide limited consumer
protection. Changes to consumer protection
regulations since 1994 now ensure that a consumer
receives a copy of appraisals and other valuations
used by a creditor to make a credit decision at least
three business days before consummation of the
transaction (for closed-end credit) or account
opening (for open-end credit). See 12 CFR 1002.14
(for business or consumer credit secured by a first
lien on a dwelling).
28 15 U.S.C. 1601 et seq.
29 Dodd-Frank Act, Public Law 111–203, Title
XIV, sec. 1473(a), 124 Stat. 2190 (2010), (codified
at 12 U.S.C. 3341(b)), as discussed earlier in this
SUPPLEMENTARY INFORMATION.
30 ‘‘Higher-risk mortgages’’ are certain mortgages
with an annual percentage rate that exceeds the
average prime offer rate by a specified percentage.
See Dodd-Frank Act, Public Law 111–203, Title
XIV, sec. 1471, 124 Stat. 2185 (2010), which added
section 129H to TILA, (codified at 15 U.S.C. 1639h).
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During the EGRPRA process, the staff
of the agencies conferred with the CFPB
regarding comments the agencies
received supporting an increase in the
threshold for 1-to-4 family residential
transactions. CFPB staff shared the view
that appraisals can provide consumer
protection benefits and their concern
about potential risks to consumers
resulting from an expansion of the
number of residential mortgage
transactions that would be exempt from
the Title XI appraisal requirement.
Third, the agencies considered safety
and soundness concerns that could
result from a threshold increase for
residential transactions. As the EGRPRA
Report noted, the 2008 financial crisis
showed that, like other asset classes,
imprudent residential mortgage lending
can pose significant risks to financial
institutions.
For these reasons, the agencies
concluded in the EGRPRA Report that a
change to the current $250,000
threshold for residential mortgage loans
would not be appropriate at the present
time. The agencies are interested in
comment on whether there are other
factors that should be considered in
evaluating the current threshold for 1to-4 family residential transactions and
whether the threshold can and should
be raised, consistent with consumer
protection, safety and soundness, and
reduction of unnecessary regulatory
burden. The agencies will also continue
to consider possibilities for relieving
burden related to appraisals for
residential mortgage loans, such as
coordination of the agencies’ Title XI
appraisal regulations with the practices
of HUD, the GSEs, and other federal
participants in the residential real estate
market.
II. Revisions to the Title XI Appraisal
Regulations
sradovich on DSKBCFCHB2PROD with PROPOSALS
A. Threshold Increase for Commercial
Real Estate Transactions
Overview of Proposal
The agencies propose to amend the
Title XI appraisal regulations to increase
the monetary threshold for commercial
real estate transactions at or below
which a Title XI appraisal would not be
required.31 The proposal would
establish a separate threshold for
commercial real estate transactions of
See also Appraisals for Higher-Priced Mortgage
Loans, 78 FR 78520 (December 26, 2013)
(interagency rule implementing appraisal
requirements for higher-priced mortgage loans).
31 The agencies have coordinated with the NCUA
in developing this proposal. The agencies
understand that the NCUA is evaluating options to
develop a separate proposal to provide comparable
relief for federally insured credit unions.
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$400,000, which represents an increase
from the current threshold of $250,000
for all real estate-related financial
transactions.
In considering whether to propose an
increased threshold for commercial real
estate transactions, the agencies
considered the comments received
through the EGRPRA process, and took
into account whether changes to the
threshold would be appropriate to
reduce regulatory burden consistent
with the federal financial and public
policy interests in real estate-related
financial transactions and the safety and
soundness of regulated institutions.
As stated, the threshold for exempt
transactions was last modified in 1994.
Given increases in commercial property
values since that time, the current
threshold requires institutions to obtain
Title XI appraisals on a larger
proportion of commercial real estate
transactions than in 1994. This increase
in the number of appraisals required
may contribute to the increased burden
in time and cost described by the
EGRPRA commenters.
Based on supervisory experience and
available data, the agencies propose to
increase the threshold for commercial
real estate transactions, as defined
below, to $400,000. This proposal
would reduce burden for both rural and
non-rural institutions and, as discussed
below, would not pose a threat to the
safety and soundness of financial
institutions. The agencies are consulting
with the CFPB regarding this proposal
and will continue this consultation in
developing a final rule.
The agencies propose to make the
proposal, if adopted, effective on
publication of the final rule in the
Federal Register.32
Question 1. The agencies invite
comment on the proposed effective date,
including whether this time period is
appropriate and, if not, why.
32 The Riegle Community Development and
Regulatory Improvement Act of 1994, Public Law
103–325, 108 Stat. 2163 (Riegle Act) provides that
rules imposing additional reporting, disclosures, or
other new requirements on IDIs generally must take
effect on the first day of a calendar quarter that
begins on or after the date on which the regulations
are published in final form. 12 U.S.C. 4802(b). As
discussed further in the Section IV of the
SUPPLEMENTARY INFORMATION, the proposed rule
does not impose any new requirements on IDIs,
and, as such, the effective date requirement of the
Riegle Act is inapplicable. Additionally, the 30-day
delayed effective date required under the
Administrative Procedure Act (APA) is waived
pursuant to 5 U.S.C. 553(d)(1), which provides a
waiver when a substantive rule grants or recognizes
an exception or relieves a restriction. The proposed
rule would exempt certain transactions from the
Title XI appraisal requirements. Consequently, the
proposed rule meets the requirements for waiver set
forth in the APA.
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Definition of Commercial Real Estate
Transaction
The proposed $400,000 threshold
would apply only to transactions
defined as ‘‘commercial real estate
transactions.’’ Under the proposed
definition, a commercial real estate
transaction would include any ‘‘real
estate-related financial transaction,’’ as
defined in the Title XI appraisal
regulations, excluding any loans
secured by a 1-to-4 family residential
property,33 but including loans that
finance the construction of buildings
with 1-to-4 dwelling units and that do
not include permanent financing.34
Accordingly, the definition would
include a loan extended to a consumer
to finance the initial construction 35 of
the consumer’s dwelling, but exclude
loans that provide both initial
construction funding and permanent
financing.36
The proposed definition would
largely capture the following four
categories of loans secured by real estate
in the Consolidated Reports of
Condition and Income (Call Report) 37
(FFIEC 031; RCFD 1410), namely loans
that are: (1) For construction, land
development, and other land loans; (2)
secured by farmland; (3) secured by
residential properties with five or more
units; or (4) secured by nonfarm
nonresidential properties. However,
loans that provide both initial
construction funding and permanent
financing and are reported as
construction, land development, and
other land loans during the construction
phase would be excluded from the
definition.
The definition generally aligns with
the categories of transactions to which
33 A 1-to-4 family residential property is a
property containing one, two, three, or four
individual dwelling units, including manufactured
homes permanently affixed to the underlying land
(when deemed to be real property under state law).
See OCC: 12 CFR part 34, subpart D, appendix A;
Board: 12 CFR part 208, appendix C; FDIC: 12 CFR
part 365, subpart A, appendix A.
34 The second part of the definition is intended
to clarify, not be an exception to, the first part.
35 ‘‘Initial construction’’ refers to construction of
a new dwelling, as opposed to improvements on an
existing dwelling. This is intended to be consistent
with the meaning of this phrase in provisions of
TILA and its implementing regulation, Regulation
Z. See, e.g., 15 U.S.C. 1602(x); 12 CFR 1026.2(a)(24).
36 The agencies propose to exclude consumer
‘‘construction-to-permanent’’ loans because these
loans are, in effect, for the purchase of 1-to-4 family
residential property, which would otherwise be
subject to the $250,000 threshold. This carve-out for
construction-to-permanent financing would avoid
the anomaly of requiring appraisals for permanent
financing of 1-to-4 family residential properties
above $250,000 while allowing an evaluation for
permanent financing (at or below $400,000) that is
preceded by a construction phrase.
37 See https://www.ffiec.gov/pdf/FFIEC_forms/
FFIEC031_201703_f.pdf.
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sradovich on DSKBCFCHB2PROD with PROPOSALS
agency guidance on commercial real
estate lending applies.38 The agencies
are treating construction-only loans to
consumers as commercial real estate
transactions to maintain consistency
with other regulations and guidance that
address construction loans to consumers
in other contexts.
Supervisory experience indicates that
financial institutions generally
administer construction loans to
consumers in a way similar to
construction loans to businesses.
Therefore, subjecting most construction
loans to the same threshold would
minimize regulatory burden. This
treatment would also be consistent with
other mortgage-related rules, which
exempt consumer construction loans
from various consumer protection
requirements.39 The agencies believe
that promoting consistency in
definitions and structure across
different regulations can reduce
confusion and regulatory burden for
financial institutions.
Moreover, including all 1-to-4 family
residential construction-only loans in
the proposed definition of commercial
real estate transactions is consistent
with the agencies’ longstanding practice
under the Title XI appraisal regulations
of treating construction loans for 1-to-4
family residential properties as
‘‘nonresidential’’ for purposes of the
requirement that certified appraisers be
used for ‘‘nonresidential’’ federally
related transactions.40
38 Real Estate Lending: Interagency Statement on
Prudent Risk Management for Commercial Real
Estate Lending, OCC Bulletin 2015–51 (December
18, 2015); Statement on Prudent Risk Management
for Commercial Real Estate Lending, Board SR
Letter 15–17 (December 18, 2015); Statement on
Prudent Risk Management for CRE Lending, FDIC
FIL–62–2015 (December 18, 2015); Guidance on
Prudent Loan Workouts, OCC Bulletin 2009–32
(October 30, 2009); Policy Statement on Prudent
Commercial Real Estate Loan Workouts, Board SR
Letter 09–07 (October 30, 2009); Policy Statement
on Prudent Commercial Real Estate Loan Workouts,
FDIC FIL–61–2009 (October 30, 2009);
Concentrations in Commercial Real Estate Lending,
Sound Risk Management Practices, 71 FR 74580
(December 12, 2006).
39 78 FR 10368 (February 13, 2013) (exempting
transactions to finance the initial construction of a
dwelling from the higher-priced mortgage appraisal
rule); 78 FR 4725 (January 22, 2013) (exempting
transactions to finance the initial construction of a
dwelling from the higher-priced mortgage escrow
requirements); 78 FR 6408 (January 30, 2013)
(exempting transactions to finance the initial
construction of a dwelling from the ability-to-repay
requirements); 78 FR 6856 (January 31, 2013)
(exempting transactions to finance the initial
construction of a dwelling from the high-cost
mortgage loan term restrictions and disclosure
requirements in the Home Ownership and Equity
Protections Act); 76 FR 79772 (December 22, 2011)
(exempting loans with maturity of 12 months or less
for the construction primary dwelling from the
balloon payment limitations).
40 See OCC: 12 CFR 34.43(d); Board: 12 CFR
225.63(d)(2); FDIC: 12 CFR 323.3(d)(2). The
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As discussed further below, financial
institutions report information about
consumer construction loans aggregated
with other construction loans through
the Call Report.41 Thus, much of the
supervisory information that the
agencies receive, including the basis for
the analysis presented below, aggregates
consumer construction loans with other
construction loans secured by 1-to-4
residential properties.
Question 2. The agencies invite
comment on the proposed definition of
commercial real estate transaction.
Question 3. The proposed definition
of commercial real estate transaction
would include loans to consumers for
the initial construction of their dwelling
or transactions financing the
construction of any building with 1-to4 dwelling units, so long as the loan
does not include permanent financing,
with the effect of permitting these loans
to qualify for the higher $400,000
threshold. The agencies invite comment
on the consumer, regulatory burden,
and other implications of the proposal.
What would be the implications of not
including these loans in the definition,
which would leave the current $250,000
threshold in place?
Question 4. The agencies invite
comment on the consumer, regulatory
burden, and other implications of the
proposed exclusion of construction-topermanent loans from the definition of
commercial real estate transaction,
meaning that the current $250,000
threshold would apply. What would be
the implications of including
construction-to-permanent loans in the
definition of commercial real estate
transaction, thus allowing these loans to
qualify for the higher $400,000
threshold?
direct measure of the changes in
commercial real estate prices in the
United States.43 The CRE Index is
comprised of data from the CoStar
Commercial Repeat Sale Index,44 which
uses repeat sale regression analysis of
1.7 million commercial property sales
records to compare the change in price
for the same property between its most
recent and previous sale transactions.45
The data incorporated into this index
covers properties across the country and
across all price ranges,46 from before
1994 through the present.
Based on a review of the CRE Index,
prices for commercial real estate have
increased since 1994, resulting in an
increased proportion of commercial real
estate transactions exceeding the
threshold level today compared to 1994.
Based on the change in the CRE Index,
a commercial property that sold for
$250,000 as of June 30, 1994 would be
expected to sell for approximately
$830,000 as of December 2016.
However, as shown below in Table 1,
the price of commercial real estate can
be particularly volatile. For example,
the CRE Index indicates a commercial
property that sold for $250,000 in 1994
would be expected to sell for
approximately $412,000 in December
2003, $711,000 in December 2007, and
$423,000 in March 2010, when
commercial real estate prices were at
their lowest point in the most recent
downturn.
In proposing to raise the commercial
real estate threshold to $400,000 the
agencies are approximating prices at the
low point of the most recent cycle,
which occurred in 2010. This more
conservative approach is appropriate
because it takes into consideration the
Threshold Increase
The agencies propose to increase the
threshold in the Title XI appraisal
regulations for commercial real estate
transactions from $250,000 to $400,000.
In determining the level of increase, the
agencies considered the change in
prices for commercial real estate
measured by the Federal Reserve
Commercial Real Estate Price Index
(‘‘CRE Index’’). The CRE Index 42 is a
Governors of the Federal Reserve System, Financial
Accounts of the United States, https://
www.federalreserve.gov/releases/z1/current/
default.htm.
43 The CRE Index is quarterly and not seasonally
adjusted. See Board of Governors of the Federal
Reserve System, Series analyzer for
FL075035503.Q, https://www.federalreserve.gov/
apps/fof/SeriesAnalyzer
.aspx?s=FL075035503&t=&bc=:FI075035503,
FL075035503&suf=Q; Board of Governors of the
Federal Reserve System, Series Structure, https://
www.federalreserve.gov/apps/fof/
SeriesStructure.aspx.
44 Board of Governors of the Federal Reserve
System, Series analyzer for FL075035503.Q, https://
www.federalreserve.gov/apps/fof/SeriesAnalyzer
.aspx?s=FL075035503&t=&bc=:FI075035503,
FL075035503&suf=Q. Data for years prior to 1996
are comprised of a weighted average of three
appraisal-based commercial property series from
National Real Estate Investor. Id.
45 CoStar, Federal Reserve’s Flow of Funds to
Incorporate CoStar Group’s Price Indices, CoStar
(June 4, 2012), https://www.costar.com/News/
Article/Federal-Reserves-Flow-of-Funds-ToIncorporate-CoStar-Groups-Price-Indices/138998.
46 See id.
agencies have long subjected such loans to this
requirement, as opposed to permitting licensed
appraisers, which is the case for typical 1-to-4
family residential properties.
41 See series RCFD F158 and F159.
42 The Board publishes data on the flow of funds
and levels of financial assets and liabilities, by
sector and financial instrument; full balance sheets,
including net worth, for households and nonprofit
organizations, nonfinancial corporate businesses,
and nonfinancial noncorporate businesses;
Integrated Macroeconomic Accounts; and
additional supplemental detail. See, Board of
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volatility in actual prices of commercial
real estate over time.
This figure is also consistent with
general measures of inflation across the
economy since 1994, when the current
threshold of $250,000 was set. The
agencies considered general inflation
indices, including the Consumer Price
Index (CPI) 47 and the Personal
Consumption Expenditures Price Index
(PCE).48 Certain price changes tracked
by these general indices indirectly affect
commercial real estate values. For
example, the change in rents for
multifamily housing affects the value of
underlying properties, and the change
in prices of consumer products affects
the value of retail and warehouse space.
While these indices are not directly
based on changes in commercial real
estate prices, general inflation is a
component of the change in commercial
real estate values.
As indicated in the table below, when
adjusting a $250,000 basket of goods
under the CPI and PCE from 1994
dollars to 2017 dollars and using a
lowest point in the cycle adjustment for
the prices for commercial real estate
under the CRE Index, each of the
indices considered approximately tracks
the $400,000 proposed threshold.
TABLE 1—INFLATION ADJUSTMENTS OF $250,000 AT JUNE 30, 1994, FOR THE CRE INDEX; JULY 1994 FOR THE CPI
INDEX AND JULY 1, 1994, FOR THE PCE INDEX
Index source:
Index series:
Dated adjusted to
CRE Index ..................................
Flow of Funds ................................................
CPI ..............................................
PCE ............................................
All items, US ..................................................
All products ....................................................
December 2016 .............................................
March 2010 ....................................................
December 2007 .............................................
December 2003 .............................................
March 2017 ....................................................
March 2017 ....................................................
Adjusted
amount
$830,674
423,659
711,367
412,194
401,166
373,706
decades suggest that larger acquisition,
construction, and development 52
transactions were more likely to be
troublesome due to the lack of
appropriate underwriting and
administration of issues unique to larger
properties, such as longer construction
periods, extended ‘‘lease up’’ periods
(the time required to lease a building
after construction), and the more
complex nature of the construction of
such properties. The agencies have no
evidence that increasing the appraisal
threshold to $400,000 for commercial
real estate transactions would materially
increase the risk of loss on such
transactions.
Under Title XI, the agencies may set
a threshold at or below which an
appraisal performed by a state certified
or licensed appraiser 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.49 Analysis of supervisory
experience and available data indicates
that the proposed threshold level of
$400,000 for commercial real estate
transactions would not pose a threat to
the safety and soundness of financial
institutions.
Many variables, including changing
market conditions and various loan
underwriting practices, may affect an
institution’s loss experience. The
$250,000 threshold has been applicable
to commercial real estate transactions
since 1994. Analysis of supervisory
information concerning losses on
commercial real estate transactions
suggests that faulty valuations of the
underlying real estate collateral have
not been a material cause of losses in
connection with transactions at or
below $250,000. In the last three
decades, the banking industry suffered
two crises in which poorly underwritten
and administered commercial real estate
loans were a key feature in elevated
levels of loan losses and bank failures.50
Supervisory experience and a review of
material loss reviews 51 covering those
47 The CPI, which is published by the Bureau of
Labor Statistics (BLS), is a measure of the average
change over time in the prices paid by urban
consumers for a market basket of goods and
services. This series is published monthly and is
not seasonally adjusted. See U.S. Dept. of Labor
Statistics, Consumer Price Index, https://
www.bls.gov/cpi/.
48 The PCE, which is published by the Bureau of
Economic Analysis within the U.S. Department of
Commerce, is the broadest measure of the average
change over time of the price of consumer goods
and services. This series is published monthly and
is seasonally adjusted. See U.S. Department of
Commerce, Bureau of Economic Analysis,
Consumer Spending, https://www.bea.gov/national/
consumer_spending.htm; Federal Reserve Bank of
San Francisco, PCE Inflation Dispersion, https://
www.frbsf.org/economic-research/indicators-data/
pce-personal-consumption-expenditure-priceindex-pcepi/.
49 12 U.S.C. 3341(b).
50 See, e.g., FDIC, History of the Eighties—Lessons
for the Future, Chapter 3: Commercial Real Estate
and the Banking Crises of the 1980s and Early
1990s, available at https://www.fdic.gov/bank/
historical/history/137_165.pdf; FDIC, Office of the
Inspector General, EVAL–13–002, Comprehensive
Study on the Impact of the Failure of Insured
Depository Institutions 50, Table 6 (January 2013),
available at https://www.fdicig.gov/reports13/13002EV.pdf.
51 Section 38(k) of the FDI Act, as amended,
provides that if the Deposit Insurance Fund incurs
a ‘‘material loss’’ with respect to an IDI, the
Inspector General of the appropriate regulator
(which for the OCC is the Inspector General of the
Department of the Treasury) shall prepare a report
to that agency, identifying the cause of failure and
reviewing the agency’s supervision of the
institution. 12 U.S.C. 1831o(k).
52 Acquisition, development and construction
refers to transactions that finance construction
projects including land, site development, and
vertical construction. This type of financing is
typically recorded in the land or construction
categories of the Call Report.
53 The agencies have examined data from a
number of different sources to evaluate the impact
of the proposed change in the appraisal threshold
on the safety and soundness of financial
institutions, as no single data source is sufficient
alone to fully analyze the impact.
Question 5. The agencies invite
comment on the proposed level of
$400,000 for the threshold at or below
which regulated institutions would not
be required to obtain appraisals for
commercial real estate transactions.
Question 6. How would having three
threshold levels ($250,000 for all
transactions, $400,000 for commercial
real estate transactions, and $1 million
for qualifying business loans) rather
than two threshold levels applicable to
Title XI appraisals within the appraisal
regulations affect burden to applicable
institutions?
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Safety and Soundness Considerations
for Increasing the Threshold for
Commercial Real Estate Transactions
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Coverage of the Threshold
The agencies’ analysis of available
data 53 related to commercial real estate
lending at financial institutions suggests
that an increase in the threshold would
not pose a safety and soundness risk to
financial institutions.
In order to consider the potential
impact of the proposed threshold
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change on safety and soundness, the
agencies considered how the coverage of
transactions exempted by the threshold
would change, both in terms of number
of transactions and aggregate value. The
agencies considered three different
metrics to estimate the overall coverage
of the existing threshold and the
proposed threshold: The number of
commercial real estate transactions at or
under the threshold as a share of the
number of all commercial real estate
transactions; the dollar volume of
commercial real estate transactions at or
under the threshold as a share of the
total dollar volume of all commercial
real estate transactions; and the dollar
volume of commercial real estate
transactions at or under the threshold
relative to IDIs’ capital and the
allowance for loan and lease losses,
which act as a buffer to absorb losses,
as explained below. The agencies
examined data reported on the Call
Report 54 and data from the CoStar
Comps database to estimate the volume
of commercial real estate transactions
covered by the existing threshold and
increased thresholds.
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Analysis of Call Report Data
The agencies’ analysis of data
reported on the Call Report suggests that
the threshold for commercial real estate
transactions could be raised without
exceeding the risk that these
transactions posed when the thresholds
were established in 1994.
All FDIC-insured depository
institutions report information about
loans on their balance sheets by
category of loan,55 but because IDIs do
54 The agencies used data reported on Schedule
RC–C and RC–C Part II of the Call Report. Schedule
RC–C includes the dollar volume of all loans
secured by real estate, reported in the five
categories: (1) For construction, land development,
and other land loans (RCFD F158 and F159); (2)
secured by farmland (RCFD 1420); (3) secured by
residential properties with five or more units (RCFD
1460); or (4) secured by nonfarm nonresidential
properties (RCFD F160 and F161); and (5) secured
by residential properties with fewer than five
dwelling units (RCFD 1797, 5367, and 5368). As
discussed earlier in this SUPPLEMENTARY
INFORMATION, the fifth category would not be
included in the definition of commercial real estate
transaction. Schedule RC–C Part II, Loans to Small
Businesses and Farms, includes the number and
amount currently outstanding in each case reported
in groupings by loan amount of loans secured by
nonfarm, nonresidential real estate (NFNR), with
original amounts of $1,000,000 or less and loans
secured by farmland with original amounts of
$500,000 or less. Institutions do not report
information on the size of land and construction or
multifamily loans. See FFIEC, Consolidated Reports
of Condition and Income for a Bank with Domestic
and Foreign Offices—FFIEC 031, https://
www.ffiec.gov/pdf/FFIEC_forms/FFIEC031_201703_
f.pdf.
55 See FDIC, Bank Financial Reports,
Consolidated Reports of Condition and Income,
https://www.fdic.gov/regulations/resources/call/
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not report on loans in all of the
categories that would be included in the
definition of commercial real estate
transaction by loan size, the agencies
used loans secured by NFNR as a proxy
for commercial real estate transactions
in this analysis.56 Data on NFNR loans
are an effective proxy because the vast
majority of commercial real estate
transactions are in the NFNR category.
NFNR loans should mirror trends across
all categories of commercial real estate
transactions.
IDIs report information on NFNR
loans in the Call Report by three
separate size categories: (1) Loans with
original amounts of $100,000 or less; (2)
loans with original amounts of more
than $100,000, but $250,000 or less; and
(3) loans with original amounts of more
than $250,000, but $1,000,000 or less.
They separately report the dollar
amount of all NFNR loans, including
those over $1,000,000. Using this data,
the agencies calculated the dollar
amount of NFNR loans at or under the
current $250,000 threshold as a
percentage of the dollar amount of all
NFNR loans.
According to Call Report data, when
the threshold for real-estate related
financial transactions was raised from
$100,000 to $250,000 in 1994,
approximately 18 percent of the dollar
volume of all NFNR loans reported by
IDIs had original loan amounts of
$250,000 or less. As of the fourth
quarter of 2016, approximately 4
percent of the dollar volume of such
loans had original loan amounts of
$250,000 or less. This analysis suggests
that a larger proportion of commercial
real estate transactions now require
appraisals than when the threshold was
last raised.
In contemplating an increase in the
threshold for commercial real estate
transactions, the agencies also used Call
Report data to consider the transactions
exempted from the appraisal threshold
as a share of equity capital plus the
allowance for loan and lease losses (the
allowance), which is a measure of the
potential concentration risk that these
transactions could pose to the financial
index.html. (‘‘Every national bank, state member
bank, insured state nonmember bank, and savings
association (‘institution’) is required to file a Call
Report as of the close of business on the last day
of each calendar quarter, i.e., the report date. The
specific reporting requirements depend upon the
size of the institution, the nature of its activities,
and whether it has any foreign offices.’’).
56 Although farmland is reported by size of loan,
such loans were also excluded from the analysis,
because they comprise a very small percent of
overall commercial real estate transactions and are
unlikely to materially affect the analysis. Moreover,
the majority of farmland loans are considered
qualifying business loans and are eligible for the
higher $1,000,000 threshold.
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well-being of institutions as a whole. In
1994, NFNR loans with original loan
amounts of $250,000 or less represented
in the aggregate approximately 14
percent of IDIs’ equity capital plus the
allowance. By the fourth quarter of
2016, such loans represented only about
3 percent of IDIs’ equity capital plus the
allowance.
To determine whether concentration
risk would be similar for small
institutions, the agencies separately
considered the percentage of NFNR
transactions exempted from the
appraisal threshold as a share of equity
capital plus the allowance for IDIs with
assets of less than $1 billion. This
analysis produced similar results.
Approximately 30 percent of the dollar
volume of all NFNR loans in such
smaller institutions had original loan
amounts of $250,000 or less in 1994. By
the fourth quarter of 2016, however,
only about 11 percent of the dollar
volume of such loans had original loan
amounts of $250,000 or less. In 1994,
the dollar volume of smaller IDIs’ NFNR
loans with original loan amounts of
$250,000 or less represented
approximately 33 percent of equity
capital plus the allowance. These loans
represented only about 18 percent of
IDIs’ equity capital plus the allowance
by the fourth quarter of 2016.
Because IDIs report loans on the Call
Report aggregated into only the three
categories mentioned above (less than
$100,000, $100,000 to $250,000, and
$250,000 to $1,000,000), the agencies
cannot use Call Report data to
determine the precise percentage or
number of transactions that would be
exempted by the proposed $400,000
threshold or the precise impact of a
$400,000 threshold on equity capital
plus the allowance.
Analysis of CoStar Comps Data
As described below, the agencies have
used the CoStar Comps database to
estimate this impact. The CoStar Comps
database 57 provides sales value data on
specific commercial real estate
transactions. While there are some
limitations regarding use of the CoStar
Comps database, as detailed below, the
database contains information on sales
values for individual transactions, so it
can be used to estimate the number and
57 The CoStar Comps database is comprised of
sales data involving commercial real estate
properties. The agencies have limited their analysis
to arms-length completed sales, where the price is
provided. The agencies have also limited the
sample to properties that were financed. Owneroccupied properties and sales of coops and
condominiums were excluded. The sample was also
limited to existing buildings. Land includes only
raw land defined as land held for development or
held for investment.
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percentage of transactions that would
become exempt under the proposed
threshold change (i.e., those above
$250,000, but less than $400,000).58
The CoStar Comps database contains
data for transactions involving
nonresidential commercial mortgages,
multifamily and land. The CoStar
Comps database is derived from sales
data and reflects the total transaction
amount, as opposed to the loan amount.
For purposes of this analysis, the
agencies included only financed
transactions and assumed a loan-tovalue ratio of 85 percent for
nonresidential and multifamily
commercial mortgages and a loan-tovalue ratio of 65 percent for raw land
transactions 59 to arrive at an estimated
loan amount which would be equivalent
to the ‘‘transaction value’’ under the
Title XI appraisal regulations. While the
CoStar Comps database has some
limitations for the purposes of
evaluating the proposed increase,60 it
provides information that can be used to
estimate the dollar volume and number
of commercial real estate transactions
that would potentially be exempted by
the proposed threshold increase.
An analysis of the CoStar Comps
database suggests that increasing the
threshold to $400,000 would
significantly increase the number of
commercial real estate transactions
exempted from the Title XI appraisal
requirements, but the portion of the
total dollar size of commercial real
estate transactions that would remain
exempted by the threshold would be
minimal. The percentage of commercial
properties with loans in the CoStar
Comps database that would be
exempted from the Title XI appraisal
regulations by the threshold would
increase from 17 percent to 28 percent
if the threshold were raised from
$250,000 to $400,000. However, the
total dollar volume of loans for
commercial properties in the CoStar
Comps database would only increase
from 0.7 percent to 1.5 percent.
58 This same analysis could not be performed
using Call Report data because, as described above,
transactions reported for purposes of the Call
Report are either reported in groupings of large
value ranges or not reported by size at all.
59 The Interagency Guidelines for Real Estate
Lending provides that institutions’ loan-to-value
limits should not exceed 85 percent for loans
secured by improved property and 65 percent for
loans secured by raw land. See OCC: 12 CFR part
34, subpart D, appendix A; Board: 12 CFR part 208,
appendix C; FDIC: 12 CFR part 365, subpart A,
appendix A.
60 For example, the database tends to
underrepresent sales of smaller properties and
transactions in rural markets, and includes
transactions that are not financed by depository
institutions.
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Exempting an additional 11 percent of
commercial real estate transactions
would provide burden relief as sought
by some of the EGRPRA commenters.
The 0.8 percentage point increase in the
dollar volume of commercial real estate
transactions that the CoStar data
suggests would be exempted from the
appraisal requirements under the
proposed threshold is unlikely to
expose financial institutions to
increased safety and soundness risk.
proportion of small loans, given their
lower legal lending limits due to their
smaller size) were lower than for larger
banks as a group.
This data suggests that the loss
experience associated with commercial
real estate loans for the banking system
as a whole has stayed at a relatively
consistent rate through multiple credit
cycles. Thus, banking system safety and
soundness concerns associated with the
commercial real estate loan loss rates
have not increased. However,
commercial real estate loan charge-off
rates during periods of economic stress
have and will continue to vary across
individual IDIs based on location,
collateral, quality of underwriting and
risk management, and other factors.
Thus commercial real estate loan
concentration risk at individual
institutions remains a focus for the
banking agencies.
Question 7. The agencies invite
comment on the safety and soundness
impact of the proposed $400,000
threshold for commercial real estate
transactions.
Question 8. The agencies invite
comment on the data used in this
analysis, and what alternative sources of
data would be appropriate for this
analysis.
Analysis of Charge-Off Rates
In addition to assessing changes in the
magnitude of transactions covered by
the appraisal threshold, the agencies
assessed trends in the loss rate
experience of commercial real estate
transactions.
While the agencies do not regularly
collect data on rates of loss for
commercial real estate by the size of
loans, they do collect net charge-off 61
data for commercial real estate loans on
the Call Report. The agencies
considered aggregate net charge-off rates
for commercial real estate loans in
determining whether the threshold
would pose a threat to the safety and
soundness of financial institutions.62
In order to evaluate the impact of
commercial real estate lending on the
safety and soundness of the banking
system generally, the agencies compared
peak net charge-off rates for two
periods: 1991 to 1994 and 2007 to 2012.
These periods represent two distress
cycles when aggregate net charge-offs
rose to their highest levels. The agencies
separately examined charge-off rates on
lending for all commercial real estate
categories covering construction,
multifamily, nonfarm, nonresidential,
and farmland. In order to evaluate
whether commercial real estate lending
may have a disparate impact on the
safety and soundness of IDIs of varying
sizes, the agencies examined peak
charge-off rates on loans for all IDIs, IDIs
under one billion dollars in total assets,
IDIs with total assets between one
billion dollars and ten billion dollars,
and IDIs with total assets of more than
ten billion dollars.
The analysis showed that aggregate
peak net charge-off rates for the most
recent cycle were generally no worse
than those recorded for the prior cycle,
with the exception of construction
loans. Moreover, aggregate commercial
real estate loan loss rates for banks less
than $1 billion (which would
reasonably be expected to have a larger
B. Use of Evaluations
The Title XI appraisal regulations
require regulated institutions to obtain
evaluations for three categories of real
estate-related financial transactions that
the agencies have determined do not
require a Title XI appraisal, including
real-estate related financial transactions
at or below the $250,000 threshold and
qualifying business loans at or below
the $1,000,000 threshold. Similarly, the
agencies propose to require that
institutions entering into commercial
real estate transactions at or below the
proposed $400,000 threshold obtain
evaluations that are consistent with safe
and sound banking practices for such
transactions.63
An evaluation provides a general
estimate of the value of real estate, but
is not subject to the same requirements
as a Title XI appraisal. An evaluation
should provide appropriate information
to enable the institution to make a
prudent decision regarding the
transaction. Through the Guidelines, the
agencies have provided guidance to
regulated institutions on their
expectations regarding when and how
evaluations should be used. The
61 Net charge-offs are charge-offs minus
recoveries.
62 Net charge-offs represent losses to financial
institutions, which, in the aggregate, can pose a
threat to safety and soundness.
63 When a below-threshold transaction also
qualifies for an exemption from the appraisal
requirements for a reason other than being below
one of the thresholds or a qualifying existing
extension of credit, no evaluation is required.
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Guidelines describe the transactions for
which financial institutions are required
to obtain an evaluation, and recommend
that institutions develop policies and
procedures for identifying when to
obtain appraisals for such transactions.
Institutions should conduct
evaluations consistent with the
provisions in the Guidelines.64 As
described in the Guidelines, evaluations
should be performed by persons who
are competent and have the relevant
experience and knowledge of the
market, location, and type of real
property being valued.65 Evaluations
may be completed by a bank employee
or by a third party, as explained by the
Interagency Advisory on Use of
Evaluations in Real Estate-Related
Financial Transactions.66 Guidance on
achieving independence in the
collateral valuation program can be
found in the Guidelines, among other
sources.67 The Guidelines state that an
evaluation should provide an estimate
of the property’s market value or
sufficient information and analysis to
support the credit decision. The
Guidelines also describe the minimum
content that an evaluation should
contain.
In evaluating this proposal, the
agencies considered the impact to the
financial system of the proposal, and
specifically the impact to financial
institutions and borrowers of obtaining
evaluations instead of Title XI
appraisals. Based on information from
industry participants, the cost of thirdparty evaluations of commercial real
estate generally ranges from $500 to
over $1,500, whereas the cost of
appraisals of such properties generally
ranges from $1,000 to over $3,000.
Commercial real estate transactions with
transaction values above $250,000 but at
or below $400,000 (affected
transactions), are likely to involve
smaller and less complex properties,
and appraisals and evaluations on such
properties would likely be at the lower
end of the cost range. This third-party
pricing information suggests a savings of
several hundred dollars per affected
transaction.
sradovich on DSKBCFCHB2PROD with PROPOSALS
64 Guidelines
at 75 FR 77461.
65 Interagency Appraisal and Evaluations
Guidelines, 75 FR 77450, at 77458 (December 10,
2010).
66 Interagency Advisory on Use of Evaluations in
Real Estate-Related Financial Transactions, OCC
Bulletin 2016–8 (March 4, 2016); Board SR Letter
16–05 (March 4, 2016); Supervisory Expectations
for Evaluations, FDIC FIL–16–2016 (March 4, 2016).
67 Guidelines at 75 FR 77457–58. See also
Valuation Independence rules in Regulation Z,
which apply to all creditors and cover extensions
of consumer credit that are or will be secured by
a consumer’s principal dwelling: Board: 12 CFR
226.42; CFPB: 12 CFR 1026.42.
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The agencies also considered the costs
in terms of time to obtain and process
appraisals and evaluations. There may
be less delay in finding appropriate
personnel to perform an evaluation than
to perform a Title XI appraisal,
particularly in rural areas. As described
in the Guidelines, financial institutions
should review the property valuation
prior to entering into the transaction.
Financial institutions require less time
to review evaluations than to review
appraisals, because evaluations contain
less detailed information. The agencies
estimate that, on average, the review
process for an appraisal would take
approximately forty minutes and the
review process for an evaluation would
take approximately ten minutes. Thus,
for affected transactions, the proposed
rule would alleviate approximately
thirty minutes of employee time per
transaction, in addition to the reduced
delay and the cost savings of obtaining
an evaluation instead of an appraisal.
In considering the aggregate effect of
this proposal, the agencies considered
the number of affected transactions. As
previously discussed, the agencies
estimate that the number of commercial
real estate transactions that would be
exempted by the threshold is expected
to increase by approximately 11 percent
under the proposed rule. Thus, while
the precise number of affected
transactions and the precise cost
reduction per transaction cannot be
determined, the proposed rule is
expected to lead to significant cost
savings for institutions that engage in
commercial real estate lending.
Question 9. The agencies invite
comment on the proposed requirement
that regulated institutions obtain
evaluations for commercial real estate
transactions at or below the $400,000
threshold.
Question 10. What type of additional
guidance, if any, do institutions need to
support the increased use of
evaluations?
Question 11. To what extent does the
use of evaluations reduce burden and
cost over the use of appraisals? To what
extent are evaluations currently done by
in-house staff versus outsourced to
appraisers or other qualified
professionals?
C. State Certified Appraiser Required
The current Title XI appraisal
regulations, require that ‘‘[a]ll federally
related transactions having a transaction
value of $250,000 or more, other than
those involving appraisals of 1-to-4
family residential properties, shall
require an appraisal prepared by a State
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35487
certified appraiser.’’ 68 In order to make
this paragraph consistent with the other
proposed changes to the appraisal
regulations, the agencies are proposing
a change to its wording to introduce the
$400,000 threshold and use the term
‘‘commercial real estate transaction.’’
The amendment to this provision would
be a technical change that would not
alter any substantive requirement.
III. Appraisal Threshold for Qualifying
Business Loans
As noted above, in the 2017 EGRPRA
Report to Congress, the agencies stated
their intention to gather more
information about the appropriateness
of increasing the $1 million threshold
for qualifying business loans. The
agencies are not proposing an increase
in the business loan threshold at this
time, but the agencies invite comment
on the following questions concerning
the qualifying business loan exemption:
Question 12. The agencies invite
comment and supporting data on the
appropriateness of raising the current
$1,000,000 threshold for qualifying
business loans and the associated
implications for safety and soundness.
Question 13. What unique risks do
institutions associate with qualifying
business loans?
Question 14. What percentage of total
real estate lending at financial
institutions, by number of loans and
dollar volume of lending, are qualifying
business loans?
Question 15. What is the average size
of a qualifying business loan at financial
institutions? What are the incidences of
default on qualifying business loans
compared to other commercial real
estate transactions that institutions have
observed over time?
Question 16. The agencies invite
comment on the clarity of the
application of the current threshold for
qualifying business loans, and on any
difficulty that financial institutions have
experienced in interpreting the
limitation on source of repayment.
IV. Request for Comments
The Agencies invite comment on all
aspects of the proposed rulemaking.
Question 17. As discussed earlier, the
agencies have articulated several bases
for declining to propose an increase in
the residential threshold. The agencies
request comment on whether there are
other factors that should be considered
in evaluating the current appraisal
threshold for 1-to-4 family residential
properties.
68 OCC: 12 CFR 34.43(d); Board: 12 CFR
225.63(d)(2); FDIC: 12 CFR 323.3(d)(2).
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V. 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 $550 million
or less and $38.5 million or less,
respectively) and publishes its
certification and a brief explanatory
statement in the Federal Register
together with the rule.
The OCC currently supervises
approximately 956 small entities. Data
currently available to the OCC are not
sufficient to estimate how many OCCsupervised small entities make CRE
loans in amounts that fall between the
current and proposed thresholds.
Therefore, we cannot estimate how
many small entities may be affected by
the increase threshold. However,
because the proposal does not contain
any new recordkeeping, reporting, or
compliance requirements, the proposal
will not impose costs on any OCCsupervised institutions. Accordingly,
the OCC certifies that the proposed rule
will not have a significant economic
impact on a substantial number of small
entities.
Board: The RFA,69 requires an agency
either to provide an initial regulatory
flexibility analysis with a proposed rule
or certify that the proposed rule will not
have a significant economic impact on
a substantial number of small entities.
The proposed threshold increase applies
to certain IDIs and non-bank entities
that make loans secured by commercial
real estate.70 The SBA establishes size
standards that define which entities are
small businesses for purposes of the
RFA.71 The size standard to be
considered a small business is: $550
million or less in assets for banks and
69 5
U.S.C. 601 et seq.
its RFA analysis, the Board considered all
Board-regulated creditors to which the proposed
rule would apply.
71 U.S. SBA, Table of Small Business Size
Standards Matched to North American Industry
Classification System Codes, available at https://
www.sba.gov/sites/default/files/files/Size_
Standards_Table.pdf.
70 For
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other depository institutions; and $38.5
million or less in annual revenues for
the majority of non-bank entities that
are likely to be subject to the proposed
regulation.72 Based on the Board’s
analysis, and for the reasons stated
below, the proposed rule may have a
significant positive economic impact on
a substantial number of small entities.
Accordingly, the Board is publishing an
initial regulatory flexibility analysis.
The Board will conduct a final
regulatory flexibility analysis after
consideration of comments received
during the public comment period.
The Board requests public comment
on all aspects of this analysis.
1. Reasons for the Proposed Rule
In response to comments received in
the EGRPRA process, the agencies are
proposing to increase the threshold from
$250,000 to $400,000 at or below which
a Title XI appraisal is not required for
commercial real estate transactions.
Because commercial real estate prices
have increased since 1994, when the
current $250,000 threshold was
established, a smaller percentage of
commercial real estate transactions are
currently exempted from the Title XI
appraisal requirements than when the
threshold was established. This
threshold adjustment is intended to
reduce the regulatory burden associated
with extending credit secured by
commercial real estate in a manner that
is consistent with the safety and
soundness of financial institutions.
2. Statement of Objectives and Legal
Basis
As discussed above, the agencies’
objective in proposing this threshold
increase is to reduce the regulatory
burden associated with extending credit
in a safe and sound manner by reducing
the number of commercial real estate
transactions that are subject to the Title
XI appraisal requirements.
Title XI explicitly authorizes the
agencies to establish a threshold level at
or below which a Title XI appraisal is
not required if the agencies determine in
writing that the threshold does not
represent a threat to the safety and
soundness of financial institutions and
receive concurrence from the CFPB that
such threshold level provides
reasonable protection for consumers
who purchase 1-to-4 unit single-family
homes.73 Based on available data and
supervisory experience, the agencies
tailored the size and scope of the
72 Asset size and annual revenues are calculated
according to SBA regulations. See 13 CFR 121 et
seq.
73 12 U.S.C. 3341(b).
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proposed threshold increase to ensure
that it would not pose a threat to the
safety and soundness of financial
institutions or erode protections for
consumers who purchase 1-to-4 unit
single-family homes.
The Board’s proposed rule would
apply to state chartered banks that are
members of the Federal Reserve System
(state member banks), as well as bank
holding companies and nonbank
subsidiaries of bank holding companies
that engage in lending. There are
approximately 601 state member banks
and 35 nonbank lenders regulated by
the Board that meet the SBA definition
of small entities and would be subject
to the proposed rule. Data currently
available to the Board do not allow for
a precise estimate of the number of
small entities that would be affected by
the proposed rule because the number
of small entities that will engage in
commercial real estate transactions
within the proposed threshold is
unknown.
3. Projected Reporting, Recordkeeping
and Other Compliance Requirements
The proposed rule would reduce
reporting, recordkeeping, and other
compliance requirements for small
entities. For transactions at or below the
proposed threshold, regulated
institutions would be given the option
to obtain an evaluation of the property
instead of an appraisal. Unlike
appraisals, evaluations may be
performed by a lender’s own employees
and are not required to comply with
USPAP. As discussed in detail in
Section II.B of the SUPPLEMENTARY
INFORMATION, the cost of obtaining
appraisals and evaluations can vary
widely depending on the size and
complexity of the property, the party
performing the valuation, and market
conditions where the property is
located. Additionally, the costs of
obtaining appraisals and evaluations
may be passed on to borrowers. Because
of this variation in cost and practice, it
is not possible to precisely determine
the cost savings that regulated
institutions will experience due to the
decreased cost of obtaining an
evaluation rather than an appraisal.
However, based on information
available to the Board, it is likely that
small entities and borrowers engaging in
commercial real estate transactions
could experience significant cost
reductions.
In addition to costing less to obtain
than appraisals, evaluations also require
less time to review than appraisals
because they contain less detailed
information. As discussed further in
Section II.B of the SUPPLEMENTARY
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INFORMATION,
an appraisal takes
approximately forty minutes to review
and an evaluation takes approximately
ten minutes to review. Thus, the
proposed rule would alleviate
approximately thirty minutes of
employee time per affected transaction
for which the lender obtains an
evaluation instead of an appraisal.
As previously discussed, the Board
estimates that the percentage of
commercial real estate transactions that
would be exempted by the threshold is
expected to increase by approximately
11 percent under the proposed rule. The
Board expects this percentage to be
higher for small entities, because a
higher percentage of their loan
portfolios are likely to be made up of
small, below-threshold loans than those
of larger entities. Thus, while the
precise number of transactions that will
be affected and the precise cost
reduction per transaction cannot be
determined, the proposed rule is
expected to have a significant positive
economic impact on small entities that
engage in commercial real estate
lending.
sradovich on DSKBCFCHB2PROD with PROPOSALS
4. Identification of Duplicative,
Overlapping, or Conflicting Federal
Regulations
The Board has not identified any
federal statutes or regulations that
would duplicate, overlap, or conflict
with the proposed revisions.
5. Discussion of Significant Alternatives
The agencies considered additional
burden-reducing measures, such as
increasing the commercial threshold to
a higher dollar amount and increasing
the residential and business loan
thresholds, but have not proposed such
measures at this time for the safety and
soundness and consumer protection
reasons previously discussed. For
transactions exempted from the Title XI
appraisal requirements, the proposed
rule would require regulated
institutions to get an evaluation if they
do not get an appraisal. The agencies
believe this requirement is necessary to
protect the safety and soundness of
financial institutions, which is a legal
prerequisite to the establishment of any
threshold. The Board is not aware of any
other significant alternatives that would
reduce burden on small entities without
sacrificing the safety and soundness of
financial institutions or consumer
protections.
FDIC: The RFA generally requires
that, in connection with a notice of
proposed rulemaking, an agency prepare
and make available for public comment
an initial regulatory flexibility analysis
describing the impact of the proposed
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rule on small entities.74 A regulatory
flexibility analysis is not required,
however, if the agency certifies that the
rule will not have a significant
economic impact on a substantial
number of small entities. The SBA has
defined ‘‘small entities’’ to include
banking organizations with total assets
less than or equal to $550 million.75 For
the reasons described below and
pursuant to section 605(b) of the RFA,
the FDIC certifies that the final rule will
not have a significant economic impact
on a substantial number of small
entities.
The FDIC supervises 3,744 depository
institutions,76 of which, 3,028 are
defined as small banking entities by the
terms of the RFA.77 According to the
Call Report, 3,010 small entities
reported holding some volume of real
estate related financial transactions that
meet the proposed rule’s definition of a
commercial real estate transaction.78
Therefore, 3,010 small entities could be
affected by the proposed rule.
The proposed rule will raise the
appraisal threshold for commercial real
estate transactions from $250,000 to
$400,000. Any commercial real estate
transaction with a value in excess of the
$400,000 threshold is required to have
an appraisal by a state licensed or state
certified appraiser. Any commercial real
estate transaction at or below the
$400,000 threshold requires an
evaluation.
To estimate the dollar volume of
commercial real estate transactions the
proposed change could potentially
affect, the FDIC used information on the
dollar volume and number of loans in
the Call Report for small institutions
from two categories of loans included in
the definition of a commercial real
estate transaction. The Call Report data
reflect that 4.55 percent of the dollar
volume of nonfarm, nonresidential
loans secured by real estate has an
original loan amount between $1 and
$250,000, while 11.81 percent have an
U.S.C. 601 et seq.
CFR 121.201 (as amended, effective
December 2, 2014).
76 FDIC-supervised institutions are set forth in 12
U.S.C. 1813(q)(2).
77 FDIC Call Report, March 31, 2017.
78 The proposed definition of ‘‘Commercial Real
Estate Transaction’’ would largely capture the
following four categories of loans secured by real
estate in the Call Report (FFIEC 031; RCFD 1410),
namely loans that are: (1) For construction, land
development, and other land loans; (2) secured by
farmland; (3) secured by residential properties with
five or more units; or (4) secured by nonfarm
nonresidential properties. However, loans that
provide both initial construction funding and
permanent financing and are reported as
construction, land development, and other land
loans during the construction phase would be
excluded from the definition.
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75 13
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35489
original loan amount between $250,000
and $1,000,000. The Call Report data
also reflects that 8.85 percent of the
dollar volume of agricultural loans
secured by farmland has an original
loan amount between $1 and $250,000,
while 7.49 percent have an original loan
amount between $250,000 and
$500,000.79 Assuming that the original
amount of nonfarm, nonresidential
loans secured by real estate and the
original amount of agricultural loans
secured by farmland are normally
distributed, the FDIC estimates that
between 6.08 percent and 12.95 percent
of loan volume is at or below the
$400,000 threshold for these categories,
respectively.
Therefore, raising the appraisal
threshold from $250,000 to $400,000 for
commercial real estate transactions
could affect an estimated 1.53 percent to
4.10 percent of the dollar volume of all
commercial real estate transactions
originated each year. This estimate
assumes that the distribution of loans
for the other loan categories within the
proposed definition of commercial real
estate transactions is similar to those
loans secured by nonfarm,
nonresidential properties or farmland.
The proposed rule is likely to reduce
valuation review costs for covered
institutions. The FDIC estimates that it
takes a loan officer an average of 40
minutes to review an appraisal to ensure
that it meets that standards set forth in
Title XI, but 10 minutes to perform a
similar review of an evaluation, which
does not need to meet the Title XI
standards for appraisals. The proposed
rule increases the number of
commercial real estate transactions that
would require an evaluation by raising
the appraisal threshold from $250,000 to
$400,000. Assuming that 15 percent of
the outstanding balance of commercial
real estate transactions for small entities
gets renewed or replaced by new
originations each year, the FDIC
estimates that small entities originate
$31.9 billion in new commercial real
estate transactions each year. Assuming
that 1.53 percent to 4.10 percent of
annual originations represent loans with
an origination amount greater than
$250,000 but not more than $400,000,
the FDIC estimates that the proposed
rule will affect approximately 1,504 to
4,040 loans per year,80 or 0.5 percent to
1.33 percent of loans on average for
small FDIC-supervised institutions.
79 FDIC
Call Report data, March 31, 2017.
$31.9 billion by 1.53 percent then
dividing the product by an average loan amount of
$325,000 equals 1,504 loans and multiplying $31.9
billion by 4.10 percent then dividing the product
by an average loan amount of $325,000 equals 4,040
loans.
80 Multiplying
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Therefore, based on an estimated hourly
rate, the proposed rule would reduce
loan review costs for small entities by
$51,625 to $138,673, on average, each
year.81 If lenders opt to not utilize an
evaluation and require an appraisal on
commercial real estate transaction
greater than $250,000 but not more than
$400,000 any reduction in costs would
be smaller.
Any associated recordkeeping costs
are unlikely to change for small FDICsupervised entities as the amount of
labor required to satisfy documentation
requirements for an evaluation or an
appraisal is estimated to be the same at
about five minutes for either an
appraisal or evaluation.
The proposed rule also is likely to
reduce the loan origination costs
associated with real estate appraisals for
commercial real estate borrowers. The
FDIC assumes that these costs are
always paid by the borrower for this
analysis. Anecdotal information from
industry participants indicates that a
commercial real estate appraisal costs
between $1,000 to over $3,000, or about
$2,000 on average, and a commercial
real estate evaluation costs between
$500 to over $1,500, or about $1,000 on
average. Based on the prior
assumptions, the FDIC estimates that
the proposed rule will affect
approximately 1,504 to 4,040
transactions per year,82 or 0.5 percent to
1.33 percent of loans on average for
small FDIC-supervised institutions.
Therefore, the proposed rule could
reduce loan origination costs for
borrowers doing business with small
entities by $1.5 to $4.0 million on
average per year.83
By lowering valuation costs on
commercial real estate transactions
81 The FDIC estimates that the average hourly
compensation for a loan officer is $68.65 an hour.
The hourly compensation estimate is based on
published compensation rates for Credit Counselors
and Loan Officers ($43.40). The estimate includes
the March 2017 75th percentile hourly wage rate
reported by the BLS, National Industry-Specific
Occupational Employment and Wage Estimates.
The reported hourly wage rate is adjusted for
changes in the CPI–U between May 2016 and March
2017 (1.83 percent) and grossed up by 155.3 percent
to account for non-monetary compensation as
reported by the March 2017 Employer Costs for
Employee Compensation Data. Based on this
estimate, loan review costs would decline between
$51,625 (1,504 loans multiplied by 30 minutes and
multiplied by $68.65 per hour) and $138,673 (4,040
loans multiplied by 30 minutes and multiplied by
$68.65 per hour).
82 Multiplying $31.9 billion by 1.53 percent then
dividing the product by an average loan amount of
$325,000 equals 1,504 loans and multiplying $31.9
billion by 4.10 percent then dividing the product
by an average loan amount of $325,000 equals 4,040
loans.
83 Multiplying 1,504 loans by $1,000 savings
equals $1.5 million and multiplying 4,040 loans by
$1,000 savings equals $4.0 million.
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greater than $250,000 but less than or
equal to $400,000 for small FDICsupervised institutions, the proposed
rule could marginally increase lending
activity. As discussed previously,
commenters in the EGRPRA review
noted that appraisals can be costly and
time consuming. By enabling small
FDIC-supervised institutions to utilize
evaluations for more commercial real
estate transactions, the proposed rule
will reduce transaction costs. The
reduction in loan origination fees could
marginally increase commercial real
estate lending activity for loans with an
origination value greater than $250,000
and not more than $400,000.
B. Paperwork Reduction Act
Certain provisions of the proposed
rule contain ‘‘collection of information’’
requirements within the meaning of the
Paperwork Reduction Act (PRA) of
1995.84 In accordance with the
requirements of the PRA, the agencies
may not conduct or sponsor, and the
respondent is not required to respond
to, an information collection unless it
displays a currently-valid Office of
Management and Budget (OMB) control
number. The OMB control number for
the OCC is 1557–0190, the Board is
7100–0250, and the FDIC is 3064–0103,
which would be extended, without
revision. The agencies have concluded
that the proposed rule does not contain
any changes to the current information
collections, however, the agencies are
revising the methodology for calculating
the burden estimates. The information
collection requirements contained in
this proposed rulemaking have been
submitted by the OCC and FDIC to OMB
for review and approval under section
3507(d) of the PRA 85 and section
1320.11 of the OMB’s implementing
regulations.86 The Board reviewed the
proposed rule under the authority
delegated to the Board by OMB.
Proposed Information Collection
Title of Information Collection:
Recordkeeping Requirements
Associated with Real Estate Appraisals
and Evaluations.
Frequency of Response: Event
generated.
Affected Public: Businesses or other
for-profit.
Respondents:
OCC: National banks, Federal savings
associations.
Board: State member banks (SMBs)
and nonbank subsidiaries of bank
holding companies (BHCs).
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U.S.C. 3501–3521.
U.S.C. 3507(d).
86 5 CFR 1320.
85 44
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FDIC: Insured state nonmember banks
and state savings associations, insured
state branches of foreign banks.
General Description of Report: For
federally related transactions, Title XI
requires regulated institutions 87 to
obtain appraisals prepared in
accordance with USPAP promulgated
by the Appraisal Standards Board of the
Appraisal Foundation. Generally, these
standards include the methods and
techniques used to estimate the market
value of a property as well as the
requirements for reporting such analysis
and a market value conclusion in the
appraisal. Regulated institutions are
expected to maintain records that
demonstrate that appraisals used in
their real estate-related lending
activities comply with these regulatory
requirements. For commercial real
estate transactions exempted from the
Title XI appraisal requirements by the
proposed rule, regulated institutions
would still be required to obtain an
evaluation to justify the transaction
amount. The agencies estimate that the
recordkeeping burden associated with
evaluations would be the same as the
recordkeeping burden associated with
appraisals for such transactions.
Current Action: The threshold change
in the proposed rule will result in
lenders being able to use evaluations
instead of appraisals for certain
transactions. It is estimated that the time
required to document the review of an
appraisal or an evaluation is the same.
While the rulemaking described in this
proposed rule would not change the
amount of time that institutions spend
complying with the Title XI appraisal
regulation, the agencies are using a more
accurate methodology for calculating
the burden of the information
collections based on the experience of
the agencies. Thus, the PRA burden
estimates shown here are different from
those previously reported. The agencies
are (1) using the average number of
loans per institution as the frequency
and (2) using 5 minutes as the estimated
time per response for the appraisals or
evaluations.
PRA Burden Estimates
Estimated average time per response:
5 minutes.
OCC
Number of Respondents: 1,284.
Annual Frequency: 1,488.
Total Estimated Annual Burden:
159,216 hours.
87 National banks, federal savings associations,
SMBs and nonbank subsidiaries of BHCs, insured
state nonmember banks and state savings
associations, and insured state branches of foreign
banks.
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Board
Number of Respondents: 828 SMBs;
1,215 nonbank subsidiaries of BHCs.
Annual Frequency: 419; 25.
Total Estimated Annual Burden:
28,911 hours; 2,531 hours.
FDIC
Number of Respondents: 3,744.
Annual Frequency: 141.
Total Estimated Annual Burden:
43,992 hours.
Comments are invited on:
(a) Whether the collections of
information are necessary for the proper
performance of the agencies’ functions,
including whether the information has
practical utility;
(b) The accuracy of the estimates of
the burden of the information
collections, including the validity of the
methodology and assumptions used;
(c) Ways to enhance the quality,
utility, and clarity of the information to
be collected;
(d) Ways to minimize the burden of
the information collections on
respondents, including through the use
of automated collection techniques or
other forms of information technology;
and
(e) Estimates of capital or start-up
costs and costs of operation,
maintenance, and purchase of services
to provide information.
All comments will become a matter of
public record. Comments on aspects of
this notice that may affect reporting,
recordkeeping, or disclosure
requirements and burden estimates
should be sent to the addresses listed in
the ADDRESSES section of this document.
A copy of the comments may also be
submitted to the OMB desk officer for
the agencies: by mail to U.S. Office of
Management and Budget, 725 17th
Street NW., # 10235, Washington, DC
20503; by facsimile to (202) 395–5806;
or by email to: oira_submission@
omb.eop.gov, Attention, Federal
Banking Agency Desk Officer.
sradovich on DSKBCFCHB2PROD with PROPOSALS
C. Riegle Act
The Riegle Act requires that each of
the agencies, in determining the
effective date and administrative
compliance requirements for new
regulations that impose additional
reporting, disclosure, or other
requirements on IDIs, consider,
consistent with principles of safety and
soundness and the public interest, any
administrative burdens that such
regulations would place on depository
institutions, including small depository
institutions, and customers of
depository institutions, as well as the
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benefits of such regulations.88 In
addition, in order to provide an
adequate transition period, new
regulations that impose additional
reporting, disclosures, or other new
requirements on IDIs generally must
take effect on the first day of a calendar
quarter that begins on or after the date
on which the regulations are published
in final form.89
The proposed rule would reduce
burden and would not impose any
reporting, disclosure, or other new
requirements on IDIs. For transactions
exempted from the Title XI appraisal
requirements by the proposed rule (i.e.,
commercial real estate transactions
between $250,000 and $400,000),
lenders would be required to get an
evaluation if they chose not to get an
appraisal. However, the agencies do not
view the option to obtain an evaluation
instead of an appraisal as a new or
additional requirement for purposes of
the Riegle Act. First, the process of
obtaining an evaluation is not new since
IDIs already get evaluations for
transactions at or below the current
$250,000-threshold. Second, for
commercial real estate transactions
between $250,000 and $400,000, IDIs
could continue to get appraisals instead
of evaluations. Because the proposed
rule would impose no new requirements
on IDIs, the agencies are not required by
the Riegle Act to consider the
administrative burdens and benefits of
the rule or delay its effective date.
Because delaying the effective date of
the rule is not required and would serve
no purpose, the agencies propose to
make the threshold increase effective on
the first day after publication of the final
rule in the Federal Register.
Additionally, although not required by
the Riegle Act, the agencies did consider
the administrative costs and benefits of
the rule while developing the proposal.
In designing the scope of the threshold
increase, the agencies chose to align the
definition of commercial real estate
transaction with industry practice,
regulatory guidance, and the categories
used in the Call Report in order to
reduce the administrative burden of
determining which transactions were
exempted by the rule. The agencies also
considered the cost savings that IDIs
would experience by obtaining
evaluations instead of appraisals and set
the proposed threshold at a level
designed to provide significant burden
relief without sacrificing safety and
soundness. The agencies note that
comment on these matters has been
solicited in questions 2 through 14 in
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89 12
U.S.C. 4802(a).
U.S.C. 4802(b).
Frm 00024
Fmt 4702
35491
Section II, and in the RFA discussion in
Section IV, of the SUPPLEMENTARY
INFORMATION, and that the requirements
of the Riegle Act will be considered as
part of the overall rulemaking process.
In addition, the agencies invite any
other comments that further will inform
the agencies’ consideration of the Riegle
Act.
D. Solicitation of Comments on Use of
Plain Language
Section 722 of the Gramm-LeachBliley Act 90 requires the agencies to use
plain language in all proposed and final
rules published after January 1, 2000.
Agencies invite comment on how to
make these proposed rules easier to
understand. For example:
• Have the agencies organized the
material to suit your needs? If not, how
could this material be better organized?
• Are the requirements in the
proposed rules clearly stated? If not,
how could the proposed rules be stated
more clearly?
• Do the proposed rules contain
language or jargon that is not clear? If
so, which language requires
clarification?
• Would a different format (grouping
and order of sections, use of headings,
paragraphing) make the proposed rules
easier to understand? If so, what
changes to the format would make the
proposed rules easier to understand?
• What else could the agencies do to
make the regulation easier to
understand?
E. Unfunded Mandates Act
OCC Unfunded Mandates Reform Act of
1995 Determination
The OCC has analyzed the proposed
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 proposed
rule includes a federal mandate that
may result in the expenditure by state,
local, and tribal governments, in the
aggregate, or by the private sector, of
$100 million or more in any one year
(adjusted annually for inflation).
The proposed rule does not impose
new requirements or include new
mandates. Therefore, we conclude that
the proposed rule will not result in an
expenditure of $100 million or more by
state, local, and tribal governments, or
by the private sector, in any one year.
List of Subjects
12 CFR Part 34
Appraisal, Appraiser, Banks, Banking,
Consumer protection, Credit, Mortgages,
90 Pub. L. 106–102, section 722, 113 Stat. 1338
1471 (1999).
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National banks, Reporting and
recordkeeping requirements, Savings
associations, Truth in lending.
12 CFR Part 225
Administrative practice and
procedure, Banks, banking, Federal
Reserve System, Capital planning,
Holding companies, Reporting and
recordkeeping requirements, Securities,
Stress testing
12 CFR Part 323
Banks, banking, Mortgages, Reporting
and recordkeeping requirements,
Savings associations.
Office of the Comptroller of the
Currency, 12 CFR Part 34
For the reasons set forth in the joint
preamble, the OCC proposes to amend
part 34 of chapter I of title 12 of the
Code of Federal Regulations as follows:
PART 34—REAL ESTATE LENDING
AND APPRISALS
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.
2. Section 34.42 is amended by
redesignating paragraphs (e) through (m)
as paragraphs (f) through (n),
respectively, and by adding a new
paragraph (e) to read as follows:
■
§ 34.42
Definitions.
*
*
*
*
(e) Commercial real estate transaction
means a real estate-related financial
transaction that is not secured by a 1to-4 family residential property. A real
estate-related financial transaction to
finance the initial construction of a 1-to4 family residential property that does
not include permanent financing is a
commercial real estate transaction.
*
*
*
*
*
■ 3. Section 34.43 is amended by:
■ a. Removing the word ‘‘or’’ at the end
of paragraph (a)(11);
■ b. Revising paragraph (a)(12);
■ c. Adding paragraph (a)(13); and
■ d. Revising paragraphs (b) and (d)(2).
The revisions and addition read as
follows:
sradovich on DSKBCFCHB2PROD with PROPOSALS
*
§ 34.43 Appraisals required; transactions
requiring a State certified or licensed
appraiser.
(a) * * *
(12) The OCC determines that the
services of an appraiser are not
necessary in order to protect Federal
financial and public policy interests in
real estate-related financial transactions
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or to protect the safety and soundness
of the institution; or
(13) The transaction is a commercial
real estate transaction that has a
transaction value of $400,000 or less.
(b) Evaluations required. For a
transaction that does not require the
services of a State certified or licensed
appraiser under paragraph (a)(1), (a)(5),
(a)(7), or (a)(13) of this section, the
institution shall obtain an appropriate
evaluation of real property collateral
that is consistent with safe and sound
banking practices.
*
*
*
*
*
(d) * * *
(2) Commercial real estate
transactions of more than $400,000. All
federally related transactions that are
commercial real estate transactions
having a transaction value of more than
$400,000 shall require an appraisal
prepared by a State certified appraiser.
*
*
*
*
*
Federal Reserve Board, 12 CFR Part
225
For the reasons set forth in the joint
preamble, the Board amends part 225 of
chapter II of title 12 of the Code of
Federal Regulations as follows:
PART 225—BANK HOLDING
COMPANIES AND CHANGE IN BANK
CONTROL (REGULATION Y)
4. The authority citation for part 225
continues to read as follows:
■
Authority: 12 U.S.C. 1817(j)(13), 1818,
1828(o), 1831i, 1831p–1, 1843(c)(8), 1844(b),
1972(l), 3106, 3108, 3310, 3331–3351, 3906,
3907, and 3909; 15 U.S.C. 1681s, 1681w,
6801 and 6805.
§ 225.63 Appraisals required; transactions
requiring a State certified or licensed
appraiser.
(a) * * *
(13) The Board determines that the
services of an appraiser are not
necessary in order to protect Federal
financial and public policy interests in
real estate-related financial transactions
or to protect the safety and soundness
of the institution; or
(14) The transaction is a commercial
real estate transaction that has a
transaction value of $400,000 or less.
(b) Evaluations required. For a
transaction that does not require the
services of a State certified or licensed
appraiser under paragraph (a)(1), (a)(5),
(a)(7), or (a)(14) of this section, the
institution shall obtain an appropriate
evaluation of real property collateral
that is consistent with safe and sound
banking practices.
*
*
*
*
*
(d) * * *
(2) Commercial real estate
transactions of more than $400,000. All
federally related transactions that are
commercial real estate transactions
having a transaction value of more than
$400,000 shall require an appraisal
prepared by a State certified appraiser.
*
*
*
*
*
Federal Deposit Insurance Corporation,
12 CFR Part 323
For the reasons set forth in the joint
preamble, the FDIC amends part 323 of
chapter III of title 12 of the Code of
Federal Regulations as follows:
PART 323—APPRAISALS
7. Revise the authority citation for part
323 to read as follows:
5. Section 225.62 is amended by
redesignating paragraphs (e) through (m)
as paragraphs (f) through (n),
respectively, and by adding a new
paragraph (e) to read as follows:
■
§ 225.62
■
■
Definitions.
*
*
*
*
*
(e) Commercial real estate transaction
means a real estate-related financial
transaction that is not secured by a 1to-4 family residential property. A real
estate-related financial transaction to
finance the initial construction of a 1-to4 family residential property that does
not include permanent financing is a
commercial real estate transaction.
*
*
*
*
*
■ 6. Section 225.63 is amended by:
■ a. Removing the word ‘‘or’’ at the end
of paragraph (a)(12);
■ b. Revising paragraph (a)(13);
■ c. Adding paragraph (a)(14);
■ d. Revising paragraph (b); and
■ e. Revising paragraph (d)(2).
The revisions and addition read as
follows:
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Authority: 12 U.S.C. 1818, 1819
[‘‘Seventh’’ and ‘‘Tenth’’], 1831p–1 and 3331
et seq.
8. Revise the authority citation for
subpart A of part 323 to read as follows:
Authority: This subpart is issued under 12
U.S.C. 1818, 1819 [‘‘Seventh’’ and ‘‘Tenth’’],
1831p–1 and title XI of the Financial
Institutions Reform, Recovery, and
Enforcement Act of 1989 (‘‘FIRREA’’) (Pub. L.
101–73, 103 Stat. 183, 12 U.S.C. 3331 et seq.
(1989)).
9. Section 323.2 is amended by
redesignating paragraphs (e) through (m)
as paragraphs (f) through (n),
respectively, and by adding a new
paragraph (e) to read as follows:
■
§ 323.2
Definitions.
*
*
*
*
*
(e) Commercial real estate transaction
means a real estate-related financial
transaction that is not secured by a 1to-4 family residential property. A real
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estate-related financial transaction to
finance the initial construction of a 1-to4 family residential property that does
not include permanent financing is a
commercial real estate transaction.
*
*
*
*
*
■ 4. Section 323.3 is amended by:
■ a. Removing the word ‘‘or’’ at the end
of paragraph (a)(11);
■ b. Revising paragraph (a)(12);
■ c. Adding paragraph (a)(13);
■ d. Revising paragraph (b); and
■ e. Revising paragraph (d)(2).
The revisions and addition read as
follows:
§ 323.3 Appraisals required; transactions
requiring a State certified or licensed
appraiser.
(a) * * *
(12) The FDIC determines that the
services of an appraiser are not
necessary in order to protect Federal
financial and public policy interests in
real estate-related financial transactions
or to protect the safety and soundness
of the institution; or
(13) The transaction is a commercial
real estate transaction that has a
transaction value of $400,000 or less.
(b) Evaluations required. For a
transaction that does not require the
services of a State certified or licensed
appraiser under paragraph (a)(1), (a)(5),
(a)(7), or (a)(13) of this section, the
institution shall obtain an appropriate
evaluation of real property collateral
that is consistent with safe and sound
banking practices.
*
*
*
*
*
(d) * * *
(2) Commercial real estate
transactions of more than $400,000. All
federally related transactions that are
commercial real estate transactions
having a transaction value of more than
$400,000 shall require an appraisal
prepared by a State certified appraiser.
*
*
*
*
*
Dated: July 18, 2017.
Keith A. Noreika,
Acting Comptroller of the Currency.
sradovich on DSKBCFCHB2PROD with PROPOSALS
By order of the Board of Governors of the
Federal Reserve System, July 18, 2017.
Margaret McCloskey Shanks,
Deputy Secretary of the Board.
Dated at Washington, DC, this 18th of July,
2017.
By order of the Board of Directors.
VerDate Sep<11>2014
16:29 Jul 28, 2017
Jkt 241001
Federal Deposit Insurance Corporation.
Robert E. Feldman,
Executive Secretary.
[FR Doc. 2017–15748 Filed 7–28–17; 8:45 am]
BILLING CODE P
NATIONAL CREDIT UNION
ADMINISTRATION
12 CFR Part 701
RIN 3133–AE76
Emergency Mergers—Chartering and
Field of Membership
National Credit Union
Administration (NCUA).
ACTION: Proposed rule.
AGENCY:
The NCUA Board (Board)
proposes to amend in its Chartering and
Field of Membership Manual the
definition of the term ‘‘in danger of
insolvency’’ for emergency merger
purposes. The current definition
requires a credit union to fall into at
least one of three net worth categories
over a period of time to be ‘‘in danger
of insolvency.’’ For two of the three
categories, the Board proposes to
lengthen by six months the forecast
horizons, the time period in which
NCUA projects a credit union’s net
worth will decline to the point that it
falls into one of the categories. This will
extend the time period in which a credit
union’s net worth is projected to either
render it insolvent or drop below two
percent from 24 to 30 months and from
12 to 18 months, respectively.
Additionally, the Board proposes to add
a fourth category to the three existing
net worth categories to include credit
unions that have been granted or
received assistance under section 208 of
the Federal Credit Union Act (FCU Act)
in the 15 months prior to the Region’s
determination that the credit union is in
danger of insolvency.
DATES: Comments must be received on
or before September 29, 2017.
ADDRESSES: You may submit comments
by any of the following methods (Please
send comments by one method only):
• Federal eRulemaking Portal: https://
www.regulations.gov. Follow the
instructions for submitting comments.
• NCUA Web site: https://
www.ncua.gov/regulation-supervision/
Pages/rules/proposed.aspx. Follow the
instructions for submitting comments.
SUMMARY:
PO 00000
Frm 00026
Fmt 4702
Sfmt 4702
35493
• Email: Address to regcomments@
ncua.gov. Include ‘‘[Your name]
Comments on Proposed Rule 701, In
Danger of Insolvency Definition’’ in the
email subject line.
• Fax: (703) 518–6319. Use the
subject line described above for email.
• Mail: Address to Gerard S. Poliquin,
Secretary of the Board, National Credit
Union Administration, 1775 Duke
Street, Alexandria, Virginia 22314–
3428.
• Hand Delivery/Courier: Same as
mail address.
Public inspection: You may view all
public comments on NCUA’s Web site
at https://www.ncua.gov/regulationsupervision/Pages/rules/proposed.aspx
as submitted, except for those we cannot
post for technical reasons. NCUA will
not edit or remove any identifying or
contact information from the public
comments submitted. You may inspect
paper copies of comments in NCUA’s
law library at 1775 Duke Street,
Alexandria, Virginia 22314, by
appointment weekdays between 9 a.m.
and 3 p.m. To make an appointment,
call (703) 518–6546 or send an email to
OGCMail@ncua.gov.
FOR FURTHER INFORMATION CONTACT:
Thomas I. Zells, Staff Attorney, Office of
General Counsel, or Amanda Parkhill,
Loss/Risk Analysis Officer, Office of
Examination and Insurance, at 1775
Duke Street, Alexandria, VA 22314 or
telephone: (703) 548–2478 (Mr. Zells) or
(703) 518–6385 (Ms. Parkhill).
SUPPLEMENTARY INFORMATION:
I. Background
II. Summary of the Proposed Rule
III. Regulatory Procedures
I. Background
Credit unions that experience a sharp
decline in net worth have a much higher
likelihood of failing. From the second
quarter of 1996 through the second
quarter of 2016, there were 11,734
federally insured credit unions. As
shown by the table below, 2,502 of these
credit unions fell below the wellcapitalized threshold (7 percent net
worth ratio) after having a net worth
ratio above that threshold for at least
one quarter. The net worth ratio of 490
of these 2,502 credit unions eventually
fell below two percent. Importantly,
only 15 percent of those credit unions
whose net worth dropped below two
percent sometime in this period remain
active.
E:\FR\FM\31JYP1.SGM
31JYP1
]]>Agencies
[Federal Register Volume 82, Number 145 (Monday, July 31, 2017)]
[Proposed Rules]
[Pages 35478-35493]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-15748]
=======================================================================
-----------------------------------------------------------------------
DEPARTMENT OF THE TREASURY
Office of the Comptroller of the Currency
12 CFR Part 34
[Docket No. OCC-2017-0011]
RIN 1557-AE18
FEDERAL RESERVE SYSTEM
12 CFR Part 225
[Docket No. R-1568; RIN 7100 AE-81]
FEDERAL DEPOSIT INSURANCE CORPORATION
12 CFR Part 323
RIN 3064 AE-56
Real Estate Appraisals
AGENCY: Office of the Comptroller of the Currency, Treasury (OCC);
Board of Governors of the Federal Reserve System (Board); and Federal
Deposit Insurance Corporation (FDIC).
ACTION: Notice of proposed rulemaking and request for comment.
-----------------------------------------------------------------------
SUMMARY: The OCC, Board, and FDIC (collectively, the agencies) are
inviting comment on a proposed rule to amend the agencies' regulations
requiring appraisals of real estate for certain transactions. The
proposal would increase the threshold level at or below which
appraisals would not be required for commercial real estate
transactions from $250,000 to $400,000. This proposed change to the
appraisal threshold reflects comments the
[[Page 35479]]
agencies received through the regulatory review process required by the
Economic Growth and Regulatory Paperwork Reduction Act (EGRPRA) and
completed in early 2017. For commercial real estate transactions with a
value at or below the proposed threshold, the amended rule would
require institutions to obtain an evaluation of the real property
collateral that is consistent with safe and sound banking practices if
the institution does not obtain an appraisal by a state certified or
licensed appraiser.
DATES: Comments must be received by September 29, 2017.
ADDRESSES: Interested parties are encouraged to submit written comments
jointly to all of the agencies. Commenters should use the title ``Real
Estate Appraisals'' to facilitate the organization and distribution of
comments among the agencies. Interested parties are invited to submit
written comments to:
Office of the Comptroller of the Currency: Because paper mail in
the Washington, DC area and at the OCC is subject to delay, commenters
are encouraged to submit comments by the Federal eRulemaking Portal or
email, if possible. Please use the title ``Real Estate Appraisals'' to
facilitate the organization and distribution of the comments. You may
submit comments by any of the following methods:
Federal eRulemaking Portal--Regulations.gov: Go to
www.regulations.gov. Enter ``Docket ID OCC-2017-0011'' in the Search
Box and click ``Search.'' Click on ``Comment Now'' to submit public
comments.
Click on the ``Help'' tab on the Regulations.gov home page
to get information on using Regulations.gov, including instructions for
submitting public comments.
Email: regs.comments@occ.treas.gov.
Mail: Legislative and Regulatory Activities Division,
Office of the Comptroller of the Currency, 400 7th Street SW., Suite
3E-218, Mail Stop 9W-11, Washington, DC 20219.
Fax: (571) 465-4326.
Hand Delivery/Courier: 400 7th Street SW., Suite 3E-218,
Mail Stop 9W-11, Washington, DC 20219.
Instructions: You must include ``OCC'' as the agency name and
``Docket ID OCC-2017-0011'' in your comment. In general, OCC will enter
all comments received into the docket and publish them on the
Regulations.gov Web site without change, including any business or
personal information that you provide such as name and address
information, email addresses, or phone numbers. Comments received,
including attachments and other supporting materials, are part of the
public record and subject to public disclosure. Do not enclose any
information in your comment or supporting materials that you consider
confidential or inappropriate for public disclosure.
You may review comments and other related materials that pertain to
this proposed rule by any of the following methods:
Viewing Comments Electronically: Go to
www.regulations.gov. Enter ``Docket ID OCC-2017-0011'' in the Search
box and click ``Search.'' Click on ``Open Docket Folder'' on the right
side of the screen and then ``Comments.'' Comments can be filtered by
clicking on ``View All'' and then using the filtering tools on the left
side of the screen.
Click on the ``Help'' tab on the Regulations.gov home page
to get information on using Regulations.gov. Supporting materials may
be viewed by clicking on ``Open Docket Folder'' and then clicking on
``Supporting Documents.'' The docket may be viewed after the close of
the comment period in the same manner as during the comment period.
Viewing Comments Personally: You may personally inspect
and photocopy comments at the OCC, 400 7th Street SW., Washington, DC.
For security reasons, the OCC requires that visitors make an
appointment to inspect comments. You may do so by calling (202) 649-
6700 or, for persons who are deaf or hard of hearing, TTY, (202) 649-
5597. Upon arrival, visitors will be required to present valid
government-issued photo identification and to submit to security
screening in order to inspect and photocopy comments.
Board of Governors of the Federal Reserve System: You may submit
comments, identified by [Docket No. R-1568 and RIN 7100 AE-81], by any
of the following methods:
Agency Web site: https://www.federalreserve.gov. Follow the
instructions for submitting comments at https://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.
Federal eRulemaking Portal: https://www.regulations.gov.
Follow the instructions for submitting comments.
Email: regs.comments@federalreserve.gov. Include the
docket number and RIN number in the subject line of the message.
Fax: (202) 452-3819 or (202) 452-3102.
Mail: Address to Ann E. Misback, Secretary, Board of
Governors of the Federal Reserve System, 20th Street and Constitution
Avenue NW., Washington, DC 20551.
All public comments will be made available on the Board's Web site
at https://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as
submitted, unless modified for technical reasons. Accordingly, comments
will not be edited to remove any identifying or contact information.
Public comments may also be viewed electronically or in paper form in
Room 3515, 1801 K Street NW. (between 18th and 19th Streets NW.),
Washington, DC 20006 between 9:00 a.m. and 5:00 p.m. on weekdays.
Federal Deposit Insurance Corporation: You may submit comments,
identified by RIN 3064-AE56, by any of the following methods:
Federal eRulemaking Portal: https://www.regulations.gov.
Follow the instructions for submitting comments.
Agency Web site: https://www.FDIC.gov/regulations/laws/federal/propose.html.
Mail: Robert E. Feldman, Executive Secretary, Attention:
Comments/Legal ESS, Federal Deposit Insurance Corporation, 550 17th
Street NW., Washington, DC 20429.
Hand Delivered/Courier: The guard station at the rear of
the 550 17th Street Building (located on F Street) on business days
between 7:00 a.m. and 5:00 p.m.
Email: Comments@FDIC.gov. Comments submitted must include
``FDIC'' and ``Real Estate Appraisals.'' Comments received will be
posted without change to https://www.fdic.gov/regulations/laws/federal/
propose.html including any personal information provided.
FOR FURTHER INFORMATION CONTACT:
OCC: G. Kevin Lawton, Appraiser (Real Estate Specialist), (202)
649-7152, Mitchell E. Plave, Special Counsel, Legislative and
Regulatory Activities Division, (202) 649-5490, for persons who are
deaf or hard of hearing, TTY, (202) 649-5597, or Christopher Manthey,
Special Counsel, or Joanne Phillips, Attorney, Bank Activities and
Structure Division, (202) 649-5500, Office of the Comptroller of the
Currency, 400 7th Street SW., Washington, DC 20219.
Board: Anna Lee Hewko, Associate Director, (202) 530-6260, or
Carmen Holly, Senior Supervisory Financial Analyst, (202) 973-6122,
Division of Supervision and Regulation; or Gillian Burgess, Senior
Counsel, (202) 736-5564, Matthew Suntag, Senior Attorney, (202) 452-
3694, or Kirin Walsh, Attorney, (202) 452-3058, Legal Division, Board
of Governors of the Federal Reserve System, 20th and C Streets NW.,
Washington, DC 20551.
[[Page 35480]]
FDIC: Beverlea S. Gardner, Senior Examination Specialist, Division
of Risk Management and Supervision, at (202) 898-3640, Mark Mellon,
Counsel, Legal Division, at (202) 898-3884, Kimberly Stock, Counsel,
Legal Division, at (202) 898-3815, Benjamin K. Gibbs, Counsel, at (202)
898-6726, or Lauren Whitaker, Senior Attorney, at (202) 898-3872,
Federal Deposit Insurance Corporation, 550 17th Street NW., Washington,
DC 20429.
SUPPLEMENTARY INFORMATION:
I. Introduction
A. Background
Title XI of the Financial Institutions Reform, Recovery, and
Enforcement Act of 1989 (Title XI) \1\ directs each federal financial
institutions regulatory agency \2\ 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
\3\ 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.\4\
---------------------------------------------------------------------------
\1\ 12 U.S.C. 3331 et seq.
\2\ ``Federal financial institutions regulatory agency'' means
the Board, the FDIC, the OCC, the National Credit Union Association
(NCUA), and, formerly, the Office of Thrift Supervision. 12 U.S.C.
3350(6).
\3\ 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).
\4\ 12 U.S.C. 3331.
---------------------------------------------------------------------------
Title XI directs the agencies to prescribe appropriate standards
for Title XI appraisals under the agencies' respective
jurisdictions,\5\ including, at a minimum, that Title XI appraisals be:
(1) Performed in accordance with the Uniform Standards of Professional
Appraisal Practice (USPAP); \6\ (2) written appraisals, as defined by
the statute; and (3) subject to appropriate review for compliance with
USPAP. All federally related transactions must have Title XI
appraisals.
---------------------------------------------------------------------------
\5\ 12 U.S.C. 3339. The agencies' Title XI appraisal regulations
apply to transactions entered into by the agencies or by
institutions regulated by the agencies that are depository
institutions or bank holding companies or subsidiaries of depository
institutions or bank holding companies. OCC: 12 CFR part 34, subpart
C; Board: 12 CFR 225.61(b); 12 CFR part 208, subpart E; FDIC: 12 CFR
part 323.
\6\ USPAP is written and interpreted by the Appraisal Standards
Board of the Appraisal Foundation. Adopted by Congress in 1989,
USPAP contains generally recognized ethical and performance
standards for the appraisal profession in the United States,
including real estate, personal property, and business appraisals.
See https://www.appraisalfoundation.org/imis/TAF/Standards/Appraisal_Standards/Uniform_Standards_of_Professional_Appraisal_Practice/TAF/USPAP.aspx?hkey=a6420a67-dbfa-41b3-9878-fac35923d2af.
---------------------------------------------------------------------------
Title XI defines a ``federally related transaction'' as a real
estate-related financial transaction that is regulated or engaged in by
a federal financial institutions regulatory agency and requires the
services of an appraiser.\7\ 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.\8\
---------------------------------------------------------------------------
\7\ 12 U.S.C. 3350(4) (defining ``federally related
transaction'').
\8\ 12 U.S.C. 3350(5).
---------------------------------------------------------------------------
The agencies have authority to determine those real estate-related
financial transactions that do not require the services of a certified
or licensed appraiser and are therefore exempt from the appraisal
requirements of Title XI. These real estate-related financial
transactions are not federally related transactions under the statutory
or regulatory definitions because they are not required to have Title
XI appraisals.\9\
---------------------------------------------------------------------------
\9\ See 59 FR 29482 (June 7, 1994).
---------------------------------------------------------------------------
The agencies have exercised this authority by exempting several
categories of real estate-related financial transactions from the
appraisal requirements.\10\ The agencies have determined that these
categories of transactions do not require appraisals by state certified
or licensed appraisers in order to protect federal financial and public
policy interests or to satisfy principles of safe and sound banking.
---------------------------------------------------------------------------
\10\ See OCC: 12 CFR 34.43(a); Board: 12 CFR 225.63(a); FDIC: 12
CFR 323.3(a).
---------------------------------------------------------------------------
In 1992, Congress amended Title XI, expressly authorizing the
agencies to establish a threshold level at or below which an appraisal
by a state certified or licensed appraiser is not required in
connection with federally related transactions if the agencies
determine in writing that the threshold does not represent a threat to
the safety and soundness of financial institutions.\11\ In the Dodd-
Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank
Act),\12\ Congress amended the threshold provision to require
concurrence ``from the Bureau of Consumer Financial Protection that
such threshold level provides reasonable protection for consumers who
purchase 1-4 unit single-family residences.'' \13\ As noted above,
transactions at or below the threshold level are exempt from the Title
XI appraisal requirements and thus are not federally related
transactions.
---------------------------------------------------------------------------
\11\ Housing and Community Development Act of 1992, Public Law
102-550, sec. 954, 106 Stat. 3894 (amending 12 U.S.C. 3341).
\12\ Public Law 111-203, 124 Stat.1376.
\13\ Dodd-Frank Act, sec. 1473, 124 Stat. 2190 (amending 12
U.S.C. 3341(b)).
---------------------------------------------------------------------------
Under the current thresholds, which were established by rulemaking
in 1994,\14\ all real estate-related financial transactions with a
transaction value \15\ of $250,000 or less, as well as certain real
estate-secured business loans (qualifying business loans) with a
transaction value of $1 million or less, do not require appraisals.\16\
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.\17\
---------------------------------------------------------------------------
\14\ See 59 FR 29482 (June 7, 1994). The NCUA promulgated a
similar rule with similar thresholds in 1995. 60 FR 51889 (October
4, 1995).
\15\ 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 such loan or
the market value of each such real property, respectively. See OCC:
12 CFR 34.42(m); Board: 12 CFR 225.62(m); FDIC: CFR 323.2(m).
\16\ See OCC: 12 CFR 34.43(a)(1) and (5); Board: 12 CFR
225.63(a)(1) and (5); FDIC: 12 CFR 323.3(a)(1) and (5).
\17\ OCC: 12 CFR 34.43(a)(5); Board: 12 CFR 225.63(a)(5); FDIC:
12 CFR 323.3(a)(5).
---------------------------------------------------------------------------
For real estate-related financial transactions that are exempt from
the appraisal requirement because they are within the applicable
thresholds or qualify for the exemption for certain existing extensions
of credit,\18\ the
[[Page 35481]]
appraisal regulations require financial institutions to obtain an
evaluation of the real property collateral that is consistent with safe
and sound banking practices.\19\ An evaluation should contain
sufficient information and analysis to support the financial
institution's decision to engage in the transaction. However,
evaluations need not be performed in accordance with USPAP or by
certified or licensed appraisers. The agencies have provided
supervisory guidance for conducting evaluations in a safe and sound
manner in the Interagency Appraisal and Evaluation Guidelines
(Guidelines).\20\
---------------------------------------------------------------------------
\18\ Transactions that involve an existing extension of credit
at the lending institution are exempt from the Title XI appraisal
requirements, but are required to have evaluations, provided that
there has been no obvious and material change in market conditions
or physical aspects of the property that threatens the adequacy of
the institution's real estate collateral protection after the
transaction, even with the advancement of new monies; or there is no
advancement of new monies, other than funds necessary to cover
reasonable closing costs. See OCC: 12 CFR 34.43(a)(7) and (b);
Board: 12 CFR 225.63(a)(7) and (b); FDIC: 12 CFR 323.3(a)(7) and
(b).
\19\ See OCC: 12 CFR 34.43(b); Board: 12 CFR 225.63(b); FDIC: 12
CFR 323.3(b).
\20\ 75 FR 77450 (Dec. 10, 2010). See also Interagency Advisory
on the Use of Evaluations in Real Estate-Related Financial
Transactions, OCC Bulletin 2016-8 (March 4, 2016); Board SR Letter
16-5 (March 4, 2016); Supervisory Expectations for Evaluations, FDIC
FIL-16-2016 (March 4, 2016).
---------------------------------------------------------------------------
B. The EGRPRA Process
In early 2017, the agencies completed a review of their regulations
pursuant to EGRPRA, which requires that, not less than once every 10
years, the Federal Financial Institutions Examination Council (FFIEC),
Board, OCC, and FDIC conduct a review of their regulations to identify
outdated or otherwise unnecessary regulatory requirements imposed on
insured depository institutions (IDIs).\21\
---------------------------------------------------------------------------
\21\ Public Law 104-208, Div. A, Title II, sec. 2222, 110 Stat.
3009-414, (1996) (codified at 12 U.S.C. 3311). The FFIEC is an
interagency body comprised of the Board, OCC, FDIC, NCUA, Bureau of
Consumer Financial Protection (CFPB) and State Liaison Committee. Of
these, only the Board, OCC and FDIC are statutorily required to
undertake the EGRPRA review. The FFIEC does not issue regulations
that impose burden on financial institutions and therefore its
regulations were not included in the EGRPRA review. The NCUA is not
required to participate in the EGRPRA review, but elected to review
its regulations pursuant to the goals of EGRPRA, as it did during
the agencies' first EGRPRA review 10 years ago. Accordingly, the
NCUA participated in the recent EGRPRA review process with the
Board, OCC and FDIC. The results of the NCUA's review are included
in Part II of the EGRPRA Report, described below. The CFPB is
required to review its significant rules and publish a report of its
review no later than five years after the rules takes effect. See 12
U.S.C. 5512(d).
---------------------------------------------------------------------------
As part of the EGRPRA review, the agencies received numerous
comments from bankers, banking trade associations, associations of
appraisers, and other commenters related to the Title XI appraisal
regulations. These comments included recommendations to increase the
thresholds at or below which real estate-related financial transactions
are exempt from the Title XI appraisal requirements. Some commenters
noted that the current thresholds have not been adjusted since they
were established in 1994, even though property values have increased,
and that the time and cost associated with the appraisal process impose
an unnecessary burden in the completion of smaller-dollar amount real
estate-related transactions. Some commenters also argued that the time
and financial costs attributed to meeting the appraisal requirements at
the current threshold levels particularly affect banks in rural
markets. These commenters contended that it is often difficult to find
state certified and licensed appraisers to complete assignments for
properties in rural areas.\22\
---------------------------------------------------------------------------
\22\ Earlier this year, the agencies and the NCUA issued an
advisory on appraiser availability that points to alternatives that
may help in areas facing a shortage of appraisers. Interagency
Advisory on the Availability of Appraisers. See OCC Bulletin 2017-19
(May 31, 2017); Board SR Letter 17-4 (May 31, 2017); FDIC FIL-19-
2017 (May 31, 2017).
---------------------------------------------------------------------------
In March 2017, the agencies submitted a joint EGRPRA report to
Congress (EGRPRA Report) that identified potential initiatives to
reduce regulatory burden.\23\ In the EGRPRA Report, the agencies
addressed comments received concerning the appraisal thresholds and
stated that the agencies would propose an increase to the threshold for
commercial real estate transactions from $250,000 to $400,000.\24\
Section II of this SUPPLEMENTARY INFORMATION invites comments on this
proposed increase. The agencies also stated their intention to gather
more information about the appropriateness of increasing the $1 million
threshold for qualifying business loans, which is being done through a
request for comment in Section III of the SUPPLEMENTARY INFORMATION.
---------------------------------------------------------------------------
\23\ FFIEC, Joint Report to Congress: Economic Growth and
Regulatory Paperwork Reduction Act, (March 2017), (EGRPRA Report),
available at https://www.ffiec.gov/pdf/2017_FFIEC_EGRPRA_Joint-Report_to_Congress.pdf.
\24\ The $250,000 threshold in the current Title XI appraisal
regulations applies, by its terms, to all real estate-related
financial transactions, whether or not the borrower is a consumer.
---------------------------------------------------------------------------
In the EGRPRA Report, the agencies also addressed whether it would
be appropriate to increase the current $250,000 threshold for
transactions secured by residential real estate. The agencies
determined that it would not be appropriate to increase the threshold
for this category of transactions at this time based on three
considerations. First, the agencies observed that any increase in the
threshold for residential transactions would have a limited impact on
burden, as appraisals would still be required for the vast majority of
these transactions pursuant to rules of other federal government
agencies and the government-sponsored enterprises (GSEs).\25\ As
reflected in the 2015 Home Mortgage Disclosure Act (HMDA) data,\26\ at
least 90 percent of residential mortgage loan originations had loan
amounts at or below the threshold, were eligible for sale to GSEs, or
were insured by the Federal Housing Administration or the United States
Department of Veterans Affairs. Those transactions are not subject to
the Title XI appraisal regulations, but the majority of those
transactions are subject to the appraisal requirements of other
government agencies or the GSEs. Therefore, raising the appraisal
threshold for residential transactions in the Title XI appraisal
regulations would have limited impact on burden.
---------------------------------------------------------------------------
\25\ Other Federal Government agencies involved in the
residential mortgage market include the U.S. Department of Housing
and Urban Development (HUD), the U.S. Department of Veterans
Affairs, and the Rural Housing Service of the U.S. Department of
Agriculture. These agencies, along with the GSEs (which are
regulated by the Federal Housing Finance Agency (FHFA)), have the
authority to set separate appraisal requirements for loans they
originate, acquire, or guarantee, and generally require an appraisal
by a certified or licensed appraiser for residential mortgages
regardless of the loan amount.
\26\ See FFIEC, Home Mortgage Disclosure Act, www.ffiec.gov/hmda/.
---------------------------------------------------------------------------
Second, appraisals can provide protection to consumers by helping
to assure the residential purchaser that the value of the property
supports the purchase price and the mortgage amount.\27\ The consumer
protection role of appraisals is reflected in amendments made to Title
XI and the Truth in Lending Act (TILA) \28\ through the Dodd-Frank Act
governing the scope of transactions requiring the services of a
certified or licensed appraiser. These include the addition of the CFPB
to the group of agencies assigned a role in the appraisal threshold-
setting process for Title XI,\29\ and a new TILA provision requiring
appraisals for loans involving ``higher-risk mortgages.'' \30\
---------------------------------------------------------------------------
\27\ The agencies posited in the 1994 amendments to the Title XI
appraisal regulations that the timing of the appraisal may provide
limited consumer protection. Changes to consumer protection
regulations since 1994 now ensure that a consumer receives a copy of
appraisals and other valuations used by a creditor to make a credit
decision at least three business days before consummation of the
transaction (for closed-end credit) or account opening (for open-end
credit). See 12 CFR 1002.14 (for business or consumer credit secured
by a first lien on a dwelling).
\28\ 15 U.S.C. 1601 et seq.
\29\ Dodd-Frank Act, Public Law 111-203, Title XIV, sec.
1473(a), 124 Stat. 2190 (2010), (codified at 12 U.S.C. 3341(b)), as
discussed earlier in this SUPPLEMENTARY INFORMATION.
\30\ ``Higher-risk mortgages'' are certain mortgages with an
annual percentage rate that exceeds the average prime offer rate by
a specified percentage. See Dodd-Frank Act, Public Law 111-203,
Title XIV, sec. 1471, 124 Stat. 2185 (2010), which added section
129H to TILA, (codified at 15 U.S.C. 1639h). See also Appraisals for
Higher-Priced Mortgage Loans, 78 FR 78520 (December 26, 2013)
(interagency rule implementing appraisal requirements for higher-
priced mortgage loans).
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[[Page 35482]]
During the EGRPRA process, the staff of the agencies conferred with
the CFPB regarding comments the agencies received supporting an
increase in the threshold for 1-to-4 family residential transactions.
CFPB staff shared the view that appraisals can provide consumer
protection benefits and their concern about potential risks to
consumers resulting from an expansion of the number of residential
mortgage transactions that would be exempt from the Title XI appraisal
requirement.
Third, the agencies considered safety and soundness concerns that
could result from a threshold increase for residential transactions. As
the EGRPRA Report noted, the 2008 financial crisis showed that, like
other asset classes, imprudent residential mortgage lending can pose
significant risks to financial institutions.
For these reasons, the agencies concluded in the EGRPRA Report that
a change to the current $250,000 threshold for residential mortgage
loans would not be appropriate at the present time. The agencies are
interested in comment on whether there are other factors that should be
considered in evaluating the current threshold for 1-to-4 family
residential transactions and whether the threshold can and should be
raised, consistent with consumer protection, safety and soundness, and
reduction of unnecessary regulatory burden. The agencies will also
continue to consider possibilities for relieving burden related to
appraisals for residential mortgage loans, such as coordination of the
agencies' Title XI appraisal regulations with the practices of HUD, the
GSEs, and other federal participants in the residential real estate
market.
II. Revisions to the Title XI Appraisal Regulations
A. Threshold Increase for Commercial Real Estate Transactions
Overview of Proposal
The agencies propose to amend the Title XI appraisal regulations to
increase the monetary threshold for commercial real estate transactions
at or below which a Title XI appraisal would not be required.\31\ The
proposal would establish a separate threshold for commercial real
estate transactions of $400,000, which represents an increase from the
current threshold of $250,000 for all real estate-related financial
transactions.
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\31\ The agencies have coordinated with the NCUA in developing
this proposal. The agencies understand that the NCUA is evaluating
options to develop a separate proposal to provide comparable relief
for federally insured credit unions.
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In considering whether to propose an increased threshold for
commercial real estate transactions, the agencies considered the
comments received through the EGRPRA process, and took into account
whether changes to the threshold would be appropriate to reduce
regulatory burden consistent with the federal financial and public
policy interests in real estate-related financial transactions and the
safety and soundness of regulated institutions.
As stated, the threshold for exempt transactions was last modified
in 1994. Given increases in commercial property values since that time,
the current threshold requires institutions to obtain Title XI
appraisals on a larger proportion of commercial real estate
transactions than in 1994. This increase in the number of appraisals
required may contribute to the increased burden in time and cost
described by the EGRPRA commenters.
Based on supervisory experience and available data, the agencies
propose to increase the threshold for commercial real estate
transactions, as defined below, to $400,000. This proposal would reduce
burden for both rural and non-rural institutions and, as discussed
below, would not pose a threat to the safety and soundness of financial
institutions. The agencies are consulting with the CFPB regarding this
proposal and will continue this consultation in developing a final
rule.
The agencies propose to make the proposal, if adopted, effective on
publication of the final rule in the Federal Register.\32\
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\32\ The Riegle Community Development and Regulatory Improvement
Act of 1994, Public Law 103-325, 108 Stat. 2163 (Riegle Act)
provides that rules imposing additional reporting, disclosures, or
other new requirements on IDIs generally must take effect on the
first day of a calendar quarter that begins on or after the date on
which the regulations are published in final form. 12 U.S.C.
4802(b). As discussed further in the Section IV of the SUPPLEMENTARY
INFORMATION, the proposed rule does not impose any new requirements
on IDIs, and, as such, the effective date requirement of the Riegle
Act is inapplicable. Additionally, the 30-day delayed effective date
required under the Administrative Procedure Act (APA) is waived
pursuant to 5 U.S.C. 553(d)(1), which provides a waiver when a
substantive rule grants or recognizes an exception or relieves a
restriction. The proposed rule would exempt certain transactions
from the Title XI appraisal requirements. Consequently, the proposed
rule meets the requirements for waiver set forth in the APA.
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Question 1. The agencies invite comment on the proposed effective
date, including whether this time period is appropriate and, if not,
why.
Definition of Commercial Real Estate Transaction
The proposed $400,000 threshold would apply only to transactions
defined as ``commercial real estate transactions.'' Under the proposed
definition, a commercial real estate transaction would include any
``real estate-related financial transaction,'' as defined in the Title
XI appraisal regulations, excluding any loans secured by a 1-to-4
family residential property,\33\ but including loans that finance the
construction of buildings with 1-to-4 dwelling units and that do not
include permanent financing.\34\ Accordingly, the definition would
include a loan extended to a consumer to finance the initial
construction \35\ of the consumer's dwelling, but exclude loans that
provide both initial construction funding and permanent financing.\36\
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\33\ A 1-to-4 family residential property is a property
containing one, two, three, or four individual dwelling units,
including manufactured homes permanently affixed to the underlying
land (when deemed to be real property under state law). See OCC: 12
CFR part 34, subpart D, appendix A; Board: 12 CFR part 208, appendix
C; FDIC: 12 CFR part 365, subpart A, appendix A.
\34\ The second part of the definition is intended to clarify,
not be an exception to, the first part.
\35\ ``Initial construction'' refers to construction of a new
dwelling, as opposed to improvements on an existing dwelling. This
is intended to be consistent with the meaning of this phrase in
provisions of TILA and its implementing regulation, Regulation Z.
See, e.g., 15 U.S.C. 1602(x); 12 CFR 1026.2(a)(24).
\36\ The agencies propose to exclude consumer ``construction-to-
permanent'' loans because these loans are, in effect, for the
purchase of 1-to-4 family residential property, which would
otherwise be subject to the $250,000 threshold. This carve-out for
construction-to-permanent financing would avoid the anomaly of
requiring appraisals for permanent financing of 1-to-4 family
residential properties above $250,000 while allowing an evaluation
for permanent financing (at or below $400,000) that is preceded by a
construction phrase.
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The proposed definition would largely capture the following four
categories of loans secured by real estate in the Consolidated Reports
of Condition and Income (Call Report) \37\ (FFIEC 031; RCFD 1410),
namely loans that are: (1) For construction, land development, and
other land loans; (2) secured by farmland; (3) secured by residential
properties with five or more units; or (4) secured by nonfarm
nonresidential properties. However, loans that provide both initial
construction funding and permanent financing and are reported as
construction, land development, and other land loans during the
construction phase would be excluded from the definition.
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\37\ See https://www.ffiec.gov/pdf/FFIEC_forms/FFIEC031_201703_f.pdf.
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The definition generally aligns with the categories of transactions
to which
[[Page 35483]]
agency guidance on commercial real estate lending applies.\38\ The
agencies are treating construction-only loans to consumers as
commercial real estate transactions to maintain consistency with other
regulations and guidance that address construction loans to consumers
in other contexts.
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\38\ Real Estate Lending: Interagency Statement on Prudent Risk
Management for Commercial Real Estate Lending, OCC Bulletin 2015-51
(December 18, 2015); Statement on Prudent Risk Management for
Commercial Real Estate Lending, Board SR Letter 15-17 (December 18,
2015); Statement on Prudent Risk Management for CRE Lending, FDIC
FIL-62-2015 (December 18, 2015); Guidance on Prudent Loan Workouts,
OCC Bulletin 2009-32 (October 30, 2009); Policy Statement on Prudent
Commercial Real Estate Loan Workouts, Board SR Letter 09-07 (October
30, 2009); Policy Statement on Prudent Commercial Real Estate Loan
Workouts, FDIC FIL-61-2009 (October 30, 2009); Concentrations in
Commercial Real Estate Lending, Sound Risk Management Practices, 71
FR 74580 (December 12, 2006).
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Supervisory experience indicates that financial institutions
generally administer construction loans to consumers in a way similar
to construction loans to businesses. Therefore, subjecting most
construction loans to the same threshold would minimize regulatory
burden. This treatment would also be consistent with other mortgage-
related rules, which exempt consumer construction loans from various
consumer protection requirements.\39\ The agencies believe that
promoting consistency in definitions and structure across different
regulations can reduce confusion and regulatory burden for financial
institutions.
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\39\ 78 FR 10368 (February 13, 2013) (exempting transactions to
finance the initial construction of a dwelling from the higher-
priced mortgage appraisal rule); 78 FR 4725 (January 22, 2013)
(exempting transactions to finance the initial construction of a
dwelling from the higher-priced mortgage escrow requirements); 78 FR
6408 (January 30, 2013) (exempting transactions to finance the
initial construction of a dwelling from the ability-to-repay
requirements); 78 FR 6856 (January 31, 2013) (exempting transactions
to finance the initial construction of a dwelling from the high-cost
mortgage loan term restrictions and disclosure requirements in the
Home Ownership and Equity Protections Act); 76 FR 79772 (December
22, 2011) (exempting loans with maturity of 12 months or less for
the construction primary dwelling from the balloon payment
limitations).
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Moreover, including all 1-to-4 family residential construction-only
loans in the proposed definition of commercial real estate transactions
is consistent with the agencies' longstanding practice under the Title
XI appraisal regulations of treating construction loans for 1-to-4
family residential properties as ``nonresidential'' for purposes of the
requirement that certified appraisers be used for ``nonresidential''
federally related transactions.\40\
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\40\ See OCC: 12 CFR 34.43(d); Board: 12 CFR 225.63(d)(2); FDIC:
12 CFR 323.3(d)(2). The agencies have long subjected such loans to
this requirement, as opposed to permitting licensed appraisers,
which is the case for typical 1-to-4 family residential properties.
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As discussed further below, financial institutions report
information about consumer construction loans aggregated with other
construction loans through the Call Report.\41\ Thus, much of the
supervisory information that the agencies receive, including the basis
for the analysis presented below, aggregates consumer construction
loans with other construction loans secured by 1-to-4 residential
properties.
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\41\ See series RCFD F158 and F159.
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Question 2. The agencies invite comment on the proposed definition
of commercial real estate transaction.
Question 3. The proposed definition of commercial real estate
transaction would include loans to consumers for the initial
construction of their dwelling or transactions financing the
construction of any building with 1-to-4 dwelling units, so long as the
loan does not include permanent financing, with the effect of
permitting these loans to qualify for the higher $400,000 threshold.
The agencies invite comment on the consumer, regulatory burden, and
other implications of the proposal. What would be the implications of
not including these loans in the definition, which would leave the
current $250,000 threshold in place?
Question 4. The agencies invite comment on the consumer, regulatory
burden, and other implications of the proposed exclusion of
construction-to-permanent loans from the definition of commercial real
estate transaction, meaning that the current $250,000 threshold would
apply. What would be the implications of including construction-to-
permanent loans in the definition of commercial real estate
transaction, thus allowing these loans to qualify for the higher
$400,000 threshold?
Threshold Increase
The agencies propose to increase the threshold in the Title XI
appraisal regulations for commercial real estate transactions from
$250,000 to $400,000. In determining the level of increase, the
agencies considered the change in prices for commercial real estate
measured by the Federal Reserve Commercial Real Estate Price Index
(``CRE Index''). The CRE Index \42\ is a direct measure of the changes
in commercial real estate prices in the United States.\43\ The CRE
Index is comprised of data from the CoStar Commercial Repeat Sale
Index,\44\ which uses repeat sale regression analysis of 1.7 million
commercial property sales records to compare the change in price for
the same property between its most recent and previous sale
transactions.\45\ The data incorporated into this index covers
properties across the country and across all price ranges,\46\ from
before 1994 through the present.
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\42\ The Board publishes data on the flow of funds and levels of
financial assets and liabilities, by sector and financial
instrument; full balance sheets, including net worth, for households
and nonprofit organizations, nonfinancial corporate businesses, and
nonfinancial noncorporate businesses; Integrated Macroeconomic
Accounts; and additional supplemental detail. See, Board of
Governors of the Federal Reserve System, Financial Accounts of the
United States, https://www.federalreserve.gov/releases/z1/current/default.htm.
\43\ The CRE Index is quarterly and not seasonally adjusted. See
Board of Governors of the Federal Reserve System, Series analyzer
for FL075035503.Q, https://www.federalreserve.gov/apps/fof/SeriesAnalyzer.aspx?s=FL075035503&t=&bc=:FI075035503,FL075035503&suf=Q; Board of Governors of the Federal Reserve System, Series
Structure, https://www.federalreserve.gov/apps/fof/SeriesStructure.aspx.
\44\ Board of Governors of the Federal Reserve System, Series
analyzer for FL075035503.Q, https://www.federalreserve.gov/apps/fof/SeriesAnalyzer.aspx?s=FL075035503&t=&bc=:FI075035503,FL075035503&suf=Q. Data for years prior to 1996 are comprised of a weighted average
of three appraisal-based commercial property series from National
Real Estate Investor. Id.
\45\ CoStar, Federal Reserve's Flow of Funds to Incorporate
CoStar Group's Price Indices, CoStar (June 4, 2012), https://www.costar.com/News/Article/Federal-Reserves-Flow-of-Funds-To-Incorporate-CoStar-Groups-Price-Indices/138998.
\46\ See id.
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Based on a review of the CRE Index, prices for commercial real
estate have increased since 1994, resulting in an increased proportion
of commercial real estate transactions exceeding the threshold level
today compared to 1994. Based on the change in the CRE Index, a
commercial property that sold for $250,000 as of June 30, 1994 would be
expected to sell for approximately $830,000 as of December 2016.
However, as shown below in Table 1, the price of commercial real estate
can be particularly volatile. For example, the CRE Index indicates a
commercial property that sold for $250,000 in 1994 would be expected to
sell for approximately $412,000 in December 2003, $711,000 in December
2007, and $423,000 in March 2010, when commercial real estate prices
were at their lowest point in the most recent downturn.
In proposing to raise the commercial real estate threshold to
$400,000 the agencies are approximating prices at the low point of the
most recent cycle, which occurred in 2010. This more conservative
approach is appropriate because it takes into consideration the
[[Page 35484]]
volatility in actual prices of commercial real estate over time.
This figure is also consistent with general measures of inflation
across the economy since 1994, when the current threshold of $250,000
was set. The agencies considered general inflation indices, including
the Consumer Price Index (CPI) \47\ and the Personal Consumption
Expenditures Price Index (PCE).\48\ Certain price changes tracked by
these general indices indirectly affect commercial real estate values.
For example, the change in rents for multifamily housing affects the
value of underlying properties, and the change in prices of consumer
products affects the value of retail and warehouse space. While these
indices are not directly based on changes in commercial real estate
prices, general inflation is a component of the change in commercial
real estate values.
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\47\ The CPI, which is published by the Bureau of Labor
Statistics (BLS), is a measure of the average change over time in
the prices paid by urban consumers for a market basket of goods and
services. This series is published monthly and is not seasonally
adjusted. See U.S. Dept. of Labor Statistics, Consumer Price Index,
https://www.bls.gov/cpi/.
\48\ The PCE, which is published by the Bureau of Economic
Analysis within the U.S. Department of Commerce, is the broadest
measure of the average change over time of the price of consumer
goods and services. This series is published monthly and is
seasonally adjusted. See U.S. Department of Commerce, Bureau of
Economic Analysis, Consumer Spending, https://www.bea.gov/national/consumer_spending.htm; Federal Reserve Bank of San Francisco, PCE
Inflation Dispersion, https://www.frbsf.org/economic-research/indicators-data/pce-personal-consumption-expenditure-price-index-pcepi/.
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As indicated in the table below, when adjusting a $250,000 basket
of goods under the CPI and PCE from 1994 dollars to 2017 dollars and
using a lowest point in the cycle adjustment for the prices for
commercial real estate under the CRE Index, each of the indices
considered approximately tracks the $400,000 proposed threshold.
Table 1--Inflation Adjustments of $250,000 at June 30, 1994, for the CRE Index; July 1994 for the CPI Index and
July 1, 1994, for the PCE Index
----------------------------------------------------------------------------------------------------------------
Adjusted
Index source: Index series: Dated adjusted to amount
----------------------------------------------------------------------------------------------------------------
CRE Index............................... Flow of Funds............. December 2016............. $830,674
March 2010................ 423,659
December 2007............. 711,367
December 2003............. 412,194
CPI..................................... All items, US............. March 2017................ 401,166
PCE..................................... All products.............. March 2017................ 373,706
----------------------------------------------------------------------------------------------------------------
Question 5. The agencies invite comment on the proposed level of
$400,000 for the threshold at or below which regulated institutions
would not be required to obtain appraisals for commercial real estate
transactions.
Question 6. How would having three threshold levels ($250,000 for
all transactions, $400,000 for commercial real estate transactions, and
$1 million for qualifying business loans) rather than two threshold
levels applicable to Title XI appraisals within the appraisal
regulations affect burden to applicable institutions?
Safety and Soundness Considerations for Increasing the Threshold for
Commercial Real Estate Transactions
Under Title XI, the agencies may set a threshold at or below which
an appraisal performed by a state certified or licensed appraiser 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.\49\ Analysis of supervisory experience and available data
indicates that the proposed threshold level of $400,000 for commercial
real estate transactions would not pose a threat to the safety and
soundness of financial institutions.
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\49\ 12 U.S.C. 3341(b).
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Many variables, including changing market conditions and various
loan underwriting practices, may affect an institution's loss
experience. The $250,000 threshold has been applicable to commercial
real estate transactions since 1994. Analysis of supervisory
information concerning losses on commercial real estate transactions
suggests that faulty valuations of the underlying real estate
collateral have not been a material cause of losses in connection with
transactions at or below $250,000. In the last three decades, the
banking industry suffered two crises in which poorly underwritten and
administered commercial real estate loans were a key feature in
elevated levels of loan losses and bank failures.\50\ Supervisory
experience and a review of material loss reviews \51\ covering those
decades suggest that larger acquisition, construction, and development
\52\ transactions were more likely to be troublesome due to the lack of
appropriate underwriting and administration of issues unique to larger
properties, such as longer construction periods, extended ``lease up''
periods (the time required to lease a building after construction), and
the more complex nature of the construction of such properties. The
agencies have no evidence that increasing the appraisal threshold to
$400,000 for commercial real estate transactions would materially
increase the risk of loss on such transactions.
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\50\ See, e.g., FDIC, History of the Eighties--Lessons for the
Future, Chapter 3: Commercial Real Estate and the Banking Crises of
the 1980s and Early 1990s, available at https://www.fdic.gov/bank/historical/history/137_165.pdf; FDIC, Office of the Inspector
General, EVAL-13-002, Comprehensive Study on the Impact of the
Failure of Insured Depository Institutions 50, Table 6 (January
2013), available at https://www.fdicig.gov/reports13/13-002EV.pdf.
\51\ Section 38(k) of the FDI Act, as amended, provides that if
the Deposit Insurance Fund incurs a ``material loss'' with respect
to an IDI, the Inspector General of the appropriate regulator (which
for the OCC is the Inspector General of the Department of the
Treasury) shall prepare a report to that agency, identifying the
cause of failure and reviewing the agency's supervision of the
institution. 12 U.S.C. 1831o(k).
\52\ Acquisition, development and construction refers to
transactions that finance construction projects including land, site
development, and vertical construction. This type of financing is
typically recorded in the land or construction categories of the
Call Report.
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Coverage of the Threshold
The agencies' analysis of available data \53\ related to commercial
real estate lending at financial institutions suggests that an increase
in the threshold would not pose a safety and soundness risk to
financial institutions.
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\53\ The agencies have examined data from a number of different
sources to evaluate the impact of the proposed change in the
appraisal threshold on the safety and soundness of financial
institutions, as no single data source is sufficient alone to fully
analyze the impact.
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In order to consider the potential impact of the proposed threshold
[[Page 35485]]
change on safety and soundness, the agencies considered how the
coverage of transactions exempted by the threshold would change, both
in terms of number of transactions and aggregate value. The agencies
considered three different metrics to estimate the overall coverage of
the existing threshold and the proposed threshold: The number of
commercial real estate transactions at or under the threshold as a
share of the number of all commercial real estate transactions; the
dollar volume of commercial real estate transactions at or under the
threshold as a share of the total dollar volume of all commercial real
estate transactions; and the dollar volume of commercial real estate
transactions at or under the threshold relative to IDIs' capital and
the allowance for loan and lease losses, which act as a buffer to
absorb losses, as explained below. The agencies examined data reported
on the Call Report \54\ and data from the CoStar Comps database to
estimate the volume of commercial real estate transactions covered by
the existing threshold and increased thresholds.
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\54\ The agencies used data reported on Schedule RC-C and RC-C
Part II of the Call Report. Schedule RC-C includes the dollar volume
of all loans secured by real estate, reported in the five
categories: (1) For construction, land development, and other land
loans (RCFD F158 and F159); (2) secured by farmland (RCFD 1420); (3)
secured by residential properties with five or more units (RCFD
1460); or (4) secured by nonfarm nonresidential properties (RCFD
F160 and F161); and (5) secured by residential properties with fewer
than five dwelling units (RCFD 1797, 5367, and 5368). As discussed
earlier in this SUPPLEMENTARY INFORMATION, the fifth category would
not be included in the definition of commercial real estate
transaction. Schedule RC-C Part II, Loans to Small Businesses and
Farms, includes the number and amount currently outstanding in each
case reported in groupings by loan amount of loans secured by
nonfarm, nonresidential real estate (NFNR), with original amounts of
$1,000,000 or less and loans secured by farmland with original
amounts of $500,000 or less. Institutions do not report information
on the size of land and construction or multifamily loans. See
FFIEC, Consolidated Reports of Condition and Income for a Bank with
Domestic and Foreign Offices--FFIEC 031, https://www.ffiec.gov/pdf/FFIEC_forms/FFIEC031_201703_f.pdf.
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Analysis of Call Report Data
The agencies' analysis of data reported on the Call Report suggests
that the threshold for commercial real estate transactions could be
raised without exceeding the risk that these transactions posed when
the thresholds were established in 1994.
All FDIC-insured depository institutions report information about
loans on their balance sheets by category of loan,\55\ but because IDIs
do not report on loans in all of the categories that would be included
in the definition of commercial real estate transaction by loan size,
the agencies used loans secured by NFNR as a proxy for commercial real
estate transactions in this analysis.\56\ Data on NFNR loans are an
effective proxy because the vast majority of commercial real estate
transactions are in the NFNR category. NFNR loans should mirror trends
across all categories of commercial real estate transactions.
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\55\ See FDIC, Bank Financial Reports, Consolidated Reports of
Condition and Income, https://www.fdic.gov/regulations/resources/call/. (``Every national bank, state member bank, insured
state nonmember bank, and savings association (`institution') is
required to file a Call Report as of the close of business on the
last day of each calendar quarter, i.e., the report date. The
specific reporting requirements depend upon the size of the
institution, the nature of its activities, and whether it has any
foreign offices.'').
\56\ Although farmland is reported by size of loan, such loans
were also excluded from the analysis, because they comprise a very
small percent of overall commercial real estate transactions and are
unlikely to materially affect the analysis. Moreover, the majority
of farmland loans are considered qualifying business loans and are
eligible for the higher $1,000,000 threshold.
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IDIs report information on NFNR loans in the Call Report by three
separate size categories: (1) Loans with original amounts of $100,000
or less; (2) loans with original amounts of more than $100,000, but
$250,000 or less; and (3) loans with original amounts of more than
$250,000, but $1,000,000 or less. They separately report the dollar
amount of all NFNR loans, including those over $1,000,000. Using this
data, the agencies calculated the dollar amount of NFNR loans at or
under the current $250,000 threshold as a percentage of the dollar
amount of all NFNR loans.
According to Call Report data, when the threshold for real-estate
related financial transactions was raised from $100,000 to $250,000 in
1994, approximately 18 percent of the dollar volume of all NFNR loans
reported by IDIs had original loan amounts of $250,000 or less. As of
the fourth quarter of 2016, approximately 4 percent of the dollar
volume of such loans had original loan amounts of $250,000 or less.
This analysis suggests that a larger proportion of commercial real
estate transactions now require appraisals than when the threshold was
last raised.
In contemplating an increase in the threshold for commercial real
estate transactions, the agencies also used Call Report data to
consider the transactions exempted from the appraisal threshold as a
share of equity capital plus the allowance for loan and lease losses
(the allowance), which is a measure of the potential concentration risk
that these transactions could pose to the financial well-being of
institutions as a whole. In 1994, NFNR loans with original loan amounts
of $250,000 or less represented in the aggregate approximately 14
percent of IDIs' equity capital plus the allowance. By the fourth
quarter of 2016, such loans represented only about 3 percent of IDIs'
equity capital plus the allowance.
To determine whether concentration risk would be similar for small
institutions, the agencies separately considered the percentage of NFNR
transactions exempted from the appraisal threshold as a share of equity
capital plus the allowance for IDIs with assets of less than $1
billion. This analysis produced similar results. Approximately 30
percent of the dollar volume of all NFNR loans in such smaller
institutions had original loan amounts of $250,000 or less in 1994. By
the fourth quarter of 2016, however, only about 11 percent of the
dollar volume of such loans had original loan amounts of $250,000 or
less. In 1994, the dollar volume of smaller IDIs' NFNR loans with
original loan amounts of $250,000 or less represented approximately 33
percent of equity capital plus the allowance. These loans represented
only about 18 percent of IDIs' equity capital plus the allowance by the
fourth quarter of 2016.
Because IDIs report loans on the Call Report aggregated into only
the three categories mentioned above (less than $100,000, $100,000 to
$250,000, and $250,000 to $1,000,000), the agencies cannot use Call
Report data to determine the precise percentage or number of
transactions that would be exempted by the proposed $400,000 threshold
or the precise impact of a $400,000 threshold on equity capital plus
the allowance.
Analysis of CoStar Comps Data
As described below, the agencies have used the CoStar Comps
database to estimate this impact. The CoStar Comps database \57\
provides sales value data on specific commercial real estate
transactions. While there are some limitations regarding use of the
CoStar Comps database, as detailed below, the database contains
information on sales values for individual transactions, so it can be
used to estimate the number and
[[Page 35486]]
percentage of transactions that would become exempt under the proposed
threshold change (i.e., those above $250,000, but less than
$400,000).\58\
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\57\ The CoStar Comps database is comprised of sales data
involving commercial real estate properties. The agencies have
limited their analysis to arms-length completed sales, where the
price is provided. The agencies have also limited the sample to
properties that were financed. Owner-occupied properties and sales
of coops and condominiums were excluded. The sample was also limited
to existing buildings. Land includes only raw land defined as land
held for development or held for investment.
\58\ This same analysis could not be performed using Call Report
data because, as described above, transactions reported for purposes
of the Call Report are either reported in groupings of large value
ranges or not reported by size at all.
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The CoStar Comps database contains data for transactions involving
nonresidential commercial mortgages, multifamily and land. The CoStar
Comps database is derived from sales data and reflects the total
transaction amount, as opposed to the loan amount. For purposes of this
analysis, the agencies included only financed transactions and assumed
a loan-to-value ratio of 85 percent for nonresidential and multifamily
commercial mortgages and a loan-to-value ratio of 65 percent for raw
land transactions \59\ to arrive at an estimated loan amount which
would be equivalent to the ``transaction value'' under the Title XI
appraisal regulations. While the CoStar Comps database has some
limitations for the purposes of evaluating the proposed increase,\60\
it provides information that can be used to estimate the dollar volume
and number of commercial real estate transactions that would
potentially be exempted by the proposed threshold increase.
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\59\ The Interagency Guidelines for Real Estate Lending provides
that institutions' loan-to-value limits should not exceed 85 percent
for loans secured by improved property and 65 percent for loans
secured by raw land. See OCC: 12 CFR part 34, subpart D, appendix A;
Board: 12 CFR part 208, appendix C; FDIC: 12 CFR part 365, subpart
A, appendix A.
\60\ For example, the database tends to underrepresent sales of
smaller properties and transactions in rural markets, and includes
transactions that are not financed by depository institutions.
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An analysis of the CoStar Comps database suggests that increasing
the threshold to $400,000 would significantly increase the number of
commercial real estate transactions exempted from the Title XI
appraisal requirements, but the portion of the total dollar size of
commercial real estate transactions that would remain exempted by the
threshold would be minimal. The percentage of commercial properties
with loans in the CoStar Comps database that would be exempted from the
Title XI appraisal regulations by the threshold would increase from 17
percent to 28 percent if the threshold were raised from $250,000 to
$400,000. However, the total dollar volume of loans for commercial
properties in the CoStar Comps database would only increase from 0.7
percent to 1.5 percent.
Exempting an additional 11 percent of commercial real estate
transactions would provide burden relief as sought by some of the
EGRPRA commenters. The 0.8 percentage point increase in the dollar
volume of commercial real estate transactions that the CoStar data
suggests would be exempted from the appraisal requirements under the
proposed threshold is unlikely to expose financial institutions to
increased safety and soundness risk.
Analysis of Charge-Off Rates
In addition to assessing changes in the magnitude of transactions
covered by the appraisal threshold, the agencies assessed trends in the
loss rate experience of commercial real estate transactions.
While the agencies do not regularly collect data on rates of loss
for commercial real estate by the size of loans, they do collect net
charge-off \61\ data for commercial real estate loans on the Call
Report. The agencies considered aggregate net charge-off rates for
commercial real estate loans in determining whether the threshold would
pose a threat to the safety and soundness of financial
institutions.\62\
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\61\ Net charge-offs are charge-offs minus recoveries.
\62\ Net charge-offs represent losses to financial institutions,
which, in the aggregate, can pose a threat to safety and soundness.
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In order to evaluate the impact of commercial real estate lending
on the safety and soundness of the banking system generally, the
agencies compared peak net charge-off rates for two periods: 1991 to
1994 and 2007 to 2012. These periods represent two distress cycles when
aggregate net charge-offs rose to their highest levels. The agencies
separately examined charge-off rates on lending for all commercial real
estate categories covering construction, multifamily, nonfarm,
nonresidential, and farmland. In order to evaluate whether commercial
real estate lending may have a disparate impact on the safety and
soundness of IDIs of varying sizes, the agencies examined peak charge-
off rates on loans for all IDIs, IDIs under one billion dollars in
total assets, IDIs with total assets between one billion dollars and
ten billion dollars, and IDIs with total assets of more than ten
billion dollars.
The analysis showed that aggregate peak net charge-off rates for
the most recent cycle were generally no worse than those recorded for
the prior cycle, with the exception of construction loans. Moreover,
aggregate commercial real estate loan loss rates for banks less than $1
billion (which would reasonably be expected to have a larger proportion
of small loans, given their lower legal lending limits due to their
smaller size) were lower than for larger banks as a group.
This data suggests that the loss experience associated with
commercial real estate loans for the banking system as a whole has
stayed at a relatively consistent rate through multiple credit cycles.
Thus, banking system safety and soundness concerns associated with the
commercial real estate loan loss rates have not increased. However,
commercial real estate loan charge-off rates during periods of economic
stress have and will continue to vary across individual IDIs based on
location, collateral, quality of underwriting and risk management, and
other factors. Thus commercial real estate loan concentration risk at
individual institutions remains a focus for the banking agencies.
Question 7. The agencies invite comment on the safety and soundness
impact of the proposed $400,000 threshold for commercial real estate
transactions.
Question 8. The agencies invite comment on the data used in this
analysis, and what alternative sources of data would be appropriate for
this analysis.
B. Use of Evaluations
The Title XI appraisal regulations require regulated institutions
to obtain evaluations for three categories of real estate-related
financial transactions that the agencies have determined do not require
a Title XI appraisal, including real-estate related financial
transactions at or below the $250,000 threshold and qualifying business
loans at or below the $1,000,000 threshold. Similarly, the agencies
propose to require that institutions entering into commercial real
estate transactions at or below the proposed $400,000 threshold obtain
evaluations that are consistent with safe and sound banking practices
for such transactions.\63\
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\63\ When a below-threshold transaction also qualifies for an
exemption from the appraisal requirements for a reason other than
being below one of the thresholds or a qualifying existing extension
of credit, no evaluation is required.
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An evaluation provides a general estimate of the value of real
estate, but is not subject to the same requirements as a Title XI
appraisal. An evaluation should provide appropriate information to
enable the institution to make a prudent decision regarding the
transaction. Through the Guidelines, the agencies have provided
guidance to regulated institutions on their expectations regarding when
and how evaluations should be used. The
[[Page 35487]]
Guidelines describe the transactions for which financial institutions
are required to obtain an evaluation, and recommend that institutions
develop policies and procedures for identifying when to obtain
appraisals for such transactions.
Institutions should conduct evaluations consistent with the
provisions in the Guidelines.\64\ As described in the Guidelines,
evaluations should be performed by persons who are competent and have
the relevant experience and knowledge of the market, location, and type
of real property being valued.\65\ Evaluations may be completed by a
bank employee or by a third party, as explained by the Interagency
Advisory on Use of Evaluations in Real Estate-Related Financial
Transactions.\66\ Guidance on achieving independence in the collateral
valuation program can be found in the Guidelines, among other
sources.\67\ The Guidelines state that an evaluation should provide an
estimate of the property's market value or sufficient information and
analysis to support the credit decision. The Guidelines also describe
the minimum content that an evaluation should contain.
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\64\ Guidelines at 75 FR 77461.
\65\ Interagency Appraisal and Evaluations Guidelines, 75 FR
77450, at 77458 (December 10, 2010).
\66\ Interagency Advisory on Use of Evaluations in Real Estate-
Related Financial Transactions, OCC Bulletin 2016-8 (March 4, 2016);
Board SR Letter 16-05 (March 4, 2016); Supervisory Expectations for
Evaluations, FDIC FIL-16-2016 (March 4, 2016).
\67\ Guidelines at 75 FR 77457-58. See also Valuation
Independence rules in Regulation Z, which apply to all creditors and
cover extensions of consumer credit that are or will be secured by a
consumer's principal dwelling: Board: 12 CFR 226.42; CFPB: 12 CFR
1026.42.
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In evaluating this proposal, the agencies considered the impact to
the financial system of the proposal, and specifically the impact to
financial institutions and borrowers of obtaining evaluations instead
of Title XI appraisals. Based on information from industry
participants, the cost of third-party evaluations of commercial real
estate generally ranges from $500 to over $1,500, whereas the cost of
appraisals of such properties generally ranges from $1,000 to over
$3,000. Commercial real estate transactions with transaction values
above $250,000 but at or below $400,000 (affected transactions), are
likely to involve smaller and less complex properties, and appraisals
and evaluations on such properties would likely be at the lower end of
the cost range. This third-party pricing information suggests a savings
of several hundred dollars per affected transaction.
The agencies also considered the costs in terms of time to obtain
and process appraisals and evaluations. There may be less delay in
finding appropriate personnel to perform an evaluation than to perform
a Title XI appraisal, particularly in rural areas. As described in the
Guidelines, financial institutions should review the property valuation
prior to entering into the transaction. Financial institutions require
less time to review evaluations than to review appraisals, because
evaluations contain less detailed information. The agencies estimate
that, on average, the review process for an appraisal would take
approximately forty minutes and the review process for an evaluation
would take approximately ten minutes. Thus, for affected transactions,
the proposed rule would alleviate approximately thirty minutes of
employee time per transaction, in addition to the reduced delay and the
cost savings of obtaining an evaluation instead of an appraisal.
In considering the aggregate effect of this proposal, the agencies
considered the number of affected transactions. As previously
discussed, the agencies estimate that the number of commercial real
estate transactions that would be exempted by the threshold is expected
to increase by approximately 11 percent under the proposed rule. Thus,
while the precise number of affected transactions and the precise cost
reduction per transaction cannot be determined, the proposed rule is
expected to lead to significant cost savings for institutions that
engage in commercial real estate lending.
Question 9. The agencies invite comment on the proposed requirement
that regulated institutions obtain evaluations for commercial real
estate transactions at or below the $400,000 threshold.
Question 10. What type of additional guidance, if any, do
institutions need to support the increased use of evaluations?
Question 11. To what extent does the use of evaluations reduce
burden and cost over the use of appraisals? To what extent are
evaluations currently done by in-house staff versus outsourced to
appraisers or other qualified professionals?
C. State Certified Appraiser Required
The current Title XI appraisal regulations, require that ``[a]ll
federally related transactions having a transaction value of $250,000
or more, other than those involving appraisals of 1-to-4 family
residential properties, shall require an appraisal prepared by a State
certified appraiser.'' \68\ In order to make this paragraph consistent
with the other proposed changes to the appraisal regulations, the
agencies are proposing a change to its wording to introduce the
$400,000 threshold and use the term ``commercial real estate
transaction.'' The amendment to this provision would be a technical
change that would not alter any substantive requirement.
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\68\ OCC: 12 CFR 34.43(d); Board: 12 CFR 225.63(d)(2); FDIC: 12
CFR 323.3(d)(2).
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III. Appraisal Threshold for Qualifying Business Loans
As noted above, in the 2017 EGRPRA Report to Congress, the agencies
stated their intention to gather more information about the
appropriateness of increasing the $1 million threshold for qualifying
business loans. The agencies are not proposing an increase in the
business loan threshold at this time, but the agencies invite comment
on the following questions concerning the qualifying business loan
exemption:
Question 12. The agencies invite comment and supporting data on the
appropriateness of raising the current $1,000,000 threshold for
qualifying business loans and the associated implications for safety
and soundness.
Question 13. What unique risks do institutions associate with
qualifying business loans?
Question 14. What percentage of total real estate lending at
financial institutions, by number of loans and dollar volume of
lending, are qualifying business loans?
Question 15. What is the average size of a qualifying business loan
at financial institutions? What are the incidences of default on
qualifying business loans compared to other commercial real estate
transactions that institutions have observed over time?
Question 16. The agencies invite comment on the clarity of the
application of the current threshold for qualifying business loans, and
on any difficulty that financial institutions have experienced in
interpreting the limitation on source of repayment.
IV. Request for Comments
The Agencies invite comment on all aspects of the proposed
rulemaking.
Question 17. As discussed earlier, the agencies have articulated
several bases for declining to propose an increase in the residential
threshold. The agencies request comment on whether there are other
factors that should be considered in evaluating the current appraisal
threshold for 1-to-4 family residential properties.
[[Page 35488]]
V. 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 $550 million or less
and $38.5 million or less, respectively) and publishes its
certification and a brief explanatory statement in the Federal Register
together with the rule.
The OCC currently supervises approximately 956 small entities. Data
currently available to the OCC are not sufficient to estimate how many
OCC-supervised small entities make CRE loans in amounts that fall
between the current and proposed thresholds. Therefore, we cannot
estimate how many small entities may be affected by the increase
threshold. However, because the proposal does not contain any new
recordkeeping, reporting, or compliance requirements, the proposal will
not impose costs on any OCC-supervised institutions. Accordingly, the
OCC certifies that the proposed rule will not have a significant
economic impact on a substantial number of small entities.
Board: The RFA,\69\ requires an agency either to provide an initial
regulatory flexibility analysis with a proposed rule or certify that
the proposed rule will not have a significant economic impact on a
substantial number of small entities. The proposed threshold increase
applies to certain IDIs and non-bank entities that make loans secured
by commercial real estate.\70\ The SBA establishes size standards that
define which entities are small businesses for purposes of the RFA.\71\
The size standard to be considered a small business is: $550 million or
less in assets for banks and other depository institutions; and $38.5
million or less in annual revenues for the majority of non-bank
entities that are likely to be subject to the proposed regulation.\72\
Based on the Board's analysis, and for the reasons stated below, the
proposed rule may have a significant positive economic impact on a
substantial number of small entities. Accordingly, the Board is
publishing an initial regulatory flexibility analysis. The Board will
conduct a final regulatory flexibility analysis after consideration of
comments received during the public comment period.
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\69\ 5 U.S.C. 601 et seq.
\70\ For its RFA analysis, the Board considered all Board-
regulated creditors to which the proposed rule would apply.
\71\ U.S. SBA, Table of Small Business Size Standards Matched to
North American Industry Classification System Codes, available at
https://www.sba.gov/sites/default/files/files/Size_Standards_Table.pdf.
\72\ Asset size and annual revenues are calculated according to
SBA regulations. See 13 CFR 121 et seq.
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The Board requests public comment on all aspects of this analysis.
1. Reasons for the Proposed Rule
In response to comments received in the EGRPRA process, the
agencies are proposing to increase the threshold from $250,000 to
$400,000 at or below which a Title XI appraisal is not required for
commercial real estate transactions. Because commercial real estate
prices have increased since 1994, when the current $250,000 threshold
was established, a smaller percentage of commercial real estate
transactions are currently exempted from the Title XI appraisal
requirements than when the threshold was established. This threshold
adjustment is intended to reduce the regulatory burden associated with
extending credit secured by commercial real estate in a manner that is
consistent with the safety and soundness of financial institutions.
2. Statement of Objectives and Legal Basis
As discussed above, the agencies' objective in proposing this
threshold increase is to reduce the regulatory burden associated with
extending credit in a safe and sound manner by reducing the number of
commercial real estate transactions that are subject to the Title XI
appraisal requirements.
Title XI explicitly authorizes the agencies to establish a
threshold level at or below which a Title XI appraisal is not required
if the agencies determine in writing that the threshold does not
represent a threat to the safety and soundness of financial
institutions and receive concurrence from the CFPB that such threshold
level provides reasonable protection for consumers who purchase 1-to-4
unit single-family homes.\73\ Based on available data and supervisory
experience, the agencies tailored the size and scope of the proposed
threshold increase to ensure that it would not pose a threat to the
safety and soundness of financial institutions or erode protections for
consumers who purchase 1-to-4 unit single-family homes.
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\73\ 12 U.S.C. 3341(b).
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The Board's proposed rule would apply to state chartered banks that
are members of the Federal Reserve System (state member banks), as well
as bank holding companies and nonbank subsidiaries of bank holding
companies that engage in lending. There are approximately 601 state
member banks and 35 nonbank lenders regulated by the Board that meet
the SBA definition of small entities and would be subject to the
proposed rule. Data currently available to the Board do not allow for a
precise estimate of the number of small entities that would be affected
by the proposed rule because the number of small entities that will
engage in commercial real estate transactions within the proposed
threshold is unknown.
3. Projected Reporting, Recordkeeping and Other Compliance Requirements
The proposed rule would reduce reporting, recordkeeping, and other
compliance requirements for small entities. For transactions at or
below the proposed threshold, regulated institutions would be given the
option to obtain an evaluation of the property instead of an appraisal.
Unlike appraisals, evaluations may be performed by a lender's own
employees and are not required to comply with USPAP. As discussed in
detail in Section II.B of the SUPPLEMENTARY INFORMATION, the cost of
obtaining appraisals and evaluations can vary widely depending on the
size and complexity of the property, the party performing the
valuation, and market conditions where the property is located.
Additionally, the costs of obtaining appraisals and evaluations may be
passed on to borrowers. Because of this variation in cost and practice,
it is not possible to precisely determine the cost savings that
regulated institutions will experience due to the decreased cost of
obtaining an evaluation rather than an appraisal. However, based on
information available to the Board, it is likely that small entities
and borrowers engaging in commercial real estate transactions could
experience significant cost reductions.
In addition to costing less to obtain than appraisals, evaluations
also require less time to review than appraisals because they contain
less detailed information. As discussed further in Section II.B of the
SUPPLEMENTARY
[[Page 35489]]
INFORMATION, an appraisal takes approximately forty minutes to review
and an evaluation takes approximately ten minutes to review. Thus, the
proposed rule would alleviate approximately thirty minutes of employee
time per affected transaction for which the lender obtains an
evaluation instead of an appraisal.
As previously discussed, the Board estimates that the percentage of
commercial real estate transactions that would be exempted by the
threshold is expected to increase by approximately 11 percent under the
proposed rule. The Board expects this percentage to be higher for small
entities, because a higher percentage of their loan portfolios are
likely to be made up of small, below-threshold loans than those of
larger entities. Thus, while the precise number of transactions that
will be affected and the precise cost reduction per transaction cannot
be determined, the proposed rule is expected to have a significant
positive economic impact on small entities that engage in commercial
real estate lending.
4. Identification of Duplicative, Overlapping, or Conflicting Federal
Regulations
The Board has not identified any federal statutes or regulations
that would duplicate, overlap, or conflict with the proposed revisions.
5. Discussion of Significant Alternatives
The agencies considered additional burden-reducing measures, such
as increasing the commercial threshold to a higher dollar amount and
increasing the residential and business loan thresholds, but have not
proposed such measures at this time for the safety and soundness and
consumer protection reasons previously discussed. For transactions
exempted from the Title XI appraisal requirements, the proposed rule
would require regulated institutions to get an evaluation if they do
not get an appraisal. The agencies believe this requirement is
necessary to protect the safety and soundness of financial
institutions, which is a legal prerequisite to the establishment of any
threshold. The Board is not aware of any other significant alternatives
that would reduce burden on small entities without sacrificing the
safety and soundness of financial institutions or consumer protections.
FDIC: The RFA generally requires that, in connection with a notice
of proposed rulemaking, an agency prepare and make available for public
comment an initial regulatory flexibility analysis describing the
impact of the proposed rule on small entities.\74\ A regulatory
flexibility analysis is not required, however, if the agency certifies
that the rule will not have a significant economic impact on a
substantial number of small entities. The SBA has defined ``small
entities'' to include banking organizations with total assets less than
or equal to $550 million.\75\ For the reasons described below and
pursuant to section 605(b) of the RFA, the FDIC certifies that the
final rule will not have a significant economic impact on a substantial
number of small entities.
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\74\ 5 U.S.C. 601 et seq.
\75\ 13 CFR 121.201 (as amended, effective December 2, 2014).
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The FDIC supervises 3,744 depository institutions,\76\ of which,
3,028 are defined as small banking entities by the terms of the
RFA.\77\ According to the Call Report, 3,010 small entities reported
holding some volume of real estate related financial transactions that
meet the proposed rule's definition of a commercial real estate
transaction.\78\ Therefore, 3,010 small entities could be affected by
the proposed rule.
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\76\ FDIC-supervised institutions are set forth in 12 U.S.C.
1813(q)(2).
\77\ FDIC Call Report, March 31, 2017.
\78\ The proposed definition of ``Commercial Real Estate
Transaction'' would largely capture the following four categories of
loans secured by real estate in the Call Report (FFIEC 031; RCFD
1410), namely loans that are: (1) For construction, land
development, and other land loans; (2) secured by farmland; (3)
secured by residential properties with five or more units; or (4)
secured by nonfarm nonresidential properties. However, loans that
provide both initial construction funding and permanent financing
and are reported as construction, land development, and other land
loans during the construction phase would be excluded from the
definition.
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The proposed rule will raise the appraisal threshold for commercial
real estate transactions from $250,000 to $400,000. Any commercial real
estate transaction with a value in excess of the $400,000 threshold is
required to have an appraisal by a state licensed or state certified
appraiser. Any commercial real estate transaction at or below the
$400,000 threshold requires an evaluation.
To estimate the dollar volume of commercial real estate
transactions the proposed change could potentially affect, the FDIC
used information on the dollar volume and number of loans in the Call
Report for small institutions from two categories of loans included in
the definition of a commercial real estate transaction. The Call Report
data reflect that 4.55 percent of the dollar volume of nonfarm,
nonresidential loans secured by real estate has an original loan amount
between $1 and $250,000, while 11.81 percent have an original loan
amount between $250,000 and $1,000,000. The Call Report data also
reflects that 8.85 percent of the dollar volume of agricultural loans
secured by farmland has an original loan amount between $1 and
$250,000, while 7.49 percent have an original loan amount between
$250,000 and $500,000.\79\ Assuming that the original amount of
nonfarm, nonresidential loans secured by real estate and the original
amount of agricultural loans secured by farmland are normally
distributed, the FDIC estimates that between 6.08 percent and 12.95
percent of loan volume is at or below the $400,000 threshold for these
categories, respectively.
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\79\ FDIC Call Report data, March 31, 2017.
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Therefore, raising the appraisal threshold from $250,000 to
$400,000 for commercial real estate transactions could affect an
estimated 1.53 percent to 4.10 percent of the dollar volume of all
commercial real estate transactions originated each year. This estimate
assumes that the distribution of loans for the other loan categories
within the proposed definition of commercial real estate transactions
is similar to those loans secured by nonfarm, nonresidential properties
or farmland.
The proposed rule is likely to reduce valuation review costs for
covered institutions. The FDIC estimates that it takes a loan officer
an average of 40 minutes to review an appraisal to ensure that it meets
that standards set forth in Title XI, but 10 minutes to perform a
similar review of an evaluation, which does not need to meet the Title
XI standards for appraisals. The proposed rule increases the number of
commercial real estate transactions that would require an evaluation by
raising the appraisal threshold from $250,000 to $400,000. Assuming
that 15 percent of the outstanding balance of commercial real estate
transactions for small entities gets renewed or replaced by new
originations each year, the FDIC estimates that small entities
originate $31.9 billion in new commercial real estate transactions each
year. Assuming that 1.53 percent to 4.10 percent of annual originations
represent loans with an origination amount greater than $250,000 but
not more than $400,000, the FDIC estimates that the proposed rule will
affect approximately 1,504 to 4,040 loans per year,\80\ or 0.5 percent
to 1.33 percent of loans on average for small FDIC-supervised
institutions.
[[Page 35490]]
Therefore, based on an estimated hourly rate, the proposed rule would
reduce loan review costs for small entities by $51,625 to $138,673, on
average, each year.\81\ If lenders opt to not utilize an evaluation and
require an appraisal on commercial real estate transaction greater than
$250,000 but not more than $400,000 any reduction in costs would be
smaller.
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\80\ Multiplying $31.9 billion by 1.53 percent then dividing the
product by an average loan amount of $325,000 equals 1,504 loans and
multiplying $31.9 billion by 4.10 percent then dividing the product
by an average loan amount of $325,000 equals 4,040 loans.
\81\ The FDIC estimates that the average hourly compensation for
a loan officer is $68.65 an hour. The hourly compensation estimate
is based on published compensation rates for Credit Counselors and
Loan Officers ($43.40). The estimate includes the March 2017 75th
percentile hourly wage rate reported by the BLS, National Industry-
Specific Occupational Employment and Wage Estimates. The reported
hourly wage rate is adjusted for changes in the CPI-U between May
2016 and March 2017 (1.83 percent) and grossed up by 155.3 percent
to account for non-monetary compensation as reported by the March
2017 Employer Costs for Employee Compensation Data. Based on this
estimate, loan review costs would decline between $51,625 (1,504
loans multiplied by 30 minutes and multiplied by $68.65 per hour)
and $138,673 (4,040 loans multiplied by 30 minutes and multiplied by
$68.65 per hour).
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Any associated recordkeeping costs are unlikely to change for small
FDIC-supervised entities as the amount of labor required to satisfy
documentation requirements for an evaluation or an appraisal is
estimated to be the same at about five minutes for either an appraisal
or evaluation.
The proposed rule also is likely to reduce the loan origination
costs associated with real estate appraisals for commercial real estate
borrowers. The FDIC assumes that these costs are always paid by the
borrower for this analysis. Anecdotal information from industry
participants indicates that a commercial real estate appraisal costs
between $1,000 to over $3,000, or about $2,000 on average, and a
commercial real estate evaluation costs between $500 to over $1,500, or
about $1,000 on average. Based on the prior assumptions, the FDIC
estimates that the proposed rule will affect approximately 1,504 to
4,040 transactions per year,\82\ or 0.5 percent to 1.33 percent of
loans on average for small FDIC-supervised institutions. Therefore, the
proposed rule could reduce loan origination costs for borrowers doing
business with small entities by $1.5 to $4.0 million on average per
year.\83\
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\82\ Multiplying $31.9 billion by 1.53 percent then dividing the
product by an average loan amount of $325,000 equals 1,504 loans and
multiplying $31.9 billion by 4.10 percent then dividing the product
by an average loan amount of $325,000 equals 4,040 loans.
\83\ Multiplying 1,504 loans by $1,000 savings equals $1.5
million and multiplying 4,040 loans by $1,000 savings equals $4.0
million.
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By lowering valuation costs on commercial real estate transactions
greater than $250,000 but less than or equal to $400,000 for small
FDIC-supervised institutions, the proposed rule could marginally
increase lending activity. As discussed previously, commenters in the
EGRPRA review noted that appraisals can be costly and time consuming.
By enabling small FDIC-supervised institutions to utilize evaluations
for more commercial real estate transactions, the proposed rule will
reduce transaction costs. The reduction in loan origination fees could
marginally increase commercial real estate lending activity for loans
with an origination value greater than $250,000 and not more than
$400,000.
B. Paperwork Reduction Act
Certain provisions of the proposed rule contain ``collection of
information'' requirements within the meaning of the Paperwork
Reduction Act (PRA) of 1995.\84\ In accordance with the requirements of
the PRA, the agencies may not conduct or sponsor, and the respondent is
not required to respond to, an information collection unless it
displays a currently-valid Office of Management and Budget (OMB)
control number. The OMB control number for the OCC is 1557-0190, the
Board is 7100-0250, and the FDIC is 3064-0103, which would be extended,
without revision. The agencies have concluded that the proposed rule
does not contain any changes to the current information collections,
however, the agencies are revising the methodology for calculating the
burden estimates. The information collection requirements contained in
this proposed rulemaking have been submitted by the OCC and FDIC to OMB
for review and approval under section 3507(d) of the PRA \85\ and
section 1320.11 of the OMB's implementing regulations.\86\ The Board
reviewed the proposed rule under the authority delegated to the Board
by OMB.
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\84\ 44 U.S.C. 3501-3521.
\85\ 44 U.S.C. 3507(d).
\86\ 5 CFR 1320.
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Proposed Information Collection
Title of Information Collection: Recordkeeping Requirements
Associated with Real Estate Appraisals and Evaluations.
Frequency of Response: Event generated.
Affected Public: Businesses or other for-profit.
Respondents:
OCC: National banks, Federal savings associations.
Board: State member banks (SMBs) and nonbank subsidiaries of bank
holding companies (BHCs).
FDIC: Insured state nonmember banks and state savings associations,
insured state branches of foreign banks.
General Description of Report: For federally related transactions,
Title XI requires regulated institutions \87\ to obtain appraisals
prepared in accordance with USPAP promulgated by the Appraisal
Standards Board of the Appraisal Foundation. Generally, these standards
include the methods and techniques used to estimate the market value of
a property as well as the requirements for reporting such analysis and
a market value conclusion in the appraisal. Regulated institutions are
expected to maintain records that demonstrate that appraisals used in
their real estate-related lending activities comply with these
regulatory requirements. For commercial real estate transactions
exempted from the Title XI appraisal requirements by the proposed rule,
regulated institutions would still be required to obtain an evaluation
to justify the transaction amount. The agencies estimate that the
recordkeeping burden associated with evaluations would be the same as
the recordkeeping burden associated with appraisals for such
transactions.
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\87\ National banks, federal savings associations, SMBs and
nonbank subsidiaries of BHCs, insured state nonmember banks and
state savings associations, and insured state branches of foreign
banks.
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Current Action: The threshold change in the proposed rule will
result in lenders being able to use evaluations instead of appraisals
for certain transactions. It is estimated that the time required to
document the review of an appraisal or an evaluation is the same. While
the rulemaking described in this proposed rule would not change the
amount of time that institutions spend complying with the Title XI
appraisal regulation, the agencies are using a more accurate
methodology for calculating the burden of the information collections
based on the experience of the agencies. Thus, the PRA burden estimates
shown here are different from those previously reported. The agencies
are (1) using the average number of loans per institution as the
frequency and (2) using 5 minutes as the estimated time per response
for the appraisals or evaluations.
PRA Burden Estimates
Estimated average time per response: 5 minutes.
OCC
Number of Respondents: 1,284.
Annual Frequency: 1,488.
Total Estimated Annual Burden: 159,216 hours.
[[Page 35491]]
Board
Number of Respondents: 828 SMBs; 1,215 nonbank subsidiaries of
BHCs.
Annual Frequency: 419; 25.
Total Estimated Annual Burden: 28,911 hours; 2,531 hours.
FDIC
Number of Respondents: 3,744.
Annual Frequency: 141.
Total Estimated Annual Burden: 43,992 hours.
Comments are invited on:
(a) Whether the collections of information are necessary for the
proper performance of the agencies' functions, including whether the
information has practical utility;
(b) The accuracy of the estimates of the burden of the information
collections, including the validity of the methodology and assumptions
used;
(c) Ways to enhance the quality, utility, and clarity of the
information to be collected;
(d) Ways to minimize the burden of the information collections on
respondents, including through the use of automated collection
techniques or other forms of information technology; and
(e) Estimates of capital or start-up costs and costs of operation,
maintenance, and purchase of services to provide information.
All comments will become a matter of public record. Comments on
aspects of this notice that may affect reporting, recordkeeping, or
disclosure requirements and burden estimates should be sent to the
addresses listed in the ADDRESSES section of this document. A copy of
the comments may also be submitted to the OMB desk officer for the
agencies: by mail to U.S. Office of Management and Budget, 725 17th
Street NW., #[thinsp]10235, Washington, DC 20503; by facsimile to (202)
395-5806; or by email to: oira_submission@omb.eop.gov, Attention,
Federal Banking Agency Desk Officer.
C. Riegle Act
The Riegle Act requires that each of the agencies, in determining
the effective date and administrative compliance requirements for new
regulations that impose additional reporting, disclosure, or other
requirements on IDIs, consider, consistent with principles of safety
and soundness and the public interest, any administrative burdens that
such regulations would place on depository institutions, including
small depository institutions, and customers of depository
institutions, as well as the benefits of such regulations.\88\ In
addition, in order to provide an adequate transition period, new
regulations that impose additional reporting, disclosures, or other new
requirements on IDIs generally must take effect on the first day of a
calendar quarter that begins on or after the date on which the
regulations are published in final form.\89\
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\88\ 12 U.S.C. 4802(a).
\89\ 12 U.S.C. 4802(b).
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The proposed rule would reduce burden and would not impose any
reporting, disclosure, or other new requirements on IDIs. For
transactions exempted from the Title XI appraisal requirements by the
proposed rule (i.e., commercial real estate transactions between
$250,000 and $400,000), lenders would be required to get an evaluation
if they chose not to get an appraisal. However, the agencies do not
view the option to obtain an evaluation instead of an appraisal as a
new or additional requirement for purposes of the Riegle Act. First,
the process of obtaining an evaluation is not new since IDIs already
get evaluations for transactions at or below the current $250,000-
threshold. Second, for commercial real estate transactions between
$250,000 and $400,000, IDIs could continue to get appraisals instead of
evaluations. Because the proposed rule would impose no new requirements
on IDIs, the agencies are not required by the Riegle Act to consider
the administrative burdens and benefits of the rule or delay its
effective date.
Because delaying the effective date of the rule is not required and
would serve no purpose, the agencies propose to make the threshold
increase effective on the first day after publication of the final rule
in the Federal Register. Additionally, although not required by the
Riegle Act, the agencies did consider the administrative costs and
benefits of the rule while developing the proposal. In designing the
scope of the threshold increase, the agencies chose to align the
definition of commercial real estate transaction with industry
practice, regulatory guidance, and the categories used in the Call
Report in order to reduce the administrative burden of determining
which transactions were exempted by the rule. The agencies also
considered the cost savings that IDIs would experience by obtaining
evaluations instead of appraisals and set the proposed threshold at a
level designed to provide significant burden relief without sacrificing
safety and soundness. The agencies note that comment on these matters
has been solicited in questions 2 through 14 in Section II, and in the
RFA discussion in Section IV, of the SUPPLEMENTARY INFORMATION, and
that the requirements of the Riegle Act will be considered as part of
the overall rulemaking process. In addition, the agencies invite any
other comments that further will inform the agencies' consideration of
the Riegle Act.
D. Solicitation of Comments on Use of Plain Language
Section 722 of the Gramm-Leach-Bliley Act \90\ requires the
agencies to use plain language in all proposed and final rules
published after January 1, 2000. Agencies invite comment on how to make
these proposed rules easier to understand. For example:
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\90\ Pub. L. 106-102, section 722, 113 Stat. 1338 1471 (1999).
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Have the agencies organized the material to suit your
needs? If not, how could this material be better organized?
Are the requirements in the proposed rules clearly stated?
If not, how could the proposed rules be stated more clearly?
Do the proposed rules contain language or jargon that is
not clear? If so, which language requires clarification?
Would a different format (grouping and order of sections,
use of headings, paragraphing) make the proposed rules easier to
understand? If so, what changes to the format would make the proposed
rules easier to understand?
What else could the agencies do to make the regulation
easier to understand?
E. Unfunded Mandates Act
OCC Unfunded Mandates Reform Act of 1995 Determination
The OCC has analyzed the proposed 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 proposed rule includes a
federal mandate that may result in the expenditure by state, local, and
tribal governments, in the aggregate, or by the private sector, of $100
million or more in any one year (adjusted annually for inflation).
The proposed rule does not impose new requirements or include new
mandates. Therefore, we conclude that the proposed rule will not result
in an expenditure of $100 million or more by state, local, and tribal
governments, or by the private sector, in any one year.
List of Subjects
12 CFR Part 34
Appraisal, Appraiser, Banks, Banking, Consumer protection, Credit,
Mortgages,
[[Page 35492]]
National banks, Reporting and recordkeeping requirements, Savings
associations, Truth in lending.
12 CFR Part 225
Administrative practice and procedure, Banks, banking, Federal
Reserve System, Capital planning, Holding companies, Reporting and
recordkeeping requirements, Securities, Stress testing
12 CFR Part 323
Banks, banking, Mortgages, Reporting and recordkeeping
requirements, Savings associations.
Office of the Comptroller of the Currency, 12 CFR Part 34
For the reasons set forth in the joint preamble, the OCC proposes
to amend part 34 of chapter I of title 12 of the Code of Federal
Regulations as follows:
PART 34--REAL ESTATE LENDING AND APPRISALS
0
1. The authority citation for part 34 continues to read as follows:
Authority: 12 U.S.C. 1, 25b, 29, 93a, 371, 1462a, 1463, 1464,
1465, 1701j-3, 1828(o), 3331 et seq., 5101 et seq., and
5412(b)(2)(B), and 15 U.S.C. 1639h.
0
2. Section 34.42 is amended by redesignating paragraphs (e) through (m)
as paragraphs (f) through (n), respectively, and by adding a new
paragraph (e) to read as follows:
Sec. 34.42 Definitions.
* * * * *
(e) Commercial real estate transaction means a real estate-related
financial transaction that is not secured by a 1-to-4 family
residential property. A real estate-related financial transaction to
finance the initial construction of a 1-to-4 family residential
property that does not include permanent financing is a commercial real
estate transaction.
* * * * *
0
3. Section 34.43 is amended by:
0
a. Removing the word ``or'' at the end of paragraph (a)(11);
0
b. Revising paragraph (a)(12);
0
c. Adding paragraph (a)(13); and
0
d. Revising paragraphs (b) and (d)(2).
The revisions and addition read as follows:
Sec. 34.43 Appraisals required; transactions requiring a State
certified or licensed appraiser.
(a) * * *
(12) The OCC determines that the services of an appraiser are not
necessary in order to protect Federal financial and public policy
interests in real estate-related financial transactions or to protect
the safety and soundness of the institution; or
(13) The transaction is a commercial real estate transaction that
has a transaction value of $400,000 or less.
(b) Evaluations required. For a transaction that does not require
the services of a State certified or licensed appraiser under paragraph
(a)(1), (a)(5), (a)(7), or (a)(13) of this section, the institution
shall obtain an appropriate evaluation of real property collateral that
is consistent with safe and sound banking practices.
* * * * *
(d) * * *
(2) Commercial real estate transactions of more than $400,000. All
federally related transactions that are commercial real estate
transactions having a transaction value of more than $400,000 shall
require an appraisal prepared by a State certified appraiser.
* * * * *
Federal Reserve Board, 12 CFR Part 225
For the reasons set forth in the joint preamble, the Board amends
part 225 of chapter II of title 12 of the Code of Federal Regulations
as follows:
PART 225--BANK HOLDING COMPANIES AND CHANGE IN BANK CONTROL
(REGULATION Y)
0
4. The authority citation for part 225 continues to read as follows:
Authority: 12 U.S.C. 1817(j)(13), 1818, 1828(o), 1831i, 1831p-1,
1843(c)(8), 1844(b), 1972(l), 3106, 3108, 3310, 3331-3351, 3906,
3907, and 3909; 15 U.S.C. 1681s, 1681w, 6801 and 6805.
0
5. Section 225.62 is amended by redesignating paragraphs (e) through
(m) as paragraphs (f) through (n), respectively, and by adding a new
paragraph (e) to read as follows:
Sec. 225.62 Definitions.
* * * * *
(e) Commercial real estate transaction means a real estate-related
financial transaction that is not secured by a 1-to-4 family
residential property. A real estate-related financial transaction to
finance the initial construction of a 1-to-4 family residential
property that does not include permanent financing is a commercial real
estate transaction.
* * * * *
0
6. Section 225.63 is amended by:
0
a. Removing the word ``or'' at the end of paragraph (a)(12);
0
b. Revising paragraph (a)(13);
0
c. Adding paragraph (a)(14);
0
d. Revising paragraph (b); and
0
e. Revising paragraph (d)(2).
The revisions and addition read as follows:
Sec. 225.63 Appraisals required; transactions requiring a State
certified or licensed appraiser.
(a) * * *
(13) The Board determines that the services of an appraiser are not
necessary in order to protect Federal financial and public policy
interests in real estate-related financial transactions or to protect
the safety and soundness of the institution; or
(14) The transaction is a commercial real estate transaction that
has a transaction value of $400,000 or less.
(b) Evaluations required. For a transaction that does not require
the services of a State certified or licensed appraiser under paragraph
(a)(1), (a)(5), (a)(7), or (a)(14) of this section, the institution
shall obtain an appropriate evaluation of real property collateral that
is consistent with safe and sound banking practices.
* * * * *
(d) * * *
(2) Commercial real estate transactions of more than $400,000. All
federally related transactions that are commercial real estate
transactions having a transaction value of more than $400,000 shall
require an appraisal prepared by a State certified appraiser.
* * * * *
Federal Deposit Insurance Corporation, 12 CFR Part 323
For the reasons set forth in the joint preamble, the FDIC amends
part 323 of chapter III of title 12 of the Code of Federal Regulations
as follows:
PART 323--APPRAISALS
0
7. Revise the authority citation for part 323 to read as follows:
Authority: 12 U.S.C. 1818, 1819 [``Seventh'' and ``Tenth''],
1831p-1 and 3331 et seq.
0
8. Revise the authority citation for subpart A of part 323 to read as
follows:
Authority: This subpart is issued under 12 U.S.C. 1818, 1819
[``Seventh'' and ``Tenth''], 1831p-1 and title XI of the Financial
Institutions Reform, Recovery, and Enforcement Act of 1989
(``FIRREA'') (Pub. L. 101-73, 103 Stat. 183, 12 U.S.C. 3331 et seq.
(1989)).
0
9. Section 323.2 is amended by redesignating paragraphs (e) through (m)
as paragraphs (f) through (n), respectively, and by adding a new
paragraph (e) to read as follows:
Sec. 323.2 Definitions.
* * * * *
(e) Commercial real estate transaction means a real estate-related
financial transaction that is not secured by a 1-to-4 family
residential property. A real
[[Page 35493]]
estate-related financial transaction to finance the initial
construction of a 1-to-4 family residential property that does not
include permanent financing is a commercial real estate transaction.
* * * * *
0
4. Section 323.3 is amended by:
0
a. Removing the word ``or'' at the end of paragraph (a)(11);
0
b. Revising paragraph (a)(12);
0
c. Adding paragraph (a)(13);
0
d. Revising paragraph (b); and
0
e. Revising paragraph (d)(2).
The revisions and addition read as follows:
Sec. 323.3 Appraisals required; transactions requiring a State
certified or licensed appraiser.
(a) * * *
(12) The FDIC determines that the services of an appraiser are not
necessary in order to protect Federal financial and public policy
interests in real estate-related financial transactions or to protect
the safety and soundness of the institution; or
(13) The transaction is a commercial real estate transaction that
has a transaction value of $400,000 or less.
(b) Evaluations required. For a transaction that does not require
the services of a State certified or licensed appraiser under paragraph
(a)(1), (a)(5), (a)(7), or (a)(13) of this section, the institution
shall obtain an appropriate evaluation of real property collateral that
is consistent with safe and sound banking practices.
* * * * *
(d) * * *
(2) Commercial real estate transactions of more than $400,000. All
federally related transactions that are commercial real estate
transactions having a transaction value of more than $400,000 shall
require an appraisal prepared by a State certified appraiser.
* * * * *
Dated: July 18, 2017.
Keith A. Noreika,
Acting Comptroller of the Currency.
By order of the Board of Governors of the Federal Reserve
System, July 18, 2017.
Margaret McCloskey Shanks,
Deputy Secretary of the Board.
Dated at Washington, DC, this 18th of July, 2017.
By order of the Board of Directors.
Federal Deposit Insurance Corporation.
Robert E. Feldman,
Executive Secretary.
[FR Doc. 2017-15748 Filed 7-28-17; 8:45 am]
BILLING CODE P
