Real Estate Appraisals, 15019-15036 [2018-06960]
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15019
Rules and Regulations
Federal Register
Vol. 83, No. 68
Monday, April 9, 2018
This section of the FEDERAL REGISTER
contains regulatory documents having general
applicability and legal effect, most of which
are keyed to and codified in the Code of
Federal Regulations, which is published under
50 titles pursuant to 44 U.S.C. 1510.
The Code of Federal Regulations is sold by
the Superintendent of Documents.
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: Final rule.
AGENCY:
The OCC, Board, and FDIC
(collectively, the agencies) are adopting
a final rule to amend the agencies’
regulations requiring appraisals of real
estate for certain transactions. The final
rule increases the threshold level at or
below which appraisals are not required
for commercial real estate transactions
from $250,000 to $500,000. The final
rule defines commercial real estate
transaction as a real estate-related
financial transaction that is not secured
by a single 1-to-4 family residential
property. It excludes all transactions
secured by a single 1-to-4 family
residential property, and thus
construction loans secured by a single 1to-4 family residential property are
excluded. For commercial real estate
transactions exempted from the
appraisal requirement as a result of the
revised threshold, regulated institutions
must obtain an evaluation of the real
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SUMMARY:
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property collateral that is consistent
with safe and sound banking practices.
DATES: This final rule is effective on
April 9, 2018.
FOR FURTHER INFORMATION CONTACT:
OCC: G. Kevin Lawton, Appraiser
(Real Estate Specialist), (202) 649–7152,
Mitchell E. Plave, Special Counsel,
Legislative and Regulatory Activities
Division, (202) 649–5490, or Joanne
Phillips, Attorney, Bank Activities and
Structure Division, (202) 649–5500,
Office of the Comptroller of the
Currency, 400 7th Street SW,
Washington, DC 20219. For persons
who are deaf or hearing impaired, TTY
users may contact (202) 649–5597.
Board: Constance Horsley, Deputy
Associate Director, (202) 452–5239, or
Carmen Holly, Senior Supervisory
Financial Analyst, (202) 973–6122,
Division of Supervision and Regulation;
or Gillian Burgess, Senior Counsel, (202)
736–5564, Matthew Suntag, Counsel,
(202) 452–3694, or Kirin Walsh,
Attorney, (202) 452–3058, Legal
Division, Board of Governors of the
Federal Reserve System, 20th and C
Streets NW, Washington, DC 20551. For
the hearing impaired only,
Telecommunications Device for the Deaf
(TDD) users may contact (202) 263–
4869.
FDIC: Beverlea S. Gardner, Senior
Examination Specialist, Division of Risk
Management and Supervision, (202)
898–3640, Mark Mellon, Counsel, Legal
Division, (202) 898–3884, or Lauren
Whitaker, Senior Attorney, Legal
Division, (202) 898–3872, Federal
Deposit Insurance Corporation, 550 17th
Street NW, Washington, DC 20429. For
the hearing impaired only, TDD users
may contact (202) 925–4618.
SUPPLEMENTARY INFORMATION:
I. Background and Summary of the
Proposed Rule
In July 2017, the agencies invited
comment on a notice of proposed
rulemaking (proposal or proposed rule) 1
that would amend the agencies’
appraisal regulations promulgated
pursuant to Title XI of the Financial
Institutions Reform, Recovery, and
Enforcement Act of 1989 (Title XI).2
Specifically, the proposal would have
increased the monetary threshold at or
below which financial institutions that
1 82
2 12
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FR 35478 (July 31, 2017).
U.S.C. 3331 et seq.
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are regulated by the agencies (regulated
institutions) would not be required to
obtain appraisals in connection with
commercial real estate transactions
(commercial real estate appraisal
threshold) from $250,000 to $400,000.
The proposal followed the completion
in early 2017 of the regulatory review
process required by the Economic
Growth and Regulatory Paperwork
Reduction Act (EGRPRA).3 During the
EGRPRA process, the agencies received
numerous comments related to the Title
XI appraisal regulations, including
recommendations to increase the
thresholds at or below which
transactions are exempt from the Title
XI appraisal requirements. Among other
proposals developed through the
EGRPRA process, the agencies
recommended increasing the
commercial real estate appraisal
threshold to $400,000.4
Title XI directs each federal financial
institutions regulatory agency 5 to
publish appraisal regulations for
federally related transactions within its
jurisdiction. The purpose of Title XI is
to protect federal financial and public
policy interests 6 in real estate-related
transactions by requiring that real estate
appraisals used in connection with
federally related transactions (Title XI
appraisals) be performed in accordance
with uniform standards, by individuals
whose competency has been
demonstrated, and whose professional
conduct will be subject to effective
supervision.7
3 Public Law 104–208, Div. A, Title II, section
2222, 110 Stat. 3009–414, (1996) (codified at 12
U.S.C. 3311).
4 See FFIEC, Joint Report to Congress: Economic
Growth and Regulatory Paperwork Reduction Act,
(March 2017), (EGRPRA Report), available at
https://www.ffiec.gov/pdf/2017_FFIEC_EGRPRA_
Joint-Report_to_Congress.pdf.
5 ‘‘Federal financial institutions regulatory
agency’’ means the Board, the FDIC, the OCC, the
National Credit Union Association (NCUA), and,
formerly, the Office of Thrift Supervision. 12 U.S.C.
3350(6).
6 These interests include those stemming from the
federal government’s roles as regulator and deposit
insurer of financial institutions that engage in real
estate lending and investment, guarantor or lender
on mortgage loans, and as a direct party in real
estate-related financial transactions. These federal
financial and public policy interests have been
described in predecessor legislation and
accompanying Congressional reports. See Real
Estate Appraisal Reform Act of 1988, H.R. Rep. No.
100–1001, pt. 1, at 19 (1988); 133 Cong. Rec. 33047–
33048 (1987).
7 12 U.S.C. 3331.
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Title XI directs the agencies to
prescribe appropriate standards for Title
XI appraisals under the agencies’
respective jurisdictions,8 including, at a
minimum, that appraisals be: (1)
Performed in accordance with the
Uniform Standards of Professional
Appraisal Practice (USPAP); 9 (2)
written appraisals, as defined by the
statute, by licensed or certified
appraisers; 10 and (3) subject to
appropriate review for compliance with
USPAP. All federally related
transactions must have Title XI
appraisals.
Title XI defines a ‘‘federally related
transaction’’ as a real estate-related
financial transaction that is regulated or
engaged in by a federal financial
institutions regulatory agency and
requires the services of an appraiser.11
A real estate-related financial
transaction is defined as any transaction
that involves: (i) The sale, lease,
purchase, investment in or exchange of
real property, including interests in
property, or financing thereof; (ii) the
refinancing of real property or interests
in real property; and (iii) the use of real
property or interests in real property as
security for a loan or investment,
including mortgage-backed securities.12
The agencies have authority to
determine those real estate-related
financial transactions that do not
require the services of a state certified
or state licensed appraiser and are
therefore exempt from the appraisal
requirements of Title XI. These real
estate-related financial transactions are
not federally related transactions under
the statutory or regulatory definitions,
because they do not require the services
of an appraiser.13
The agencies have exempted several
categories of real estate-related financial
transactions from the Title XI appraisal
requirements.14 The agencies have
determined that these categories of
transactions do not require appraisals by
state certified or state licensed
appraisers in order to protect federal
financial and public policy interests or
to satisfy principles of safe and sound
banking.
In 1992, Congress amended Title XI,
expressly authorizing the agencies to
establish a threshold level at or below
which an appraisal by a state certified
or state licensed appraiser is not
required in connection with federally
related transactions if the agencies
determine in writing that the threshold
does not represent a threat to the safety
and soundness of financial
institutions.15 As noted above,
transactions at or below the threshold
level are exempt from the Title XI
appraisal requirements and thus are not
federally related transactions.
Under the current thresholds,
established in 1994,16 all real estaterelated financial transactions with a
transaction value 17 of $250,000 or less,
as well as certain real estate-secured
business loans (qualifying business
loans or QBLs) with a transaction value
of $1 million or less, do not require Title
XI appraisals.18 QBLs are business
loans 19 that are real estate-related
financial transactions and that are not
dependent on the sale of, or rental
13 See
59 FR 29482 (June 7, 1994).
OCC: 12 CFR 34.43(a); Board: 12 CFR
225.63(a); and FDIC: 12 CFR 323.3(a).
15 Housing and Community Development Act of
1992, Pub. L. 102–550, section 954, 106 Stat. 3894
(amending 12 U.S.C. 3341).
16 See 59 FR at 29482. The NCUA has
promulgated similar rules with similar thresholds.
See 60 FR 51889 (October 4, 1995) and 66 FR 58656
(November 23, 2001).
17 For loans and extensions of credit, the
transaction value is the amount of the loan or
extension of credit. For sales, leases, purchases,
investments in or exchanges of real property, the
transaction value is the market value of the real
property. For the pooling of loans or interests in
real property for resale or purchase, the transaction
value is the amount of each loan or the market
value of each real property, respectively. See OCC:
12 CFR 34.42(m); Board: 12 CFR 225.62(m); and
FDIC: 12 CFR 323.2(m).
18 See OCC: 12 CFR 34.43(a)(1) and (5); Board: 12
CFR 225.63(a)(1) and (5); and FDIC: 12 CFR
323.3(a)(1) and (5).
19 The Title XI appraisal regulations define
‘‘business loan’’ to mean ‘‘a loan or extension of
credit to any corporation, general or limited
partnership, business trust, joint venture, pool,
syndicate, sole proprietorship, or other business
entity.’’ OCC: 12 CFR 34.42(d); Board: 12 CFR
225.62(d); and FDIC: 12 CFR 323.2(d).
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14 See
8 12 U.S.C. 3339. The agencies’ Title XI appraisal
regulations apply to transactions entered into by the
agencies or by institutions regulated by the agencies
that are depository institutions or bank holding
companies or subsidiaries of depository institutions
or bank holding companies. See OCC: 12 CFR 34,
subpart C; Board: 12 CFR 225.61(b); 12 CFR part
208, subpart E; and FDIC: 12 CFR part 323.
9 USPAP is written and interpreted by the
Appraisal Standards Board of the Appraisal
Foundation. USPAP contains generally recognized
ethical and performance standards for the appraisal
profession in the United States, including real
estate, personal property, and business appraisals.
See https://www.appraisalfoundation.org/imis/TAF/
Standards/Appraisal_Standards/Uniform_
Standards_of_Professional_Appraisal_Practice/
TAF/USPAP.aspx?hkey=a6420a67-dbfa-41b3-9878fac35923d2af.
10 Title XI defines ‘‘written appraisal’’ as ‘‘a
written statement used in connection with a
federally related transaction that is independently
and impartially prepared by a licensed or certified
appraiser setting forth an opinion of defined value
of an adequately described property as of a specific
date, supported by presentation and analysis of
relevant market information. 12 U.S.C. 3350(10).
11 12 U.S.C. 3350(4).
12 12 U.S.C. 3350(5).
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income derived from, real estate as the
primary source of repayment.20
For real estate-related financial
transactions that are exempt from the
Title XI appraisal requirement because
they are at or below the applicable
thresholds or qualify for the exemption
for certain existing extensions of
credit,21 the Title XI appraisal
regulations require regulated
institutions to obtain an evaluation of
the real property collateral that is
consistent with safe and sound banking
practices.22 An evaluation should
contain sufficient information and
analysis to support the financial
institution’s decision to engage in the
transaction.23
The agencies proposed to increase the
commercial real estate appraisal
threshold from $250,000 to $400,000.
The proposal would have defined
commercial real estate transaction to
include all real estate-related financial
transactions, except for those secured by
a 1-to-4 family residential property,24
but including loans that finance the
construction of 1-to-4 family properties
and that do not include permanent
financing.25 Under the proposal,
regulated institutions would have been
required to obtain evaluations
consistent with safe and sound banking
20 See OCC: 12 CFR 34.43(a)(5); Board: 12 CFR
225.63(a)(5); and FDIC: 12 CFR 323.3(a)(5).
21 Transactions that involve an existing extension
of credit at the lending institution are exempt from
the Title XI appraisal requirements, but are required
to have evaluations, provided that there has been
no obvious and material change in market
conditions or physical aspects of the property that
threatens the adequacy of the institution’s real
estate collateral protection after the transaction,
even with the advancement of new monies; or there
is no advancement of new monies, other than funds
necessary to cover reasonable closing costs. See
OCC: 12 CFR 34.43(a)(7) and (b); Board: 12 CFR
225.63(a)(7) and (b); and FDIC: 12 CFR 323.3(a)(7)
and (b).
22 See OCC: 12 CFR 34.43(b); Board: 12 CFR
225.63(b); and FDIC: 12 CFR 323.3(b).
23 Evaluations are not required to be performed in
accordance with USPAP or by state certified or state
licensed appraisers. The agencies have provided
supervisory guidance for conducting evaluations in
a safe and sound manner in the Interagency
Appraisal and Evaluation Guidelines (Guidelines)
and the Interagency Advisory on the Use of
Evaluations in Real Estate-Related Financial
Transactions (Evaluations Advisory, and together
with the Guidelines, Evaluation Guidance). See, 75
FR 77450 (December 10, 2010); OCC Bulletin 2016–
8 (March 4, 2016); Board SR Letter 16–5 (March 4,
2016); and Supervisory Expectations for
Evaluations, FDIC FIL–16–2016 (March 4, 2016).
24 A 1-to-4 family residential property is a
property containing one, two, three, or four
individual dwelling units, including manufactured
homes permanently affixed to the underlying land
(when deemed to be real property under state law).
See OCC: 12 CFR part 34 subpart D, Appendix A;
Board: 12 CFR 208, Appendix C; and FDIC: 12 CFR
part 365, subpart A, Appendix A.
25 The second part of the definition was intended
to clarify, not be an exception to, the first part.
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practices in connection with
commercial real estate transactions at or
below the proposed $400,000 threshold.
The agencies did not propose increasing
the thresholds for other types of real
estate-related financial transactions, but
solicited comment on the
appropriateness of raising the threshold
for residential real estate transactions
and QBLs.
The comment period closed on
September 29, 2017. The agencies
collectively received over 200
comments from appraisers, appraiser
trade organizations, financial
institutions, financial institutions trade
organizations, and individuals.
As noted in the proposal, increases in
commercial property values over time
have required regulated institutions to
obtain Title XI appraisals for a larger
proportion of commercial real estate
transactions than in 1994 when the
current $250,000 threshold was
established. This increase in the number
of appraisals required may have
contributed to increased burden for
regulated institutions in terms of time
and cost. The proposal was intended to
reduce regulatory burden consistent
with federal financial and public policy
interests in real estate-related financial
transactions. Based on supervisory
experience and available data, the
agencies published the proposal to
accomplish these goals without posing a
threat to the safety and soundness of
financial institutions.
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II. Revisions to the Title XI Appraisal
Regulations
Overview of Changes
After carefully considering the
comments and conducting further
analysis, the agencies are adopting a
final rule that increases the commercial
real estate appraisal threshold with
three modifications from the proposal.
First, the agencies have decided to
increase the commercial real estate
appraisal threshold to $500,000 rather
than $400,000 as proposed. Second, the
final rule also makes a conforming
change to the section requiring state
certified appraisers to be used for
federally related transactions that are
commercial real estate transactions
above the increased threshold.
Third, the final rule also reflects a
change to the proposed definition of
commercial real estate transaction,
which no longer includes construction
loans secured by a single 1-to-4 family
residential property, regardless of
whether the loan is for initial
construction only or includes
permanent financing. Thus, under the
final rule, a loan that is secured by a
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single 1-to-4 family residential property,
including a loan for construction, will
remain subject to the $250,000
threshold.26 The agencies made this
change in the final rule after
consideration of the comments, which
suggested that including 1-to-4 family
constructions loans that do not include
permanent financing in the definition,
but excluding those that do not, would
not significantly reduce burden.
These changes are discussed in more
detail below, in the order in which they
appear in the rule. As described in more
detail below, the effective date for the
rule will be the date of its publication
in the Federal Register. In the DoddFrank Wall Street Reform and Consumer
Protection Act (the Dodd-Frank Act),27
Congress amended the threshold
provision to require ‘‘concurrence from
the Consumer Financial Protection
Bureau (CFPB) that such threshold level
provides reasonable protection for
consumers who purchase 1–4 unit
single-family residences.’’ 28 The
agencies have received concurrence
from the CFPB that the commercial real
estate appraisal threshold being adopted
provides reasonable protection for
consumers who purchase 1–4 unit
single family residential properties.
Comments on the Proposed Increase to
the Commercial Real Estate Appraisal
Threshold
The agencies received a range of
comments regarding the proposal to
increase the commercial real estate
appraisal threshold. Comments from
financial institutions and financial
institutions trade associations generally
supported an increase, although many
requested a higher increase than
proposed. Comments from appraisers
and appraiser-related trade associations
generally opposed an increase.
Commenters supporting a threshold
increase stated that an increase would
be appropriate, given the increases in
real estate values since the current
threshold was established, the cost and
time savings to lenders and borrowers
the higher threshold would provide, and
the burden relief it would provide to
financial institutions in rural and other
areas where there are reported shortages
of state licensed or state certified
appraisers, which may have caused
transaction delays and increased
lending costs. Commenters supporting a
threshold increase also asserted that it
26 Residential construction loans secured by more
than one 1-to-4 family residential property will be
considered commercial real estate transactions
subject to the higher threshold.
27 Public Law 111–203, 124 Stat.1376.
28 Dodd-Frank Act, § 1473, 124 Stat. 2190
(amending 12 U.S.C. 3341(b)).
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would provide burden relief for
financial institutions, without
sacrificing sound risk management
principles or safe and sound banking
practices, and that an increase would
help justify the cost and return of
originating smaller and less complex
commercial real estate loans. Several
commenters asserted the higher
threshold could be implemented easily
and would result in burden relief, for
example, by reducing loan costs and
minimizing delays in loan processing.
One commenter asserted that the
proposed increase would support local
and regional economies, and another
represented that it would assist small
builders. This same commenter asserted
that reducing burden on lenders would
facilitate financing to builders generally,
as they rely heavily on commercial
banks for financing.
Commenters opposing an increase to
the commercial real estate appraisal
threshold asserted that an increase
would elevate risks to financial
institutions, the banking system,
borrowers, small business owners,
commercial property owners, and
taxpayers. Several of these commenters
asserted that the increased risk would
not be justified by burden relief. Other
commenters asserted that the proposed
increase contradicts publicly stated
concerns of the agencies relating to the
state of the commercial real estate
market and the quality of evaluation
reports. Another commenter asserted
that the inclusion of construction loans
extended to consumers as commercial
real estate transactions would magnify
risk, as the commenter viewed such
loans as particularly risky. One
commenter expressed concern that the
proposal would lead to increased use of
automated valuations, which the
commenter asserted are not adequate
substitutes for appraisals, or would
eliminate collateral verifications
altogether.
Some commenters opposing the
threshold raised issues unrelated to risk.
A few asserted that appraisals are
relatively inexpensive and, thus, that
the proposed increase would not
materially reduce costs. One commenter
expressed the view that an increase in
the commercial real estate appraisal
threshold would be contrary to
consumer protection objectives. Another
commenter asserted that the agencies
are required by Title XI to receive
concurrence from the CFPB for a
threshold change. In support of its
opposition to the proposal, a commenter
cited a 2012 U.S. Government
Accountability Office (GAO) report,
contending that the report found no
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support for raising the threshold.29
Another commenter asserted that the
proposed threshold increase is contrary
to Congressional intent and also
asserted that most commenters during
the EGRPRA process were against a
threshold increase.
Several commenters rejected
assertions that there was an appraiser
shortage warranting regulatory relief,
some asserting that any shortage is
caused by appraisers’ unwillingness to
work for appraisal management
companies (AMCs) at the reduced fees
being offered to appraisers by AMCs.
Two commenters questioned the impact
of the proposed commercial real estate
appraisal threshold on appraiser
shortages, one asserting that the number
of commercial real estate appraisers has
remained relatively steady in recent
years and the other asserting that
appraiser shortages are primarily related
to residential property valuations.
Many commenters opposing the
proposal highlighted the benefits that
state licensed or state certified
appraisers bring to the process of
valuing real estate collateral. One of
these commenters asserted that
appraisers serve a necessary function in
real estate lending and expressed
concerns that bypassing them to create
a more streamlined valuation process
could lead to fraud and another real
estate crisis. Several commenters
highlighted that appraisers are the only
unbiased party in the valuation process,
in contrast to buyers, agents, lenders,
and sellers, who each have an interest
in the underlying transactions. One
commenter asserted that appraisers have
a unique vantage point during the
property inspection process to provide
lenders with information, in addition to
a valuation, that may be critical to the
lending decision and help to avoid bad
loans and fraud.
Some commenters who were
supportive of the proposal also
discussed the role of appraisals and
appraisers. One of these commenters
asserted that appraisals are an integral
part of the safety and soundness of the
real estate industry, but believed that
certain transactions are well served by
alternative valuation methods. Some
other commenters expressed skepticism
about the value of appraisals prepared
by independent appraisers. In this
regard, one commenter asserted that
banks have a better understanding of
property values in their communities
than appraisers from other areas, while
another expressed concern for the
29 See GAO, ‘‘Real Estate Appraisals: Appraisal
Subcommittee Needs to Improve Monitoring
Procedures,’’ GAO–12–147 (January 2012).
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reliability of appraisals and whether
appraisers’ valuations are keeping up
with property growth trends. Another
commenter expressed concern that
appraisers’ access to sales contracts can
lead to an over-abundance of appraised
values at or above the amounts in the
contracts.
After carefully considering the
comments received, the agencies have
decided to increase the commercial real
estate appraisal threshold. As discussed
in the proposal and further detailed
below, increasing the commercial real
estate appraisal threshold will provide
regulatory relief for financial
institutions by removing the appraisal
requirement for a material number of
transactions without threatening the
safety and soundness of financial
institutions.
The agencies are increasing the
threshold based on express statutory
authority to do so if they determine in
writing that the threshold does not
represent a threat to the safety and
soundness of financial institutions.30
The agencies have made this safety and
soundness determination and a detailed
analysis is provided below.
Regarding consumer protection
concerns, the agencies do not expect
that this increase will affect a significant
number of consumer transactions. As
discussed in more detail below, the final
rule is only raising the threshold for
commercial real estate transactions.
This definition was revised to exclude
construction loans secured by a single 1to-4 family residential property, which
would have included construction loans
to consumers. As a result of this change,
the final rule will not affect a material
number of consumer transactions.
Regarding the efficacy of Title XI
appraisals, the agencies recognize and
are supportive of the role that appraisers
play in ensuring a safe and sound real
estate lending process, regardless of
whether it is in connection with an
appraisal or an evaluation. Indeed, the
Title XI appraisal regulations, appraiser
independence requirements, and the
Guidelines emphasize the importance of
an independent opinion of collateral
value in the process of real estate
lending. Through the agencies’
supervisory experience with loans that
were exempted by the current
thresholds and an analysis of loan losses
over prior credit cycles for such loans,
the agencies have found that evaluations
can be an effective valuation method for
lower-risk transactions. Even when the
transaction amount is at or below the
threshold, the Evaluation Guidance
encourages regulated institutions to
30 12
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obtain Title XI appraisals when
necessary for risk management and to
preserve the safety and soundness of the
institution.
A. Threshold Increase for Commercial
Real Estate Transactions
Definition of Commercial Real Estate
Transaction
The commercial real estate appraisal
threshold increase applies only to
transactions defined as ‘‘commercial
real estate transactions.’’ Under the
proposed definition, a commercial real
estate transaction would have included
construction loans for 1-to-4 family
residential units, but not those
providing permanent financing.
Accordingly, the proposed definition
would have included a loan extended to
finance the construction of a consumer’s
dwelling, but would have excluded
construction loans that provide both the
initial construction funding and
permanent financing.
The agencies received several
comments related to the proposed
definition. Most comments were not
supportive of the proposed treatment of
loans to finance the construction of 1to-4 family residential properties. The
one commenter in support of the
proposal to include 1-to-4 family
construction-only loans in the definition
of a commercial real estate transaction
asserted that these loans are
underwritten similar to commercial real
estate transactions.
Some commenters supported
excluding all loans to finance the
construction of 1-to-4 family residential
properties from the definition. Some
commenters maintained that it would be
safer from a risk perspective to keep
construction loans for 1-to-4 family
properties in the residential loan
category subject to the $250,000
threshold. These commenters asserted
that 1-to-4 family construction loans are
riskier than conventional residential
lending, and maintained that
evaluations lack the market analysis
needed for a phased construction
project. One commenter asserted that
there may be limited benefit to
including transactions to finance the
construction of 1-to-4 family residential
properties without permanent financing
in the definition of commercial real
estate transaction, because an appraisal
would be required prior to the
permanent financing phase and prudent
risk management would dictate
obtaining the appraisal prior to initial
funding. Another commenter asserted
that the implementation of two
thresholds for 1-to-4 family residential
construction loans would cause
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confusion and increase regulatory
burden on financial institutions.
A few commenters expressed the view
that all residential construction loans
should be included in the definition and
subject to the higher threshold. One
commenter noted that an increasing
percentage of 1-to-4 family properties
are rental properties and that the
proposed definition would have
excluded a class of rent-dependent real
estate that should be classified as
commercial real estate. Another
commenter recommended that
‘‘construction-to-permanent’’ loans be
included in the definition of
commercial real estate transaction to
increase the financing available for new
home construction, indicating that strict
underwriting and active engagement
among the bank, home builder, and
home buyer alleviate risks for these
loans. This commenter supported
subjecting all construction loans to the
same treatment, and asserted that doing
so would reduce regulatory burden,
provide consistency, and allow for more
efficient processes. Another commenter
indicated that including all 1-to-4
family construction loans in the
definition would avoid creating
additional complications by
distinguishing such loans into two
different classes.
After carefully considering the
comments, the agencies have adopted a
definition of commercial real estate
transaction that excludes construction
loans secured by single 1-to-4 family
residential properties. Specifically, the
final rule defines commercial real estate
transaction as a real estate-related
financial transaction that is not secured
by a single 1-to-4 family residential
property. This definition eliminates the
distinction between construction loans
secured by a single 1-to-4 family
residential property that only finance
construction and those that provide
both construction and permanent
financing. Under the definition in the
final rule, neither of these types of loans
will be commercial real estate
transactions; they will both remain
subject to the $250,000 threshold.
This approach addresses the potential
confusion from subjecting two classes of
construction loans secured by a single 1to-4 family residential property to
different threshold levels. The revised
definition also reflects comments stating
that Title XI appraisals are typically
conducted for loans for construction of
a single 1-to-4 family residential
property regardless of whether the loan
provides only financing for construction
or provides ‘‘construction-topermanent’’ financing.
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The agencies have included the term
‘‘single’’ in the definition to clarify that
only transactions secured by one 1-to-4
family residential property are excluded
from the definition of ‘‘commercial real
estate transaction,’’ whether financing
construction or for other purposes. This
change addresses potential confusion
about whether a loan for the
construction of multiple residential
properties would meet the definition of
‘‘commercial real estate transaction;’’ a
loan that is secured by multiple 1-to-4
family residential properties (for
example, a loan to construct multiple
properties in a residential
neighborhood) would meet the
definition of commercial real estate
transaction and thus be subject to the
higher threshold.
This approach addresses concerns
about consumer protection, because a
large portion of loans to finance the
purchase or initial construction of a
single 1-to-4 family residential property
that are secured by the property are
likely to be extended to consumers who
will use the property as their dwelling.
By contrast, transactions secured by
multiple 1-to-4 family properties are
more likely to be transactions to real
estate developers or investors in rental
properties.
The agencies note that they proposed
to treat construction-only loans to
consumers as commercial real estate
transactions to maintain consistency
with agency reporting standards and
other regulations and guidance that
address construction loans to consumers
in other contexts. As in the proposal,
the definition being adopted generally
aligns with the categories of commercial
real estate transactions under the Call
Report 31 and other agency guidance,32
31 The
following four categories of real-estate
secured loans in the Consolidated Reports of
Condition and Income (Call Report) (FFIEC 031;
RCFD 1410) are largely captured in the definition
of commercial real estate transaction in the rule: (1)
For construction, land development, and other land
loans; (2) secured by farmland; (3) secured by
residential properties with five or more units; or (4)
secured by nonfarm nonresidential properties. As
discussed in the proposal, loans that provide
construction funding and are secured by a single 1to-4 family residential property are typically
reported as ‘‘for construction, land development,
and other land loans.’’ The definition applies to
corresponding categories of real estate-secured
loans in the FFIEC 041 and FFIEC 051 forms of the
Call Report.
32 Other interagency guidance includes all
construction loans in one category: Real Estate
Lending: Interagency Statement on Prudent Risk
Management for Commercial Real Estate Lending,
OCC Bulletin 2015–51 (December 18, 2015);
Statement on Prudent Risk Management for
Commercial Real Estate Lending, Board SR Letter
15–17 (December 18, 2015); Statement on Prudent
Risk Management for CRE Lending, FDIC FIL–62–
2015 (December 18, 2015); Guidance on Prudent
Loan Workouts, OCC Bulletin 2009–32 (October 30,
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15023
with the exception that construction
loans secured by a single 1-to-4 family
property would not be considered a
commercial real estate transaction for
purposes of this rule.
The agencies have determined that,
on balance, the benefits of adopting this
definition of commercial real estate
transaction outweigh the drawbacks of
the limited inconsistency with other
agency issuances relating to commercial
real estate lending. Those issuances are
for different purposes than the Title XI
appraisal regulations, and a different set
of considerations is relevant for
determining what types of transactions
are appropriately exempt from the Title
XI appraisal requirement on the basis of
transaction size. The definition of
commercial real estate transaction in the
final rule ensures that loans made to
consumers are largely treated
consistently, remaining subject to the
$250,000 threshold. In addition, by
categorizing residential construction
loans more clearly, the definition of
commercial real estate transaction being
adopted can facilitate compliance and
enhance the burden reduction benefits
of the rule.
Threshold Increase
The agencies proposed increasing the
commercial real estate appraisal
threshold from $250,000 to $400,000. In
determining the level of increase, the
agencies considered the change in
prices for commercial real estate
measured by the Federal Reserve
Commercial Real Estate Price Index
(CRE Index). As described in the
proposal, the CRE Index 33 is a direct
measure of the changes in commercial
real estate prices in the United States.34
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).
33 The Board publishes data on the flow of funds
and levels of financial assets and liabilities, by
sector and financial instrument; full balance sheets,
including net worth, for households and nonprofit
organizations, nonfinancial corporate businesses,
and nonfinancial noncorporate businesses;
Integrated Macroeconomic Accounts; and
additional supplemental detail. See Board of
Governors of the Federal Reserve System, Financial
Accounts of the United States, https://
www.federalreserve.gov/releases/z1/current/
default.htm.
34 The CRE Index is quarterly and not seasonally
adjusted. See Board of Governors of the Federal
Reserve System, Series analyzer for
FL075035503.Q, https://www.federalreserve.gov/
apps/fof/SeriesAnalyzer.aspx?s=FL075035503&t=
&bc=:FI075035503,FL075035503&suf=Q; Board of
Governors of the Federal Reserve System, Series
Structure, https://www.federalreserve.gov/apps/fof/
SeriesStructure.aspx.
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The CRE Index is comprised of data
from the CoStar Commercial Repeat Sale
Index,35 which uses repeat sale
regression analysis of 1.7 million
commercial property sales records to
compare the change in price for the
same property between its most recent
and previous sale transactions.36 The
data incorporated into this index covers
properties across the country and across
all price ranges,37 from before 1994
through the present.
According to the CRE Index, a
commercial property that sold for
$250,000 as of June 30, 1994, would be
expected to sell for approximately
$760,000 as of December 2016.38
However, because the price of
commercial real estate can be
particularly volatile, the agencies
proposed to base the increased
threshold on the value of the CRE Index
when commercial real estate prices were
at their lowest point in the most recent
downturn, which was $423,000 in
March 2010. The agencies invited
comment on the proposed level for the
commercial real estate appraisal
threshold.
Most of the commenters, who
supported increasing the threshold to at
least $400,000, supported a higher
amount. Some of these commenters also
advocated for automatically increasing
or reevaluating the level more
frequently than every ten years as real
estate prices rise and valuation
technology changes. Some commenters
urged the agencies to conduct further
analysis to determine whether the
threshold could be increased to a higher
amount, but did not specify an amount.
Some commenters supported increasing
the threshold to $500,000 and suggested
that this higher figure would avoid the
need for additional changes to the
threshold in the near-term due to
expected increases in prices. A few
commenters supported raising the
threshold to $750,000 or higher,
claiming the methodology in the
proposal was unnecessarily
conservative.
Some commenters supported
lowering the commercial real estate
appraisal threshold to unspecified
amounts. Some of those commenters
specifically objected to the methodology
used by the agencies in the proposal,
asserting that adjusting the previous
$250,000 level for changes in prices was
inappropriate because that level was not
itself the result of an inflation
adjustment.
After careful consideration of the
comments, the agencies have increased
35 Board of Governors of the Federal Reserve
System, Series analyzer for FL075035503.Q, https://
www.federalreserve.gov/apps/fof/Series
Analyzer.aspx?s=FL075035503&t=&bc=
:FI075035503,FL075035503&suf=Q. Data for years
prior to 1996 are comprised of a weighted average
of three appraisal-based commercial property series
from National Real Estate Investor. Id.
36 CoStar, Federal Reserve’s Flow of Funds to
Incorporate CoStar Group’s Price Indices, CoStar
(June 4, 2012), https://www.costar.com/News/
Article/Federal-Reserves-Flow-of-Funds-ToIncorporate-CoStar-Groups-Price-Indices/138998.
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the commercial real estate appraisal
threshold to $500,000, rather than the
proposed $400,000 level. The proposed
$400,000 threshold was based on the
value of the CRE Index in March 2010,
when commercial real estate prices were
at their lowest point in the most recent
downturn. The agencies proposed this
conservative approach, due to the
volatility of commercial real estate
prices over time. The agencies based the
beginning point of this analysis on
$250,000, because supervisory
experience with the $250,000 threshold
has confirmed that this threshold level
did not threaten the safety and
soundness of financial institutions.
Based on the CRE Index, a commercial
property that sold for $250,000 as of
June 30, 1994, would be expected to sell
for $423,600 in March 2010, which was
the trough of the CRE price cycle.
Following this trend, that property
would be expected to have a
conservative value of approximately
$509,000 as of December 2017 (as
shown below). Based on the comments
received and this further review of the
CRE Index, as well as the safety and
soundness analysis discussed below, the
agencies have decided to finalize the
threshold at $500,000.
37 See
id.
the proposal was published, the CRE
Index data points for some of the recent quarters
were revised. The numbers in this document reflect
the revised CRE Index.
38 Since
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Regarding the suggestion to raise the
commercial real estate appraisal
threshold to $750,000 or higher, the
agencies also note that $750,000 was
close to the high point on the volatile
CRE Index, as discussed above. Given
the volatility in commercial real estate
prices, raising the threshold to this
amount or higher would raise safety and
soundness concerns. Finally, a possible
threshold increase to $750,000 or higher
may pose too great a risk to smaller
institutions, as such transactions may
represent a higher percentage of capital
for such firms than has historically been
permitted under the 1994 threshold.
In the proposal, the agencies also
invited comment on how having three
threshold levels ($250,000 for all
transactions, $400,000 for commercial
real estate transactions, and $1 million
for QBLs) rather than the two threshold
levels applicable to Title XI appraisals
($1 million for QBLs and $250,000 for
all other transactions) would affect
burden on regulated institutions. Three
commenters supported the proposal,
noting that having three thresholds
would have minimal impact on
operations. One commenter opposed
having three thresholds, asserting that it
will increase complexity, particularly
for small community banks with less
rigorous compliance operations. The
agencies have determined that the
burden reduction associated with a
higher threshold for commercial real
estate transactions outweighs the
potential burden of implementing three
thresholds.
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Safety and Soundness Considerations
for Increasing the Threshold for
Commercial Real Estate Transactions
Under Title XI, the agencies may set
a threshold at or below which a Title XI
appraisal is not required if they
determine in writing that such a
threshold level does not pose a threat to
the safety and soundness of financial
institutions.39 The analysis of
supervisory experience and available
data presented in the proposal indicated
that the proposed threshold level of
$400,000 for commercial real estate
transactions would not have posed a
threat to the safety and soundness of
financial institutions. The agencies
invited comment on their preliminary
finding and the data used. Taking into
consideration those comments and
updated analysis, discussed below, the
agencies determined that the threshold
level of $500,000 for commercial real
estate transactions does not pose a
39 12
U.S.C. 3341(b).
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threat to the safety and soundness of
financial institutions.
Multiple financial institutions trade
associations, financial institutions,
individuals, and home builder and
realtor associations supported the
agencies’ analysis showing that an
increase to the appraisal threshold for
commercial real estate would not have
a significant impact on the safety and
soundness of financial institutions. A
few commenters noted that appraisals
are only one part of the underwriting
process, one asserting that loans are
primarily underwritten on borrowers’
ability to repay, with collateral as a
secondary consideration. Another
commenter asserted that commercial
borrowers tend to be larger entities, with
the capital to withstand detrimental
financial events and shifts in the
market. This commenter also indicated
that the proposal would not increase
safety and soundness risk, given that the
increased threshold would affect a
relatively small number of transactions
in the commercial real estate lending
market.
Some commenters noted that
evaluations would be required where
appraisals were not obtained, and some
asserted that the increased use of
evaluations with these less complex
loans would not increase risk if
prepared with adequate analysis. One of
these commenters asserted that
evaluations for smaller transactions
provide more targeted and precise data
than appraisals performed by someone
from another area.
The agencies received comments from
appraisers, appraiser-related groups and
individuals opposing the proposed
increase, many of whom asserted that
appraisals are key to preserving the
safety and soundness of financial
institutions and the economy. Several of
these commenters claimed that
evaluations were not an appropriate
substitute for appraisals, some
suggesting that they are less reliable and
prepared by individuals that are not
held to the same standards as
appraisers. One commenter asserted that
the increase would pose safety and
soundness risks because commercial
loans are riskier than residential loans.
Another commenter suggested that
entry-level properties that are lower in
price and close to the threshold are
more likely to have performance issues
compared to more expensive properties.
One commenter raised concerns that the
rule focused on time and cost savings to
financial institutions in selecting an
appropriate valuation method, rather
than risk.
Several commenters voiced concerns
about recent price increases, increasing
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15025
delinquencies, or volatility in the
commercial real estate market, which,
some asserted, may be indicative of a
market ‘‘bubble.’’ Some commenters
suggested that it is the wrong time to
relax valuation standards, given their
view that past market bubbles have been
preceded by loosening of underwriting
and appraisal standards, and that poor
valuation practices contributed to losses
during past financial crises. One of
these commenters asserted that there is
increasing risk in commercial real estate
lending, particularly among smaller
community and regional banks, which
the commenter believed are less likely
to have robust collateral risk
management policies, practices and
procedures.
Multiple commenters noted a 2015
appraiser trade association survey of
appraisal industry professionals,
including chief appraisers and appraisal
managers at financial institutions,
which showed that the majority of those
surveyed opposed increasing the current
$250,000 threshold and believed that
increases to the threshold could
increase risk to lenders.
The agencies received a limited
number of comments in response to the
request for comment on the data sources
used for the agencies’ safety and
soundness analysis from financial
institutions, financial institution trade
associations and appraiser trade
associations. Multiple commenters
asserted that the data in the proposal
supports the increase in the commercial
real estate threshold, and indicated that
they did not know of other sources of
data that the agencies should consider.
A number of commenters asserted that
the agencies’ analysis was too
conservative, that past housing crises do
not imply current volatility, and that the
data suggest the threshold could be
increased further than proposed without
threatening safety and soundness of
financial institutions. One commenter
opposing the proposal suggested that
the data used in the agencies’ safety and
soundness analysis was weak and
questioned why the agencies did not
provide specific numbers to support the
assertion that the data related to chargeoffs from 2007–2012 is ‘‘no worse than’’
those from the years 1991–1994, except
for marked increases in construction
loan charge-offs.40 This commenter also
40 During the 1991–1994 credit cycle, the net
charge-off rate for commercial real estate loans
reached a high of about 4.5 percent. During the
2007–2012 credit cycle, net charge-off rates reached
a high of about 3.5 percent. These are the numbers
the agencies used to support their conclusion that
the data related to charge-offs from 2007 to 2012
was no worse than that from the years 1991 to 1994.
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asserted that the agencies’ analysis of
the CoStar data should have considered
that newly exempted loans under the
higher threshold would more likely be
extended to small businesses, which by
nature are more vulnerable to market
volatility and the potential for business
failure.
Based on their supervisory
experiences, the agencies disagree that
increasing the commercial real estate
appraisal threshold would increase risks
to financial institutions, including
smaller institutions. As outlined earlier,
the agencies closely examined a variety
of data and metrics indicating that the
relative risks associated with the new
threshold in terms of the scope of
covered transactions were similar to
those presented by the 1994 threshold.
The agencies specifically examined the
information from smaller insured
depository institutions (IDIs) from Call
Reports to assess the concentration risk
for institutions and concluded that these
risks were similar to those presented for
larger IDIs. The agencies also note that
smaller IDIs are often better positioned
than larger institutions to understand
and quantify local real estate market
values since they serve a smaller, more
defined market area.
Regarding comments concerning
evaluations as a valuation method, in
the agencies’ views, evaluations are an
effective valuation method for smaller
commercial real estate transactions and
other transactions under the thresholds.
As provided in the Title XI appraisal
regulations, evaluations for each
transaction must be consistent with safe
and sound banking practices. The
Evaluation Guidance provides guidance
on appropriate evaluation practices. In
adopting the increased threshold for
commercial real estate transactions, the
agencies note that regulated institutions
have the flexibility to choose to obtain
a Title XI appraisal when markets are
volatile or when an appraisal is
warranted for other reasons.41
The agencies have no evidence that
increasing the appraisal threshold to
$500,000 for commercial real estate
transactions will materially increase the
risk of loss to financial institutions.
Analysis of supervisory experience
concerning losses on commercial real
estate transactions suggests that faulty
valuations of the underlying real estate
collateral since 1994 have not been a
material cause of losses in connection
Federal Reserve Bank of San Francisco: Aggregate
Net Charge-Off Rate Database as derived from the
Federal Financial Institutions Examination Council
Consolidated Reports of Condition and Income,
FFIEC031 4Q 2016: https://www.frbsf.org/banking/
data/aggregate-data/.
41 75 FR 77450, 77460.
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with transactions at or below
$250,000.42 In the last three decades, the
banking industry suffered two crises in
which poorly underwritten and
administered commercial real estate
loans were a key feature in elevated
levels of loan losses and bank failures.
Supervisory experience and an
examination of material loss reviews
covering those decades suggest that
larger acquisition, development, and
construction transactions pose greater
credit risk, due to the lack of
appropriate underwriting and
administration of issues unique to larger
properties, such as longer construction
periods, extended ‘‘lease up’’ periods
(the time required to lease a building
after construction), and the more
complex nature of the construction of
such properties.43
In addition to considering the
agencies’ supervisory experience since
1994, the agencies reviewed how the
coverage of transactions exempted by
the threshold would change, both in
terms of number of transactions and
aggregate value, in order to consider the
potential impact on safety and
soundness of increasing the commercial
real estate appraisal threshold to
$500,000. In the proposal, the agencies
used three different metrics to estimate
the overall coverage of the existing
threshold and the proposed threshold:
(1) The number of commercial real
estate transactions at or under the
threshold as a share of the number of all
commercial real estate transactions; (2)
the dollar volume of commercial real
estate transactions at or under the
threshold as a share of the total dollar
volume of all commercial real estate
transactions; and (3) the dollar volume
of commercial real estate transactions at
or under the threshold relative to IDIs’
capital and the allowance for loan and
lease losses, which act as buffers to
absorb losses, as explained below. The
agencies examined data reported on the
Call Report and data from the CoStar
Comps database to estimate the volume
of commercial real estate transactions
covered by the existing threshold and
increased thresholds.
The Call Report data shows that the
scope of the exemption in 1994, in
terms of the number of transactions
impacted, decreased significantly over
time, and implies that raising the
commercial real estate appraisal
threshold to $500,000 will not involve
a greater number of transactions than
when the thresholds were established in
1994.
42 See
43 See
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id.
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Due to the manner in which IDIs
report information on nonfarm
nonresidential (NFNR) loans in the Call
Report, this data set does not enable the
agencies to calculate the percentage of
loans that would fall under any
threshold amount between $250,000
and $1 million.44 The percentage of the
total dollar volume of loans that fall
beneath the $250,000 threshold is now
less than one third of what it was when
the threshold was established in 1994.45
This is true even for institutions under
$1 billion in assets, who are more likely
to hold smaller loans. Based in part on
this analysis, the agencies conclude that
the exposure of financial institutions
will remain at acceptable levels with a
$500,000 commercial real estate
appraisal threshold.
The CoStar Comps database provides
sales value data on specific commercial
real estate transactions and allows for an
analysis of the estimated coverage at any
potential threshold level. As described
in the proposal, the agencies used this
dataset to analyze the impact of
increasing the commercial real estate
appraisal threshold to $400,000, and
have recently updated this analysis to
evaluate the impact of a $500,000
threshold. An analysis of the CoStar
Comps database for the most recent year
available suggests that increasing the
amount to $500,000 would significantly
increase the number of commercial real
estate transactions exempted from the
Title XI appraisal requirements, but the
portion of the total dollar volume of
commercial real estate transactions that
would be exempted by the threshold
would be comparatively minimal.
At the existing $250,000 threshold
and the proposed $400,000 threshold,
the percentage of commercial properties
with loans in the CoStar Comps
database that would be exempted from
the Title XI appraisal regulations would
have been 16.1 percent and 26.3
44 As described in the proposal, IDIs annually
report information on NFNR loans in the Call
Report by three separate size categories: (1) Loans
with original amounts of $100,000 or less; (2) loans
with original amounts of more than $100,000, but
$250,000 or less; and (3) loans with original
amounts of more than $250,000, but $1 million or
less. They also annually report the dollar amount
of all NFNR loans, including those over $1 million.
Using this data, the agencies calculated the dollar
amount of NFNR loans at or under the current
$250,000 threshold as a percentage of the dollar
amount of all NFNR loans.
45 In the proposal, the agencies explained that 18
percent of the dollar volume of all NFNR loans
reported by IDIs had original loan amounts of
$250,000 or less when the current appraisal
threshold was established in 1994, but as of the
fourth quarter of 2016, approximately 4 percent of
the dollar volume of such loans had original loan
amounts of $250,000 or less. 82 FR at 35485.
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percent, respectively.46 The $500,000
threshold that the agencies are adopting
will increase the percentage of
transactions affected by another 5.5
percent, resulting in 31.9 percent of
loans in the CoStar database being
exempt from the appraisal requirement,
or 15.7 percent more transactions than
under the $250,000 threshold. The
proposed $400,000 threshold would
have increased the percentage of
exempted transactions by dollar volume
from 0.5 percent, under the current
threshold, to 1.2 percent. Increasing the
threshold to $500,000 would increase
the dollar volume by an additional 0.5
percent, so that a total of 1.8 percent of
the dollar volume of loans in the CoStar
database will be exempt from the
appraisal requirement, or 1.3 percent
more of the dollar volume than under
the $250,000 threshold. Thus, this
analysis indicates that the increased
threshold will affect a low aggregate
dollar volume, but a material number of
transactions.
The agencies have used this analysis
and the Call Report analysis to
determine that increasing the
commercial real estate appraisal
threshold to $500,000 does not pose a
threat to safety and soundness. In
reaching this determination, the
agencies also considered the fact that
evaluations would be required for such
transactions. The Guidelines provide
regulated institutions with guidance on
establishing parameters for ordering
Title XI appraisals for transactions that
present significant risk, even if those
transactions are eligible for evaluations
under the regulation.47 Regulated
institutions are encouraged to continue
using a risk-focused approach when
considering whether to order an
appraisal for real estate-related financial
transactions.
B. Use of Evaluations
Overview
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The Title XI appraisal regulations
require regulated institutions to obtain
evaluations for three categories of real
estate-related financial transactions that
the agencies have determined do not
require a Title XI appraisal, including
commercial and residential real-estate
related financial transactions of
$250,000 or less and QBLs with a
46 Certain percentages shown here differ from the
values presented in the proposal because of ongoing
refinements to the database and filters used to
extract the information. The methodology was
further refined to improve its ability to reflect the
relevant population of commercial real estate
transactions. Also, values presented here may not
sum due to rounding.
47 See Guidelines, Section XI.
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transaction value of $1 million or less.48
Accordingly, the agencies proposed to
require that regulated institutions
entering into commercial real estate
transactions at or below the proposed
commercial real estate appraisal
threshold obtain evaluations that are
consistent with safe and sound banking
practices unless the institution chooses
to obtain an appraisal for such
transactions.49
The agencies are adopting this aspect
of the proposal in the final rule without
change.50 An evaluation estimates the
market value of real estate, but is not
subject to the same requirements as a
Title XI appraisal. For example, a Title
XI appraisal must be performed by a
state certified or state licensed appraiser
and must conform to USPAP standards,
whereas evaluations are not required to
be performed by individuals with
specific credentials or to conform to
USPAP standards. As noted above, the
agencies have issued guidance on the
preparation of evaluations.51
The agencies requested comment on
the proposed requirement that regulated
institutions obtain evaluations for
commercial real estate transactions at or
below the proposed commercial real
estate appraisal threshold. The agencies
also asked related questions concerning
whether additional guidance is needed
by institutions to support the increased
use of evaluations as well as questions
concerning burden and costs related to
the use of evaluations.
Evaluations Required at or Below the
Threshold
Several commenters generally
supported the proposal that regulated
institutions obtain evaluations for
commercial real estate transactions at or
below the threshold. Other commenters
expressed concern regarding the
competency and credentialing of
persons performing evaluations, as well
as concerns regarding difficulty in
locating persons qualified to perform
evaluations.52 Some of these
48 See OCC: 12 CFR 34.43(a)(1) and (5); Board: 12
CFR 225.63(a)(1) and (5); and FDIC: 12 CFR
323.3(a)(1) and (5).
49 An evaluation is not required when real estaterelated financial transactions meet the threshold
criteria and also qualify for another exemption from
the appraisal requirements where no evaluation is
required by the regulation.
50 The agencies are adopting the commercial real
estate appraisal threshold at $500,000, which is
higher than proposed. Financial institutions will be
required to obtain evaluations for commercial real
estate transactions with transaction values of
$500,000 or less.
51 See Evaluation Guidance.
52 A commenter highlighted two sentences in the
proposal that appeared to conflict with the
requirements of the appraisal regulations. First, the
commenter disagreed with the following statement
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commenters also expressed concern
over the lack of standards for
evaluations and the lack of oversight
and regulation for persons performing
evaluations. One commenter urged the
agencies to increase the qualification
requirements for those completing
evaluations if the commercial real estate
appraisal threshold were increased.
As discussed in the proposal,
institutions must obtain evaluations that
are consistent with safe and sound
banking practices. The agencies have
provided guidance to regulated
institutions on evaluations.53 The
Guidelines state that evaluations should
be performed by persons who are
competent and have the relevant
experience and knowledge of the
market, location, and type of real
property being valued. An evaluation is
not required to be completed by a state
licensed or state certified appraiser, but
may be completed by an employee of
the regulated institution or by a third
party, as addressed in the Evaluations
Advisory.54 However, the agencies’ final
rule does not prohibit regulated
institutions from using state licensed or
state certified appraisers to prepare
evaluations. A Title XI appraisal would
satisfy the requirement for an
‘‘appropriate evaluation of real property
collateral that is consistent with safe
and sound banking practices;’’ thus,
regulated institutions that choose to
obtain Title XI appraisals for real estaterelated financial transactions that
require evaluations are not in violation
of the Title XI appraisal regulations.
Evaluation Guidance
The agencies also requested comment
on the type of additional guidance, if
any, regulated institutions need to
support the increased use of
evaluations. In response, the agencies
received comments indicating concern
regarding the clarity of, and the burden
produced by, the existing guidance on
evaluations. A few commenters
requested that the agencies provide
additional guidance, such as guidance
relating to the adequacy of evaluation
products available on the market or
examples of acceptable industry
practices for evaluations. Some other
in the proposal: ‘‘Unlike appraisals, evaluations
may be performed by a lender’s own employees and
are not required to comply with USPAP.’’ The
agencies agree with the commenter that regulations
do not prohibit employees of regulated institutions
from preparing appraisals if they are so qualified
and independent of the real estate-related financial
transaction.
53 See Evaluation Guidance.
54 OCC Bulletin 2016–8 (March 4, 2016); Board
SR Letter 16–05 (March 4, 2016); and Supervisory
Expectations for Evaluations, FDIC FIL–16–2016
(March 4, 2016).
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commenters requested that the agencies
revisit and relax the current guidance
pertaining to evaluations and ensure
examiners accept evaluations when
permissible. One commenter expressed
the view that a simplification would
make the current existing guidance for
evaluations less time consuming and
complex for lower value transactions.
Another commenter suggested there
should be no need for a review of
internal evaluations where the direct
lender did not complete the evaluation.
The Evaluation Guidance provides
information to help ensure that
evaluations provide a credible estimate
of the market value of the property
pledged as collateral for the loan. The
current Evaluation Guidance provides
flexibility to regulated institutions for
developing evaluations that are
appropriate for the type and risk of the
real estate financial transaction and
does not prescribe specific valuation
approaches or products to use tools in
the development of evaluations. Also, in
addition to various valuation
approaches, the Guidelines discuss the
possible use of several analytical
methods and technological tools in the
development of evaluations, such as
automated valuation models and tax
assessment values. The agencies will
continue to assess the adequacy of
agency guidance on evaluations.
Cost and Burden of Evaluations
The agencies invited comment
regarding whether the use of evaluations
reduces burden and cost as compared to
the use of Title XI appraisals. The
agencies also invited comment on
whether evaluations are currently
prepared by in-house staff or outsourced
to appraisers or other qualified
professionals.
The agencies received several
comments indicating that the proposed
increase in the commercial real estate
appraisal threshold and the increased
use of evaluations would provide cost
and time savings for consumers and
institutions, because evaluations tend to
cost less that appraisals and take less
time to prepare. One commenter
asserted that third-party evaluations are
approximately 25 percent of the cost of
an appraisal. Another commenter
indicated noted that some financial
institutions prefer to conduct them inhouse to maintain consistency of the
product and because of staff knowledge
of the marketplace. One commenter
asserted that appraiser-developed
evaluations are unnecessarily
expensive, necessitating evaluations to
be conducted in-house. Another
commenter indicated that increasing the
threshold would provide cost savings
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for portfolio loans but would not
address issues related to secondary
market requirements, which are outside
the agencies’ purview.
On the other hand, some commenters
asserted that the agencies had overstated
how much the proposal would reduce
burden for regulated institutions, and
questioned the agencies’ methods for
estimating the reduction in burden.
Some commenters expressed concern
regarding the length of time required to
review an evaluation. A few
commenters suggested that the agencies’
cost analysis reflected a lack of
precision and absence of detailed
research to determine the cost
differential of appraisals and
evaluations between the current and
proposed threshold. This same
commenter asserted that evaluations
lack the detail of appraisals, and, as a
result, lenders are often required to
perform additional research in
determining whether evaluations are
credible, which reduces cost and time
savings produced by the proposal. One
commenter implied that the limited
guidance for performing evaluations
creates confusion, which results in
added costs. One commenter asserted
that it is not true that evaluations
contain less detailed information or take
less time to review than appraisals.55
Another commenter asserted that,
because evaluations provide less detail
than appraisals, lenders may be required
to do more research to determine
whether the value conclusion is
credible.
The agencies carefully considered
these comments in evaluating the rule’s
impact on the time to obtain and review
Title XI appraisals and evaluations. The
agencies conclude that there may be less
delay in finding appropriate personnel
to perform an evaluation than to
perform a Title XI appraisal, particularly
in rural areas, because evaluations are
not required to be prepared by a
certified or licensed appraiser.
Requiring regulated institutions to
procure the services of a state licensed
or state certified appraiser to prepare
evaluations for commercial real estate
transactions at or below the threshold
55 Two commenters disagreed with the agencies’
use of the term ‘‘loan officer’’ relative to the
estimated time for reviewing an appraisal or
evaluation, and asserted that the usage of the term
could be perceived to imply that originators are
permitted to be involved in the appraisal review
process, which is contrary to the agencies’ appraiser
independence requirements. The agencies were
using the term ‘‘loan officer’’ in its broadest context,
and did not intend to imply that the officer
originating the credit may conduct appraisal or
evaluation reviews relating to that credit. The use
of the term ‘‘loan officer’’ was not intended to
change standards established on appraiser
independence or any implementing guidance.
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could impose significant additional
costs on lenders and borrowers without
materially increasing the safety and
soundness of the transactions. The
agencies’ data and analysis reflect that
the increase in the commercial real
estate appraisal threshold and
corresponding increased use of
evaluations could result in a cost
savings of several hundred dollars for
each commercial real estate transaction,
as discussed below.
Based on supervisory experience the
agencies conclude that regulated
institutions generally need less time to
review evaluations than Title XI
appraisals, because the content of the
report can be less comprehensive than
an appraisal report. Transactions
permitting the use of an evaluation
typically have a lower dollar value,
often are less complex, or are
subsequent to previous transactions for
which Title XI appraisals were obtained.
Therefore, a consolidated analysis is
more likely to be used in an evaluation.
The agencies estimate that, on average,
the time to review an evaluation for an
affected transaction under the final rule
will be approximately 30 minutes less
than the time to review an appraisal.56
In evaluating this rule, the agencies
considered the impact of obtaining
evaluations instead of Title XI
appraisals on regulated institutions and
borrowers. As noted in the proposal,
based on information from industry
participants, the cost of third-party
evaluations of commercial real estate
generally ranges from $500 to over
$1,500, whereas the cost of appraisals of
such properties generally ranges from
$1,000 to over $3,000. Commercial real
estate transactions with transaction
values above $250,000, but at or below
$500,000, are likely to involve smaller
and less complex properties, and
appraisals and evaluations on such
properties would likely be at the lower
end of the cost range. This third-party
pricing information suggests a savings of
several hundred dollars per transaction
affected by the proposal. Comments
from financial institutions generally
affirmed similar information presented
in the proposal.
In considering the aggregate effect of
this rule, the agencies considered the
number of transactions affected by the
increased threshold. As previously
discussed, the agencies estimate that the
number of commercial real estate
transactions that would be exempted by
56 The agencies recognize some evaluations take
longer to review than some appraisals; yet, on
average, evaluations are likely to take less time to
review than appraisals. This view is based on
supervisory experience as well as discussions with
regulated institutions.
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the threshold is expected to increase by
approximately 16 percent under the
rule. Thus, while the precise number of
affected transactions and the precise
cost reduction per transaction cannot be
determined, the rule is expected to lead
to significant cost savings for regulated
institutions that engage in commercial
real estate lending.
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Competitive Disadvantage of
Evaluations
The agencies received comments from
financial institutions, individuals, and a
trade association representing valuation
professionals, indicating concern that
the proposal would put smaller banks
that do not have in-house expertise to
prepare evaluations at a competitive
disadvantage to larger banks.
Commenters asserted that these banks
hire outside parties to prepare
evaluations and pass the cost along to
borrowers, making their loans more
expensive than comparable loans at
larger financial institutions.
In evaluating the final rule, the
agencies considered these concerns. In
response, the agencies note that the cost
for completing an evaluation would be
less than the cost for completing a Title
XI appraisal for the same property,
which thereby reduces burden. The goal
of the agencies with this increase is to
provide flexibility to regulated
institutions in approaching property
valuation. Some institutions may not
currently be in a position to take
advantage of this flexibility. However,
raising the threshold will help those
regulated institutions that choose to
train in-house staff to perform
evaluations and would reduce costs for
those institutions that choose to
outsource evaluations.
C. State Certified Appraiser Required
As described in the proposal, the
current Title XI appraisal regulations
require that ‘‘[a]ll federally related
transactions having a transaction value
of $250,000 or more, other than those
involving appraisals of 1-to-4 family
residential properties, shall require an
appraisal prepared by a State certified
appraiser.’’ 57 In order to make this
paragraph consistent with the other
proposed changes to the appraisal
regulations, the agencies proposed to
change its wording to introduce the
$400,000 threshold and use the term
‘‘commercial real estate transaction.’’
The agencies did not receive any
comments on this proposed change.
Given the change from the proposed
rule from a $400,000 threshold to a
57 OCC: 12 CFR 34.43(d); Board: 12 CFR
225.63(d)(2); and FDIC: 12 CFR 323.3(d)(2).
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$500,000 threshold, the final rule makes
a corresponding change to this section.
The amendment to this provision is a
technical change that does not alter any
substantive requirement.
III. Effective Date
The agencies proposed to make the
final rule, if adopted, effective upon
publication in the Federal Register. The
agencies reasoned that a delayed
effective date was not required by
applicable law because the proposal
exempted additional transactions from
the Title XI appraisal requirements and
did not impose any new requirements
on regulated institutions.58 The agencies
requested comment on whether the
proposed effective date was appropriate.
The agencies received three
comments on the proposed effective
date. One commenter supported the
proposed effective date and did not
think it would pose challenges to
financial institutions. The other two
commenters disagreed with an
immediate effective date, asserting that
financial institutions required time to
adjust policies and procedures to
implement the proposed changes. One
commenter recommended a six-month
to one-year implementation period,
while the other suggested an effective
date 180 days after the final rule is
published.
The agencies have retained the
proposed effective date, which is the
date of publication in the Federal
Register.59 In doing so, the agencies
balanced the need for some financial
institutions to update policies and
procedures to incorporate evaluations
for transactions exempted by the revised
threshold with the benefit of an
immediate effective date, which will
enable institutions to benefit from lower
costs and regulatory relief upon or
shortly after the effective date of the
final rule. The agencies note that an
effective date immediately upon
publication in the Federal Register is
58 See
82 FR at 35482.
discussed in Section V.A of the
SUPPLEMENTARY INFORMATION, the 30-day delayed
effective date required under the Administrative
Procedure Act (APA) is waived pursuant to 5 U.S.C.
553(d)(1), which provides a waiver when a
substantive rule grants or recognizes an exception
or relieves a restriction. Additionally, the Riegle
Community Development and Regulatory
Improvement Act of 1994, Public Law 103–325, 108
Stat. 2163 (Riegle Act) provides that rules imposing
additional reporting, disclosures, or other new
requirements on IDIs generally must take effect on
the first day of a calendar quarter that begins on or
after the date on which the regulations are
published in final form. 12 U.S.C. 4802(b). As
discussed further in the Section V.D of the
SUPPLEMENTARY INFORMATION, the final rule does not
impose any new requirements on IDIs, and, as such,
the effective date requirement of the Riegle Act is
inapplicable.
59 As
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the approach used in adopting the 1994
amendments to the Title XI appraisal
regulations. The agencies are not aware
of any evidence that using an immediate
effective date in connection with the
1994 amendments caused a competitive
disadvantage or hardship to regulated
institutions. The agencies also note that
regulated institutions have the
discretion to use Title XI appraisals in
lieu of evaluations for any exempt
transaction.
IV. Other Efforts To Relieve Burden
Residential and Qualifying Business
Loan Thresholds
The agencies explained in the
proposal that they were not proposing
any threshold increases for transactions
secured by a single 1-to-4 family
residential property (residential
transactions) or QBLs in connection
with this rulemaking. The agencies
requested comment on whether there
are other factors that should be
considered in evaluating the current
appraisal threshold for residential
transactions. The agencies also invited
comment and supporting data on the
appropriateness of raising the current $1
million threshold for QBLs and posed a
number of specific questions related to
regulated institutions’ experiences with
QBLs.
Numerous commenters, particularly
financial institutions and their trade
associations, encouraged the agencies to
consider increasing the threshold for
residential transactions, though few
introduced new factors for the agencies’
consideration. Many of these
commenters asserted that an increase
would produce cost and time savings
that would benefit regulated institutions
and consumers without threatening the
safety and soundness of financial
institutions. In support of its position
that an increase would not threaten
safety and soundness, one of these
commenters asserted that there is less
risk in the homogenous loan pool of 1to-4 family residential loans than there
is in commercial real estate. One
commenter asserted that the consumer
benefits of appraisals have been
overstated, that appraisals are primarily
for the benefit of financial institutions,
and that consumers could always order
their own appraisals.
Several commenters supporting an
increase in the threshold for residential
transactions noted that an increase in
the threshold would be justified by
increases in residential property values
since the current threshold was
established. Some commenters
represented that relief would be
particularly beneficial for lending in
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rural communities that often have
shortages in state licensed and state
certified appraisers. One of these
commenters cited feedback from several
state bank supervisory agencies
indicating that access to appraisers,
particularly for residential transactions,
is limited in rural areas within their
states and that federal appraisal
regulations are causing significant
burden. A few commenters noted that
the government sponsored enterprises
(GSEs) waive appraisal requirements for
certain residential mortgage loans that
they purchase and they expected the
GSEs to expand eligibility for such
waivers. In this regard, they asserted
that increasing the threshold in the
appraisal regulations would provide
burden relief. One of these commenters
asserted that as the GSEs expand their
appraisal waiver programs, regulated
institutions that hold residential
mortgage loans in portfolio will be at a
competitive disadvantage if the current
threshold in the appraisal regulations is
not increased. Another commenter
asserted that, even if inconsistent GSE
requirements would negate some of the
burden reduction, the agencies should
raise the residential threshold now if, by
doing so, safety and soundness would
not be jeopardized. A separate
commenter suggested that the agencies
should provide a de minimis exemption
from appraisal requirements for
residential mortgage loans that are
retained in portfolio by regulated
institutions. This same commenter
urged the agencies to consider more
regional data in deciding whether to
make future changes to the threshold for
residential transactions.
Many commenters, particularly
appraisers and appraiser trade
associations, supported with the
agencies’ decision not to propose an
increase in the threshold for residential
transactions. Several commenters
pointed to the safety and soundness and
consumer protection benefits of
obtaining appraisals in connection with
residential transactions. Several
commenters also asserted that the
appraisal regulations already exempt a
significant percentage of residential
mortgage loans. One commenter
suggested that the agencies should not
rely on policies of other federal entities,
such as the GSEs, in making decisions
about the appraisal regulations. Another
commenter expressed concern that the
potential negative consequences of
raising the threshold could be
exacerbated by the loosening of
appraisal standards by the GSEs for
some transactions. Another commenter
asserted that increasing the threshold
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for residential transactions could
discourage entrance into the appraisal
profession and cause further appraiser
shortages.
Regarding an increase to the appraisal
threshold for QBLs, the majority of
comments received opposed an
increase. These commenters, who were
appraisers or their trade associations,
cautioned against a loosening of
standards that could raise safety and
soundness concerns. Commenters
supporting an increase in the QBL
threshold asserted that the value of real
estate offered as collateral on a QBL is
a secondary consideration, because the
primary source of repayment is not the
income from or sale of that collateral.
Some commenters also supported an
increase in the threshold due to limited
availability of appraisers in their states.
Commenters advocated a range of
increases from $1.5 million to $3
million.
Few commenters specifically
addressed the agencies’ questions
regarding unique risks that may be
posed by QBLs, data regarding QBLs,
and regulated institutions’ experiences
in applying the current QBL threshold.
Regarding risks posed by QBLs, one
financial institutions trade association
commented that its members consider
QBLs to be higher-risk loans. An
appraiser trade association that was
opposed to an increase asserted that
small business loans are riskier than
others and that lenders with
concentrations in such loans are at
greater risk. The commenter also noted
that such loans are usually held in
portfolio, thus increasing risk.
Regarding the agencies’ requests for data
on QBLs, a commenter expressed
surprise that the agencies lack data on
QBL concentrations, and asserted this
lack of data further supports not
increasing the threshold. In response to
the agencies’ question regarding
regulated institutions’ experiences in
applying the QBL threshold, a
commenter asserted that many loan
officers are poorly trained in classifying
loans as either real estate or business.
The commenter recommended that the
agencies provide examples of these
types of loans. In addition, two
commenters asked the agencies to
clarify the QBL threshold relative to
transactions secured by farmland.
The agencies appreciate the issues
raised by the commenters relating to the
thresholds for residential transactions
and QBLs. As discussed in the proposal,
the agencies decided not to propose any
change to these thresholds in
connection with this rulemaking.
Nevertheless, the comments reflect a
variety of issues that the agencies would
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consider if they decide to propose
changes to the residential or QBL
thresholds in the future.
Regarding the requests for
clarification of the QBL threshold, the
Title XI appraisal regulations have
established a $1 million threshold that
is applicable to any business loans that
are not dependent on the sale of, or
rental income derived from, real estate
as the primary source of repayment.60
For example, a loan secured by a farm,
which could include a situation where
one or more affiliated limited liability
companies own the farmland securing
the loan, could be treated as a QBL
subject to the $1 million threshold, if
repayment is primarily from the
proceeds from the farm business (e.g.,
sale of crops and related payments).
However, a real estate-related financial
transaction secured by farmland whose
repayment is primarily from rental
income from renting or leasing the
farmland to a non-affiliated entity
would be subject to the final rule’s
$500,000 threshold.
Other Proposals and Clarifications
The agencies received several
comments suggesting additional ways
the agencies could reduce burden under
the Title XI appraisal regulations. One
commenter urged the agencies to review
the appraisal requirements of other
federal agencies and pursue ways to
make appraisal requirements across
agencies more consistent. The agencies
have publically articulated their interest
in seeking ways to coordinate appraisal
standards across various government
agencies that are involved in residential
mortgage lending.61 The agencies have
begun conducting outreach to
government agencies to implement this
goal and will continue to consider
opportunities to do so.
Another commenter asserted that the
agencies should focus on allowing the
use by appraisers of products that
streamline the valuation process,
instead of exempting additional
transactions from the appraisal
requirements. Several commenters,
including a financial institution and a
financial institutions trade association,
suggested that certain transactions could
be added to the list of exemptions from
the appraisal requirements to further
reduce regulatory burden without
sacrificing safety and soundness. These
suggestions included exemptions for
transactions secured by real estate
outside the United States; loans below
a threshold that a bank originates and
60 See OCC: 12 CFR 34.43(a)(5); Board: 12 CFR
225.63(a)(5); and FDIC: 12 CFR 323.3(a)(5).
61 See EGRPRA Report at 36; 82 FR at 35482.
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retains ‘‘in-house;’’ transactions
involving mortgage-backed securities
and pools of mortgages; and loans made
to certain community development
organizations. An association of state
bank supervisors requested that the
agencies release further guidance on the
Title XI process for temporary waivers
of appraiser certification and licensing
requirements and also requested that the
education requirements for appraiser
qualifications be relaxed. A financial
institution suggested establishing an
additional threshold of $50,000, below
which certain transactions would not
require appraisals or evaluations.
These comments concerning
additional potential exemptions from
the appraisal regulations and additional
burden relieving measures are outside
the scope of this rulemaking. However,
the agencies appreciate the suggestions
for ways to expand burden relief beyond
what was proposed.
V. Regulatory Analysis
A. Waiver of Delayed Effective Date
This final rule is effective on April 9,
2018. The 30-day delayed effective date
required under the APA is waived
pursuant to 5 U.S.C. 553(d)(1), which
provides for waiver when a substantive
rule grants or recognizes an exemption
or relieves a restriction. The amendment
adopted in this final rule exempts
additional transactions from the Title XI
appraisal requirements, which has the
effect of relieving restrictions.
Consequently, the amendment in this
final rule meets the requirements for
waiver set forth in the APA.
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B. Regulatory Flexibility Act
OCC: The Regulatory Flexibility Act
(RFA), 5 U.S.C. 601 et seq., generally
requires that, in connection with a
rulemaking, an agency prepare and
make available for public comment a
regulatory flexibility analysis that
describes the impact of the rule on small
entities. However, the regulatory
flexibility analysis otherwise required
under the RFA is not required if an
agency certifies that the rule will not
have a significant economic impact on
a substantial number of small entities
(defined in regulations promulgated by
the Small Business Administration
(SBA) to include commercial banks and
savings institutions, and trust
companies, with assets of $550 million
or less and $38.5 million or less,
respectively) and publishes its
certification and a brief explanatory
statement in the Federal Register
together with the rule.
The OCC currently supervises
approximately 956 small entities. Data
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currently available to the OCC are not
sufficient to estimate how many OCCsupervised small entities make
commercial real estate loans in amounts
that fall between the current and final
thresholds. Therefore, we cannot
estimate how many small entities may
be affected by the increase threshold.
However, because the final rule does not
contain any new recordkeeping,
reporting, or compliance requirements,
the final rule will not impose costs on
any OCC-supervised institution.
Accordingly, the OCC certifies that the
final rule will not have a significant
economic impact on a substantial
number of small entities.
Board: The Board is providing a
regulatory flexibility analysis with
respect to this final rule. The RFA
requires that an agency prepare and
make available a final regulatory
flexibility analysis in connection with a
final rulemaking that the agency expects
will have a significant economic impact
on a substantial number of small
entities. The commercial real estate
appraisal threshold increase applies to
certain IDIs and nonbank entities that
make loans secured by commercial real
estate.62 The SBA establishes size
standards that define which entities are
small businesses for purposes of the
RFA.63 The size standard to be
considered a small business is: $550
million or less in assets for banks and
other depository institutions; and $38.5
million or less in annual revenues for
the majority of non-bank entities that
are likely to be subject to the final
rule.64 Based on the Board’s analysis,
and for the reasons discussed below, the
final rule may have a significant
positive economic impact on a
substantial number of small entities.
The Board requested comment on all
aspects of the initial regulatory
flexibility analysis it provided in
connection with the proposal. The
comments received are addressed
below.
A. Reasons for the Threshold Increase
In response to comments received in
the EGRPRA process and in connection
with the proposal, the agencies are
increasing the commercial real estate
appraisal threshold from $250,000 to
$500,000. Because commercial real
62 For its RFA analysis, the Board considered all
Board-regulated creditors to which the proposed
rule would apply.
63 U.S. SBA, Table of Small Business Size
Standards Matched to North American Industry
Classification System Codes, available at https://
www.sba.gov/sites/default/files/files/Size_
Standards_Table.pdf.
64 Asset size and annual revenues are calculated
according to SBA regulations. See 13 CFR 121 et
seq.
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15031
estate prices have increased since 1994,
when the current $250,000 threshold
was established, a smaller percentage of
commercial real estate transactions are
currently exempted from the Title XI
appraisal requirements than when the
threshold was established. This
threshold adjustment is intended to
reduce the regulatory burden associated
with extending credit secured by
commercial real estate in a manner that
is consistent with the safety and
soundness of financial institutions.
B. Statement of Objectives and Legal
Basis
As discussed above, the agencies’
objective in finalizing this threshold
increase is to reduce the regulatory
burden associated with extending credit
in a safe and sound manner by reducing
the number of commercial real estate
transactions that are subject to the Title
XI appraisal requirements.
Title XI explicitly authorizes the
agencies to establish a threshold level at
or below which a Title XI appraisal is
not required if the agencies determine in
writing that the threshold does not
represent a threat to the safety and
soundness of financial institutions and
receive concurrence from the CFPB that
such threshold level provides
reasonable protection for consumers
who purchase 1-to-4 unit single-family
homes.65 Based on available data and
supervisory experience, the agencies
tailored the size and scope of the
threshold increase to ensure that it
would not pose a threat to the safety and
soundness of financial institutions or
erode protections for consumers who
purchase 1-to-4 unit single-family
homes.
The Board’s final rule applies to state
chartered banks that are members of the
Federal Reserve System (state member
banks), as well as bank holding
companies and nonbank subsidiaries of
bank holding companies that engage in
lending. There are approximately 601
state member banks and 35 nonbank
lenders regulated by the Board that meet
the SBA definition of small entities and
would be subject to the proposed rule.
Data currently available to the Board do
not allow for a precise estimate of the
number of small entities that will be
affected by the final rule because the
number of small entities that will
engage in commercial real estate
transactions at or below the commercial
real estate appraisal threshold is
unknown.
65 12
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C. Projected Reporting, Recordkeeping
and Other Compliance Requirements
The final rule would reduce reporting,
recordkeeping, and other compliance
requirements for small entities. For
transactions at or below the threshold,
regulated institutions will be given the
option to obtain an evaluation of the
property instead of an appraisal.
Evaluations may be performed by a
lender’s own employees and are not
required to comply with USPAP. As
discussed in detail in Section II.B of the
SUPPLEMENTARY INFORMATION, the cost of
obtaining appraisals and evaluations
can vary widely depending on the size
and complexity of the property, the
party performing the valuation, and
market conditions where the property is
located. Additionally, the costs of
obtaining appraisals and evaluations
may be passed on to borrowers. Because
of this variation in cost and practice, it
is not possible to precisely determine
the cost savings that regulated
institutions will experience due to the
decreased cost of obtaining an
evaluation rather than an appraisal.
However, based on information
available to the Board, it is likely that
small entities and borrowers engaging in
commercial real estate transactions
could experience significant cost
reductions.
In addition to costing less to obtain
than appraisals, evaluations also require
less time to review than appraisals
because they contain less detailed
information. As discussed further in
Section II.B of the SUPPLEMENTARY
INFORMATION, an evaluation takes
approximately 30 minutes less to review
than an appraisal. Thus, the agencies
believe that the final rule will alleviate
approximately 30 minutes of employee
time per affected transaction for which
the lender obtains an evaluation instead
of an appraisal. As discussed above,
some commenters provided anecdotal
evidence to show that the agencies’
estimate of time savings was incorrect.
The agencies recognize that certain
evaluations may take longer to review
than others; however, this variation was
taken into account in the agencies’
estimate of the average time savings that
are expected to occur.
As previously discussed, the Board
estimates that the percentage of
commercial real estate transactions that
would be exempted by the threshold is
expected to increase by approximately
16 percent under the final rule. The
Board expects this percentage to be
higher for small entities, because a
higher percentage of their loan
portfolios are likely to be made up of
small, below-threshold loans than those
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of larger entities. Thus, while the
precise number of transactions that will
be affected and the precise cost
reduction per transaction cannot be
determined, the final rule is expected to
have a significant positive economic
impact on small entities that engage in
commercial real estate lending.
D. Identification of Duplicative,
Overlapping, or Conflicting Federal
Regulations
The Board has not identified any
federal statutes or regulations that
would duplicate, overlap, or conflict
with the final rule.
E. Discussion of Significant Alternatives
The agencies considered additional
burden-reducing measures, such as
increasing the commercial threshold to
an amount higher than $500,000 and
increasing the residential and business
loan thresholds, but did not implement
such measures for the safety and
soundness and consumer protection
reasons discussed in the proposal. For
transactions exempted from the Title XI
appraisal requirements under the
commercial real estate appraisal
threshold, the final rule requires
regulated institutions to get an
evaluation if they do not choose to
obtain a Title XI appraisal. The agencies
believe this requirement is necessary to
protect the safety and soundness of
financial institutions, which is a legal
prerequisite to the establishment of any
appraisal threshold. The Board is not
aware of any other significant
alternatives that would reduce burden
on small entities without sacrificing the
safety and soundness of financial
institutions or consumer protections.
FDIC: The RFA generally requires
that, in connection with a rulemaking,
an agency prepare and make available
for public comment an initial regulatory
flexibility analysis describing the
impact of the proposed rule on small
entities.66 A regulatory flexibility
analysis is not required, however, if the
agency certifies that the rule will not
have a significant economic impact on
a substantial number of small entities.
The SBA has defined ‘‘small entities’’ to
include banking organizations with total
assets less than or equal to $550
million.67 For the reasons described
below and pursuant to section 605(b) of
the RFA, the FDIC certifies that the final
rule will not have a significant
economic impact on a substantial
number of small entities.
66 5
U.S.C. 601 et seq.
CFR 121.201 (as amended, effective
December 2, 2014).
67 13
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The FDIC supervises 3,675 depository
institutions,68 of which 2,950 are
defined as small banking entities by the
terms of the RFA.69 According to the
Call Report 2,950 small entities reported
holding some volume of real estaterelated financial transactions that meet
the final rule’s definition of a
commercial real estate transaction.70
Therefore, 2,950 small entities could be
affected by the final rule.
The final rule will raise the appraisal
threshold for commercial real estate
transactions from $250,000 to $500,000.
Any commercial real estate transaction
with a value in excess of the $500,000
threshold is required to have an
appraisal by a state licensed or state
certified appraiser. Any commercial real
estate transaction at or below the
$500,000 threshold requires an
evaluation.
To estimate the dollar volume of
commercial real estate transactions the
change could potentially affect, the
FDIC used information on the dollar
volume and number of loans in the Call
Report for small institutions from two
categories of loans included in the
definition of a commercial real estate
transaction. The Call Report data reflect
that 3.92 percent of the dollar volume of
NFNR loans secured by real estate has
an original amount between $1 and
$250,000, while 10.19 percent have an
original amount between $250,000 and
$1 million. The Call Report data also
reflect that 7.30 percent of the dollar
volume of agricultural loans secured by
farmland has an original amount
between $1 and $250,000, while 6.05
percent have an original amount
between $250,000 and $500,000.71
Assuming that the original amount of
NFNR loans secured by real estate and
the original amount of agricultural loans
secured by farmland are normally
distributed, the FDIC estimates that 6.28
and 13.35 percent of loan volume is at
or below the $500,000 threshold for
these categories, respectively.
Therefore, raising the appraisal
threshold from $250,000 to $500,000 for
commercial real estate transactions
68 FDIC-supervised institutions are set forth in 12
U.S.C. 1813(q)(2).
69 FDIC Call Report, September 30, 2017.
70 The definition of ‘‘commercial real estate
transaction’’ would largely capture the following
four categories of loans secured by real estate in the
Call Report (FFIEC 031; RCFD 1410), namely loans
that are: (1) For construction, land development,
and other land loans; (2) secured by farmland; (3)
secured by residential properties with five or more
units; or (4) secured by NFNR properties. However,
loans secured by a single 1-to-4 family residential
property would be excluded from the definition.
The definition applies to corresponding categories
of real estate-secured loans in the FFIEC 041 and
FFIEC 051 forms of the Call Report.
71 FDIC Call Report, September 30, 2017.
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could affect an estimated 2.36 to 6.05
percent of the dollar volume of all
commercial real estate transactions
originated each year for small FDICsupervised institutions. This estimate
assumes that the distribution of loans
for the other loan categories within the
definition of commercial real estate
transactions is similar to those loans
secured by NFNR properties or
farmland.
The final rule is likely to reduce
valuation review costs for covered
institutions. The FDIC estimates that it
takes a loan officer an average of 40
minutes to review an appraisal to ensure
that it meets that standards set forth in
Title XI, but 10 minutes to perform a
similar review of an evaluation, which
does not need to meet the Title XI
standards for appraisals. The final rule
increases the number of commercial real
estate transactions that would require an
evaluation by raising the appraisal
threshold from $250,000 to $500,000.
Assuming that 15 percent of the
outstanding balance of commercial real
estate transactions for small entities gets
renewed or replaced by new
originations each year, the FDIC
estimates that small entities originate
$31.8 billion in new commercial real
estate transactions each year. Assuming
that 2.36 to 6.05 percent of annual
originations represent loans with an
origination amount greater than
$250,000 but not more than $500,000,
the FDIC estimates that the proposed
rule will affect approximately 2,003 to
5,138 loans per year,72 or 0.68 to 1.74
loans on average for small FDICsupervised institutions. Therefore,
based on an estimated hourly rate, the
final rule would reduce loan review
costs for small entities by $67,391 to
$172,868, on average, each year.73 If
lenders opt to not utilize an evaluation
72 Multiplying $31.8 billion by 2.36 percent then
dividing the product by an average loan amount of
$375,000 equals 2,003 loans and multiplying $31.8
billion by 6.05 percent then dividing the product
by an average loan amount of $375,000 equals 5,138
loans.
73 The FDIC estimates that the average hourly
compensation for a loan officer is $67.29 an hour.
The hourly compensation estimate is based on
published compensation rates for Credit Counselors
and Loan Officers ($43.40). The estimate includes
the September 2017 75th percentile hourly wage
rate reported by the Bureau of Labor Statistics,
National Industry-Specific Occupational
Employment and Wage Estimates for the Depository
Credit Intermediation sector. The reported hourly
wage rate is grossed up by 155.0 percent to account
for non-monetary compensation as reported by the
3rd Quarter 2017 Employer Costs for Employee
Compensation Data. Based on this estimate, loan
review costs would decline between $67,391 (2,003
loans multiplied by 30 minutes and multiplied by
$67.29 per hour) and $172,868 (5,138 loans
multiplied by 30 minutes and multiplied by $67.29
per hour).
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and require an appraisal on commercial
real estate transaction greater than
$250,000 but not more than $500,000
any reduction in costs would be smaller.
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 final rule also is likely to reduce
the loan origination costs associated
with real estate appraisals for
commercial real estate borrowers. The
FDIC assumes that these costs are
always paid by the borrower for this
analysis. Anecdotal information from
industry participants indicates that a
commercial real estate appraisal costs
between $1,000 to over $3,000, or about
$2,000 on average, and a commercial
real estate evaluation costs between
$500 to over $1,500, or about $1,000 on
average. Based on the prior
assumptions, the FDIC estimates that
the final rule will affect approximately
2,003 to 5,138 transactions per year,74 or
0.68 to 1.74 loans on average for small
FDIC-supervised institutions. Therefore,
the final rule could reduce loan
origination costs for borrowers doing
business with small entities by $2.0 to
$5.1 million on average per year.75
By lowering valuation costs on
commercial real estate transactions
greater than $250,000 but less than or
equal to $500,000 for small FDICsupervised institutions, the final rule
could marginally increase lending
activity. As discussed previously,
commenters in the EGRPRA review
noted that appraisals can be costly and
time consuming. By enabling small
FDIC-supervised institutions to utilize
evaluations for more commercial real
estate transactions, the final rule will
reduce transaction costs. The reduction
in loan origination fees could
marginally increase commercial real
estate lending activity for loans with an
origination value greater than $250,000
and not more than $500,000.
C. Paperwork Reduction Act
Certain provisions of the final rule
contain ‘‘collection of information’’
requirements within the meaning of the
Paperwork Reduction Act (PRA) of
74 Multiplying $31.8 billion by 2.36 percent then
dividing the product by an average loan amount of
$375,000 equals 2,003 loans and multiplying $31.8
billion by 6.05 percent then dividing the product
by an average loan amount of $375,000 equals 5,138
loans.
75 Multiplying 2,003 loans by $1,000 savings
equals $2.0 million and multiplying 5,138 loans by
$1,000 savings equals $5.1 million.
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15033
1995.76 In accordance with the
requirements of the PRA, the agencies
may not conduct or sponsor, and the
respondent is not required to respond
to, an information collection unless it
displays a currently-valid Office of
Management and Budget (OMB) control
number. The OMB control number for
the OCC is 1557–0190, the Board is
7100–0250, and the FDIC is 3064–0103,
which will be extended, without
revision. The agencies have concluded
that the final rule does not contain any
changes to the current information
collections; however, the agencies are
revising the methodology for calculating
the burden estimates. There were no
comments received regarding the PRA.
The OCC and the FDIC submitted the
information collection requirements to
OMB in connection with the proposal
under section 3507(d) of the PRA 77 and
section 1320.11 of the OMB’s
implementing regulations.78 OMB filed
a comment pursuant to 5 CFR
1320.11(c) instructing the agencies to
examine public comment in response to
the proposal and describe in the
supporting statement of its next
collection (the final rule) any public
comments received regarding the
collection as well as why (or why it did
not) incorporate the commenter’s
recommendation and include the draft
final rule in its next submission. The
OCC and the FDIC have resubmitted the
collection to OMB in connection with
the final rule. The Board reviewed the
final rule under the authority delegated
to the Board by OMB.
Information Collection
Title of Information Collection:
Recordkeeping Requirements
Associated with Real Estate Appraisals
and Evaluations.
Frequency of Response: Event
generated.
Affected Public: Businesses or other
for-profit.
Respondents:
OCC: National banks, federal savings
associations.
Board: State member banks (SMBs)
and nonbank subsidiaries of bank
holding companies (BHCs).
FDIC: Insured state nonmember banks
and state savings associations, insured
state branches of foreign banks.
General Description of Report: For
federally related transactions, Title XI
requires regulated institutions 79 to
76 44
U.S.C. 3501–3521.
U.S.C. 3507(d).
78 5 CFR 1320.
79 National banks, federal savings associations,
SMBs and nonbank subsidiaries of BHCs, insured
state nonmember banks and state savings
77 44
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obtain appraisals prepared in
accordance with USPAP promulgated
by the Appraisal Standards Board of the
Appraisal Foundation. Generally, these
standards include the methods and
techniques used to estimate the market
value of a property as well as the
requirements for reporting such analysis
and a market value conclusion in the
appraisal. Regulated institutions are
expected to maintain records that
demonstrate that appraisals used in
their real estate-related lending
activities comply with these regulatory
requirements. For commercial real
estate transactions exempted from the
Title XI appraisal requirements by the
final rule, regulated institutions will
still be required to obtain an evaluation
to justify the transaction amount. The
agencies estimate that the recordkeeping
burden associated with evaluations is
the same as the recordkeeping burden
associated with appraisals for such
transactions.
Current Action: The threshold change
in the final rule will result in lenders
being able to use evaluations instead of
appraisals for certain transactions. It is
estimated that the time required to
document the review of an appraisal or
an evaluation is the same. While the
rulemaking described in this final rule
will not change the amount of time that
institutions spend complying with the
Title XI appraisal regulation, the
agencies are using a more accurate
methodology for calculating the burden
of the information collections based on
the experience of the agencies. Thus, the
PRA burden estimates shown here are
different from those previously
reported. The agencies are (1) using the
average number of loans per institution
as the frequency and (2) using 5 minutes
as the estimated time per response for
the appraisals or evaluations.
PRA Burden Estimates
Estimated average time per response:
5 minutes.
sradovich on DSK3GMQ082PROD with RULES
OCC
Number of Respondents: 1,200.
Annual Frequency: 1,488.
Total Estimated Annual Burden:
148,800 hours.
Board
Number of Respondents: 828 SMBs;
1,215 nonbank subsidiaries of BHCs.
Annual Frequency: 419; 25.
Total Estimated Annual Burden:
28,911 hours; 2,531 hours.
FDIC
Number of Respondents: 3,675.
associations, and insured state branches of foreign
banks.
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Annual Frequency: 143.
Total Estimated Annual Burden:
43,794 hours.
These collections are available to the
public at www.reginfo.gov.
The agencies have an ongoing interest
in public comments on its burden
estimates. Comments on the collection
of information should be sent to:
OCC: Because paper mail in the
Washington, DC area and at the OCC is
subject to delay, commenters are
encouraged to submit comments by
email, if possible. Comments may be
sent to: Legislative and Regulatory
Activities Division, Office of the
Comptroller of the Currency, Attention:
1557–0190, 400 7th Street SW, Suite
3E–218, Mail Stop 9W–11, Washington,
DC 20219. In addition, comments may
be sent by fax to (571) 465–4326 or by
electronic mail to regs.comments@
occ.treas.gov. You may personally
inspect and photocopy comments at the
OCC, 400 7th Street SW, Washington,
DC 20219. For security reasons, the OCC
requires that visitors make an
appointment to inspect comments. You
may do so by calling (202) 649–6700.
Upon arrival, visitors will be required to
present valid government-issued photo
identification and submit to security
screening in order to inspect and
photocopy comments.
All comments received, including
attachments and other supporting
materials, are part of the public record
and subject to public disclosure. Do not
include any information in your
comment or supporting materials that
you consider confidential or
inappropriate for public disclosure.
Board: Nuha Elmaghrabi, Federal
Reserve Clearance Officer, Office of the
Chief Data Officer, Mail Stop K1–148,
Board of Governors of the Federal
Reserve System, Washington, DC 20551,
with copies of such comments sent to
the Office of Management and Budget,
Paperwork Reduction Project (7100–
0250), Washington, DC 20503.
FDIC: You may submit comments,
which should refer to ‘‘Real Estate
Appraisals, 3064–0103’’ by any of the
following methods:
• Agency website: https://
www.fdic.gov/regulations/laws/federal/.
Follow the instructions for submitting
comments on the FDIC website.
• Federal eRulemaking Portal: https://
www.regulations.gov. Follow the
instructions for submitting comments.
• Email: comments@FDIC.gov.
Include ‘‘Real Estate Appraisals, 3064–
0103’’ in the subject line of the message.
• Mail: Jennifer Jones, Attn:
Comments, Federal Deposit Insurance
Corporation, 550 17th Street NW, MB–
3105, Washington, DC 20429.
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• Hand Delivery: Comments may be
hand delivered to the guard station at
the rear of the 550 17th Street Building
(located on F Street) on business days
between 7 a.m. and 5 p.m.
Public Inspection: All comments
received will be posted without change
to https://www.fdic.gov/regulations/laws/
federal/ including any personal
information provided.
Additionally, commenters may send a
copy of their comments to the OMB
desk officer for the PRA Agencies by
mail to the Office of Information and
Regulatory Affairs, U.S. Office of
Management and Budget, New
Executive Office Building, Room 10235,
725 17th Street NW, Washington, DC
20503; by fax to (202) 395–6974; or by
email to oira_submission@omb.eop.gov.
D. Riegle Act
The Riegle Act requires that each of
the agencies, in determining the
effective date and administrative
compliance requirements for new
regulations that impose additional
reporting, disclosure, or other
requirements on IDIs, consider,
consistent with principles of safety and
soundness and the public interest, any
administrative burdens that such
regulations would place on depository
institutions, including small depository
institutions, and customers of
depository institutions, as well as the
benefits of such regulations.80 In
addition, in order to provide an
adequate transition period, new
regulations that impose additional
reporting, disclosures, or other new
requirements on IDIs generally must
take effect on the first day of a calendar
quarter that begins on or after the date
on which the regulations are published
in final form.81
The final rule reduces burden and
does not impose any reporting,
disclosure, or other new requirements
on IDIs. For transactions exempted from
the Title XI appraisal requirements by
the proposed rule (i.e., commercial real
estate transactions between $250,000
and $500,000), lenders are required to
get an evaluation if they chose not to get
an appraisal. However, the agencies do
not view the option to obtain an
evaluation instead of an appraisal as a
new or additional requirement for
purposes of the Riegle Act. First, the
process of obtaining an evaluation is not
new since IDIs already get evaluations
for transactions at or below the current
$250,000 threshold. Second, for
commercial real estate transactions
between $250,000 and $500,000, IDIs
80 12
81 12
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U.S.C. 4802(a).
U.S.C. 4802(b).
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can continue to get appraisals instead of
evaluations. Because the final rule
imposes no new requirements on IDIs,
the agencies are not required by the
Riegle Act to consider the
administrative burdens and benefits of
the rule or delay its effective date.
Because delaying the effective date of
the rule is not required, the agencies are
making the threshold increase effective
on the first day after publication of the
final rule in the Federal Register.
Additionally, although not required by
the Riegle Act, the agencies did consider
the administrative costs and benefits of
the rule while developing the proposal
and finalizing the rule. In designing the
scope of the threshold increase, the
agencies chose to largely align the
definition of commercial real estate
transaction with industry practice,
regulatory guidance, and the categories
used in the Call Report in order to
reduce the administrative burden of
determining which transactions were
exempted by the rule. The agencies also
considered the cost savings that IDIs
would experience by obtaining
evaluations instead of appraisals and set
the threshold at a level designed to
provide significant burden relief
without sacrificing safety and
soundness. In the proposal, the agencies
invited comments on compliance with
the Riegle Act, but no such comments
were received.
E. Solicitation of Comments on Use of
Plain Language
Section 722 of the Gramm-LeachBliley Act 82 requires the agencies to use
plain language in all proposed and final
rules published after January 1, 2000.
The agencies invited comment on how
to make the rule easier to understand,
but no such comments were received.
sradovich on DSK3GMQ082PROD with RULES
F. OCC Unfunded Mandates Reform Act
of 1995 Determination
The OCC has analyzed the final rule
under the factors in the Unfunded
Mandates Reform Act of 1995 (2 U.S.C.
1532). Under this analysis, the OCC
considered whether the final rule
includes a federal mandate that may
result in the expenditure by state, local,
and tribal governments, in the aggregate,
or by the private sector, of $100 million
or more in any one year (adjusted
annually for inflation).
The final rule does not impose new
requirements or include new mandates.
Therefore, we conclude that the final
rule will not result in an expenditure of
$100 million or more by state, local, and
82 Public Law 106–102, section 722, 113 Stat.
1338 1471 (1999).
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tribal governments, or by the private
sector, in any one year.
List of Subjects
12 CFR Part 34
Appraisal, Appraiser, Banks, Banking,
Consumer protection, Credit, Mortgages,
National banks, Reporting and
recordkeeping requirements, Savings
associations, Truth in lending.
12 CFR Part 225
Administrative practice and
procedure, Banks, banking, Federal
Reserve System, Capital planning,
Holding companies, Reporting and
recordkeeping requirements, Securities,
Stress testing.
12 CFR Part 323
Banks, banking, Mortgages, Reporting
and recordkeeping requirements,
Savings associations.
Office of the Comptroller of the
Currency 12 CFR Part 34
For the reasons set forth in the joint
preamble, the OCC amends part 34 of
chapter I of title 12 of the Code of
Federal Regulations as follows:
PART 34—REAL ESTATE LENDING
AND APPRAISALS
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
single 1-to-4 family residential property.
*
*
*
*
*
■ 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:
§ 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
PO 00000
Frm 00017
Fmt 4700
Sfmt 4700
15035
financial and public policy interests in
real estate-related financial transactions
or to protect the safety and soundness
of the institution; or
(13) The transaction is a commercial
real estate transaction that has a
transaction value of $500,000 or less.
(b) Evaluations required. For a
transaction that does not require the
services of a State certified or licensed
appraiser under paragraph (a)(1), (a)(5),
(a)(7), or (a)(13) of this section, the
institution shall obtain an appropriate
evaluation of real property collateral
that is consistent with safe and sound
banking practices.
*
*
*
*
*
(d) * * *
(2) Commercial real estate
transactions of more than $500,000. All
federally related transactions that are
commercial real estate transactions
having a transaction value of more than
$500,000 shall require an appraisal
prepared by a State certified appraiser.
*
*
*
*
*
Federal Reserve Board
12 CFR Part 225
For the reasons set forth in the joint
preamble, the Board amends part 225 of
chapter II of title 12 of the Code of
Federal Regulations as follows:
PART 225—BANK HOLDING
COMPANIES AND CHANGE IN BANK
CONTROL (REGULATION Y)
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.
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
single 1-to-4 family residential property.
*
*
*
*
*
■ 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:
E:\FR\FM\09APR1.SGM
09APR1
15036
Federal Register / Vol. 83, No. 68 / Monday, April 9, 2018 / Rules and Regulations
§ 225.63 Appraisals required; transactions
requiring a State certified or licensed
appraiser.
transaction that is not secured by a
single 1-to-4 family residential property.
(a) * * *
(13) The Board determines that the
services of an appraiser are not
necessary in order to protect Federal
financial and public policy interests in
real estate-related financial transactions
or to protect the safety and soundness
of the institution; or
(14) The transaction is a commercial
real estate transaction that has a
transaction value of $500,000 or less.
(b) Evaluations required. For a
transaction that does not require the
services of a State certified or licensed
appraiser under paragraph (a)(1), (a)(5),
(a)(7), or (a)(14) of this section, the
institution shall obtain an appropriate
evaluation of real property collateral
that is consistent with safe and sound
banking practices.
*
*
*
*
*
(d) * * *
(2) Commercial real estate
transactions of more than $500,000. All
federally related transactions that are
commercial real estate transactions
having a transaction value of more than
$500,000 shall require an appraisal
prepared by a State certified appraiser.
*
*
*
*
*
■
Federal Deposit Insurance Corporation
12 CFR Part 323
For the reasons set forth in the joint
preamble, the FDIC amends part 323 of
chapter III of title 12 of the Code of
Federal Regulations as follows:
PART 323—APPRAISALS
7. Revise the authority citation for part
323 to read as follows:
■
Authority: 12 U.S.C. 1818,
1819(a)(Seventh’’ and ‘‘Tenth), 1831p–1 and
3331 et seq.
8. Section 323.1 is amended by
revising paragraph (a) to read as follows:
■
sradovich on DSK3GMQ082PROD with RULES
§ 323.1
Authority, purpose, and scope.
(a) Authority. This subpart is issued
under 12 U.S.C. 1818, 1819(a)(Seventh
and Tenth), 1831p–1 and title XI of the
Financial Institutions Reform, Recovery,
and Enforcement Act of 1989 (FIRREA)
(Pub. L. 101–73, 103 Stat. 183, 12 U.S.C.
3331 et seq. (1989)).
■ 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
VerDate Sep<11>2014
16:01 Apr 06, 2018
Jkt 244001
10. 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 $500,000 or less.
(b) Evaluations required. For a
transaction that does not require the
services of a State certified or licensed
appraiser under paragraph (a)(1), (a)(5),
(a)(7), or (a)(13) of this section, the
institution shall obtain an appropriate
evaluation of real property collateral
that is consistent with safe and sound
banking practices.
*
*
*
*
*
(d) * * *
(2) Commercial real estate
transactions of more than $500,000. All
federally related transactions that are
commercial real estate transactions
having a transaction value of more than
$500,000 shall require an appraisal
prepared by a State certified appraiser.
*
*
*
*
*
Dated: March 16, 2018.
Joseph M. Otting,
Comptroller of the Currency.
By order of the Board of Governors of the
Federal Reserve System, March 23, 2018.
Ann E. Misback,
Secretary of the Board.
Dated at Washington, DC on March 20,
2018.
By order of the Board of Directors.
Federal Deposit Insurance Corporation.
Valerie J. Best,
Assistant Executive Secretary.
[FR Doc. 2018–06960 Filed 4–6–18; 8:45 am]
BILLING CODE 4810–33–P; 6210–01–P; 6714–01–P
PO 00000
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DEPARTMENT OF TRANSPORTATION
Federal Aviation Administration
14 CFR Part 39
[Docket No. FAA–2018–0284; Product
Identifier 2018–CE–014–AD; Amendment
39–19246; AD 2018–07–15]
RIN 2120–AA64
Airworthiness Directives; XtremeAir
GmbH Airplanes
Federal Aviation
Administration (FAA), DOT.
ACTION: Final rule; request for
comments.
AGENCY:
We are adopting a new
airworthiness directive (AD) for
XtremeAir GmbH Model XA42 airplanes
equipped with an engine mount part
number XA42–7120–151. This AD
results from mandatory continuing
airworthiness information (MCAI)
issued by the aviation authority of
another country to identify and address
an unsafe condition on an aviation
product. The MCAI describes the unsafe
condition as cracking of the diagonal
strut of the engine mount frame. We are
issuing this AD to require actions to
address the unsafe condition on these
products.
SUMMARY:
This AD is effective April 30,
2018.
The Director of the Federal Register
approved the incorporation by reference
of a certain publication listed in the AD
as of April 30, 2018.
We must receive comments on this
AD by May 24, 2018.
ADDRESSES: You may send comments by
any of the following methods:
• Federal eRulemaking Portal: Go to
https://www.regulations.gov. Follow the
instructions for submitting comments.
• Fax: (202) 493–2251.
• Mail: U.S. Department of
Transportation, Docket Operations, M–
30, West Building Ground Floor, Room
W12–140, 1200 New Jersey Avenue SE,
Washington, DC 20590.
• Hand Delivery: U.S. Department of
Transportation, Docket Operations, M–
30, West Building Ground Floor, Room
W12–140, 1200 New Jersey Avenue SE,
Washington, DC 20590, between 9 a.m.
and 5 p.m., Monday through Friday,
except Federal holidays.
For service information identified in
this AD, contact XtremeAir GmbH,
Harzstrasse 2, Am Flughafen Cochstedt,
D–39444 Hecklingen, Germany; phone:
+49 39267 60999 0; fax: +49 39267
60999 20; email: info@xtremeair.de;
internet: https://www.xtremeair.com.
You may view this referenced service
DATES:
E:\FR\FM\09APR1.SGM
09APR1
]]>Agencies
[Federal Register Volume 83, Number 68 (Monday, April 9, 2018)]
[Rules and Regulations]
[Pages 15019-15036]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-06960]
========================================================================
Rules and Regulations
Federal Register
________________________________________________________________________
This section of the FEDERAL REGISTER contains regulatory documents
having general applicability and legal effect, most of which are keyed
to and codified in the Code of Federal Regulations, which is published
under 50 titles pursuant to 44 U.S.C. 1510.
The Code of Federal Regulations is sold by the Superintendent of Documents.
========================================================================
Federal Register / Vol. 83, No. 68 / Monday, April 9, 2018 / Rules
and Regulations
[[Page 15019]]
DEPARTMENT OF THE TREASURY
Office of the Comptroller of the Currency
12 CFR Part 34
[Docket No. OCC-2017-0011]
RIN 1557-AE18
FEDERAL RESERVE SYSTEM
12 CFR Part 225
[Docket No. R-1568; RIN 7100 AE-81]
FEDERAL DEPOSIT INSURANCE CORPORATION
12 CFR Part 323
RIN 3064 AE-56
Real Estate Appraisals
AGENCY: Office of the Comptroller of the Currency, Treasury (OCC);
Board of Governors of the Federal Reserve System (Board); and Federal
Deposit Insurance Corporation (FDIC).
ACTION: Final rule.
-----------------------------------------------------------------------
SUMMARY: The OCC, Board, and FDIC (collectively, the agencies) are
adopting a final rule to amend the agencies' regulations requiring
appraisals of real estate for certain transactions. The final rule
increases the threshold level at or below which appraisals are not
required for commercial real estate transactions from $250,000 to
$500,000. The final rule defines commercial real estate transaction as
a real estate-related financial transaction that is not secured by a
single 1-to-4 family residential property. It excludes all transactions
secured by a single 1-to-4 family residential property, and thus
construction loans secured by a single 1-to-4 family residential
property are excluded. For commercial real estate transactions exempted
from the appraisal requirement as a result of the revised threshold,
regulated institutions must obtain an evaluation of the real property
collateral that is consistent with safe and sound banking practices.
DATES: This final rule is effective on April 9, 2018.
FOR FURTHER INFORMATION CONTACT:
OCC: G. Kevin Lawton, Appraiser (Real Estate Specialist), (202)
649-7152, Mitchell E. Plave, Special Counsel, Legislative and
Regulatory Activities Division, (202) 649-5490, or Joanne Phillips,
Attorney, Bank Activities and Structure Division, (202) 649-5500,
Office of the Comptroller of the Currency, 400 7th Street SW,
Washington, DC 20219. For persons who are deaf or hearing impaired, TTY
users may contact (202) 649-5597.
Board: Constance Horsley, Deputy Associate Director, (202) 452-
5239, or Carmen Holly, Senior Supervisory Financial Analyst, (202) 973-
6122, Division of Supervision and Regulation; or Gillian Burgess,
Senior Counsel, (202) 736-5564, Matthew Suntag, Counsel, (202) 452-
3694, or Kirin Walsh, Attorney, (202) 452-3058, Legal Division, Board
of Governors of the Federal Reserve System, 20th and C Streets NW,
Washington, DC 20551. For the hearing impaired only, Telecommunications
Device for the Deaf (TDD) users may contact (202) 263-4869.
FDIC: Beverlea S. Gardner, Senior Examination Specialist, Division
of Risk Management and Supervision, (202) 898-3640, Mark Mellon,
Counsel, Legal Division, (202) 898-3884, or Lauren Whitaker, Senior
Attorney, Legal Division, (202) 898-3872, Federal Deposit Insurance
Corporation, 550 17th Street NW, Washington, DC 20429. For the hearing
impaired only, TDD users may contact (202) 925-4618.
SUPPLEMENTARY INFORMATION:
I. Background and Summary of the Proposed Rule
In July 2017, the agencies invited comment on a notice of proposed
rulemaking (proposal or proposed rule) \1\ that would amend the
agencies' appraisal regulations promulgated pursuant to Title XI of the
Financial Institutions Reform, Recovery, and Enforcement Act of 1989
(Title XI).\2\ Specifically, the proposal would have increased the
monetary threshold at or below which financial institutions that are
regulated by the agencies (regulated institutions) would not be
required to obtain appraisals in connection with commercial real estate
transactions (commercial real estate appraisal threshold) from $250,000
to $400,000. The proposal followed the completion in early 2017 of the
regulatory review process required by the Economic Growth and
Regulatory Paperwork Reduction Act (EGRPRA).\3\ During the EGRPRA
process, the agencies received numerous comments related to the Title
XI appraisal regulations, including recommendations to increase the
thresholds at or below which transactions are exempt from the Title XI
appraisal requirements. Among other proposals developed through the
EGRPRA process, the agencies recommended increasing the commercial real
estate appraisal threshold to $400,000.\4\
---------------------------------------------------------------------------
\1\ 82 FR 35478 (July 31, 2017).
\2\ 12 U.S.C. 3331 et seq.
\3\ Public Law 104-208, Div. A, Title II, section 2222, 110
Stat. 3009-414, (1996) (codified at 12 U.S.C. 3311).
\4\ See FFIEC, Joint Report to Congress: Economic Growth and
Regulatory Paperwork Reduction Act, (March 2017), (EGRPRA Report),
available at https://www.ffiec.gov/pdf/2017_FFIEC_EGRPRA_Joint-Report_to_Congress.pdf.
---------------------------------------------------------------------------
Title XI directs each federal financial institutions regulatory
agency \5\ to publish appraisal regulations for federally related
transactions within its jurisdiction. The purpose of Title XI is to
protect federal financial and public policy interests \6\ in real
estate-related transactions by requiring that real estate appraisals
used in connection with federally related transactions (Title XI
appraisals) be performed in accordance with uniform standards, by
individuals whose competency has been demonstrated, and whose
professional conduct will be subject to effective supervision.\7\
---------------------------------------------------------------------------
\5\ ``Federal financial institutions regulatory agency'' means
the Board, the FDIC, the OCC, the National Credit Union Association
(NCUA), and, formerly, the Office of Thrift Supervision. 12 U.S.C.
3350(6).
\6\ These interests include those stemming from the federal
government's roles as regulator and deposit insurer of financial
institutions that engage in real estate lending and investment,
guarantor or lender on mortgage loans, and as a direct party in real
estate-related financial transactions. These federal financial and
public policy interests have been described in predecessor
legislation and accompanying Congressional reports. See Real Estate
Appraisal Reform Act of 1988, H.R. Rep. No. 100-1001, pt. 1, at 19
(1988); 133 Cong. Rec. 33047-33048 (1987).
\7\ 12 U.S.C. 3331.
---------------------------------------------------------------------------
[[Page 15020]]
Title XI directs the agencies to prescribe appropriate standards
for Title XI appraisals under the agencies' respective
jurisdictions,\8\ including, at a minimum, that appraisals be: (1)
Performed in accordance with the Uniform Standards of Professional
Appraisal Practice (USPAP); \9\ (2) written appraisals, as defined by
the statute, by licensed or certified appraisers; \10\ and (3) subject
to appropriate review for compliance with USPAP. All federally related
transactions must have Title XI appraisals.
---------------------------------------------------------------------------
\8\ 12 U.S.C. 3339. The agencies' Title XI appraisal regulations
apply to transactions entered into by the agencies or by
institutions regulated by the agencies that are depository
institutions or bank holding companies or subsidiaries of depository
institutions or bank holding companies. See OCC: 12 CFR 34, subpart
C; Board: 12 CFR 225.61(b); 12 CFR part 208, subpart E; and FDIC: 12
CFR part 323.
\9\ USPAP is written and interpreted by the Appraisal Standards
Board of the Appraisal Foundation. USPAP contains generally
recognized ethical and performance standards for the appraisal
profession in the United States, including real estate, personal
property, and business appraisals. See https://www.appraisalfoundation.org/imis/TAF/Standards/Appraisal_Standards/Uniform_Standards_of_Professional_Appraisal_Practice/TAF/USPAP.aspx?hkey=a6420a67-dbfa-41b3-9878-fac35923d2af.
\10\ Title XI defines ``written appraisal'' as ``a written
statement used in connection with a federally related transaction
that is independently and impartially prepared by a licensed or
certified appraiser setting forth an opinion of defined value of an
adequately described property as of a specific date, supported by
presentation and analysis of relevant market information. 12 U.S.C.
3350(10).
---------------------------------------------------------------------------
Title XI defines a ``federally related transaction'' as a real
estate-related financial transaction that is regulated or engaged in by
a federal financial institutions regulatory agency and requires the
services of an appraiser.\11\ A real estate-related financial
transaction is defined as any transaction that involves: (i) The sale,
lease, purchase, investment in or exchange of real property, including
interests in property, or financing thereof; (ii) the refinancing of
real property or interests in real property; and (iii) the use of real
property or interests in real property as security for a loan or
investment, including mortgage-backed securities.\12\
---------------------------------------------------------------------------
\11\ 12 U.S.C. 3350(4).
\12\ 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 state
certified or state licensed appraiser and are therefore exempt from the
appraisal requirements of Title XI. These real estate-related financial
transactions are not federally related transactions under the statutory
or regulatory definitions, because they do not require the services of
an appraiser.\13\
---------------------------------------------------------------------------
\13\ See 59 FR 29482 (June 7, 1994).
---------------------------------------------------------------------------
The agencies have exempted several categories of real estate-
related financial transactions from the Title XI appraisal
requirements.\14\ The agencies have determined that these categories of
transactions do not require appraisals by state certified or state
licensed appraisers in order to protect federal financial and public
policy interests or to satisfy principles of safe and sound banking.
---------------------------------------------------------------------------
\14\ See OCC: 12 CFR 34.43(a); Board: 12 CFR 225.63(a); and
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 state licensed appraiser is not required in
connection with federally related transactions if the agencies
determine in writing that the threshold does not represent a threat to
the safety and soundness of financial institutions.\15\ As noted above,
transactions at or below the threshold level are exempt from the Title
XI appraisal requirements and thus are not federally related
transactions.
---------------------------------------------------------------------------
\15\ Housing and Community Development Act of 1992, Pub. L. 102-
550, section 954, 106 Stat. 3894 (amending 12 U.S.C. 3341).
---------------------------------------------------------------------------
Under the current thresholds, established in 1994,\16\ all real
estate-related financial transactions with a transaction value \17\ of
$250,000 or less, as well as certain real estate-secured business loans
(qualifying business loans or QBLs) with a transaction value of $1
million or less, do not require Title XI appraisals.\18\ QBLs are
business loans \19\ that are real estate-related financial transactions
and that are not dependent on the sale of, or rental income derived
from, real estate as the primary source of repayment.\20\
---------------------------------------------------------------------------
\16\ See 59 FR at 29482. The NCUA has promulgated similar rules
with similar thresholds. See 60 FR 51889 (October 4, 1995) and 66 FR
58656 (November 23, 2001).
\17\ For loans and extensions of credit, the transaction value
is the amount of the loan or extension of credit. For sales, leases,
purchases, investments in or exchanges of real property, the
transaction value is the market value of the real property. For the
pooling of loans or interests in real property for resale or
purchase, the transaction value is the amount of each loan or the
market value of each real property, respectively. See OCC: 12 CFR
34.42(m); Board: 12 CFR 225.62(m); and FDIC: 12 CFR 323.2(m).
\18\ See OCC: 12 CFR 34.43(a)(1) and (5); Board: 12 CFR
225.63(a)(1) and (5); and FDIC: 12 CFR 323.3(a)(1) and (5).
\19\ The Title XI appraisal regulations define ``business loan''
to mean ``a loan or extension of credit to any corporation, general
or limited partnership, business trust, joint venture, pool,
syndicate, sole proprietorship, or other business entity.'' OCC: 12
CFR 34.42(d); Board: 12 CFR 225.62(d); and FDIC: 12 CFR 323.2(d).
\20\ See OCC: 12 CFR 34.43(a)(5); Board: 12 CFR 225.63(a)(5);
and FDIC: 12 CFR 323.3(a)(5).
---------------------------------------------------------------------------
For real estate-related financial transactions that are exempt from
the Title XI appraisal requirement because they are at or below the
applicable thresholds or qualify for the exemption for certain existing
extensions of credit,\21\ the Title XI appraisal regulations require
regulated institutions to obtain an evaluation of the real property
collateral that is consistent with safe and sound banking
practices.\22\ An evaluation should contain sufficient information and
analysis to support the financial institution's decision to engage in
the transaction.\23\
---------------------------------------------------------------------------
\21\ Transactions that involve an existing extension of credit
at the lending institution are exempt from the Title XI appraisal
requirements, but are required to have evaluations, provided that
there has been no obvious and material change in market conditions
or physical aspects of the property that threatens the adequacy of
the institution's real estate collateral protection after the
transaction, even with the advancement of new monies; or there is no
advancement of new monies, other than funds necessary to cover
reasonable closing costs. See OCC: 12 CFR 34.43(a)(7) and (b);
Board: 12 CFR 225.63(a)(7) and (b); and FDIC: 12 CFR 323.3(a)(7) and
(b).
\22\ See OCC: 12 CFR 34.43(b); Board: 12 CFR 225.63(b); and
FDIC: 12 CFR 323.3(b).
\23\ Evaluations are not required to be performed in accordance
with USPAP or by state certified or state licensed appraisers. The
agencies have provided supervisory guidance for conducting
evaluations in a safe and sound manner in the Interagency Appraisal
and Evaluation Guidelines (Guidelines) and the Interagency Advisory
on the Use of Evaluations in Real Estate-Related Financial
Transactions (Evaluations Advisory, and together with the
Guidelines, Evaluation Guidance). See, 75 FR 77450 (December 10,
2010); OCC Bulletin 2016-8 (March 4, 2016); Board SR Letter 16-5
(March 4, 2016); and Supervisory Expectations for Evaluations, FDIC
FIL-16-2016 (March 4, 2016).
---------------------------------------------------------------------------
The agencies proposed to increase the commercial real estate
appraisal threshold from $250,000 to $400,000. The proposal would have
defined commercial real estate transaction to include all real estate-
related financial transactions, except for those secured by a 1-to-4
family residential property,\24\ but including loans that finance the
construction of 1-to-4 family properties and that do not include
permanent financing.\25\ Under the proposal, regulated institutions
would have been required to obtain evaluations consistent with safe and
sound banking
[[Page 15021]]
practices in connection with commercial real estate transactions at or
below the proposed $400,000 threshold. The agencies did not propose
increasing the thresholds for other types of real estate-related
financial transactions, but solicited comment on the appropriateness of
raising the threshold for residential real estate transactions and
QBLs.
---------------------------------------------------------------------------
\24\ A 1-to-4 family residential property is a property
containing one, two, three, or four individual dwelling units,
including manufactured homes permanently affixed to the underlying
land (when deemed to be real property under state law). See OCC: 12
CFR part 34 subpart D, Appendix A; Board: 12 CFR 208, Appendix C;
and FDIC: 12 CFR part 365, subpart A, Appendix A.
\25\ The second part of the definition was intended to clarify,
not be an exception to, the first part.
---------------------------------------------------------------------------
The comment period closed on September 29, 2017. The agencies
collectively received over 200 comments from appraisers, appraiser
trade organizations, financial institutions, financial institutions
trade organizations, and individuals.
As noted in the proposal, increases in commercial property values
over time have required regulated institutions to obtain Title XI
appraisals for a larger proportion of commercial real estate
transactions than in 1994 when the current $250,000 threshold was
established. This increase in the number of appraisals required may
have contributed to increased burden for regulated institutions in
terms of time and cost. The proposal was intended to reduce regulatory
burden consistent with federal financial and public policy interests in
real estate-related financial transactions. Based on supervisory
experience and available data, the agencies published the proposal to
accomplish these goals without posing a threat to the safety and
soundness of financial institutions.
II. Revisions to the Title XI Appraisal Regulations
Overview of Changes
After carefully considering the comments and conducting further
analysis, the agencies are adopting a final rule that increases the
commercial real estate appraisal threshold with three modifications
from the proposal. First, the agencies have decided to increase the
commercial real estate appraisal threshold to $500,000 rather than
$400,000 as proposed. Second, the final rule also makes a conforming
change to the section requiring state certified appraisers to be used
for federally related transactions that are commercial real estate
transactions above the increased threshold.
Third, the final rule also reflects a change to the proposed
definition of commercial real estate transaction, which no longer
includes construction loans secured by a single 1-to-4 family
residential property, regardless of whether the loan is for initial
construction only or includes permanent financing. Thus, under the
final rule, a loan that is secured by a single 1-to-4 family
residential property, including a loan for construction, will remain
subject to the $250,000 threshold.\26\ The agencies made this change in
the final rule after consideration of the comments, which suggested
that including 1-to-4 family constructions loans that do not include
permanent financing in the definition, but excluding those that do not,
would not significantly reduce burden.
---------------------------------------------------------------------------
\26\ Residential construction loans secured by more than one 1-
to-4 family residential property will be considered commercial real
estate transactions subject to the higher threshold.
---------------------------------------------------------------------------
These changes are discussed in more detail below, in the order in
which they appear in the rule. As described in more detail below, the
effective date for the rule will be the date of its publication in the
Federal Register. In the Dodd-Frank Wall Street Reform and Consumer
Protection Act (the Dodd-Frank Act),\27\ Congress amended the threshold
provision to require ``concurrence from the Consumer Financial
Protection Bureau (CFPB) that such threshold level provides reasonable
protection for consumers who purchase 1-4 unit single-family
residences.'' \28\ The agencies have received concurrence from the CFPB
that the commercial real estate appraisal threshold being adopted
provides reasonable protection for consumers who purchase 1-4 unit
single family residential properties.
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\27\ Public Law 111-203, 124 Stat.1376.
\28\ Dodd-Frank Act, Sec. 1473, 124 Stat. 2190 (amending 12
U.S.C. 3341(b)).
---------------------------------------------------------------------------
Comments on the Proposed Increase to the Commercial Real Estate
Appraisal Threshold
The agencies received a range of comments regarding the proposal to
increase the commercial real estate appraisal threshold. Comments from
financial institutions and financial institutions trade associations
generally supported an increase, although many requested a higher
increase than proposed. Comments from appraisers and appraiser-related
trade associations generally opposed an increase.
Commenters supporting a threshold increase stated that an increase
would be appropriate, given the increases in real estate values since
the current threshold was established, the cost and time savings to
lenders and borrowers the higher threshold would provide, and the
burden relief it would provide to financial institutions in rural and
other areas where there are reported shortages of state licensed or
state certified appraisers, which may have caused transaction delays
and increased lending costs. Commenters supporting a threshold increase
also asserted that it would provide burden relief for financial
institutions, without sacrificing sound risk management principles or
safe and sound banking practices, and that an increase would help
justify the cost and return of originating smaller and less complex
commercial real estate loans. Several commenters asserted the higher
threshold could be implemented easily and would result in burden
relief, for example, by reducing loan costs and minimizing delays in
loan processing. One commenter asserted that the proposed increase
would support local and regional economies, and another represented
that it would assist small builders. This same commenter asserted that
reducing burden on lenders would facilitate financing to builders
generally, as they rely heavily on commercial banks for financing.
Commenters opposing an increase to the commercial real estate
appraisal threshold asserted that an increase would elevate risks to
financial institutions, the banking system, borrowers, small business
owners, commercial property owners, and taxpayers. Several of these
commenters asserted that the increased risk would not be justified by
burden relief. Other commenters asserted that the proposed increase
contradicts publicly stated concerns of the agencies relating to the
state of the commercial real estate market and the quality of
evaluation reports. Another commenter asserted that the inclusion of
construction loans extended to consumers as commercial real estate
transactions would magnify risk, as the commenter viewed such loans as
particularly risky. One commenter expressed concern that the proposal
would lead to increased use of automated valuations, which the
commenter asserted are not adequate substitutes for appraisals, or
would eliminate collateral verifications altogether.
Some commenters opposing the threshold raised issues unrelated to
risk. A few asserted that appraisals are relatively inexpensive and,
thus, that the proposed increase would not materially reduce costs. One
commenter expressed the view that an increase in the commercial real
estate appraisal threshold would be contrary to consumer protection
objectives. Another commenter asserted that the agencies are required
by Title XI to receive concurrence from the CFPB for a threshold
change. In support of its opposition to the proposal, a commenter cited
a 2012 U.S. Government Accountability Office (GAO) report, contending
that the report found no
[[Page 15022]]
support for raising the threshold.\29\ Another commenter asserted that
the proposed threshold increase is contrary to Congressional intent and
also asserted that most commenters during the EGRPRA process were
against a threshold increase.
---------------------------------------------------------------------------
\29\ See GAO, ``Real Estate Appraisals: Appraisal Subcommittee
Needs to Improve Monitoring Procedures,'' GAO-12-147 (January 2012).
---------------------------------------------------------------------------
Several commenters rejected assertions that there was an appraiser
shortage warranting regulatory relief, some asserting that any shortage
is caused by appraisers' unwillingness to work for appraisal management
companies (AMCs) at the reduced fees being offered to appraisers by
AMCs. Two commenters questioned the impact of the proposed commercial
real estate appraisal threshold on appraiser shortages, one asserting
that the number of commercial real estate appraisers has remained
relatively steady in recent years and the other asserting that
appraiser shortages are primarily related to residential property
valuations.
Many commenters opposing the proposal highlighted the benefits that
state licensed or state certified appraisers bring to the process of
valuing real estate collateral. One of these commenters asserted that
appraisers serve a necessary function in real estate lending and
expressed concerns that bypassing them to create a more streamlined
valuation process could lead to fraud and another real estate crisis.
Several commenters highlighted that appraisers are the only unbiased
party in the valuation process, in contrast to buyers, agents, lenders,
and sellers, who each have an interest in the underlying transactions.
One commenter asserted that appraisers have a unique vantage point
during the property inspection process to provide lenders with
information, in addition to a valuation, that may be critical to the
lending decision and help to avoid bad loans and fraud.
Some commenters who were supportive of the proposal also discussed
the role of appraisals and appraisers. One of these commenters asserted
that appraisals are an integral part of the safety and soundness of the
real estate industry, but believed that certain transactions are well
served by alternative valuation methods. Some other commenters
expressed skepticism about the value of appraisals prepared by
independent appraisers. In this regard, one commenter asserted that
banks have a better understanding of property values in their
communities than appraisers from other areas, while another expressed
concern for the reliability of appraisals and whether appraisers'
valuations are keeping up with property growth trends. Another
commenter expressed concern that appraisers' access to sales contracts
can lead to an over-abundance of appraised values at or above the
amounts in the contracts.
After carefully considering the comments received, the agencies
have decided to increase the commercial real estate appraisal
threshold. As discussed in the proposal and further detailed below,
increasing the commercial real estate appraisal threshold will provide
regulatory relief for financial institutions by removing the appraisal
requirement for a material number of transactions without threatening
the safety and soundness of financial institutions.
The agencies are increasing the threshold based on express
statutory authority to do so if they determine in writing that the
threshold does not represent a threat to the safety and soundness of
financial institutions.\30\ The agencies have made this safety and
soundness determination and a detailed analysis is provided below.
---------------------------------------------------------------------------
\30\ 12 U.S.C. 3341(b).
---------------------------------------------------------------------------
Regarding consumer protection concerns, the agencies do not expect
that this increase will affect a significant number of consumer
transactions. As discussed in more detail below, the final rule is only
raising the threshold for commercial real estate transactions. This
definition was revised to exclude construction loans secured by a
single 1-to-4 family residential property, which would have included
construction loans to consumers. As a result of this change, the final
rule will not affect a material number of consumer transactions.
Regarding the efficacy of Title XI appraisals, the agencies
recognize and are supportive of the role that appraisers play in
ensuring a safe and sound real estate lending process, regardless of
whether it is in connection with an appraisal or an evaluation. Indeed,
the Title XI appraisal regulations, appraiser independence
requirements, and the Guidelines emphasize the importance of an
independent opinion of collateral value in the process of real estate
lending. Through the agencies' supervisory experience with loans that
were exempted by the current thresholds and an analysis of loan losses
over prior credit cycles for such loans, the agencies have found that
evaluations can be an effective valuation method for lower-risk
transactions. Even when the transaction amount is at or below the
threshold, the Evaluation Guidance encourages regulated institutions to
obtain Title XI appraisals when necessary for risk management and to
preserve the safety and soundness of the institution.
A. Threshold Increase for Commercial Real Estate Transactions
Definition of Commercial Real Estate Transaction
The commercial real estate appraisal threshold increase applies
only to transactions defined as ``commercial real estate
transactions.'' Under the proposed definition, a commercial real estate
transaction would have included construction loans for 1-to-4 family
residential units, but not those providing permanent financing.
Accordingly, the proposed definition would have included a loan
extended to finance the construction of a consumer's dwelling, but
would have excluded construction loans that provide both the initial
construction funding and permanent financing.
The agencies received several comments related to the proposed
definition. Most comments were not supportive of the proposed treatment
of loans to finance the construction of 1-to-4 family residential
properties. The one commenter in support of the proposal to include 1-
to-4 family construction-only loans in the definition of a commercial
real estate transaction asserted that these loans are underwritten
similar to commercial real estate transactions.
Some commenters supported excluding all loans to finance the
construction of 1-to-4 family residential properties from the
definition. Some commenters maintained that it would be safer from a
risk perspective to keep construction loans for 1-to-4 family
properties in the residential loan category subject to the $250,000
threshold. These commenters asserted that 1-to-4 family construction
loans are riskier than conventional residential lending, and maintained
that evaluations lack the market analysis needed for a phased
construction project. One commenter asserted that there may be limited
benefit to including transactions to finance the construction of 1-to-4
family residential properties without permanent financing in the
definition of commercial real estate transaction, because an appraisal
would be required prior to the permanent financing phase and prudent
risk management would dictate obtaining the appraisal prior to initial
funding. Another commenter asserted that the implementation of two
thresholds for 1-to-4 family residential construction loans would cause
[[Page 15023]]
confusion and increase regulatory burden on financial institutions.
A few commenters expressed the view that all residential
construction loans should be included in the definition and subject to
the higher threshold. One commenter noted that an increasing percentage
of 1-to-4 family properties are rental properties and that the proposed
definition would have excluded a class of rent-dependent real estate
that should be classified as commercial real estate. Another commenter
recommended that ``construction-to-permanent'' loans be included in the
definition of commercial real estate transaction to increase the
financing available for new home construction, indicating that strict
underwriting and active engagement among the bank, home builder, and
home buyer alleviate risks for these loans. This commenter supported
subjecting all construction loans to the same treatment, and asserted
that doing so would reduce regulatory burden, provide consistency, and
allow for more efficient processes. Another commenter indicated that
including all 1-to-4 family construction loans in the definition would
avoid creating additional complications by distinguishing such loans
into two different classes.
After carefully considering the comments, the agencies have adopted
a definition of commercial real estate transaction that excludes
construction loans secured by single 1-to-4 family residential
properties. Specifically, the final rule defines commercial real estate
transaction as a real estate-related financial transaction that is not
secured by a single 1-to-4 family residential property. This definition
eliminates the distinction between construction loans secured by a
single 1-to-4 family residential property that only finance
construction and those that provide both construction and permanent
financing. Under the definition in the final rule, neither of these
types of loans will be commercial real estate transactions; they will
both remain subject to the $250,000 threshold.
This approach addresses the potential confusion from subjecting two
classes of construction loans secured by a single 1-to-4 family
residential property to different threshold levels. The revised
definition also reflects comments stating that Title XI appraisals are
typically conducted for loans for construction of a single 1-to-4
family residential property regardless of whether the loan provides
only financing for construction or provides ``construction-to-
permanent'' financing.
The agencies have included the term ``single'' in the definition to
clarify that only transactions secured by one 1-to-4 family residential
property are excluded from the definition of ``commercial real estate
transaction,'' whether financing construction or for other purposes.
This change addresses potential confusion about whether a loan for the
construction of multiple residential properties would meet the
definition of ``commercial real estate transaction;'' a loan that is
secured by multiple 1-to-4 family residential properties (for example,
a loan to construct multiple properties in a residential neighborhood)
would meet the definition of commercial real estate transaction and
thus be subject to the higher threshold.
This approach addresses concerns about consumer protection, because
a large portion of loans to finance the purchase or initial
construction of a single 1-to-4 family residential property that are
secured by the property are likely to be extended to consumers who will
use the property as their dwelling. By contrast, transactions secured
by multiple 1-to-4 family properties are more likely to be transactions
to real estate developers or investors in rental properties.
The agencies note that they proposed to treat construction-only
loans to consumers as commercial real estate transactions to maintain
consistency with agency reporting standards and other regulations and
guidance that address construction loans to consumers in other
contexts. As in the proposal, the definition being adopted generally
aligns with the categories of commercial real estate transactions under
the Call Report \31\ and other agency guidance,\32\ with the exception
that construction loans secured by a single 1-to-4 family property
would not be considered a commercial real estate transaction for
purposes of this rule.
---------------------------------------------------------------------------
\31\ The following four categories of real-estate secured loans
in the Consolidated Reports of Condition and Income (Call Report)
(FFIEC 031; RCFD 1410) are largely captured in the definition of
commercial real estate transaction in the rule: (1) For
construction, land development, and other land loans; (2) secured by
farmland; (3) secured by residential properties with five or more
units; or (4) secured by nonfarm nonresidential properties. As
discussed in the proposal, loans that provide construction funding
and are secured by a single 1-to-4 family residential property are
typically reported as ``for construction, land development, and
other land loans.'' The definition applies to corresponding
categories of real estate-secured loans in the FFIEC 041 and FFIEC
051 forms of the Call Report.
\32\ Other interagency guidance includes all construction loans
in one category: Real Estate Lending: Interagency Statement on
Prudent Risk Management for Commercial Real Estate Lending, OCC
Bulletin 2015-51 (December 18, 2015); Statement on Prudent Risk
Management for Commercial Real Estate Lending, Board SR Letter 15-17
(December 18, 2015); Statement on Prudent Risk Management for CRE
Lending, FDIC FIL-62-2015 (December 18, 2015); Guidance on Prudent
Loan Workouts, OCC Bulletin 2009-32 (October 30, 2009); Policy
Statement on Prudent Commercial Real Estate Loan Workouts, Board SR
Letter 09-07 (October 30, 2009); Policy Statement on Prudent
Commercial Real Estate Loan Workouts, FDIC FIL-61-2009 (October 30,
2009); Concentrations in Commercial Real Estate Lending, Sound Risk
Management Practices, 71 FR 74580 (December 12, 2006).
---------------------------------------------------------------------------
The agencies have determined that, on balance, the benefits of
adopting this definition of commercial real estate transaction outweigh
the drawbacks of the limited inconsistency with other agency issuances
relating to commercial real estate lending. Those issuances are for
different purposes than the Title XI appraisal regulations, and a
different set of considerations is relevant for determining what types
of transactions are appropriately exempt from the Title XI appraisal
requirement on the basis of transaction size. The definition of
commercial real estate transaction in the final rule ensures that loans
made to consumers are largely treated consistently, remaining subject
to the $250,000 threshold. In addition, by categorizing residential
construction loans more clearly, the definition of commercial real
estate transaction being adopted can facilitate compliance and enhance
the burden reduction benefits of the rule.
Threshold Increase
The agencies proposed increasing the commercial real estate
appraisal threshold from $250,000 to $400,000. In determining the level
of increase, the agencies considered the change in prices for
commercial real estate measured by the Federal Reserve Commercial Real
Estate Price Index (CRE Index). As described in the proposal, the CRE
Index \33\ is a direct measure of the changes in commercial real estate
prices in the United States.\34\
[[Page 15024]]
The CRE Index is comprised of data from the CoStar Commercial Repeat
Sale Index,\35\ which uses repeat sale regression analysis of 1.7
million commercial property sales records to compare the change in
price for the same property between its most recent and previous sale
transactions.\36\ The data incorporated into this index covers
properties across the country and across all price ranges,\37\ from
before 1994 through the present.
---------------------------------------------------------------------------
\33\ The Board publishes data on the flow of funds and levels of
financial assets and liabilities, by sector and financial
instrument; full balance sheets, including net worth, for households
and nonprofit organizations, nonfinancial corporate businesses, and
nonfinancial noncorporate businesses; Integrated Macroeconomic
Accounts; and additional supplemental detail. See Board of Governors
of the Federal Reserve System, Financial Accounts of the United
States, https://www.federalreserve.gov/releases/z1/current/default.htm.
\34\ The CRE Index is quarterly and not seasonally adjusted. See
Board of Governors of the Federal Reserve System, Series analyzer
for FL075035503.Q, https://www.federalreserve.gov/apps/fof/SeriesAnalyzer.aspx?s=FL075035503&t=&bc=:FI075035503,FL075035503&suf=Q; Board of Governors of the Federal Reserve System, Series
Structure, https://www.federalreserve.gov/apps/fof/SeriesStructure.aspx.
\35\ Board of Governors of the Federal Reserve System, Series
analyzer for FL075035503.Q, https://www.federalreserve.gov/apps/fof/SeriesAnalyzer.aspx?s=FL075035503&t=&bc=:FI075035503,FL075035503&suf=Q. Data for years prior to 1996 are comprised of a weighted average
of three appraisal-based commercial property series from National
Real Estate Investor. Id.
\36\ CoStar, Federal Reserve's Flow of Funds to Incorporate
CoStar Group's Price Indices, CoStar (June 4, 2012), https://www.costar.com/News/Article/Federal-Reserves-Flow-of-Funds-To-Incorporate-CoStar-Groups-Price-Indices/138998.
\37\ See id.
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According to the CRE Index, a commercial property that sold for
$250,000 as of June 30, 1994, would be expected to sell for
approximately $760,000 as of December 2016.\38\ However, because the
price of commercial real estate can be particularly volatile, the
agencies proposed to base the increased threshold on the value of the
CRE Index when commercial real estate prices were at their lowest point
in the most recent downturn, which was $423,000 in March 2010. The
agencies invited comment on the proposed level for the commercial real
estate appraisal threshold.
---------------------------------------------------------------------------
\38\ Since the proposal was published, the CRE Index data points
for some of the recent quarters were revised. The numbers in this
document reflect the revised CRE Index.
---------------------------------------------------------------------------
Most of the commenters, who supported increasing the threshold to
at least $400,000, supported a higher amount. Some of these commenters
also advocated for automatically increasing or reevaluating the level
more frequently than every ten years as real estate prices rise and
valuation technology changes. Some commenters urged the agencies to
conduct further analysis to determine whether the threshold could be
increased to a higher amount, but did not specify an amount. Some
commenters supported increasing the threshold to $500,000 and suggested
that this higher figure would avoid the need for additional changes to
the threshold in the near-term due to expected increases in prices. A
few commenters supported raising the threshold to $750,000 or higher,
claiming the methodology in the proposal was unnecessarily
conservative.
Some commenters supported lowering the commercial real estate
appraisal threshold to unspecified amounts. Some of those commenters
specifically objected to the methodology used by the agencies in the
proposal, asserting that adjusting the previous $250,000 level for
changes in prices was inappropriate because that level was not itself
the result of an inflation adjustment.
After careful consideration of the comments, the agencies have
increased the commercial real estate appraisal threshold to $500,000,
rather than the proposed $400,000 level. The proposed $400,000
threshold was based on the value of the CRE Index in March 2010, when
commercial real estate prices were at their lowest point in the most
recent downturn. The agencies proposed this conservative approach, due
to the volatility of commercial real estate prices over time. The
agencies based the beginning point of this analysis on $250,000,
because supervisory experience with the $250,000 threshold has
confirmed that this threshold level did not threaten the safety and
soundness of financial institutions. Based on the CRE Index, a
commercial property that sold for $250,000 as of June 30, 1994, would
be expected to sell for $423,600 in March 2010, which was the trough of
the CRE price cycle. Following this trend, that property would be
expected to have a conservative value of approximately $509,000 as of
December 2017 (as shown below). Based on the comments received and this
further review of the CRE Index, as well as the safety and soundness
analysis discussed below, the agencies have decided to finalize the
threshold at $500,000.
[GRAPHIC] [TIFF OMITTED] TR09AP18.006
[[Page 15025]]
Regarding the suggestion to raise the commercial real estate
appraisal threshold to $750,000 or higher, the agencies also note that
$750,000 was close to the high point on the volatile CRE Index, as
discussed above. Given the volatility in commercial real estate prices,
raising the threshold to this amount or higher would raise safety and
soundness concerns. Finally, a possible threshold increase to $750,000
or higher may pose too great a risk to smaller institutions, as such
transactions may represent a higher percentage of capital for such
firms than has historically been permitted under the 1994 threshold.
In the proposal, the agencies also invited comment on how having
three threshold levels ($250,000 for all transactions, $400,000 for
commercial real estate transactions, and $1 million for QBLs) rather
than the two threshold levels applicable to Title XI appraisals ($1
million for QBLs and $250,000 for all other transactions) would affect
burden on regulated institutions. Three commenters supported the
proposal, noting that having three thresholds would have minimal impact
on operations. One commenter opposed having three thresholds, asserting
that it will increase complexity, particularly for small community
banks with less rigorous compliance operations. The agencies have
determined that the burden reduction associated with a higher threshold
for commercial real estate transactions outweighs the potential burden
of implementing three thresholds.
Safety and Soundness Considerations for Increasing the Threshold for
Commercial Real Estate Transactions
Under Title XI, the agencies may set a threshold at or below which
a Title XI appraisal is not required if they determine in writing that
such a threshold level does not pose a threat to the safety and
soundness of financial institutions.\39\ The analysis of supervisory
experience and available data presented in the proposal indicated that
the proposed threshold level of $400,000 for commercial real estate
transactions would not have posed a threat to the safety and soundness
of financial institutions. The agencies invited comment on their
preliminary finding and the data used. Taking into consideration those
comments and updated analysis, discussed below, the agencies determined
that the threshold level of $500,000 for commercial real estate
transactions does not pose a threat to the safety and soundness of
financial institutions.
---------------------------------------------------------------------------
\39\ 12 U.S.C. 3341(b).
---------------------------------------------------------------------------
Multiple financial institutions trade associations, financial
institutions, individuals, and home builder and realtor associations
supported the agencies' analysis showing that an increase to the
appraisal threshold for commercial real estate would not have a
significant impact on the safety and soundness of financial
institutions. A few commenters noted that appraisals are only one part
of the underwriting process, one asserting that loans are primarily
underwritten on borrowers' ability to repay, with collateral as a
secondary consideration. Another commenter asserted that commercial
borrowers tend to be larger entities, with the capital to withstand
detrimental financial events and shifts in the market. This commenter
also indicated that the proposal would not increase safety and
soundness risk, given that the increased threshold would affect a
relatively small number of transactions in the commercial real estate
lending market.
Some commenters noted that evaluations would be required where
appraisals were not obtained, and some asserted that the increased use
of evaluations with these less complex loans would not increase risk if
prepared with adequate analysis. One of these commenters asserted that
evaluations for smaller transactions provide more targeted and precise
data than appraisals performed by someone from another area.
The agencies received comments from appraisers, appraiser-related
groups and individuals opposing the proposed increase, many of whom
asserted that appraisals are key to preserving the safety and soundness
of financial institutions and the economy. Several of these commenters
claimed that evaluations were not an appropriate substitute for
appraisals, some suggesting that they are less reliable and prepared by
individuals that are not held to the same standards as appraisers. One
commenter asserted that the increase would pose safety and soundness
risks because commercial loans are riskier than residential loans.
Another commenter suggested that entry-level properties that are lower
in price and close to the threshold are more likely to have performance
issues compared to more expensive properties. One commenter raised
concerns that the rule focused on time and cost savings to financial
institutions in selecting an appropriate valuation method, rather than
risk.
Several commenters voiced concerns about recent price increases,
increasing delinquencies, or volatility in the commercial real estate
market, which, some asserted, may be indicative of a market ``bubble.''
Some commenters suggested that it is the wrong time to relax valuation
standards, given their view that past market bubbles have been preceded
by loosening of underwriting and appraisal standards, and that poor
valuation practices contributed to losses during past financial crises.
One of these commenters asserted that there is increasing risk in
commercial real estate lending, particularly among smaller community
and regional banks, which the commenter believed are less likely to
have robust collateral risk management policies, practices and
procedures.
Multiple commenters noted a 2015 appraiser trade association survey
of appraisal industry professionals, including chief appraisers and
appraisal managers at financial institutions, which showed that the
majority of those surveyed opposed increasing the current $250,000
threshold and believed that increases to the threshold could increase
risk to lenders.
The agencies received a limited number of comments in response to
the request for comment on the data sources used for the agencies'
safety and soundness analysis from financial institutions, financial
institution trade associations and appraiser trade associations.
Multiple commenters asserted that the data in the proposal supports the
increase in the commercial real estate threshold, and indicated that
they did not know of other sources of data that the agencies should
consider. A number of commenters asserted that the agencies' analysis
was too conservative, that past housing crises do not imply current
volatility, and that the data suggest the threshold could be increased
further than proposed without threatening safety and soundness of
financial institutions. One commenter opposing the proposal suggested
that the data used in the agencies' safety and soundness analysis was
weak and questioned why the agencies did not provide specific numbers
to support the assertion that the data related to charge-offs from
2007-2012 is ``no worse than'' those from the years 1991-1994, except
for marked increases in construction loan charge-offs.\40\ This
commenter also
[[Page 15026]]
asserted that the agencies' analysis of the CoStar data should have
considered that newly exempted loans under the higher threshold would
more likely be extended to small businesses, which by nature are more
vulnerable to market volatility and the potential for business failure.
---------------------------------------------------------------------------
\40\ During the 1991-1994 credit cycle, the net charge-off rate
for commercial real estate loans reached a high of about 4.5
percent. During the 2007-2012 credit cycle, net charge-off rates
reached a high of about 3.5 percent. These are the numbers the
agencies used to support their conclusion that the data related to
charge-offs from 2007 to 2012 was no worse than that from the years
1991 to 1994. Federal Reserve Bank of San Francisco: Aggregate Net
Charge-Off Rate Database as derived from the Federal Financial
Institutions Examination Council Consolidated Reports of Condition
and Income, FFIEC031 4Q 2016: https://www.frbsf.org/banking/data/aggregate-data/.
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Based on their supervisory experiences, the agencies disagree that
increasing the commercial real estate appraisal threshold would
increase risks to financial institutions, including smaller
institutions. As outlined earlier, the agencies closely examined a
variety of data and metrics indicating that the relative risks
associated with the new threshold in terms of the scope of covered
transactions were similar to those presented by the 1994 threshold. The
agencies specifically examined the information from smaller insured
depository institutions (IDIs) from Call Reports to assess the
concentration risk for institutions and concluded that these risks were
similar to those presented for larger IDIs. The agencies also note that
smaller IDIs are often better positioned than larger institutions to
understand and quantify local real estate market values since they
serve a smaller, more defined market area.
Regarding comments concerning evaluations as a valuation method, in
the agencies' views, evaluations are an effective valuation method for
smaller commercial real estate transactions and other transactions
under the thresholds. As provided in the Title XI appraisal
regulations, evaluations for each transaction must be consistent with
safe and sound banking practices. The Evaluation Guidance provides
guidance on appropriate evaluation practices. In adopting the increased
threshold for commercial real estate transactions, the agencies note
that regulated institutions have the flexibility to choose to obtain a
Title XI appraisal when markets are volatile or when an appraisal is
warranted for other reasons.\41\
---------------------------------------------------------------------------
\41\ 75 FR 77450, 77460.
---------------------------------------------------------------------------
The agencies have no evidence that increasing the appraisal
threshold to $500,000 for commercial real estate transactions will
materially increase the risk of loss to financial institutions.
Analysis of supervisory experience concerning losses on commercial real
estate transactions suggests that faulty valuations of the underlying
real estate collateral since 1994 have not been a material cause of
losses in connection with transactions at or below $250,000.\42\ In the
last three decades, the banking industry suffered two crises in which
poorly underwritten and administered commercial real estate loans were
a key feature in elevated levels of loan losses and bank failures.
Supervisory experience and an examination of material loss reviews
covering those decades suggest that larger acquisition, development,
and construction transactions pose greater credit risk, due to the lack
of appropriate underwriting and administration of issues unique to
larger properties, such as longer construction periods, extended
``lease up'' periods (the time required to lease a building after
construction), and the more complex nature of the construction of such
properties.\43\
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\42\ See 82 FR at 35484.
\43\ See id.
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In addition to considering the agencies' supervisory experience
since 1994, the agencies reviewed how the coverage of transactions
exempted by the threshold would change, both in terms of number of
transactions and aggregate value, in order to consider the potential
impact on safety and soundness of increasing the commercial real estate
appraisal threshold to $500,000. In the proposal, the agencies used
three different metrics to estimate the overall coverage of the
existing threshold and the proposed threshold: (1) The number of
commercial real estate transactions at or under the threshold as a
share of the number of all commercial real estate transactions; (2) the
dollar volume of commercial real estate transactions at or under the
threshold as a share of the total dollar volume of all commercial real
estate transactions; and (3) the dollar volume of commercial real
estate transactions at or under the threshold relative to IDIs' capital
and the allowance for loan and lease losses, which act as buffers to
absorb losses, as explained below. The agencies examined data reported
on the Call Report and data from the CoStar Comps database to estimate
the volume of commercial real estate transactions covered by the
existing threshold and increased thresholds.
The Call Report data shows that the scope of the exemption in 1994,
in terms of the number of transactions impacted, decreased
significantly over time, and implies that raising the commercial real
estate appraisal threshold to $500,000 will not involve a greater
number of transactions than when the thresholds were established in
1994.
Due to the manner in which IDIs report information on nonfarm
nonresidential (NFNR) loans in the Call Report, this data set does not
enable the agencies to calculate the percentage of loans that would
fall under any threshold amount between $250,000 and $1 million.\44\
The percentage of the total dollar volume of loans that fall beneath
the $250,000 threshold is now less than one third of what it was when
the threshold was established in 1994.\45\ This is true even for
institutions under $1 billion in assets, who are more likely to hold
smaller loans. Based in part on this analysis, the agencies conclude
that the exposure of financial institutions will remain at acceptable
levels with a $500,000 commercial real estate appraisal threshold.
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\44\ As described in the proposal, IDIs annually report
information on NFNR loans in the Call Report by three separate size
categories: (1) Loans with original amounts of $100,000 or less; (2)
loans with original amounts of more than $100,000, but $250,000 or
less; and (3) loans with original amounts of more than $250,000, but
$1 million or less. They also annually report the dollar amount of
all NFNR loans, including those over $1 million. Using this data,
the agencies calculated the dollar amount of NFNR loans at or under
the current $250,000 threshold as a percentage of the dollar amount
of all NFNR loans.
\45\ In the proposal, the agencies explained that 18 percent of
the dollar volume of all NFNR loans reported by IDIs had original
loan amounts of $250,000 or less when the current appraisal
threshold was established in 1994, but as of the fourth quarter of
2016, approximately 4 percent of the dollar volume of such loans had
original loan amounts of $250,000 or less. 82 FR at 35485.
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The CoStar Comps database provides sales value data on specific
commercial real estate transactions and allows for an analysis of the
estimated coverage at any potential threshold level. As described in
the proposal, the agencies used this dataset to analyze the impact of
increasing the commercial real estate appraisal threshold to $400,000,
and have recently updated this analysis to evaluate the impact of a
$500,000 threshold. An analysis of the CoStar Comps database for the
most recent year available suggests that increasing the amount to
$500,000 would significantly increase the number of commercial real
estate transactions exempted from the Title XI appraisal requirements,
but the portion of the total dollar volume of commercial real estate
transactions that would be exempted by the threshold would be
comparatively minimal.
At the existing $250,000 threshold and the proposed $400,000
threshold, the percentage of commercial properties with loans in the
CoStar Comps database that would be exempted from the Title XI
appraisal regulations would have been 16.1 percent and 26.3
[[Page 15027]]
percent, respectively.\46\ The $500,000 threshold that the agencies are
adopting will increase the percentage of transactions affected by
another 5.5 percent, resulting in 31.9 percent of loans in the CoStar
database being exempt from the appraisal requirement, or 15.7 percent
more transactions than under the $250,000 threshold. The proposed
$400,000 threshold would have increased the percentage of exempted
transactions by dollar volume from 0.5 percent, under the current
threshold, to 1.2 percent. Increasing the threshold to $500,000 would
increase the dollar volume by an additional 0.5 percent, so that a
total of 1.8 percent of the dollar volume of loans in the CoStar
database will be exempt from the appraisal requirement, or 1.3 percent
more of the dollar volume than under the $250,000 threshold. Thus, this
analysis indicates that the increased threshold will affect a low
aggregate dollar volume, but a material number of transactions.
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\46\ Certain percentages shown here differ from the values
presented in the proposal because of ongoing refinements to the
database and filters used to extract the information. The
methodology was further refined to improve its ability to reflect
the relevant population of commercial real estate transactions.
Also, values presented here may not sum due to rounding.
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The agencies have used this analysis and the Call Report analysis
to determine that increasing the commercial real estate appraisal
threshold to $500,000 does not pose a threat to safety and soundness.
In reaching this determination, the agencies also considered the fact
that evaluations would be required for such transactions. The
Guidelines provide regulated institutions with guidance on establishing
parameters for ordering Title XI appraisals for transactions that
present significant risk, even if those transactions are eligible for
evaluations under the regulation.\47\ Regulated institutions are
encouraged to continue using a risk-focused approach when considering
whether to order an appraisal for real estate-related financial
transactions.
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\47\ See Guidelines, Section XI.
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B. Use of Evaluations
Overview
The Title XI appraisal regulations require regulated institutions
to obtain evaluations for three categories of real estate-related
financial transactions that the agencies have determined do not require
a Title XI appraisal, including commercial and residential real-estate
related financial transactions of $250,000 or less and QBLs with a
transaction value of $1 million or less.\48\ Accordingly, the agencies
proposed to require that regulated institutions entering into
commercial real estate transactions at or below the proposed commercial
real estate appraisal threshold obtain evaluations that are consistent
with safe and sound banking practices unless the institution chooses to
obtain an appraisal for such transactions.\49\
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\48\ See OCC: 12 CFR 34.43(a)(1) and (5); Board: 12 CFR
225.63(a)(1) and (5); and FDIC: 12 CFR 323.3(a)(1) and (5).
\49\ An evaluation is not required when real estate-related
financial transactions meet the threshold criteria and also qualify
for another exemption from the appraisal requirements where no
evaluation is required by the regulation.
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The agencies are adopting this aspect of the proposal in the final
rule without change.\50\ An evaluation estimates the market value of
real estate, but is not subject to the same requirements as a Title XI
appraisal. For example, a Title XI appraisal must be performed by a
state certified or state licensed appraiser and must conform to USPAP
standards, whereas evaluations are not required to be performed by
individuals with specific credentials or to conform to USPAP standards.
As noted above, the agencies have issued guidance on the preparation of
evaluations.\51\
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\50\ The agencies are adopting the commercial real estate
appraisal threshold at $500,000, which is higher than proposed.
Financial institutions will be required to obtain evaluations for
commercial real estate transactions with transaction values of
$500,000 or less.
\51\ See Evaluation Guidance.
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The agencies requested comment on the proposed requirement that
regulated institutions obtain evaluations for commercial real estate
transactions at or below the proposed commercial real estate appraisal
threshold. The agencies also asked related questions concerning whether
additional guidance is needed by institutions to support the increased
use of evaluations as well as questions concerning burden and costs
related to the use of evaluations.
Evaluations Required at or Below the Threshold
Several commenters generally supported the proposal that regulated
institutions obtain evaluations for commercial real estate transactions
at or below the threshold. Other commenters expressed concern regarding
the competency and credentialing of persons performing evaluations, as
well as concerns regarding difficulty in locating persons qualified to
perform evaluations.\52\ Some of these commenters also expressed
concern over the lack of standards for evaluations and the lack of
oversight and regulation for persons performing evaluations. One
commenter urged the agencies to increase the qualification requirements
for those completing evaluations if the commercial real estate
appraisal threshold were increased.
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\52\ A commenter highlighted two sentences in the proposal that
appeared to conflict with the requirements of the appraisal
regulations. First, the commenter disagreed with the following
statement in the proposal: ``Unlike appraisals, evaluations may be
performed by a lender's own employees and are not required to comply
with USPAP.'' The agencies agree with the commenter that regulations
do not prohibit employees of regulated institutions from preparing
appraisals if they are so qualified and independent of the real
estate-related financial transaction.
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As discussed in the proposal, institutions must obtain evaluations
that are consistent with safe and sound banking practices. The agencies
have provided guidance to regulated institutions on evaluations.\53\
The Guidelines state that evaluations should be performed by persons
who are competent and have the relevant experience and knowledge of the
market, location, and type of real property being valued. An evaluation
is not required to be completed by a state licensed or state certified
appraiser, but may be completed by an employee of the regulated
institution or by a third party, as addressed in the Evaluations
Advisory.\54\ However, the agencies' final rule does not prohibit
regulated institutions from using state licensed or state certified
appraisers to prepare evaluations. A Title XI appraisal would satisfy
the requirement for an ``appropriate evaluation of real property
collateral that is consistent with safe and sound banking practices;''
thus, regulated institutions that choose to obtain Title XI appraisals
for real estate-related financial transactions that require evaluations
are not in violation of the Title XI appraisal regulations.
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\53\ See Evaluation Guidance.
\54\ OCC Bulletin 2016-8 (March 4, 2016); Board SR Letter 16-05
(March 4, 2016); and Supervisory Expectations for Evaluations, FDIC
FIL-16-2016 (March 4, 2016).
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Evaluation Guidance
The agencies also requested comment on the type of additional
guidance, if any, regulated institutions need to support the increased
use of evaluations. In response, the agencies received comments
indicating concern regarding the clarity of, and the burden produced
by, the existing guidance on evaluations. A few commenters requested
that the agencies provide additional guidance, such as guidance
relating to the adequacy of evaluation products available on the market
or examples of acceptable industry practices for evaluations. Some
other
[[Page 15028]]
commenters requested that the agencies revisit and relax the current
guidance pertaining to evaluations and ensure examiners accept
evaluations when permissible. One commenter expressed the view that a
simplification would make the current existing guidance for evaluations
less time consuming and complex for lower value transactions. Another
commenter suggested there should be no need for a review of internal
evaluations where the direct lender did not complete the evaluation.
The Evaluation Guidance provides information to help ensure that
evaluations provide a credible estimate of the market value of the
property pledged as collateral for the loan. The current Evaluation
Guidance provides flexibility to regulated institutions for developing
evaluations that are appropriate for the type and risk of the real
estate financial transaction and does not prescribe specific valuation
approaches or products to use tools in the development of evaluations.
Also, in addition to various valuation approaches, the Guidelines
discuss the possible use of several analytical methods and
technological tools in the development of evaluations, such as
automated valuation models and tax assessment values. The agencies will
continue to assess the adequacy of agency guidance on evaluations.
Cost and Burden of Evaluations
The agencies invited comment regarding whether the use of
evaluations reduces burden and cost as compared to the use of Title XI
appraisals. The agencies also invited comment on whether evaluations
are currently prepared by in-house staff or outsourced to appraisers or
other qualified professionals.
The agencies received several comments indicating that the proposed
increase in the commercial real estate appraisal threshold and the
increased use of evaluations would provide cost and time savings for
consumers and institutions, because evaluations tend to cost less that
appraisals and take less time to prepare. One commenter asserted that
third-party evaluations are approximately 25 percent of the cost of an
appraisal. Another commenter indicated noted that some financial
institutions prefer to conduct them in-house to maintain consistency of
the product and because of staff knowledge of the marketplace. One
commenter asserted that appraiser-developed evaluations are
unnecessarily expensive, necessitating evaluations to be conducted in-
house. Another commenter indicated that increasing the threshold would
provide cost savings for portfolio loans but would not address issues
related to secondary market requirements, which are outside the
agencies' purview.
On the other hand, some commenters asserted that the agencies had
overstated how much the proposal would reduce burden for regulated
institutions, and questioned the agencies' methods for estimating the
reduction in burden. Some commenters expressed concern regarding the
length of time required to review an evaluation. A few commenters
suggested that the agencies' cost analysis reflected a lack of
precision and absence of detailed research to determine the cost
differential of appraisals and evaluations between the current and
proposed threshold. This same commenter asserted that evaluations lack
the detail of appraisals, and, as a result, lenders are often required
to perform additional research in determining whether evaluations are
credible, which reduces cost and time savings produced by the proposal.
One commenter implied that the limited guidance for performing
evaluations creates confusion, which results in added costs. One
commenter asserted that it is not true that evaluations contain less
detailed information or take less time to review than appraisals.\55\
Another commenter asserted that, because evaluations provide less
detail than appraisals, lenders may be required to do more research to
determine whether the value conclusion is credible.
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\55\ Two commenters disagreed with the agencies' use of the term
``loan officer'' relative to the estimated time for reviewing an
appraisal or evaluation, and asserted that the usage of the term
could be perceived to imply that originators are permitted to be
involved in the appraisal review process, which is contrary to the
agencies' appraiser independence requirements. The agencies were
using the term ``loan officer'' in its broadest context, and did not
intend to imply that the officer originating the credit may conduct
appraisal or evaluation reviews relating to that credit. The use of
the term ``loan officer'' was not intended to change standards
established on appraiser independence or any implementing guidance.
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The agencies carefully considered these comments in evaluating the
rule's impact on the time to obtain and review Title XI appraisals and
evaluations. The agencies conclude that there may be less delay in
finding appropriate personnel to perform an evaluation than to perform
a Title XI appraisal, particularly in rural areas, because evaluations
are not required to be prepared by a certified or licensed appraiser.
Requiring regulated institutions to procure the services of a state
licensed or state certified appraiser to prepare evaluations for
commercial real estate transactions at or below the threshold could
impose significant additional costs on lenders and borrowers without
materially increasing the safety and soundness of the transactions. The
agencies' data and analysis reflect that the increase in the commercial
real estate appraisal threshold and corresponding increased use of
evaluations could result in a cost savings of several hundred dollars
for each commercial real estate transaction, as discussed below.
Based on supervisory experience the agencies conclude that
regulated institutions generally need less time to review evaluations
than Title XI appraisals, because the content of the report can be less
comprehensive than an appraisal report. Transactions permitting the use
of an evaluation typically have a lower dollar value, often are less
complex, or are subsequent to previous transactions for which Title XI
appraisals were obtained. Therefore, a consolidated analysis is more
likely to be used in an evaluation. The agencies estimate that, on
average, the time to review an evaluation for an affected transaction
under the final rule will be approximately 30 minutes less than the
time to review an appraisal.\56\
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\56\ The agencies recognize some evaluations take longer to
review than some appraisals; yet, on average, evaluations are likely
to take less time to review than appraisals. This view is based on
supervisory experience as well as discussions with regulated
institutions.
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In evaluating this rule, the agencies considered the impact of
obtaining evaluations instead of Title XI appraisals on regulated
institutions and borrowers. As noted in the proposal, based on
information from industry participants, the cost of third-party
evaluations of commercial real estate generally ranges from $500 to
over $1,500, whereas the cost of appraisals of such properties
generally ranges from $1,000 to over $3,000. Commercial real estate
transactions with transaction values above $250,000, but at or below
$500,000, are likely to involve smaller and less complex properties,
and appraisals and evaluations on such properties would likely be at
the lower end of the cost range. This third-party pricing information
suggests a savings of several hundred dollars per transaction affected
by the proposal. Comments from financial institutions generally
affirmed similar information presented in the proposal.
In considering the aggregate effect of this rule, the agencies
considered the number of transactions affected by the increased
threshold. As previously discussed, the agencies estimate that the
number of commercial real estate transactions that would be exempted by
[[Page 15029]]
the threshold is expected to increase by approximately 16 percent under
the rule. Thus, while the precise number of affected transactions and
the precise cost reduction per transaction cannot be determined, the
rule is expected to lead to significant cost savings for regulated
institutions that engage in commercial real estate lending.
Competitive Disadvantage of Evaluations
The agencies received comments from financial institutions,
individuals, and a trade association representing valuation
professionals, indicating concern that the proposal would put smaller
banks that do not have in-house expertise to prepare evaluations at a
competitive disadvantage to larger banks. Commenters asserted that
these banks hire outside parties to prepare evaluations and pass the
cost along to borrowers, making their loans more expensive than
comparable loans at larger financial institutions.
In evaluating the final rule, the agencies considered these
concerns. In response, the agencies note that the cost for completing
an evaluation would be less than the cost for completing a Title XI
appraisal for the same property, which thereby reduces burden. The goal
of the agencies with this increase is to provide flexibility to
regulated institutions in approaching property valuation. Some
institutions may not currently be in a position to take advantage of
this flexibility. However, raising the threshold will help those
regulated institutions that choose to train in-house staff to perform
evaluations and would reduce costs for those institutions that choose
to outsource evaluations.
C. State Certified Appraiser Required
As described in the proposal, the current Title XI appraisal
regulations require that ``[a]ll federally related transactions having
a transaction value of $250,000 or more, other than those involving
appraisals of 1-to-4 family residential properties, shall require an
appraisal prepared by a State certified appraiser.'' \57\ In order to
make this paragraph consistent with the other proposed changes to the
appraisal regulations, the agencies proposed to change its wording to
introduce the $400,000 threshold and use the term ``commercial real
estate transaction.'' The agencies did not receive any comments on this
proposed change.
---------------------------------------------------------------------------
\57\ OCC: 12 CFR 34.43(d); Board: 12 CFR 225.63(d)(2); and FDIC:
12 CFR 323.3(d)(2).
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Given the change from the proposed rule from a $400,000 threshold
to a $500,000 threshold, the final rule makes a corresponding change to
this section. The amendment to this provision is a technical change
that does not alter any substantive requirement.
III. Effective Date
The agencies proposed to make the final rule, if adopted, effective
upon publication in the Federal Register. The agencies reasoned that a
delayed effective date was not required by applicable law because the
proposal exempted additional transactions from the Title XI appraisal
requirements and did not impose any new requirements on regulated
institutions.\58\ The agencies requested comment on whether the
proposed effective date was appropriate.
---------------------------------------------------------------------------
\58\ See 82 FR at 35482.
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The agencies received three comments on the proposed effective
date. One commenter supported the proposed effective date and did not
think it would pose challenges to financial institutions. The other two
commenters disagreed with an immediate effective date, asserting that
financial institutions required time to adjust policies and procedures
to implement the proposed changes. One commenter recommended a six-
month to one-year implementation period, while the other suggested an
effective date 180 days after the final rule is published.
The agencies have retained the proposed effective date, which is
the date of publication in the Federal Register.\59\ In doing so, the
agencies balanced the need for some financial institutions to update
policies and procedures to incorporate evaluations for transactions
exempted by the revised threshold with the benefit of an immediate
effective date, which will enable institutions to benefit from lower
costs and regulatory relief upon or shortly after the effective date of
the final rule. The agencies note that an effective date immediately
upon publication in the Federal Register is the approach used in
adopting the 1994 amendments to the Title XI appraisal regulations. The
agencies are not aware of any evidence that using an immediate
effective date in connection with the 1994 amendments caused a
competitive disadvantage or hardship to regulated institutions. The
agencies also note that regulated institutions have the discretion to
use Title XI appraisals in lieu of evaluations for any exempt
transaction.
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\59\ As discussed in Section V.A of the SUPPLEMENTARY
INFORMATION, the 30-day delayed effective date required under the
Administrative Procedure Act (APA) is waived pursuant to 5 U.S.C.
553(d)(1), which provides a waiver when a substantive rule grants or
recognizes an exception or relieves a restriction. Additionally, the
Riegle Community Development and Regulatory Improvement Act of 1994,
Public Law 103-325, 108 Stat. 2163 (Riegle Act) provides that rules
imposing additional reporting, disclosures, or other new
requirements on IDIs generally must take effect on the first day of
a calendar quarter that begins on or after the date on which the
regulations are published in final form. 12 U.S.C. 4802(b). As
discussed further in the Section V.D of the SUPPLEMENTARY
INFORMATION, the final rule does not impose any new requirements on
IDIs, and, as such, the effective date requirement of the Riegle Act
is inapplicable.
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IV. Other Efforts To Relieve Burden
Residential and Qualifying Business Loan Thresholds
The agencies explained in the proposal that they were not proposing
any threshold increases for transactions secured by a single 1-to-4
family residential property (residential transactions) or QBLs in
connection with this rulemaking. The agencies requested comment on
whether there are other factors that should be considered in evaluating
the current appraisal threshold for residential transactions. The
agencies also invited comment and supporting data on the
appropriateness of raising the current $1 million threshold for QBLs
and posed a number of specific questions related to regulated
institutions' experiences with QBLs.
Numerous commenters, particularly financial institutions and their
trade associations, encouraged the agencies to consider increasing the
threshold for residential transactions, though few introduced new
factors for the agencies' consideration. Many of these commenters
asserted that an increase would produce cost and time savings that
would benefit regulated institutions and consumers without threatening
the safety and soundness of financial institutions. In support of its
position that an increase would not threaten safety and soundness, one
of these commenters asserted that there is less risk in the homogenous
loan pool of 1-to-4 family residential loans than there is in
commercial real estate. One commenter asserted that the consumer
benefits of appraisals have been overstated, that appraisals are
primarily for the benefit of financial institutions, and that consumers
could always order their own appraisals.
Several commenters supporting an increase in the threshold for
residential transactions noted that an increase in the threshold would
be justified by increases in residential property values since the
current threshold was established. Some commenters represented that
relief would be particularly beneficial for lending in
[[Page 15030]]
rural communities that often have shortages in state licensed and state
certified appraisers. One of these commenters cited feedback from
several state bank supervisory agencies indicating that access to
appraisers, particularly for residential transactions, is limited in
rural areas within their states and that federal appraisal regulations
are causing significant burden. A few commenters noted that the
government sponsored enterprises (GSEs) waive appraisal requirements
for certain residential mortgage loans that they purchase and they
expected the GSEs to expand eligibility for such waivers. In this
regard, they asserted that increasing the threshold in the appraisal
regulations would provide burden relief. One of these commenters
asserted that as the GSEs expand their appraisal waiver programs,
regulated institutions that hold residential mortgage loans in
portfolio will be at a competitive disadvantage if the current
threshold in the appraisal regulations is not increased. Another
commenter asserted that, even if inconsistent GSE requirements would
negate some of the burden reduction, the agencies should raise the
residential threshold now if, by doing so, safety and soundness would
not be jeopardized. A separate commenter suggested that the agencies
should provide a de minimis exemption from appraisal requirements for
residential mortgage loans that are retained in portfolio by regulated
institutions. This same commenter urged the agencies to consider more
regional data in deciding whether to make future changes to the
threshold for residential transactions.
Many commenters, particularly appraisers and appraiser trade
associations, supported with the agencies' decision not to propose an
increase in the threshold for residential transactions. Several
commenters pointed to the safety and soundness and consumer protection
benefits of obtaining appraisals in connection with residential
transactions. Several commenters also asserted that the appraisal
regulations already exempt a significant percentage of residential
mortgage loans. One commenter suggested that the agencies should not
rely on policies of other federal entities, such as the GSEs, in making
decisions about the appraisal regulations. Another commenter expressed
concern that the potential negative consequences of raising the
threshold could be exacerbated by the loosening of appraisal standards
by the GSEs for some transactions. Another commenter asserted that
increasing the threshold for residential transactions could discourage
entrance into the appraisal profession and cause further appraiser
shortages.
Regarding an increase to the appraisal threshold for QBLs, the
majority of comments received opposed an increase. These commenters,
who were appraisers or their trade associations, cautioned against a
loosening of standards that could raise safety and soundness concerns.
Commenters supporting an increase in the QBL threshold asserted that
the value of real estate offered as collateral on a QBL is a secondary
consideration, because the primary source of repayment is not the
income from or sale of that collateral. Some commenters also supported
an increase in the threshold due to limited availability of appraisers
in their states. Commenters advocated a range of increases from $1.5
million to $3 million.
Few commenters specifically addressed the agencies' questions
regarding unique risks that may be posed by QBLs, data regarding QBLs,
and regulated institutions' experiences in applying the current QBL
threshold. Regarding risks posed by QBLs, one financial institutions
trade association commented that its members consider QBLs to be
higher-risk loans. An appraiser trade association that was opposed to
an increase asserted that small business loans are riskier than others
and that lenders with concentrations in such loans are at greater risk.
The commenter also noted that such loans are usually held in portfolio,
thus increasing risk. Regarding the agencies' requests for data on
QBLs, a commenter expressed surprise that the agencies lack data on QBL
concentrations, and asserted this lack of data further supports not
increasing the threshold. In response to the agencies' question
regarding regulated institutions' experiences in applying the QBL
threshold, a commenter asserted that many loan officers are poorly
trained in classifying loans as either real estate or business. The
commenter recommended that the agencies provide examples of these types
of loans. In addition, two commenters asked the agencies to clarify the
QBL threshold relative to transactions secured by farmland.
The agencies appreciate the issues raised by the commenters
relating to the thresholds for residential transactions and QBLs. As
discussed in the proposal, the agencies decided not to propose any
change to these thresholds in connection with this rulemaking.
Nevertheless, the comments reflect a variety of issues that the
agencies would consider if they decide to propose changes to the
residential or QBL thresholds in the future.
Regarding the requests for clarification of the QBL threshold, the
Title XI appraisal regulations have established a $1 million threshold
that is applicable to any business loans that are not dependent on the
sale of, or rental income derived from, real estate as the primary
source of repayment.\60\ For example, a loan secured by a farm, which
could include a situation where one or more affiliated limited
liability companies own the farmland securing the loan, could be
treated as a QBL subject to the $1 million threshold, if repayment is
primarily from the proceeds from the farm business (e.g., sale of crops
and related payments). However, a real estate-related financial
transaction secured by farmland whose repayment is primarily from
rental income from renting or leasing the farmland to a non-affiliated
entity would be subject to the final rule's $500,000 threshold.
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\60\ See OCC: 12 CFR 34.43(a)(5); Board: 12 CFR 225.63(a)(5);
and FDIC: 12 CFR 323.3(a)(5).
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Other Proposals and Clarifications
The agencies received several comments suggesting additional ways
the agencies could reduce burden under the Title XI appraisal
regulations. One commenter urged the agencies to review the appraisal
requirements of other federal agencies and pursue ways to make
appraisal requirements across agencies more consistent. The agencies
have publically articulated their interest in seeking ways to
coordinate appraisal standards across various government agencies that
are involved in residential mortgage lending.\61\ The agencies have
begun conducting outreach to government agencies to implement this goal
and will continue to consider opportunities to do so.
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\61\ See EGRPRA Report at 36; 82 FR at 35482.
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Another commenter asserted that the agencies should focus on
allowing the use by appraisers of products that streamline the
valuation process, instead of exempting additional transactions from
the appraisal requirements. Several commenters, including a financial
institution and a financial institutions trade association, suggested
that certain transactions could be added to the list of exemptions from
the appraisal requirements to further reduce regulatory burden without
sacrificing safety and soundness. These suggestions included exemptions
for transactions secured by real estate outside the United States;
loans below a threshold that a bank originates and
[[Page 15031]]
retains ``in-house;'' transactions involving mortgage-backed securities
and pools of mortgages; and loans made to certain community development
organizations. An association of state bank supervisors requested that
the agencies release further guidance on the Title XI process for
temporary waivers of appraiser certification and licensing requirements
and also requested that the education requirements for appraiser
qualifications be relaxed. A financial institution suggested
establishing an additional threshold of $50,000, below which certain
transactions would not require appraisals or evaluations.
These comments concerning additional potential exemptions from the
appraisal regulations and additional burden relieving measures are
outside the scope of this rulemaking. However, the agencies appreciate
the suggestions for ways to expand burden relief beyond what was
proposed.
V. Regulatory Analysis
A. Waiver of Delayed Effective Date
This final rule is effective on April 9, 2018. The 30-day delayed
effective date required under the APA is waived pursuant to 5 U.S.C.
553(d)(1), which provides for waiver when a substantive rule grants or
recognizes an exemption or relieves a restriction. The amendment
adopted in this final rule exempts additional transactions from the
Title XI appraisal requirements, which has the effect of relieving
restrictions. Consequently, the amendment in this final rule meets the
requirements for waiver set forth in the APA.
B. Regulatory Flexibility Act
OCC: The Regulatory Flexibility Act (RFA), 5 U.S.C. 601 et seq.,
generally requires that, in connection with a rulemaking, an agency
prepare and make available for public comment a regulatory flexibility
analysis that describes the impact of the rule on small entities.
However, the regulatory flexibility analysis otherwise required under
the RFA is not required if an agency certifies that the rule will not
have a significant economic impact on a substantial number of small
entities (defined in regulations promulgated by the Small Business
Administration (SBA) to include commercial banks and savings
institutions, and trust companies, with assets of $550 million or less
and $38.5 million or less, respectively) and publishes its
certification and a brief explanatory statement in the Federal Register
together with the rule.
The OCC currently supervises approximately 956 small entities. Data
currently available to the OCC are not sufficient to estimate how many
OCC-supervised small entities make commercial real estate loans in
amounts that fall between the current and final thresholds. Therefore,
we cannot estimate how many small entities may be affected by the
increase threshold. However, because the final rule does not contain
any new recordkeeping, reporting, or compliance requirements, the final
rule will not impose costs on any OCC-supervised institution.
Accordingly, the OCC certifies that the final rule will not have a
significant economic impact on a substantial number of small entities.
Board: The Board is providing a regulatory flexibility analysis
with respect to this final rule. The RFA requires that an agency
prepare and make available a final regulatory flexibility analysis in
connection with a final rulemaking that the agency expects will have a
significant economic impact on a substantial number of small entities.
The commercial real estate appraisal threshold increase applies to
certain IDIs and nonbank entities that make loans secured by commercial
real estate.\62\ The SBA establishes size standards that define which
entities are small businesses for purposes of the RFA.\63\ The size
standard to be considered a small business is: $550 million or less in
assets for banks and other depository institutions; and $38.5 million
or less in annual revenues for the majority of non-bank entities that
are likely to be subject to the final rule.\64\ Based on the Board's
analysis, and for the reasons discussed below, the final rule may have
a significant positive economic impact on a substantial number of small
entities.
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\62\ For its RFA analysis, the Board considered all Board-
regulated creditors to which the proposed rule would apply.
\63\ U.S. SBA, Table of Small Business Size Standards Matched to
North American Industry Classification System Codes, available at
https://www.sba.gov/sites/default/files/files/Size_Standards_Table.pdf.
\64\ Asset size and annual revenues are calculated according to
SBA regulations. See 13 CFR 121 et seq.
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The Board requested comment on all aspects of the initial
regulatory flexibility analysis it provided in connection with the
proposal. The comments received are addressed below.
A. Reasons for the Threshold Increase
In response to comments received in the EGRPRA process and in
connection with the proposal, the agencies are increasing the
commercial real estate appraisal threshold from $250,000 to $500,000.
Because commercial real estate prices have increased since 1994, when
the current $250,000 threshold was established, a smaller percentage of
commercial real estate transactions are currently exempted from the
Title XI appraisal requirements than when the threshold was
established. This threshold adjustment is intended to reduce the
regulatory burden associated with extending credit secured by
commercial real estate in a manner that is consistent with the safety
and soundness of financial institutions.
B. Statement of Objectives and Legal Basis
As discussed above, the agencies' objective in finalizing this
threshold increase is to reduce the regulatory burden associated with
extending credit in a safe and sound manner by reducing the number of
commercial real estate transactions that are subject to the Title XI
appraisal requirements.
Title XI explicitly authorizes the agencies to establish a
threshold level at or below which a Title XI appraisal is not required
if the agencies determine in writing that the threshold does not
represent a threat to the safety and soundness of financial
institutions and receive concurrence from the CFPB that such threshold
level provides reasonable protection for consumers who purchase 1-to-4
unit single-family homes.\65\ Based on available data and supervisory
experience, the agencies tailored the size and scope of the threshold
increase to ensure that it would not pose a threat to the safety and
soundness of financial institutions or erode protections for consumers
who purchase 1-to-4 unit single-family homes.
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\65\ 12 U.S.C. 3341(b).
---------------------------------------------------------------------------
The Board's final rule applies to state chartered banks that are
members of the Federal Reserve System (state member banks), as well as
bank holding companies and nonbank subsidiaries of bank holding
companies that engage in lending. There are approximately 601 state
member banks and 35 nonbank lenders regulated by the Board that meet
the SBA definition of small entities and would be subject to the
proposed rule. Data currently available to the Board do not allow for a
precise estimate of the number of small entities that will be affected
by the final rule because the number of small entities that will engage
in commercial real estate transactions at or below the commercial real
estate appraisal threshold is unknown.
[[Page 15032]]
C. Projected Reporting, Recordkeeping and Other Compliance Requirements
The final rule would reduce reporting, recordkeeping, and other
compliance requirements for small entities. For transactions at or
below the threshold, regulated institutions will be given the option to
obtain an evaluation of the property instead of an appraisal.
Evaluations may be performed by a lender's own employees and are not
required to comply with USPAP. As discussed in detail in Section II.B
of the SUPPLEMENTARY INFORMATION, the cost of obtaining appraisals and
evaluations can vary widely depending on the size and complexity of the
property, the party performing the valuation, and market conditions
where the property is located. Additionally, the costs of obtaining
appraisals and evaluations may be passed on to borrowers. Because of
this variation in cost and practice, it is not possible to precisely
determine the cost savings that regulated institutions will experience
due to the decreased cost of obtaining an evaluation rather than an
appraisal. However, based on information available to the Board, it is
likely that small entities and borrowers engaging in commercial real
estate transactions could experience significant cost reductions.
In addition to costing less to obtain than appraisals, evaluations
also require less time to review than appraisals because they contain
less detailed information. As discussed further in Section II.B of the
SUPPLEMENTARY INFORMATION, an evaluation takes approximately 30 minutes
less to review than an appraisal. Thus, the agencies believe that the
final rule will alleviate approximately 30 minutes of employee time per
affected transaction for which the lender obtains an evaluation instead
of an appraisal. As discussed above, some commenters provided anecdotal
evidence to show that the agencies' estimate of time savings was
incorrect. The agencies recognize that certain evaluations may take
longer to review than others; however, this variation was taken into
account in the agencies' estimate of the average time savings that are
expected to occur.
As previously discussed, the Board estimates that the percentage of
commercial real estate transactions that would be exempted by the
threshold is expected to increase by approximately 16 percent under the
final rule. The Board expects this percentage to be higher for small
entities, because a higher percentage of their loan portfolios are
likely to be made up of small, below-threshold loans than those of
larger entities. Thus, while the precise number of transactions that
will be affected and the precise cost reduction per transaction cannot
be determined, the final rule is expected to have a significant
positive economic impact on small entities that engage in commercial
real estate lending.
D. Identification of Duplicative, Overlapping, or Conflicting Federal
Regulations
The Board has not identified any federal statutes or regulations
that would duplicate, overlap, or conflict with the final rule.
E. Discussion of Significant Alternatives
The agencies considered additional burden-reducing measures, such
as increasing the commercial threshold to an amount higher than
$500,000 and increasing the residential and business loan thresholds,
but did not implement such measures for the safety and soundness and
consumer protection reasons discussed in the proposal. For transactions
exempted from the Title XI appraisal requirements under the commercial
real estate appraisal threshold, the final rule requires regulated
institutions to get an evaluation if they do not choose to obtain a
Title XI appraisal. The agencies believe this requirement is necessary
to protect the safety and soundness of financial institutions, which is
a legal prerequisite to the establishment of any appraisal threshold.
The Board is not aware of any other significant alternatives that would
reduce burden on small entities without sacrificing the safety and
soundness of financial institutions or consumer protections.
FDIC: The RFA generally requires that, in connection with a
rulemaking, an agency prepare and make available for public comment an
initial regulatory flexibility analysis describing the impact of the
proposed rule on small entities.\66\ A regulatory flexibility analysis
is not required, however, if the agency certifies that the rule will
not have a significant economic impact on a substantial number of small
entities. The SBA has defined ``small entities'' to include banking
organizations with total assets less than or equal to $550 million.\67\
For the reasons described below and pursuant to section 605(b) of the
RFA, the FDIC certifies that the final rule will not have a significant
economic impact on a substantial number of small entities.
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\66\ 5 U.S.C. 601 et seq.
\67\ 13 CFR 121.201 (as amended, effective December 2, 2014).
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The FDIC supervises 3,675 depository institutions,\68\ of which
2,950 are defined as small banking entities by the terms of the
RFA.\69\ According to the Call Report 2,950 small entities reported
holding some volume of real estate-related financial transactions that
meet the final rule's definition of a commercial real estate
transaction.\70\ Therefore, 2,950 small entities could be affected by
the final rule.
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\68\ FDIC-supervised institutions are set forth in 12 U.S.C.
1813(q)(2).
\69\ FDIC Call Report, September 30, 2017.
\70\ The definition of ``commercial real estate transaction''
would largely capture the following four categories of loans secured
by real estate in the Call Report (FFIEC 031; RCFD 1410), namely
loans that are: (1) For construction, land development, and other
land loans; (2) secured by farmland; (3) secured by residential
properties with five or more units; or (4) secured by NFNR
properties. However, loans secured by a single 1-to-4 family
residential property would be excluded from the definition. The
definition applies to corresponding categories of real estate-
secured loans in the FFIEC 041 and FFIEC 051 forms of the Call
Report.
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The final rule will raise the appraisal threshold for commercial
real estate transactions from $250,000 to $500,000. Any commercial real
estate transaction with a value in excess of the $500,000 threshold is
required to have an appraisal by a state licensed or state certified
appraiser. Any commercial real estate transaction at or below the
$500,000 threshold requires an evaluation.
To estimate the dollar volume of commercial real estate
transactions the change could potentially affect, the FDIC used
information on the dollar volume and number of loans in the Call Report
for small institutions from two categories of loans included in the
definition of a commercial real estate transaction. The Call Report
data reflect that 3.92 percent of the dollar volume of NFNR loans
secured by real estate has an original amount between $1 and $250,000,
while 10.19 percent have an original amount between $250,000 and $1
million. The Call Report data also reflect that 7.30 percent of the
dollar volume of agricultural loans secured by farmland has an original
amount between $1 and $250,000, while 6.05 percent have an original
amount between $250,000 and $500,000.\71\ Assuming that the original
amount of NFNR loans secured by real estate and the original amount of
agricultural loans secured by farmland are normally distributed, the
FDIC estimates that 6.28 and 13.35 percent of loan volume is at or
below the $500,000 threshold for these categories, respectively.
---------------------------------------------------------------------------
\71\ FDIC Call Report, September 30, 2017.
---------------------------------------------------------------------------
Therefore, raising the appraisal threshold from $250,000 to
$500,000 for commercial real estate transactions
[[Page 15033]]
could affect an estimated 2.36 to 6.05 percent of the dollar volume of
all commercial real estate transactions originated each year for small
FDIC-supervised institutions. This estimate assumes that the
distribution of loans for the other loan categories within the
definition of commercial real estate transactions is similar to those
loans secured by NFNR properties or farmland.
The final rule is likely to reduce valuation review costs for
covered institutions. The FDIC estimates that it takes a loan officer
an average of 40 minutes to review an appraisal to ensure that it meets
that standards set forth in Title XI, but 10 minutes to perform a
similar review of an evaluation, which does not need to meet the Title
XI standards for appraisals. The final rule increases the number of
commercial real estate transactions that would require an evaluation by
raising the appraisal threshold from $250,000 to $500,000. Assuming
that 15 percent of the outstanding balance of commercial real estate
transactions for small entities gets renewed or replaced by new
originations each year, the FDIC estimates that small entities
originate $31.8 billion in new commercial real estate transactions each
year. Assuming that 2.36 to 6.05 percent of annual originations
represent loans with an origination amount greater than $250,000 but
not more than $500,000, the FDIC estimates that the proposed rule will
affect approximately 2,003 to 5,138 loans per year,\72\ or 0.68 to 1.74
loans on average for small FDIC-supervised institutions. Therefore,
based on an estimated hourly rate, the final rule would reduce loan
review costs for small entities by $67,391 to $172,868, on average,
each year.\73\ If lenders opt to not utilize an evaluation and require
an appraisal on commercial real estate transaction greater than
$250,000 but not more than $500,000 any reduction in costs would be
smaller.
---------------------------------------------------------------------------
\72\ Multiplying $31.8 billion by 2.36 percent then dividing the
product by an average loan amount of $375,000 equals 2,003 loans and
multiplying $31.8 billion by 6.05 percent then dividing the product
by an average loan amount of $375,000 equals 5,138 loans.
\73\ The FDIC estimates that the average hourly compensation for
a loan officer is $67.29 an hour. The hourly compensation estimate
is based on published compensation rates for Credit Counselors and
Loan Officers ($43.40). The estimate includes the September 2017
75th percentile hourly wage rate reported by the Bureau of Labor
Statistics, National Industry-Specific Occupational Employment and
Wage Estimates for the Depository Credit Intermediation sector. The
reported hourly wage rate is grossed up by 155.0 percent to account
for non-monetary compensation as reported by the 3rd Quarter 2017
Employer Costs for Employee Compensation Data. Based on this
estimate, loan review costs would decline between $67,391 (2,003
loans multiplied by 30 minutes and multiplied by $67.29 per hour)
and $172,868 (5,138 loans multiplied by 30 minutes and multiplied by
$67.29 per hour).
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Any associated recordkeeping costs are unlikely to change for small
FDIC-supervised entities as the amount of labor required to satisfy
documentation requirements for an evaluation or an appraisal is
estimated to be the same at about five minutes for either an appraisal
or evaluation.
The final rule also is likely to reduce the loan origination costs
associated with real estate appraisals for commercial real estate
borrowers. The FDIC assumes that these costs are always paid by the
borrower for this analysis. Anecdotal information from industry
participants indicates that a commercial real estate appraisal costs
between $1,000 to over $3,000, or about $2,000 on average, and a
commercial real estate evaluation costs between $500 to over $1,500, or
about $1,000 on average. Based on the prior assumptions, the FDIC
estimates that the final rule will affect approximately 2,003 to 5,138
transactions per year,\74\ or 0.68 to 1.74 loans on average for small
FDIC-supervised institutions. Therefore, the final rule could reduce
loan origination costs for borrowers doing business with small entities
by $2.0 to $5.1 million on average per year.\75\
---------------------------------------------------------------------------
\74\ Multiplying $31.8 billion by 2.36 percent then dividing the
product by an average loan amount of $375,000 equals 2,003 loans and
multiplying $31.8 billion by 6.05 percent then dividing the product
by an average loan amount of $375,000 equals 5,138 loans.
\75\ Multiplying 2,003 loans by $1,000 savings equals $2.0
million and multiplying 5,138 loans by $1,000 savings equals $5.1
million.
---------------------------------------------------------------------------
By lowering valuation costs on commercial real estate transactions
greater than $250,000 but less than or equal to $500,000 for small
FDIC-supervised institutions, the final rule could marginally increase
lending activity. As discussed previously, commenters in the EGRPRA
review noted that appraisals can be costly and time consuming. By
enabling small FDIC-supervised institutions to utilize evaluations for
more commercial real estate transactions, the final rule will reduce
transaction costs. The reduction in loan origination fees could
marginally increase commercial real estate lending activity for loans
with an origination value greater than $250,000 and not more than
$500,000.
C. Paperwork Reduction Act
Certain provisions of the final rule contain ``collection of
information'' requirements within the meaning of the Paperwork
Reduction Act (PRA) of 1995.\76\ In accordance with the requirements of
the PRA, the agencies may not conduct or sponsor, and the respondent is
not required to respond to, an information collection unless it
displays a currently-valid Office of Management and Budget (OMB)
control number. The OMB control number for the OCC is 1557-0190, the
Board is 7100-0250, and the FDIC is 3064-0103, which will be extended,
without revision. The agencies have concluded that the final rule does
not contain any changes to the current information collections;
however, the agencies are revising the methodology for calculating the
burden estimates. There were no comments received regarding the PRA.
---------------------------------------------------------------------------
\76\ 44 U.S.C. 3501-3521.
---------------------------------------------------------------------------
The OCC and the FDIC submitted the information collection
requirements to OMB in connection with the proposal under section
3507(d) of the PRA \77\ and section 1320.11 of the OMB's implementing
regulations.\78\ OMB filed a comment pursuant to 5 CFR 1320.11(c)
instructing the agencies to examine public comment in response to the
proposal and describe in the supporting statement of its next
collection (the final rule) any public comments received regarding the
collection as well as why (or why it did not) incorporate the
commenter's recommendation and include the draft final rule in its next
submission. The OCC and the FDIC have resubmitted the collection to OMB
in connection with the final rule. The Board reviewed the final rule
under the authority delegated to the Board by OMB.
---------------------------------------------------------------------------
\77\ 44 U.S.C. 3507(d).
\78\ 5 CFR 1320.
---------------------------------------------------------------------------
Information Collection
Title of Information Collection: Recordkeeping Requirements
Associated with Real Estate Appraisals and Evaluations.
Frequency of Response: Event generated.
Affected Public: Businesses or other for-profit.
Respondents:
OCC: National banks, federal savings associations.
Board: State member banks (SMBs) and nonbank subsidiaries of bank
holding companies (BHCs).
FDIC: Insured state nonmember banks and state savings associations,
insured state branches of foreign banks.
General Description of Report: For federally related transactions,
Title XI requires regulated institutions \79\ to
[[Page 15034]]
obtain appraisals prepared in accordance with USPAP promulgated by the
Appraisal Standards Board of the Appraisal Foundation. Generally, these
standards include the methods and techniques used to estimate the
market value of a property as well as the requirements for reporting
such analysis and a market value conclusion in the appraisal. Regulated
institutions are expected to maintain records that demonstrate that
appraisals used in their real estate-related lending activities comply
with these regulatory requirements. For commercial real estate
transactions exempted from the Title XI appraisal requirements by the
final rule, regulated institutions will still be required to obtain an
evaluation to justify the transaction amount. The agencies estimate
that the recordkeeping burden associated with evaluations is the same
as the recordkeeping burden associated with appraisals for such
transactions.
---------------------------------------------------------------------------
\79\ National banks, federal savings associations, SMBs and
nonbank subsidiaries of BHCs, insured state nonmember banks and
state savings associations, and insured state branches of foreign
banks.
---------------------------------------------------------------------------
Current Action: The threshold change in the final rule will result
in lenders being able to use evaluations instead of appraisals for
certain transactions. It is estimated that the time required to
document the review of an appraisal or an evaluation is the same. While
the rulemaking described in this final rule will not change the amount
of time that institutions spend complying with the Title XI appraisal
regulation, the agencies are using a more accurate methodology for
calculating the burden of the information collections based on the
experience of the agencies. Thus, the PRA burden estimates shown here
are different from those previously reported. The agencies are (1)
using the average number of loans per institution as the frequency and
(2) using 5 minutes as the estimated time per response for the
appraisals or evaluations.
PRA Burden Estimates
Estimated average time per response: 5 minutes.
OCC
Number of Respondents: 1,200.
Annual Frequency: 1,488.
Total Estimated Annual Burden: 148,800 hours.
Board
Number of Respondents: 828 SMBs; 1,215 nonbank subsidiaries of
BHCs.
Annual Frequency: 419; 25.
Total Estimated Annual Burden: 28,911 hours; 2,531 hours.
FDIC
Number of Respondents: 3,675.
Annual Frequency: 143.
Total Estimated Annual Burden: 43,794 hours.
These collections are available to the public at www.reginfo.gov.
The agencies have an ongoing interest in public comments on its
burden estimates. Comments on the collection of information should be
sent to:
OCC: Because paper mail in the Washington, DC area and at the OCC
is subject to delay, commenters are encouraged to submit comments by
email, if possible. Comments may be sent to: Legislative and Regulatory
Activities Division, Office of the Comptroller of the Currency,
Attention: 1557-0190, 400 7th Street SW, Suite 3E-218, Mail Stop 9W-11,
Washington, DC 20219. In addition, comments may be sent by fax to (571)
465-4326 or by electronic mail to [email protected]. You may
personally inspect and photocopy comments at the OCC, 400 7th Street
SW, Washington, DC 20219. For security reasons, the OCC requires that
visitors make an appointment to inspect comments. You may do so by
calling (202) 649-6700. Upon arrival, visitors will be required to
present valid government-issued photo identification and submit to
security screening in order to inspect and photocopy comments.
All comments received, including attachments and other supporting
materials, are part of the public record and subject to public
disclosure. Do not include any information in your comment or
supporting materials that you consider confidential or inappropriate
for public disclosure.
Board: Nuha Elmaghrabi, Federal Reserve Clearance Officer, Office
of the Chief Data Officer, Mail Stop K1-148, Board of Governors of the
Federal Reserve System, Washington, DC 20551, with copies of such
comments sent to the Office of Management and Budget, Paperwork
Reduction Project (7100-0250), Washington, DC 20503.
FDIC: You may submit comments, which should refer to ``Real Estate
Appraisals, 3064-0103'' by any of the following methods:
Agency website: https://www.fdic.gov/regulations/laws/federal/. Follow the instructions for submitting comments on the FDIC
website.
Federal eRulemaking Portal: https://www.regulations.gov.
Follow the instructions for submitting comments.
Email: [email protected]. Include ``Real Estate
Appraisals, 3064-0103'' in the subject line of the message.
Mail: Jennifer Jones, Attn: Comments, Federal Deposit
Insurance Corporation, 550 17th Street NW, MB-3105, Washington, DC
20429.
Hand Delivery: Comments may be hand delivered to the guard
station at the rear of the 550 17th Street Building (located on F
Street) on business days between 7 a.m. and 5 p.m.
Public Inspection: All comments received will be posted without
change to https://www.fdic.gov/regulations/laws/federal/ including any
personal information provided.
Additionally, commenters may send a copy of their comments to the
OMB desk officer for the PRA Agencies by mail to the Office of
Information and Regulatory Affairs, U.S. Office of Management and
Budget, New Executive Office Building, Room 10235, 725 17th Street NW,
Washington, DC 20503; by fax to (202) 395-6974; or by email to
[email protected].
D. Riegle Act
The Riegle Act requires that each of the agencies, in determining
the effective date and administrative compliance requirements for new
regulations that impose additional reporting, disclosure, or other
requirements on IDIs, consider, consistent with principles of safety
and soundness and the public interest, any administrative burdens that
such regulations would place on depository institutions, including
small depository institutions, and customers of depository
institutions, as well as the benefits of such regulations.\80\ In
addition, in order to provide an adequate transition period, new
regulations that impose additional reporting, disclosures, or other new
requirements on IDIs generally must take effect on the first day of a
calendar quarter that begins on or after the date on which the
regulations are published in final form.\81\
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\80\ 12 U.S.C. 4802(a).
\81\ 12 U.S.C. 4802(b).
---------------------------------------------------------------------------
The final rule reduces burden and does not impose any reporting,
disclosure, or other new requirements on IDIs. For transactions
exempted from the Title XI appraisal requirements by the proposed rule
(i.e., commercial real estate transactions between $250,000 and
$500,000), lenders are required to get an evaluation if they chose not
to get an appraisal. However, the agencies do not view the option to
obtain an evaluation instead of an appraisal as a new or additional
requirement for purposes of the Riegle Act. First, the process of
obtaining an evaluation is not new since IDIs already get evaluations
for transactions at or below the current $250,000 threshold. Second,
for commercial real estate transactions between $250,000 and $500,000,
IDIs
[[Page 15035]]
can continue to get appraisals instead of evaluations. Because the
final rule imposes no new requirements on IDIs, the agencies are not
required by the Riegle Act to consider the administrative burdens and
benefits of the rule or delay its effective date.
Because delaying the effective date of the rule is not required,
the agencies are making the threshold increase effective on the first
day after publication of the final rule in the Federal Register.
Additionally, although not required by the Riegle Act, the agencies did
consider the administrative costs and benefits of the rule while
developing the proposal and finalizing the rule. In designing the scope
of the threshold increase, the agencies chose to largely align the
definition of commercial real estate transaction with industry
practice, regulatory guidance, and the categories used in the Call
Report in order to reduce the administrative burden of determining
which transactions were exempted by the rule. The agencies also
considered the cost savings that IDIs would experience by obtaining
evaluations instead of appraisals and set the threshold at a level
designed to provide significant burden relief without sacrificing
safety and soundness. In the proposal, the agencies invited comments on
compliance with the Riegle Act, but no such comments were received.
E. Solicitation of Comments on Use of Plain Language
Section 722 of the Gramm-Leach-Bliley Act \82\ requires the
agencies to use plain language in all proposed and final rules
published after January 1, 2000. The agencies invited comment on how to
make the rule easier to understand, but no such comments were received.
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\82\ Public Law 106-102, section 722, 113 Stat. 1338 1471
(1999).
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F. OCC Unfunded Mandates Reform Act of 1995 Determination
The OCC has analyzed the final rule under the factors in the
Unfunded Mandates Reform Act of 1995 (2 U.S.C. 1532). Under this
analysis, the OCC considered whether the final rule includes a federal
mandate that may result in the expenditure by state, local, and tribal
governments, in the aggregate, or by the private sector, of $100
million or more in any one year (adjusted annually for inflation).
The final rule does not impose new requirements or include new
mandates. Therefore, we conclude that the final rule will not result in
an expenditure of $100 million or more by state, local, and tribal
governments, or by the private sector, in any one year.
List of Subjects
12 CFR Part 34
Appraisal, Appraiser, Banks, Banking, Consumer protection, Credit,
Mortgages, National banks, Reporting and recordkeeping requirements,
Savings associations, Truth in lending.
12 CFR Part 225
Administrative practice and procedure, Banks, banking, Federal
Reserve System, Capital planning, Holding companies, Reporting and
recordkeeping requirements, Securities, Stress testing.
12 CFR Part 323
Banks, banking, Mortgages, Reporting and recordkeeping
requirements, Savings associations.
Office of the Comptroller of the Currency 12 CFR Part 34
For the reasons set forth in the joint preamble, the OCC amends
part 34 of chapter I of title 12 of the Code of Federal Regulations as
follows:
PART 34--REAL ESTATE LENDING AND APPRAISALS
0
1. The authority citation for part 34 continues to read as follows:
Authority: 12 U.S.C. 1, 25b, 29, 93a, 371, 1462a, 1463, 1464,
1465, 1701j-3, 1828(o), 3331 et seq., 5101 et seq., and
5412(b)(2)(B), and 15 U.S.C. 1639h.
0
2. Section 34.42 is amended by redesignating paragraphs (e) through (m)
as paragraphs (f) through (n), respectively, and by adding a new
paragraph (e) to read as follows:
Sec. 34.42 Definitions.
* * * * *
(e) Commercial real estate transaction means a real estate-related
financial transaction that is not secured by a single 1-to-4 family
residential property.
* * * * *
0
3. Section 34.43 is amended by:
0
a. Removing the word ``or'' at the end of paragraph (a)(11);
0
b. Revising paragraph (a)(12);
0
c. Adding paragraph (a)(13); and
0
d. Revising paragraphs (b) and (d)(2).
The revisions and addition read as follows:
Sec. 34.43 Appraisals required; transactions requiring a State
certified or licensed appraiser.
(a) * * *
(12) The OCC determines that the services of an appraiser are not
necessary in order to protect Federal financial and public policy
interests in real estate-related financial transactions or to protect
the safety and soundness of the institution; or
(13) The transaction is a commercial real estate transaction that
has a transaction value of $500,000 or less.
(b) Evaluations required. For a transaction that does not require
the services of a State certified or licensed appraiser under paragraph
(a)(1), (a)(5), (a)(7), or (a)(13) of this section, the institution
shall obtain an appropriate evaluation of real property collateral that
is consistent with safe and sound banking practices.
* * * * *
(d) * * *
(2) Commercial real estate transactions of more than $500,000. All
federally related transactions that are commercial real estate
transactions having a transaction value of more than $500,000 shall
require an appraisal prepared by a State certified appraiser.
* * * * *
Federal Reserve Board
12 CFR Part 225
For the reasons set forth in the joint preamble, the Board amends
part 225 of chapter II of title 12 of the Code of Federal Regulations
as follows:
PART 225--BANK HOLDING COMPANIES AND CHANGE IN BANK CONTROL
(REGULATION Y)
0
4. The authority citation for part 225 continues to read as follows:
Authority: 12 U.S.C. 1817(j)(13), 1818, 1828(o), 1831i, 1831p-1,
1843(c)(8), 1844(b), 1972(l), 3106, 3108, 3310, 3331-3351, 3906,
3907, and 3909; 15 U.S.C. 1681s, 1681w, 6801 and 6805.
0
5. Section 225.62 is amended by redesignating paragraphs (e) through
(m) as paragraphs (f) through (n), respectively, and by adding a new
paragraph (e) to read as follows:
Sec. 225.62 Definitions.
* * * * *
(e) Commercial real estate transaction means a real estate-related
financial transaction that is not secured by a single 1-to-4 family
residential property.
* * * * *
0
6. Section 225.63 is amended by:
0
a. Removing the word ``or'' at the end of paragraph (a)(12);
0
b. Revising paragraph (a)(13);
0
c. Adding paragraph (a)(14);
0
d. Revising paragraph (b); and
0
e. Revising paragraph (d)(2).
The revisions and addition read as follows:
[[Page 15036]]
Sec. 225.63 Appraisals required; transactions requiring a State
certified or licensed appraiser.
(a) * * *
(13) The Board determines that the services of an appraiser are not
necessary in order to protect Federal financial and public policy
interests in real estate-related financial transactions or to protect
the safety and soundness of the institution; or
(14) The transaction is a commercial real estate transaction that
has a transaction value of $500,000 or less.
(b) Evaluations required. For a transaction that does not require
the services of a State certified or licensed appraiser under paragraph
(a)(1), (a)(5), (a)(7), or (a)(14) of this section, the institution
shall obtain an appropriate evaluation of real property collateral that
is consistent with safe and sound banking practices.
* * * * *
(d) * * *
(2) Commercial real estate transactions of more than $500,000. All
federally related transactions that are commercial real estate
transactions having a transaction value of more than $500,000 shall
require an appraisal prepared by a State certified appraiser.
* * * * *
Federal Deposit Insurance Corporation
12 CFR Part 323
For the reasons set forth in the joint preamble, the FDIC amends
part 323 of chapter III of title 12 of the Code of Federal Regulations
as follows:
PART 323--APPRAISALS
0
7. Revise the authority citation for part 323 to read as follows:
Authority: 12 U.S.C. 1818, 1819(a)(Seventh'' and ``Tenth),
1831p-1 and 3331 et seq.
0
8. Section 323.1 is amended by revising paragraph (a) to read as
follows:
Sec. 323.1 Authority, purpose, and scope.
(a) Authority. This subpart is issued under 12 U.S.C. 1818,
1819(a)(Seventh and Tenth), 1831p-1 and title XI of the Financial
Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA)
(Pub. L. 101-73, 103 Stat. 183, 12 U.S.C. 3331 et seq. (1989)).
0
9. Section 323.2 is amended by redesignating paragraphs (e) through (m)
as paragraphs (f) through (n), respectively, and by adding a new
paragraph (e) to read as follows:
Sec. 323.2 Definitions.
* * * * *
(e) Commercial real estate transaction means a real estate-related
financial transaction that is not secured by a single 1-to-4 family
residential property.
0
10. Section 323.3 is amended by:
0
a. Removing the word ``or'' at the end of paragraph (a)(11);
0
b. Revising paragraph (a)(12);
0
c. Adding paragraph (a)(13);
0
d. Revising paragraph (b); and
0
e. Revising paragraph (d)(2).
The revisions and addition read as follows:
Sec. 323.3 Appraisals required; transactions requiring a State
certified or licensed appraiser.
(a) * * *
(12) The FDIC determines that the services of an appraiser are not
necessary in order to protect Federal financial and public policy
interests in real estate-related financial transactions or to protect
the safety and soundness of the institution; or
(13) The transaction is a commercial real estate transaction that
has a transaction value of $500,000 or less.
(b) Evaluations required. For a transaction that does not require
the services of a State certified or licensed appraiser under paragraph
(a)(1), (a)(5), (a)(7), or (a)(13) of this section, the institution
shall obtain an appropriate evaluation of real property collateral that
is consistent with safe and sound banking practices.
* * * * *
(d) * * *
(2) Commercial real estate transactions of more than $500,000. All
federally related transactions that are commercial real estate
transactions having a transaction value of more than $500,000 shall
require an appraisal prepared by a State certified appraiser.
* * * * *
Dated: March 16, 2018.
Joseph M. Otting,
Comptroller of the Currency.
By order of the Board of Governors of the Federal Reserve
System, March 23, 2018.
Ann E. Misback,
Secretary of the Board.
Dated at Washington, DC on March 20, 2018.
By order of the Board of Directors.
Federal Deposit Insurance Corporation.
Valerie J. Best,
Assistant Executive Secretary.
[FR Doc. 2018-06960 Filed 4-6-18; 8:45 am]
BILLING CODE 4810-33-P; 6210-01-P; 6714-01-P
