Real Estate Appraisals, 53579-53598 [2019-21376]
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Federal Register / Vol. 84, No. 195 / Tuesday, October 8, 2019 / Rules and Regulations
7 CFR Part 718
Dawes-North Sioux, Morrill, and
Sheridan. Instead, the final rule did not
list any counties in Nebraska. This
correction adds the list of Nebraska
counties.
Commodity Credit Corporation
List of Subjects in 7 CFR Part 1412
DEPARTMENT OF AGRICULTURE
Farm Service Agency
Cotton, Feed grains, Oilseeds,
Peanuts, Price support programs,
Reporting and recordkeeping
requirements, Rice, Soil conservation,
Wheat.
7 CFR Part 1412
RIN 0560–AI45
[Docket ID FSA–2019–0008]
Agriculture Risk Coverage and Price
Loss Coverage Programs; Correction
Commodity Credit Corporation
and Farm Service Agency, USDA.
ACTION: Final rule; correction and
correcting amendment.
The Commodity Credit
Corporation (CCC) is correcting a final
rule that was published in the Federal
Register on September 3, 2019, which
revised the Agriculture Risk Coverage
(ARC) and Price Loss Coverage (PLC)
Programs. That document inadvertently
failed to include the relevant counties in
Nebraska that have been established as
having a history of double-cropping
covered commodities or peanuts with
fruits, vegetables, or wild rice and
incorrectly listed the previous
Regulation Identifier Number (RIN).
DATES: Effective: October 8, 2019.
FOR FURTHER INFORMATION CONTACT:
Mary Ann Ball; telephone: (202) 720–
4283, email address: maryann.ball@
usda.gov. Persons with disabilities who
require alternative means for
communication should contact the
USDA Target Center at (202) 720–2600
(voice only).
SUPPLEMENTARY INFORMATION:
Correction to Preamble
In the published final rule beginning
on page 45877, in the 3rd column, in the
Federal Register of Monday, September
3, 2019 (84 FR 45877–45895), correct
the ‘‘RIN’’ heading to read: RIN 0560–
AI45.
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Correcting Amendment to Regulations
In addition, the final rule
inadvertently omitted the list of
counties for Nebraska in 7 CFR
1412.46(f). The listing of counties in
§ 1412.46(f) specifies which counties
have been determined to be regions
having a history of double-cropping
covered commodities or peanuts with
fruits, vegetables, or wild rice. The FSA
State committees establish the counties
as regions within their respective States.
During the development of the final
rule, the list of counties for Nebraska
was intended to be added as: Box Butte,
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DEPARTMENT OF THE TREASURY
Office of the Comptroller of the
Currency
12 CFR Part 34
[Docket No. OCC–2019–0038]
RIN 1557–AE57
FEDERAL RESERVE SYSTEM
12 CFR Part 225
For the reasons discussed above, CCC
corrects 7 CFR part 1412 as follows:
[Docket No. R–1639]
PART 1412—AGRICULTURE RISK
COVERAGE, PRICE LOSS COVERAGE,
AND COTTON TRANSITION
ASSISTANCE PROGRAMS
FEDERAL DEPOSIT INSURANCE
CORPORATION
1. The authority citation for part 1412
continues to read as follows:
RIN 3064–AE87
AGENCY:
SUMMARY:
53579
■
Authority: 7 U.S.C. 1508b, 7911–7912,
7916, 8702, 8711–8712, 8751–8752, and 15
U.S.C. 714b and 714c.
Subpart D—ARC and PLC Contract
Terms and Enrollment Provisions for
Covered Commodities
2. In § 1412.46:
■ a. Revise paragraph (f)(28).
■ b. In paragraph (g), remove the crossreference ‘‘paragraph (h)’’ and add the
cross-reference ‘‘paragraph (i)’’ in its
place.
The revision reads as follows:
■
§ 1412.46
Planting flexibility.
*
*
*
*
*
(f) * * *
(28) Nebraska. Box Butte, DawesNorth Sioux, Morrill, and Sheridan.
*
*
*
*
*
Robert Stephenson,
Executive Vice President, Commodity Credit
Corporation.
Richard Fordyce,
Administrator, Farm Service Agency.
[FR Doc. 2019–21604 Filed 10–7–19; 8:45 am]
BILLING CODE 3410–05–P
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RIN 7100–AF30
12 CFR Part 323
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 residential real estate transactions
from $250,000 to $400,000. The final
rule defines a residential real estate
transaction as a real estate-related
financial transaction that is secured by
a single 1-to-4 family residential
property. For residential real estate
transactions exempted from the
appraisal requirement as a result of the
revised threshold, regulated institutions
must obtain an evaluation of the real
property collateral that is consistent
with safe and sound banking practices.
The final rule makes a conforming
change to add to the list of exempt
transactions those transactions secured
by residential property in rural areas
that have been exempted from the
agencies’ appraisal requirement
pursuant to the Economic Growth,
Regulatory Relief, and Consumer
Protection Act. The final rule requires
evaluations for these exempt
transactions. The final rule also amends
the agencies’ appraisal regulations to
require regulated institutions to subject
appraisals for federally related
transactions to appropriate review for
compliance with the Uniform Standards
of Professional Appraisal Practice.
SUMMARY:
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Federal Register / Vol. 84, No. 195 / Tuesday, October 8, 2019 / Rules and Regulations
This final rule is effective on
October 9, 2019, except for the
amendments in instructions 4, 5, 9, 10,
14, and 15, which are effective on
January 1, 2020.
FOR FURTHER INFORMATION CONTACT:
OCC: G. Kevin Lawton, Appraiser
(Real Estate Specialist), (202) 649–7152;
Mitchell E. Plave, Special Counsel, (202)
649–5490; or Joanne Phillips, Counsel,
Chief Counsel’s Office (202) 649–5500;
Office of the Comptroller of the
Currency, 400 7th Street SW,
Washington, DC 20219. For persons
who are deaf or hearing impaired, TTY
users may contact (202) 649–5597.
Board: Anna Lee Hewko, Associate
Director, (202) 530–6260; Virginia
Gibbs, Manager, Policy Development
Section, (202) 452–2521; Carmen Holly,
Lead Financial Institution Policy
Analyst, (202) 973–6122, Division of
Supervision and Regulation; Laurie
Schaffer, Associate General Counsel,
(202) 452–2272; Matthew Suntag,
Counsel, (202) 452–3694; Derald Seid,
Counsel, (202) 452–2246; or Trevor
Feigleson, Senior Attorney, (202) 452–
3274, Legal Division, Board of
Governors of the Federal Reserve
System, 20th and C Streets NW,
Washington, DC 20551. For the hearing
impaired only, Telecommunications
Device for the Deaf (TDD) users may
contact (202) 263–4869.
FDIC: Beverlea S. Gardner, Senior
Examination Specialist, Division of Risk
Management and Supervision, (202)
898–3640, BGardner@FDIC.gov;
Benjamin K. Gibbs, Counsel, Legal
Division, (202) 898–6726; Mark Mellon,
Counsel, Legal Division, (202) 898–
3884; or Navid Choudhury, Legal
Division, (202) 898–6526, Federal
Deposit Insurance Corporation, 550 17th
Street NW, Washington, DC 20429. For
the hearing impaired only, TDD users
may contact (202) 925–4618.
SUPPLEMENTARY INFORMATION:
DATES:
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Table of Contents
I. Introduction
A. Background
B. Summary of Proposed Rule
C. Overview of Comments
II. Revisions to the Title XI Appraisal
Regulations
A. Threshold Increase for Residential Real
Estate Transactions
1. Definition of Residential Real Estate
Transaction
2. Threshold Level
3. Safety and Soundness Considerations for
Raising the Residential Real Estate
Threshold
4. Consumer Protection Considerations
5. Reducing Burden Associated With
Appraisals
B. Incorporation of the Rural Residential
Appraisal Exemption Under Section 103
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of the Economic Growth, Regulatory
Relief, and Consumer Protection Act
C. Addition of Appraisal Review
Requirement
D. Conforming and Technical Amendments
III. Effective Date
IV. Regulatory Analysis
A. Regulatory Flexibility Act Analysis
B. Paperwork Reduction Act
C. Riegle Community Development and
Regulatory Improvement Act of 1994
D. Solicitation of Comments on Use of
Plain Language
E. OCC Unfunded Mandates Reform Act of
1995 Determination
Regulatory Text
I. Introduction
A. Background
In December 2018, the agencies
invited comment on a notice of
proposed rulemaking (proposal or
proposed rule) 1 that would amend the
agencies’ appraisal regulations
promulgated pursuant to Title XI of the
Financial Institutions Reform, Recovery,
and Enforcement Act of 1989 (Title XI).2
Specifically, the proposal would
increase the monetary threshold at or
below which financial institutions that
are subject to the agencies’ appraisal
regulations (regulated institutions)
would not be required to obtain
appraisals in connection with
residential real estate transactions
(residential real estate appraisal
threshold) from $250,000 to $400,000.
In addition, the proposal would add to
the list of exempt transactions those
transactions that are secured by
residential property in rural areas that
have been exempted from the agencies’
appraisal requirement pursuant to the
Economic Growth, Regulatory Relief,
and Consumer Protection Act
(EGRRCPA) 3 (rural residential appraisal
exemption). The proposal would require
regulated institutions to obtain
evaluations for transactions exempt
from the agencies’ appraisal
requirements due to the increase in the
residential real estate appraisal
threshold or the rural residential
appraisal exemption. Finally, the
proposal would amend the agencies’
appraisal regulations to require
regulated institutions to subject
appraisals for federally related
transactions to appropriate review for
compliance with the Uniform Standards
of Professional Appraisal Practice
(USPAP), as required under section
1473(e) of the Dodd-Frank Wall Street
1 83
FR 63110 (December 7, 2018).
U.S.C. 3331 et seq.
3 Public Law 115–174, 132 Stat. 1296, Title I,
section 103, codified at 12 U.S.C. 3356.
2 12
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Reform and Consumer Protection Act
(the Dodd-Frank Act).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
Title XI directs the agencies to
prescribe appropriate standards for Title
XI appraisals under the agencies’
respective jurisdictions.8 At a
minimum, the statute provides that Title
XI appraisals must be: (1) performed in
accordance with USPAP; (2) written
appraisals, as defined by the statute; and
(3) subject to appropriate review for
compliance with USPAP.9
All federally related transactions must
have Title XI appraisals. Title XI defines
a federally related transaction as a real
estate-related financial transaction 10
that the agencies or a financial
institution regulated by the agencies
engages in or contracts for, that requires
the services of an appraiser under Title
XI and the interagency appraisal rules.11
The agencies have authority to
determine those real estate-related
4 Public Law 111–203, 124 Stat. 1376, codified at
12 U.S.C. 3339(3).
5 The term ‘‘Federal financial institutions
regulatory agencies’’ means the Board, the FDIC, the
OCC, the National Credit Union Administration
(NCUA), and, formerly, the Office of Thrift
Supervision. 12 U.S.C. 3350(6).
6 These interests include those stemming from the
federal government’s roles as regulator and deposit
insurer of financial institutions that engage in real
estate lending and investment, guarantor or lender
on mortgage loans, and as a direct party in realestate 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.
8 12 U.S.C. 3339.
9 The third minimum requirement was added to
Title XI by section 1473(e) of the Dodd-Frank Act,
as noted supra, and is being implemented by this
rulemaking. See infra, Section II.C.
10 12 U.S.C. 3350(5). A real estate-related
financial transaction is defined as any transaction
that involves: (i) The sale, lease, purchase,
investment in or exchange of real property,
including interests in property, or financing thereof;
(ii) the refinancing of real property or interests in
real property; and (iii) the use of real property or
interests in real property as security for a loan or
investment, including mortgage-backed securities.
11 12 U.S.C. 3350(4).
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financial transactions that do not
require Title XI appraisals.12 The
agencies have exercised this authority
by exempting several categories of real
estate-related financial transactions
from the agencies’ appraisal
requirement, including transactions at
or below certain designated
thresholds.13
Title XI expressly authorizes the
agencies to establish thresholds at or
below which Title XI appraisals are not
required if: (1) The agencies determine
in writing that the threshold does not
represent a threat to the safety and
soundness of financial institutions; and
(2) the agencies receive concurrence
from the Consumer Financial Protection
Bureau (CFPB) that such threshold level
provides reasonable protection for
consumers who purchase 1-to-4 unit
single-family residences.14 Under the
current thresholds, residential real
estate transactions 15 with a transaction
value 16 of $250,000 or less, certain real
estate-secured business loans
(qualifying business loans) 17 with a
transaction value of $1 million or less,
and commercial real estate (CRE)
transactions with a transaction value of
$500,000 or less do not require Title XI
appraisals.18 The appraisal threshold
applicable to residential real estate
12 Real estate-related financial transactions that
the agencies have exempted from the appraisal
requirement are not federally related transactions
under the agencies’ appraisal regulations.
13 See OCC: 12 CFR 34.43(a); Board: 12 CFR
225.63(a); FDIC: 12 CFR 323.3(a). The agencies have
determined that these categories of transactions do
not require appraisals by state certified or state
licensed appraisers in order to protect federal
financial and public policy interests or to satisfy
principles of safe and sound banking.
14 12 U.S.C. 3341(b).
15 While the $250,000 threshold explicitly applies
to all real estate-related financial transactions with
transaction values of $250,000 or less, it effectively
only applies to residential real estate transactions
because all other real estate-related financial
transactions are subject to higher thresholds.
16 For loans and extensions of credit, the
transaction value is the amount of the loan or
extension of credit. For sales, leases, purchases,
investments in or exchanges of real property, the
transaction value is the market value of the real
property. For the pooling of loans or interests in
real property for resale or purchase, the transaction
value is the amount of each loan or the market
value of each real property, respectively. See OCC:
12 CFR 34.42(m); Board: 12 CFR 225.62(m); FDIC:
12 CFR 323.2(m).
17 Qualifying business loans are business loans
that are real estate-related financial transactions and
that are not dependent on the sale of, or rental
income derived from, real estate as the primary
source of repayment. The Title XI appraisal
regulations define ‘‘business loan’’ to mean a loan
or extension of credit to any corporation, general or
limited partnership, business trust, joint venture,
pool, syndicate, sole proprietorship, or other
business entity. See OCC: 12 CFR 34.42(d); Board:
12 CFR 225.62(d); FDIC: 12 CFR 323.2(d).
18 See OCC: 12 CFR 34.43(a)(1), (5), and (13);
Board: 12 CFR 225.63(a)(1), (5), and (14); and FDIC:
12 CFR 323.3(a)(1), (5), and (13).
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transactions has not been changed since
1994.19
For real estate-related financial
transactions at or below the applicable
thresholds and for certain existing
extensions of credit exempt from the
agencies’ appraisal requirement,20 the
Title XI appraisal regulations require
regulated institutions to obtain an
appropriate evaluation of the real
property collateral that is consistent
with safe and sound banking
practices.21 An evaluation should
contain sufficient information and
analysis to support the regulated
institution’s decision to engage in the
transaction.22 The agencies have
provided supervisory guidance for
conducting evaluations in a safe and
sound manner in the Interagency
Appraisal and Evaluation Guidelines
(Guidelines) 23 and the Interagency
Advisory on the Use of Evaluations in
Real Estate-Related Financial
Transactions (Evaluations Advisory,24
and together with the Guidelines,
Evaluation Guidance).
In 2018, Congress amended Title XI
by adding the rural residential appraisal
exemption to provide relief for financial
institutions engaging in residential real
estate transactions in certain rural areas.
The exemption provides that residential
transactions in certain rural areas do not
require Title XI appraisals if the
19 See 59 FR 29482 (June 7, 1994). The OCC,
Board, and FDIC had previously set the appraisal
threshold at $100,000. OCC: 57 FR 12190–02 (April
9, 1992); Board: 55 FR 27762 (July 5, 1990); FDIC:
57 FR 9043–02 (March 16, 1992).
20 Transactions that involve an existing extension
of credit at the lending institution are exempt from
the agencies’ appraisal requirement, but are
required to have evaluations, provided that there
has been no obvious and material change in market
conditions or physical aspects of the property that
threatens the adequacy of the institution’s real
estate collateral protection after the transaction,
even with the advancement of new monies; or there
is no advancement of new monies, other than funds
necessary to cover reasonable closing costs. See
OCC: 12 CFR 34.43(a)(7) and (b); Board: 12 CFR
225.63(a)(7) and (b); FDIC: 12 CFR 323.3(a)(7) and
(b).
21 See OCC: 12 CFR 34.43(b); Board: 12 CFR
225.63(b); FDIC: 12 CFR 323.3(b). An evaluation is
not required when real estate-related financial
transactions meet the threshold criteria and also
qualify for another exemption from the agencies’
appraisal requirement where no evaluation is
required by the regulation.
22 Evaluations are not required to be performed in
accordance with USPAP or by state certified or state
licensed appraisers by federal law. For additional
information on evaluations, see infra notes 23 and
24.
23 The agencies proposed the Guidelines for
public comment in 2008, see 73 FR 69647
(November 19, 2008), and adopted the final
Guidelines in 2010, see 75 FR 77450 (December 10,
2010).
24 Interagency Advisory on the Use of Evaluations
in Real Estate-Related Financial Transactions
(March 4, 2016), OCC Bulletin 2016–8; Board SR
Letter 16–5; FDIC FIL–16–2016.
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53581
financial institution documents that
appraisers are not available for the
transaction within reasonable time and
cost parameters.25 The statute does not
specifically require that real estate
evaluations be performed when
financial institutions utilize this
exemption.
B. Summary of Proposed Rule
As noted in the proposed rule,
residential property values have
increased over time, but the appraisal
threshold has not been adjusted since
1994. The agencies believe rising market
prices of residential properties have
contributed to increased burden for
regulated institutions and consumers in
terms of transaction time and costs,
given that the threshold has remained
the same since 1994. The proposed rule
was intended to reduce regulatory
burden consistent with federal financial
and public policy interests in residential
real estate-related financial transactions.
Based on supervisory experience and
available data, the agencies published
the proposed rule to accomplish these
goals without posing a threat to the
safety and soundness of financial
institutions.
The agencies proposed to increase the
threshold level at or below which
appraisals are not required for
residential real estate transactions from
$250,000 to $400,000. Residential real
estate transaction would be defined as a
real-estate related financial transaction
that is secured by a single 1-to-4 family
residential property. For residential real
estate transactions exempted from the
appraisal requirement as a result of the
revised threshold, regulated institutions
would be required to obtain an
evaluation of the real property collateral
that is consistent with safe and sound
banking practices.
The agencies also proposed to make
conforming changes to add the rural
residential appraisal exemption to the
appraisal regulations. The agencies
proposed that evaluations be required
25 Public Law 115–174, Title I, section 103,
codified at 12 U.S.C. 3356. Effective May 24, 2018,
section 103 provides that a Title XI appraisal is not
required if the real property or interest in real
property is located in a rural area, as described in
12 CFR 1026.35(b)(2)(iv)(A), and if the transaction
value is $400,000 or less. In addition, the mortgage
originator or its agent, directly or indirectly must
have contacted not fewer than three state certified
or state licensed appraisers, as applicable, on the
mortgage originator’s approved appraiser list in the
market area, in accordance with 12 CFR part 226,
not later than three days after the date on which the
Closing Disclosure was provided to the consumer
and documented that no state certified or state
licensed appraiser, as applicable, was available
within five business days beyond customary and
reasonable fee and timeliness standards for
comparable appraisal assignments.
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for these transactions. In addition, the
agencies proposed to amend the
agencies’ appraisal regulations to
require regulated institutions to subject
appraisals for federally related
transactions to appropriate review for
compliance with USPAP, pursuant to
Title XI, as amended by the Dodd-Frank
Act.26 The agencies also proposed
several conforming and technical
amendments to their appraisal
regulations. The agencies invited
comment on all aspects of the proposal.
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C. Overview of Comments
The agencies collectively received
over 560 comments regarding the
proposal to increase the residential real
estate appraisal threshold that
addressed a variety of issues. Comments
from financial institutions, financial
institution trade associations, and state
banking regulators generally supported
the proposed increase. Comments from
appraisers, appraiser trade
organizations, individuals, and
consumer advocate groups generally
opposed the proposal to increase the
threshold. The agencies also received a
few comments that are addressed
separately below concerning the
proposed requirement to obtain
evaluations for transactions that qualify
for the rural residential appraisal
exemption or to subject certain
appraisals to appropriate review for
compliance with USPAP.27
Commenters supporting the proposed
threshold increase asserted that an
increase would be appropriate given the
increases in real estate values since the
current threshold was established as
well as the cost and time savings to
lenders and borrowers that the higher
threshold would provide. Supportive
commenters also indicated that a
threshold increase would provide
burden relief for financial institutions
without sacrificing safe and sound
banking practices. Many of these
commenters saw evaluations as
appropriate substitutes for appraisals
and institutions as having appropriate
risk management controls in place to
manage the proposed threshold change
responsibly. Some commenters in
support of the proposal indicated that
the proposed threshold increase would
benefit consumers, arguing that costs
and delays due to appraisals could be
reduced. These commenters asserted
26 Public
Law 111–203, 124 Stat. 1376.
agencies received five comments
suggesting that the agencies hold public hearings
regarding the proposed rule. The agencies denied
these requests on grounds that holding a public
hearing would not elicit relevant information that
could not be conveyed through the notice and
comment process.
27 The
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that expedited valuations could make
the residential mortgage market more
efficient and lower closing costs.
Commenters opposing an increase to
the residential real estate appraisal
threshold asserted that the proposal
would elevate risks to borrowers,
financial institutions, the financial
system, and taxpayers. Several
commenters asserted that the increased
risk would not be justified by burden
relief resulting from a threshold
increase. As described in more detail
below, many commenters in opposition
asserted that the proposal would
negatively impact consumers. Many of
these comments focused on views that
evaluations are inadequate substitutes
for appraisals.
Many commenters opposing the
proposal highlighted the benefits that
state licensed or state certified
appraisers bring to the real estate
valuation process. Commenters asserted
that appraisers serve a necessary
function in real estate lending and
expressed concerns that bypassing them
to create a more streamlined valuation
process could lead to fraud and another
real estate crisis. Many commenters
asserted that appraisers are the only
unbiased party in the valuation process,
in contrast to buyers, agents, lenders,
and sellers, who each have an interest
in the underlying transactions. Several
commenters rejected assertions that
there was an appraiser shortage
warranting regulatory relief.
Several commenters questioned the
proposal in light of the agencies’
previous decision not to propose an
increase to the residential real estate
appraisal threshold during the
regulatory review process required by
the Economic Growth and Regulatory
Paperwork Reduction Act (EGRPRA).28
A few commenters also questioned
whether the proposed threshold
increase is consistent with
Congressional intent, given that the
rural residential real estate exemption
was made available only to transactions
meeting certain criteria, while the
proposed threshold increase would
exempt all residential transactions at or
below $400,000.
II. Revisions to the Title XI Appraisal
Regulations
After carefully considering the
comments and conducting further
analysis, the agencies are adopting the
final rule as proposed, and are
increasing the residential real estate
appraisal threshold from $250,000 to
28 Public
Law 104–208, Div. A, Title II, section
2222, 110 Stat. 3009–414, (1996) (codified at 12
U.S.C. 3311).
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$400,000. As discussed in the proposal
and further detailed below, increasing
the residential real estate appraisal
threshold will provide meaningful
regulatory relief for financial
institutions without threatening the
safety and soundness of financial
institutions.
The agencies are authorized to
increase the threshold based on express
statutory authority to do so upon
making a determination in writing that
the threshold does not represent a threat
to the safety and soundness of financial
institutions and receiving concurrence
from the CFPB that the threshold level
provides reasonable protection for
consumers who purchase 1-to-4 unit
single-family residences.29
As detailed below, the agencies have
determined that a residential real estate
appraisal threshold of $400,000 will not
threaten the safety and soundness of
financial institutions and have received
concurrence from the CFPB that this
threshold level provides reasonable
protection for consumers who purchase
1–4 unit single-family residences.
The agencies recognize that they
decided against proposing a residential
appraisal threshold increase during the
EGRPRA process. The agencies have
reconsidered this decision based on
continued comments received from
financial institutions and state bank
regulatory agencies that increasing the
residential appraisal threshold would
provide meaningful burden relief, as
well as further analysis regarding safety
and soundness and consumer protection
factors related to the proposal, as
detailed below. The agencies also
recognize that Congress recently
amended Title XI to provide a narrow,
self-effectuating appraisal exemption for
rural transactions meeting certain
requirements. However, the agencies
also observe that Congress did not
amend the agencies’ long-standing
authority in Title XI to establish a
threshold level at or below which a
certified or licensed appraiser is not
required to perform an appraisal in
connection with federally related
transactions. Through the EGRRCPA
amendment, Congress mandated that
rural transactions meeting specific
statutory criteria be exempted from the
appraisal regulations; however, there is
no indication that Congress intended to
restrict the agencies’ authority to
provide additional exemptions pursuant
to their existing statutory authority.
29 The agencies note the rural residential
appraisal exemption does not require a safety and
soundness determination by the agencies or a
concurrence by the CFPB. 12 U.S.C. 3341(b).
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The agencies are also finalizing as
proposed the requirement to obtain an
evaluation for transactions that qualify
for the rural residential appraisal
exemption and the requirement that
appraisals for federally related
transactions be subject to appropriate
review for compliance with USPAP. The
final rule also makes several technical
and conforming changes to the appraisal
regulations. These changes are
discussed in more detail below, in the
order in which they appear in the rule.
The effective date for the rule will be
the first day after its publication in the
Federal Register, other than the
evaluation requirement for transactions
exempted by the rural residential
appraisal exemption and the appraisal
review provision, which will become
effective on January 1, 2020.
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A. Threshold Increase for Residential
Real Estate Transactions
1. Definition of Residential Real
Estate Transaction. The agencies
proposed to define a residential real
estate transaction as a real estate-related
financial transaction secured by a single
1-to-4 family residential property and
specifically asked commenters whether
the proposed definition is appropriate.
The agencies received one comment
generally supporting the proposed
definition and one comment generally
opposing the definition, neither of
which included any detail regarding the
reasoning for the position. This
definition is consistent with current
references to appraisals for residential
real estate in the agencies’ appraisal
regulations and in Title XI, and the
definition of commercial real estate
transaction that was created in the
recent rulemaking to increase the
appraisal threshold for commercial real
estate (CRE) transactions (CRE
rulemaking).30 Adding this definition
does not change any substantive
requirement, but provides clarity to the
regulation.31 Therefore, the agencies are
adopting the definition of a residential
real estate transaction as proposed.
2. Threshold Level. The agencies
proposed increasing the residential real
estate appraisal threshold from $250,000
to $400,000. In determining the level of
increase, the agencies considered
increases in housing prices and general
inflation across the economy since the
30 83 FR 15019–01 (April 9, 2018) (‘‘commercial
real estate transaction’’ is defined as a ‘‘real estaterelated financial transaction that is not secured by
a single 1-to-4 family residential property’’).
31 The agencies believe that federally related
transactions secured by single 1-to-4 family
residential properties are currently the only real
estate transactions subject to the $250,000 appraisal
threshold.
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current threshold was established in
1994. The agencies also considered
comments received during the EGRPRA
process and in response to questions
posed about the residential threshold in
the CRE rulemaking.32 As discussed in
the proposal, the agencies analyzed the
Standard & Poor’s Case-Shiller Home
Price Index (Case-Shiller Index) 33 and
the FHFA Index 34 to determine changes
in house prices since 1994. The agencies
also analyzed general measures of
inflation by reviewing the Consumer
Price Index (CPI).35
A residential property that sold for
$250,000 as of June 30, 1994, would be
expected to sell in March 2019 for
$643,750 according to the Case-Shiller
Index and $621,448 according to the
FHFA Index (see Table 1 below). The
agencies also considered housing prices
over the most recent financial cycle
which were generally at a low point in
2011. During the low point of the cycle,
in December 2011, a house that sold for
$250,000 in 1994 would have been
expected to sell for $445,152 in
December 2011, according to the CaseShiller Index and $414,629 according to
the FHFA Index.
TABLE 1—HOUSE PRICE AND INFLATION ADJUSTMENTS OF $250,000 AT
JUNE 30, 1994, FOR THE CASESHILLER INDEX AND THE FHFA
INDEX, AND JULY 1, 1994 FOR THE
CPI INDEX
Table 1
year
1994
2006
2011
2019
......
......
......
......
CaseShiller
FHFA
250,000
578,813
445,152
643,750
250,000
511,636
414,629
621,448
CPI
250,000
341,109
379,997
429,240
The agencies adopted a conservative
approach and proposed a threshold of
$400,000 to approximate housing prices
based on the low point during the most
recent cycle. The proposed threshold
level is also consistent with general
32 82 FR 35478, 35482 (July 31, 2017); 83 FR at
15029–15030.
33 The Case-Shiller Index reflects changes in
home prices from a base of $250,000 in June 1994,
based on the Standard & Poor’s Case-Shiller Home
Price Index. See Standard & Poor’s CoreLogic CaseShiller Home Price Indices, available at https://
us.spindices.com/index-family/real-estate/spcorelogic-case-shiller.
34 The FHFA Index reflects changes in home
prices from a base of $250,000 in June 1994, based
on the FHFA House Price Index. See FHFA House
Price Index, available at https://www.fhfa.gov/
DataTools/Downloads/Pages/House-PriceIndex.aspx.
35 The CPI, which is published by the Bureau of
Labor Statistics, is a measure of the average change
over time in the prices paid by urban consumers for
a market basket of goods and services. See https://
www.bls.gov/cpi/.
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measures of inflation across the
economy reflected in the CPI since
1994. The agencies invited comment on
the proposed level for the residential
real estate appraisal threshold.
The agencies received a number of
comments agreeing that the proposed
threshold level would be justified by
changes in real estate prices, inflation,
and the data presented by the agencies
in the proposal. Other commenters
supporting a threshold increase
supported a higher threshold, such as
$500,000. These commenters generally
asserted that doing so would be more
consistent with the data presented.
Some commenters also cited
consistency with the CRE appraisal
threshold as a justification for
increasing the residential real estate
threshold to $500,000. One commenter
supporting a higher threshold
questioned why the agencies did not
adjust from the lowest point in the most
recent cycle to account for price
appreciation up to a more recent date,
as was done in the CRE rulemaking.
Several commenters supportive of
increasing the threshold recommended
that the agencies either commit to
adjusting the threshold periodically, or
automatically adjust the threshold
periodically, to reflect changes in
housing values, market conditions or
inflation.
Some commenters opposing the
increase asserted that inflationary
changes are inadequate justifications for
increasing the appraisal threshold.
Some opposing commenters suggested
the agencies should either maintain the
current $250,000 threshold or lower the
threshold, with suggested ranges from
$100,000 or under to $275,000. Some
commenters suggested eliminating the
residential appraisal threshold
exemption entirely and requiring
appraisals for all residential real estate
transactions. A few commenters
suggested lower thresholds and that
transactions under the current and
proposed thresholds often pose risk to
financial institutions and to consumers.
Some of these commenters asserted that
many transactions involving defaults or
foreclosures are transactions below
$400,000.
Some commenters asserted that the
threshold should vary based on market
values in specific geographic areas, and
that a national threshold level is
inappropriate given differences in
property values across the country.
Some commenters suggested doing so
by basing the threshold on the GSE
conforming loan limits for specific
geographic areas. Several commenters
asserted that inflationary measures such
as the CPI are inappropriate measures
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on which to base the threshold because
they are not accurate indicators of
housing prices. One of these
commenters suggested that the
threshold be based on wage growth and
housing affordability. Two commenters
asserted that adjusting the $250,000
threshold based on changes in prices
would be inappropriate because that
level was not itself the result of an
inflation adjustment and was either
arbitrary or improper.
After carefully considering the
comments received, and for the reasons
discussed previously, the agencies have
decided to increase the residential real
estate appraisal threshold to $400,000,
as proposed. Increasing the appraisal
threshold for residential real estate
transactions to $400,000 approximates
more recent house prices and provides
an inflation adjustment to a threshold
that has not been increased since 1994.
The agencies based the beginning point
for this analysis on $250,000 because, as
discussed below, supervisory
experience with the $250,000 threshold
indicates that this threshold level did
not threaten the safety and soundness of
financial institutions.
The agencies acknowledge that the
data presented indicates that a house
sold in 1994 would sell for higher than
$400,000 today; however, the agencies
believe the more conservative approach
is appropriate. Setting the threshold
level to the low point of the most recent
cycle takes into consideration potential
price fluctuations to which financial
institutions that engage in residential
real estate lending could be exposed.
This approach also considers that a high
percentage of residential real estate
transactions is already captured by the
existing residential real estate threshold,
as reflected below in Table 2.
The agencies also concluded that
automatic adjustments to the threshold
or agency commitments to set timetables
for future threshold increases would not
be appropriate. The agencies already
periodically review their regulations to
identify outdated or unnecessary
regulatory requirements, such as
through the EGRPRA process, and can
consider any comments concerning the
thresholds through that process. In
addition, the agencies are required by
Title XI to weigh safety and soundness
implications regarding any proposed
threshold increase and obtain CFPB
concurrence. The other alternative
proposals suggested, such as varying the
threshold based on local housing prices
or wages, would add unnecessary
regulatory burden and complexity by
introducing numerous threshold levels
across the country.
3. Safety and Soundness
Considerations for Raising the
Residential Real Estate. Threshold.
Under Title XI, the agencies may set a
threshold at or below which a Title XI
appraisal is not required if they
determine in writing that such a
threshold level does not pose a threat to
the safety and soundness of financial
institutions.36 In the proposal, the
agencies preliminarily determined that
the proposed threshold level for
residential real estate transactions
would not pose a threat to the safety and
soundness of financial institutions. The
preliminary determination was based on
supervisory experience regarding causes
of losses at financial institutions,
analysis of available Home Mortgage
Disclosure Act (HMDA) data, and the
fact that evaluations would be required
for transactions below the proposed
threshold.37 The agencies invited
comment on their preliminary finding
that the proposed threshold would not
pose a threat to the safety and
soundness of financial institutions, as
well as the data used to support the
finding. After taking into account the
comments, discussed below, and
analyzing a range of data and
information, the agencies have
determined that the threshold level of
$400,000 for residential real estate
transactions does not represent a threat
to the safety and soundness of financial
institutions.
Agency staff used HMDA data to
estimate the number and dollar volume
of institutions’ residential real estate
transactions that would be affected by
the increased threshold. Table 2 below
shows the number and dollar volume of
transactions in 2017 that: (i) Would
have been exempted under the current
threshold; (ii) would be newly
exempted under the proposed threshold
increase; (iii) in total would be
exempted as a result of the proposed
threshold increase; and (iv) would not
be exempted following the proposed
threshold increase. The data are limited
to first-lien, single-family mortgage
originations 38 on residential properties
by FDIC-insured institutions and
affiliated institutions that are not sold to
the GSEs or otherwise insured or
guaranteed by a U.S. government agency
(‘‘regulated transactions’’).39
TABLE 2—2017 HMDA 40
Exempted by
current
threshold of
$250,000
Regulated
transactions by transaction amount
Number of Transactions ..........................................................
% of Total ................................................................................
Dollar Volume ($billions) ..........................................................
% of Total ................................................................................
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The 2017 HMDA data suggests that
the $250,000 threshold currently
exempts approximately 20 percent of
the total dollar volume of regulated
transactions. Raising the threshold to
36 12
U.S.C. 3341(b).
FR at 63116–63119.
38 Single-family properties include 1-to-4 family
and manufactured housing property types.
39 Transactions originated by regulated
institutions but sold to the GSEs or otherwise
37 83
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Newly exempted
by proposed
increase to
$400,000
750,000
56%
96
20%
Total exempted
by proposed
increase to
$400,000
214,000
16%
68
14%
965,000
72%
164
35%
Total not
exempted by
proposed
increase to
$400,000
379,000
28%
305
65%
$400,000 will exempt an additional
estimated 14 percent of the dollar
volume, thus increasing the share of the
dollar volume of regulated transactions
that are exempt to approximately 35
percent.
The agencies reviewed HMDA data to
measure the percent of regulated
transactions exempted in 1994 when the
insured or guaranteed by a U.S. government agency
are separately exempted from the agencies’
appraisal requirement. See OCC: 12 CFR 34.43(a)(9);
Board: 12 CFR 225.63(a)(9); FDIC: 12 CFR
323.3(a)(9). As described in the proposal, the
214,000 additional exempted transactions represent
only three percent of total HMDA originations in
2017 and, as also reflected in Table 2, 16 percent
of regulated transactions.
40 Numbers and dollar volumes are based on 2017
HMDA data. Originations with loan amounts greater
than $20 million are excluded. Subtotals may not
add to totals due to rounding.
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threshold was raised from $100,000 to
$250,000 as compared to raising the
threshold from $250,000 to $400,000.
The data show that increasing the
threshold from $100,000 to $250,000 in
1994 resulted in an estimated 77 percent
of the total dollar volume of regulated
transactions being exempt.41 By
comparison, as referenced above in
Table 2, 2017 HMDA data indicates that
increasing the threshold from $250,000
to $400,000 will result in an estimated
35 percent of the total dollar volume of
regulated transactions being exempt. As
stated in the proposal, the threshold
increase will exempt a much smaller
percentage of regulated transactions by
dollar volume.
In the proposal, the agencies
requested comment on whether the
proposed level of $400,000 for the
threshold would be appropriate from a
safety and soundness perspective, and
on what sources of data would be
appropriate for the safety and soundness
analysis. In general, commenters who
supported the proposed increase in the
threshold viewed the data presented in
the proposed rule as supporting the
increase, while commenters opposed to
the increase found the data insufficient.
A number of commenters noted that
the scope of the threshold had
decreased significantly since it was
established in 1994 due to inflation in
home values. As such, they argued that
an increase in the threshold would be
justified to align the threshold with its
1994 scope. Other commenters
expressed concern that the proposed
threshold level would exempt too high
a percentage of residential transactions
from the protections provided by
appraisals. These commenters focused
on the percentage of residential
transactions that would be affected,
either on a national basis or based on
specific geographic areas. Many such
commenters cited data indicating that
41 In both the 1994 and 2017 HMDA analyses, the
agencies excluded transactions originated by
nonbanks or transactions sold to the GSEs or
otherwise insured or guaranteed by a U.S.
government agency because those transactions are
already subject to other exemptions in the appraisal
regulations. When discussing the impact of the
threshold increase from $100,000 to $250,000, the
preamble to the 1994 rule noted that information
from the National Association of Realtors, the
Census Bureau, and the Department of Housing and
Urban Development indicated that 85 percent of the
dollar volume of mortgages financing new homes
and 82 percent of the volume of mortgages
financing purchases of existing homes would fall
below the $250,000 threshold. See 59 FR at 29486.
The agencies reviewed the data used in 1994 and
determined that the information reviewed by the
agencies did not appear to exclude transactions
originated by nonbanks or transactions sold to the
GSEs or otherwise insured or guaranteed by a U.S.
government agency, thus, necessitating the
additional analysis.
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the proposed threshold of $400,000 is
well above median home prices
nationally and would exempt a large
majority of residential transactions in
specific areas. One commenter indicated
that only 17 metropolitan statistical
areas have a median sales price for
single-family homes that exceeds
$400,000. Several commenters cited to
sources of data that indicated lower
median home prices than the sources
cited in the proposal.
A number of commenters requested
that the agencies conduct alternative
analyses and pointed out that the
agencies did not analyze the local or
regional markets affected by the increase
nor the impact on particular borrowers
or communities. Some commenters
called for further study of home prices
by region and metro area and for the
agencies to show which markets would
be most affected by the threshold
increase. In particular, commenters
requested that the agencies analyze the
effect of the proposed increase in the
threshold in dynamic markets and
compare its effect in urban versus rural
areas. One commenter indicated that
HMDA data are the wrong source of
information for evaluating the impact of
the threshold on rural areas, given that
certain low volume originators in rural
areas are not required to report HMDA
data.
Based on the agencies’ supervisory
experience and analysis, as discussed in
more detail below, the current threshold
has not negatively impacted safety and
soundness, and the agencies do not
believe raising the threshold to $400,000
will present a safety and soundness
concern. Although several commenters
were concerned that the agencies had
not analyzed the effects on local markets
or particular communities, the agencies’
supervisory experience with the current
threshold since 1994 suggests that this
incremental increase will not negatively
affect safety and soundness on the local
or national level based on loss rates for
residential real estate loans as discussed
below and observations during
examinations.
Moreover, the 2017 HMDA data also
suggests that, though the impact on the
total dollar volume of exempted
transactions would be somewhat
limited, the number of exempted
transactions would increase materially
and provide cost savings and regulatory
burden relief for financial institutions.
As shown in table 2 above, the agencies
estimate that the increase would exempt
an additional 214,000 transactions and
thus raise the share of the number of
regulated transactions that would be
exempt from 56 percent to 72 percent.
This analysis of the 2017 HMDA data
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53585
indicates that the increased threshold
will affect a low aggregate dollar volume
but a material number of transactions,
suggesting the potential for financial
savings and burden relief with limited
additional risk.42
Further, as covered in the proposal,
the 2017 HMDA data show that the rule
would provide significant burden relief
in rural areas. The agencies estimate
that increasing the appraisal threshold
to $400,000 would potentially increase
the share of exempted transactions from
82 percent to 91 percent of the number,
and from 43 percent to 58 percent of the
dollar volume, of regulated transactions
that were secured by residential
property located in a rural area.43
a. Use of Evaluations. The Title XI
appraisal regulations require regulated
institutions to obtain evaluations for
several categories of real estate-related
financial transactions that the agencies
have determined do not require a Title
XI appraisal, including transactions at
or below the current thresholds.44
Accordingly, the agencies proposed to
require that regulated institutions
entering into residential real estate
transactions at or below the proposed
residential real estate appraisal
threshold obtain evaluations that are
consistent with safe and sound banking
practices unless the institution chooses
to obtain an appraisal for such
transactions. The agencies requested
comment on use of evaluations instead
of appraisals for residential real estate
transactions.
In general, commenters who
supported the increase in the threshold
42 As noted above, in estimating the impact of the
threshold increase on institutions, the agencies
attempted to exclude from the HMDA data analysis
residential transactions that were already exempt
from the appraisal regulations, including those sold
to the GSEs. The agencies recognize that the
analysis may not have excluded all GSE-related
transactions exempted from the appraisal
regulations, as the regulations exempt not just
transactions sold to the GSEs, but all transactions
that qualify for sale to a GSE or U.S. government
agency. OCC: 12 CFR 34.43(a)(10)(i); Board: 12 CFR
225.63(a)(10)(i); FDIC: 12 CFR 323.3(a)(10)(i). The
agencies do not currently have the ability to
accurately determine which transactions not sold to
a GSE or U.S. government agency actually qualified
for sale. Even assuming that a number of
transactions fall into this category, the agencies
believe the threshold increase will produce burden
relief for regulated institutions.
43 For the purposes of the HMDA analysis, a
property is considered to be located in a ‘‘rural’’
area if it is in a county that is neither in a
metropolitan statistical area nor in a micropolitan
statistical area that is adjacent to a metropolitan
statistical area, based on 2013 Urban Influence
Codes (UIC) published by the United States
Department of Agriculture. Any loans from Census
tracts that are missing geographical identifiers or
undefined in the 2013 UIC have been excluded
from the analysis of burden relief in rural areas.
44 See OCC: 12 CFR 34.43(b); Board: 12 CFR
225.63(b); FDIC: 12 CFR 323.3(b).
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also viewed evaluations as providing
sufficient valuation information and
analysis for financial institutions and
consumers to engage in safe and sound
residential real estate transactions.
Those opposed to the increase in the
threshold generally argued that
evaluations would not provide enough
support for these transactions and
would pose a threat to financial
institutions and consumers.
Commenters in support of the
proposal asserted that there would be
little impact to safety and soundness by
relying on evaluations instead of
appraisals. Some financial institutions
commented that they had found
evaluations to generally contain
sufficient information and analysis to be
the basis for lending decisions. Several
commenters noted that financial
institutions are only allowed to use
evaluations when doing so is consistent
with safety and soundness and that the
institution always retains the discretion
to seek an appraisal. Some of these
commenters also asserted that they have
adequate programs and policies to
ensure that evaluations are used
prudently.
Many commenters opined that
appraisals are more accurate and
reliable sources of valuation information
than evaluations because they are done
by professionals with strict training
requirements and who are subject to
state credentialing and disciplinary
review for poor quality work. In
contrast, commenters noted there are no
standardized requirements for those
who perform evaluations. Commenters
also noted that appraisals are required
to follow established requirements as
provided by USPAP, which guarantees
a certain level of information and
quality, whereas evaluations lack
standard requirements for information
or structure. Some of these commenters
expressed particular concern about
homes in rural areas that tend to have
unusual features or fewer comparable
properties and thus are harder to value.
Some commenters also raised concerns
about the use of evaluations on homes
that may need repairs, suggesting that
evaluations may not uncover these
issues.
Many commenters argued that
appraisers are the only independent
third party in a real estate transaction
and that only appraisers’ opinions are
independent and unbiased. These
commenters represented that those who
perform evaluations often do not have
the same level of independence from the
transaction. Some commenters asserted
that appraisals provide more accuracy
than evaluations because they include a
physical inspection of the property. In
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contrast, some commenters who were
providers of evaluation services
indicated that they typically include a
physical inspection of the property in
their product. A few commenters
suggested that evaluations are subject to
less regulatory scrutiny than appraisals.
Commenters also opined about the
use of automated valuation models
(AVMs) in the performance of
evaluations. Many commenters felt that
AVMs are unreliable and expressed
concern that raising the threshold could
lead to greater reliance on AVMs. Some
of these commenters asserted that it
would be inappropriate for the agencies
to expand the residential real estate
transaction threshold before issuing
quality control standards for AVMs, as
required by Title XI.45 In contrast, some
commenters believed that AVMs could
provide valuable information, and that
improvements in technology and greater
availability of information has improved
the quality of evaluations. One
commenter indicated that AVMs are
more predictive of default than
appraisals. Another indicated that
evaluations based on AVMs are
generally more objective than appraisals
because they are not skewed by
knowledge of the contract price.
The agencies are adopting this aspect
of the final rule without change. As is
the case currently for transactions under
the threshold exemptions, evaluations
will be required for transactions
exempted by the new threshold that do
not receive appraisals.46 Although the
agencies recognize, as many
commenters noted, that evaluations are
not subject to the same uniform
standards as appraisals in terms of
structure and content or the preparer’s
training and credentialing requirements,
evaluations must be consistent with safe
and sound banking practices.47 The
agencies have provided the Evaluation
Guidance to assist institutions in
complying with this requirement.48 The
Evaluation Guidance provides
information to help ensure that
evaluations provide a credible estimate
of the market value of the property
pledged as collateral for the loan. For
instance, the Evaluation Guidance states
that, generally, evaluations should be
performed by persons who are
45 12
U.S.C. 3354(b).
evaluation is not necessary if the
transaction qualifies both for the new threshold and
for another exemption that does not require an
evaluation.
47 OCC: 12 CFR 34.43(b); Board: 12 CFR
225.63(b); FDIC: 12 CFR 323.3(b).
48 See supra notes 23 and 24. See also Frequently
Asked Questions on the Appraisal Regulations and
the Interagency Appraisal and Evaluation
Guidelines (October 16, 2018), OCC Bulletin 2018–
39; Board SR Letter 18–9; FDIC FIL–62–2018.
46 An
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competent, independent of the
transaction, and have the relevant
experience and knowledge of the
market, location, and type of real
property being valued.
Although some commenters
expressed concern that raising the
threshold would cause financial
institutions to feel pressured to use
evaluations whenever possible in order
to remain competitive, data analyzed by
the agencies suggests that financial
institutions are generally using caution
when determining when evaluations are
suitable for a given transaction. A fiveyear review of supervisory information
on the use of appraisals and evaluations
by large financial institutions found
larger lenders obtained appraisals on 74
percent of portfolio residential real
estate originations at or below the
current $250,000 threshold.49 These
data suggest that financial institutions
are often exercising discretion in
determining when to use evaluations
and are not automatically using
evaluations whenever permitted.
Further, individuals performing
evaluations are expected to be
independent of the transaction. The
agencies note that many evaluations of
residential properties that are a
consumer’s principal dwelling are
covered by the valuation independence
requirements of section 1472 of the
Dodd-Frank Act and its implementing
regulation.50 Among other
requirements, this regulation prohibits
conflicts of interest and coercion in the
preparation of any opinion of value and
prohibits preparers of opinions of value
from materially misrepresenting the
value of the property.51 In addition, the
agencies have issued guidance to help
institutions ensure that they have the
proper controls to fulfill independence
expectations.52
Regarding concerns about AVM use,
the agencies note that, while financial
institutions may use AVMs in preparing
evaluations, any evaluation in which
they are used must be consistent with
safe and sound practices. The agencies
have published guidance to help ensure
that financial institutions’ use of AVMs
is consistent with this requirement.53
49 Y–14 data. Bank holding companies and
intermediate holding companies with $50 billion or
more in total consolidated assets are required to
submit a quarterly Capital Assessments and Stress
Testing (FR Y–14M) reports and schedules, which
collect granular data on institutions’ various asset
classes, including residential real estate loans.
50 15 U.S.C. 1631; 12 CFR 226.42.
51 12 CFR 226.42.
52 Guidelines, Section V.
53 See Supervisory Guidance on Model Risk
Management (April 4, 2011), OCC Bulletin 2011–12;
Board SR Letter 11–7; FDIC FIL–22–2017 (adopted
by the FDIC in 2017 with technical and conforming
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b. Analysis of Loss Rates. When
considering the threshold increase’s
potential impact on safety and
soundness, the agencies considered a
loss analysis of aggregate net charge-off
rates for residential real estate loans
after the last increase in the appraisal
threshold in 1994. The agencies’
analysis of the charge-off rates offered
no evidence that increasing the
appraisal threshold to $400,000 for
residential real estate transactions
would materially increase the risk of
loss to financial institutions. The
agencies requested comment on this
analysis of the charge-off data.
Several commenters noted that the
agencies’ loss analysis did not reflect
any significant change in the loss
history for residential real estate
transactions after the threshold was
increased from $100,000 to $250,000 in
1994. Other commenters requested
alternative analyses of charge-off rates,
specifically data on foreclosures and
losses based on loan amount, as
opposed to aggregate net charge-off data.
These commenters asserted that the
aggregate data could include loans not
eligible for the exemption or loans
exempted on other grounds. A few
commenters recommended that the
agencies compare loan-level foreclosure
rates for their use of appraisals and
evaluations to determine if a correlation
exists between the use of evaluations
and foreclosures.
As noted in the proposal, a historical
review of loss data demonstrates that
the net charge-off rate for residential
real estate transactions did not increase
after the appraisal threshold was raised
from $100,000 to $250,000 in June 1994,
indicating the 1994 threshold increase
did not have a negative impact on the
safety and soundness of regulated
institutions. The historical loss
information in the Reports of Condition
and Income (Call Reports) also shows
that the net charge-off rate for
residential real estate transactions
remained relatively unchanged after the
increase in the threshold in 1994
through year-end 2007. While the net
charge-off rate for residential real estate
transactions escalated significantly from
2008 through 2013 during the financial
crisis, the agencies primarily attribute
this to weak underwriting standards in
the lead up to the crisis.
changes)); Guidelines, Appendix B. The agencies
note that many commenters suggested that
appraisers, unlike those who perform evaluations,
cannot be employees of the financial institution
making the loan. However, appraisers are permitted
to be employees of the lender provided that the
independence requirements in the agencies’ rules
are met. OCC: 12 CFR 34.45(a); Board: 12 CFR
225.65(a); FDIC: 12 CFR 323.5(a).
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Based on the net charge-off data,
which suggest that the increase in the
appraisal threshold in 1994 did not have
a material effect on the loss experience
associated with residential real estate
loans, the agencies believe the increase
to $400,000 will not lead to increases in
charge-off rates.
c. Supervisory Experience. In addition
to analyzing net charge-off rates for
residential real estate transactions, the
agencies also considered their own
supervisory experience with appraisals
and evaluations. The agencies’
experience in supervising appraisal and
evaluation programs and practices since
the enactment of FIRREA indicates that
increasing the threshold would not
threaten the safety and soundness of
financial institutions. The agencies have
found that both appraisals and
evaluations prepared properly can be
credible tools to support real estate
lending decisions.
As part of the agencies’ consideration
of the safety and soundness
implications of the proposed threshold
increased, the agencies reviewed safety
and soundness Reports of Examination.
Regarding examination experience, the
agencies reviewed Reports of
Examination of their respective
supervised institutions from January
2017 to December 2018 for examiner
findings regarding appraisals and
evaluations.54 Both appraisals and
evaluations were cited in examiner
findings, however, the overall amount
and nature of valuation-related
examination findings support a
conclusion that the proposed threshold
increase would not threaten the safety
and soundness of financial institutions.
The agencies have a long history with
evaluations as an alternative valuation
tool. The agencies have implemented
examination procedures to frame their
review of an institution’s valuation
practices and the sufficiency of the
supporting information in evaluations,
as appropriate for the size and nature of
the institution’s residential real estate
lending activities. The agencies have
used these procedures to assess the use
of evaluations and ensure that they are
prepared according to safety and
soundness principles and will continue
to examine institutions’ evaluation
policies and practices. The fact that
evaluations, which will continue to be
subject to supervisory oversight, will be
required for transactions at or below the
increased threshold supports the
conclusion that increasing the
54 The Reports of Examination data reviewed
related to both commercial and residential real
estate lending valuations and valuation programs of
supervised institutions.
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residential real estate appraisal
threshold to $400,000 will not pose a
threat to safety and soundness.
d. Additional Protections. In
proposing to raise the residential real
estate appraisal threshold, the agencies
noted that institutions may elect to
obtain appraisals for transactions that
fall under the threshold, even though an
evaluation would also be permitted. In
the supervisory experience of the
agencies, a financial institution may
choose to obtain appraisals for exempt
transactions based on the risks
associated with a particular transaction
or to preserve the flexibility to sell
residential loans in the secondary
market. The agencies requested
comment on the question of whether
and when institutions use appraisals
even if not required to do so by the
appraisal regulations.
Several commenters indicated that
institutions follow risk-based internal
policies to determine whether to obtain
an appraisal, including for transactions
that fall under one of the exemptions
from the appraisal regulations. One
commenter provided survey data
suggesting that the majority of lenders
in one state often obtain appraisals for
loans that fall below the current
threshold. On the other hand, some
commenters asserted that lenders would
feel competitive pressure to use more
evaluations if the threshold were raised
and that the agencies lacked data on
how often lenders use evaluations when
permitted.
The agencies expect regulated
institutions to continue using a riskfocused approach when considering
whether to order an appraisal for
transactions that fall below the
threshold. The Guidelines encourage
institutions to establish appropriate
policies and procedures for determining
when to obtain an appraisal in
connection with transactions for which
an evaluation is permitted.55 Similarly,
the Evaluations Advisory suggests it
would be prudent to obtain an appraisal
rather than an evaluation when an
institution’s portfolio risk increases or
for higher-risk transactions.56 As
detailed above, data reviewed by the
agencies found that lenders often choose
to obtain appraisals, even when
evaluations are permitted for
transactions at or below the current
$250,000 threshold.
In addition to the additional safety
and soundness protection provided by
the risk-based approach to valuations,
the agencies note that each agency has
the ability under the appraisal
55 Guidelines,
56 Evaluations
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Section XI.
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regulations to require an appraisal
whenever it is necessary to address
safety and soundness concerns.57 This
authority allows the agencies to require
appraisals for exempt transactions, for
example, where an institution
demonstrates weakness in the safe and
sound use of evaluations for exempt
transactions.
4. Consumer Protection
Considerations. In proposing the
increase in the appraisal threshold for
residential transactions, the agencies
noted that evaluations can provide
consumer protections. The agencies
noted that evaluations have long been
required for below-threshold
transactions; must be consistent with
safe and sound banking practices; 58 and
should contain sufficient information
and analysis to support the decision to
engage in the transaction,59 although
they may be less structured than
appraisals. In the proposal, the agencies
also highlighted that the Guidelines and
the Evaluations Advisory 60 provide that
individuals preparing evaluations
should be qualified, competent, and
independent of the transaction and the
loan production function of the
institution.61 For these reasons, the
agencies posited that evaluations could
provide a level of consumer protection
for transactions at or below the
proposed appraisal threshold.
The agencies requested comment
generally regarding any implications of
the proposed rule on consumer
protection. In addition, the agencies
asked commenters for specific
information about the potential cost and
time savings to consumers that may
result from the increased use of
evaluations versus appraisals and
whether information in evaluations
would be sufficiently clear to enable the
consumer to make an informed
decision. The agencies also requested
comment on the availability of valuation
information to consumers through
public sources and whether information
from those sources help provide
consumers with additional protection in
residential transactions. Finally, the
agencies requested comment on
challenges, if any, that financial
institutions may have in meeting the
requirements and standards for
independence for evaluations prepared
by internal staff or external third parties.
In general, commenters that
supported the proposed threshold and
57 OCC: 12 CFR 34.43(c); Board: 12 CFR 225.63(c);
FDIC: 12 CFR 323.3(c).
58 OCC: 12 CFR 34.43(b); Board: 12 CFR
225.63(b); FDIC: 12 CFR 323.3(b).
59 Guidelines, Section XIII.
60 Evaluations Advisory at 2.
61 Guidelines, Section V.
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commented on consumer protection
issues indicated that evaluations
provide consumers with sufficient
protection in a residential real estate
transaction. Many commenters who
opposed the increased threshold
indicated that evaluations are
inadequate substitutes for appraisals
and therefore an increased threshold
would pose a threat to consumer
protection.
Many commenters opposed to an
increase in the threshold argued that
appraisers are the only objective and
unbiased party in a transaction and
bring checks, balances, and oversight to
the mortgage lending process. Some of
these commenters based this assertion
on the legal requirement for appraiser
independence and the professional
standards to which appraisers are held.
These commenters also argued that
individuals preparing evaluations are
often not disinterested third parties
because they are employed by the
lender. Several commenters asserted
that evaluations are usually performed
by individuals who, unlike appraisers,
are not credentialed valuation
professionals subject to standardized
training and experience requirements.
A number of commenters suggested
that inadequate property valuations and
undue influence on appraisers
contributed to property overvaluation
during the most recent financial crisis,
with adverse impacts for consumers.
They indicated that the Dodd-Frank Act
strengthened protections regarding
appraisals, including federal oversight
provisions, and that a number of these
protections do not apply to evaluations
that are not conducted by appraisers. On
the other hand, commenters who
supported the proposed increase in the
threshold argued that evaluations are a
safe alternative to appraisals, with some
noting that individuals who prepare
evaluations are also required to be
independent under federal law, as
discussed further below.
Many commenters who opposed a
threshold increase on consumer
protection grounds asserted that
evaluations are not subject to uniform
standards and are not a meaningful
substitute for an appraisal that must be
conducted in compliance with USPAP.
A number of commenters questioned
the reliability of valuation methods
other than appraisals, particularly
AVMs and evaluations. Other
commenters suggested that the proposal
would cause consumers to lose the
benefit of appraisers performing a
physical inspection and an analysis of
specific property features, including
property maintenance and repair issues
that can affect the property value.
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Some commenters in favor of a
threshold increase asserted that
evaluations protect consumers by
helping to ensure the property’s value
supports the purchase price. In this
regard, one commenter indicated that
evaluations must be consistent with safe
and sound banking practices and,
according to agency guidelines, they
should provide supporting information
and an estimate of market value. One
commenter in favor of a threshold
increase raised concerns that appraisals
may provide a false sense of protection
to consumers who incorrectly assume
their property can be sold for the
appraised market value if they
encounter financial difficulties. A few
commenters that supported an increase
argued that neither appraisals nor
evaluations are consumer protection
tools for homebuyers, asserting that both
are received after prospective buyers
have entered into a purchase and sale
agreement (PSA) to purchase the
residential property at a specified price.
Some commenters that opposed an
increase in the residential threshold
argued that, unlike for faulty appraisals,
consumers do not have any recourse for
faulty evaluations. Some commenters
noted that consumers may file an
official complaint with a state’s
appraiser board to address an inaccurate
appraisal, which is not an option for
addressing an inaccurate evaluation
performed by a non-appraiser. In
addition, one commenter questioned
whether evaluations could be used to
renegotiate or cancel PSAs under an
appraisal contingency clause.
A number of commenters opposed to
a threshold increase asserted that
appraisals are easier for consumers to
understand than evaluations. Some
commenters noted the standardized
requirements of a USPAP-compliant
appraisal report provide information in
a consistent manner and ensure that the
user has enough information to
understand the conclusions in the
report. Some commenters opposed to an
increase raised concerns that free online
valuation information and tools may be
flawed due to, for example, their
reliance on public records with data
entry errors.
One commenter in favor of an
increased threshold indicated that
evaluations are often easier for
consumers to read and understand,
asserting that they typically explain the
comparisons with other recent sales in
‘‘plain English.’’ Some commenters
generally in favor of an increase noted
that consumers have access to a wide
array of readily available valuation
information, and may also voluntarily
obtain appraisals.
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Numerous commenters opposed to a
threshold increase asserted that an
increase to the appraisal threshold
would have a disproportionately
negative impact on more at-risk
consumers, such as low-income
individuals, members of certain
minority groups, or first-time
homebuyers, because at-risk borrowers
are more likely to purchase homes
priced in lower ranges and, therefore,
are more likely to enter into residential
transactions without the benefit of an
appraisal. Some commenters asserted
that first-time homebuyers are among
the consumers least able to manage
financial risk, and are most in need of
consumer protections. According to
several of these commenters, this is
because first-time homebuyers typically
use a substantial portion of their savings
for the down payment or obtain
mortgages with high loan-to-value
ratios.
In adopting the threshold increase for
residential mortgage loans as proposed,
the agencies appreciate and have
considered the consumer protection
issues and concerns raised by the
commenters. Based on their supervisory
experience with evaluations since 1994,
the agencies have found that both
appraisals and evaluations can protect
consumers by facilitating the informed
use of credit and helping to ensure the
estimated value of the property supports
the purchase price and mortgage
amount. Further, the agencies consulted
with the CFPB throughout the
development of the proposal and final
rule and, as required by Title XI,62 have
received concurrence from the CFPB
that the residential real estate appraisal
threshold being adopted provides
reasonable protection for consumers
who purchase 1–4 unit single-family
residences.
In response to the comments
concerning valuation independence, the
agencies have long recognized that
evaluations prepared by competent and
independent preparers can provide
credible valuation information for
residential real estate transactions. In
addition, the Dodd-Frank Act contained
provisions that addressed independence
requirements applicable to ‘‘valuations’’
for consumer-purpose mortgages
secured by a consumer’s principal
dwelling. The Valuation Independence
62 In the Dodd-Frank Act, Congress amended the
threshold provision to require ‘‘concurrence from
the Bureau of Consumer Financial Protection that
such threshold level [established by the agencies]
provides reasonable protection for consumers who
purchase 1–4 unit single-family residences.’’ 12
U.S.C. 3341(b).
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Rule,63 which implements the DoddFrank Act independence provisions,
states that ‘‘no covered person shall or
shall attempt to directly or indirectly
cause the value assigned to the
consumer’s principal dwelling to be
based on any factor other than the
independent judgment of a person that
prepares valuations, through coercion,
extortion, inducement, bribery, or
intimidation of, compensation or
instruction to, or collusion with a
person that prepares valuations or
performs valuation management
functions.’’ 64 Additionally, the rule
prohibits mischaracterizations of
property value and conflicts of interest
for persons preparing valuations or
performing valuation management
functions.65 These independence
requirements extend to appraisals,
evaluations, and other estimations of
value and encompass not only
individuals preparing such valuations
but also those performing valuation
management functions.66 The failure to
comply with the independence
requirements in the Valuation
Independence Rule can result in civil
liability.67
In response to comments concerning
on-site inspections of real estate, the
agencies note that USPAP does not
require appraisers to inspect the subject
property and that some appraisers use
third parties to conduct inspections. As
such, not all appraisals include
inspections. As with appraisals, the
agencies note that when financial
institutions obtain an evaluation, the
evaluation will often include a physical
property inspection, which can provide
a prospective buyer with relevant
information about a property’s
condition. Evaluations, like appraisals,
should contain sufficient information
63 See Interim Final Rule for Valuation
Independence, 75 FR 66554 (October 28, 2010) and
75 FR 80675 (December 23, 2010), Board: 12 CFR
226.42; CFPB: 12 CFR 1026.42 (implementing
valuation independence amendments to the Truth
in Lending Act (TILA), 15 U.S.C. 1601 et seq., by
Dodd-Frank Act section 1472, 15 U.S.C. 1639e).
64 Board: 12 CFR 226.42(c)(1); CFPB: 12 CFR
1026.42(c)(1).
65 See Board: 12 CFR 226.42(c)(2), (d); CFPB: 12
CFR 1026.42(c)(2), (d).
66 Valuation management functions include:
‘‘Recruiting, selecting, or retaining a person to
prepare a valuation’’; ‘‘contracting with or
employing a person to prepare a valuation’’;
‘‘managing or overseeing the process of preparing
a valuation, including by providing administrative
services such as receiving orders for and receiving
a valuation, submitting a completed valuation to
creditors and underwriters, collecting fees from
creditors and underwriters for services provided in
connection with a valuation, and compensating a
person that prepares valuations’’; and ‘‘reviewing or
verifying the work of a person that prepares
valuations.’’ 12 CFR 1026.42(b)(4).
67 See 15 U.S.C. 1640.
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53589
and analysis to support the institution’s
decision to engage in a credit decision,
including information relating to the
actual physical condition and
characteristics of the property, as
discussed in the Guidelines.68 The
individual who is performing the
evaluation should determine whether a
physical property inspection is
necessary to support the property’s
value. Based on the agencies’
supervisory experience with appraisals
and evaluations since 1994, the agencies
believe that property inspections done
by appropriately trained individuals for
either appraisals or evaluations can
provide prospective buyers with
detailed information regarding a
property’s condition and features, may
provide consumer protection, and can
help ensure that appraisals or
evaluations are consistent with safe and
sound banking practices.
The agencies recognize that some
consumers may seek to include
appraisal contingency clauses in PSAs.
However, the threshold exemption does
not affect the ability to enter into these
arrangements. One commenter
suggested that evaluations may not
constitute appraisals for purposes of
appraisal contingency clauses and may
cause confusion to consumers opting for
these contingencies. The agencies are
not aware of any such issues regarding
the current threshold, which already
exempts a significant portion of
residential real estate transactions. In
this regard, the agencies do not have
reason to believe that the incremental
increase in exempted transactions will
create consumer protection concerns
related to PSAs. With respect to
consumer recourse for faulty
evaluations, available information from
entities that use or provide evaluations
indicates that lenders often order
appraisals when disputes arise with
evaluations, so the agencies do not
expect the proposal to materially affect
options for consumer recourse.
Regarding the impact of the threshold
increase on consumers’ understanding
of and access to valuation information,
the agencies note that lenders must
provide a copy of all appraisals and
written valuations developed in
connection with an application for a
first-lien loan secured by a dwelling,69
which includes both appraisals and
evaluations. In addition, although all
sources of publicly available valuation
information might not always accurately
68 Guidelines,
Section XII.
12 CFR 1002.14, 78 FR 7216 (January 31,
2013) (implementing amendments to the Equal
Credit Opportunity Act (ECOA), 15 U.S.C. 1691 et
seq., by Dodd-Frank Act section 1474, 15 U.S.C.
1691(e)).
69 See
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reflect the market value of a particular
property, consumers can use a variety of
available information to learn more
about the availability of and the
potential range of values for properties
in a particular area or market. Moreover,
although limited in scope, the higherpriced mortgage loan rule (HPML
rule),70 as adopted by the agencies,
requires lenders for certain HPMLs
secured by a consumer’s principal
dwelling to obtain an appraisal—and in
some cases two appraisals—that include
an interior property visit, and provide
free copies to the consumer. The HPML
Rule applies to certain higher-risk
transactions. Thus, for a select group of
loans, the HPML Rule assures that the
information in an appraisal will be
available for some of the consumers
who might be more likely to fall into the
at-risk categories mentioned by
commenters as being most affected by
the threshold increase.
Finally, the agencies note that even
when the transaction amount is at or
below the threshold, the Guidelines 71
encourage regulated institutions to
establish policies and procedures for
obtaining Title XI appraisals when
necessary for risk management. As
discussed above, the FR Y–14M data
reviewed by the agencies found that
lenders included in the data obtained
appraisals on 74 percent of residential
real estate loans of $250,000 and below
that were held in portfolio. These
empirical data indicate that lenders
generally obtain appraisals for a
majority of residential real estate
transactions for which the agencies’
appraisal regulations permitted an
evaluation. These data are also
consistent with some commenters’
assertions that lenders would continue
to use a risk-based approach in
determining whether to obtain an
evaluation or an appraisal for a
particular transaction, regardless of the
threshold amount. Further, consumers
may voluntarily obtain appraisals
70 OCC: 12 CFR part 34, subpart G; Board: 12 CFR
226.43; FDIC (through adoption of CFPB rule): 12
CFR 1026.35(c). The FDIC adopted the HPML Rule
as published in the CFPB’s regulation. See 78 FR
10368–01, 10370 (December 26, 2013). Exemptions
from the requirements of the HPML Rule include,
among others, ‘‘qualified mortgages’’ under 15
U.S.C. 1639c (implemented by the CFPB at 12 CFR
1026.43); reverse mortgages subject to 12 CFR
1026.33; and certain refinancings. See OCC: 12 CFR
34.203(b); Board: 12 CFR 226.43(b); FDIC (through
adoption of CFPB rule): 12 CFR 1026.35(c)(2).
Exemptions from the requirement for two appraisals
for certain transactions include, among others,
extensions of credit that finance a consumer’s
acquisition of property located in a rural county, as
defined in 12 CFR 1026.35(b)(2)(iv)(A). See OCC: 12
CFR 34.203(d)(7)(H); Board: 12 CFR 226.43(d)(7)(H);
FDIC (through adoption of CFPB rule): 12 CFR
1026.35(c)(4)(vii)(H).
71 See Guidelines, Section XI.
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regardless of whether the regulated
institution is required to do so.
5. Reducing Burden Associated with
Appraisals. In proposing the increase in
the residential appraisal threshold, the
agencies considered that the increased
use of evaluations would likely reduce
the time and costs associated with
residential real estate transactions,
which in turn would reduce burden for
financial institutions and consumers.
The agencies invited comment on the
cost and time associated with
performing and reviewing evaluations
as compared to Title XI appraisals. The
agencies also invited comment on the
appropriateness of the data used in the
proposal and requested any suggestions
for alternative sources of data.
The agencies received a number of
comments indicating that the proposed
increase in the residential real estate
appraisal threshold would result in cost
and time savings for consumers and
regulated institutions. Several
commenters concurred with the
agencies’ cost estimates in the proposal.
One commenter indicated that
evaluation tools provide accurate
valuation information at approximately
half the cost of an appraisal. Another
commenter estimated that an evaluation
could cost between 20 and 50 percent of
the price of a comparable appraisal, and
that an evaluation can generally be
delivered in one to five days while an
appraisal may take between five and
twenty-one days. Another commenter
asserted that evaluations typically cost
about $100 less than appraisals. One
commenter noted that evaluations are
often performed by bank employees, in
which case the customer is not typically
charged for the service, and that when
the lender obtains an evaluation from a
third-party provider (as opposed to
using its own employee), borrowers may
still save approximately 50 percent.
Some commenters also asserted that the
proposed threshold increase would
reduce the time needed for appraisal
review. The agencies received several
comments from financial institutions,
financial institution trade associations,
and state regulators asserting that the
proposals would particularly reduce
delays and costs in rural areas that may
be experiencing a shortage of state
licensed or state certified appraisers.
Two of these commenters specifically
asserted that a broadly applicable
threshold increase to $400,000, rather
than the more limited rural residential
appraisal exemption, is appropriate
because it would provide additional
burden relief by eliminating
unnecessary qualifying criteria. One of
these commenters, a financial
institution trade association from a large
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state, asserted that the rural residential
appraisal exemption would not apply to
transactions in areas representing 86
percent of the state’s population, and
that the proposed threshold increase
thus would provide additional burden
relief in the state beyond what was
provided by the rural residential
appraisal exemption.
Other commenters questioned how
much relief the proposal would provide.
Some commenters noted the agencies’
acknowledgement that there is limited
information on the cost and time burden
of evaluations versus appraisals and
urged the agencies to obtain additional
data to quantify any expected savings.
Several commenters noted that the cost
of an appraisal is relatively small
compared to other financing costs in the
transaction such as the fees charged by
banks and brokers. Some of these
commenters also suggested that any cost
savings to consumers would be
outweighed by the financial harm that
could result from purchasing a home
without an estimate of value provided
by an appraiser. One commenter
indicated that evaluations may take
longer to review than appraisals.
Another argued that even if an appraisal
takes longer to review, the time
difference is not significant and would
not delay a loan closing. Some
commenters questioned the need for,
and appropriateness of, the proposed
threshold increase in light of the rural
residential appraisal exemption.
Several commenters challenged the
agencies use in the proposal of the
Department of Veterans Affairs (VA)
appraisal fee schedule as support for
their analysis of potential cost savings,
arguing that the $600 average cost noted
in the proposal based on the VA fee
schedule likely overstates the cost of
appraisals. One commenter noted the
VA’s underwriting requirements exceed
USPAP standards, which increases
costs. Some of these commenters cited
alternative sources for fee data,
including several state-specific studies.
One such commenter referred to a
survey showing that VA fees are higher
than the norm, indicating that the
median cost of an appraisal is $450,
with 89 percent of those surveyed
stating the typical cost of an appraisal
is below $600. This commenter also
questioned whether the cost and time to
receive an appraisal were burdensome,
as its survey reflected that appraisals
represented less than 0.2 percent of the
total transaction cost and that the
typical wait time for an appraisal in
2018 was only 7 days.
A number of commenters disputed
that there are appraiser shortages
warranting regulatory relief outside of
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rural areas, with some offering
supporting data from the Appraisal
Subcommittee of the Federal Financial
Institutions Examination Council and
the Appraisal Foundation. Several
commenters identified appraisal
management companies (AMCs) as a
significant source of unnecessary costs
and delays, and suggested that appraiser
shortages are due to the low appraisal
fees AMCs offer, resulting in appraisers
being unwilling to work for AMCs.
The agencies considered these
comments in evaluating the rule’s
potential impact. As discussed further
below, available data and analysis
indicate that, while there is limited
information available to compare the
cost and time savings related to
performing appraisals versus
evaluations, raising the residential
threshold, and the corresponding
increased use of evaluations, will lead
to some level of cost savings for
consumers and institutions. The
agencies also conclude that raising the
threshold is likely to reduce the time
needed to find appropriate personnel to
perform the valuation, particularly in
areas experiencing shortages of certified
or licensed appraisers.
As noted in the proposal, and
according to data submitted by
commenters, the cost of obtaining an
evaluation can be substantially less than
the cost of obtaining an appraisal, with
estimates ranging from evaluations
costing $100 less than the cost of an
appraisal or less than half (with one
estimate of 20 percent) of the cost of an
appraisal. The agencies acknowledge
the limitations in relying on the VA
appraisal fee schedule, which may
reflect appraisal fees that are higher
than average across the industry.
However, even if the average appraisal
cost is less than the $375 to $900 range
suggested in the proposal, the agencies
believe expanding the use of evaluations
will produce time and cost savings.
Some commenters indicated that, while
the cost of an appraisal is generally
passed on to the borrower, an evaluation
performed by in-house staff may be
provided at no cost to the borrower.
When a borrower pays for an evaluation
outsourced to a third-party, the cost may
still be significantly less than for a
comparable appraisal.
The agencies also note that regulated
institutions generally need less time to
review evaluations than Title XI
appraisals because the content of the
report can be less comprehensive than
an appraisal report. Institutions are
more likely to obtain an evaluation,
where permitted, for transactions with a
lower dollar value, that are less
complex, or that are subsequent to a
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previous transaction for which a Title XI
appraisal was obtained. As a result,
evaluations are often simpler and take
less time to review than appraisals.
Based on supervisory experience, the
agencies have previously estimated that,
on average, the time to review
evaluations takes approximately 30
minutes less than the time to review
appraisals. While the precise time and
cost reduction per transaction is
difficult to determine, the agencies
conclude that the increased threshold is
likely to result in some level of cost and
time savings for regulated institutions
that engage in residential real estate
lending and for consumers.
In considering the aggregate effect of
this rule, the agencies also considered
the number of transactions likely to be
affected by the increased threshold. As
discussed above, the agencies’ analysis
of 2017 HMDA data suggests that
increasing the residential threshold
from $250,000 to $400,000 would
exempt an additional 214,000
residential real estate originations at
regulated institutions from the agencies’
appraisal requirement, representing an
additional 16 percent of all regulated
transactions. While the supervisory data
discussed above suggest that use of
evaluations is lower than it could be,
the agencies expect that raising the
residential appraisal threshold will still
provide burden relief because it will
provide flexibility in those situations
where obtaining an appraisal would
significantly delay the transaction and
the financial institution determines that
an evaluation would be sufficient for the
safety and soundness of the particular
transaction.
B. Incorporation of the Rural Residential
Appraisal Exemption Under Section 103
of the Economic Growth, Regulatory
Relief, and Consumer Protection Act
As discussed above, in section 103 of
EGRRCPA, Congress amended Title XI
in 2018 to add a rural residential
appraisal exemption.72 Under this new
exemption, a financial institution need
not obtain a Title XI appraisal if the
property is located in a rural area; the
transaction value is less than $400,000;
the financial institution retains the loan
in portfolio, subject to exceptions; and
not later than three days after the
Closing Disclosure Form is given to the
consumer, the financial institution or its
agent has contacted not fewer than three
state certified or state licensed
appraisers, as applicable, and has
documented that no such appraiser was
available within five business days
72 Public Law 115–174, Title I, section 103,
codified at 12 U.S.C. 3356.
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beyond customary and reasonable fee
and timeliness standards for comparable
appraisal assignments.73
The proposed rule would have
amended the agencies’ appraisal
regulations to reflect the rural
residential appraisal exemption under
section 103 of EGRRCPA in the list of
transactions that are exempt from the
agencies’ appraisal requirement. The
amendment to this provision would
have been a technical change that would
not alter any substantive requirement,
because the statutory provision is selfeffectuating and the proposed threshold
increase to $400,000 would encompass
loans that would otherwise qualify for
the section 103 rural residential
appraisal exemption. In addition, the
proposed rule would have required
evaluations for transactions that are
exempt from the agencies’ appraisal
requirement under the rural residential
appraisal exemption under section 103
of EGRRCPA. The agencies proposed
that financial institutions obtain
evaluations for these transactions
because evaluations protect the safety
and soundness of financial institutions.
In the proposed rule, the agencies
specifically asked what challenges, if
any, would be posed by requiring
lenders to obtain evaluations where the
rural residential appraisal exemption
under section 103 of EGRRCPA is used.
The agencies received very few
comments on the proposed evaluation
requirement. A few commenters
asserted that the preparation of both
appraisals and evaluations on properties
located in rural areas may be affected by
the limited comparable sales data
available in rural areas.
After considering the comments
received, the agencies have decided to
implement the requirement for
regulated institutions to obtain
evaluations when the rural residential
appraisal exemption is used. The
agencies recognize that the scarcity of
comparable sales data in rural areas has
been a long-standing issue and issued
guidance in 2016 to assist institutions in
obtaining evaluations in rural areas with
few or no recent comparable sales.74
Since the early 1990s, the agencies’
appraisal regulations have required that
regulated institutions obtain evaluations
for certain other exempt residential real
73 12 U.S.C. 3356. The mortgage originator must
be subject to oversight by a Federal financial
institutions regulatory agency, as defined in Title
XI. Further, the exemption does not apply to loans
that are high-cost mortgages, as defined in section
103 of TILA, or if a Federal financial institutions
regulatory agency requires an appraisal because it
believes it is necessary to address safety and
soundness concerns.
74 Evaluations Advisory at 3.
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estate transactions (which in practice
are generally retained in their
portfolios). Requiring evaluations for
transactions exempted by the rural
residential appraisal exemption reflects
the agencies’ long-standing view that
safety and soundness principles require
institutions to obtain an understanding
of the value of real estate collateral
underlying most real estate-related
transactions they originate.
For clarity, the agencies note that
under the final rule, creditors operating
in rural areas could opt to rely on the
more broadly applicable exemption for
transactions of $400,000 or less in lieu
of the rural residential appraisal
exemption and will not need to meet the
additional criteria required under the
rural residential appraisal exemption.
This is because the broader exemption
for transactions of $400,000 or less
adopted in this final rule encompasses
the more narrow exemption under
EGRRCPA section 103. An evaluation is
required regardless of which of these
exemptions is relied upon. By
specifying that an evaluation is required
for transactions in which all of the
criteria under EGRRCPA section 103 are
met, the agencies seek to streamline the
exemption rules and eliminate
confusion for creditors operating in
rural areas.
C. Addition of the Appraisal Review
Requirement
Section 1473(e) of the Dodd-Frank Act
amended Title XI to require that the
agencies’ appraisal regulations include a
requirement that Title XI appraisals be
subject to appropriate review for
compliance with USPAP.75 The
proposed rule would have made a
conforming amendment to add this
statutory requirement for appraisal
review to the appraisal regulations. The
agencies proposed to mirror the
statutory language for this standard. The
agencies also indicated in the proposal
that the Guidelines provide more
information to assist financial
institutions in the appropriate review of
appraisals and evaluations.76
In the proposal, the agencies
specifically asked what concerns, if any,
would be posed by requiring lenders to
conduct appropriate reviews of Title XI
appraisals for compliance with USPAP.
The agencies received very few
comments addressing the appraisal
review proposal. One commenter
indicated that appraisal review provides
significant consumer and lender
safeguards. Another commenter
expressed concern that a requirement
for appraisal review would force some
financial institutions to outsource the
review process, given that many small
institutions do not have staff trained in
USPAP standards, which would add
considerable overhead expense for
financial institutions. This commenter
also requested clarification of whether
evaluations must be reviewed for
compliance with USPAP.
In response to these comments, the
agencies note that the appraisal review
proposed is statutorily required by Title
XI. In addition, the agencies have long
recognized that appraisal review is
consistent with safe and sound banking
practices, as outlined in the Guidelines,
and should be employed as part of the
credit approval process to ensure that
appraisals comply with USPAP, the
appraisal regulations, and a financial
institution’s internal policies.77 As
noted in the Guidelines, appraisal
reviews should help ensure that an
appraisal contains sufficient
information and analysis to support the
decision to engage in the transaction, as
required by the appraisal regulations.78
Through the review process, the
institution should be able to assess the
reasonableness of the valuation method,
the assumptions, and whether data
sources are appropriate and wellsupported.79
As a reflection of the long-standing
guidance on appraisal review, many
financial institutions may already have
review processes in place for these
purposes. With respect to the question
concerning evaluations and appraisal
review, the agencies note that
evaluations need not comply with
USPAP. While financial institutions
should continue to conduct safety and
soundness reviews of evaluations to
ensure that an evaluation contains
sufficient information and analysis to
support the decision to engage in the
transaction, the USPAP review
requirement in Title XI does not apply
to such a review.
After carefully considering the
comments received, the agencies have
decided to implement the requirement
that financial institutions review
appraisals for federally related
transactions for compliance with
USPAP. The agencies encourage
regulated institutions to review their
existing appraisal review policies and
incorporate additional procedures for
subjecting appraisals for federally
related transactions to appropriate
77 See
75 Dodd-Frank
Act, section 1473, Public Law 111–
203, 124 Stat. 1376.
76 See Guidelines, Section XV.
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id.
OCC: 12 CFR 34.44(b); Board: 12 CFR
225.64(b); FDIC: 12 CFR 323.4(b).
79 See Guidelines, Section XV.
78 See
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review for compliance with USPAP, as
needed. Financial institutions may refer
to the Guidelines for more information
to assist them in the appropriate review
of appraisals and evaluations.80
D. Conforming and Technical
Amendments
The agencies’ appraisal regulations
require that all complex 1-to-4 family
residential property appraisals rendered
in connection with federally related
transactions shall have a state certified
appraiser if the transaction value is
$250,000 or more.81 In order to make
this paragraph consistent with the other
proposed changes to the agencies’
appraisal regulations, the agencies
proposed changes to its wording to
incorporate the proposed definition of
‘‘residential real estate transaction,’’ to
introduce the $400,000 threshold, and
to make other technical and conforming
changes. The agencies also proposed to
amend the definitional term ‘‘complex
1-to-4 family residential property
appraisal’’ to ‘‘complex appraisal for a
residential real estate transaction’’ to
conform to the definition of residential
real estate transaction. The proposed
amendments to these provisions would
have been conforming changes that
would not alter any substantive
requirements.
The agencies received one comment
on these conforming changes seeking
clarification as to whether certified
appraisers would be required for
complex appraisals for residential real
estate transactions above $400,000 or
transactions at or above $400,000. As
provided in the rule text, the
requirement will only apply to
transactions above $400,000. The
agencies did not receive further
comment on these proposed technical
and conforming changes and are
adopting the proposed technical
changes as final.
III. Effective Date
All provisions of the rule, other than
the evaluation requirement for
transactions exempted by the rural
residential appraisal exemption 82 and
the requirement to subject appraisals to
appropriate review for compliance with
USPAP (as discussed below) are
effective the first day after publication
of the final rule in the Federal Register.
The 30-day delayed effective date
required under the Administrative
Procedure Act is waived for all other
amendments to the regulation, pursuant
80 See
id.
12 CFR 34.43(d)(3); Board: 12 CFR
225.63(d)(3); FDIC: 12 CFR 323.3(d)(3).
82 See supra note 3.
81 OCC:
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to 5 U.S.C. 553(d)(1), which provides an
exception to the 30-day delayed
effective date requirement when a
substantive rule grants or recognizes an
exemption or relieves a restriction. The
amendments to increase the residential
appraisal threshold exempts additional
transactions from the agencies’ appraisal
requirement, which would have the
effect of relieving restrictions.
Consequently, all provisions of this rule,
except the evaluation requirement for
transactions exempted by the rural
residential appraisal exemption and the
appraisal review provision, meet the
criteria to waive the 30-day delayed
effective date requirement set forth in
the Administrative Procedure Act.
The provisions for the evaluation
requirement for transactions exempted
by the rural residential appraisal
exemption and for the appraisal review
will be effective on January 1, 2020. The
delayed effective date will provide
regulated institutions adequate time to
implement procedures for obtaining an
evaluation for certain residential
transactions secured by property in a
rural area that are exempt from the
appraisal requirements and for
subjecting appraisals for federally
related transactions to appropriate
review for compliance with USPAP.83
The agencies did not receive any
comments on the proposed effective
date.
IV. Regulatory Analysis
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A. Regulatory Flexibility Act
OCC: The Regulatory Flexibility Act
(RFA), 5 U.S.C. 601 et seq., generally
requires that, in connection with a
rulemaking, an agency prepare and
make available for public comment a
regulatory flexibility analysis that
describes the impact of the rule on small
entities. However, the regulatory
flexibility analysis otherwise required
under the RFA is not required if an
agency certifies that the rule will not
have a significant economic impact on
a substantial number of small entities
(defined in regulations promulgated by
the Small Business Administration
(SBA) to include commercial banks and
savings institutions, and trust
companies, with assets of $600 million
or less and $41.5 million or less,
respectively) and publishes its
certification and a brief explanatory
statement in the Federal Register
together with the rule.
83 As discussed below, new requirements on
insured depository institutions (IDIs) generally
must take effect on the first day of a calendar
quarter that begins on or after the date on which
the regulations are published in final form. See 12
U.S.C. 4802(b).
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The OCC currently supervises 1,211
institutions (commercial banks, trust
companies, federal savings associations,
and branches or agencies of foreign
banks) of which approximately 782 are
small entities.84 The OCC estimates that
the final rule may impact approximately
734 of these small entities. The final
rule to increase the residential threshold
may result in cost savings for impacted
institutions.
For transactions at or below the new
residential threshold, regulated
institutions will be given the option to
obtain an evaluation of the property
instead of an appraisal. While the cost
of obtaining appraisals and evaluations
can vary and may be passed on to
borrowers, evaluations generally cost
less to perform than appraisals, given
that evaluations are not required to
comply with USPAP. In addition to
costing less than an appraisal,
evaluations may require less time to
review than appraisals because
evaluations typically contain less
detailed information than appraisals. In
addition to savings relating to the
relative costs associated with appraisals
and evaluations, the final rule may also
reduce burden for institutions in areas
with appraiser shortages. In the course
of the agencies’ most recent EGRPRA
review, commenters contended that it
can be difficult to find state certified
and licensed appraisers, particularly in
rural areas, which results in delays in
completing transactions and sometimes
increased costs for appraisals.85 For this
reason, substituting evaluations for
appraisals may reduce burden for
institutions in areas with appraiser
shortages. While the increased
residential threshold may decrease costs
for institutions, the extent to which
institutions will employ evaluations
instead of appraisals is uncertain, given
that institutions retain the option of
using appraisals for below-threshold
transactions.
The requirement in the final rule that
institutions obtain an evaluation for
transactions that qualify for the rural
84 The OCC bases this estimate of the number of
small entities on the SBA’s size thresholds for
commercial banks and savings institutions, and
trust companies, which are $600 million and $41.5
million, respectively. Consistent with the General
Principles of Affiliation, 13 CFR 121.103(a), the
OCC includes the assets of affiliated financial
institutions when determining whether to classify
an OCC-supervised institution as a small entity. The
OCC used December 31, 2018, to determine size
because a ‘‘financial institution’s assets are
determined by averaging the assets reported in its
four quarterly financial statements for the preceding
year.’’ See footnote 8 of the U.S. Small Business
Administration’s Table of Size Standards.
85 See EGRPRA Report, available at https://
www.ffiec.gov/pdf/2017_FFIEC_EGRPRA_JointReport_to_Congress.pdf.
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residential appraisal exemption could
be viewed as a new mandate. However,
because the final rule increases the
residential threshold to $400,000 for all
residential transactions, institutions will
not need to comply with the detailed
requirements of the rural residential
appraisal exemption in order for such
transactions to be exempt from the
agencies’ appraisal requirement.
Therefore, complying with the
evaluation requirement for belowthreshold transactions will be
significantly less burdensome than
complying with the requirements of the
rural residential appraisal exemption.
The requirement that Title XI
appraisals be subject to appropriate
review for USPAP compliance could
also be viewed as a new mandate. The
OCC does not believe, however, that this
requirement will impose a significant
burden or economic impact on regulated
institutions because Title XI and the
agencies’ appraisal regulations already
require that Title XI appraisals be
performed in compliance with USPAP.
In addition, many financial institutions
already have review processes in place
to ensure that appraisals comply with
USPAP. Finally, the OCC notes that the
requirement for appraisal review is
statutorily mandated by Title XI.
Because the final rule does not
contain any new recordkeeping,
reporting, or significant compliance
requirements, the OCC anticipates that
costs associated with the final rule, if
any, will be de minimis. Therefore, the
OCC certifies that the final rule will not
have a significant economic impact on
a substantial number of small entities.
FRB: The RFA 86 generally requires
that an agency prepare and make
available a final regulatory flexibility
analysis in connection with a final
rulemaking that the agency expects will
have a significant economic impact on
a substantial number of small entities.
The regulatory flexibility analysis
otherwise required under the RFA is not
required if an agency certifies that the
rule will not have a significant
economic impact on a substantial
number of small entities and publishes
its certification and a brief explanatory
statement in the Federal Register
together with the rule.
The agencies are increasing the
threshold from $250,000 to $400,000 at
or below which a Title XI appraisal is
not required for residential real estate
transactions in order to reduce
regulatory burden in a manner that is
consistent with the safety and
soundness of financial institutions. To
ensure that the safety and soundness of
86 5
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regulated institutions are protected, the
agencies will require evaluations for
transactions that are exempted by the
increased residential appraisal
threshold. The final rule also requires
evaluations for transactions exempted
by the rural residential appraisal
exemption. In order to fulfill the
agencies’ statutory responsibility under
the Dodd-Frank Act, the agencies are
also adding to the appraisal regulations
a requirement that appraisals be subject
to appropriate review for compliance
with USPAP.
The Board’s rule applies to state
chartered banks that are members of the
Federal Reserve System (state member
banks), as well as bank holding
companies and nonbank subsidiaries of
bank holding companies that engage in
lending. There are approximately 529
state member banks and 232 nonbank
lenders regulated by the Board that meet
the SBA definition of small entities and
are subject to the final rule. Data
currently available to the Board do not
allow for a precise estimate of the
number of small entities that are
affected by the threshold increase or the
evaluation requirement for transactions
exempted by the rural residential
appraisal exemption, because the
number of small entities that engage in
residential real estate transactions
qualifying for these exemptions is
unknown.
The increased threshold level for
residential transactions is expected to
produce cost and time savings for
financial institutions without imposing
any burden, since it will permit
institutions to use evaluations instead of
appraisals for a greater number of
transactions, and evaluations generally
cost less and take less time to conduct
and review than appraisals. The cost
and time savings produced for
institutions by obtaining evaluations
versus appraisals is difficult to quantify
because of limited available data and
variation based on the type and
complexity of the transaction. Costs of
appraisals and evaluations may also be
passed on to borrowers.
With respect to transactions that
qualify for the rural residential appraisal
exemption, the requirement that
institutions obtain evaluations for such
transactions could be viewed as an
additional burden. However, because
the final rule increases the residential
threshold to $400,000 for all residential
transactions, institutions, including
small entities, will not need to comply
with the detailed requirements of the
rural residential appraisal exemption in
order for such transactions to be exempt
from the agencies’ appraisal
requirement. Complying with the
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evaluation requirement for transactions
below the residential appraisal
threshold is likely to be less
burdensome than complying with the
requirements of the rural residential
appraisal exemption. Overall, the Board
does not believe this requirement will
have a significant economic impact on
small institutions.
The requirement that Title XI
appraisals be subject to appropriate
review for USPAP compliance applies
to all small entities regulated by the
Board that engage in real estate lending.
However, the Board does not believe
this requirement would impose a
significant burden or economic impact
on such institutions because the
agencies’ appraisal requirements already
require that Title XI appraisals be
performed in compliance with USPAP.
Further, many financial institutions
already have review processes in place
to ensure that appraisals comply with
USPAP.
The final rule does not contain any
new recordkeeping, reporting, or
significant compliance requirements.
Based on information available to the
Board, the final rule is not expected to
impose any significant cost or burden
on small entities, and small entities and
borrowers engaging in residential real
estate transactions could experience
cost reductions; however, the overall
economic impact on small entities is not
expected to be significant. The Board
certifies that the final rule will not have
a significant economic impact on a
substantial number of small entities
supervised by the Board.
FDIC: The RFA generally requires
that, in connection with a final
rulemaking, an agency prepare and
make available a final regulatory
flexibility analysis describing the
impact of the rule on small entities.87
However, a regulatory flexibility
analysis is not required if the agency
certifies that the rule will not have a
significant economic impact on a
substantial number of small entities.
The SBA has defined ‘‘small entities’’ to
include banking organizations with total
assets of less than or equal to $600
million.88 Generally, the FDIC considers
87 5
U.S.C. 601 et seq.
SBA defines a small banking organization
as having $600 million or less in assets, where an
organization’s ‘‘assets are determined by averaging
the assets reported on its four quarterly financial
statements for the preceding year.’’ See 13 CFR
121.201 (as amended by 84 FR 34261, effective
August 19, 2019). In its determination, the ‘‘SBA
counts the receipts, employees, or other measure of
size of the concern whose size is at issue and all
of its domestic and foreign affiliates.’’ See 13 CFR
121.103. Following these regulations, the FDIC uses
a covered entity’s affiliated and acquired assets,
averaged over the preceding four quarters, to
88 The
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a significant effect to be a quantified
effect in excess of 5 percent of total
annual salaries and benefits per
institution, or 2.5 percent of total noninterest expenses. The FDIC believes
that effects in excess of these thresholds
typically represent significant effects for
FDIC-supervised institutions. For the
reasons described below and under
section 605(b) of the RFA, the FDIC
certifies that this rule will not have a
significant economic effect on a
substantial number of small entities.
The FDIC supervises 3,465 depository
institutions,89 of which 2,705 are
defined as small entities by the terms of
the RFA.90 In 2017, 1,139 small, FDICsupervised institutions reported
originating residential real estate loans.
However, beginning in 2017, FDICsupervised institutions ceased reporting
residential loan origination data in
compliance with HMDA if they
originated less than 25 loans per year.
Therefore, in order to more accurately
assess the number of institutions that
could be affected by this rule we
counted the number of existing
institutions who reported any
residential loan originations in 2015,
2016, or 2017. By that measure, 1,430
(52.9 percent) are estimated to be
affected by this rule.91
The final rule is likely to reduce loan
valuation-related costs for small,
covered institutions. By increasing the
residential real estate appraisal
threshold, the rule is expected to
increase the number of residential real
estate loans eligible for an evaluation,
instead of an appraisal. The FDIC
estimates that, on average, the review
process for an appraisal would take
approximately forty minutes, but only
ten minutes, on average, for an
evaluation. Therefore, the FDIC
estimates that the rule would reduce
loan valuation-related costs for small,
FDIC-supervised institutions by 30
minutes per transaction, on average.
According to 2017 HMDA data, 13.3
percent of residential real estate loans
originated by small, FDIC-supervised
institutions and affiliated institutions
are subject to the Title XI appraisal
requirements and have loan amounts
between $250,000 and $400,000.92
Additionally, of the 1,430 small, FDICsupervised institutions that reported
residential loan originations, a total of
163,148 residential real estate loans
determine whether the covered entity is ‘‘small’’ for
the purposes of RFA.
89 FDIC-supervised institutions are set forth in 12
U.S.C. 1813(q)(2).
90 Call Report, March 31, 2019.
91 HMDA data, December 2015–2017.
92 HMDA data, December 2017.
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were originated,93 and the average
number of originations per year was
approximately 128. Assuming that 13.3
percent of originations by small, FDICsupervised institutions fall in the
$250,000 to $400,000 range and are
subject to the Title XI appraisal
requirement, approximately 21,699
originations per year, or an average of 15
per small, FDIC-supervised institution,
would have the option of an evaluation
rather than an appraisal as a result of
this rule. Thus, by using evaluations
instead of appraisals a small, FDICsupervised institution may reduce its
total annual residential real estate
transaction valuation-related labor
hours by 7.5 hours.94 The FDIC
estimates this will result in a potential
cost savings for small, FDIC-supervised
institutions of $519.15 per year, per
institution.95 The estimated reduction
in costs would be smaller if lenders opt
to not utilize an evaluation and require
an appraisal on a residential real estate
transaction greater than $250,000 but
not more than $400,000. These
estimated savings would not exceed 5
percent of annualized salary expense or
2.5 percent of annualized noninterest
expense for any small, FDIC-supervised
institutions.96
This rule is likely to reduce
residential real estate transaction
valuation-related costs for the parties
involved. By increasing the residential
real estate appraisal threshold, the rule
is expected to increase the number of
residential real estate loans eligible for
an evaluation, instead of an appraisal.
As discussed in the proposal, the United
States Department of Veterans Affairs’
appraisal fee schedule 97 for a singlefamily residence generally ranges from
$375 to $900, depending on the location
of the property. While the FDIC does not
have definitive data on the cost of
evaluations, some of the comments from
financial institutions and their trade
associations represented that
93 Id.
94 0.5
hours *15 originations = 7.5 hours.
hours * $69.22 per hour = $519.15 The
FDIC estimates that the average hourly
compensation for a loan officer is $69.22 an hour.
The hourly compensation estimate is based on
published compensation rates for Credit Counselors
and Loan Officers ($44.30). The estimate includes
the May 2017 75th percentile hourly wage rate
reported by the Bureau of Labor Statistics, National
Industry Specific Occupational Employment and
Wage Estimates for the Depository Credit
Intermediation sector. These wage rates have been
adjusted for changes in the Consumer Price Index
for all Urban Consumers between May 2017 and
December 2018 (3.59 percent) and grossed up by
50.8 percent to account for non-monetary
compensation as reported by the December 2018
Employer Costs for Employee Compensation Data.
96 Call Report, March 31 2019.
97 See https://www.benefits.va.gov/HOMELOANS/
appraiser_fee_schedule.asp.
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95 7.5
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evaluations are less costly than
appraisals. Making more residential real
estate transactions eligible for
evaluations rather than appraisals is
likely to reduce transaction valuationrelated costs. However, the FDIC
assumes that most, if not all, of these
cost reductions would be passed on to
residential real estate buyers. Therefore,
this aspect of the rule is likely to have
little or no effect on small, FDICsupervised entities.
The FDIC does not expect the rule to
have any substantive effects on the
safety and soundness of small, FDICsupervised institutions. Analysis of
HMDA data shows that the rule would
newly exempt from appraisal
requirements an estimated 13.3 percent
of transactions, and 23 percent of the
dollar volume of transactions, among
small, FDIC-supervised institutions.
Assuming that loans secured by
residential properties with values from
$250,000 to $400,000 represent the same
percentage of the residential real estate
loan portfolios of small, FDICsupervised institutions as they do of the
dollar volume of new originations, such
loans do not represent more than 19.5
percent of total assets for any small,
FDIC-supervised institutions.98 The
aggregate value of such loans for all
small, FDIC-supervised institutions
represents approximately four percent
of assets, assuming that 23 percent of
each institution’s portfolio of loans
secured by first liens on one- to fourfamily residential mortgages is made up
of loans with a value at origination of
$250,000 to $400,000.99 While
exempted transactions would not
require an appraisal, they would still
require an evaluation that is consistent
with safe and sound banking practices.
As previously discussed in the
Revisions to the Title XI Appraisal
Regulations section,100 supervisory
experience indicates that appraisals and
evaluations are both credible tools to
support real estate lending decisions, so
the FDIC does not expect that increasing
the threshold for appraisals will affect
the safety and soundness of small, FDICsupervised institutions. Further,
historical loss information in the Call
Reports reflects that the net charge-off
rate for residential transactions did not
increase after the increase in the
appraisal threshold from $100,000 to
$250,000 in June 1994, or during and
after the recession in 2001 through yearend 2007. During this timeframe, the net
charge-off rate for small, FDICsupervised institutions ranged from 1
98 Call
Report data, March 31, 2019.
99 Id.
100 See
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53595
basis point to 9 basis points. However,
the net charge-off rate for residential
transactions increased significantly from
2008–2013, which was during and
immediately after the recent recession,
ranging from 3 basis points to 55 basis
points. As discussed earlier, the
agencies attribute the increase in the net
charge-off rate for loans secured by
single 1-to-4 family residential real
estate during the recent recession to
weak underwriting standards in the lead
up to the crisis. Therefore, the FDIC
believes the proposed rule is unlikely to
pose significant safety and soundness
risks for small, FDIC-supervised entities.
The rule is likely to pose relatively
larger residential real estate valuationrelated transaction cost reductions for
rural buyers and small, FDIC-supervised
institutions lending in rural areas;
however, these effects are difficult to
accurately estimate. Home prices in
rural areas are generally lower than
those in suburban and urban areas.
Therefore, residential real estate
transactions in rural areas are likely to
utilize evaluations more than appraisals,
under the proposed rule. Additionally,
there may be less delay in finding
qualified personnel to perform an
evaluation than to perform a Title XI
appraisal, particularly in rural areas.
Finally, by potentially reducing
valuation-related costs associated with
residential real estate transactions for
properties greater than $250,000 but not
more than $400,000, the proposed rule
could result in a marginal increase in
lending activity of small, FDICsupervised institutions for properties of
this type. However, the FDIC believes
that this effect is likely to be negligible
given that the potential cost savings of
using an evaluation, rather than an
appraisal, represents between 0.12–0.29
percent of the median home price.101
For the reasons described above and
under section 605(b) of the RFA, the
FDIC certifies that the proposed rule
will not have a significant economic
impact on a substantial number of small
entities.
B. Paperwork Reduction Act
In accordance with the requirements
of the Paperwork Reduction Act of
1995 102 (PRA), the agencies may not
conduct or sponsor, and a respondent is
not required to respond to, an
information collection unless it displays
a currently valid Office of Management
and Budget (OMB) control number. The
101 Median home price in the United States as of
January 2019 is estimated at $307,700 by the
Federal Reserve Bank of St. Louis. See https://
fred.stlouisfed.org/series/MSPUS. $375/$307,700 =
.001218, $900/$307,700 = .002925.
102 44 U.S.C. 3501–3521.
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Federal Register / Vol. 84, No. 195 / Tuesday, October 8, 2019 / Rules and Regulations
agencies have reviewed this final rule
and determined that it would not
introduce any new or revise any
collection of information pursuant to
the PRA. In addition, the agencies
received no comments on the PRA
analysis in the proposal. Therefore, no
submissions will be made to OMB for
review.
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C. Riegle Community Development and
Regulatory Improvement Act of 1994
Pursuant to section 302(a) of the
Riegle Community Development and
Regulatory Improvement Act
(RCDRIA),103 in determining the
effective date and administrative
compliance requirements for new
regulations that impose additional
reporting, disclosure, or other
requirements on IDIs, each Federal
banking agency must consider,
consistent with principles of safety and
soundness and the public interest, any
administrative burdens that such
regulations would place on depository
institutions, including small depository
institutions, and customers of
depository institutions, as well as the
benefits of such regulations. In addition,
section 302(b) of RCDRIA requires new
regulations and amendments to
regulations that impose additional
reporting, disclosures, or other new
requirements on IDIs generally to take
effect on the first day of a calendar
quarter that begins on or after the date
on which the regulations are published
in final form.104
The agencies recognize that the
requirement to obtain an evaluation for
transactions exempted by the rural
residential appraisal exemption 105
could be considered by IDIs to be a new
requirement, despite the longstanding
requirements for IDIs to obtain
evaluations for transactions exempt
from agencies’ appraisal requirement
under a threshold exemption. The
agencies also recognize that the
requirement for an appraisal review
could be considered by IDIs to be a new
requirement, despite the longstanding
practice of many financial institutions
to conduct appraisal reviews.
Accordingly, with respect to the
requirement that financial institutions
obtain evaluations for transactions
exempted by the rural residential
appraisal exemption and the
requirement for appraisal review, the
effective date will be January 1, 2020,
which is the first day of a calendar
quarter which begins on or after the date
103 12
U.S.C. 4802(a).
at 4802(b).
105 See supra note 25.
104 Id.
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on which the regulations are published
in final form, consistent with RCDRIA.
Otherwise, the final rule reduces
burden and does not impose any
reporting, disclosure, or other new
requirements on IDIs. For transactions
exempted from the agencies’ appraisal
requirement by the final rule (i.e.,
residential real estate transactions
between $250,000 and $400,000),
lenders are required to get an evaluation
if they chose not to get an appraisal.
However, the agencies do not view the
option to obtain an evaluation instead of
an appraisal as a new or additional
requirement for purposes of RCDRIA.
First, the process of obtaining an
evaluation is not new since IDIs already
obtain evaluations for transactions at or
below the current $250,000-threshold.
Second, for residential real estate
transactions between $250,000 and
$400,000, IDIs could continue to obtain
appraisals instead of evaluations.
Because the final rule does not impose
new requirements on IDIs, the agencies
are not required by RCDRIA to consider
the administrative burdens and benefits
of the rule or delay its effective date
(other than the evaluation provision for
transactions exempted by the rural
residential appraisal exemption or and
the appraisal review provision, as
discussed above).
Because delaying the effective date of
the final rule’s threshold increase is not
required and would serve no purpose,
the threshold increase and all other
provisions of the final rule, other than
the evaluation requirement for the rural
residential appraisal exemption and the
requirement that appraisals be subject to
appropriate review for compliance with
USPAP, are effective on the first day
after publication of the final rule in the
Federal Register.
Additionally, although not required
by RCDRIA, the agencies did consider
the administrative costs and benefits of
the residential appraisal threshold
increase while developing the proposal.
In designing the scope of the threshold
increase, the agencies chose to align the
definition of residential real estate
transaction with industry practice,
regulatory guidance, and the categories
used in the Call Report in order to
reduce the administrative burden of
determining which transactions were
exempted by the final rule. The agencies
also considered the cost savings that
IDIs would experience by obtaining
evaluations instead of appraisals and set
the threshold at a level designed to
provide significant burden relief
without sacrificing safety and
soundness. Similarly, in requiring
evaluations for exempted rural
transactions and adding the appraisal
PO 00000
Frm 00020
Fmt 4700
Sfmt 4700
review requirement, the agencies
considered the administrative burden of
these requirements on IDIs consistent
with principles of safety and soundness
and the public interest.
D. Solicitation of Comments on Use of
Plain Language
Section 722 of the Gramm-LeachBliley Act 106 requires the Federal
banking agencies to use plain language
in all proposed and final rules
published after January 1, 2000. The
agencies have sought to present the final
rule in a simple and straightforward
manner and did not receive any
comments on the use of plain language.
E. OCC Unfunded Mandates Reform Act
of 1995 Determination
The OCC has analyzed the final rule
under the factors in the Unfunded
Mandates Reform Act of 1995 (UMRA)
(2 U.S.C. 1532). Under this analysis, the
OCC considered whether the final rule
includes a Federal mandate that may
result in the expenditure by state, local,
and tribal governments, in the aggregate,
or by the private sector, of $100 million
or more in any one year (adjusted
annually for inflation, currently $154
million).107 As discussed in the OCC’s
Regulatory Flexibility Act section, the
costs associated with the final rule, if
any, would be de minimis. Therefore,
the OCC concludes that the final rule
will not result in an expenditure of $154
million or more annually by state, local,
and tribal governments, or by the
private sector.
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
106 Public Law 106–102, section 722, 113 Stat.
1338, 1471 (1999).
107 The OCC estimates the UMRA inflation
adjustment using the change in the annual U.S.
GDP Implicit Price Deflator between 1995 and 2018,
which is the most recent available annual data. The
deflator was 71.868 in 1995, and 110.382 in 2018,
resulting in an inflation adjustment factor of 1.54
(110.382/71.868 = 1.54, and $100 million × 1.54 =
$154 million).
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Federal Register / Vol. 84, No. 195 / Tuesday, October 8, 2019 / Rules and Regulations
12 CFR Part 323
Banks, banking, Mortgages, Reporting
and recordkeeping requirements,
Savings associations.
DEPARTMENT OF THE TREASURY
Office of the Comptroller of the
Currency
12 CFR Part 34
For the reasons set forth in the joint
preamble, the OCC amends part 34 of
chapter I of title 12 of the Code of
Federal Regulations as follows:
PART 34—REAL ESTATE LENDING
AND APPRAISALS
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:
a. Revising paragraph (f);
b. Redesignating paragraphs (k)
through (n) as (l) through (o),
respectively; and
■ c. Adding a new paragraph (k).
The revision and addition read as
follows:
■
■
■
§ 34.42
Definitions.
*
*
*
*
*
(f) Complex appraisal for a residential
real estate transaction means one in
which the property to be appraised, the
form of ownership, or market conditions
are atypical.
*
*
*
*
*
(k) Residential real estate transaction
means a real estate-related financial
transaction that is secured by a single 1to-4 family residential property.
*
*
*
*
*
■ 3. Section 34.43 is amended by:
■ a. Revising paragraph (a)(1);
■ b. Removing the word ‘‘or’’ at the end
of paragraph (a)(12);
■ c. Removing the period at the end of
paragraph (a)(13) and adding ‘‘; or’’ in
its place;
■ d. Adding paragraph (a)(14); and
■ e. Revising paragraph (d)(3).
The revisions and addition read as
follows:
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§ 34.43 Appraisals required; transactions
requiring a State certified or licensed
appraiser.
(a) * * *
(1) The transaction is a residential real
estate transaction that has a transaction
value of $400,000 or less;
*
*
*
*
*
(14) The transaction is exempted from
the appraisal requirement pursuant to
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18:16 Oct 07, 2019
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the rural residential exemption under 12
U.S.C. 3356.
*
*
*
*
*
(d) * * *
(3) Complex appraisals for residential
real estate transactions of more than
$400,000. All complex appraisals for
residential real estate transactions
rendered in connection with federally
related transactions shall require a State
certified appraiser if the transaction
value is more than $400,000. A
regulated institution may presume that
appraisals for residential real estate
transactions are not complex, unless the
institution has readily available
information that a given appraisal will
be complex. The regulated institution
shall be responsible for making the final
determination of whether the appraisal
is complex. If during the course of the
appraisal a licensed appraiser identifies
factors that would result in the property,
form of ownership, or market conditions
being considered atypical, then either:
(i) The regulated institution may ask
the licensed appraiser to complete the
appraisal and have a certified appraiser
approve and co-sign the appraisal; or
(ii) The institution may engage a
certified appraiser to complete the
appraisal.
*
*
*
*
*
■ 4. Effective January 1, 2020, § 34.43 is
further amended by revising paragraph
(b) to read as follows:
§ 34.43 Appraisals required; transactions
requiring a State certified or licensed
appraiser.
*
*
*
*
*
(b) Evaluations required. For a
transaction that does not require the
services of a State certified or licensed
appraiser under paragraphs (a)(1), (5),
(7), (13), or (14) of this section, the
institution shall obtain an appropriate
evaluation of real property collateral
that is consistent with safe and sound
banking practices.
*
*
*
*
*
■ 5. Effective January 1, 2020. § 34.44 is
amended by:
■ a. Republishing the introductory text;
■ b. Redesignating paragraphs (c), (d),
and (e) as (d), (e), and (f), respectively;
and
■ c. Adding a new paragraph (c).
The addition reads as follows:
§ 34.44
Minimum appraisal standards.
For federally related transactions, all
appraisals shall, at a minimum:
*
*
*
*
*
(c) Be subject to appropriate review
for compliance with the Uniform
Standards of Professional Appraisal
Practice;
*
*
*
*
*
PO 00000
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53597
Federal Reserve Board
For the reasons set forth in the joint
preamble, the Board amends part 225 of
chapter II of title 12 of the Code of
Federal Regulations as follows:
PART 225—BANK HOLDING
COMPANIES AND CHANGE IN BANK
CONTROL (REGULATION Y)
6. The authority citation for part 225
continues to read as follows:
■
Authority: 12 U.S.C. 1817(j)(13), 1818,
1828(o), 1831i, 1831p–1, 1843(c)(8), 1844(b),
1972(l), 3106, 3108, 3310, 3331 et seq., 3906,
3907, and 3909; 15 U.S.C. 1681s, 1681w,
6801 and 6805.
7. Section 225.62 is amended by:
a. Revising paragraph (f);
b. Redesignating paragraphs (k)
through (n) as (l) through (o),
respectively; and
■ c. Adding a new paragraph (k).
The revisions and addition read as
follows:
■
■
■
§ 225.62
Definitions.
*
*
*
*
*
(f) Complex appraisal for a residential
real estate transaction means one in
which the property to be appraised, the
form of ownership, or market conditions
are atypical.
*
*
*
*
*
(k) Residential real estate transaction
means a real estate-related financial
transaction that is secured by a single 1to-4 family residential property.
*
*
*
*
*
■ 8. Section 225.63 is amended by:
■ a. Revising paragraph (a)(1);
■ b. Removing the word ‘‘or’’ at the end
of paragraph (a)(13);
■ c. Removing the period at the end of
paragraph (a)(14) and adding ‘‘; or’’ in
its place;
■ d. Adding paragraph (a)(15); and
■ e. Revising paragraph (d)(3).
The addition and revisions read as
follows:
§ 225.63 Appraisals required; transactions
requiring a State certified or licensed
appraiser.
(a) * * *
(1) The transaction is a residential real
estate transaction that has a transaction
value of $400,000 or less;
*
*
*
*
*
(15) The transaction is exempted from
the appraisal requirement pursuant to
the rural residential exemption under 12
U.S.C. 3356.
*
*
*
*
*
(d) * * *
(3) Complex appraisals for residential
real estate transactions of more than
$400,000. All complex appraisals for
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residential real estate transactions
rendered in connection with federally
related transactions shall require a State
certified appraiser if the transaction
value is more than $400,000. A
regulated institution may presume that
appraisals for residential real estate
transactions are not complex, unless the
institution has readily available
information that a given appraisal will
be complex. The regulated institution
shall be responsible for making the final
determination of whether the appraisal
is complex. If during the course of the
appraisal a licensed appraiser identifies
factors that would result in the property,
form of ownership, or market conditions
being considered atypical, then either:
(i) The regulated institution may ask
the licensed appraiser to complete the
appraisal and have a certified appraiser
approve and co-sign the appraisal; or
(ii) The institution may engage a
certified appraiser to complete the
appraisal.
*
*
*
*
*
■ 9. Effective January 1, 2010, § 225.63
is further amended by revising
paragraph (b) to read as follows:
§ 225.63 Appraisals required; transactions
requiring a State certified or licensed
appraiser.
*
*
*
*
*
(b) Evaluations required. For a
transaction that does not require the
services of a State certified or licensed
appraiser under paragraphs (a)(1), (5),
(7), (14), or (15) of this section, the
institution shall obtain an appropriate
evaluation of real property collateral
that is consistent with safe and sound
banking practices.
*
*
*
*
*
■ 10. Effective January 1, 2020, § 225.64
is amended by:
■ a. Republishing the introductory text;
■ b. Redesignating paragraphs (c), (d),
and (e) as (d), (e), and (f), respectively;
and
■ c. Adding a new paragraph (c).
The addition reads as follows:
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§ 225.64
Minimum appraisal standards.
For federally related transactions, all
appraisals shall, at a minimum:
*
*
*
*
*
(c) Be subject to appropriate review
for compliance with the Uniform
Standards of Professional Appraisal
Practice;
*
*
*
*
*
Federal Deposit Insurance Corporation
For the reasons set forth in the joint
preamble, the FDIC amends part 323 of
chapter III of title 12 of the Code of
Federal Regulations as follows:
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18:16 Oct 07, 2019
Jkt 250001
11. The authority citation for part 323
continues to read as follows:
■
Authority: 12 U.S.C. 1818, 1819(a)
(‘‘Seventh’’ and ‘‘Tenth’’), 1831p–1 and 3331
et seq.
12. Section 323.2 is amended by:
a. Revising paragraph (f);
b. Redesignating paragraphs (k)
through (n) as (l) through (o),
respectively; and
■ c. Adding a new paragraph (k).
The revision and addition read as
follows:
■
■
■
§ 323.2
Definitions.
*
*
*
*
*
(f) Complex appraisal for a residential
real estate transaction means one in
which the property to be appraised, the
form of ownership, or market conditions
are atypical.
*
*
*
*
*
(k) Residential real estate transaction
means a real estate-related financial
transaction that is secured by a single 1to-4 family residential property.
*
*
*
*
*
■ 13. Section 323.3 is amended by:
■ a. Revising paragraph (a)(1);
■ b. Removing the word ‘‘or’’ at the end
of paragraph (a)(12);
■ c. Removing the period at the end of
paragraph (a)(13) and adding ‘‘; or’’ in
its place; and
■ d. Adding paragraph (a)(14); and
■ e. Revising paragraph (d)(3).
The revisions and addition read as
follows:
§ 323.3 Appraisals required; transactions
requiring a State certified or licensed
appraiser.
(a) * * *
(1) The transaction is a residential real
estate transaction that has a transaction
value of $400,000 or less;
*
*
*
*
*
(14) The transaction is exempted from
the appraisal requirement pursuant to
the rural residential exemption under 12
U.S.C. 3356.
*
*
*
*
*
(d) * * *
(3) Complex appraisals for residential
real estate transactions of more than
$400,000. All complex appraisals for
residential real estate transactions
rendered in connection with federally
related transactions shall require a State
certified appraiser if the transaction
value is more than $400,000. A
regulated institution may presume that
appraisals for residential real estate
transactions are not complex, unless the
institution has readily available
information that a given appraisal will
be complex. The regulated institution
shall be responsible for making the final
PO 00000
Frm 00022
Fmt 4700
Sfmt 9990
determination of whether the appraisal
is complex. If during the course of the
appraisal a licensed appraiser identifies
factors that would result in the property,
form of ownership, or market conditions
being considered atypical, then either:
(i) The regulated institution may ask
the licensed appraiser to complete the
appraisal and have a certified appraiser
approve and co-sign the appraisal; or
(ii) The institution may engage a
certified appraiser to complete the
appraisal.
*
*
*
*
*
■ 14. Effective January 1, 2020. § 323.3
is further amended by revising
paragraph (b) to read as follows:
§ 323.3 Appraisals required; transactions
requiring a State certified or licensed
appraiser.
*
*
*
*
*
(b) Evaluations required. For a
transaction that does not require the
services of a State certified or licensed
appraiser under paragraphs (a)(1), (5),
(7), (13), or (14) of this section, the
institution shall obtain an appropriate
evaluation of real property collateral
that is consistent with safe and sound
banking practices.
*
*
*
*
*
■ 15. Effective January 1, 2020, § 323.4
is amended by
■ a. Republishing the introductory text;
■ b. Redesignating paragraphs (c), (d),
and (e) as (d), (e), and (f), respectively;
and
■ c. Adding a new paragraph (c).
The addition reads as follows:
§ 323.4
Minimum appraisal standards.
For federally related transactions, all
appraisals shall, at a minimum:
*
*
*
*
*
(c) Be subject to appropriate review
for compliance with the Uniform
Standards of Professional Appraisal
Practice;
*
*
*
*
*
Dated: August 8, 2019.
Joseph M. Otting,
Comptroller of the Currency.
By order of the Board of Governors of the
Federal Reserve System, September 23, 2019.
Ann E. Misback,
Secretary of the Board.
Federal Deposit Insurance Corporation.
By order of the Board of Directors.
Dated at Washington, DC, on August 20,
2019.
Valerie J. Best,
Assistant Executive Secretary.
[FR Doc. 2019–21376 Filed 10–7–19; 8:45 am]
BILLING CODE 4810–33–P 6210–01–P; 6714–01–P
E:\FR\FM\08OCR1.SGM
08OCR1
]]>Agencies
[Federal Register Volume 84, Number 195 (Tuesday, October 8, 2019)]
[Rules and Regulations]
[Pages 53579-53598]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-21376]
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DEPARTMENT OF THE TREASURY
Office of the Comptroller of the Currency
12 CFR Part 34
[Docket No. OCC-2019-0038]
RIN 1557-AE57
FEDERAL RESERVE SYSTEM
12 CFR Part 225
[Docket No. R-1639]
RIN 7100-AF30
FEDERAL DEPOSIT INSURANCE CORPORATION
12 CFR Part 323
RIN 3064-AE87
Real Estate Appraisals
AGENCY: Office of the Comptroller of the Currency, Treasury (OCC);
Board of Governors of the Federal Reserve System (Board); and Federal
Deposit Insurance Corporation (FDIC).
ACTION: Final rule.
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SUMMARY: The OCC, Board, and FDIC (collectively, the agencies) are
adopting a final rule to amend the agencies' regulations requiring
appraisals of real estate for certain transactions. The final rule
increases the threshold level at or below which appraisals are not
required for residential real estate transactions from $250,000 to
$400,000. The final rule defines a residential real estate transaction
as a real estate-related financial transaction that is secured by a
single 1-to-4 family residential property. For residential real estate
transactions exempted from the appraisal requirement as a result of the
revised threshold, regulated institutions must obtain an evaluation of
the real property collateral that is consistent with safe and sound
banking practices. The final rule makes a conforming change to add to
the list of exempt transactions those transactions secured by
residential property in rural areas that have been exempted from the
agencies' appraisal requirement pursuant to the Economic Growth,
Regulatory Relief, and Consumer Protection Act. The final rule requires
evaluations for these exempt transactions. The final rule also amends
the agencies' appraisal regulations to require regulated institutions
to subject appraisals for federally related transactions to appropriate
review for compliance with the Uniform Standards of Professional
Appraisal Practice.
[[Page 53580]]
DATES: This final rule is effective on October 9, 2019, except for the
amendments in instructions 4, 5, 9, 10, 14, and 15, which are effective
on January 1, 2020.
FOR FURTHER INFORMATION CONTACT:
OCC: G. Kevin Lawton, Appraiser (Real Estate Specialist), (202)
649-7152; Mitchell E. Plave, Special Counsel, (202) 649-5490; or Joanne
Phillips, Counsel, Chief Counsel's Office (202) 649-5500; Office of the
Comptroller of the Currency, 400 7th Street SW, Washington, DC 20219.
For persons who are deaf or hearing impaired, TTY users may contact
(202) 649-5597.
Board: Anna Lee Hewko, Associate Director, (202) 530-6260; Virginia
Gibbs, Manager, Policy Development Section, (202) 452-2521; Carmen
Holly, Lead Financial Institution Policy Analyst, (202) 973-6122,
Division of Supervision and Regulation; Laurie Schaffer, Associate
General Counsel, (202) 452-2272; Matthew Suntag, Counsel, (202) 452-
3694; Derald Seid, Counsel, (202) 452-2246; or Trevor Feigleson, Senior
Attorney, (202) 452-3274, Legal Division, Board of Governors of the
Federal Reserve System, 20th and C Streets NW, Washington, DC 20551.
For the hearing impaired only, Telecommunications Device for the Deaf
(TDD) users may contact (202) 263-4869.
FDIC: Beverlea S. Gardner, Senior Examination Specialist, Division
of Risk Management and Supervision, (202) 898-3640, [email protected];
Benjamin K. Gibbs, Counsel, Legal Division, (202) 898-6726; Mark
Mellon, Counsel, Legal Division, (202) 898-3884; or Navid Choudhury,
Legal Division, (202) 898-6526, Federal Deposit Insurance Corporation,
550 17th Street NW, Washington, DC 20429. For the hearing impaired
only, TDD users may contact (202) 925-4618.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Introduction
A. Background
B. Summary of Proposed Rule
C. Overview of Comments
II. Revisions to the Title XI Appraisal Regulations
A. Threshold Increase for Residential Real Estate Transactions
1. Definition of Residential Real Estate Transaction
2. Threshold Level
3. Safety and Soundness Considerations for Raising the
Residential Real Estate Threshold
4. Consumer Protection Considerations
5. Reducing Burden Associated With Appraisals
B. Incorporation of the Rural Residential Appraisal Exemption
Under Section 103 of the Economic Growth, Regulatory Relief, and
Consumer Protection Act
C. Addition of Appraisal Review Requirement
D. Conforming and Technical Amendments
III. Effective Date
IV. Regulatory Analysis
A. Regulatory Flexibility Act Analysis
B. Paperwork Reduction Act
C. Riegle Community Development and Regulatory Improvement Act
of 1994
D. Solicitation of Comments on Use of Plain Language
E. OCC Unfunded Mandates Reform Act of 1995 Determination
Regulatory Text
I. Introduction
A. Background
In December 2018, the agencies invited comment on a notice of
proposed rulemaking (proposal or proposed rule) \1\ that would amend
the agencies' appraisal regulations promulgated pursuant to Title XI of
the Financial Institutions Reform, Recovery, and Enforcement Act of
1989 (Title XI).\2\ Specifically, the proposal would increase the
monetary threshold at or below which financial institutions that are
subject to the agencies' appraisal regulations (regulated institutions)
would not be required to obtain appraisals in connection with
residential real estate transactions (residential real estate appraisal
threshold) from $250,000 to $400,000. In addition, the proposal would
add to the list of exempt transactions those transactions that are
secured by residential property in rural areas that have been exempted
from the agencies' appraisal requirement pursuant to the Economic
Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA) \3\
(rural residential appraisal exemption). The proposal would require
regulated institutions to obtain evaluations for transactions exempt
from the agencies' appraisal requirements due to the increase in the
residential real estate appraisal threshold or the rural residential
appraisal exemption. Finally, the proposal would amend the agencies'
appraisal regulations to require regulated institutions to subject
appraisals for federally related transactions to appropriate review for
compliance with the Uniform Standards of Professional Appraisal
Practice (USPAP), as required under section 1473(e) of the Dodd-Frank
Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act).\4\
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\1\ 83 FR 63110 (December 7, 2018).
\2\ 12 U.S.C. 3331 et seq.
\3\ Public Law 115-174, 132 Stat. 1296, Title I, section 103,
codified at 12 U.S.C. 3356.
\4\ Public Law 111-203, 124 Stat. 1376, codified at 12 U.S.C.
3339(3).
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Title XI directs each Federal financial institutions regulatory
agency \5\ to publish appraisal regulations for federally related
transactions within its jurisdiction. The purpose of Title XI is to
protect federal financial and public policy interests \6\ in real
estate-related transactions by requiring that real estate appraisals
used in connection with federally related transactions (Title XI
appraisals) be performed in accordance with uniform standards by
individuals whose competency has been demonstrated and whose
professional conduct will be subject to effective supervision.\7\
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\5\ The term ``Federal financial institutions regulatory
agencies'' means the Board, the FDIC, the OCC, the National Credit
Union Administration (NCUA), and, formerly, the Office of Thrift
Supervision. 12 U.S.C. 3350(6).
\6\ These interests include those stemming from the federal
government's roles as regulator and deposit insurer of financial
institutions that engage in real estate lending and investment,
guarantor or lender on mortgage loans, and as a direct party in
real-estate related financial transactions. These federal financial
and public policy interests have been described in predecessor
legislation and accompanying Congressional reports. See Real Estate
Appraisal Reform Act of 1988, H.R. Rep. No. 100-1001, pt. 1, at 19
(1988); 133 Cong. Rec. 33047-33048 (1987).
\7\ 12 U.S.C. 3331.
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Title XI directs the agencies to prescribe appropriate standards
for Title XI appraisals under the agencies' respective
jurisdictions.\8\ At a minimum, the statute provides that Title XI
appraisals must be: (1) performed in accordance with USPAP; (2) written
appraisals, as defined by the statute; and (3) subject to appropriate
review for compliance with USPAP.\9\
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\8\ 12 U.S.C. 3339.
\9\ The third minimum requirement was added to Title XI by
section 1473(e) of the Dodd-Frank Act, as noted supra, and is being
implemented by this rulemaking. See infra, Section II.C.
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All federally related transactions must have Title XI appraisals.
Title XI defines a federally related transaction as a real estate-
related financial transaction \10\ that the agencies or a financial
institution regulated by the agencies engages in or contracts for, that
requires the services of an appraiser under Title XI and the
interagency appraisal rules.\11\ The agencies have authority to
determine those real estate-related
[[Page 53581]]
financial transactions that do not require Title XI appraisals.\12\ The
agencies have exercised this authority by exempting several categories
of real estate-related financial transactions from the agencies'
appraisal requirement, including transactions at or below certain
designated thresholds.\13\
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\10\ 12 U.S.C. 3350(5). A real estate-related financial
transaction is defined as any transaction that involves: (i) The
sale, lease, purchase, investment in or exchange of real property,
including interests in property, or financing thereof; (ii) the
refinancing of real property or interests in real property; and
(iii) the use of real property or interests in real property as
security for a loan or investment, including mortgage-backed
securities.
\11\ 12 U.S.C. 3350(4).
\12\ Real estate-related financial transactions that the
agencies have exempted from the appraisal requirement are not
federally related transactions under the agencies' appraisal
regulations.
\13\ See OCC: 12 CFR 34.43(a); Board: 12 CFR 225.63(a); FDIC: 12
CFR 323.3(a). The agencies have determined that these categories of
transactions do not require appraisals by state certified or state
licensed appraisers in order to protect federal financial and public
policy interests or to satisfy principles of safe and sound banking.
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Title XI expressly authorizes the agencies to establish thresholds
at or below which Title XI appraisals are not required if: (1) The
agencies determine in writing that the threshold does not represent a
threat to the safety and soundness of financial institutions; and (2)
the agencies receive concurrence from the Consumer Financial Protection
Bureau (CFPB) that such threshold level provides reasonable protection
for consumers who purchase 1-to-4 unit single-family residences.\14\
Under the current thresholds, residential real estate transactions \15\
with a transaction value \16\ of $250,000 or less, certain real estate-
secured business loans (qualifying business loans) \17\ with a
transaction value of $1 million or less, and commercial real estate
(CRE) transactions with a transaction value of $500,000 or less do not
require Title XI appraisals.\18\ The appraisal threshold applicable to
residential real estate transactions has not been changed since
1994.\19\
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\14\ 12 U.S.C. 3341(b).
\15\ While the $250,000 threshold explicitly applies to all real
estate-related financial transactions with transaction values of
$250,000 or less, it effectively only applies to residential real
estate transactions because all other real estate-related financial
transactions are subject to higher thresholds.
\16\ For loans and extensions of credit, the transaction value
is the amount of the loan or extension of credit. For sales, leases,
purchases, investments in or exchanges of real property, the
transaction value is the market value of the real property. For the
pooling of loans or interests in real property for resale or
purchase, the transaction value is the amount of each loan or the
market value of each real property, respectively. See OCC: 12 CFR
34.42(m); Board: 12 CFR 225.62(m); FDIC: 12 CFR 323.2(m).
\17\ Qualifying business loans are business loans that are real
estate-related financial transactions and that are not dependent on
the sale of, or rental income derived from, real estate as the
primary source of repayment. The Title XI appraisal regulations
define ``business loan'' to mean a loan or extension of credit to
any corporation, general or limited partnership, business trust,
joint venture, pool, syndicate, sole proprietorship, or other
business entity. See OCC: 12 CFR 34.42(d); Board: 12 CFR 225.62(d);
FDIC: 12 CFR 323.2(d).
\18\ See OCC: 12 CFR 34.43(a)(1), (5), and (13); Board: 12 CFR
225.63(a)(1), (5), and (14); and FDIC: 12 CFR 323.3(a)(1), (5), and
(13).
\19\ See 59 FR 29482 (June 7, 1994). The OCC, Board, and FDIC
had previously set the appraisal threshold at $100,000. OCC: 57 FR
12190-02 (April 9, 1992); Board: 55 FR 27762 (July 5, 1990); FDIC:
57 FR 9043-02 (March 16, 1992).
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For real estate-related financial transactions at or below the
applicable thresholds and for certain existing extensions of credit
exempt from the agencies' appraisal requirement,\20\ the Title XI
appraisal regulations require regulated institutions to obtain an
appropriate evaluation of the real property collateral that is
consistent with safe and sound banking practices.\21\ An evaluation
should contain sufficient information and analysis to support the
regulated institution's decision to engage in the transaction.\22\ The
agencies have provided supervisory guidance for conducting evaluations
in a safe and sound manner in the Interagency Appraisal and Evaluation
Guidelines (Guidelines) \23\ and the Interagency Advisory on the Use of
Evaluations in Real Estate-Related Financial Transactions (Evaluations
Advisory,\24\ and together with the Guidelines, Evaluation Guidance).
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\20\ Transactions that involve an existing extension of credit
at the lending institution are exempt from the agencies' appraisal
requirement, but are required to have evaluations, provided that
there has been no obvious and material change in market conditions
or physical aspects of the property that threatens the adequacy of
the institution's real estate collateral protection after the
transaction, even with the advancement of new monies; or there is no
advancement of new monies, other than funds necessary to cover
reasonable closing costs. See OCC: 12 CFR 34.43(a)(7) and (b);
Board: 12 CFR 225.63(a)(7) and (b); FDIC: 12 CFR 323.3(a)(7) and
(b).
\21\ See OCC: 12 CFR 34.43(b); Board: 12 CFR 225.63(b); FDIC: 12
CFR 323.3(b). An evaluation is not required when real estate-related
financial transactions meet the threshold criteria and also qualify
for another exemption from the agencies' appraisal requirement where
no evaluation is required by the regulation.
\22\ Evaluations are not required to be performed in accordance
with USPAP or by state certified or state licensed appraisers by
federal law. For additional information on evaluations, see infra
notes 23 and 24.
\23\ The agencies proposed the Guidelines for public comment in
2008, see 73 FR 69647 (November 19, 2008), and adopted the final
Guidelines in 2010, see 75 FR 77450 (December 10, 2010).
\24\ Interagency Advisory on the Use of Evaluations in Real
Estate-Related Financial Transactions (March 4, 2016), OCC Bulletin
2016-8; Board SR Letter 16-5; FDIC FIL-16-2016.
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In 2018, Congress amended Title XI by adding the rural residential
appraisal exemption to provide relief for financial institutions
engaging in residential real estate transactions in certain rural
areas. The exemption provides that residential transactions in certain
rural areas do not require Title XI appraisals if the financial
institution documents that appraisers are not available for the
transaction within reasonable time and cost parameters.\25\ The statute
does not specifically require that real estate evaluations be performed
when financial institutions utilize this exemption.
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\25\ Public Law 115-174, Title I, section 103, codified at 12
U.S.C. 3356. Effective May 24, 2018, section 103 provides that a
Title XI appraisal is not required if the real property or interest
in real property is located in a rural area, as described in 12 CFR
1026.35(b)(2)(iv)(A), and if the transaction value is $400,000 or
less. In addition, the mortgage originator or its agent, directly or
indirectly must have contacted not fewer than three state certified
or state licensed appraisers, as applicable, on the mortgage
originator's approved appraiser list in the market area, in
accordance with 12 CFR part 226, not later than three days after the
date on which the Closing Disclosure was provided to the consumer
and documented that no state certified or state licensed appraiser,
as applicable, was available within five business days beyond
customary and reasonable fee and timeliness standards for comparable
appraisal assignments.
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B. Summary of Proposed Rule
As noted in the proposed rule, residential property values have
increased over time, but the appraisal threshold has not been adjusted
since 1994. The agencies believe rising market prices of residential
properties have contributed to increased burden for regulated
institutions and consumers in terms of transaction time and costs,
given that the threshold has remained the same since 1994. The proposed
rule was intended to reduce regulatory burden consistent with federal
financial and public policy interests in residential real estate-
related financial transactions. Based on supervisory experience and
available data, the agencies published the proposed rule to accomplish
these goals without posing a threat to the safety and soundness of
financial institutions.
The agencies proposed to increase the threshold level at or below
which appraisals are not required for residential real estate
transactions from $250,000 to $400,000. Residential real estate
transaction would be defined as a real-estate related financial
transaction that is secured by a single 1-to-4 family residential
property. For residential real estate transactions exempted from the
appraisal requirement as a result of the revised threshold, regulated
institutions would be required to obtain an evaluation of the real
property collateral that is consistent with safe and sound banking
practices.
The agencies also proposed to make conforming changes to add the
rural residential appraisal exemption to the appraisal regulations. The
agencies proposed that evaluations be required
[[Page 53582]]
for these transactions. In addition, the agencies proposed to amend the
agencies' appraisal regulations to require regulated institutions to
subject appraisals for federally related transactions to appropriate
review for compliance with USPAP, pursuant to Title XI, as amended by
the Dodd-Frank Act.\26\ The agencies also proposed several conforming
and technical amendments to their appraisal regulations. The agencies
invited comment on all aspects of the proposal.
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\26\ Public Law 111-203, 124 Stat. 1376.
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C. Overview of Comments
The agencies collectively received over 560 comments regarding the
proposal to increase the residential real estate appraisal threshold
that addressed a variety of issues. Comments from financial
institutions, financial institution trade associations, and state
banking regulators generally supported the proposed increase. Comments
from appraisers, appraiser trade organizations, individuals, and
consumer advocate groups generally opposed the proposal to increase the
threshold. The agencies also received a few comments that are addressed
separately below concerning the proposed requirement to obtain
evaluations for transactions that qualify for the rural residential
appraisal exemption or to subject certain appraisals to appropriate
review for compliance with USPAP.\27\
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\27\ The agencies received five comments suggesting that the
agencies hold public hearings regarding the proposed rule. The
agencies denied these requests on grounds that holding a public
hearing would not elicit relevant information that could not be
conveyed through the notice and comment process.
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Commenters supporting the proposed threshold increase asserted that
an increase would be appropriate given the increases in real estate
values since the current threshold was established as well as the cost
and time savings to lenders and borrowers that the higher threshold
would provide. Supportive commenters also indicated that a threshold
increase would provide burden relief for financial institutions without
sacrificing safe and sound banking practices. Many of these commenters
saw evaluations as appropriate substitutes for appraisals and
institutions as having appropriate risk management controls in place to
manage the proposed threshold change responsibly. Some commenters in
support of the proposal indicated that the proposed threshold increase
would benefit consumers, arguing that costs and delays due to
appraisals could be reduced. These commenters asserted that expedited
valuations could make the residential mortgage market more efficient
and lower closing costs.
Commenters opposing an increase to the residential real estate
appraisal threshold asserted that the proposal would elevate risks to
borrowers, financial institutions, the financial system, and taxpayers.
Several commenters asserted that the increased risk would not be
justified by burden relief resulting from a threshold increase. As
described in more detail below, many commenters in opposition asserted
that the proposal would negatively impact consumers. Many of these
comments focused on views that evaluations are inadequate substitutes
for appraisals.
Many commenters opposing the proposal highlighted the benefits that
state licensed or state certified appraisers bring to the real estate
valuation process. Commenters asserted that appraisers serve a
necessary function in real estate lending and expressed concerns that
bypassing them to create a more streamlined valuation process could
lead to fraud and another real estate crisis. Many commenters asserted
that appraisers are the only unbiased party in the valuation process,
in contrast to buyers, agents, lenders, and sellers, who each have an
interest in the underlying transactions. Several commenters rejected
assertions that there was an appraiser shortage warranting regulatory
relief.
Several commenters questioned the proposal in light of the
agencies' previous decision not to propose an increase to the
residential real estate appraisal threshold during the regulatory
review process required by the Economic Growth and Regulatory Paperwork
Reduction Act (EGRPRA).\28\ A few commenters also questioned whether
the proposed threshold increase is consistent with Congressional
intent, given that the rural residential real estate exemption was made
available only to transactions meeting certain criteria, while the
proposed threshold increase would exempt all residential transactions
at or below $400,000.
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\28\ Public Law 104-208, Div. A, Title II, section 2222, 110
Stat. 3009-414, (1996) (codified at 12 U.S.C. 3311).
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II. Revisions to the Title XI Appraisal Regulations
After carefully considering the comments and conducting further
analysis, the agencies are adopting the final rule as proposed, and are
increasing the residential real estate appraisal threshold from
$250,000 to $400,000. As discussed in the proposal and further detailed
below, increasing the residential real estate appraisal threshold will
provide meaningful regulatory relief for financial institutions without
threatening the safety and soundness of financial institutions.
The agencies are authorized to increase the threshold based on
express statutory authority to do so upon making a determination in
writing that the threshold does not represent a threat to the safety
and soundness of financial institutions and receiving concurrence from
the CFPB that the threshold level provides reasonable protection for
consumers who purchase 1-to-4 unit single-family residences.\29\
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\29\ The agencies note the rural residential appraisal exemption
does not require a safety and soundness determination by the
agencies or a concurrence by the CFPB. 12 U.S.C. 3341(b).
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As detailed below, the agencies have determined that a residential
real estate appraisal threshold of $400,000 will not threaten the
safety and soundness of financial institutions and have received
concurrence from the CFPB that this threshold level provides reasonable
protection for consumers who purchase 1-4 unit single-family
residences.
The agencies recognize that they decided against proposing a
residential appraisal threshold increase during the EGRPRA process. The
agencies have reconsidered this decision based on continued comments
received from financial institutions and state bank regulatory agencies
that increasing the residential appraisal threshold would provide
meaningful burden relief, as well as further analysis regarding safety
and soundness and consumer protection factors related to the proposal,
as detailed below. The agencies also recognize that Congress recently
amended Title XI to provide a narrow, self-effectuating appraisal
exemption for rural transactions meeting certain requirements. However,
the agencies also observe that Congress did not amend the agencies'
long-standing authority in Title XI to establish a threshold level at
or below which a certified or licensed appraiser is not required to
perform an appraisal in connection with federally related transactions.
Through the EGRRCPA amendment, Congress mandated that rural
transactions meeting specific statutory criteria be exempted from the
appraisal regulations; however, there is no indication that Congress
intended to restrict the agencies' authority to provide additional
exemptions pursuant to their existing statutory authority.
[[Page 53583]]
The agencies are also finalizing as proposed the requirement to
obtain an evaluation for transactions that qualify for the rural
residential appraisal exemption and the requirement that appraisals for
federally related transactions be subject to appropriate review for
compliance with USPAP. The final rule also makes several technical and
conforming changes to the appraisal regulations. These changes are
discussed in more detail below, in the order in which they appear in
the rule. The effective date for the rule will be the first day after
its publication in the Federal Register, other than the evaluation
requirement for transactions exempted by the rural residential
appraisal exemption and the appraisal review provision, which will
become effective on January 1, 2020.
A. Threshold Increase for Residential Real Estate Transactions
1. Definition of Residential Real Estate Transaction. The agencies
proposed to define a residential real estate transaction as a real
estate-related financial transaction secured by a single 1-to-4 family
residential property and specifically asked commenters whether the
proposed definition is appropriate. The agencies received one comment
generally supporting the proposed definition and one comment generally
opposing the definition, neither of which included any detail regarding
the reasoning for the position. This definition is consistent with
current references to appraisals for residential real estate in the
agencies' appraisal regulations and in Title XI, and the definition of
commercial real estate transaction that was created in the recent
rulemaking to increase the appraisal threshold for commercial real
estate (CRE) transactions (CRE rulemaking).\30\ Adding this definition
does not change any substantive requirement, but provides clarity to
the regulation.\31\ Therefore, the agencies are adopting the definition
of a residential real estate transaction as proposed.
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\30\ 83 FR 15019-01 (April 9, 2018) (``commercial real estate
transaction'' is defined as a ``real estate-related financial
transaction that is not secured by a single 1-to-4 family
residential property'').
\31\ The agencies believe that federally related transactions
secured by single 1-to-4 family residential properties are currently
the only real estate transactions subject to the $250,000 appraisal
threshold.
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2. Threshold Level. The agencies proposed increasing the
residential real estate appraisal threshold from $250,000 to $400,000.
In determining the level of increase, the agencies considered increases
in housing prices and general inflation across the economy since the
current threshold was established in 1994. The agencies also considered
comments received during the EGRPRA process and in response to
questions posed about the residential threshold in the CRE
rulemaking.\32\ As discussed in the proposal, the agencies analyzed the
Standard & Poor's Case-Shiller Home Price Index (Case-Shiller Index)
\33\ and the FHFA Index \34\ to determine changes in house prices since
1994. The agencies also analyzed general measures of inflation by
reviewing the Consumer Price Index (CPI).\35\
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\32\ 82 FR 35478, 35482 (July 31, 2017); 83 FR at 15029-15030.
\33\ The Case-Shiller Index reflects changes in home prices from
a base of $250,000 in June 1994, based on the Standard & Poor's
Case-Shiller Home Price Index. See Standard & Poor's CoreLogic Case-
Shiller Home Price Indices, available at https://us.spindices.com/index-family/real-estate/sp-corelogic-case-shiller.
\34\ The FHFA Index reflects changes in home prices from a base
of $250,000 in June 1994, based on the FHFA House Price Index. See
FHFA House Price Index, available at https://www.fhfa.gov/DataTools/Downloads/Pages/House-Price-Index.aspx.
\35\ The CPI, which is published by the Bureau of Labor
Statistics, is a measure of the average change over time in the
prices paid by urban consumers for a market basket of goods and
services. See https://www.bls.gov/cpi/.
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A residential property that sold for $250,000 as of June 30, 1994,
would be expected to sell in March 2019 for $643,750 according to the
Case-Shiller Index and $621,448 according to the FHFA Index (see Table
1 below). The agencies also considered housing prices over the most
recent financial cycle which were generally at a low point in 2011.
During the low point of the cycle, in December 2011, a house that sold
for $250,000 in 1994 would have been expected to sell for $445,152 in
December 2011, according to the Case-Shiller Index and $414,629
according to the FHFA Index.
Table 1--House Price and Inflation Adjustments of $250,000 at June 30,
1994, for the Case-Shiller Index and the FHFA Index, and July 1, 1994
for the CPI Index
------------------------------------------------------------------------
Case-
Table 1 year Shiller FHFA CPI
------------------------------------------------------------------------
1994................................... 250,000 250,000 250,000
2006................................... 578,813 511,636 341,109
2011................................... 445,152 414,629 379,997
2019................................... 643,750 621,448 429,240
------------------------------------------------------------------------
The agencies adopted a conservative approach and proposed a
threshold of $400,000 to approximate housing prices based on the low
point during the most recent cycle. The proposed threshold level is
also consistent with general measures of inflation across the economy
reflected in the CPI since 1994. The agencies invited comment on the
proposed level for the residential real estate appraisal threshold.
The agencies received a number of comments agreeing that the
proposed threshold level would be justified by changes in real estate
prices, inflation, and the data presented by the agencies in the
proposal. Other commenters supporting a threshold increase supported a
higher threshold, such as $500,000. These commenters generally asserted
that doing so would be more consistent with the data presented. Some
commenters also cited consistency with the CRE appraisal threshold as a
justification for increasing the residential real estate threshold to
$500,000. One commenter supporting a higher threshold questioned why
the agencies did not adjust from the lowest point in the most recent
cycle to account for price appreciation up to a more recent date, as
was done in the CRE rulemaking. Several commenters supportive of
increasing the threshold recommended that the agencies either commit to
adjusting the threshold periodically, or automatically adjust the
threshold periodically, to reflect changes in housing values, market
conditions or inflation.
Some commenters opposing the increase asserted that inflationary
changes are inadequate justifications for increasing the appraisal
threshold. Some opposing commenters suggested the agencies should
either maintain the current $250,000 threshold or lower the threshold,
with suggested ranges from $100,000 or under to $275,000. Some
commenters suggested eliminating the residential appraisal threshold
exemption entirely and requiring appraisals for all residential real
estate transactions. A few commenters suggested lower thresholds and
that transactions under the current and proposed thresholds often pose
risk to financial institutions and to consumers. Some of these
commenters asserted that many transactions involving defaults or
foreclosures are transactions below $400,000.
Some commenters asserted that the threshold should vary based on
market values in specific geographic areas, and that a national
threshold level is inappropriate given differences in property values
across the country. Some commenters suggested doing so by basing the
threshold on the GSE conforming loan limits for specific geographic
areas. Several commenters asserted that inflationary measures such as
the CPI are inappropriate measures
[[Page 53584]]
on which to base the threshold because they are not accurate indicators
of housing prices. One of these commenters suggested that the threshold
be based on wage growth and housing affordability. Two commenters
asserted that adjusting the $250,000 threshold based on changes in
prices would be inappropriate because that level was not itself the
result of an inflation adjustment and was either arbitrary or improper.
After carefully considering the comments received, and for the
reasons discussed previously, the agencies have decided to increase the
residential real estate appraisal threshold to $400,000, as proposed.
Increasing the appraisal threshold for residential real estate
transactions to $400,000 approximates more recent house prices and
provides an inflation adjustment to a threshold that has not been
increased since 1994. The agencies based the beginning point for this
analysis on $250,000 because, as discussed below, supervisory
experience with the $250,000 threshold indicates that this threshold
level did not threaten the safety and soundness of financial
institutions.
The agencies acknowledge that the data presented indicates that a
house sold in 1994 would sell for higher than $400,000 today; however,
the agencies believe the more conservative approach is appropriate.
Setting the threshold level to the low point of the most recent cycle
takes into consideration potential price fluctuations to which
financial institutions that engage in residential real estate lending
could be exposed. This approach also considers that a high percentage
of residential real estate transactions is already captured by the
existing residential real estate threshold, as reflected below in Table
2.
The agencies also concluded that automatic adjustments to the
threshold or agency commitments to set timetables for future threshold
increases would not be appropriate. The agencies already periodically
review their regulations to identify outdated or unnecessary regulatory
requirements, such as through the EGRPRA process, and can consider any
comments concerning the thresholds through that process. In addition,
the agencies are required by Title XI to weigh safety and soundness
implications regarding any proposed threshold increase and obtain CFPB
concurrence. The other alternative proposals suggested, such as varying
the threshold based on local housing prices or wages, would add
unnecessary regulatory burden and complexity by introducing numerous
threshold levels across the country.
3. Safety and Soundness Considerations for Raising the Residential
Real Estate. Threshold. Under Title XI, the agencies may set a
threshold at or below which a Title XI appraisal is not required if
they determine in writing that such a threshold level does not pose a
threat to the safety and soundness of financial institutions.\36\ In
the proposal, the agencies preliminarily determined that the proposed
threshold level for residential real estate transactions would not pose
a threat to the safety and soundness of financial institutions. The
preliminary determination was based on supervisory experience regarding
causes of losses at financial institutions, analysis of available Home
Mortgage Disclosure Act (HMDA) data, and the fact that evaluations
would be required for transactions below the proposed threshold.\37\
The agencies invited comment on their preliminary finding that the
proposed threshold would not pose a threat to the safety and soundness
of financial institutions, as well as the data used to support the
finding. After taking into account the comments, discussed below, and
analyzing a range of data and information, the agencies have determined
that the threshold level of $400,000 for residential real estate
transactions does not represent a threat to the safety and soundness of
financial institutions.
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\36\ 12 U.S.C. 3341(b).
\37\ 83 FR at 63116-63119.
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Agency staff used HMDA data to estimate the number and dollar
volume of institutions' residential real estate transactions that would
be affected by the increased threshold. Table 2 below shows the number
and dollar volume of transactions in 2017 that: (i) Would have been
exempted under the current threshold; (ii) would be newly exempted
under the proposed threshold increase; (iii) in total would be exempted
as a result of the proposed threshold increase; and (iv) would not be
exempted following the proposed threshold increase. The data are
limited to first-lien, single-family mortgage originations \38\ on
residential properties by FDIC-insured institutions and affiliated
institutions that are not sold to the GSEs or otherwise insured or
guaranteed by a U.S. government agency (``regulated
transactions'').\39\
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\38\ Single-family properties include 1-to-4 family and
manufactured housing property types.
\39\ Transactions originated by regulated institutions but sold
to the GSEs or otherwise insured or guaranteed by a U.S. government
agency are separately exempted from the agencies' appraisal
requirement. See OCC: 12 CFR 34.43(a)(9); Board: 12 CFR
225.63(a)(9); FDIC: 12 CFR 323.3(a)(9). As described in the
proposal, the 214,000 additional exempted transactions represent
only three percent of total HMDA originations in 2017 and, as also
reflected in Table 2, 16 percent of regulated transactions.
Table 2--2017 HMDA \40\
----------------------------------------------------------------------------------------------------------------
Total not
Exempted by Newly exempted Total exempted exempted by
Regulated transactions by current by proposed by proposed proposed
transaction amount threshold of increase to increase to increase to
$250,000 $400,000 $400,000 $400,000
----------------------------------------------------------------------------------------------------------------
Number of Transactions.............. 750,000 214,000 965,000 379,000
% of Total.......................... 56% 16% 72% 28%
Dollar Volume ($billions)........... 96 68 164 305
% of Total.......................... 20% 14% 35% 65%
----------------------------------------------------------------------------------------------------------------
The 2017 HMDA data suggests that the $250,000 threshold currently
exempts approximately 20 percent of the total dollar volume of
regulated transactions. Raising the threshold to $400,000 will exempt
an additional estimated 14 percent of the dollar volume, thus
increasing the share of the dollar volume of regulated transactions
that are exempt to approximately 35 percent.
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\40\ Numbers and dollar volumes are based on 2017 HMDA data.
Originations with loan amounts greater than $20 million are
excluded. Subtotals may not add to totals due to rounding.
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The agencies reviewed HMDA data to measure the percent of regulated
transactions exempted in 1994 when the
[[Page 53585]]
threshold was raised from $100,000 to $250,000 as compared to raising
the threshold from $250,000 to $400,000. The data show that increasing
the threshold from $100,000 to $250,000 in 1994 resulted in an
estimated 77 percent of the total dollar volume of regulated
transactions being exempt.\41\ By comparison, as referenced above in
Table 2, 2017 HMDA data indicates that increasing the threshold from
$250,000 to $400,000 will result in an estimated 35 percent of the
total dollar volume of regulated transactions being exempt. As stated
in the proposal, the threshold increase will exempt a much smaller
percentage of regulated transactions by dollar volume.
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\41\ In both the 1994 and 2017 HMDA analyses, the agencies
excluded transactions originated by nonbanks or transactions sold to
the GSEs or otherwise insured or guaranteed by a U.S. government
agency because those transactions are already subject to other
exemptions in the appraisal regulations. When discussing the impact
of the threshold increase from $100,000 to $250,000, the preamble to
the 1994 rule noted that information from the National Association
of Realtors, the Census Bureau, and the Department of Housing and
Urban Development indicated that 85 percent of the dollar volume of
mortgages financing new homes and 82 percent of the volume of
mortgages financing purchases of existing homes would fall below the
$250,000 threshold. See 59 FR at 29486. The agencies reviewed the
data used in 1994 and determined that the information reviewed by
the agencies did not appear to exclude transactions originated by
nonbanks or transactions sold to the GSEs or otherwise insured or
guaranteed by a U.S. government agency, thus, necessitating the
additional analysis.
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In the proposal, the agencies requested comment on whether the
proposed level of $400,000 for the threshold would be appropriate from
a safety and soundness perspective, and on what sources of data would
be appropriate for the safety and soundness analysis. In general,
commenters who supported the proposed increase in the threshold viewed
the data presented in the proposed rule as supporting the increase,
while commenters opposed to the increase found the data insufficient.
A number of commenters noted that the scope of the threshold had
decreased significantly since it was established in 1994 due to
inflation in home values. As such, they argued that an increase in the
threshold would be justified to align the threshold with its 1994
scope. Other commenters expressed concern that the proposed threshold
level would exempt too high a percentage of residential transactions
from the protections provided by appraisals. These commenters focused
on the percentage of residential transactions that would be affected,
either on a national basis or based on specific geographic areas. Many
such commenters cited data indicating that the proposed threshold of
$400,000 is well above median home prices nationally and would exempt a
large majority of residential transactions in specific areas. One
commenter indicated that only 17 metropolitan statistical areas have a
median sales price for single-family homes that exceeds $400,000.
Several commenters cited to sources of data that indicated lower median
home prices than the sources cited in the proposal.
A number of commenters requested that the agencies conduct
alternative analyses and pointed out that the agencies did not analyze
the local or regional markets affected by the increase nor the impact
on particular borrowers or communities. Some commenters called for
further study of home prices by region and metro area and for the
agencies to show which markets would be most affected by the threshold
increase. In particular, commenters requested that the agencies analyze
the effect of the proposed increase in the threshold in dynamic markets
and compare its effect in urban versus rural areas. One commenter
indicated that HMDA data are the wrong source of information for
evaluating the impact of the threshold on rural areas, given that
certain low volume originators in rural areas are not required to
report HMDA data.
Based on the agencies' supervisory experience and analysis, as
discussed in more detail below, the current threshold has not
negatively impacted safety and soundness, and the agencies do not
believe raising the threshold to $400,000 will present a safety and
soundness concern. Although several commenters were concerned that the
agencies had not analyzed the effects on local markets or particular
communities, the agencies' supervisory experience with the current
threshold since 1994 suggests that this incremental increase will not
negatively affect safety and soundness on the local or national level
based on loss rates for residential real estate loans as discussed
below and observations during examinations.
Moreover, the 2017 HMDA data also suggests that, though the impact
on the total dollar volume of exempted transactions would be somewhat
limited, the number of exempted transactions would increase materially
and provide cost savings and regulatory burden relief for financial
institutions. As shown in table 2 above, the agencies estimate that the
increase would exempt an additional 214,000 transactions and thus raise
the share of the number of regulated transactions that would be exempt
from 56 percent to 72 percent. This analysis of the 2017 HMDA data
indicates that the increased threshold will affect a low aggregate
dollar volume but a material number of transactions, suggesting the
potential for financial savings and burden relief with limited
additional risk.\42\
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\42\ As noted above, in estimating the impact of the threshold
increase on institutions, the agencies attempted to exclude from the
HMDA data analysis residential transactions that were already exempt
from the appraisal regulations, including those sold to the GSEs.
The agencies recognize that the analysis may not have excluded all
GSE-related transactions exempted from the appraisal regulations, as
the regulations exempt not just transactions sold to the GSEs, but
all transactions that qualify for sale to a GSE or U.S. government
agency. OCC: 12 CFR 34.43(a)(10)(i); Board: 12 CFR 225.63(a)(10)(i);
FDIC: 12 CFR 323.3(a)(10)(i). The agencies do not currently have the
ability to accurately determine which transactions not sold to a GSE
or U.S. government agency actually qualified for sale. Even assuming
that a number of transactions fall into this category, the agencies
believe the threshold increase will produce burden relief for
regulated institutions.
---------------------------------------------------------------------------
Further, as covered in the proposal, the 2017 HMDA data show that
the rule would provide significant burden relief in rural areas. The
agencies estimate that increasing the appraisal threshold to $400,000
would potentially increase the share of exempted transactions from 82
percent to 91 percent of the number, and from 43 percent to 58 percent
of the dollar volume, of regulated transactions that were secured by
residential property located in a rural area.\43\
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\43\ For the purposes of the HMDA analysis, a property is
considered to be located in a ``rural'' area if it is in a county
that is neither in a metropolitan statistical area nor in a
micropolitan statistical area that is adjacent to a metropolitan
statistical area, based on 2013 Urban Influence Codes (UIC)
published by the United States Department of Agriculture. Any loans
from Census tracts that are missing geographical identifiers or
undefined in the 2013 UIC have been excluded from the analysis of
burden relief in rural areas.
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a. Use of Evaluations. The Title XI appraisal regulations require
regulated institutions to obtain evaluations for several categories of
real estate-related financial transactions that the agencies have
determined do not require a Title XI appraisal, including transactions
at or below the current thresholds.\44\ Accordingly, the agencies
proposed to require that regulated institutions entering into
residential real estate transactions at or below the proposed
residential real estate appraisal threshold obtain evaluations that are
consistent with safe and sound banking practices unless the institution
chooses to obtain an appraisal for such transactions. The agencies
requested comment on use of evaluations instead of appraisals for
residential real estate transactions.
---------------------------------------------------------------------------
\44\ See OCC: 12 CFR 34.43(b); Board: 12 CFR 225.63(b); FDIC: 12
CFR 323.3(b).
---------------------------------------------------------------------------
In general, commenters who supported the increase in the threshold
[[Page 53586]]
also viewed evaluations as providing sufficient valuation information
and analysis for financial institutions and consumers to engage in safe
and sound residential real estate transactions. Those opposed to the
increase in the threshold generally argued that evaluations would not
provide enough support for these transactions and would pose a threat
to financial institutions and consumers.
Commenters in support of the proposal asserted that there would be
little impact to safety and soundness by relying on evaluations instead
of appraisals. Some financial institutions commented that they had
found evaluations to generally contain sufficient information and
analysis to be the basis for lending decisions. Several commenters
noted that financial institutions are only allowed to use evaluations
when doing so is consistent with safety and soundness and that the
institution always retains the discretion to seek an appraisal. Some of
these commenters also asserted that they have adequate programs and
policies to ensure that evaluations are used prudently.
Many commenters opined that appraisals are more accurate and
reliable sources of valuation information than evaluations because they
are done by professionals with strict training requirements and who are
subject to state credentialing and disciplinary review for poor quality
work. In contrast, commenters noted there are no standardized
requirements for those who perform evaluations. Commenters also noted
that appraisals are required to follow established requirements as
provided by USPAP, which guarantees a certain level of information and
quality, whereas evaluations lack standard requirements for information
or structure. Some of these commenters expressed particular concern
about homes in rural areas that tend to have unusual features or fewer
comparable properties and thus are harder to value. Some commenters
also raised concerns about the use of evaluations on homes that may
need repairs, suggesting that evaluations may not uncover these issues.
Many commenters argued that appraisers are the only independent
third party in a real estate transaction and that only appraisers'
opinions are independent and unbiased. These commenters represented
that those who perform evaluations often do not have the same level of
independence from the transaction. Some commenters asserted that
appraisals provide more accuracy than evaluations because they include
a physical inspection of the property. In contrast, some commenters who
were providers of evaluation services indicated that they typically
include a physical inspection of the property in their product. A few
commenters suggested that evaluations are subject to less regulatory
scrutiny than appraisals.
Commenters also opined about the use of automated valuation models
(AVMs) in the performance of evaluations. Many commenters felt that
AVMs are unreliable and expressed concern that raising the threshold
could lead to greater reliance on AVMs. Some of these commenters
asserted that it would be inappropriate for the agencies to expand the
residential real estate transaction threshold before issuing quality
control standards for AVMs, as required by Title XI.\45\ In contrast,
some commenters believed that AVMs could provide valuable information,
and that improvements in technology and greater availability of
information has improved the quality of evaluations. One commenter
indicated that AVMs are more predictive of default than appraisals.
Another indicated that evaluations based on AVMs are generally more
objective than appraisals because they are not skewed by knowledge of
the contract price.
---------------------------------------------------------------------------
\45\ 12 U.S.C. 3354(b).
---------------------------------------------------------------------------
The agencies are adopting this aspect of the final rule without
change. As is the case currently for transactions under the threshold
exemptions, evaluations will be required for transactions exempted by
the new threshold that do not receive appraisals.\46\ Although the
agencies recognize, as many commenters noted, that evaluations are not
subject to the same uniform standards as appraisals in terms of
structure and content or the preparer's training and credentialing
requirements, evaluations must be consistent with safe and sound
banking practices.\47\ The agencies have provided the Evaluation
Guidance to assist institutions in complying with this requirement.\48\
The Evaluation Guidance provides information to help ensure that
evaluations provide a credible estimate of the market value of the
property pledged as collateral for the loan. For instance, the
Evaluation Guidance states that, generally, evaluations should be
performed by persons who are competent, independent of the transaction,
and have the relevant experience and knowledge of the market, location,
and type of real property being valued.
---------------------------------------------------------------------------
\46\ An evaluation is not necessary if the transaction qualifies
both for the new threshold and for another exemption that does not
require an evaluation.
\47\ OCC: 12 CFR 34.43(b); Board: 12 CFR 225.63(b); FDIC: 12 CFR
323.3(b).
\48\ See supra notes 23 and 24. See also Frequently Asked
Questions on the Appraisal Regulations and the Interagency Appraisal
and Evaluation Guidelines (October 16, 2018), OCC Bulletin 2018-39;
Board SR Letter 18-9; FDIC FIL-62-2018.
---------------------------------------------------------------------------
Although some commenters expressed concern that raising the
threshold would cause financial institutions to feel pressured to use
evaluations whenever possible in order to remain competitive, data
analyzed by the agencies suggests that financial institutions are
generally using caution when determining when evaluations are suitable
for a given transaction. A five-year review of supervisory information
on the use of appraisals and evaluations by large financial
institutions found larger lenders obtained appraisals on 74 percent of
portfolio residential real estate originations at or below the current
$250,000 threshold.\49\ These data suggest that financial institutions
are often exercising discretion in determining when to use evaluations
and are not automatically using evaluations whenever permitted.
---------------------------------------------------------------------------
\49\ Y-14 data. Bank holding companies and intermediate holding
companies with $50 billion or more in total consolidated assets are
required to submit a quarterly Capital Assessments and Stress
Testing (FR Y-14M) reports and schedules, which collect granular
data on institutions' various asset classes, including residential
real estate loans.
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Further, individuals performing evaluations are expected to be
independent of the transaction. The agencies note that many evaluations
of residential properties that are a consumer's principal dwelling are
covered by the valuation independence requirements of section 1472 of
the Dodd-Frank Act and its implementing regulation.\50\ Among other
requirements, this regulation prohibits conflicts of interest and
coercion in the preparation of any opinion of value and prohibits
preparers of opinions of value from materially misrepresenting the
value of the property.\51\ In addition, the agencies have issued
guidance to help institutions ensure that they have the proper controls
to fulfill independence expectations.\52\
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\50\ 15 U.S.C. 1631; 12 CFR 226.42.
\51\ 12 CFR 226.42.
\52\ Guidelines, Section V.
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Regarding concerns about AVM use, the agencies note that, while
financial institutions may use AVMs in preparing evaluations, any
evaluation in which they are used must be consistent with safe and
sound practices. The agencies have published guidance to help ensure
that financial institutions' use of AVMs is consistent with this
requirement.\53\
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\53\ See Supervisory Guidance on Model Risk Management (April 4,
2011), OCC Bulletin 2011-12; Board SR Letter 11-7; FDIC FIL-22-2017
(adopted by the FDIC in 2017 with technical and conforming
changes)); Guidelines, Appendix B. The agencies note that many
commenters suggested that appraisers, unlike those who perform
evaluations, cannot be employees of the financial institution making
the loan. However, appraisers are permitted to be employees of the
lender provided that the independence requirements in the agencies'
rules are met. OCC: 12 CFR 34.45(a); Board: 12 CFR 225.65(a); FDIC:
12 CFR 323.5(a).
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[[Page 53587]]
b. Analysis of Loss Rates. When considering the threshold
increase's potential impact on safety and soundness, the agencies
considered a loss analysis of aggregate net charge-off rates for
residential real estate loans after the last increase in the appraisal
threshold in 1994. The agencies' analysis of the charge-off rates
offered no evidence that increasing the appraisal threshold to $400,000
for residential real estate transactions would materially increase the
risk of loss to financial institutions. The agencies requested comment
on this analysis of the charge-off data.
Several commenters noted that the agencies' loss analysis did not
reflect any significant change in the loss history for residential real
estate transactions after the threshold was increased from $100,000 to
$250,000 in 1994. Other commenters requested alternative analyses of
charge-off rates, specifically data on foreclosures and losses based on
loan amount, as opposed to aggregate net charge-off data. These
commenters asserted that the aggregate data could include loans not
eligible for the exemption or loans exempted on other grounds. A few
commenters recommended that the agencies compare loan-level foreclosure
rates for their use of appraisals and evaluations to determine if a
correlation exists between the use of evaluations and foreclosures.
As noted in the proposal, a historical review of loss data
demonstrates that the net charge-off rate for residential real estate
transactions did not increase after the appraisal threshold was raised
from $100,000 to $250,000 in June 1994, indicating the 1994 threshold
increase did not have a negative impact on the safety and soundness of
regulated institutions. The historical loss information in the Reports
of Condition and Income (Call Reports) also shows that the net charge-
off rate for residential real estate transactions remained relatively
unchanged after the increase in the threshold in 1994 through year-end
2007. While the net charge-off rate for residential real estate
transactions escalated significantly from 2008 through 2013 during the
financial crisis, the agencies primarily attribute this to weak
underwriting standards in the lead up to the crisis.
Based on the net charge-off data, which suggest that the increase
in the appraisal threshold in 1994 did not have a material effect on
the loss experience associated with residential real estate loans, the
agencies believe the increase to $400,000 will not lead to increases in
charge-off rates.
c. Supervisory Experience. In addition to analyzing net charge-off
rates for residential real estate transactions, the agencies also
considered their own supervisory experience with appraisals and
evaluations. The agencies' experience in supervising appraisal and
evaluation programs and practices since the enactment of FIRREA
indicates that increasing the threshold would not threaten the safety
and soundness of financial institutions. The agencies have found that
both appraisals and evaluations prepared properly can be credible tools
to support real estate lending decisions.
As part of the agencies' consideration of the safety and soundness
implications of the proposed threshold increased, the agencies reviewed
safety and soundness Reports of Examination. Regarding examination
experience, the agencies reviewed Reports of Examination of their
respective supervised institutions from January 2017 to December 2018
for examiner findings regarding appraisals and evaluations.\54\ Both
appraisals and evaluations were cited in examiner findings, however,
the overall amount and nature of valuation-related examination findings
support a conclusion that the proposed threshold increase would not
threaten the safety and soundness of financial institutions.
---------------------------------------------------------------------------
\54\ The Reports of Examination data reviewed related to both
commercial and residential real estate lending valuations and
valuation programs of supervised institutions.
---------------------------------------------------------------------------
The agencies have a long history with evaluations as an alternative
valuation tool. The agencies have implemented examination procedures to
frame their review of an institution's valuation practices and the
sufficiency of the supporting information in evaluations, as
appropriate for the size and nature of the institution's residential
real estate lending activities. The agencies have used these procedures
to assess the use of evaluations and ensure that they are prepared
according to safety and soundness principles and will continue to
examine institutions' evaluation policies and practices. The fact that
evaluations, which will continue to be subject to supervisory
oversight, will be required for transactions at or below the increased
threshold supports the conclusion that increasing the residential real
estate appraisal threshold to $400,000 will not pose a threat to safety
and soundness.
d. Additional Protections. In proposing to raise the residential
real estate appraisal threshold, the agencies noted that institutions
may elect to obtain appraisals for transactions that fall under the
threshold, even though an evaluation would also be permitted. In the
supervisory experience of the agencies, a financial institution may
choose to obtain appraisals for exempt transactions based on the risks
associated with a particular transaction or to preserve the flexibility
to sell residential loans in the secondary market. The agencies
requested comment on the question of whether and when institutions use
appraisals even if not required to do so by the appraisal regulations.
Several commenters indicated that institutions follow risk-based
internal policies to determine whether to obtain an appraisal,
including for transactions that fall under one of the exemptions from
the appraisal regulations. One commenter provided survey data
suggesting that the majority of lenders in one state often obtain
appraisals for loans that fall below the current threshold. On the
other hand, some commenters asserted that lenders would feel
competitive pressure to use more evaluations if the threshold were
raised and that the agencies lacked data on how often lenders use
evaluations when permitted.
The agencies expect regulated institutions to continue using a
risk-focused approach when considering whether to order an appraisal
for transactions that fall below the threshold. The Guidelines
encourage institutions to establish appropriate policies and procedures
for determining when to obtain an appraisal in connection with
transactions for which an evaluation is permitted.\55\ Similarly, the
Evaluations Advisory suggests it would be prudent to obtain an
appraisal rather than an evaluation when an institution's portfolio
risk increases or for higher-risk transactions.\56\ As detailed above,
data reviewed by the agencies found that lenders often choose to obtain
appraisals, even when evaluations are permitted for transactions at or
below the current $250,000 threshold.
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\55\ Guidelines, Section XI.
\56\ Evaluations Advisory at 2.
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In addition to the additional safety and soundness protection
provided by the risk-based approach to valuations, the agencies note
that each agency has the ability under the appraisal
[[Page 53588]]
regulations to require an appraisal whenever it is necessary to address
safety and soundness concerns.\57\ This authority allows the agencies
to require appraisals for exempt transactions, for example, where an
institution demonstrates weakness in the safe and sound use of
evaluations for exempt transactions.
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\57\ OCC: 12 CFR 34.43(c); Board: 12 CFR 225.63(c); FDIC: 12 CFR
323.3(c).
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4. Consumer Protection Considerations. In proposing the increase in
the appraisal threshold for residential transactions, the agencies
noted that evaluations can provide consumer protections. The agencies
noted that evaluations have long been required for below-threshold
transactions; must be consistent with safe and sound banking practices;
\58\ and should contain sufficient information and analysis to support
the decision to engage in the transaction,\59\ although they may be
less structured than appraisals. In the proposal, the agencies also
highlighted that the Guidelines and the Evaluations Advisory \60\
provide that individuals preparing evaluations should be qualified,
competent, and independent of the transaction and the loan production
function of the institution.\61\ For these reasons, the agencies
posited that evaluations could provide a level of consumer protection
for transactions at or below the proposed appraisal threshold.
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\58\ OCC: 12 CFR 34.43(b); Board: 12 CFR 225.63(b); FDIC: 12 CFR
323.3(b).
\59\ Guidelines, Section XIII.
\60\ Evaluations Advisory at 2.
\61\ Guidelines, Section V.
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The agencies requested comment generally regarding any implications
of the proposed rule on consumer protection. In addition, the agencies
asked commenters for specific information about the potential cost and
time savings to consumers that may result from the increased use of
evaluations versus appraisals and whether information in evaluations
would be sufficiently clear to enable the consumer to make an informed
decision. The agencies also requested comment on the availability of
valuation information to consumers through public sources and whether
information from those sources help provide consumers with additional
protection in residential transactions. Finally, the agencies requested
comment on challenges, if any, that financial institutions may have in
meeting the requirements and standards for independence for evaluations
prepared by internal staff or external third parties.
In general, commenters that supported the proposed threshold and
commented on consumer protection issues indicated that evaluations
provide consumers with sufficient protection in a residential real
estate transaction. Many commenters who opposed the increased threshold
indicated that evaluations are inadequate substitutes for appraisals
and therefore an increased threshold would pose a threat to consumer
protection.
Many commenters opposed to an increase in the threshold argued that
appraisers are the only objective and unbiased party in a transaction
and bring checks, balances, and oversight to the mortgage lending
process. Some of these commenters based this assertion on the legal
requirement for appraiser independence and the professional standards
to which appraisers are held. These commenters also argued that
individuals preparing evaluations are often not disinterested third
parties because they are employed by the lender. Several commenters
asserted that evaluations are usually performed by individuals who,
unlike appraisers, are not credentialed valuation professionals subject
to standardized training and experience requirements.
A number of commenters suggested that inadequate property
valuations and undue influence on appraisers contributed to property
overvaluation during the most recent financial crisis, with adverse
impacts for consumers. They indicated that the Dodd-Frank Act
strengthened protections regarding appraisals, including federal
oversight provisions, and that a number of these protections do not
apply to evaluations that are not conducted by appraisers. On the other
hand, commenters who supported the proposed increase in the threshold
argued that evaluations are a safe alternative to appraisals, with some
noting that individuals who prepare evaluations are also required to be
independent under federal law, as discussed further below.
Many commenters who opposed a threshold increase on consumer
protection grounds asserted that evaluations are not subject to uniform
standards and are not a meaningful substitute for an appraisal that
must be conducted in compliance with USPAP. A number of commenters
questioned the reliability of valuation methods other than appraisals,
particularly AVMs and evaluations. Other commenters suggested that the
proposal would cause consumers to lose the benefit of appraisers
performing a physical inspection and an analysis of specific property
features, including property maintenance and repair issues that can
affect the property value.
Some commenters in favor of a threshold increase asserted that
evaluations protect consumers by helping to ensure the property's value
supports the purchase price. In this regard, one commenter indicated
that evaluations must be consistent with safe and sound banking
practices and, according to agency guidelines, they should provide
supporting information and an estimate of market value. One commenter
in favor of a threshold increase raised concerns that appraisals may
provide a false sense of protection to consumers who incorrectly assume
their property can be sold for the appraised market value if they
encounter financial difficulties. A few commenters that supported an
increase argued that neither appraisals nor evaluations are consumer
protection tools for homebuyers, asserting that both are received after
prospective buyers have entered into a purchase and sale agreement
(PSA) to purchase the residential property at a specified price.
Some commenters that opposed an increase in the residential
threshold argued that, unlike for faulty appraisals, consumers do not
have any recourse for faulty evaluations. Some commenters noted that
consumers may file an official complaint with a state's appraiser board
to address an inaccurate appraisal, which is not an option for
addressing an inaccurate evaluation performed by a non-appraiser. In
addition, one commenter questioned whether evaluations could be used to
renegotiate or cancel PSAs under an appraisal contingency clause.
A number of commenters opposed to a threshold increase asserted
that appraisals are easier for consumers to understand than
evaluations. Some commenters noted the standardized requirements of a
USPAP-compliant appraisal report provide information in a consistent
manner and ensure that the user has enough information to understand
the conclusions in the report. Some commenters opposed to an increase
raised concerns that free online valuation information and tools may be
flawed due to, for example, their reliance on public records with data
entry errors.
One commenter in favor of an increased threshold indicated that
evaluations are often easier for consumers to read and understand,
asserting that they typically explain the comparisons with other recent
sales in ``plain English.'' Some commenters generally in favor of an
increase noted that consumers have access to a wide array of readily
available valuation information, and may also voluntarily obtain
appraisals.
[[Page 53589]]
Numerous commenters opposed to a threshold increase asserted that
an increase to the appraisal threshold would have a disproportionately
negative impact on more at-risk consumers, such as low-income
individuals, members of certain minority groups, or first-time
homebuyers, because at-risk borrowers are more likely to purchase homes
priced in lower ranges and, therefore, are more likely to enter into
residential transactions without the benefit of an appraisal. Some
commenters asserted that first-time homebuyers are among the consumers
least able to manage financial risk, and are most in need of consumer
protections. According to several of these commenters, this is because
first-time homebuyers typically use a substantial portion of their
savings for the down payment or obtain mortgages with high loan-to-
value ratios.
In adopting the threshold increase for residential mortgage loans
as proposed, the agencies appreciate and have considered the consumer
protection issues and concerns raised by the commenters. Based on their
supervisory experience with evaluations since 1994, the agencies have
found that both appraisals and evaluations can protect consumers by
facilitating the informed use of credit and helping to ensure the
estimated value of the property supports the purchase price and
mortgage amount. Further, the agencies consulted with the CFPB
throughout the development of the proposal and final rule and, as
required by Title XI,\62\ have received concurrence from the CFPB that
the residential real estate appraisal threshold being adopted provides
reasonable protection for consumers who purchase 1-4 unit single-family
residences.
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\62\ In the Dodd-Frank Act, Congress amended the threshold
provision to require ``concurrence from the Bureau of Consumer
Financial Protection that such threshold level [established by the
agencies] provides reasonable protection for consumers who purchase
1-4 unit single-family residences.'' 12 U.S.C. 3341(b).
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In response to the comments concerning valuation independence, the
agencies have long recognized that evaluations prepared by competent
and independent preparers can provide credible valuation information
for residential real estate transactions. In addition, the Dodd-Frank
Act contained provisions that addressed independence requirements
applicable to ``valuations'' for consumer-purpose mortgages secured by
a consumer's principal dwelling. The Valuation Independence Rule,\63\
which implements the Dodd-Frank Act independence provisions, states
that ``no covered person shall or shall attempt to directly or
indirectly cause the value assigned to the consumer's principal
dwelling to be based on any factor other than the independent judgment
of a person that prepares valuations, through coercion, extortion,
inducement, bribery, or intimidation of, compensation or instruction
to, or collusion with a person that prepares valuations or performs
valuation management functions.'' \64\ Additionally, the rule prohibits
mischaracterizations of property value and conflicts of interest for
persons preparing valuations or performing valuation management
functions.\65\ These independence requirements extend to appraisals,
evaluations, and other estimations of value and encompass not only
individuals preparing such valuations but also those performing
valuation management functions.\66\ The failure to comply with the
independence requirements in the Valuation Independence Rule can result
in civil liability.\67\
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\63\ See Interim Final Rule for Valuation Independence, 75 FR
66554 (October 28, 2010) and 75 FR 80675 (December 23, 2010), Board:
12 CFR 226.42; CFPB: 12 CFR 1026.42 (implementing valuation
independence amendments to the Truth in Lending Act (TILA), 15
U.S.C. 1601 et seq., by Dodd-Frank Act section 1472, 15 U.S.C.
1639e).
\64\ Board: 12 CFR 226.42(c)(1); CFPB: 12 CFR 1026.42(c)(1).
\65\ See Board: 12 CFR 226.42(c)(2), (d); CFPB: 12 CFR
1026.42(c)(2), (d).
\66\ Valuation management functions include: ``Recruiting,
selecting, or retaining a person to prepare a valuation'';
``contracting with or employing a person to prepare a valuation'';
``managing or overseeing the process of preparing a valuation,
including by providing administrative services such as receiving
orders for and receiving a valuation, submitting a completed
valuation to creditors and underwriters, collecting fees from
creditors and underwriters for services provided in connection with
a valuation, and compensating a person that prepares valuations'';
and ``reviewing or verifying the work of a person that prepares
valuations.'' 12 CFR 1026.42(b)(4).
\67\ See 15 U.S.C. 1640.
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In response to comments concerning on-site inspections of real
estate, the agencies note that USPAP does not require appraisers to
inspect the subject property and that some appraisers use third parties
to conduct inspections. As such, not all appraisals include
inspections. As with appraisals, the agencies note that when financial
institutions obtain an evaluation, the evaluation will often include a
physical property inspection, which can provide a prospective buyer
with relevant information about a property's condition. Evaluations,
like appraisals, should contain sufficient information and analysis to
support the institution's decision to engage in a credit decision,
including information relating to the actual physical condition and
characteristics of the property, as discussed in the Guidelines.\68\
The individual who is performing the evaluation should determine
whether a physical property inspection is necessary to support the
property's value. Based on the agencies' supervisory experience with
appraisals and evaluations since 1994, the agencies believe that
property inspections done by appropriately trained individuals for
either appraisals or evaluations can provide prospective buyers with
detailed information regarding a property's condition and features, may
provide consumer protection, and can help ensure that appraisals or
evaluations are consistent with safe and sound banking practices.
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\68\ Guidelines, Section XII.
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The agencies recognize that some consumers may seek to include
appraisal contingency clauses in PSAs. However, the threshold exemption
does not affect the ability to enter into these arrangements. One
commenter suggested that evaluations may not constitute appraisals for
purposes of appraisal contingency clauses and may cause confusion to
consumers opting for these contingencies. The agencies are not aware of
any such issues regarding the current threshold, which already exempts
a significant portion of residential real estate transactions. In this
regard, the agencies do not have reason to believe that the incremental
increase in exempted transactions will create consumer protection
concerns related to PSAs. With respect to consumer recourse for faulty
evaluations, available information from entities that use or provide
evaluations indicates that lenders often order appraisals when disputes
arise with evaluations, so the agencies do not expect the proposal to
materially affect options for consumer recourse.
Regarding the impact of the threshold increase on consumers'
understanding of and access to valuation information, the agencies note
that lenders must provide a copy of all appraisals and written
valuations developed in connection with an application for a first-lien
loan secured by a dwelling,\69\ which includes both appraisals and
evaluations. In addition, although all sources of publicly available
valuation information might not always accurately
[[Page 53590]]
reflect the market value of a particular property, consumers can use a
variety of available information to learn more about the availability
of and the potential range of values for properties in a particular
area or market. Moreover, although limited in scope, the higher-priced
mortgage loan rule (HPML rule),\70\ as adopted by the agencies,
requires lenders for certain HPMLs secured by a consumer's principal
dwelling to obtain an appraisal--and in some cases two appraisals--that
include an interior property visit, and provide free copies to the
consumer. The HPML Rule applies to certain higher-risk transactions.
Thus, for a select group of loans, the HPML Rule assures that the
information in an appraisal will be available for some of the consumers
who might be more likely to fall into the at-risk categories mentioned
by commenters as being most affected by the threshold increase.
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\69\ See 12 CFR 1002.14, 78 FR 7216 (January 31, 2013)
(implementing amendments to the Equal Credit Opportunity Act (ECOA),
15 U.S.C. 1691 et seq., by Dodd-Frank Act section 1474, 15 U.S.C.
1691(e)).
\70\ OCC: 12 CFR part 34, subpart G; Board: 12 CFR 226.43; FDIC
(through adoption of CFPB rule): 12 CFR 1026.35(c). The FDIC adopted
the HPML Rule as published in the CFPB's regulation. See 78 FR
10368-01, 10370 (December 26, 2013). Exemptions from the
requirements of the HPML Rule include, among others, ``qualified
mortgages'' under 15 U.S.C. 1639c (implemented by the CFPB at 12 CFR
1026.43); reverse mortgages subject to 12 CFR 1026.33; and certain
refinancings. See OCC: 12 CFR 34.203(b); Board: 12 CFR 226.43(b);
FDIC (through adoption of CFPB rule): 12 CFR 1026.35(c)(2).
Exemptions from the requirement for two appraisals for certain
transactions include, among others, extensions of credit that
finance a consumer's acquisition of property located in a rural
county, as defined in 12 CFR 1026.35(b)(2)(iv)(A). See OCC: 12 CFR
34.203(d)(7)(H); Board: 12 CFR 226.43(d)(7)(H); FDIC (through
adoption of CFPB rule): 12 CFR 1026.35(c)(4)(vii)(H).
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Finally, the agencies note that even when the transaction amount is
at or below the threshold, the Guidelines \71\ encourage regulated
institutions to establish policies and procedures for obtaining Title
XI appraisals when necessary for risk management. As discussed above,
the FR Y-14M data reviewed by the agencies found that lenders included
in the data obtained appraisals on 74 percent of residential real
estate loans of $250,000 and below that were held in portfolio. These
empirical data indicate that lenders generally obtain appraisals for a
majority of residential real estate transactions for which the
agencies' appraisal regulations permitted an evaluation. These data are
also consistent with some commenters' assertions that lenders would
continue to use a risk-based approach in determining whether to obtain
an evaluation or an appraisal for a particular transaction, regardless
of the threshold amount. Further, consumers may voluntarily obtain
appraisals regardless of whether the regulated institution is required
to do so.
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\71\ See Guidelines, Section XI.
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5. Reducing Burden Associated with Appraisals. In proposing the
increase in the residential appraisal threshold, the agencies
considered that the increased use of evaluations would likely reduce
the time and costs associated with residential real estate
transactions, which in turn would reduce burden for financial
institutions and consumers. The agencies invited comment on the cost
and time associated with performing and reviewing evaluations as
compared to Title XI appraisals. The agencies also invited comment on
the appropriateness of the data used in the proposal and requested any
suggestions for alternative sources of data.
The agencies received a number of comments indicating that the
proposed increase in the residential real estate appraisal threshold
would result in cost and time savings for consumers and regulated
institutions. Several commenters concurred with the agencies' cost
estimates in the proposal. One commenter indicated that evaluation
tools provide accurate valuation information at approximately half the
cost of an appraisal. Another commenter estimated that an evaluation
could cost between 20 and 50 percent of the price of a comparable
appraisal, and that an evaluation can generally be delivered in one to
five days while an appraisal may take between five and twenty-one days.
Another commenter asserted that evaluations typically cost about $100
less than appraisals. One commenter noted that evaluations are often
performed by bank employees, in which case the customer is not
typically charged for the service, and that when the lender obtains an
evaluation from a third-party provider (as opposed to using its own
employee), borrowers may still save approximately 50 percent. Some
commenters also asserted that the proposed threshold increase would
reduce the time needed for appraisal review. The agencies received
several comments from financial institutions, financial institution
trade associations, and state regulators asserting that the proposals
would particularly reduce delays and costs in rural areas that may be
experiencing a shortage of state licensed or state certified
appraisers. Two of these commenters specifically asserted that a
broadly applicable threshold increase to $400,000, rather than the more
limited rural residential appraisal exemption, is appropriate because
it would provide additional burden relief by eliminating unnecessary
qualifying criteria. One of these commenters, a financial institution
trade association from a large state, asserted that the rural
residential appraisal exemption would not apply to transactions in
areas representing 86 percent of the state's population, and that the
proposed threshold increase thus would provide additional burden relief
in the state beyond what was provided by the rural residential
appraisal exemption.
Other commenters questioned how much relief the proposal would
provide. Some commenters noted the agencies' acknowledgement that there
is limited information on the cost and time burden of evaluations
versus appraisals and urged the agencies to obtain additional data to
quantify any expected savings. Several commenters noted that the cost
of an appraisal is relatively small compared to other financing costs
in the transaction such as the fees charged by banks and brokers. Some
of these commenters also suggested that any cost savings to consumers
would be outweighed by the financial harm that could result from
purchasing a home without an estimate of value provided by an
appraiser. One commenter indicated that evaluations may take longer to
review than appraisals. Another argued that even if an appraisal takes
longer to review, the time difference is not significant and would not
delay a loan closing. Some commenters questioned the need for, and
appropriateness of, the proposed threshold increase in light of the
rural residential appraisal exemption.
Several commenters challenged the agencies use in the proposal of
the Department of Veterans Affairs (VA) appraisal fee schedule as
support for their analysis of potential cost savings, arguing that the
$600 average cost noted in the proposal based on the VA fee schedule
likely overstates the cost of appraisals. One commenter noted the VA's
underwriting requirements exceed USPAP standards, which increases
costs. Some of these commenters cited alternative sources for fee data,
including several state-specific studies. One such commenter referred
to a survey showing that VA fees are higher than the norm, indicating
that the median cost of an appraisal is $450, with 89 percent of those
surveyed stating the typical cost of an appraisal is below $600. This
commenter also questioned whether the cost and time to receive an
appraisal were burdensome, as its survey reflected that appraisals
represented less than 0.2 percent of the total transaction cost and
that the typical wait time for an appraisal in 2018 was only 7 days.
A number of commenters disputed that there are appraiser shortages
warranting regulatory relief outside of
[[Page 53591]]
rural areas, with some offering supporting data from the Appraisal
Subcommittee of the Federal Financial Institutions Examination Council
and the Appraisal Foundation. Several commenters identified appraisal
management companies (AMCs) as a significant source of unnecessary
costs and delays, and suggested that appraiser shortages are due to the
low appraisal fees AMCs offer, resulting in appraisers being unwilling
to work for AMCs.
The agencies considered these comments in evaluating the rule's
potential impact. As discussed further below, available data and
analysis indicate that, while there is limited information available to
compare the cost and time savings related to performing appraisals
versus evaluations, raising the residential threshold, and the
corresponding increased use of evaluations, will lead to some level of
cost savings for consumers and institutions. The agencies also conclude
that raising the threshold is likely to reduce the time needed to find
appropriate personnel to perform the valuation, particularly in areas
experiencing shortages of certified or licensed appraisers.
As noted in the proposal, and according to data submitted by
commenters, the cost of obtaining an evaluation can be substantially
less than the cost of obtaining an appraisal, with estimates ranging
from evaluations costing $100 less than the cost of an appraisal or
less than half (with one estimate of 20 percent) of the cost of an
appraisal. The agencies acknowledge the limitations in relying on the
VA appraisal fee schedule, which may reflect appraisal fees that are
higher than average across the industry. However, even if the average
appraisal cost is less than the $375 to $900 range suggested in the
proposal, the agencies believe expanding the use of evaluations will
produce time and cost savings. Some commenters indicated that, while
the cost of an appraisal is generally passed on to the borrower, an
evaluation performed by in-house staff may be provided at no cost to
the borrower. When a borrower pays for an evaluation outsourced to a
third-party, the cost may still be significantly less than for a
comparable appraisal.
The agencies also note that regulated institutions generally need
less time to review evaluations than Title XI appraisals because the
content of the report can be less comprehensive than an appraisal
report. Institutions are more likely to obtain an evaluation, where
permitted, for transactions with a lower dollar value, that are less
complex, or that are subsequent to a previous transaction for which a
Title XI appraisal was obtained. As a result, evaluations are often
simpler and take less time to review than appraisals. Based on
supervisory experience, the agencies have previously estimated that, on
average, the time to review evaluations takes approximately 30 minutes
less than the time to review appraisals. While the precise time and
cost reduction per transaction is difficult to determine, the agencies
conclude that the increased threshold is likely to result in some level
of cost and time savings for regulated institutions that engage in
residential real estate lending and for consumers.
In considering the aggregate effect of this rule, the agencies also
considered the number of transactions likely to be affected by the
increased threshold. As discussed above, the agencies' analysis of 2017
HMDA data suggests that increasing the residential threshold from
$250,000 to $400,000 would exempt an additional 214,000 residential
real estate originations at regulated institutions from the agencies'
appraisal requirement, representing an additional 16 percent of all
regulated transactions. While the supervisory data discussed above
suggest that use of evaluations is lower than it could be, the agencies
expect that raising the residential appraisal threshold will still
provide burden relief because it will provide flexibility in those
situations where obtaining an appraisal would significantly delay the
transaction and the financial institution determines that an evaluation
would be sufficient for the safety and soundness of the particular
transaction.
B. Incorporation of the Rural Residential Appraisal Exemption Under
Section 103 of the Economic Growth, Regulatory Relief, and Consumer
Protection Act
As discussed above, in section 103 of EGRRCPA, Congress amended
Title XI in 2018 to add a rural residential appraisal exemption.\72\
Under this new exemption, a financial institution need not obtain a
Title XI appraisal if the property is located in a rural area; the
transaction value is less than $400,000; the financial institution
retains the loan in portfolio, subject to exceptions; and not later
than three days after the Closing Disclosure Form is given to the
consumer, the financial institution or its agent has contacted not
fewer than three state certified or state licensed appraisers, as
applicable, and has documented that no such appraiser was available
within five business days beyond customary and reasonable fee and
timeliness standards for comparable appraisal assignments.\73\
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\72\ Public Law 115-174, Title I, section 103, codified at 12
U.S.C. 3356.
\73\ 12 U.S.C. 3356. The mortgage originator must be subject to
oversight by a Federal financial institutions regulatory agency, as
defined in Title XI. Further, the exemption does not apply to loans
that are high-cost mortgages, as defined in section 103 of TILA, or
if a Federal financial institutions regulatory agency requires an
appraisal because it believes it is necessary to address safety and
soundness concerns.
---------------------------------------------------------------------------
The proposed rule would have amended the agencies' appraisal
regulations to reflect the rural residential appraisal exemption under
section 103 of EGRRCPA in the list of transactions that are exempt from
the agencies' appraisal requirement. The amendment to this provision
would have been a technical change that would not alter any substantive
requirement, because the statutory provision is self-effectuating and
the proposed threshold increase to $400,000 would encompass loans that
would otherwise qualify for the section 103 rural residential appraisal
exemption. In addition, the proposed rule would have required
evaluations for transactions that are exempt from the agencies'
appraisal requirement under the rural residential appraisal exemption
under section 103 of EGRRCPA. The agencies proposed that financial
institutions obtain evaluations for these transactions because
evaluations protect the safety and soundness of financial institutions.
In the proposed rule, the agencies specifically asked what
challenges, if any, would be posed by requiring lenders to obtain
evaluations where the rural residential appraisal exemption under
section 103 of EGRRCPA is used. The agencies received very few comments
on the proposed evaluation requirement. A few commenters asserted that
the preparation of both appraisals and evaluations on properties
located in rural areas may be affected by the limited comparable sales
data available in rural areas.
After considering the comments received, the agencies have decided
to implement the requirement for regulated institutions to obtain
evaluations when the rural residential appraisal exemption is used. The
agencies recognize that the scarcity of comparable sales data in rural
areas has been a long-standing issue and issued guidance in 2016 to
assist institutions in obtaining evaluations in rural areas with few or
no recent comparable sales.\74\ Since the early 1990s, the agencies'
appraisal regulations have required that regulated institutions obtain
evaluations for certain other exempt residential real
[[Page 53592]]
estate transactions (which in practice are generally retained in their
portfolios). Requiring evaluations for transactions exempted by the
rural residential appraisal exemption reflects the agencies' long-
standing view that safety and soundness principles require institutions
to obtain an understanding of the value of real estate collateral
underlying most real estate-related transactions they originate.
---------------------------------------------------------------------------
\74\ Evaluations Advisory at 3.
---------------------------------------------------------------------------
For clarity, the agencies note that under the final rule, creditors
operating in rural areas could opt to rely on the more broadly
applicable exemption for transactions of $400,000 or less in lieu of
the rural residential appraisal exemption and will not need to meet the
additional criteria required under the rural residential appraisal
exemption. This is because the broader exemption for transactions of
$400,000 or less adopted in this final rule encompasses the more narrow
exemption under EGRRCPA section 103. An evaluation is required
regardless of which of these exemptions is relied upon. By specifying
that an evaluation is required for transactions in which all of the
criteria under EGRRCPA section 103 are met, the agencies seek to
streamline the exemption rules and eliminate confusion for creditors
operating in rural areas.
C. Addition of the Appraisal Review Requirement
Section 1473(e) of the Dodd-Frank Act amended Title XI to require
that the agencies' appraisal regulations include a requirement that
Title XI appraisals be subject to appropriate review for compliance
with USPAP.\75\ The proposed rule would have made a conforming
amendment to add this statutory requirement for appraisal review to the
appraisal regulations. The agencies proposed to mirror the statutory
language for this standard. The agencies also indicated in the proposal
that the Guidelines provide more information to assist financial
institutions in the appropriate review of appraisals and
evaluations.\76\
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\75\ Dodd-Frank Act, section 1473, Public Law 111-203, 124 Stat.
1376.
\76\ See Guidelines, Section XV.
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In the proposal, the agencies specifically asked what concerns, if
any, would be posed by requiring lenders to conduct appropriate reviews
of Title XI appraisals for compliance with USPAP. The agencies received
very few comments addressing the appraisal review proposal. One
commenter indicated that appraisal review provides significant consumer
and lender safeguards. Another commenter expressed concern that a
requirement for appraisal review would force some financial
institutions to outsource the review process, given that many small
institutions do not have staff trained in USPAP standards, which would
add considerable overhead expense for financial institutions. This
commenter also requested clarification of whether evaluations must be
reviewed for compliance with USPAP.
In response to these comments, the agencies note that the appraisal
review proposed is statutorily required by Title XI. In addition, the
agencies have long recognized that appraisal review is consistent with
safe and sound banking practices, as outlined in the Guidelines, and
should be employed as part of the credit approval process to ensure
that appraisals comply with USPAP, the appraisal regulations, and a
financial institution's internal policies.\77\ As noted in the
Guidelines, appraisal reviews should help ensure that an appraisal
contains sufficient information and analysis to support the decision to
engage in the transaction, as required by the appraisal
regulations.\78\ Through the review process, the institution should be
able to assess the reasonableness of the valuation method, the
assumptions, and whether data sources are appropriate and well-
supported.\79\
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\77\ See id.
\78\ See OCC: 12 CFR 34.44(b); Board: 12 CFR 225.64(b); FDIC: 12
CFR 323.4(b).
\79\ See Guidelines, Section XV.
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As a reflection of the long-standing guidance on appraisal review,
many financial institutions may already have review processes in place
for these purposes. With respect to the question concerning evaluations
and appraisal review, the agencies note that evaluations need not
comply with USPAP. While financial institutions should continue to
conduct safety and soundness reviews of evaluations to ensure that an
evaluation contains sufficient information and analysis to support the
decision to engage in the transaction, the USPAP review requirement in
Title XI does not apply to such a review.
After carefully considering the comments received, the agencies
have decided to implement the requirement that financial institutions
review appraisals for federally related transactions for compliance
with USPAP. The agencies encourage regulated institutions to review
their existing appraisal review policies and incorporate additional
procedures for subjecting appraisals for federally related transactions
to appropriate review for compliance with USPAP, as needed. Financial
institutions may refer to the Guidelines for more information to assist
them in the appropriate review of appraisals and evaluations.\80\
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\80\ See id.
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D. Conforming and Technical Amendments
The agencies' appraisal regulations require that all complex 1-to-4
family residential property appraisals rendered in connection with
federally related transactions shall have a state certified appraiser
if the transaction value is $250,000 or more.\81\ In order to make this
paragraph consistent with the other proposed changes to the agencies'
appraisal regulations, the agencies proposed changes to its wording to
incorporate the proposed definition of ``residential real estate
transaction,'' to introduce the $400,000 threshold, and to make other
technical and conforming changes. The agencies also proposed to amend
the definitional term ``complex 1-to-4 family residential property
appraisal'' to ``complex appraisal for a residential real estate
transaction'' to conform to the definition of residential real estate
transaction. The proposed amendments to these provisions would have
been conforming changes that would not alter any substantive
requirements.
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\81\ OCC: 12 CFR 34.43(d)(3); Board: 12 CFR 225.63(d)(3); FDIC:
12 CFR 323.3(d)(3).
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The agencies received one comment on these conforming changes
seeking clarification as to whether certified appraisers would be
required for complex appraisals for residential real estate
transactions above $400,000 or transactions at or above $400,000. As
provided in the rule text, the requirement will only apply to
transactions above $400,000. The agencies did not receive further
comment on these proposed technical and conforming changes and are
adopting the proposed technical changes as final.
III. Effective Date
All provisions of the rule, other than the evaluation requirement
for transactions exempted by the rural residential appraisal exemption
\82\ and the requirement to subject appraisals to appropriate review
for compliance with USPAP (as discussed below) are effective the first
day after publication of the final rule in the Federal Register. The
30-day delayed effective date required under the Administrative
Procedure Act is waived for all other amendments to the regulation,
pursuant
[[Page 53593]]
to 5 U.S.C. 553(d)(1), which provides an exception to the 30-day
delayed effective date requirement when a substantive rule grants or
recognizes an exemption or relieves a restriction. The amendments to
increase the residential appraisal threshold exempts additional
transactions from the agencies' appraisal requirement, which would have
the effect of relieving restrictions. Consequently, all provisions of
this rule, except the evaluation requirement for transactions exempted
by the rural residential appraisal exemption and the appraisal review
provision, meet the criteria to waive the 30-day delayed effective date
requirement set forth in the Administrative Procedure Act.
---------------------------------------------------------------------------
\82\ See supra note 3.
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The provisions for the evaluation requirement for transactions
exempted by the rural residential appraisal exemption and for the
appraisal review will be effective on January 1, 2020. The delayed
effective date will provide regulated institutions adequate time to
implement procedures for obtaining an evaluation for certain
residential transactions secured by property in a rural area that are
exempt from the appraisal requirements and for subjecting appraisals
for federally related transactions to appropriate review for compliance
with USPAP.\83\ The agencies did not receive any comments on the
proposed effective date.
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\83\ As discussed below, new requirements on insured depository
institutions (IDIs) generally must take effect on the first day of a
calendar quarter that begins on or after the date on which the
regulations are published in final form. See 12 U.S.C. 4802(b).
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IV. Regulatory Analysis
A. Regulatory Flexibility Act
OCC: The Regulatory Flexibility Act (RFA), 5 U.S.C. 601 et seq.,
generally requires that, in connection with a rulemaking, an agency
prepare and make available for public comment a regulatory flexibility
analysis that describes the impact of the rule on small entities.
However, the regulatory flexibility analysis otherwise required under
the RFA is not required if an agency certifies that the rule will not
have a significant economic impact on a substantial number of small
entities (defined in regulations promulgated by the Small Business
Administration (SBA) to include commercial banks and savings
institutions, and trust companies, with assets of $600 million or less
and $41.5 million or less, respectively) and publishes its
certification and a brief explanatory statement in the Federal Register
together with the rule.
The OCC currently supervises 1,211 institutions (commercial banks,
trust companies, federal savings associations, and branches or agencies
of foreign banks) of which approximately 782 are small entities.\84\
The OCC estimates that the final rule may impact approximately 734 of
these small entities. The final rule to increase the residential
threshold may result in cost savings for impacted institutions.
---------------------------------------------------------------------------
\84\ The OCC bases this estimate of the number of small entities
on the SBA's size thresholds for commercial banks and savings
institutions, and trust companies, which are $600 million and $41.5
million, respectively. Consistent with the General Principles of
Affiliation, 13 CFR 121.103(a), the OCC includes the assets of
affiliated financial institutions when determining whether to
classify an OCC-supervised institution as a small entity. The OCC
used December 31, 2018, to determine size because a ``financial
institution's assets are determined by averaging the assets reported
in its four quarterly financial statements for the preceding year.''
See footnote 8 of the U.S. Small Business Administration's Table of
Size Standards.
---------------------------------------------------------------------------
For transactions at or below the new residential threshold,
regulated institutions will be given the option to obtain an evaluation
of the property instead of an appraisal. While the cost of obtaining
appraisals and evaluations can vary and may be passed on to borrowers,
evaluations generally cost less to perform than appraisals, given that
evaluations are not required to comply with USPAP. In addition to
costing less than an appraisal, evaluations may require less time to
review than appraisals because evaluations typically contain less
detailed information than appraisals. In addition to savings relating
to the relative costs associated with appraisals and evaluations, the
final rule may also reduce burden for institutions in areas with
appraiser shortages. In the course of the agencies' most recent EGRPRA
review, commenters contended that it can be difficult to find state
certified and licensed appraisers, particularly in rural areas, which
results in delays in completing transactions and sometimes increased
costs for appraisals.\85\ For this reason, substituting evaluations for
appraisals may reduce burden for institutions in areas with appraiser
shortages. While the increased residential threshold may decrease costs
for institutions, the extent to which institutions will employ
evaluations instead of appraisals is uncertain, given that institutions
retain the option of using appraisals for below-threshold transactions.
---------------------------------------------------------------------------
\85\ See EGRPRA Report, available at https://www.ffiec.gov/pdf/2017_FFIEC_EGRPRA_Joint-Report_to_Congress.pdf.
---------------------------------------------------------------------------
The requirement in the final rule that institutions obtain an
evaluation for transactions that qualify for the rural residential
appraisal exemption could be viewed as a new mandate. However, because
the final rule increases the residential threshold to $400,000 for all
residential transactions, institutions will not need to comply with the
detailed requirements of the rural residential appraisal exemption in
order for such transactions to be exempt from the agencies' appraisal
requirement. Therefore, complying with the evaluation requirement for
below-threshold transactions will be significantly less burdensome than
complying with the requirements of the rural residential appraisal
exemption.
The requirement that Title XI appraisals be subject to appropriate
review for USPAP compliance could also be viewed as a new mandate. The
OCC does not believe, however, that this requirement will impose a
significant burden or economic impact on regulated institutions because
Title XI and the agencies' appraisal regulations already require that
Title XI appraisals be performed in compliance with USPAP. In addition,
many financial institutions already have review processes in place to
ensure that appraisals comply with USPAP. Finally, the OCC notes that
the requirement for appraisal review is statutorily mandated by Title
XI.
Because the final rule does not contain any new recordkeeping,
reporting, or significant compliance requirements, the OCC anticipates
that costs associated with the final rule, if any, will be de minimis.
Therefore, the OCC certifies that the final rule will not have a
significant economic impact on a substantial number of small entities.
FRB: The RFA \86\ generally requires that an agency prepare and
make available a final regulatory flexibility analysis in connection
with a final rulemaking that the agency expects will have a significant
economic impact on a substantial number of small entities. The
regulatory flexibility analysis otherwise required under the RFA is not
required if an agency certifies that the rule will not have a
significant economic impact on a substantial number of small entities
and publishes its certification and a brief explanatory statement in
the Federal Register together with the rule.
---------------------------------------------------------------------------
\86\ 5 U.S.C. 601 et seq.
---------------------------------------------------------------------------
The agencies are increasing the threshold from $250,000 to $400,000
at or below which a Title XI appraisal is not required for residential
real estate transactions in order to reduce regulatory burden in a
manner that is consistent with the safety and soundness of financial
institutions. To ensure that the safety and soundness of
[[Page 53594]]
regulated institutions are protected, the agencies will require
evaluations for transactions that are exempted by the increased
residential appraisal threshold. The final rule also requires
evaluations for transactions exempted by the rural residential
appraisal exemption. In order to fulfill the agencies' statutory
responsibility under the Dodd-Frank Act, the agencies are also adding
to the appraisal regulations a requirement that appraisals be subject
to appropriate review for compliance with USPAP.
The Board's rule applies to state chartered banks that are members
of the Federal Reserve System (state member banks), as well as bank
holding companies and nonbank subsidiaries of bank holding companies
that engage in lending. There are approximately 529 state member banks
and 232 nonbank lenders regulated by the Board that meet the SBA
definition of small entities and are subject to the final rule. Data
currently available to the Board do not allow for a precise estimate of
the number of small entities that are affected by the threshold
increase or the evaluation requirement for transactions exempted by the
rural residential appraisal exemption, because the number of small
entities that engage in residential real estate transactions qualifying
for these exemptions is unknown.
The increased threshold level for residential transactions is
expected to produce cost and time savings for financial institutions
without imposing any burden, since it will permit institutions to use
evaluations instead of appraisals for a greater number of transactions,
and evaluations generally cost less and take less time to conduct and
review than appraisals. The cost and time savings produced for
institutions by obtaining evaluations versus appraisals is difficult to
quantify because of limited available data and variation based on the
type and complexity of the transaction. Costs of appraisals and
evaluations may also be passed on to borrowers.
With respect to transactions that qualify for the rural residential
appraisal exemption, the requirement that institutions obtain
evaluations for such transactions could be viewed as an additional
burden. However, because the final rule increases the residential
threshold to $400,000 for all residential transactions, institutions,
including small entities, will not need to comply with the detailed
requirements of the rural residential appraisal exemption in order for
such transactions to be exempt from the agencies' appraisal
requirement. Complying with the evaluation requirement for transactions
below the residential appraisal threshold is likely to be less
burdensome than complying with the requirements of the rural
residential appraisal exemption. Overall, the Board does not believe
this requirement will have a significant economic impact on small
institutions.
The requirement that Title XI appraisals be subject to appropriate
review for USPAP compliance applies to all small entities regulated by
the Board that engage in real estate lending. However, the Board does
not believe this requirement would impose a significant burden or
economic impact on such institutions because the agencies' appraisal
requirements already require that Title XI appraisals be performed in
compliance with USPAP. Further, many financial institutions already
have review processes in place to ensure that appraisals comply with
USPAP.
The final rule does not contain any new recordkeeping, reporting,
or significant compliance requirements. Based on information available
to the Board, the final rule is not expected to impose any significant
cost or burden on small entities, and small entities and borrowers
engaging in residential real estate transactions could experience cost
reductions; however, the overall economic impact on small entities is
not expected to be significant. The Board certifies that the final rule
will not have a significant economic impact on a substantial number of
small entities supervised by the Board.
FDIC: The RFA generally requires that, in connection with a final
rulemaking, an agency prepare and make available a final regulatory
flexibility analysis describing the impact of the rule on small
entities.\87\ However, a regulatory flexibility analysis is not
required if the agency certifies that the rule will not have a
significant economic impact on a substantial number of small entities.
The SBA has defined ``small entities'' to include banking organizations
with total assets of less than or equal to $600 million.\88\ Generally,
the FDIC considers a significant effect to be a quantified effect in
excess of 5 percent of total annual salaries and benefits per
institution, or 2.5 percent of total non-interest expenses. The FDIC
believes that effects in excess of these thresholds typically represent
significant effects for FDIC-supervised institutions. For the reasons
described below and under section 605(b) of the RFA, the FDIC certifies
that this rule will not have a significant economic effect on a
substantial number of small entities.
---------------------------------------------------------------------------
\87\ 5 U.S.C. 601 et seq.
\88\ The SBA defines a small banking organization as having $600
million or less in assets, where an organization's ``assets are
determined by averaging the assets reported on its four quarterly
financial statements for the preceding year.'' See 13 CFR 121.201
(as amended by 84 FR 34261, effective August 19, 2019). In its
determination, the ``SBA counts the receipts, employees, or other
measure of size of the concern whose size is at issue and all of its
domestic and foreign affiliates.'' See 13 CFR 121.103. Following
these regulations, the FDIC uses a covered entity's affiliated and
acquired assets, averaged over the preceding four quarters, to
determine whether the covered entity is ``small'' for the purposes
of RFA.
---------------------------------------------------------------------------
The FDIC supervises 3,465 depository institutions,\89\ of which
2,705 are defined as small entities by the terms of the RFA.\90\ In
2017, 1,139 small, FDIC-supervised institutions reported originating
residential real estate loans. However, beginning in 2017, FDIC-
supervised institutions ceased reporting residential loan origination
data in compliance with HMDA if they originated less than 25 loans per
year. Therefore, in order to more accurately assess the number of
institutions that could be affected by this rule we counted the number
of existing institutions who reported any residential loan originations
in 2015, 2016, or 2017. By that measure, 1,430 (52.9 percent) are
estimated to be affected by this rule.\91\
---------------------------------------------------------------------------
\89\ FDIC-supervised institutions are set forth in 12 U.S.C.
1813(q)(2).
\90\ Call Report, March 31, 2019.
\91\ HMDA data, December 2015-2017.
---------------------------------------------------------------------------
The final rule is likely to reduce loan valuation-related costs for
small, covered institutions. By increasing the residential real estate
appraisal threshold, the rule is expected to increase the number of
residential real estate loans eligible for an evaluation, instead of an
appraisal. The FDIC estimates that, on average, the review process for
an appraisal would take approximately forty minutes, but only ten
minutes, on average, for an evaluation. Therefore, the FDIC estimates
that the rule would reduce loan valuation-related costs for small,
FDIC-supervised institutions by 30 minutes per transaction, on average.
According to 2017 HMDA data, 13.3 percent of residential real estate
loans originated by small, FDIC-supervised institutions and affiliated
institutions are subject to the Title XI appraisal requirements and
have loan amounts between $250,000 and $400,000.\92\ Additionally, of
the 1,430 small, FDIC-supervised institutions that reported residential
loan originations, a total of 163,148 residential real estate loans
[[Page 53595]]
were originated,\93\ and the average number of originations per year
was approximately 128. Assuming that 13.3 percent of originations by
small, FDIC-supervised institutions fall in the $250,000 to $400,000
range and are subject to the Title XI appraisal requirement,
approximately 21,699 originations per year, or an average of 15 per
small, FDIC-supervised institution, would have the option of an
evaluation rather than an appraisal as a result of this rule. Thus, by
using evaluations instead of appraisals a small, FDIC-supervised
institution may reduce its total annual residential real estate
transaction valuation-related labor hours by 7.5 hours.\94\ The FDIC
estimates this will result in a potential cost savings for small, FDIC-
supervised institutions of $519.15 per year, per institution.\95\ The
estimated reduction in costs would be smaller if lenders opt to not
utilize an evaluation and require an appraisal on a residential real
estate transaction greater than $250,000 but not more than $400,000.
These estimated savings would not exceed 5 percent of annualized salary
expense or 2.5 percent of annualized noninterest expense for any small,
FDIC-supervised institutions.\96\
---------------------------------------------------------------------------
\92\ HMDA data, December 2017.
\93\ Id.
\94\ 0.5 hours *15 originations = 7.5 hours.
\95\ 7.5 hours * $69.22 per hour = $519.15 The FDIC estimates
that the average hourly compensation for a loan officer is $69.22 an
hour. The hourly compensation estimate is based on published
compensation rates for Credit Counselors and Loan Officers ($44.30).
The estimate includes the May 2017 75th percentile hourly wage rate
reported by the Bureau of Labor Statistics, National Industry
Specific Occupational Employment and Wage Estimates for the
Depository Credit Intermediation sector. These wage rates have been
adjusted for changes in the Consumer Price Index for all Urban
Consumers between May 2017 and December 2018 (3.59 percent) and
grossed up by 50.8 percent to account for non-monetary compensation
as reported by the December 2018 Employer Costs for Employee
Compensation Data.
\96\ Call Report, March 31 2019.
---------------------------------------------------------------------------
This rule is likely to reduce residential real estate transaction
valuation-related costs for the parties involved. By increasing the
residential real estate appraisal threshold, the rule is expected to
increase the number of residential real estate loans eligible for an
evaluation, instead of an appraisal. As discussed in the proposal, the
United States Department of Veterans Affairs' appraisal fee schedule
\97\ for a single-family residence generally ranges from $375 to $900,
depending on the location of the property. While the FDIC does not have
definitive data on the cost of evaluations, some of the comments from
financial institutions and their trade associations represented that
evaluations are less costly than appraisals. Making more residential
real estate transactions eligible for evaluations rather than
appraisals is likely to reduce transaction valuation-related costs.
However, the FDIC assumes that most, if not all, of these cost
reductions would be passed on to residential real estate buyers.
Therefore, this aspect of the rule is likely to have little or no
effect on small, FDIC-supervised entities.
---------------------------------------------------------------------------
\97\ See https://www.benefits.va.gov/HOMELOANS/appraiser_fee_schedule.asp.
---------------------------------------------------------------------------
The FDIC does not expect the rule to have any substantive effects
on the safety and soundness of small, FDIC-supervised institutions.
Analysis of HMDA data shows that the rule would newly exempt from
appraisal requirements an estimated 13.3 percent of transactions, and
23 percent of the dollar volume of transactions, among small, FDIC-
supervised institutions. Assuming that loans secured by residential
properties with values from $250,000 to $400,000 represent the same
percentage of the residential real estate loan portfolios of small,
FDIC-supervised institutions as they do of the dollar volume of new
originations, such loans do not represent more than 19.5 percent of
total assets for any small, FDIC-supervised institutions.\98\ The
aggregate value of such loans for all small, FDIC-supervised
institutions represents approximately four percent of assets, assuming
that 23 percent of each institution's portfolio of loans secured by
first liens on one- to four-family residential mortgages is made up of
loans with a value at origination of $250,000 to $400,000.\99\ While
exempted transactions would not require an appraisal, they would still
require an evaluation that is consistent with safe and sound banking
practices. As previously discussed in the Revisions to the Title XI
Appraisal Regulations section,\100\ supervisory experience indicates
that appraisals and evaluations are both credible tools to support real
estate lending decisions, so the FDIC does not expect that increasing
the threshold for appraisals will affect the safety and soundness of
small, FDIC-supervised institutions. Further, historical loss
information in the Call Reports reflects that the net charge-off rate
for residential transactions did not increase after the increase in the
appraisal threshold from $100,000 to $250,000 in June 1994, or during
and after the recession in 2001 through year-end 2007. During this
timeframe, the net charge-off rate for small, FDIC-supervised
institutions ranged from 1 basis point to 9 basis points. However, the
net charge-off rate for residential transactions increased
significantly from 2008-2013, which was during and immediately after
the recent recession, ranging from 3 basis points to 55 basis points.
As discussed earlier, the agencies attribute the increase in the net
charge-off rate for loans secured by single 1-to-4 family residential
real estate during the recent recession to weak underwriting standards
in the lead up to the crisis. Therefore, the FDIC believes the proposed
rule is unlikely to pose significant safety and soundness risks for
small, FDIC-supervised entities.
---------------------------------------------------------------------------
\98\ Call Report data, March 31, 2019.
\99\ Id.
\100\ See supra, Section II.
---------------------------------------------------------------------------
The rule is likely to pose relatively larger residential real
estate valuation-related transaction cost reductions for rural buyers
and small, FDIC-supervised institutions lending in rural areas;
however, these effects are difficult to accurately estimate. Home
prices in rural areas are generally lower than those in suburban and
urban areas. Therefore, residential real estate transactions in rural
areas are likely to utilize evaluations more than appraisals, under the
proposed rule. Additionally, there may be less delay in finding
qualified personnel to perform an evaluation than to perform a Title XI
appraisal, particularly in rural areas.
Finally, by potentially reducing valuation-related costs associated
with residential real estate transactions for properties greater than
$250,000 but not more than $400,000, the proposed rule could result in
a marginal increase in lending activity of small, FDIC-supervised
institutions for properties of this type. However, the FDIC believes
that this effect is likely to be negligible given that the potential
cost savings of using an evaluation, rather than an appraisal,
represents between 0.12-0.29 percent of the median home price.\101\
---------------------------------------------------------------------------
\101\ Median home price in the United States as of January 2019
is estimated at $307,700 by the Federal Reserve Bank of St. Louis.
See https://fred.stlouisfed.org/series/MSPUS. $375/$307,700 =
.001218, $900/$307,700 = .002925.
---------------------------------------------------------------------------
For the reasons described above and under section 605(b) of the
RFA, the FDIC certifies that the proposed rule will not have a
significant economic impact on a substantial number of small entities.
B. Paperwork Reduction Act
In accordance with the requirements of the Paperwork Reduction Act
of 1995 \102\ (PRA), the agencies may not conduct or sponsor, and a
respondent is not required to respond to, an information collection
unless it displays a currently valid Office of Management and Budget
(OMB) control number. The
[[Page 53596]]
agencies have reviewed this final rule and determined that it would not
introduce any new or revise any collection of information pursuant to
the PRA. In addition, the agencies received no comments on the PRA
analysis in the proposal. Therefore, no submissions will be made to OMB
for review.
---------------------------------------------------------------------------
\102\ 44 U.S.C. 3501-3521.
---------------------------------------------------------------------------
C. Riegle Community Development and Regulatory Improvement Act of 1994
Pursuant to section 302(a) of the Riegle Community Development and
Regulatory Improvement Act (RCDRIA),\103\ in determining the effective
date and administrative compliance requirements for new regulations
that impose additional reporting, disclosure, or other requirements on
IDIs, each Federal banking agency must consider, consistent with
principles of safety and soundness and the public interest, any
administrative burdens that such regulations would place on depository
institutions, including small depository institutions, and customers of
depository institutions, as well as the benefits of such regulations.
In addition, section 302(b) of RCDRIA requires new regulations and
amendments to regulations that impose additional reporting,
disclosures, or other new requirements on IDIs generally to take effect
on the first day of a calendar quarter that begins on or after the date
on which the regulations are published in final form.\104\
---------------------------------------------------------------------------
\103\ 12 U.S.C. 4802(a).
\104\ Id. at 4802(b).
---------------------------------------------------------------------------
The agencies recognize that the requirement to obtain an evaluation
for transactions exempted by the rural residential appraisal exemption
\105\ could be considered by IDIs to be a new requirement, despite the
longstanding requirements for IDIs to obtain evaluations for
transactions exempt from agencies' appraisal requirement under a
threshold exemption. The agencies also recognize that the requirement
for an appraisal review could be considered by IDIs to be a new
requirement, despite the longstanding practice of many financial
institutions to conduct appraisal reviews. Accordingly, with respect to
the requirement that financial institutions obtain evaluations for
transactions exempted by the rural residential appraisal exemption and
the requirement for appraisal review, the effective date will be
January 1, 2020, which is the first day of a calendar quarter which
begins on or after the date on which the regulations are published in
final form, consistent with RCDRIA.
---------------------------------------------------------------------------
\105\ See supra note 25.
---------------------------------------------------------------------------
Otherwise, the final rule reduces burden and does not impose any
reporting, disclosure, or other new requirements on IDIs. For
transactions exempted from the agencies' appraisal requirement by the
final rule (i.e., residential real estate transactions between $250,000
and $400,000), lenders are required to get an evaluation if they chose
not to get an appraisal. However, the agencies do not view the option
to obtain an evaluation instead of an appraisal as a new or additional
requirement for purposes of RCDRIA. First, the process of obtaining an
evaluation is not new since IDIs already obtain evaluations for
transactions at or below the current $250,000-threshold. Second, for
residential real estate transactions between $250,000 and $400,000,
IDIs could continue to obtain appraisals instead of evaluations.
Because the final rule does not impose new requirements on IDIs, the
agencies are not required by RCDRIA to consider the administrative
burdens and benefits of the rule or delay its effective date (other
than the evaluation provision for transactions exempted by the rural
residential appraisal exemption or and the appraisal review provision,
as discussed above).
Because delaying the effective date of the final rule's threshold
increase is not required and would serve no purpose, the threshold
increase and all other provisions of the final rule, other than the
evaluation requirement for the rural residential appraisal exemption
and the requirement that appraisals be subject to appropriate review
for compliance with USPAP, are effective on the first day after
publication of the final rule in the Federal Register.
Additionally, although not required by RCDRIA, the agencies did
consider the administrative costs and benefits of the residential
appraisal threshold increase while developing the proposal. In
designing the scope of the threshold increase, the agencies chose to
align the definition of residential real estate transaction with
industry practice, regulatory guidance, and the categories used in the
Call Report in order to reduce the administrative burden of determining
which transactions were exempted by the final rule. The agencies also
considered the cost savings that IDIs would experience by obtaining
evaluations instead of appraisals and set the threshold at a level
designed to provide significant burden relief without sacrificing
safety and soundness. Similarly, in requiring evaluations for exempted
rural transactions and adding the appraisal review requirement, the
agencies considered the administrative burden of these requirements on
IDIs consistent with principles of safety and soundness and the public
interest.
D. Solicitation of Comments on Use of Plain Language
Section 722 of the Gramm-Leach-Bliley Act \106\ requires the
Federal banking agencies to use plain language in all proposed and
final rules published after January 1, 2000. The agencies have sought
to present the final rule in a simple and straightforward manner and
did not receive any comments on the use of plain language.
---------------------------------------------------------------------------
\106\ Public Law 106-102, section 722, 113 Stat. 1338, 1471
(1999).
---------------------------------------------------------------------------
E. OCC Unfunded Mandates Reform Act of 1995 Determination
The OCC has analyzed the final rule under the factors in the
Unfunded Mandates Reform Act of 1995 (UMRA) (2 U.S.C. 1532). Under this
analysis, the OCC considered whether the final rule includes a Federal
mandate that may result in the expenditure by state, local, and tribal
governments, in the aggregate, or by the private sector, of $100
million or more in any one year (adjusted annually for inflation,
currently $154 million).\107\ As discussed in the OCC's Regulatory
Flexibility Act section, the costs associated with the final rule, if
any, would be de minimis. Therefore, the OCC concludes that the final
rule will not result in an expenditure of $154 million or more annually
by state, local, and tribal governments, or by the private sector.
---------------------------------------------------------------------------
\107\ The OCC estimates the UMRA inflation adjustment using the
change in the annual U.S. GDP Implicit Price Deflator between 1995
and 2018, which is the most recent available annual data. The
deflator was 71.868 in 1995, and 110.382 in 2018, resulting in an
inflation adjustment factor of 1.54 (110.382/71.868 = 1.54, and $100
million x 1.54 = $154 million).
---------------------------------------------------------------------------
List of Subjects
12 CFR Part 34
Appraisal, Appraiser, Banks, Banking, Consumer protection, Credit,
Mortgages, National banks, Reporting and recordkeeping requirements,
Savings associations, Truth in lending.
12 CFR Part 225
Administrative practice and procedure, Banks, banking, Federal
Reserve System, Capital planning, Holding companies, Reporting and
recordkeeping requirements, Securities, Stress testing
[[Page 53597]]
12 CFR Part 323
Banks, banking, Mortgages, Reporting and recordkeeping
requirements, Savings associations.
DEPARTMENT OF THE TREASURY
Office of the Comptroller of the Currency
12 CFR Part 34
For the reasons set forth in the joint preamble, the OCC amends
part 34 of chapter I of title 12 of the Code of Federal Regulations as
follows:
PART 34--REAL ESTATE LENDING AND APPRAISALS
0
1. The authority citation for part 34 continues to read as follows:
Authority: 12 U.S.C. 1, 25b, 29, 93a, 371, 1462a, 1463, 1464,
1465, 1701j--3, 1828(o), 3331 et seq., 5101 et seq., and
5412(b)(2)(B), and 15 U.S.C. 1639h.
0
2. Section 34.42 is amended by:
0
a. Revising paragraph (f);
0
b. Redesignating paragraphs (k) through (n) as (l) through (o),
respectively; and
0
c. Adding a new paragraph (k).
The revision and addition read as follows:
Sec. 34.42 Definitions.
* * * * *
(f) Complex appraisal for a residential real estate transaction
means one in which the property to be appraised, the form of ownership,
or market conditions are atypical.
* * * * *
(k) Residential real estate transaction means a real estate-related
financial transaction that is secured by a single 1-to-4 family
residential property.
* * * * *
0
3. Section 34.43 is amended by:
0
a. Revising paragraph (a)(1);
0
b. Removing the word ``or'' at the end of paragraph (a)(12);
0
c. Removing the period at the end of paragraph (a)(13) and adding ``;
or'' in its place;
0
d. Adding paragraph (a)(14); and
0
e. Revising paragraph (d)(3).
The revisions and addition read as follows:
Sec. 34.43 Appraisals required; transactions requiring a State
certified or licensed appraiser.
(a) * * *
(1) The transaction is a residential real estate transaction that
has a transaction value of $400,000 or less;
* * * * *
(14) The transaction is exempted from the appraisal requirement
pursuant to the rural residential exemption under 12 U.S.C. 3356.
* * * * *
(d) * * *
(3) Complex appraisals for residential real estate transactions of
more than $400,000. All complex appraisals for residential real estate
transactions rendered in connection with federally related transactions
shall require a State certified appraiser if the transaction value is
more than $400,000. A regulated institution may presume that appraisals
for residential real estate transactions are not complex, unless the
institution has readily available information that a given appraisal
will be complex. The regulated institution shall be responsible for
making the final determination of whether the appraisal is complex. If
during the course of the appraisal a licensed appraiser identifies
factors that would result in the property, form of ownership, or market
conditions being considered atypical, then either:
(i) The regulated institution may ask the licensed appraiser to
complete the appraisal and have a certified appraiser approve and co-
sign the appraisal; or
(ii) The institution may engage a certified appraiser to complete
the appraisal.
* * * * *
0
4. Effective January 1, 2020, Sec. 34.43 is further amended by
revising paragraph (b) to read as follows:
Sec. 34.43 Appraisals required; transactions requiring a State
certified or licensed appraiser.
* * * * *
(b) Evaluations required. For a transaction that does not require
the services of a State certified or licensed appraiser under
paragraphs (a)(1), (5), (7), (13), or (14) of this section, the
institution shall obtain an appropriate evaluation of real property
collateral that is consistent with safe and sound banking practices.
* * * * *
0
5. Effective January 1, 2020. Sec. 34.44 is amended by:
0
a. Republishing the introductory text;
0
b. Redesignating paragraphs (c), (d), and (e) as (d), (e), and (f),
respectively; and
0
c. Adding a new paragraph (c).
The addition reads as follows:
Sec. 34.44 Minimum appraisal standards.
For federally related transactions, all appraisals shall, at a
minimum:
* * * * *
(c) Be subject to appropriate review for compliance with the
Uniform Standards of Professional Appraisal Practice;
* * * * *
Federal Reserve Board
For the reasons set forth in the joint preamble, the Board amends
part 225 of chapter II of title 12 of the Code of Federal Regulations
as follows:
PART 225--BANK HOLDING COMPANIES AND CHANGE IN BANK CONTROL
(REGULATION Y)
0
6. The authority citation for part 225 continues to read as follows:
Authority: 12 U.S.C. 1817(j)(13), 1818, 1828(o), 1831i, 1831p-
1, 1843(c)(8), 1844(b), 1972(l), 3106, 3108, 3310, 3331 et seq.,
3906, 3907, and 3909; 15 U.S.C. 1681s, 1681w, 6801 and 6805.
0
7. Section 225.62 is amended by:
0
a. Revising paragraph (f);
0
b. Redesignating paragraphs (k) through (n) as (l) through (o),
respectively; and
0
c. Adding a new paragraph (k).
The revisions and addition read as follows:
Sec. 225.62 Definitions.
* * * * *
(f) Complex appraisal for a residential real estate transaction
means one in which the property to be appraised, the form of ownership,
or market conditions are atypical.
* * * * *
(k) Residential real estate transaction means a real estate-related
financial transaction that is secured by a single 1-to-4 family
residential property.
* * * * *
0
8. Section 225.63 is amended by:
0
a. Revising paragraph (a)(1);
0
b. Removing the word ``or'' at the end of paragraph (a)(13);
0
c. Removing the period at the end of paragraph (a)(14) and adding ``;
or'' in its place;
0
d. Adding paragraph (a)(15); and
0
e. Revising paragraph (d)(3).
The addition and revisions read as follows:
Sec. 225.63 Appraisals required; transactions requiring a State
certified or licensed appraiser.
(a) * * *
(1) The transaction is a residential real estate transaction that
has a transaction value of $400,000 or less;
* * * * *
(15) The transaction is exempted from the appraisal requirement
pursuant to the rural residential exemption under 12 U.S.C. 3356.
* * * * *
(d) * * *
(3) Complex appraisals for residential real estate transactions of
more than $400,000. All complex appraisals for
[[Page 53598]]
residential real estate transactions rendered in connection with
federally related transactions shall require a State certified
appraiser if the transaction value is more than $400,000. A regulated
institution may presume that appraisals for residential real estate
transactions are not complex, unless the institution has readily
available information that a given appraisal will be complex. The
regulated institution shall be responsible for making the final
determination of whether the appraisal is complex. If during the course
of the appraisal a licensed appraiser identifies factors that would
result in the property, form of ownership, or market conditions being
considered atypical, then either:
(i) The regulated institution may ask the licensed appraiser to
complete the appraisal and have a certified appraiser approve and co-
sign the appraisal; or
(ii) The institution may engage a certified appraiser to complete
the appraisal.
* * * * *
0
9. Effective January 1, 2010, Sec. 225.63 is further amended by
revising paragraph (b) to read as follows:
Sec. 225.63 Appraisals required; transactions requiring a State
certified or licensed appraiser.
* * * * *
(b) Evaluations required. For a transaction that does not require
the services of a State certified or licensed appraiser under
paragraphs (a)(1), (5), (7), (14), or (15) of this section, the
institution shall obtain an appropriate evaluation of real property
collateral that is consistent with safe and sound banking practices.
* * * * *
0
10. Effective January 1, 2020, Sec. 225.64 is amended by:
0
a. Republishing the introductory text;
0
b. Redesignating paragraphs (c), (d), and (e) as (d), (e), and (f),
respectively; and
0
c. Adding a new paragraph (c).
The addition reads as follows:
Sec. 225.64 Minimum appraisal standards.
For federally related transactions, all appraisals shall, at a
minimum:
* * * * *
(c) Be subject to appropriate review for compliance with the
Uniform Standards of Professional Appraisal Practice;
* * * * *
Federal Deposit Insurance Corporation
For the reasons set forth in the joint preamble, the FDIC amends
part 323 of chapter III of title 12 of the Code of Federal Regulations
as follows:
0
11. The authority citation for part 323 continues to read as follows:
Authority: 12 U.S.C. 1818, 1819(a) (``Seventh'' and ``Tenth''),
1831p-1 and 3331 et seq.
0
12. Section 323.2 is amended by:
0
a. Revising paragraph (f);
0
b. Redesignating paragraphs (k) through (n) as (l) through (o),
respectively; and
0
c. Adding a new paragraph (k).
The revision and addition read as follows:
Sec. 323.2 Definitions.
* * * * *
(f) Complex appraisal for a residential real estate transaction
means one in which the property to be appraised, the form of ownership,
or market conditions are atypical.
* * * * *
(k) Residential real estate transaction means a real estate-related
financial transaction that is secured by a single 1-to-4 family
residential property.
* * * * *
0
13. Section 323.3 is amended by:
0
a. Revising paragraph (a)(1);
0
b. Removing the word ``or'' at the end of paragraph (a)(12);
0
c. Removing the period at the end of paragraph (a)(13) and adding ``;
or'' in its place; and
0
d. Adding paragraph (a)(14); and
0
e. Revising paragraph (d)(3).
The revisions and addition read as follows:
Sec. 323.3 Appraisals required; transactions requiring a State
certified or licensed appraiser.
(a) * * *
(1) The transaction is a residential real estate transaction that
has a transaction value of $400,000 or less;
* * * * *
(14) The transaction is exempted from the appraisal requirement
pursuant to the rural residential exemption under 12 U.S.C. 3356.
* * * * *
(d) * * *
(3) Complex appraisals for residential real estate transactions of
more than $400,000. All complex appraisals for residential real estate
transactions rendered in connection with federally related transactions
shall require a State certified appraiser if the transaction value is
more than $400,000. A regulated institution may presume that appraisals
for residential real estate transactions are not complex, unless the
institution has readily available information that a given appraisal
will be complex. The regulated institution shall be responsible for
making the final determination of whether the appraisal is complex. If
during the course of the appraisal a licensed appraiser identifies
factors that would result in the property, form of ownership, or market
conditions being considered atypical, then either:
(i) The regulated institution may ask the licensed appraiser to
complete the appraisal and have a certified appraiser approve and co-
sign the appraisal; or
(ii) The institution may engage a certified appraiser to complete
the appraisal.
* * * * *
0
14. Effective January 1, 2020. Sec. 323.3 is further amended by
revising paragraph (b) to read as follows:
Sec. 323.3 Appraisals required; transactions requiring a State
certified or licensed appraiser.
* * * * *
(b) Evaluations required. For a transaction that does not require
the services of a State certified or licensed appraiser under
paragraphs (a)(1), (5), (7), (13), or (14) of this section, the
institution shall obtain an appropriate evaluation of real property
collateral that is consistent with safe and sound banking practices.
* * * * *
0
15. Effective January 1, 2020, Sec. 323.4 is amended by
0
a. Republishing the introductory text;
0
b. Redesignating paragraphs (c), (d), and (e) as (d), (e), and (f),
respectively; and
0
c. Adding a new paragraph (c).
The addition reads as follows:
Sec. 323.4 Minimum appraisal standards.
For federally related transactions, all appraisals shall, at a
minimum:
* * * * *
(c) Be subject to appropriate review for compliance with the
Uniform Standards of Professional Appraisal Practice;
* * * * *
Dated: August 8, 2019.
Joseph M. Otting,
Comptroller of the Currency.
By order of the Board of Governors of the Federal Reserve
System, September 23, 2019.
Ann E. Misback,
Secretary of the Board.
Federal Deposit Insurance Corporation.
By order of the Board of Directors.
Dated at Washington, DC, on August 20, 2019.
Valerie J. Best,
Assistant Executive Secretary.
[FR Doc. 2019-21376 Filed 10-7-19; 8:45 am]
BILLING CODE 4810-33-P 6210-01-P; 6714-01-P
