Definition of Residential Real Estate Transaction. Other commenters supporting a threshold increase supported a higher threshold, such as $500,000. 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. Additionally, of the 1,430 small, FDIC-supervised institutions that reported residential loan originations, a total of 163,148 residential real estate loans Start Printed Page 53595were originated,[93] 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. An institution may take a lien on real estate and be exempt from obtaining an appraisal if the... 3. In 2013, in keeping with its historic role, as well as in recognition of the limitations of many valuation standards currently in existence, the Appraisal Institute Board of Directors directed the development of high quality, straightforward, principle-based standards that could be used where existing standards are not already required or do not apply. daily Federal Register on FederalRegister.gov will remain an unofficial An evaluation is not necessary if the transaction qualifies both for the new threshold and for another exemption that does not require an evaluation. 3009-414, (1996) (codified at 12 U.S.C. 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. Access FDIC Financial Institution Letters (FILs) on the FDIC's website. The agencies proposed that financial institutions obtain evaluations for these transactions because evaluations protect the safety and soundness of financial institutions. documents in the last year, by the State Department Federal Register issue. 18. 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. for a single-family residence generally ranges from $375 to $900, depending on the location of the property. As previously discussed in the Revisions to the Title XI Appraisal Regulations section,[100] 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]. 27. 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. 17. Financial institutions may refer to the Guidelines for more information to assist them in the appropriate review of appraisals and evaluations.[80]. 57. 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 Federal Register. 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. A Rule by the Comptroller of the Currency, the Federal Reserve System, and the Federal Deposit Insurance Corporation on 10/08/2019. Other commenters questioned how much relief the proposal would provide. banking industry research, including quarterly banking Overall, the Board does not believe this requirement will have a significant economic impact on small institutions. 53. 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 final rule requires evaluations for these exempt transactions. I. 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: 1. 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. 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]. 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. 28. 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. The Uniform Standards of Professional Appraisal Practice (USPAP) is the generally recognized ethical and performance standards for the appraisal profession in the United States. 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. 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. 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. The President of the United States issues other types of documents, including but not limited to; memoranda, notices, determinations, letters, messages, and orders. OCC: 12 CFR 34.43(a)(10)(i); Board: 12 CFR 225.63(a)(10)(i); FDIC: 12 CFR 323.3(a)(10)(i). In contrast, some commenters who were providers of evaluation services indicated that they typically include a physical inspection of the property in their product. 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. All complex appraisals for Start Printed Page 53598residential 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. Walls and ceilings in good condition without cracks or holes. An evaluation is required regardless of which of these exemptions is relied upon. 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. 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. One commenter noted the VA's underwriting requirements exceed USPAP standards, which increases costs. 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 agencies have provided supervisory guidance for conducting evaluations in a safe and sound manner in the Interagency Appraisal and Evaluation Guidelines (Guidelines) [23] 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. bankers, analysts, and other stakeholders. The agencies requested comment generally regarding any implications of the proposed rule on consumer protection. Definition of Residential Real Estate Transaction 2. Federal government websites often end in .gov or .mil. 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. [7], Title XI directs the agencies to prescribe appropriate standards for Title XI appraisals under the agencies' respective jurisdictions. These can be useful The OCC has analyzed the final rule under the factors in the Unfunded Mandates Reform Act of 1995 (UMRA) (2 U.S.C. 48. 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. 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. 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. In general, commenters who supported the increase in the threshold Start Printed Page 53586also viewed evaluations as providing sufficient valuation information and analysis for financial institutions and consumers to engage in safe and sound residential real estate transactions. 69. [30] 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. The agencies noted that evaluations have long been required for below-threshold transactions; must be consistent with safe and sound banking practices; [58] Safety and Soundness Considerations for Raising the Residential Real Estate Threshold, 5. About the Federal Register although they may be less structured than appraisals. Public Law 106-102, section 722, 113 Stat. [83] 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. 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. [51] These commenters represented that those who perform evaluations often do not have the same level of independence from the transaction. Comments from financial institutions, financial institution trade associations, and state banking regulators generally supported the proposed increase. 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. [9], All federally related transactions must have Title XI appraisals. 66. 46. The FDIC believes that effects in excess of these thresholds typically represent significant effects for FDIC-supervised institutions. 10/07/2019 at 8:45 am. 12/02/2020, 865 This commenter also requested clarification of whether evaluations must be reviewed for compliance with USPAP. The final rule does not contain any new recordkeeping, reporting, or significant compliance requirements. 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. 1639e). Share. 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 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. Public Law 111-203, 124 Stat. independent agency created by the Congress to maintain [88] 85. documents in the last year, 929 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. 3356. Another commenter asserted that evaluations typically cost about $100 less than appraisals. 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]. [91], The final rule is likely to reduce loan valuation-related costs for small, covered institutions. As described in more detail below, many commenters in opposition asserted that the proposal would negatively impact consumers. Title XI of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (Title XI) requires the Agencies to adopt regulations prescribing standards for appraisals used in connection with federally related transactions within the jurisdiction of each agency, and that they be performed by certified or licensed appraisers. 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. Maybe he’s built a … Some commenters also raised concerns about the use of evaluations on homes that may need repairs, suggesting that evaluations may not uncover these issues. Each document posted on the site includes a link to the Otherwise, the final rule reduces burden and does not impose any reporting, disclosure, or other new requirements on IDIs. on [68] government site. 35. 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. Introduction A. 39. 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. 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. 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. A, Title II, section 2222, 110 Stat. 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. 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. Paper copies of FDIC FILs may be obtained through the FDIC's Public Information Center, 3501 Fairfax Drive, E-1002, Arlington, VA 22226 (1-877-275-3342 or 703-562-2200). Further, consumers may voluntarily obtain appraisals regardless of whether the regulated institution is required to do so. 12 U.S.C. The agencies are adopting this aspect of the final rule without change. Commenters also opined about the use of automated valuation models (AVMs) in the performance of evaluations. 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. 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