Threshold Increase for Residential Real Estate Transactions 1. 23. 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 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. on Second, for residential real estate transactions between $250,000 and $400,000, IDIs could continue to obtain appraisals instead of evaluations. One commenter indicated that only 17 metropolitan statistical areas have a median sales price for single-family homes that exceeds $400,000. Other commenters expressed concern that the proposed threshold level would exempt too high a percentage of residential transactions from the protections provided by appraisals. Each document posted on the site includes a link to the • Uniform Standards of Professional Appraisal Practice (USPAP). The agencies recognize that some consumers may seek to include appraisal contingency clauses in PSAs. 0.5 hours *15 originations = 7.5 hours. The agencies proposed increasing the residential real estate appraisal threshold from $250,000 to $400,000. [83] 78. 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] 3311). Other commenters supporting a threshold increase supported a higher threshold, such as $500,000. 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. 84. Some commenters suggested doing so by basing the threshold on the GSE conforming loan limits for specific geographic areas. encourage regulated institutions to establish policies and procedures for obtaining Title XI appraisals when necessary for risk management. 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. Section 1.07 November 20, 2020 Appraisal Guidelines Page 3 of 151 Correspondent Seller Guide Broker Seller Guide Overview Introduction The safety and soundness of mortgage loans secured by real estate depends upon the adequacy of the underwriting supporting the transaction. 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 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. • Interagency Appraisal and Evaluation Guidelines (October 7, 1994). The agencies proposed that financial institutions obtain evaluations for these transactions because evaluations protect the safety and soundness of financial institutions. [21] Finally, the OCC notes that the requirement for appraisal review is statutorily mandated by Title XI. These can be useful 3356. electronic version on GPO’s govinfo.gov. 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. 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. 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. Though it may be good practice to disclose all costs and affiliated business arrangements anyway, it is not regulated by RESPA to do so for these exempted loan types. 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. 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. As regulators work toward a decision on whether to increase the threshold for residential real-estate transactions requiring an appraisal from $250,000 to $400,000, many lenders and appraisers alike are wondering whether they are prepared, whatever happens. 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. Evaluations are not required to be performed in accordance with USPAP or by state certified or state licensed appraisers by federal law. provide that individuals preparing evaluations should be qualified, competent, and independent of the transaction and the loan production function of the institution. 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. 31. 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. documents in the last year, 787 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. 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. One of these commenters suggested that the threshold be based on wage growth and housing affordability. Adding this definition does not change any substantive requirement, but provides clarity to the regulation. See OCC: 12 CFR 34.43(a)(9); Board: 12 CFR 225.63(a)(9); FDIC: 12 CFR 323.3(a)(9). Overview of FHA Appraisal Guidelines for 2020. According to the 2020 FHA appraisal guidelines, all properties being purchased with an FHA-insured mortgage loan must be appraised by a licensed, HUD-approved home appraiser. [8] This document has been published in the Federal Register. 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. 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. 43. 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. For persons who are deaf or hearing impaired, TTY users may contact (202) 649-5597. Federal Deposit Insurance Corporation. For transactions exempted from the appraisal requirement, the final rule requires institutions to obtain an evaluation to provide an estimate of the market value of real estate collateral. 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. The OCC, Board, and FDIC had previously set the appraisal threshold at $100,000. The Public Inspection page 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. 3356. Therefore, the OCC certifies that the final rule will not have a significant economic impact on a substantial number of small entities. 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. [78] For the hearing impaired only, Telecommunications Device for the Deaf (TDD) users may contact (202) 263-4869. As discussed in the OCC's Regulatory Flexibility Act section, the costs associated with the final rule, if any, would be de minimis. [74] The agencies considered these comments in evaluating the rule's potential impact. 38. A few commenters suggested lower thresholds and that transactions under the current and proposed thresholds often pose risk to financial institutions and to consumers. 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. Therefore, the agencies are adopting the definition of a residential real estate transaction as proposed. 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. 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 hourly compensation estimate is based on published compensation rates for Credit Counselors and Loan Officers ($44.30). § 34.44 is amended by: b. Redesignating paragraphs (c), (d), and (e) as (d), (e), and (f), respectively; and. 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. by the Comptroller of the Currency As previously discussed in the Revisions to the Title XI Appraisal Regulations section,[100] 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. 1813(q)(2). for a single-family residence generally ranges from $375 to $900, depending on the location of the property. 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. 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. requires the Federal banking agencies to use plain language in all proposed and final rules published after January 1, 2000. 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. 15. The final rule also requires evaluations for transactions exempted by the rural residential appraisal exemption. 3339(3). 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 have authority to determine those real estate-related Start Printed Page 53581financial transactions that do not require Title XI appraisals. 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. 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. 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). Definition of Residential Real Estate Transaction, 3. 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). 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. One commenter indicated that evaluation tools provide accurate valuation information at approximately half the cost of an appraisal. Since the early 1990s, the agencies' appraisal regulations have required that regulated institutions obtain evaluations for certain other exempt residential real Start Printed Page 53592estate transactions (which in practice are generally retained in their portfolios). 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. 12/22/2020, 296 [75] 48. 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. 3341(b). [72] The proposed rule would have made a conforming amendment to add this statutory requirement for appraisal review to the appraisal regulations. Also, it will have no effect on the national economy. 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. In addition, the agencies have issued guidance to help institutions ensure that they have the proper controls to fulfill independence expectations. This threshold increase means that transactions at or below this level do not require appraisals that conform to Title XI of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 and the interagency appraisal rules. [18] 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. 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. Appraisals required; transactions requiring a State certified or licensed appraiser. 1639c (implemented by the CFPB at 12 CFR 1026.43); reverse mortgages subject to 12 CFR 1026.33; and certain refinancings. 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. and the average number of originations per year was approximately 128. 16. The agencies received five comments suggesting that the agencies hold public hearings regarding the proposed rule. In accordance with the requirements of the Paperwork Reduction Act of 1995 [102] [4], Title XI directs each Federal financial institutions regulatory agency [5] Some of these commenters also asserted that they have adequate programs and policies to ensure that evaluations are used prudently. 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. 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. 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. While every effort has been made to ensure that This rule is likely to reduce residential real estate transaction valuation-related costs for the parties involved. documents in the last year. 28. [37] 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. documents in the last year, 10 The agencies proposed that evaluations be required Start Printed Page 53582for these transactions. For these reasons, the agencies posited that evaluations could provide a level of consumer protection for transactions at or below the proposed appraisal threshold. 3. 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 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. [68] 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. 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