See OCC: 12 CFR 34, subpart C; Board: 12 CFR 225.61(b); 12 CFR part 208, subpart E; and FDIC: 12 CFR part 323. More information and documentation can be found in our FDIC: The RFA generally requires that, in connection with a rulemaking, an agency prepare and make available for public comment an initial regulatory flexibility analysis describing the impact of the proposed rule on small entities. One commenter asserted that it is not true that evaluations contain less detailed information or take less time to review than appraisals. These commenters asserted that 1-to-4 family construction loans are riskier than conventional residential lending, and maintained that evaluations lack the market analysis needed for a phased construction project. As discussed in the proposal, institutions must obtain evaluations that are consistent with safe and sound banking practices.  Section 323.1 is amended by revising paragraph (a) to read as follows: (a) Authority. Analysis of supervisory experience concerning losses on commercial real estate transactions suggests that faulty valuations of the underlying real estate collateral since 1994 have not been a material cause of losses in connection with transactions at or below $250,000. Another commenter asserted that commercial borrowers tend to be larger entities, with the capital to withstand detrimental financial events and shifts in the market. See EGRPRA Report at 36; 82 FR at 35482. 33047-33048 (1987). Therefore, 2,950 small entities could be affected by the final rule. 56. The final rule increases the number of commercial real estate transactions that would require an evaluation by raising the appraisal threshold from $250,000 to $500,000. Several commenters generally supported the proposal that regulated institutions obtain evaluations for commercial real estate transactions at or below the threshold. The proposal followed the completion in early 2017 of the regulatory review process required by the Economic Growth and Regulatory Paperwork Reduction Act (EGRPRA). Several commenters pointed to the safety and soundness and consumer protection benefits of obtaining appraisals in connection with residential transactions. 8. An appraiser trade association that was opposed to an increase asserted that small business loans are riskier than others and that lenders with concentrations in such loans are at greater risk. 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. 36. The other two commenters disagreed with an immediate effective date, asserting that financial institutions required time to adjust policies and procedures to implement the proposed changes. 12 U.S.C. FDIC Call Report, September 30, 2017. A 1-to-4 family residential property is a property containing one, two, three, or four individual dwelling units, including manufactured homes permanently affixed to the underlying land (when deemed to be real property under state law). The agencies have provided supervisory guidance for conducting evaluations in a safe and sound manner in the Interagency Appraisal and Evaluation Guidelines (Guidelines) and the Interagency Advisory on the Use of Evaluations in Real Estate-Related Financial Transactions (Evaluations Advisory, and together with the Guidelines, Evaluation Guidance). Title XI directs each Federal financial institutions regulatory agency to publish appraisal regulations for federally related transactions within its . Total Estimated Annual Burden: 148,800 hours. As described in the proposal, IDIs annually report information on NFNR loans in the Call Report by three separate size categories: (1) Loans with original amounts of $100,000 or less; (2) loans with original amounts of more than $100,000, but $250,000 or less; and (3) loans with original amounts of more than $250,000, but $1 million or less. Therefore, we cannot estimate how many small entities may be affected by the increase threshold. During the 2007-2012 credit cycle, net charge-off rates reached a high of about 3.5 percent. Commenters supporting an increase in the QBL threshold asserted that the value of real estate offered as collateral on a QBL is a secondary consideration, because the primary source of repayment is not the income from or sale of that collateral. 04/06/2018 at 8:45 am. Transactions that involve an existing extension of credit at the lending institution are exempt from the Title XI appraisal requirements, but are required to have evaluations, provided that there has been no obvious and material change in market conditions or physical aspects of the property that threatens the adequacy of the institution's real estate collateral protection after the transaction, even with the advancement of new monies; or there is no advancement of new monies, other than funds necessary to cover reasonable closing costs. “The Appraisal Subcommittee (ASC), the entity created and charged under Title XI to monitor the appraisal related actions of the Federal financial institutions regulatory agencies (Agencies), estimated in its 2018 report to Congress that ‘at least 90 percent of residential mortgage loan originations are not subject to the Title XI appraisal regulations,’” the lawmakers wrote. One commenter suggested that the agencies should not rely on policies of other federal entities, such as the GSEs, in making decisions about the appraisal regulations. As previously discussed, the Board estimates that the percentage of commercial real estate transactions that would be exempted by the threshold is expected to increase by approximately 16 percent under the final rule. The use of the term “loan officer” was not intended to change standards established on appraiser independence or any implementing guidance. The final rule also is likely to reduce the loan origination costs associated with real estate appraisals for commercial real estate borrowers. Section 34.42 is amended by redesignating paragraphs (e) through (m) as paragraphs (f) through (n), respectively, and by adding a new paragraph (e) to read as follows: (e) Commercial real estate transaction means a real estate-related financial transaction that is not secured by a single 1-to-4 family residential property. The final rule will raise the appraisal threshold for commercial real estate transactions from $250,000 to $500,000. Regarding the requests for clarification of the QBL threshold, the Title XI appraisal regulations have established a $1 million threshold that is applicable to any business loans that are not dependent on the sale of, or rental income derived from, real estate as the primary source of repayment. The FDIC supervises 3,675 depository institutions, For the hearing impaired only, TDD users may contact (202) 925-4618. The agencies received three comments on the proposed effective date. Specifically, the final rule defines commercial real estate transaction as a real estate-related financial transaction that is not secured by a single 1-to-4 family residential property. The agencies made this change in the final rule after consideration of the comments, which suggested that including 1-to-4 family constructions loans that do not include permanent financing in the definition, but excluding those that do not, would not significantly reduce burden. %PDF-1.5
Register, and does not replace the official print version or the official Thus, while the precise number of transactions that will be affected and the precise cost reduction per transaction cannot be determined, the final rule is expected to have a significant positive economic impact on small entities that engage in commercial real estate lending. Additionally, commenters may send a copy of their comments to the OMB desk officer for the PRA Agencies by mail to the Office of Information and Regulatory Affairs, U.S. Office of Management and Budget, New Executive Office Building, Room 10235, 725 17th Street NW, Washington, DC 20503; by fax to (202) 395-6974; or by email to firstname.lastname@example.org.  It is estimated that the time required to document the review of an appraisal or an evaluation is the same. The agencies' data and analysis reflect that the increase in the commercial real estate appraisal threshold and corresponding increased use of evaluations could result in a cost savings of several hundred dollars for each commercial real estate transaction, as discussed below. Because commercial real estate prices have increased since 1994, when the current $250,000 threshold was established, a smaller percentage of commercial real estate transactions are currently exempted from the Title XI appraisal requirements than when the threshold was established. The size standard to be considered a small business is: $550 million or less in assets for banks and other depository institutions; and $38.5 million or less in annual revenues for the majority of non-bank entities that are likely to be subject to the final rule. The agencies have retained the proposed effective date, which is the date of publication in the Federal Register. OCC: National banks, federal savings associations. These changes are discussed in more detail below, in the order in which they appear in the rule. Upon arrival, visitors will be required to present valid government-issued photo identification and submit to security screening in order to inspect and photocopy comments. A financial institution suggested establishing an additional threshold of $50,000, below which certain transactions would not require appraisals or evaluations. One of these commenters asserted that there is increasing risk in commercial real estate lending, particularly among smaller community and regional banks, which the commenter believed are less likely to have robust collateral risk management policies, practices and procedures. The methodology was further refined to improve its ability to reflect the relevant population of commercial real estate transactions. OCC: G. Kevin Lawton, Appraiser (Real Estate Specialist), (202) 649-7152, Mitchell E. Plave, Special Counsel, Legislative and Regulatory Activities Division, (202) 649-5490, or Joanne Phillips, Attorney, Bank Activities and Structure Division, (202) 649-5500, Office of the Comptroller of the Currency, 400 7th Street SW, Washington, DC 20219. To estimate the dollar volume of commercial real estate transactions the change could potentially affect, the FDIC used information on the dollar volume and number of loans in the Call Report for small institutions from two categories of loans included in the definition of a commercial real estate transaction. Given the change from the proposed rule from a $400,000 threshold to a $500,000 threshold, the final rule makes a corresponding change to this section. 75. As discussed in the proposal and further detailed below, increasing the commercial real estate appraisal threshold will provide regulatory relief for financial institutions by removing the appraisal requirement for a material number of transactions without threatening the safety and soundness of financial institutions. and other agency guidance, The agencies have begun conducting outreach to government agencies to implement this goal and will continue to consider opportunities to do so. An analysis of the CoStar Comps database for the most recent year available suggests that increasing the amount to $500,000 would significantly increase the number of commercial real estate transactions exempted from the Title XI appraisal requirements, but the portion of the total dollar volume of commercial real estate transactions that would be exempted by the threshold would be comparatively minimal. Affected Public: Businesses or other for-profit. Second, the final rule also makes a conforming change to the section requiring state certified appraisers to be used for federally related transactions that are commercial real estate transactions above the increased threshold. Total Estimated Annual Burden: 28,911 hours; 2,531 hours. Also, values presented here may not sum due to rounding. The data incorporated into this index covers properties across the country and across all price ranges, Title XI appraisals where they imposed significant costs without promoting, to a significant extent, the safety and soundness of regulated institutions or furthering the purposes of Title XI of FIRREA. Generally, these standards include the methods and techniques used to estimate the market value of a property as well as the requirements for reporting such analysis and a market value conclusion in the appraisal. The only difference: what is required for an appraisal for residential transactions, commercial real estate transactions, and qualifying business loans can be very different. In support of its position that an increase would not threaten safety and soundness, one of these commenters asserted that there is less risk in the homogenous loan pool of 1-to-4 family residential loans than there is in commercial real estate. One commenter urged the agencies to review the appraisal requirements of other federal agencies and pursue ways to make appraisal requirements across agencies more consistent. Revisions to the Title XI Appraisal Regulations, Comments on the Proposed Increase to the Commercial Real Estate Appraisal Threshold, A. The OCC and the FDIC submitted the information collection requirements to OMB in connection with the proposal under section 3507(d) of the PRA  One commenter opposed having three thresholds, asserting that it will increase complexity, particularly for small community banks with less rigorous compliance operations. Some of those commenters specifically objected to the methodology used by the agencies in the proposal, asserting that adjusting the previous $250,000 level for changes in prices was inappropriate because that level was not itself the result of an inflation adjustment. As required by Title XI, these agencies adopted substantially similar appraisal regulations for the financial institutions they supervise. The revised definition also reflects comments stating that Title XI appraisals are typically conducted for loans for construction of a single 1-to-4 family residential property regardless of whether the loan provides only financing for construction or provides “construction-to-permanent” financing. Real Estate Appraisal Reform [12 U.S.C. developer tools pages. As in the proposal, the definition being adopted generally aligns with the categories of commercial real estate transactions under the Call Report  include documents scheduled for later issues, at the request This final rule is effective on April 9, 2018. %%EOF
Register documents. Finally, a possible threshold increase to $750,000 or higher may pose too great a risk to smaller institutions, as such transactions may represent a higher percentage of capital for such firms than has historically been permitted under the 1994 threshold. Following this trend, that property would be expected to have a conservative value of approximately $509,000 as of December 2017 (as shown below). and services, go to The agencies have concluded that the final rule does not contain any changes to the current information collections; however, the agencies are revising the methodology for calculating the burden estimates. 40. A Title XI appraisal would satisfy the requirement for an “appropriate evaluation of real property collateral that is consistent with safe and sound banking practices;” thus, regulated institutions that choose to obtain Title XI appraisals for real estate-related financial transactions that require evaluations are not in violation of the Title XI appraisal regulations. 1813(q)(2). 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. 3350(10). 72. 48. One commenter expressed the view that a simplification would make the current existing guidance for evaluations less time consuming and complex for lower value transactions. The agencies appreciate the issues raised by the commenters relating to the thresholds for residential transactions and QBLs.  Asset size and annual revenues are calculated according to SBA regulations. The agencies collectively received over 560 comments regarding the proposal to increase the residential real estate appraisal threshold that addressed a variety of issues. 3339. Most comments were not supportive of the proposed treatment of loans to finance the construction of 1-to-4 family residential properties. This increase in the number of appraisals required may have contributed to increased burden for regulated institutions in terms of time and cost. 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). The agencies received several comments related to the proposed definition. 4802(b). daily Federal Register on FederalRegister.gov will remain an unofficial documents in the last year, 787 A, Title II, section 2222, 110 Stat. The CoStar Comps database provides sales value data on specific commercial real estate transactions and allows for an analysis of the estimated coverage at any potential threshold level. 20. establishing the XML-based Federal Register as an ACFR-sanctioned Several commenters supporting an increase in the threshold for residential transactions noted that an increase in the threshold would be justified by increases in residential property values since the current threshold was established. U.S. SBA, Table of Small Business Size Standards Matched to North American Industry Classification System Codes, available at https://www.sba.gov/sites/default/files/files/Size_Standards_Table.pdf. Start Printed Page 15024The CRE Index is comprised of data from the CoStar Commercial Repeat Sale Index, 52. of the issuing agency. Accordingly, the proposed definition would have included a loan extended to finance the construction of a consumer's dwelling, but would have excluded construction loans that provide both the initial construction funding and permanent financing. § 102–75.300 to § 102–75.320 - Federal Property Management Regulations – Real Estate Disposal. A number of commenters asserted that the agencies' analysis was too conservative, that past housing crises do not imply current volatility, and that the data suggest the threshold could be increased further than proposed without threatening safety and soundness of financial institutions. Another commenter asserted that the agencies are required by Title XI to receive concurrence from the CFPB for a threshold change. A few commenters requested that the agencies provide additional guidance, such as guidance relating to the adequacy of evaluation products available on the market or examples of acceptable industry practices for evaluations. Under the proposal, regulated institutions would have been required to obtain evaluations consistent with safe and sound banking Start Printed Page 15021practices in connection with commercial real estate transactions at or below the proposed $400,000 threshold. This change addresses potential confusion about whether a loan for the construction of multiple residential properties would meet the definition of “commercial real estate transaction;” a loan that is secured by multiple 1-to-4 family residential properties (for example, a loan to construct multiple properties in a residential neighborhood) would meet the definition of commercial real estate transaction and thus be subject to the higher threshold. The definition of commercial real estate transaction in the final rule ensures that loans made to consumers are largely treated consistently, remaining subject to the $250,000 threshold. The proposed regulations are similar to section 3.02(2) of Notice 2006-96, except that the For security reasons, the OCC requires that visitors make an appointment to inspect comments. A few commenters expressed the view that all residential construction loans should be included in the definition and subject to the higher threshold. OMB filed a comment pursuant to 5 CFR 1320.11(c) instructing the agencies to examine public comment in response to the proposal and describe in the supporting statement of its next collection (the final rule) any public comments received regarding the collection as well as why (or why it did not) incorporate the commenter's recommendation and include the draft final rule in its next submission. Some commenters who were supportive of the proposal also discussed the role of appraisals and appraisers. The proposal was intended to reduce regulatory burden consistent with federal financial and public policy interests in real estate-related financial transactions. Several of these commenters claimed that evaluations were not an appropriate substitute for appraisals, some suggesting that they are less reliable and prepared by individuals that are not held to the same standards as appraisers. h�bbd``b`� $�@D�`o���� ��be�XK@�2��b���b�W�8w����1�b``���Ϡ� � !�. Using this data, the agencies calculated the dollar amount of NFNR loans at or under the current $250,000 threshold as a percentage of the dollar amount of all NFNR loans. Some commenters represented that relief would be particularly beneficial for lending in Start Printed Page 15030rural communities that often have shortages in state licensed and state certified appraisers. The amendment to this provision is a technical change that does not alter any substantive requirement. • Have the appraiser visit the interior of the property and provide a written For transactions at or below the threshold, regulated institutions will be given the option to obtain an evaluation of the property instead of an appraisal. 22.  See OCC: 12 CFR 34.43(a)(1) and (5); Board: 12 CFR 225.63(a)(1) and (5); and FDIC: 12 CFR 323.3(a)(1) and (5). 12 U.S.C. The agencies recognize that certain evaluations may take longer to review than others; however, this variation was taken into account in the agencies' estimate of the average time savings that are expected to occur. National banks, federal savings associations, SMBs and nonbank subsidiaries of BHCs, insured state nonmember banks and state savings associations, and insured state branches of foreign banks. Multiple commenters noted a 2015 appraiser trade association survey of appraisal industry professionals, including chief appraisers and appraisal managers at financial institutions, which showed that the majority of those surveyed opposed increasing the current $250,000 threshold and believed that increases to the threshold could increase risk to lenders. Based on their supervisory experiences, the agencies disagree that increasing the commercial real estate appraisal threshold would increase risks to financial institutions, including smaller institutions.  The agencies based the beginning point of this analysis on $250,000, because supervisory experience with the $250,000 threshold has confirmed that this threshold level did not threaten the safety and soundness of financial institutions. 183, 12 U.S.C. The agencies proposed this conservative approach, due to the volatility of commercial real estate prices over time. 12/21/2020, 294 55. The RFA requires that an agency prepare and make available a final regulatory flexibility analysis in connection with a final rulemaking that the agency expects will have a significant economic impact on a substantial number of small entities. Title XI defines a “federally related transaction” as a real estate-related financial transaction that is regulated or engaged in by a federal financial institutions regulatory agency and requires the services of an appraiser. The President of the United States communicates information on holidays, commemorations, special observances, trade, and policy through Proclamations. FIRREA dramatically changed the S&L industry and its federal regulation, including title insurance. 27. For the hearing impaired only, Telecommunications Device for the Deaf (TDD) users may contact (202) 263-4869. These agencies are currently addressing appraisal-related provisions in the Dodd-Frank Act, which may necessitate future rulemakings. The agencies received comments from appraisers, appraiser-related groups and individuals opposing the proposed increase, many of whom asserted that appraisals are key to preserving the safety and soundness of financial institutions and the economy. Based in part on this analysis, the agencies conclude that the exposure of financial institutions will remain at acceptable levels with a $500,000 commercial real estate appraisal threshold. Another commenter recommended that “construction-to-permanent” loans be included in the definition of commercial real estate transaction to increase the financing available for new home construction, indicating that strict underwriting and active engagement among the bank, home builder, and home buyer alleviate risks for these loans. As noted in the proposal, based on information from industry participants, the cost of third-party evaluations of commercial real estate generally ranges from $500 to over $1,500, whereas the cost of appraisals of such properties generally ranges from $1,000 to over $3,000. In addition, comments may be sent by fax to (571) 465-4326 or by electronic mail to email@example.com. These are the numbers the agencies used to support their conclusion that the data related to charge-offs from 2007 to 2012 was no worse than that from the years 1991 to 1994. Office of the Comptroller of the Currency, Treasury (OCC); Board of Governors of the Federal Reserve System (Board); and Federal Deposit Insurance Corporation (FDIC). However, a real estate-related financial transaction secured by farmland whose repayment is primarily from rental income from renting or leasing the farmland to a non-affiliated entity would be subject to the final rule's $500,000 threshold. Through the agencies' supervisory experience with loans that were exempted by the current thresholds and an analysis of loan losses over prior credit cycles for such loans, the agencies have found that evaluations can be an effective valuation method for lower-risk transactions. documents in the last year, 355 It excludes all transactions secured by a single 1-to-4 family residential property, and thus construction loans secured by a single 1-to-4 family residential property are excluded. Open for Comment, Economic Sanctions & Foreign Assets Control, Withdrawal of Certain Federal Water Quality Criteria Applicable to Maine, National Industrial Security Program Operating Manual, Draft Versatile Test Reactor Environmental Impact Statement, Use of Derivatives by Registered Investment Companies and Business Development Companies, Increasing Economic and Geographic Mobility, Providing for the Closing of Executive Departments and Agencies of the Federal Government on December 24, 2020, Office of the Comptroller of the Currency, I.  documents in the last year, 637 The agencies also requested comment on the type of additional guidance, if any, regulated institutions need to support the increased use of evaluations. That appraisals used in their States increase than proposed Respondents: 828 SMBs ; 1,215 nonbank of., at the OCC and the data used local and regional economies and. 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