Proposed Appraisal Regulations
By: Ken Bennett, CPA
After an Economic Growth and Regulatory Paperwork Reduction Act review, the agencies (OCC, FRB, FDIC) have proposed to raise the regulatory threshold requiring appraisals from $250,000 to $400,000. The Agencies are inviting comments on the proposed change:
https://www.fdic.gov/news/board/2017/2017-07-18-notice-dis-a-fr.pdf
https://www.occ.gov/news-issuances/news-releases/2017/nr-ia-2017-81.html
https://www.federalreserve.gov/newsevents/pressreleases/bcreg20170719a.htm
The most detailed clarification of the current appraisal regulations can be found here.
Per the December 2010 Interagency Appraisal Guidelines (FIL 82-2010):
VII. Transactions That Require Appraisals
Although the Agencies’ appraisal regulations exempt certain real estate-related financial transactions from the appraisal requirement, most real estate-related financial transactions over the appraisal threshold are considered federally related transactions and, thus, require appraisals. The Agencies also reserve the right to require an appraisal under their appraisal regulations to address safety and soundness concerns in a transaction.
XI. Transactions That Require Evaluations
The Agencies’ appraisal regulations permit an institution to obtain an appropriate evaluation of real property collateral in lieu of an appraisal for transactions that qualify for certain exemptions. These exemptions include a transaction that:
Appendix A (Appraisal Exemptions) goes on to note:
1. Appraisal Threshold
For transactions with a transaction value equal to or less than $250,000, the Agencies’ appraisal regulations, at a minimum, require an evaluation consistent with safe and sound banking practices. If an institution enters into a transaction that is secured by several individual properties that are not part of a tract development, the estimate of value of each individual property should determine whether an appraisal or evaluation would be required for that property. For example, an institution makes a loan secured by seven commercial properties in different markets with two properties valued in excess of the appraisal threshold and five properties valued less than the appraisal threshold. An institution would need to obtain an appraisal on the two properties valued in excess of the appraisal threshold and evaluations on the five properties below the appraisal threshold, even though the aggregate loan commitment exceeds the appraisal threshold.
7. Renewals, Refinancings, and Other Subsequent Transactions
Under certain circumstances, renewals, refinancings, and other subsequent transactions may be supported by evaluations rather than appraisals. The Agencies’ appraisal regulations permit an evaluation for a renewal or refinancing of an existing extension of credit at the institution when either:
… If an evaluation is permitted under this exemption, an institution may use an existing appraisal or evaluation as long as the institution verifies and documents that the appraisal or evaluation continues to be valid. (See the discussion in the Validity of Appraisals and Evaluations section of these Guidelines.) Even if a subsequent transaction qualifies for this exemption, an institution should consider the risk posed by the transaction and may wish to consider obtaining a new appraisal.
As the real estate market has generally stabilized or improved over recent years, SHP & Co. recommends performing a brief, updated assessment of the real estate market when relying upon an older appraisal or evaluation at loan renewal or modification. In a simple example, if a residential rental home loan is renewed with an older appraisal, the institution could analyze a few comparable sales to determine how sales price per square foot in the market compare to the appraisal.
Readers are reminded that this is a proposed rule and the current threshold of $250,000 is still in place. Also note that the Interagency Appraisal Guidelines provides much more detailed information regarding appraisal expectations than is excerpted above.
https://www.fdic.gov/news/board/2017/2017-07-18-notice-dis-a-fr.pdf
https://www.occ.gov/news-issuances/news-releases/2017/nr-ia-2017-81.html
https://www.federalreserve.gov/newsevents/pressreleases/bcreg20170719a.htm
The most detailed clarification of the current appraisal regulations can be found here.
Per the December 2010 Interagency Appraisal Guidelines (FIL 82-2010):
VII. Transactions That Require Appraisals
Although the Agencies’ appraisal regulations exempt certain real estate-related financial transactions from the appraisal requirement, most real estate-related financial transactions over the appraisal threshold are considered federally related transactions and, thus, require appraisals. The Agencies also reserve the right to require an appraisal under their appraisal regulations to address safety and soundness concerns in a transaction.
XI. Transactions That Require Evaluations
The Agencies’ appraisal regulations permit an institution to obtain an appropriate evaluation of real property collateral in lieu of an appraisal for transactions that qualify for certain exemptions. These exemptions include a transaction that:
- Has a transaction value equal to or less than the appraisal threshold of $250,000.
- Is a business loan with a transaction value equal to or less than the business loan threshold of $1 million, and is not dependent on the sale of, or rental income derived from, real estate as the primary source of repayment.
- Involves an existing extension of credit at the lending institution, provided that:
- There has been no obvious and material change in market conditions or physical aspects of the property that threaten 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.
Appendix A (Appraisal Exemptions) goes on to note:
1. Appraisal Threshold
For transactions with a transaction value equal to or less than $250,000, the Agencies’ appraisal regulations, at a minimum, require an evaluation consistent with safe and sound banking practices. If an institution enters into a transaction that is secured by several individual properties that are not part of a tract development, the estimate of value of each individual property should determine whether an appraisal or evaluation would be required for that property. For example, an institution makes a loan secured by seven commercial properties in different markets with two properties valued in excess of the appraisal threshold and five properties valued less than the appraisal threshold. An institution would need to obtain an appraisal on the two properties valued in excess of the appraisal threshold and evaluations on the five properties below the appraisal threshold, even though the aggregate loan commitment exceeds the appraisal threshold.
7. Renewals, Refinancings, and Other Subsequent Transactions
Under certain circumstances, renewals, refinancings, and other subsequent transactions may be supported by evaluations rather than appraisals. The Agencies’ appraisal regulations permit an evaluation for a renewal or refinancing of an existing extension of credit at the institution when either:
- 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.
… If an evaluation is permitted under this exemption, an institution may use an existing appraisal or evaluation as long as the institution verifies and documents that the appraisal or evaluation continues to be valid. (See the discussion in the Validity of Appraisals and Evaluations section of these Guidelines.) Even if a subsequent transaction qualifies for this exemption, an institution should consider the risk posed by the transaction and may wish to consider obtaining a new appraisal.
As the real estate market has generally stabilized or improved over recent years, SHP & Co. recommends performing a brief, updated assessment of the real estate market when relying upon an older appraisal or evaluation at loan renewal or modification. In a simple example, if a residential rental home loan is renewed with an older appraisal, the institution could analyze a few comparable sales to determine how sales price per square foot in the market compare to the appraisal.
Readers are reminded that this is a proposed rule and the current threshold of $250,000 is still in place. Also note that the Interagency Appraisal Guidelines provides much more detailed information regarding appraisal expectations than is excerpted above.