Bank Regulators Just Raised Appraisal Threshold to $500,000, Evaluations Now Required for Smaller Transactions
On Monday, April 9, 2018, the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System and Federal Deposit Insurance Corporation published the final rule officially amending regulations requiring appraisals of real estate for certain transactions. Here’s what you need to know:
- The final rule increases the threshold level at or below which appraisals are not required for commercial real estate transactions from $250,000 to $500,000.
- For 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.”
- This is the agencies’ first change to the $250,000 threshold since it was first established in 1994.
- This final rule addresses input the agencies received in response to the public comment period opened up by the July 2017 notice of proposed rulemaking.
- More than 200 comments on the proposed rule were submitted by appraisers, appraiser trade organizations, financial institutions, financial institutions trade organizations, and individuals.
- In response to public comments, the agencies adopted a final rule increasing the appraisal threshold with the following three modifications from the original proposed rule:
- An increase in the commercial real estate appraisal threshold to $500,000 rather than $400,000 as first proposed.
- 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.
- A change to the proposed definition of commercial real estate transaction, which no longer includes construction loans secured by a single 1-to-4 family residential property (regardless of whether the loan is for initial construction only or includes permanent financing).
- An evaluation estimates the market value of real estate, but is not subject to the same requirements as a Title XI appraisal. For example, a Title XI appraisal must be performed by a state certified or state licensed appraiser and must conform to USPAP standards, whereas evaluations are not required to be performed by individuals with specific credentials or to conform to USPAP standards.
- The final rule does not prohibit regulated institutions from using state licensed or state certified appraisers to prepare evaluations.
- The final rule took effect immediately, as of April 9, 2018.
WHAT IT MEANS
With the new threshold now in effect, thousands of commercial real estate loans are exempt from appraisals, but require “evaluations.” That raises many questions for lenders.
FOR MORE INFORMATION
The final rule is posted here, including a detailed discussion of the public comments received last summer, and the agencies’ responses to them.
In the rule, the agencies direct financial institutions to review the supervisory guidance for conducting evaluations:
- Interagency Appraisal and Evaluation Guidelines and Interagency Advisory on the Use of Evaluations in Real Estate-Related Financial Transactions (75 FR 77450 December 10, 2010);
- OCC Bulletin 2016-8 (March 4, 2016);
- Board SR Letter 16-5 (March 4, 2016); and
- Supervisory Expectations for Evaluations, FDIC FIL-16-2016 (March 4, 2016).
