In addition, the mortgage originator or its agent, directly or indirectly must have contacted not fewer than three state certified or state licensed appraisers, as applicable, on the mortgage originator's approved appraiser list in the market area, in accordance with 12 CFR part 226, not later than three days after the date on which the Closing Disclosure was provided to the consumer and documented that no state certified or state licensed appraiser, as applicable, was available within five business days beyond customary and reasonable fee and timeliness standards for comparable appraisal assignments. Provided the transaction is not a “higher-priced mortgage loan” under 12 CFR 1026.35, which must meet separate appraisal requirements under section 129H of the Truth in Lending Act, 15 U.S.C. Rec. See OCC: 12 CFR 34.43(b); Board: 12 CFR 225.63(b); FDIC: 12 CFR 323.3(b). 89. 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. [2] The FDIC does not expect the rule to have any substantive effects on the safety and soundness of small, FDIC-supervised institutions. 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. In response to these comments, the agencies note that the appraisal review proposed is statutorily required by Title XI. [9], All federally related transactions must have Title XI appraisals. 3. Counts are subject to sampling, reprocessing and revision (up or down) throughout the day. Many of these comments focused on views that evaluations are inadequate substitutes for appraisals. on (3) Complex appraisals for residential real estate transactions of more than $400,000. 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. • Amendment to FIRREA effective June 7, 1994. The agencies have reconsidered this decision based on continued comments received from financial institutions and state bank regulatory agencies that increasing the residential appraisal threshold would provide meaningful burden relief, as well as further analysis regarding safety and soundness and consumer protection factors related to the proposal, as detailed below. 1818, 1819(a) (“Seventh” and “Tenth”), 1831p-1 and 3331 et seq. Many commenters who opposed a threshold increase on consumer protection grounds asserted that evaluations are not subject to uniform standards and are not a meaningful substitute for an appraisal that must be conducted in compliance with USPAP. At a minimum, the statute provides that Title XI appraisals must be: (1) performed in accordance with USPAP; (2) written appraisals, as defined by the statute; and (3) subject to appropriate review for compliance with USPAP. Many commenters opposed to an increase in the threshold argued that appraisers are the only objective and unbiased party in a transaction and bring checks, balances, and oversight to the mortgage lending process. However, the threshold exemption does not affect the ability to enter into these arrangements. The Evaluation Guidance provides information to help ensure that evaluations provide a credible estimate of the market value of the property pledged as collateral for the loan. The amendments to increase the residential appraisal threshold exempts additional transactions from the agencies' appraisal requirement, which would have the effect of relieving restrictions. The agencies proposed to define a residential real estate transaction as a real estate-related financial transaction secured by a single 1-to-4 family residential property and specifically asked commenters whether the proposed definition is appropriate. Many commenters argued that appraisers are the only independent third party in a real estate transaction and that only appraisers' opinions are independent and unbiased. the Federal Register. Use of Evaluations. The agencies also proposed to amend the definitional term “complex 1-to-4 family residential property appraisal” to “complex appraisal for a residential real estate transaction” to conform to the definition of residential real estate transaction. 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). A number of commenters opposed to a threshold increase asserted that appraisals are easier for consumers to understand than evaluations. The agencies received five comments suggesting that the agencies hold public hearings regarding the proposed rule. The agencies acknowledge the limitations in relying on the VA appraisal fee schedule, which may reflect appraisal fees that are higher than average across the industry. 78. 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. In addition, although all sources of publicly available valuation information might not always accurately Start Printed Page 53590reflect the market value of a particular property, consumers can use a variety of available information to learn more about the availability of and the potential range of values for properties in a particular area or market. 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. [42], Further, as covered in the proposal, the 2017 HMDA data show that the rule would provide significant burden relief in rural areas. Table 2 below shows the number and dollar volume of transactions in 2017 that: (i) Would have been exempted under the current threshold; (ii) would be newly exempted under the proposed threshold increase; (iii) in total would be exempted as a result of the proposed threshold increase; and (iv) would not be exempted following the proposed threshold increase. By that measure, 1,430 (52.9 percent) are estimated to be affected by this rule. The agencies also considered comments received during the EGRPRA process and in response to questions posed about the residential threshold in the CRE rulemaking. for better understanding how a document is structured but The final rule also makes several technical and conforming changes to the appraisal regulations. Federal Register provide legal notice to the public and judicial notice Public Law 104-208, Div. 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. 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. Similarly, the Evaluations Advisory suggests it would be prudent to obtain an appraisal rather than an evaluation when an institution's portfolio risk increases or for higher-risk transactions. [37] 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. 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. The 30-day delayed effective date required under the Administrative Procedure Act is waived for all other amendments to the regulation, pursuant Start Printed Page 53593to 5 U.S.C. A few commenters suggested lower thresholds and that transactions under the current and proposed thresholds often pose risk to financial institutions and to consumers. The other alternative proposals suggested, such as varying the threshold based on local housing prices or wages, would add unnecessary regulatory burden and complexity by introducing numerous threshold levels across the country. The regulated institution shall be responsible for making the final determination of whether the appraisal is complex. Evaluations, like appraisals, should contain sufficient information and analysis to support the institution's decision to engage in a credit decision, including information relating to the actual physical condition and characteristics of the property, as discussed in the Guidelines. For release at 11:00 a.m. EDT Share However, the FDIC assumes that most, if not all, of these cost reductions would be passed on to residential real estate buyers. The agencies have sought to present the final rule in a simple and straightforward manner and did not receive any comments on the use of plain language. could be considered by IDIs to be a new requirement, despite the longstanding requirements for IDIs to obtain evaluations for transactions exempt from agencies' appraisal requirement under a threshold exemption. Appraisals: FIRREA and Interagency Guidelines An ABA Frontline Compliance Training Course — Free to ABA Members Approach the appraisal process with impartiality, knowledge of requirements and standards, and effective evaluation techniques. The term “Federal financial institutions regulatory agencies” means the Board, the FDIC, the OCC, the National Credit Union Administration (NCUA), and, formerly, the Office of Thrift Supervision. These commenters focused on the percentage of residential transactions that would be affected, either on a national basis or based on specific geographic areas. Another argued that even if an appraisal takes longer to review, the time difference is not significant and would not delay a loan closing. Some commenters noted the standardized requirements of a USPAP-compliant appraisal report provide information in a consistent manner and ensure that the user has enough information to understand the conclusions in the report. The agencies believe rising market prices of residential properties have contributed to increased burden for regulated institutions and consumers in terms of transaction time and costs, given that the threshold has remained the same since 1994. 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. 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. 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. With respect to the question concerning evaluations and appraisal review, the agencies note that evaluations need not comply with USPAP. All real estate-related financial transactions engaged in by financial institutions are FRTs unless the transactions are exempt from the appraisal requirements of the appraisal regulations. 3356. The historical loss information in the Reports of Condition and Income (Call Reports) also shows that the net charge-off rate for residential real estate transactions remained relatively unchanged after the increase in the threshold in 1994 through year-end 2007. 12 U.S.C. Exemptions from the requirements of the HPML Rule include, among others, “qualified mortgages” under 15 U.S.C. Adding this definition does not change any substantive requirement, but provides clarity to the regulation. Commenters supporting the proposed threshold increase asserted that an increase would be appropriate given the increases in real estate values since the current threshold was established as well as the cost and time savings to lenders and borrowers that the higher threshold would provide. OCC: 57 FR 12190-02 (April 9, 1992); Board: 55 FR 27762 (July 5, 1990); FDIC: 57 FR 9043-02 (March 16, 1992). The agencies invited comment on the proposed level for the residential real estate appraisal threshold. 97. by the Comptroller of the Currency As noted in the proposal, and according to data submitted by commenters, the cost of obtaining an evaluation can be substantially less than the cost of obtaining an appraisal, with estimates ranging from evaluations costing $100 less than the cost of an appraisal or less than half (with one estimate of 20 percent) of the cost of an appraisal. 1639h, an appraisal is not required for a real estate-related financial transaction in which: Some financial institutions commented that they had found evaluations to generally contain sufficient information and analysis to be the basis for lending decisions. [88] 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. Some of these commenters expressed particular concern about homes in rural areas that tend to have unusual features or fewer comparable properties and thus are harder to value. Public Law 115-174, Title I, section 103, codified at 12 U.S.C. 30. [26] As discussed above, in section 103 of EGRRCPA, Congress amended Title XI in 2018 to add a rural residential appraisal exemption. The OCC does not believe, however, that this requirement will impose a significant burden or economic impact on regulated institutions because Title XI and the agencies' appraisal regulations already require that Title XI appraisals be performed in compliance with USPAP. That bankrupted it. However, because the final rule increases the residential threshold to $400,000 for all residential transactions, institutions will not need to comply with the detailed requirements of the rural residential appraisal exemption in order for such transactions to be exempt from the agencies' appraisal requirement. All provisions of the rule, other than the evaluation requirement for transactions exempted by the rural residential appraisal exemption [82] Only official editions of the documents in the last year, by the Education Department Some commenters questioned the need for, and appropriateness of, the proposed threshold increase in light of the rural residential appraisal exemption. [56] For loans and extensions of credit, the transaction value is the amount of the loan or extension of credit. Several commenters concurred with the agencies' cost estimates in the proposal. For the hearing impaired only, Telecommunications Device for the Deaf (TDD) users may contact (202) 263-4869. the current document as it appeared on Public Inspection on In its determination, the “SBA counts the receipts, employees, or other measure of size of the concern whose size is at issue and all of its domestic and foreign affiliates.” See 13 CFR 121.103. The agencies have provided supervisory guidance for conducting evaluations in a safe and sound manner in the Interagency Appraisal and Evaluation Guidelines (Guidelines) [23] 29. A real estate-related financial transaction is defined as any transaction that involves: (i) The sale, lease, purchase, investment in or exchange of real property, including interests in property, or financing thereof; (ii) the refinancing of real property or interests in real property; and (iii) the use of real property or interests in real property as security for a loan or investment, including mortgage-backed securities. The proposal would require regulated institutions to obtain evaluations for transactions exempt from the agencies' appraisal requirements due to the increase in the residential real estate appraisal threshold or the rural residential appraisal exemption. The agencies also note that regulated institutions generally need less time to review evaluations than Title XI appraisals because the content of the report can be less comprehensive than an appraisal report. 88. The Appraisal Rule creates a new definition of, and separate category for, commercial real estate transactions and raises the threshold for requiring an appraisal from $250,000 to $500,000 for those transactions, which will exempt an additional 15.7 percent of transactions from the appraisal … There are twelve exemptions from this requirement. The final rule increases the threshold level at or below which appraisals are not required for residential real estate transactions from $250,000 to $400,000. 23. As discussed in the proposal, the United States Department of Veterans Affairs' appraisal fee schedule [97] See infra, Section II.C. Some commenters opposed to an increase raised concerns that free online valuation information and tools may be flawed due to, for example, their reliance on public records with data entry errors. Several commenters identified appraisal management companies (AMCs) as a significant source of unnecessary costs and delays, and suggested that appraiser shortages are due to the low appraisal fees AMCs offer, resulting in appraisers being unwilling to work for AMCs. Learn more here. FDIC-supervised institutions are set forth in 12 U.S.C. 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]. 19. Under this new exemption, a financial institution need not obtain a Title XI appraisal if the property is located in a rural area; the transaction value is less than $400,000; the financial institution retains the loan in portfolio, subject to exceptions; and not later than three days after the Closing Disclosure Form is given to the consumer, the financial institution or its agent has contacted not fewer than three state certified or state licensed appraisers, as applicable, and has documented that no such appraiser was available within five business days beyond customary and reasonable fee and timeliness standards for comparable appraisal assignments.[73]. For transactions exempted from the agencies' appraisal requirement by the final rule (i.e., residential real estate transactions between $250,000 and $400,000), lenders are required to get an evaluation if they chose not to get an appraisal. This PDF is 12/22/2020, 145 Effective January 1, 2020, § 225.64 is amended by: For the reasons set forth in the joint preamble, the FDIC amends part 323 of chapter III of title 12 of the Code of Federal Regulations as follows: 11. In particular, commenters requested that the agencies analyze the effect of the proposed increase in the threshold in dynamic markets and compare its effect in urban versus rural areas. 12 U.S.C. 26. other specific standards such as the Uniform Appraisal Standards for Federal Land Acquisitions, and requiring appraisers to include specific items in an appraisal, such as all sales of the contributed property within 18 months of the appraisal date. See 59 FR 29482 (June 7, 1994). When considering the threshold increase's potential impact on safety and soundness, the agencies considered a loss analysis of aggregate net charge-off rates for residential real estate loans after the last increase in the appraisal threshold in 1994. Subtotals may not add to totals due to rounding. Board of Governors of the Federal Reserve System. 33. Public Law 111-203, 124 Stat. Raising the threshold to $400,000 will exempt an additional estimated 14 percent of the dollar volume, thus increasing the share of the dollar volume of regulated transactions that are exempt to approximately 35 percent. Institutions are more likely to obtain an evaluation, where permitted, for transactions with a lower dollar value, that are less complex, or that are subsequent to a previous transaction for which a Title XI appraisal was obtained. 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. and the average number of originations per year was approximately 128. 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. 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. Appraisal Report Options--Refer to the definitions for Restricted Use Appraisal Report, Self-Contained Appraisal Report, and Summary Appraisal Report. The agencies are not aware of any such issues regarding the current threshold, which already exempts a significant portion of residential real estate transactions. Based on the agencies' supervisory experience with appraisals and evaluations since 1994, the agencies believe that property inspections done by appropriately trained individuals for either appraisals or evaluations can provide prospective buyers with detailed information regarding a property's condition and features, may provide consumer protection, and can help ensure that appraisals or evaluations are consistent with safe and sound banking practices. [75] As discussed in the proposal, the agencies analyzed the Standard & Poor's Case-Shiller Home Price Index (Case-Shiller Index) [33] As described in the proposal, the 214,000 additional exempted transactions represent only three percent of total HMDA originations in 2017 and, as also reflected in Table 2, 16 percent of regulated transactions. The agencies have implemented examination procedures to frame their review of an institution's valuation practices and the sufficiency of the supporting information in evaluations, as appropriate for the size and nature of the institution's residential real estate lending activities. The requirement in the final rule that institutions obtain an evaluation for transactions that qualify for the rural residential appraisal exemption could be viewed as a new mandate. 83 FR 15019-01 (April 9, 2018) (“commercial real estate transaction” is defined as a “real estate-related financial transaction that is not secured by a single 1-to-4 family residential property”). legal research should verify their results against an official edition of documents in the last year, 1438 The agencies did not receive any comments on the proposed effective date. Review of Monetary Policy Strategy, Tools, and Communications, Banking Applications & Legal Developments, Financial Market Utilities & Infrastructures, Board of Governors of the Federal Reserve System, Office of the Comptroller of the Currency. 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. [12] Some commenters asserted that appraisals provide more accuracy than evaluations because they include a physical inspection of the property. [51] Some commenters in favor of a threshold increase asserted that evaluations protect consumers by helping to ensure the property's value supports the purchase price. The fact that evaluations, which will continue to be subject to supervisory oversight, will be required for transactions at or below the increased threshold supports the conclusion that increasing the residential real estate appraisal threshold to $400,000 will not pose a threat to safety and soundness. The agencies' experience in supervising appraisal and evaluation programs and practices since the enactment of FIRREA indicates that increasing the threshold would not threaten the safety and soundness of financial institutions. 17 Office of the Comptroller of the Currency, Treasury (OCC); Board of Governors of the Federal Reserve System (Board); and Federal Deposit Insurance Corporation (FDIC). One commenter in favor of an increased threshold indicated that evaluations are often easier for consumers to read and understand, asserting that they typically explain the comparisons with other recent sales in “plain English.” Some commenters generally in favor of an increase noted that consumers have access to a wide array of readily available valuation information, and may also voluntarily obtain appraisals.Start Printed Page 53589. [25] Consumer Protection Considerations 5. The agencies requested comment on this analysis of the charge-off data. See Standard & Poor's CoreLogic Case-Shiller Home Price Indices, available at https://us.spindices.com/​index-family/​real-estate/​sp-corelogic-case-shiller. 107. 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. 83. While exempted transactions would not require an appraisal, they would still require an evaluation that is consistent with safe and sound banking practices. Median home price in the United States as of January 2019 is estimated at $307,700 by the Federal Reserve Bank of St. Louis. 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 OCC, Board, and FDIC had previously set the appraisal threshold at $100,000. Both appraisals and evaluations were cited in examiner findings, however, the overall amount and nature of valuation-related examination findings support a conclusion that the proposed threshold increase would not threaten the safety and soundness of financial institutions. Proposal would negatively impact consumers Telecommunications Device for the hearing impaired only TDD. 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