Proposed Rulemaking – Changes to the Appraisal Threshold for Residential Real Estate-Related Transactions

The OCC, Federal Reserve Board, and FDIC (collectively, the agencies) jointly issued a notice of proposed rulemaking titled Real Estate Appraisals, dated December 7, 2018 which was published in the Federal Register for a 60-day comment period. The Appraisal NPR proposes to increase the threshold for residential real estate transactions requiring an appraisal from $250,000 to $400,000. Evaluations would still be required for transactions exempted as a result of the proposed threshold. In addition, the agencies are proposing several conforming and technical amendments to their appraisal regulations.

The agencies are proposing to define a residential real estate transaction as a real estate transaction secured by a single 1-to-4 family residential property, which is consistent with current references to appraisals for residential real estate.

The proposed rule would amend the agencies’ appraisal regulations to reflect the rural residential appraisal exemption in the list of transactions that are exempt from the agencies’ appraisal requirement. The amendment to this provision would be a technical change that would not alter any substantive requirement, but the proposal would require regulated institutions to obtain evaluations for transactions secured by residential property in rural areas that have been exempted from the agencies’ appraisal requirement pursuant to the Economic Growth, Regulatory Relief and Consumer Protection Act, commonly known as the rural residential appraisal exemption, and would fulfill the requirement to add appraisal review to the minimum standards for an appraisal.

Evaluations
With the proposed increase in the threshold, it is expected that many institutions will now utilize internal staff to prepare evaluations for transactions that are less than $400,000, so it might be time to revisit the Interagency Appraisal and Evaluation Guidelines (Federal Register, Vol. 75, No. 237), as well as the Interagency Advisory on Use of Evaluations in Real Estate-Related Financial Transactions (FDIC, FIL 16-016). While the Guidelines state that an evaluation is not required to be completed by a state-licensed or state-certified appraiser or to comply with USPAP, the evaluation preparer should, however, be knowledgeable, competent, and independent of the transaction and the loan production function of the institution. Evaluations may be completed by a bank employee or by a third party. In smaller communities, bankers and third-party real estate professionals have access to local market information and may be qualified to prepare evaluations for an institution.

An evaluation should provide a reliable estimate of the market value of the property and, therefore, the approach or approaches used in an evaluation should be appropriate to the property being valued, and the intended use, so it may be appropriate to omit one or more of the three approaches to value. If the income approach is the primary approach for a tenant-occupied, income-producing
property, it may be appropriate to omit the sales comparison approach and the cost approach.  Similarly, if the sales comparison approach is the primary approach for a single-family residence, it may be appropriate to omit the cost approach and the income approach.

The Guidelines provide information regarding the minimum content that should be contained in an evaluation. Unlike an appraisal report that must be written in conformity with the requirements of USPAP, there is no standard format for documenting the information and analysis performed to reach a market value conclusion; but like an appraisal report, the evaluation should contain sufficient information to allow a reader to understand the analysis that was performed to support the value conclusion and the institution’s decision to engage in the transaction.

Appraisal and Evaluation Reviews
The proposed rule would make a conforming amendment to the minimum requirements in the agencies’ appraisal regulations to add appraisal review. The agencies propose to mirror the statutory language for this standard. As outlined in the 2010 Guidelines, which provide guidance on the review process, the agencies have long recognized that appraisal review is consistent with safe and sound banking practices.

The agencies are proposing to implement the appraisal review provision in Section 1473(e) of the Dodd-Frank Act, which amended Title XI to require that the agencies’ appraisal regulations include a requirement for institutions to subject appraisals for federally related transactions to appropriate review for compliance with the Uniform Standards of Professional Appraisal Practice (USPAP). While most institutions follow the guidance, the proposed rule would implement this statutory requirement.

For more information on this article or on how Young & Associates, Inc. can assist with the appraisal review process, contact Kyle Curtis at 330.422.3445 or kcurtis@younginc.com.