Real Estate Appraisals
| Published date | 29 November 2019 |
| Citation | 84 FR 65707 |
| Record Number | 2019-25768 |
| Section | Proposed rules |
| Court | National Credit Union Administration |
Federal Register, Volume 84 Issue 230 (Friday, November 29, 2019)
[Federal Register Volume 84, Number 230 (Friday, November 29, 2019)]
[Proposed Rules]
[Pages 65707-65714]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-25768]
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Proposed Rules
Federal Register
________________________________________________________________________
This section of the FEDERAL REGISTER contains notices to the public of
the proposed issuance of rules and regulations. The purpose of these
notices is to give interested persons an opportunity to participate in
the rule making prior to the adoption of the final rules.
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Federal Register / Vol. 84, No. 230 / Friday, November 29, 2019 /
Proposed Rules
[[Page 65707]]
NATIONAL CREDIT UNION ADMINISTRATION
12 CFR Part 722
RIN 3133-AE98
Real Estate Appraisals
AGENCY: National Credit Union Administration (NCUA).
ACTION: Notice of proposed rulemaking and request for comment.
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SUMMARY: The NCUA Board (Board) proposes to amend the agency's
regulation requiring appraisals for certain real estate-related
transactions. The proposed rule would increase the threshold level
below which appraisals would not be required for residential real
estate-related transactions from $250,000 to $400,000. Consistent with
the requirement for other transactions that fall below applicable
appraisal thresholds, federally insured credit unions (FICUs) would be
required to obtain written estimates of market value of the real estate
collateral that is consistent with safe and sound banking practices in
lieu of an appraisal. For easier reference, the proposed rule would
explicitly incorporate the existing statutory requirement that
appraisals be subject to appropriate review for compliance with the
Uniform Standards of Professional Appraisal Practice (USPAP). This
proposal is consistent with the final rule, effective on October 9,
2019, issued by the Board of Governors of the Federal Reserve System,
the Federal Deposit Insurance Corporation, and the Office of the
Comptroller of the Currency (other banking agencies) that increases the
threshold level at or below which appraisals are not required for
residential real estate transactions from $250,000 to $400,000.
DATES: Comments must be received on or before January 28, 2020.
ADDRESSES: You may submit written comments, identified by RIN 3133-
AE98, by any of the following methods (Please send comments by one
method only):
Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments.
Fax: (703) 518-6319. Include ``[Your Name]--Comments on
Proposed Rule: Real Estate Appraisals'' in the transmittal.
Mail: Address to Gerard Poliquin, Secretary of the Board,
National Credit Union Administration, 1775 Duke Street, Alexandria,
Virginia 22314-3428.
Hand Delivery/Courier: Same as mail address.
Public Inspection: You may view all public comments on the Federal
eRulemaking Portal at http://www.regulations.gov as submitted, except
for those we cannot post for technical reasons. NCUA will not edit or
remove any identifying or contact information from the public comments
submitted. You may inspect paper copies of comments in NCUA's law
library at 1775 Duke Street, Alexandria, Virginia 22314, by appointment
weekdays between 9 a.m. and 3 p.m. To make an appointment, call (703)
518-6546 or send an email to [email protected].
FOR FURTHER INFORMATION CONTACT:
Technical information: Kenneth Acu[ntilde]a, Senior Credit
Specialist, (703)518-6613, Office of Examination and Insurance.
Legal information: Rachel Ackmann, Senior Staff Attorney, (703)
518-6540, Office of General Counsel.
Address: National Credit Union Administration, 1775 Duke Street,
Alexandria, VA 22314.
SUPPLEMENTARY INFORMATION:
I. Introduction
The Board proposes to increase the threshold level below which
appraisals would not be required for real estate-related financial
transactions secured by a single 1-to-4 family residential property
(residential real estate transactions) from $250,000 to $400,000
(residential threshold). The proposal would continue to require written
estimates of market value that are consistent with safe and sound
business practices for transactions exempted from the appraisal
requirement by the increased threshold. The proposal to raise the
residential threshold is based on consideration of available
information on residential real estate transactions, supervisory
experience, and comments received from the public in connection with
the July 2019 NCUA rulemaking on real estate appraisals (July 2019 real
estate appraisal rule) in which the Board specifically asked about
increasing the threshold for residential real estate transactions.\1\
Generally, credit union-related commenters to the July 2019 real estate
appraisal rule supported increasing the residential real estate
threshold. The Board believes that the proposed increase to the
residential threshold would reduce burden in a manner that is
consistent with federal public policy interests in real estate-related
financial transactions and the safety and soundness of FICUs.
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\1\ 83 FR 49857 (Oct. 3, 2018) and 84 FR 35525 (July 24, 2019).
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The Board has long recognized that the valuation information
provided by appraisals and written estimates of market value assists
FICUs in making informed lending decisions and mitigating risk. The
Board also recognizes the role that appraisers play in helping to
ensure a safe and sound real estate lending process. However, the Board
is aware the cost and time of obtaining an appraisal can result in
delays and higher expenses for both FICUs and borrowers. The Board also
acknowledges that appraisals can provide protection to consumers by
facilitating the informed use of credit and helping to ensure that the
estimated value of the property supports the loan amount. However,
written estimates of market value have provided these benefits for
FICUs and borrowers for transactions below the current $250,000
threshold.
Under Title XI of the Financial Institutions Reform, Recovery, and
Enforcement Act of 1989 (Title XI),\2\ the NCUA must receive Consumer
Financial Protection Bureau (CFPB) concurrence that the proposed
residential threshold level provides reasonable protection for
consumers who purchase ``1-4 unit single-family residences.'' \3\
Accordingly, the NCUA is consulting with the CFPB regarding the
proposed residential threshold increase and will continue this
consultation in developing a final rule. The Board notes that on August
5, 2019, the CFPB concurred
[[Page 65708]]
that the other banking agencies' residential appraisal final rule's
threshold of $400,000 provides reasonable protection for consumers who
purchase ``1-4 unit single-family residences.'' \4\
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\2\ 12 U.S.C. 3331 et seq.
\3\ 12 U.S.C. 3341(b).
\4\ Concurrence applied to the threshold, and the CFPB took no
position with respect to any other aspect of the other banking
agencies' residential appraisal final rule. See, https://files.consumerfinance.gov/f/documents/cfpb_firrea-concurrence_2019_08.pdf.
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II. Legal Authority
Title XI directs each federal financial institutions regulatory
agency \5\ to require regulated institutions to obtain appraisals
meeting minimum standards for certain real estate-related transactions.
The purpose of Title XI is to protect federal financial and public
policy interests \6\ in real estate-related transactions \7\ by
requiring that real estate appraisals used in connection with federally
related transactions (Title XI appraisals) be performed in accordance
with uniform standards, by individuals whose competency has been
demonstrated, and whose professional conduct will be subject to
effective supervision.\8\
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\5\ ``Federal financial institutions regulatory agencies'' mean
the Board of Governors of the Federal Reserve System; the Federal
Deposit Insurance Corporation (FDIC); the Office of the Comptroller
of the Currency, Treasury (OCC); the NCUA, and, formerly, the Office
of Thrift Supervision. 12 U.S.C. 3350(6).
\6\ These interests include those stemming from the federal
government's roles as regulator and deposit insurer of financial
institutions that engage in real estate lending and investment,
guarantor or lender on mortgage loans, and as a direct party in real
estate-related financial transactions. These federal financial and
public policy interests have been described in predecessor
legislation and accompanying congressional reports. See Real Estate
Appraisal Reform Act of 1988, H.R. Rep. No. 100-1001, pt. 1, at 19
(1988); 133 Cong. Rec. 33047-33048 (1987).
\7\ 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. 12 U.S.C. 3350(5).
\8\ 12 U.S.C. 3331.
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Title XI directs the NCUA to prescribe appropriate standards for
Title XI appraisals under the NCUA's jurisdiction, including, at a
minimum that Title XI appraisals 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.\9\ All
federally related transactions must have a Title XI appraisal.
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\9\ 12 U.S.C. 3339. The NCUA's Title XI appraisal regulations
apply to transactions entered into by the NCUA or by FICUs. 12 CFR
722.1(b).
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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.\10\ The NCUA has authority to determine those
real estate-related financial transactions that do not require the
services of a state-certified or state-licensed appraiser and are
therefore exempt from the appraisal requirements of Title XI. Such
exempt real estate-related financial transactions are not federally
related transactions under the statutory or regulatory definitions
because they are not required to have Title XI appraisals.\11\
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\10\ 12 U.S.C. 3350(4) (defining ``federally related
transaction'').
\11\ See 59 FR 29482 (June 7, 1994).
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The NCUA has exercised this authority by exempting several
categories of real estate-related financial transactions from the Title
XI appraisal requirements, including transactions at or below certain
designated dollar thresholds.\12\ The NCUA has 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 safety and
soundness.
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\12\ See 12 CFR 722.3(a).
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Title XI expressly authorizes the NCUA to establish dollar
threshold levels at or below which Title XI appraisals are not required
if: (1) The NCUA determines, in writing, that the threshold does not
represent a threat to the safety and soundness of financial
institutions; and (2) the NCUA receives concurrence from the CFPB that
such threshold level provides reasonable protection for consumers who
purchase ``1-4 unit single-family residences.'' \13\ As noted above,
transactions below the threshold level are exempt from the Title XI
appraisal requirements and thus are not federally related transactions.
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\13\ 12 U.S.C. 3341(b).
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III. Background
A. The Other Banking Agencies' Residential Real Estate Appraisal
Rulemaking
The other banking agencies issued a final rule on October 8, 2019,
to amend their appraisal regulations to increase the threshold level at
or below which appraisals would not be required for residential real
estate-related transactions from $250,000 to $400,000 (other banking
agencies' residential appraisal final rule).\14\ The other banking
agencies' residential appraisal final rule, consistent with the
requirement for other transactions that fall below applicable
thresholds, requires regulated institutions to obtain an evaluation of
the real property collateral that is consistent with safe and sound
banking practices instead of an appraisal. The other banking agencies'
residential appraisal final rule, pursuant to the Dodd-Frank Wall
Street Reform and Consumer Protection Act (Dodd-Frank Act),\15\ amends
the other banking agencies' appraisal regulations to require regulated
institutions to subject appraisals for federally related transactions
to appropriate review for compliance with USPAP.
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\14\ 84 FR 53579 (Oct. 8, 2019).
\15\ Dodd-Frank Act, Sec. 1473(e), Public Law 111-203, 124
Stat. 1376, 2191. USPAP is written and interpreted by the Appraisal
Standards Board of the Appraisal Foundation. USPAP contains
generally recognized ethical and performance standards for the
appraisal profession in the United States, including real estate,
personal property, and business appraisals. See http://www.appraisalfoundation.org/imis/TAF/Standards/Appraisal_Standards/Uniform_Standards_of_Professional_Appraisal_Practice/TAF/USPAP.aspx?hkey=a6420a67-dbfa-41b3-9878-fac35923d2af.
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B. Purpose of the Proposed Rule
The Board is proposing to increase the appraisal threshold for
residential real estate transactions in an effort to reduce regulatory
burden, while maintaining federal public policy interests in real
estate-related transactions and the safety and soundness of FICUs. To
consider the probable effect on burden reduction, the NCUA assessed the
potential impact of the proposed threshold increase on regulated
transactions.\16\ The NCUA estimates that setting the appraisal
threshold at $400,000 would continue to exempt the majority of
residential real estate transactions from the NCUA's residential real
estate appraisal requirement. The increase in the number of loans that
would no longer require appraisals, as compared to the current $250,000
threshold, would provide meaningful burden reduction for FICUs. The
impact of the threshold change is discussed in more detail in section
``IV. Proposed Rule.''
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\16\ Regulated transactions are residential mortgage
originations by NCUA-insured institutions that were not sold to the
government-sponsored enterprises or otherwise insured or guaranteed
by a U.S. government agency.
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Some commenters to the July 2019 real estate appraisal rule
(commenters) noted that obtaining an appraisal for a real estate
transaction adds to the cost of the transaction, which is often passed
on to the borrower. In addition, the need for an appraisal can delay
the closing of a transaction when an appraiser cannot complete the
appraisal timely. Thus,
[[Page 65709]]
reducing regulatory burden by increasing the appraisal threshold for
residential real estate transactions may provide both transaction cost
and time savings for FICUs and borrowers.
Cost and Time Estimates
As discussed above, and as noted in the preamble to the other
banking agencies' residential appraisal final rule, written estimates
of market value generally cost less than Title XI appraisals for the
same properties. The United States Department of Veterans Affairs'
appraisal fee schedule \17\ for a single-family residence reflects that
the cost of an appraisal generally ranges from $375 to $900, depending
on the location of the property. Information available on the cost of
written estimates of market value and appraisals suggests that there
could be cost savings for FICUs and borrowers where a written estimate
of market value, as opposed to an appraisal, is obtained.
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\17\ See VA Appraisal Fee Schedules and Timeliness Requirements,
available at https://www.benefits.va.gov/HOMELOANS/appraiser_fee_schedule.asp.
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The Board also considered the amount of time it takes for lenders
to receive a completed appraisal. The time it takes to complete a
written estimate of market value may often be shorter than the time it
takes to receive a Title XI appraisal, particularly in rural areas. As
described in the Interagency Appraisal and Evaluations Guidelines
(Guidelines), FICUs should review the property valuation prior to
entering into a transaction.\18\
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\18\ Interagency Appraisal and Evaluations Guidelines at 75 FR
77458, 77461 (Dec. 10, 2010).
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Congress recently amended Title XI by adding an exemption to the
Title XI appraisal requirement for certain mortgage loans under
$400,000 secured by property in rural areas. However, the exemption is
only available where FICUs can document that they are unable to obtain
an appraisal at a reasonable cost and within a reasonable timeframe,
among other requirements.\19\ This proposed rule is broader in scope
and would eliminate the requirement for an appraisal for all
residential real estate transactions below $400,000. The proposed
threshold would include all such transactions in rural areas without
requiring FICUs to meet the other criteria of the rural residential
appraisal exemption.\20\ The Board estimates the proposed rule would
provide burden relief in rural areas at a proportional rate to the
burden reduction overall.
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\19\ Public Law 115-174.
\20\ Accordingly, the proposed rule would remove the reference
to this statutory exemption.
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As discussed in the Safety and Soundness Considerations for
Increasing the Residential Threshold section below, the Board estimates
that under the proposed rule, the percentage of transactions exempted
from the appraisal requirement would be restored to the level it was
following the last threshold increase in 2001. For all of the above
reasons, the proposed rule is expected to lead to cost savings, as well
as reduce the time to close residential real estate loans.
C. Consumer Protection Considerations for Increasing the Residential
Threshold
Comments to the July 2019 real estate appraisal rule stated that
appraisals provide some measure of consumer protection, and that
increasing the appraisal threshold for residential real estate
transactions could raise consumer protection issues. Appraisals can
play a role in providing protection to borrowers who purchase 1-to-4
family residential property.\21\ Indeed, the Dodd-Frank Act's amendment
to Title XI added the CFPB to the group of agencies assigned a role in
the appraisal threshold-setting process.\22\ As stated previously, the
CFPB concurred that the other banking agencies' residential appraisal
final rule's threshold of $400,000 provides reasonable protection for
consumers who purchase ``1-4 unit single-family residences.'' \23\
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\21\ The Board notes that information on property sales
transactions and tax assessment values is now often widely available
online.
\22\ 12 U.S.C. 3341(b). The Dodd-Frank Act also required the
CFPB to engage in rulemakings under amendments to Title XI,
including standards for appraisal management companies (12 U.S.C.
3353) and automated valuation models (12 U.S.C. 3354). In addition,
the Dodd-Frank Act amended two consumer protection laws--the Truth
in Lending Act (TILA), 15 U.S.C. 1601 et seq., and Equal Credit
Opportunity Act (ECOA), 15 U.S.C. 1691 et seq.--to establish new
requirements for appraisals and other valuation types. See 15 U.S.C.
1639e and 1639h (TILA) and 15 U.S.C. 1691e (ECOA).
\23\ Concurrence applies to the threshold, and the CFPB took no
position with respect to any other aspect of the other banking
agencies' residential appraisal final rule.
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The NCUA has long required written estimates of market value in
lieu of appraisals for many transactions, including certain
transactions exempted by an appraisal threshold. A written estimate of
market value must be consistent with safe and sound business practices
and should contain sufficient information and analysis to support the
decision to engage in the transaction, although it may be less
structured than an appraisal.\24\
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\24\ Guidelines, 75 FR at 77461.
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The adequacy of written estimates of market value as a substitute
for appraisals has previously been raised by commenters. One concern
previously expressed during the July 2019 real estate appraisal
rulemaking about the adequacy of written estimates of market value is
that the individuals performing them are not required to have
professional credentials for valuing real estate. On this point, the
Board notes that one of the benefits of written estimates over
appraisals that institutions have cited is that they can more readily
be performed in-house. The Board notes, however, that under the NCUA's
regulations, individuals preparing written estimates of market value
must be qualified, competent, and independent of the transaction and
the loan production function of the institution. The Board recently
formalized specific independence expectations by codifying them in the
regulation. The amended regulation requires that a written estimate of
market value be performed by an individual who is independent of the
loan production and collection processes, has no direct, indirect, or
prospective interest, financial or otherwise, in the property or the
transaction, and is qualified and experienced to perform such estimates
of value for the type and amount of credit being considered. The Board
believes that written estimates of market value prepared accordingly
provide an important level of consumer protection for transactions
below the proposed appraisal threshold.
Additionally, the interim final rule on valuation independence (IFR
on Valuation Independence) applies to all types of valuations (other
than valuations produced solely using an automated model or system)
used in connection with a consumer-purpose transaction secured by a
borrower's principal dwelling.\25\ FICUs using written evaluations for
transactions covered by the IFR on Valuation Independence must meet
standards for independence that carry civil liability, regardless of
transaction size.
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\25\ The Federal Reserve Board issued the IFR on Valuation
Independence in 2010 that amended Regulation Z (effective April
2011), establishing independence rules for consumer purpose
residential mortgage loans secured by a consumer's primary dwelling.
See 75 FR 66554 (Oct. 28, 2010) and 75 FR 80675 (Dec. 23, 2010)
(implementing Dodd-Frank Act amendments to TILA at 15 U.S.C. 1639e);
Federal Reserve Board: 12 CFR 226.42; and CFPB: 12 CFR 1026.42.
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Another consideration about the adequacy of written estimates of
market value as a substitute for appraisals is that written estimates
of market value are not required to be in a standard form, and specific
content is not mandated. Therefore, it is possible that some written
estimates of market value
[[Page 65710]]
will be more difficult for borrowers to understand, or that written
estimates lack information about the property typically included in an
appraisal that could be useful to a borrower. However, the NCUA has not
noted any such issues with written estimates of market value being
conducted for transactions below the current $250,000 threshold.
Another consideration when weighing consumer protection issues is
the availability to borrowers of alternative valuation information,
such as written estimates of market value. The Dodd-Frank Act amended
the Equal Credit Opportunity Act \26\ (ECOA) to require creditors to
provide applicants free copies of appraisals and other types of
valuations prepared in connection with first-lien transactions secured
by a dwelling, which include written estimates of market value.\27\
Therefore, when a FICU conducts or obtains a written estimate of market
value, it must be provided to the borrower.\28\
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\26\ 15 U.S.C. 1691 et seq.
\27\ See 15 U.S.C. 1691(e), implemented by the CFPB at 12 CFR
1002.14. The Dodd-Frank Act also amended TILA to require creditors
to provide applicants free copies of appraisals prepared in
connection with certain higher-priced mortgage loans (HPMLs). See 15
U.S.C. 1639h(c), implemented jointly by the OCC, Federal Reserve
Board, FDIC, NCUA, Federal Housing Finance Agency (FHFA), and CFPB.
See, OCC: 12 CFR 34.203(f); Federal Reserve Board: 12 CFR 226.43(f);
CFPB: 12 CFR 1026.35(c)(6); NCUA: 12 CFR 722.3(a); FHFA: 12 CFR
1222, subpart A (HPML Appraisal Rule). The FDIC adopted the HPML
Appraisal Rule as published in the CFPB's regulation. See 78 FR
78520, 10370, 10415 (Dec. 26, 2013).
\28\ 12 CFR 1002.14.
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The Board also notes that borrowers currently have significantly
more access to property valuation information than when the appraisal
threshold was last increased in 2001. For example, property records are
often available to the public through the internet. These records may
include not only a particular property's tax assessed value, but also
the property's historical sales activity and information on other
recent property sales in the area.\29\ These widely available data
sources may reduce consumer reliance on appraisals. Borrowers also may
obtain an appraisal before engaging in the transaction. In addition,
appraisals would still be required, regardless of transaction amount,
for certain higher-priced mortgage loans (HPMLs), pursuant to the HPML
Appraisal Rule.\30\
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\29\ Some states (or counties within states) do not publish sale
amounts, but do provide estimates based on loan amounts or mortgage
transfer taxes, which could be substantially different from the
actual sale amount.
\30\ 15 U.S.C. 1639h, implemented by the CFPB at 12 CFR 1026.35.
Transactions covered by the HPML Appraisal Rule are limited due to
significant exemptions from the requirements, including an exemption
for qualified mortgages.
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Finally, commenters have also raised concerns about the
accountability of individuals performing written estimates of market
value and borrowers' more limited options for recourse. For example,
the Dodd-Frank Act required establishment of a national hotline for
complaints against state-certified and state-licensed appraisers
relating to non-compliance with appraisal independence and USPAP,
including complaints from appraisers, individuals, borrowers, or other
entities.\31\ State appraisal regulatory agencies have authority to
discipline appraisers that violate USPAP. These consumer protection
benefits are not applicable for complaints against individuals who
prepare written estimates of market value. However, borrowers may have
some recourse against individuals performing written estimates of
market value. Borrowers may make a complaint to the CFPB consumer
complaint database and, as discussed above, FICUs using written
evaluations for transactions covered by the IFR on Valuation
Independence may be subject to civil liability.
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\31\ The Dodd-Frank Act instituted a number of reforms to ensure
the legitimacy, independence, and oversight of appraisals. See Dodd-
Frank Act, Title XIV, Subtitle F--Appraisal Activities, Public Law
111-203, 124 Stat. 1376, 2185.
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The Board is requesting comment specifically on the following
questions related to the consumer protection aspect of appraisals.
Question 1: How often do FICUs use their own internal staff to
prepare written estimates of market value?
Question 2: What valuation information, if any, would borrowers
lose in practice if more written estimates of market value are
performed rather than appraisals? Please provide data or other evidence
to support any comments.
Question 3: To what extent do appraisals and written estimates of
market value provide benefits or protections for borrowers that are
purchasing 1-to-4 family residential property? What are the nature and
magnitude of the differences, if any, in consumer protection? Please
provide data or other evidence to support any comments.
Question 4: To what extent is useful and accurate property
valuation information readily available to borrowers through public
sources?
Question 5: How well have consumers understood written estimates of
market value, and are there any concerns the Board should take into
account? For example, would a model format for written estimates of
market value be helpful to borrowers?
Question 6: Are there any other consumer protection concerns raised
by the proposal that the Board should consider?
IV. Proposed Rule
Under the current appraisal rule, generally residential real estate
transactions with a transaction value less than $250,000 do not require
Title XI appraisals, but require written estimates of market value.\32\
The current thresholds were established in 2001 (2001 residential
appraisal final rule) and effective in 2002.\33\ The Board proposes to
increase the appraisal threshold from $250,000 to $400,000 for
residential real estate transactions. Residential real estate
transactions below the applicable threshold would still require a
written estimate of market value that is consistent with safe and sound
banking practices.\34\
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\32\ 12 CFR 722.3. See also, 66 FR 58656, 58662 (Nov. 23, 2001).
The other banking agencies promulgated a similar rule in 1994. See
59 FR 29482 (June 7, 1994). Note that transactions with insurance or
guarantees from a U.S. government agency or sponsored agency may
have slightly different treatment.
\33\ 66 FR 58656 (Nov. 23, 2001). The rule was effective March
1, 2002.
\34\ 12 CFR 722.3(d).
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A. Setting the Appropriate Threshold for Residential Real Estate
Transactions
In determining the level of the proposed increase, the Board
considered the comments received to the July 2019 real estate appraisal
rule, as well as a variety of home price and inflation indices. In
particular, the NCUA analyzed residential home prices based on the
Standard & Poor's Case-Shiller Home Price Index (Case-Shiller Index)
\35\ and the FHFA Index,\36\ as well as the Consumer Price Index
(CPI).\37\
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\35\ The Case-Shiller Index tracks the value of single-family
housing within the United States. See Standard & Poor's CoreLogic
Case-Shiller Home Price Indices, available at https://us.spindices.com/index-family/real-estate/sp-corelogic-case-shiller.
\36\ The FHFA Index tracks changes in residential property
prices. See FHFA House Price Index, available at https://www.fhfa.gov/DataTools/Downloads/Pages/House-Price-Index.aspx.
\37\ The CPI, which is published by the Bureau of Labor
Statistics, is a measure of the average change over time in the
prices paid by urban consumers for a market basket of goods and
services. See https://www.bls.gov/cpi/.
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These home price indices reflect that prices for residential real
estate have increased since 2002, when the 2001 residential appraisal
final rule increase became effective. Table 1 below shows that the
threshold level in 2002 of $250,000 would result in a price of
approximately $450,000 as of June 2019, when adjusted by the Case-
Shiller Index
[[Page 65711]]
and the FHFA Index. Using the more general CPI, which tracks price
changes for general consumer goods and services, would result in a
value of approximately $360,000, which would be $425,000 based on when
the other banking agencies changed their threshold to $250,000 in 1994.
Table 1--Appreciation in Residential Real Estate Prices Since 2002 \38\
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NCUA proposed
Year threshold Case-Shiller FHFA CPI
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NCUA since the Last Threshold Increase
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2002............................................ 250,000 250,000 250,000 250,000
2Q 2019......................................... 400,000 455,864 452,218 361,338
Compound annual growth rate (CAGR).............. 2.5% 3.2% 3.2% 2.0%
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Year OBA threshold Case-Shiller FHFA CPI
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Other Banking Agencies since the Last Threshold Increase
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1994............................................ 250,000 250,000 250,000 250,000
2Q 2019......................................... 400,000 660,689 631,576 426,518
Compound annual growth rate (CAGR).............. 1.8% 3.7% 3.5% 2.0%
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Several commenters to the other banking agencies' residential
appraisal final rule encouraged the other banking agencies to commit to
adjusting the threshold periodically, or automatically adjusting the
threshold, to reflect changes in housing values, market conditions, or
inflation.\39\ The other banking agencies concluded that automatic
adjustments to the threshold or agency commitments to set timetables
for future threshold increases would not be appropriate. The NCUA also
believes that automatic adjustments to the threshold are not
appropriate. The NCUA is required by Title XI to weigh safety and
soundness implications regarding any proposed threshold increase and
obtain CFPB concurrence on whether the threshold provides reasonable
protection for borrowers of ``1-4 unit single-family residences.'' In
addition, the NCUA already periodically reviews (at least every three
years) its regulations to identify outdated or unnecessary regulatory
requirements and can consider any comments concerning the thresholds
through that process.
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\38\ For this Table, the analysis uses a starting date of
January 1 of the year a threshold is increased and goes until June
30, 2019. The other banking agencies conducted a similar analysis,
however, used dates June 30, 1994 to June 30, 2019.
\39\ 84 FR 53579, 53583 (Oct. 8, 2019).
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B. Safety and Soundness Considerations for Increasing the Residential
Threshold
Under Title XI, in setting a threshold at or below which an
appraisal performed by a state-certified or state-licensed appraiser is
not required, the NCUA must determine in writing that such a threshold
level does not pose a threat to the safety and soundness of FICUs.\40\
The Board evaluated a number of factors in considering the effect of
the proposed residential threshold on the safety and soundness of
FICUs. The Board determined that the proposed threshold of $400,000 for
residential real estate transactions is not expected to pose a threat
to the safety and soundness of FICUs for the reasons discussed below.
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\40\ 12 U.S.C. 3341(b).
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First, the proposed threshold level of $400,000 would exempt a
similar number of transactions and dollar volume of transactions as did
the current threshold of $250,000 when it was set in 2001. The increase
in the appraisal threshold in the 2001 residential appraisal final rule
did not result in a material increase in risk to safety and
soundness.\41\
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\41\ None of the 27 material loss reviews of FICU failures
conducted by the NCUA's Inspector General since the mid-2000s found
a lack of appraisals as the cause of a FICU's failure.
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The NCUA conducted analyses using 2018 data reported under the Home
Mortgage Disclosure Act (HMDA), which requires a variety of financial
institutions to maintain, report, and publicly disclose loan-level
information about residential mortgage originations. Information
reported under HMDA includes various data points relevant to the NCUA's
analysis, including loan size, loan type, property type, property
location, and secondary market purchaser. While the HMDA data has
limitations, including that certain low-volume originators and
originators located in rural areas are not required to report, the
Board believes it provides a representative sample of the universe of
mortgage originations, including transactions subject to the NCUA's
appraisal requirement.
As described in further detail below, the NCUA used 2018 HMDA data
to estimate the effect of the proposed residential threshold increase.
The NCUA used HMDA data to determine the number of transactions and
dollar volume of transactions that would be affected relative to: (1)
Total FICU originations reported in the HMDA data; and (2) transactions
originated by NCUA-insured institutions that were not sold to a
government-sponsored enterprise (GSE) or otherwise insured or
guaranteed by a U.S. government agency (regulated transactions). The
NCUA compared these figures with similar figures using data from 2001,
which was the data set used to evaluate the 2001 residential appraisal
final rule when the $250,000 residential appraisal threshold was
adopted.
As outlined in Table 2 below, the NCUA estimates that approximately
77 percent of FICU residential real estate transactions for a total of
55 percent of the dollar amount of the transactions, are currently not
subject to the NCUA's residential appraisal requirement. This is
estimated to increase to 94 percent of transactions and 83 percent of
the dollar amount with the proposed increased threshold. For context,
in 2001, an estimated 95 percent of residential transactions and 80
percent of the dollar amount of residential transactions were exempt
when the current $250,000 threshold was set.
[[Page 65712]]
Table 2--2018 HMDA Data Mortgage Analysis
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Newly exempted
Exempted by by proposed Total exempted by Appraisal still
Regulated transactions by transaction amount current threshold increase to proposed increase required over Total
of $250,000 $400,000 to $400,000 $400,000
--------------------------------------------------------------------------------------------------------------------------------------------------------
Number of transactions................................... 215,155 45,860 261,015 16,989 278,004
% of total............................................... 77% 16% 94% 6% 100%
Dollar volume ($ billions)............................... 27.0 14.2 41.2 8.3 49.5
% of total............................................... 55% 29% 83% 17% 100%
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As seen below in Table 3, the proposed residential threshold also
would result in a level of residential transaction coverage consistent
with the coverage estimated for the 2001 threshold increase, which did
not result in a risk to safety and soundness.
Table 3--2001 HMDA Data Mortgage Analysis
--------------------------------------------------------------------------------------------------------------------------------------------------------
Newly exempted
Exempted by by proposed Total exempted by Appraisal still
Regulated transactions by transaction amount current threshold increase to proposed increase required over Total
of $100,000 $250,000 to $250,000 $250,000
--------------------------------------------------------------------------------------------------------------------------------------------------------
Number of transactions................................... 299,674 143,185 442,859 22,575 465,434
% of total............................................... 64% 31% 95% 5% 100%
Dollar volume ($ billions)............................... 12.2 18.3 30.6 7.6 38.2
% of total............................................... 32% 48% 80% 20% 100%
--------------------------------------------------------------------------------------------------------------------------------------------------------
The Board also estimates that the proposed rule would increase the
share of exempt transactions from 83 percent to 95 percent for
transactions that are secured by residential property located in a
rural area. The Board also estimates that the proposed rule would
exempt 83 percent of the dollar volume of transactions that are secured
by residential property located in a rural area.
Second, the new threshold would not introduce significant
additional risk to the credit union system. Based on 2018 data, the
NCUA estimates the proposed new threshold would only incrementally
exempt real estate-secured loans granted each year. FICUs originated
approximately $78 billion in residential transactions in 2018. Of that
amount, approximately $18 billion of transactions were sold to Federal
National Mortgage Association (Fannie Mae) and Federal Home Loan
Mortgage Corporation (Freddie Mac) and $11 billion of transactions were
insured or sold as part of other government guarantee programs.\42\
Therefore, approximately $50 billion in originated residential real
estate transactions were subject to the NCUA's appraisal rule.
Approximately $27 billion of the originated residential real estate
transactions were exempted from appraisal requirements because the
transaction values were under the current $250,000 threshold. In
addition, $8 billion of originated residential real estate transactions
had transaction values of $400,000 or greater, and therefore would
continue to be subject to appraisal requirements under the proposed
rule. Therefore, the proposed rule would only exempt an additional $14
billion of residential real estate transactions from appraisal
requirements, or 46,000 transactions. The incremental impact of the
proposed increased threshold, $14 billion, equates to approximately 0.9
percent of FICU assets as of the June 30, 2019 Statement of Financial
Condition (referred to as the Call Report). Relative to credit union
system assets, the incremental level of residential transactions exempt
from appraisals would not pose undue risk.
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\42\ Other government guarantee programs consists of Federal
Housing Administration insured (FHA), Veterans Affairs guaranteed
(VA), and USDA Rural Housing Service or Farm Service Agency
guaranteed (RHS or FSA).
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Third, the NCUA examined data reported on the (Call Report) and
determined that FICUs' residential real estate-secured loans have
performed well with relatively low delinquencies and net charge-off
rates.\43\ To evaluate the impact of residential real estate
transactions on the safety and soundness of the credit union system,
the NCUA compared the net charge-off rates from 1994 to 2018, which
includes two recessionary periods. The net charge-off rate for
residential real estate transactions did not increase after the NCUA's
increase in the appraisal threshold from $50,000 to $100,000 in 1995,
or when the NCUA threshold was increased to $250,000 in 2001. These
prior threshold increases did not have a negative impact on loan
performance.
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\43\ Net charge-offs are charge-offs minus recoveries. Net
charge-offs represent losses to financial institutions.
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The net charge-off rate for residential real estate loans from 2001
through 2007 ranged from three to nine basis points. For context, FDIC-
insured institutions experienced residential real estate net charge-
offs rates of seven to 25 basis points during the same period. From
2008 through 2011, during and immediately after the last recession,
FICU net charge-off rates for residential real estate loans ranged from
11 to 68 basis points. FDIC-insured institutions experienced net
charge-off rates for residential real estate loans ranging from 104 to
231 basis points during the same period. The data reflects that the
loss experience associated with residential real estate loans in FICUs
has been relatively modest. Thus, an increase in the appraisal
threshold is not expected to pose a safety and soundness risk to FICUs
or the National Credit Union Share Insurance Fund.
Further, based on supervisory experience and analysis of material
loss reviews conducted by the NCUA's Inspector General, appraisals have
not been a substantial factor in any material FICU failures. Of the 27
material loss reviews, 14 were residential real estate related, but
none of the failures resulted from a lack of appraisals. This available
data on failures during the recent recession suggests that an increase
in the threshold is not expected to pose a safety and soundness risk to
FICUs or
[[Page 65713]]
the National Credit Union Share Insurance Fund.
Finally, the NCUA considered the requirement for transactions below
applicable thresholds to obtain written estimates of market value and
how this requirement contributes to safety and soundness. The NCUA's
appraisal regulations require FICUs to obtain written estimates of
market value for all real estate-related financial transactions that do
not require a Title XI appraisal, unless the real estate-related
financial transaction is explicitly exempt from written estimate of
market value requirements.\44\ A written estimate of market value
prepared by qualified, competent, and independent individuals who use
appropriate supporting information provides FICUs an alternative
estimate of market value and should provide sufficient information to
enable FICUs to make a prudent decision regarding the transaction.
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\44\ See 12 CFR 722.3(d).
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Through the Guidelines, the NCUA has provided guidance to FICUs on
its expectations regarding when and how written estimates of market
value should be used.\45\ The Guidelines provide guidance on obtaining
appropriate written estimates of market value that are consistent with
safe and sound banking practices. Written estimates of market value
must be performed by persons who are competent and have the relevant
experience and knowledge of the market, location, and type of real
property being valued. The Guidelines state that a written estimate of
market value should provide an estimate of the property's market value
and have sufficient information and analysis to support the credit
decision. The Guidelines also describe the content that an evaluation
should contain.
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\45\ Guidelines at 77460.
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In addition, the NCUA strengthened independence requirements for
individuals performing written estimates of market value. Specifically,
the Board recently incorporated into the NCUA's appraisal rule the
existing Guidelines expectation that the individual performing a
written estimate of market value be independent of the loan production
and collection processes. The Board believes that the enhanced
independence requirement is an important prudential safeguard.
Furthermore, as is the current practice, FICUs and borrowers may
obtain appraisals to establish collateral value even if a transaction
is exempt from the appraisal requirement. For example, this may be done
for transactions below the appraisal threshold levels. The Guidelines
advise FICUs to develop policies and procedures for identifying
instances when this would be prudent.\46\ The Guidelines recommend that
a FICU should obtain an appraisal instead of a written estimate of
market value for higher-risk real estate-related financial
transactions. The Guidelines list factors such as those involving loans
with high loan-to-value ratios and properties outside the FICU's
traditional lending market. The NCUA also retains the ability to
require an appraisal whenever ``necessary to address safety-and-
soundness concerns.'' \47\
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\46\ Guidelines at 77460.
\47\ 12 CFR 722.3(e).
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The Board also notes that FICUs have used written estimates of
market values for transactions below the applicable appraisal
thresholds successfully since the issuance of the first rule
implementing Title XI.\48\ The Board believes written estimates of
market value are a proven safe and sound alternative for transactions
below the applicable thresholds. The Board will continue to evaluate a
FICU's use of written estimates of market value as part of its
examination and supervision program.
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\48\ 55 FR 30199 (Jul. 25, 1990).
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C. Appraisal Review
Section 1473(e) of the Dodd-Frank Act amended Title XI to include a
requirement that appraisals be subject to appropriate review for
compliance with USPAP.\49\ The proposed rule would make a conforming
amendment to the NCUA's appraisal regulation to explicitly incorporate
the existing statutory requirement for easier reference. The Board
proposes to mirror the statutory language for this standard. As
outlined in the Guidelines, which provide guidance on the review
process, the NCUA has long recognized that appraisal review is
consistent with safe and sound lending practices.\50\ The NCUA already
sets minimum appraisal standards that require appraisals to conform to
USPAP's generally accepted appraisal standards. In addition, the NCUA
recommends that FICUs have effective quality controls over the
appraisal process through a periodic review of work completed by
appraisers, and for individuals selected to hold appropriate state
certification or licenses. A FICU should ensure that selected
appraisers have the right qualifications for a given transaction and
property in order for the appraisers to be able to make appropriate
adjustments to market value for factors such as prospective
improvements, lease terms, and market conditions.
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\49\ Dodd-Frank Act, section 1473, Public Law 111-203, 124 Stat.
1376.
\50\ See Guidelines, at 77453.
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D. Consistency With Other Banking Agencies
On October 9, 2019, the other banking agencies' residential
appraisal final rule to amend their appraisal regulations became
effective. Their final rule increased the threshold level at or below
which appraisals would not be required for residential real estate
transactions from $250,000 to $400,000. The rule, consistent with the
requirement for other transactions that fall below applicable
thresholds, also requires regulated institutions to obtain an
evaluation of the real property collateral that is consistent with safe
and sound banking practices in lieu of an appraisal.
The NCUA and the other banking agencies had the same threshold for
residential transactions from 2002 up to 2019. Commenters to the July
2019 real estate appraisal rule expressed concern that any differences
between the residential threshold for banks and FICUs may create a
competitive disadvantage for FICUs and their 117 million members.
The Board is requesting comment specifically on the following
questions related to the analysis for the proposed rule and written
estimates of market value.
Question 7: Is $400,000 an appropriate level for the residential
appraisal threshold?
Question 8: Are there other sources of data that would be useful to
analyze this issue?
Question 9: Will the proposed rule lead to cost savings for FICUs
and/or borrowers, as well as reduce the time to close residential real
estate loans?
Question 10: Will FICUs expand their use of written estimates of
market value if the proposal to raise the residential threshold is
finalized, or continue to use appraisals for the residential real
estate transactions below $400,000 that are eligible for this
exemption? For what types of eligible residential real estate
transactions are FICUs likely to obtain written estimates of market
value? Please provide data or other evidence to support any comments.
Question 11: What, if any, concerns are raised by incorporating the
requirement to review appraisals consistent with the referenced
statutory language?
[[Page 65714]]
V. Request for Comments
In addition to the above questions outlined, the Board invites
comment on all aspects of the proposed rulemaking.
VI. Regulatory Procedures
A. Regulatory Flexibility Act
The Regulatory Flexibility Act (RFA) generally requires that, in
connection with a notice of proposed rulemaking, an agency prepare and
make available for public comment an initial regulatory flexibility
analysis that describes the impact of a proposed rule on small
entities. A regulatory flexibility analysis is not required, however,
if the agency certifies that the rule will not have a significant
economic impact on a substantial number of small entities (defined for
purposes of the RFA to include FICUs with assets less than $100
million) and publishes its certification and a short, explanatory
statement in the Federal Register together with the rule.
Data currently available to the NCUA is not sufficient to estimate
how many small FICUs make residential real estate loans in amounts that
fall between the current and proposed thresholds. Therefore, the NCUA
cannot estimate how many small entities may be affected by the
increased threshold and how significant the reduction in burden may be
for such small entities. The NCUA believes, however, that the proposed
threshold increase will meaningfully reduce burden for small FICUs.
Accordingly, the NCUA certifies that the proposed rule will not have a
significant economic impact on a substantial number of small FICUs.
B. Paperwork Reduction Act
The Paperwork Reduction Act of 1995 (PRA) applies to rulemakings in
which an agency by rule creates a new paperwork burden on regulated
entities or modifies an existing burden (44 U.S.C. 3507(d)). For
purposes of the PRA, a paperwork burden may take the form of a
reporting, recordkeeping, or a third-party disclosure requirement,
referred to as an information collection. The NCUA may not conduct or
sponsor, and the respondent is not required to respond to, an
information collection unless it displays a valid OMB control number.
The proposed rule increases the threshold from $250,000 to $400,000
for residential real estate transactions for which an appraisal is
required. Transaction values of less than $400,000 do not require an
appraisal, but a written estimate of market value. The information
collection requirement of this part is that the FICU retain a record of
either the appraisal or estimate, whichever applies. Even though the
threshold has increased, the proposal will not result in a change in
burden. This recordkeeping requirement is cleared under OMB control
number 3133-0125. There is no new information collection requirements
associated with this proposed rule.
C. Executive Order 13132
Executive Order 13132 encourages independent regulatory agencies to
consider the impact of their actions on state and local interests. In
adherence to fundamental federalism principles, the NCUA, an
independent regulatory agency as defined in 44 U.S.C. 3502(5),
voluntarily complies with the executive order. This rulemaking will not
have a substantial direct effect on the states, on the connection
between the national government and the states, or on the distribution
of power and responsibilities among the various levels of government.
The NCUA has determined that this proposal does not constitute a policy
that has federalism implications for purposes of the executive order.
D. Assessment of Federal Regulations and Policies on Families
The NCUA has determined that this proposed rule will not affect
family well-being within the meaning of Section 654 of the Treasury and
General Government Appropriations Act, 1999.
List of Subjects in 12 CFR Part 722
Appraisal, Appraiser, Credit unions, Mortgages, Reporting and
recordkeeping requirements, Truth in lending.
By the National Credit Union Administration Board on November
21, 2019.
Gerard Poliquin,
Secretary of the Board.
For the reasons discussed above, the NCUA Board proposes to amend
12 CFR part 722 as follows:
PART 722--APPRAISALS
0
1. The authority citation for part 722 continues to read as follows:
Authority: 12 U.S.C. 1766, 1789, and 3331 et seq. Section
722.3(a) is also issued under 15 U.S.C. 1639h.
0
2. Amend Sec. 722.3 by:
0
a. Revising paragraphs (b)(2), (c)(1); and
0
b. Removing paragraph (f).
The revision reads as follows:
Sec. 722.3 Appraisals and written estimates of market value
requirements for real estate-related financial transactions.
* * * * *
(b) * * *
(1) * * *
(2) The transaction is complex, involves a residential real estate
transaction, and $400,000 or more of the transaction value is not
insured or guaranteed by a United States government agency or United
States government sponsored agency.
(c) * * *
(1) An appraisal performed by a state-certified appraiser or a
state-licensed appraiser is required for any real estate-related
financial transaction not exempt under paragraph (a) of this section in
which the transaction is not complex, involves a residential real
estate transaction, and $400,000 or more of the transaction value is
not insured or guaranteed by a United States government agency or
United States government sponsored agency.
* * * * *
0
3. Amend Sec. 722.4 by:
0
a. Republishing the introductory text;
0
b. Redesignating paragraphs (c), (d), and (e) as (d), (e), and (f),
respectively;
0
c. Adding a new paragraph (c); and
0
d. Revising in newly designated paragraph (e) the text ``Sec.
722.2(f)'' and adding in its place the text ``Sec. 722.2''.
The addition reads as follows.
Sec. 722.4 Minimum appraisal standards.
For federally related transactions, all appraisals shall, at a
minimum:
* * * * *
(c) Be subject to appropriate review for compliance with the
Uniform Standards of Professional Appraisal Practice.
* * * * *
[FR Doc. 2019-25768 Filed 11-27-19; 8:45 am]
BILLING CODE 7535-01-P
