Letter to Agencies on Real Estate Appraisal Threshold

Dear Ms. Misback and Messrs. Plave and Feldman:

The American Bankers Association (“ABA”) appreciates the opportunity to provide comments on the Joint Agency Proposed rule on Real Estate Appraisals. In this proposal, the Office of theComptroller of the Currency, the Board of Governors of the Federal Reserve System and theFederal Deposit Insurance Corporation (the “agencies”) are inviting comment on a proposal toamend regulations requiring appraisals of real estate for certain transactions. The proposal wouldincrease the threshold level at or below which appraisals would not be required for residentialreal estate transactions from $250,000 to $400,000. The proposal would also continue to require evaluations that are consistent with safe and sound business practices for transactions exemptedby the increased threshold.

ABA commends the work of the agencies in analyzing the impact of these regulatory changes onthe safety and soundness of the banking industry, as well as the agencies’ attempts to minimizesystemic risks. These proposals are of particular importance as residential real-estate-securedtransactions impacted by these changes are loans originated for the bank’s own portfolio. ABAacknowledges the need for the agencies review of the various house price indices over the last 25years, from 1994 to 2019, and generally agrees with the agencies’ review which reflects a strong,yet conservative value that protects against inflation in the proposed increase level set at thethreshold of $400,000. This proposed change will help smaller community banks keep pacewith the strong competitive pressure posed by growing secondary market appraisal waivers.ABA members support the proposal for the less risky portfolio loans of 1-to-4 family residentialloans. The uniqueness of each individual bank’s lending structures will be enhanced by theoptionality a higher threshold of $400,000 will provide to serve various markets. ABA stronglyencourages the National Credit Union Association (NCUA) to mirror the current standards setand those proposed by the joint agencies to provide unified appraisal standards and transparencyin the marketplace.

General Comments

ABA believes that the first priority that must be considered is the continued protection of banksby the implementation of strong risk management practices. We therefore support the higherthreshold as proper valuations would be assured through internal and external valuations and theadvancement of tech-based solutions that continue to improve and serve the needs of housingsolutions in the marketplace. Our members are fully examined depository institutions and havethe risk management controls in place to manage these changes responsibly. Also, as industrychanges continue to advance with FINTECH advancements, we expect continued innovation anda new direction in valuations and the appraisal formats to develop and evolve, as outlined in theJuly 31, 2018 U. S. Department of Treasury report to the President.

Growing challenges, including demand from consumers and struggles with turn-around times,have begun to push the search for technology and alternative paths to fill the needs of portfolioinvestors. We note that the Appraisal Foundation recently acknowledged the need to changetraining techniques, and methods. At least one initiative will begin affecting practicespositively in rural areas via its upcoming creative training alternatives for new appraiserinitiatives, which was recently announced by the Appraisal Standard Board and will be rolled outin 2019/2020. This initiative, formally called the Practical Applications of Real Estate Appraisal(PAREA) will – among other things – establish an online virtual training center. “PAREA willprovide an alternative method for appraisers to gain experience towards obtaining real propertyappraiser credentials by performing USPAP-compliant appraisals on real properties as well as virtual properties via emerging classroom technology.” Appraisals, in turn, are expected tocontinue to evolve as hybrid appraisals and other online products take shape in the market.

Effective Risk Controls Currently Apply:

ABA believes that the agencies’ proposals suggest workable solutions while also paying anappropriate level of attention to the relevant prudential concerns. Under the proposed rule, theincrease in thresholds for requiring appraisals in residential transactions would be accompaniedby the required implantation of effective risk-control measures by depository institutions. Wheninstitutions decide to forego obtaining an appraisal by state-certified or licensed appraisers, therule would require that institutions obtain an evaluation of the real property collateral that isconsistent with safe and sound banking practices. This requirement will serve as an effectivesafeguard to the proposed threshold increase because alternative valuation methods can be highlyreliable and assure accuracy via various approaches to value conclusions. Depository institutionscurrently have the experience, the procedures, and the practices in place to manage and evaluatereal-estate-secured loans in their market areas, including risk management quality controlsystems to ensure the proper review is provided. The Appraisal Institute and The AppraisalFoundation have resources available via education tools to further enhance valuations and thereview process for the banks.

The proposed increase in the residential real estate threshold to $400,000 will provide immediaterelief to the challenges faced by banks as they continue to manage current challenges ofshortages and lengthening turnaround times in many areas. Financial institutions will be able tocontrol the process and the turnaround times, as well as the quality of the product to protect therisk within their own portfolios. As outlined in the proposed rule’s preamble, these loans are -forthe most part - not originated for sale in the market and the banks maintain prudent lendingpractices for their own portfolio risk.

Some banks report that they will continue to obtain USPAP compliant appraisals for alltransactions, even if exempt, to either protect their portfolio or to meet investor demand; others -primarily portfolio lenders in rural areas, have unique challenges and are well versed in the useof alternative evaluations and their effectiveness – and will use evaluations effectively in theirmarket areas. Although market competition could create pressures for evaluations to beperformed in many more scenarios, this proposed threshold modification is being implementedonly for federally regulated institutions. This ensures that existing risk management practiceswill mandate and dictate prudent usage.

Current Evaluation Tools Are Highly Reliable:

Depository institutions have access to, and currently employ, very accurate valuation tools. Ourmembers perform valuations for residential portfolio transactions, home equity loans, and routineasset quality reviews. These valuations adhere to the interagency guidelines and are assessed by the prudential regulators during safety and soundness examinations. If the bank provides aninternal evaluation for the transaction, the cost is usually borne by the bank. Third-partyevaluations cost approximately 50 percent or less than appraisals, and often result in meaningfuland immediate reductions in consumer costs. ABA believes that existing regulatory oversightrules have the necessary safeguards to assure that depository institutions deploy proper controlmethods.

Community Banks Are At Disadvantage:

Some of our portfolio lenders face ongoing concerns competing against the programs of FreddieMac’s Automated Collateral Evaluation8 and Fannie Mae’s Property Inspection Waiverprograms. Government Sponsored Enterprises (“GSEs”) now allow the waiving appraisals onsome originations that are eligible for sale. These programs apply to residential single-familypurchase and refinance loans; in such transactions, the GSEs may no longer require thatappraisals be performed. This poses strong price advantages to lenders that rely on GSEprograms. The proposed increase in the residential threshold for regulated banks would level theplaying field for small portfolio lenders—these institutions understand local property values andcan well leverage the benefits of evaluations, which afford more competitive options against afull appraisal waiver.

The agencies also cite to Consumer Financial Protection Bureau (the “Bureau”) views thatappraisals can provide consumer protection benefits and their concern about potential risks toconsumers resulting from an expansion of the number of residential mortgage transactions thatwould be exempt from the Title XI appraisal requirement. Although there may be some ancillaryconsumer benefit to a bank-ordered appraisal, the reality is that, in real estate transactions, theappraisal is not ordered for the benefit of the consumer, but rather, for the benefit of the lender.Consumers may, and are often advised to, obtain an appraisal for their own use as outlined in thePurchase and Sale agreement. This agreement is an example of a form that will require retoolingby attorneys and Realtors, and will – and should – remain outside of regulation by federalregulators.

Those in the industry must work together to ensure that consumers fully understand thesechanges. Additionally, in today’s market most buyers opt to have a home inspection performed.Such an inspection allows the condition of the property to be evaluated before purchase andallows the buyer, if the property does not pass the home inspection, to renegotiate the contract orcancel the anticipated buy-sell transaction, addressing one of the concerns of the Bureau.However, the point that the appraisal is attained for the mortgagee’s protection should not beoverlooked. We encourage the Bureau to consider a merged disclosure document that isdesigned to allow a consumer to understand and protect their interest in the transaction byallowing the consumer to clearly understand the difference between an appraisal and avaluation report, the benefits of an appraisal (versus an evaluation) and the general structure of their purchase transaction. ABA recommends a revision to the “InitialDisclosure Requirement” a written disclosure to the applicant. Specifically, we recommend thatnew language that describes the transaction and the differences between a valuation and anappraisal to be incorporated into that redrafted Disclosure document.

Answers to Additional Questions:

We would like to take this opportunity to address the following questions posed by the jointagencies that we feel are most important to our members:

Question 1. The agencies invite comment on the cost data for evaluations andappraisals detailed above. Should the agencies consider other data and data sources inassessing the costs of appraisals and evaluations to regulated institutions and consumers?

ABA is unaware of other data sources to consider using in assessing the cost of appraisals andevaluations. The cost assessment appears sound and appropriate.

Question 3. What valuation information, if any, would consumers lose in practice ifmore evaluations are performed rather than appraisals? What additional comments, if any,are there relative to the presentation or content of evaluations for residential real estatetransactions in practice? Please provide data or other evidence to support any comments.

Although an evaluation is not a USPAP appraisal, it does indicate the value of a property and itpresents recent comparable sales data on specific properties. Consumers may not fullyunderstand the difference between an appraisal, prepared by a state licensed or certifiedappraiser, and an evaluation. Although a financial institution may determine the use of anevaluation is appropriate in a lending decision, it is not appropriate for the consumer to think anevaluation and an appraisal are equivalent. This issue should be further considered in areaswhere sales data is not publicly accessible, including non-disclosure states where real estate salesare not publicly available for comparable property data.

Question 4. To what extent do appraisals or evaluations provide benefits orprotections for consumers that are purchasing 1-to-4 unit single-family residences? What arethe nature and magnitude of the differences, if any, in consumer protection, including anydifferences in credibility, arising from the use of evaluations rather than appraisals, especiallywith respect to residential real estate transactions of $400,000 or less? For example, are thereany differences with respect to negotiating the price of a home or canceling a transactionwhen an evaluation rather than an appraisal is obtained? Please provide data or otherevidence to support any comments.

At times, consumers tend to challenge bank-prepared internal evaluations more quickly thanthird party evaluations and appraisals. In those cases the depository institutions have indicatedthey have opted to order an appraisal for high loan-to-value and high risk profile loantransactions.

Question 6. How often do institutions use their own internal staff to prepareevaluations? What challenges, if any, to meeting requirements and standards forindependence, particularly in smaller institutions, do internally-prepared evaluations present?Similarly, what challenges, if any, to meeting requirements and standards for independenceare presented by evaluations prepared by third parties?

ABA members have different practices for evaluations depending on their individual bank’s riskprofile. All evaluations meet the requirements and standards outlined in Interagency Appraisaland Valuation Guidance. Many of our members have trained and knowledgeable staff whocontinue to enhance their capabilities via industry training necessary to prepare internalevaluations. Others will opt to utilize either appraisers or third parties to prepare evaluations tomeet the market demands.

Question 10. Will institutions expand their use of evaluations if the proposal to raisethe residential threshold is finalized or continue to use appraisals for the additional residentialreal estate transactions of $400,000 or less that are eligible for this exemption? Howfrequently do lenders obtain evaluations for eligible residential real estate transactions inpractice? For what types of eligible residential real estate transactions are lenders likely toobtain evaluations? Please provide data or other evidence to support any comments.

The individual risk profile of each bank will determine the type of residential real estatetransactions for which lenders will require evaluations, or appraisals, for their portfolio loans.For example, most institutions indicate that they typically only require an evaluation for “rate,term refinance with no cash out” transactions and that they (again typically) require an appraisalfor routine “cash-out refinance” transactions. Some indicate that portfolio loans, the proceeds ofwhich are used to finance arm’s length purchase money transactions, (which tend to haverelatively with low risk characteristics) will be a type of transaction for which they merelyrequire an evaluation. Some banks will require evaluations for low-LTV 1st or 2nd lien in-houseHELOCs, but others have indicated that appraisal are required for all HELOC transactions, andfor all real estate-secured loan transactions. When the market conditions and property are wellknown to the bank, the risk profile of the loan will be assessed and an evaluation will be used,assuming such determination fits the applicable risk profile characteristics.

All feedback from ABA members indicates that the determinations of whether appraisals orevaluations will be required for specific types of transactions will be risk-based, and that thepolicies governing such determinations will be approved at the Board level after they aredeveloped.

ABA appreciated the opportunity to comment on this proposal. If you have any questions aboutthe content of this letter, please contact Sharon Whitaker (202) 663-5321.

Sincerely,

Sharon Whitaker
Vice President, Commercial Real Estate Finance
American Bankers Association