On July 19, 2017, the Federal banking agencies issued a joint notice of proposed rulemaking which, if adopted as proposed, would increase the threshold above which financial institutions are required to obtain a certified appraisal for commercial real estate loans from $250,000 to $400,000. This proposal was made after the agencies conducted a review of regulations in early 2017 and solicited comments on various areas where regulatory relief might be necessary. If approved, this would be the first increase in the threshold since 1994 but would only be applicable for commercial real estate loans. The thresholds for consumer real estate loans and commercial business loans where real estate collateral is taken would remain unchanged.

Background

Title XI of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) required each Federal banking agency to adopt appraisal regulations for federally related transactions – defined as a real estate-related financial transaction that is regulated by or engaged in by a Federal banking agency - within its jurisdiction. These regulations were to include the standards for appraisal preparation as well as exemptions from the appraisal requirement. Congress subsequently amended Title XI in 1992 to explicitly permit the agencies to establish a dollar threshold at or below which no appraisal would be required. By regulations adopted in 1994, the Federal banking agencies set $250,000 as this threshold for all real estate-related loans. Commercial business loans for which real estate was taken as collateral but rentals from or the sale of the property are not the primary source of repayment for the loan, however, only require an appraisal if the loan amount exceeds $1 million. Where an appraisal is not required, an evaluation of the value of the real estate must be performed, consistent with safe and sound banking practices, but it need not be done by certified or licensed appraisers. 

In early 2017, the agencies conducted a review of existing regulation to identify potentially outdated or duplicative regulations with the ultimate goal of reducing the regulatory burden on financial institutions. One of the recommendations resulting from that study and report to Congress was the consideration of a possible increase in the appraisal threshold.

Proposed Changes

In the July 19, 2017, Notice of Proposed Rulemaking, the agencies are proposing to increase the appraisal threshold from $250,000 to $400,000 but only for commercial real estate loans. Consumer one-to four-family real estate loans above $250,000 would still require a certified appraisal. The rationale stated by the agencies for declining to increase the consumer threshold was three-fold. First, the agencies believed an increase in this threshold would have little impact as appraisals would still be required by other agencies, such as the Federal Housing Authority, or government-sponsored enterprises, such as Fannie Mae and Freddie Mac. Second, it was believed that in the consumer setting, the purpose of the appraisal was also to protect the consumer by ensuring that the value of the property supports the purchase price and loan amount. Lastly, the agencies cited safety and soundness considerations, noting that in the 2008 financial crisis imprudent mortgage lending had created significant risks for some financial institutions. Interestingly, however, the agencies are also proposing to amend the definition of what constitutes a commercial real estate transaction to include loans to finance the construction of residential property as long as the loan does not also include permanent financing. This would be true even if a consumer was the borrower on the construction loan. The agencies are also not proposing any increase to the $1 million threshold for commercial business loans with real estate collateral.

The agencies have invited comments on the proposal, which may be submitted electronically to an institution’s primary federal regulator.