[Federal Register Volume 82, Number 145 (Monday, July 31, 2017)]
[Proposed Rules]
[Pages 35478-35493]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-15748]


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DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

12 CFR Part 34

[Docket No. OCC-2017-0011]
RIN 1557-AE18

FEDERAL RESERVE SYSTEM

12 CFR Part 225

[Docket No. R-1568; RIN 7100 AE-81]

FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Part 323

RIN 3064 AE-56


Real Estate Appraisals

AGENCY: Office of the Comptroller of the Currency, Treasury (OCC); 
Board of Governors of the Federal Reserve System (Board); and Federal 
Deposit Insurance Corporation (FDIC).

ACTION: Notice of proposed rulemaking and request for comment.

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SUMMARY: The OCC, Board, and FDIC (collectively, the agencies) are 
inviting comment on a proposed rule to amend the agencies' regulations 
requiring appraisals of real estate for certain transactions. The 
proposal would increase the threshold level at or below which 
appraisals would not be required for commercial real estate 
transactions from $250,000 to $400,000. This proposed change to the 
appraisal threshold reflects comments the

[[Page 35479]]

agencies received through the regulatory review process required by the 
Economic Growth and Regulatory Paperwork Reduction Act (EGRPRA) and 
completed in early 2017. For commercial real estate transactions with a 
value at or below the proposed threshold, the amended rule would 
require institutions to obtain an evaluation of the real property 
collateral that is consistent with safe and sound banking practices if 
the institution does not obtain an appraisal by a state certified or 
licensed appraiser.

DATES: Comments must be received by September 29, 2017.

ADDRESSES: Interested parties are encouraged to submit written comments 
jointly to all of the agencies. Commenters should use the title ``Real 
Estate Appraisals'' to facilitate the organization and distribution of 
comments among the agencies. Interested parties are invited to submit 
written comments to:
    Office of the Comptroller of the Currency: Because paper mail in 
the Washington, DC area and at the OCC is subject to delay, commenters 
are encouraged to submit comments by the Federal eRulemaking Portal or 
email, if possible. Please use the title ``Real Estate Appraisals'' to 
facilitate the organization and distribution of the comments. You may 
submit comments by any of the following methods:
     Federal eRulemaking Portal--Regulations.gov: Go to 
www.regulations.gov. Enter ``Docket ID OCC-2017-0011'' in the Search 
Box and click ``Search.'' Click on ``Comment Now'' to submit public 
comments.
     Click on the ``Help'' tab on the Regulations.gov home page 
to get information on using Regulations.gov, including instructions for 
submitting public comments.
     Email: [email protected].
     Mail: Legislative and Regulatory Activities Division, 
Office of the Comptroller of the Currency, 400 7th Street SW., Suite 
3E-218, Mail Stop 9W-11, Washington, DC 20219.
     Fax: (571) 465-4326.
     Hand Delivery/Courier: 400 7th Street SW., Suite 3E-218, 
Mail Stop 9W-11, Washington, DC 20219.
    Instructions: You must include ``OCC'' as the agency name and 
``Docket ID OCC-2017-0011'' in your comment. In general, OCC will enter 
all comments received into the docket and publish them on the 
Regulations.gov Web site without change, including any business or 
personal information that you provide such as name and address 
information, email addresses, or phone numbers. Comments received, 
including attachments and other supporting materials, are part of the 
public record and subject to public disclosure. Do not enclose any 
information in your comment or supporting materials that you consider 
confidential or inappropriate for public disclosure.
    You may review comments and other related materials that pertain to 
this proposed rule by any of the following methods:
     Viewing Comments Electronically: Go to 
www.regulations.gov. Enter ``Docket ID OCC-2017-0011'' in the Search 
box and click ``Search.'' Click on ``Open Docket Folder'' on the right 
side of the screen and then ``Comments.'' Comments can be filtered by 
clicking on ``View All'' and then using the filtering tools on the left 
side of the screen.
     Click on the ``Help'' tab on the Regulations.gov home page 
to get information on using Regulations.gov. Supporting materials may 
be viewed by clicking on ``Open Docket Folder'' and then clicking on 
``Supporting Documents.'' The docket may be viewed after the close of 
the comment period in the same manner as during the comment period.
     Viewing Comments Personally: You may personally inspect 
and photocopy comments at the OCC, 400 7th Street SW., Washington, DC. 
For security reasons, the OCC requires that visitors make an 
appointment to inspect comments. You may do so by calling (202) 649-
6700 or, for persons who are deaf or hard of hearing, TTY, (202) 649-
5597. Upon arrival, visitors will be required to present valid 
government-issued photo identification and to submit to security 
screening in order to inspect and photocopy comments.
    Board of Governors of the Federal Reserve System: You may submit 
comments, identified by [Docket No. R-1568 and RIN 7100 AE-81], by any 
of the following methods:
     Agency Web site: http://www.federalreserve.gov. Follow the 
instructions for submitting comments at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
     Email: [email protected]. Include the 
docket number and RIN number in the subject line of the message.
     Fax: (202) 452-3819 or (202) 452-3102.
     Mail: Address to Ann E. Misback, Secretary, Board of 
Governors of the Federal Reserve System, 20th Street and Constitution 
Avenue NW., Washington, DC 20551.
    All public comments will be made available on the Board's Web site 
at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as 
submitted, unless modified for technical reasons. Accordingly, comments 
will not be edited to remove any identifying or contact information. 
Public comments may also be viewed electronically or in paper form in 
Room 3515, 1801 K Street NW. (between 18th and 19th Streets NW.), 
Washington, DC 20006 between 9:00 a.m. and 5:00 p.m. on weekdays.
    Federal Deposit Insurance Corporation: You may submit comments, 
identified by RIN 3064-AE56, by any of the following methods:
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
     Agency Web site: http://www.FDIC.gov/regulations/laws/federal/propose.html.
     Mail: Robert E. Feldman, Executive Secretary, Attention: 
Comments/Legal ESS, Federal Deposit Insurance Corporation, 550 17th 
Street NW., Washington, DC 20429.
     Hand Delivered/Courier: The guard station at the rear of 
the 550 17th Street Building (located on F Street) on business days 
between 7:00 a.m. and 5:00 p.m.
     Email: [email protected]. Comments submitted must include 
``FDIC'' and ``Real Estate Appraisals.'' Comments received will be 
posted without change to http://www.fdic.gov/regulations/laws/federal/
propose.html including any personal information provided.

FOR FURTHER INFORMATION CONTACT: 
    OCC: G. Kevin Lawton, Appraiser (Real Estate Specialist), (202) 
649-7152, Mitchell E. Plave, Special Counsel, Legislative and 
Regulatory Activities Division, (202) 649-5490, for persons who are 
deaf or hard of hearing, TTY, (202) 649-5597, or Christopher Manthey, 
Special Counsel, or Joanne Phillips, Attorney, Bank Activities and 
Structure Division, (202) 649-5500, Office of the Comptroller of the 
Currency, 400 7th Street SW., Washington, DC 20219.
    Board: Anna Lee Hewko, Associate Director, (202) 530-6260, or 
Carmen Holly, Senior Supervisory Financial Analyst, (202) 973-6122, 
Division of Supervision and Regulation; or Gillian Burgess, Senior 
Counsel, (202) 736-5564, Matthew Suntag, Senior Attorney, (202) 452-
3694, or Kirin Walsh, Attorney, (202) 452-3058, Legal Division, Board 
of Governors of the Federal Reserve System, 20th and C Streets NW., 
Washington, DC 20551.

[[Page 35480]]

    FDIC: Beverlea S. Gardner, Senior Examination Specialist, Division 
of Risk Management and Supervision, at (202) 898-3640, Mark Mellon, 
Counsel, Legal Division, at (202) 898-3884, Kimberly Stock, Counsel, 
Legal Division, at (202) 898-3815, Benjamin K. Gibbs, Counsel, at (202) 
898-6726, or Lauren Whitaker, Senior Attorney, at (202) 898-3872, 
Federal Deposit Insurance Corporation, 550 17th Street NW., Washington, 
DC 20429.

SUPPLEMENTARY INFORMATION:

I. Introduction

A. Background

    Title XI of the Financial Institutions Reform, Recovery, and 
Enforcement Act of 1989 (Title XI) \1\ directs each federal financial 
institutions regulatory agency \2\ to publish appraisal regulations for 
federally related transactions within its jurisdiction. The purpose of 
Title XI is to protect federal financial and public policy interests 
\3\ in real estate-related transactions 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.\4\
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    \1\ 12 U.S.C. 3331 et seq.
    \2\ ``Federal financial institutions regulatory agency'' means 
the Board, the FDIC, the OCC, the National Credit Union Association 
(NCUA), and, formerly, the Office of Thrift Supervision. 12 U.S.C. 
3350(6).
    \3\ 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).
    \4\ 12 U.S.C. 3331.
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    Title XI directs the agencies to prescribe appropriate standards 
for Title XI appraisals under the agencies' respective 
jurisdictions,\5\ including, at a minimum, that Title XI appraisals be: 
(1) Performed in accordance with the Uniform Standards of Professional 
Appraisal Practice (USPAP); \6\ (2) written appraisals, as defined by 
the statute; and (3) subject to appropriate review for compliance with 
USPAP. All federally related transactions must have Title XI 
appraisals.
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    \5\ 12 U.S.C. 3339. The agencies' Title XI appraisal regulations 
apply to transactions entered into by the agencies or by 
institutions regulated by the agencies that are depository 
institutions or bank holding companies or subsidiaries of depository 
institutions or bank holding companies. OCC: 12 CFR part 34, subpart 
C; Board: 12 CFR 225.61(b); 12 CFR part 208, subpart E; FDIC: 12 CFR 
part 323.
    \6\ USPAP is written and interpreted by the Appraisal Standards 
Board of the Appraisal Foundation. Adopted by Congress in 1989, 
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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    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.\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.\8\
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    \7\ 12 U.S.C. 3350(4) (defining ``federally related 
transaction'').
    \8\ 12 U.S.C. 3350(5).
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    The agencies have authority to determine those real estate-related 
financial transactions that do not require the services of a certified 
or licensed appraiser and are therefore exempt from the appraisal 
requirements of Title XI. These 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.\9\
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    \9\ See 59 FR 29482 (June 7, 1994).
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    The agencies have exercised this authority by exempting several 
categories of real estate-related financial transactions from the 
appraisal requirements.\10\ The agencies have determined that these 
categories of transactions do not require appraisals by state certified 
or licensed appraisers in order to protect federal financial and public 
policy interests or to satisfy principles of safe and sound banking.
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    \10\ See OCC: 12 CFR 34.43(a); Board: 12 CFR 225.63(a); FDIC: 12 
CFR 323.3(a).
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    In 1992, Congress amended Title XI, expressly authorizing the 
agencies to establish a threshold level at or below which an appraisal 
by a state certified or licensed appraiser is not required in 
connection with federally related transactions if the agencies 
determine in writing that the threshold does not represent a threat to 
the safety and soundness of financial institutions.\11\ In the Dodd-
Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank 
Act),\12\ Congress amended the threshold provision to require 
concurrence ``from the Bureau of Consumer Financial Protection that 
such threshold level provides reasonable protection for consumers who 
purchase 1-4 unit single-family residences.'' \13\ As noted above, 
transactions at or below the threshold level are exempt from the Title 
XI appraisal requirements and thus are not federally related 
transactions.
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    \11\ Housing and Community Development Act of 1992, Public Law 
102-550, sec. 954, 106 Stat. 3894 (amending 12 U.S.C. 3341).
    \12\ Public Law 111-203, 124 Stat.1376.
    \13\ Dodd-Frank Act, sec. 1473, 124 Stat. 2190 (amending 12 
U.S.C. 3341(b)).
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    Under the current thresholds, which were established by rulemaking 
in 1994,\14\ all real estate-related financial transactions with a 
transaction value \15\ of $250,000 or less, as well as certain real 
estate-secured business loans (qualifying business loans) with a 
transaction value of $1 million or less, do not require appraisals.\16\ 
Qualifying business loans are business loans that are real estate-
related financial transactions and that are not dependent on the sale 
of, or rental income derived from, real estate as the primary source of 
repayment.\17\
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    \14\ See 59 FR 29482 (June 7, 1994). The NCUA promulgated a 
similar rule with similar thresholds in 1995. 60 FR 51889 (October 
4, 1995).
    \15\ For loans and extensions of credit, the transaction value 
is the amount of the loan or extension of credit. For sales, leases, 
purchases, investments in or exchanges of real property, the 
transaction value is the market value of the real property. For the 
pooling of loans or interests in real property for resale or 
purchase, the transaction value is the amount of each such loan or 
the market value of each such real property, respectively. See OCC: 
12 CFR 34.42(m); Board: 12 CFR 225.62(m); FDIC: CFR 323.2(m).
    \16\ See OCC: 12 CFR 34.43(a)(1) and (5); Board: 12 CFR 
225.63(a)(1) and (5); FDIC: 12 CFR 323.3(a)(1) and (5).
    \17\ OCC: 12 CFR 34.43(a)(5); Board: 12 CFR 225.63(a)(5); FDIC: 
12 CFR 323.3(a)(5).
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    For real estate-related financial transactions that are exempt from 
the appraisal requirement because they are within the applicable 
thresholds or qualify for the exemption for certain existing extensions 
of credit,\18\ the

[[Page 35481]]

appraisal regulations require financial institutions to obtain an 
evaluation of the real property collateral that is consistent with safe 
and sound banking practices.\19\ An evaluation should contain 
sufficient information and analysis to support the financial 
institution's decision to engage in the transaction. However, 
evaluations need not be performed in accordance with USPAP or by 
certified or licensed appraisers. The agencies have provided 
supervisory guidance for conducting evaluations in a safe and sound 
manner in the Interagency Appraisal and Evaluation Guidelines 
(Guidelines).\20\
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    \18\ Transactions that involve an existing extension of credit 
at the lending institution are exempt from the Title XI appraisal 
requirements, but are required to have evaluations, provided that 
there has been no obvious and material change in market conditions 
or physical aspects of the property that threatens the adequacy of 
the institution's real estate collateral protection after the 
transaction, even with the advancement of new monies; or there is no 
advancement of new monies, other than funds necessary to cover 
reasonable closing costs. See OCC: 12 CFR 34.43(a)(7) and (b); 
Board: 12 CFR 225.63(a)(7) and (b); FDIC: 12 CFR 323.3(a)(7) and 
(b).
    \19\ See OCC: 12 CFR 34.43(b); Board: 12 CFR 225.63(b); FDIC: 12 
CFR 323.3(b).
    \20\ 75 FR 77450 (Dec. 10, 2010). See also Interagency Advisory 
on the Use of Evaluations in Real Estate-Related Financial 
Transactions, OCC Bulletin 2016-8 (March 4, 2016); Board SR Letter 
16-5 (March 4, 2016); Supervisory Expectations for Evaluations, FDIC 
FIL-16-2016 (March 4, 2016).
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B. The EGRPRA Process

    In early 2017, the agencies completed a review of their regulations 
pursuant to EGRPRA, which requires that, not less than once every 10 
years, the Federal Financial Institutions Examination Council (FFIEC), 
Board, OCC, and FDIC conduct a review of their regulations to identify 
outdated or otherwise unnecessary regulatory requirements imposed on 
insured depository institutions (IDIs).\21\
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    \21\ Public Law 104-208, Div. A, Title II, sec. 2222, 110 Stat. 
3009-414, (1996) (codified at 12 U.S.C. 3311). The FFIEC is an 
interagency body comprised of the Board, OCC, FDIC, NCUA, Bureau of 
Consumer Financial Protection (CFPB) and State Liaison Committee. Of 
these, only the Board, OCC and FDIC are statutorily required to 
undertake the EGRPRA review. The FFIEC does not issue regulations 
that impose burden on financial institutions and therefore its 
regulations were not included in the EGRPRA review. The NCUA is not 
required to participate in the EGRPRA review, but elected to review 
its regulations pursuant to the goals of EGRPRA, as it did during 
the agencies' first EGRPRA review 10 years ago. Accordingly, the 
NCUA participated in the recent EGRPRA review process with the 
Board, OCC and FDIC. The results of the NCUA's review are included 
in Part II of the EGRPRA Report, described below. The CFPB is 
required to review its significant rules and publish a report of its 
review no later than five years after the rules takes effect. See 12 
U.S.C. 5512(d).
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    As part of the EGRPRA review, the agencies received numerous 
comments from bankers, banking trade associations, associations of 
appraisers, and other commenters related to the Title XI appraisal 
regulations. These comments included recommendations to increase the 
thresholds at or below which real estate-related financial transactions 
are exempt from the Title XI appraisal requirements. Some commenters 
noted that the current thresholds have not been adjusted since they 
were established in 1994, even though property values have increased, 
and that the time and cost associated with the appraisal process impose 
an unnecessary burden in the completion of smaller-dollar amount real 
estate-related transactions. Some commenters also argued that the time 
and financial costs attributed to meeting the appraisal requirements at 
the current threshold levels particularly affect banks in rural 
markets. These commenters contended that it is often difficult to find 
state certified and licensed appraisers to complete assignments for 
properties in rural areas.\22\
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    \22\ Earlier this year, the agencies and the NCUA issued an 
advisory on appraiser availability that points to alternatives that 
may help in areas facing a shortage of appraisers. Interagency 
Advisory on the Availability of Appraisers. See OCC Bulletin 2017-19 
(May 31, 2017); Board SR Letter 17-4 (May 31, 2017); FDIC FIL-19-
2017 (May 31, 2017).
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    In March 2017, the agencies submitted a joint EGRPRA report to 
Congress (EGRPRA Report) that identified potential initiatives to 
reduce regulatory burden.\23\ In the EGRPRA Report, the agencies 
addressed comments received concerning the appraisal thresholds and 
stated that the agencies would propose an increase to the threshold for 
commercial real estate transactions from $250,000 to $400,000.\24\ 
Section II of this SUPPLEMENTARY INFORMATION invites comments on this 
proposed increase. The agencies also stated their intention to gather 
more information about the appropriateness of increasing the $1 million 
threshold for qualifying business loans, which is being done through a 
request for comment in Section III of the SUPPLEMENTARY INFORMATION.
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    \23\ FFIEC, Joint Report to Congress: Economic Growth and 
Regulatory Paperwork Reduction Act, (March 2017), (EGRPRA Report), 
available at https://www.ffiec.gov/pdf/2017_FFIEC_EGRPRA_Joint-Report_to_Congress.pdf.
    \24\ The $250,000 threshold in the current Title XI appraisal 
regulations applies, by its terms, to all real estate-related 
financial transactions, whether or not the borrower is a consumer.
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    In the EGRPRA Report, the agencies also addressed whether it would 
be appropriate to increase the current $250,000 threshold for 
transactions secured by residential real estate. The agencies 
determined that it would not be appropriate to increase the threshold 
for this category of transactions at this time based on three 
considerations. First, the agencies observed that any increase in the 
threshold for residential transactions would have a limited impact on 
burden, as appraisals would still be required for the vast majority of 
these transactions pursuant to rules of other federal government 
agencies and the government-sponsored enterprises (GSEs).\25\ As 
reflected in the 2015 Home Mortgage Disclosure Act (HMDA) data,\26\ at 
least 90 percent of residential mortgage loan originations had loan 
amounts at or below the threshold, were eligible for sale to GSEs, or 
were insured by the Federal Housing Administration or the United States 
Department of Veterans Affairs. Those transactions are not subject to 
the Title XI appraisal regulations, but the majority of those 
transactions are subject to the appraisal requirements of other 
government agencies or the GSEs. Therefore, raising the appraisal 
threshold for residential transactions in the Title XI appraisal 
regulations would have limited impact on burden.
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    \25\ Other Federal Government agencies involved in the 
residential mortgage market include the U.S. Department of Housing 
and Urban Development (HUD), the U.S. Department of Veterans 
Affairs, and the Rural Housing Service of the U.S. Department of 
Agriculture. These agencies, along with the GSEs (which are 
regulated by the Federal Housing Finance Agency (FHFA)), have the 
authority to set separate appraisal requirements for loans they 
originate, acquire, or guarantee, and generally require an appraisal 
by a certified or licensed appraiser for residential mortgages 
regardless of the loan amount.
    \26\ See FFIEC, Home Mortgage Disclosure Act, www.ffiec.gov/hmda/.
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    Second, appraisals can provide protection to consumers by helping 
to assure the residential purchaser that the value of the property 
supports the purchase price and the mortgage amount.\27\ The consumer 
protection role of appraisals is reflected in amendments made to Title 
XI and the Truth in Lending Act (TILA) \28\ through the Dodd-Frank Act 
governing the scope of transactions requiring the services of a 
certified or licensed appraiser. These include the addition of the CFPB 
to the group of agencies assigned a role in the appraisal threshold-
setting process for Title XI,\29\ and a new TILA provision requiring 
appraisals for loans involving ``higher-risk mortgages.'' \30\
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    \27\ The agencies posited in the 1994 amendments to the Title XI 
appraisal regulations that the timing of the appraisal may provide 
limited consumer protection. Changes to consumer protection 
regulations since 1994 now ensure that a consumer receives a copy of 
appraisals and other valuations used by a creditor to make a credit 
decision at least three business days before consummation of the 
transaction (for closed-end credit) or account opening (for open-end 
credit). See 12 CFR 1002.14 (for business or consumer credit secured 
by a first lien on a dwelling).
    \28\ 15 U.S.C. 1601 et seq.
    \29\ Dodd-Frank Act, Public Law 111-203, Title XIV, sec. 
1473(a), 124 Stat. 2190 (2010), (codified at 12 U.S.C. 3341(b)), as 
discussed earlier in this SUPPLEMENTARY INFORMATION.
    \30\ ``Higher-risk mortgages'' are certain mortgages with an 
annual percentage rate that exceeds the average prime offer rate by 
a specified percentage. See Dodd-Frank Act, Public Law 111-203, 
Title XIV, sec. 1471, 124 Stat. 2185 (2010), which added section 
129H to TILA, (codified at 15 U.S.C. 1639h). See also Appraisals for 
Higher-Priced Mortgage Loans, 78 FR 78520 (December 26, 2013) 
(interagency rule implementing appraisal requirements for higher-
priced mortgage loans).

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[[Page 35482]]

    During the EGRPRA process, the staff of the agencies conferred with 
the CFPB regarding comments the agencies received supporting an 
increase in the threshold for 1-to-4 family residential transactions. 
CFPB staff shared the view that appraisals can provide consumer 
protection benefits and their concern about potential risks to 
consumers resulting from an expansion of the number of residential 
mortgage transactions that would be exempt from the Title XI appraisal 
requirement.
    Third, the agencies considered safety and soundness concerns that 
could result from a threshold increase for residential transactions. As 
the EGRPRA Report noted, the 2008 financial crisis showed that, like 
other asset classes, imprudent residential mortgage lending can pose 
significant risks to financial institutions.
    For these reasons, the agencies concluded in the EGRPRA Report that 
a change to the current $250,000 threshold for residential mortgage 
loans would not be appropriate at the present time. The agencies are 
interested in comment on whether there are other factors that should be 
considered in evaluating the current threshold for 1-to-4 family 
residential transactions and whether the threshold can and should be 
raised, consistent with consumer protection, safety and soundness, and 
reduction of unnecessary regulatory burden. The agencies will also 
continue to consider possibilities for relieving burden related to 
appraisals for residential mortgage loans, such as coordination of the 
agencies' Title XI appraisal regulations with the practices of HUD, the 
GSEs, and other federal participants in the residential real estate 
market.

II. Revisions to the Title XI Appraisal Regulations

A. Threshold Increase for Commercial Real Estate Transactions

Overview of Proposal
    The agencies propose to amend the Title XI appraisal regulations to 
increase the monetary threshold for commercial real estate transactions 
at or below which a Title XI appraisal would not be required.\31\ The 
proposal would establish a separate threshold for commercial real 
estate transactions of $400,000, which represents an increase from the 
current threshold of $250,000 for all real estate-related financial 
transactions.
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    \31\ The agencies have coordinated with the NCUA in developing 
this proposal. The agencies understand that the NCUA is evaluating 
options to develop a separate proposal to provide comparable relief 
for federally insured credit unions.
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    In considering whether to propose an increased threshold for 
commercial real estate transactions, the agencies considered the 
comments received through the EGRPRA process, and took into account 
whether changes to the threshold would be appropriate to reduce 
regulatory burden consistent with the federal financial and public 
policy interests in real estate-related financial transactions and the 
safety and soundness of regulated institutions.
    As stated, the threshold for exempt transactions was last modified 
in 1994. Given increases in commercial property values since that time, 
the current threshold requires institutions to obtain Title XI 
appraisals on a larger proportion of commercial real estate 
transactions than in 1994. This increase in the number of appraisals 
required may contribute to the increased burden in time and cost 
described by the EGRPRA commenters.
    Based on supervisory experience and available data, the agencies 
propose to increase the threshold for commercial real estate 
transactions, as defined below, to $400,000. This proposal would reduce 
burden for both rural and non-rural institutions and, as discussed 
below, would not pose a threat to the safety and soundness of financial 
institutions. The agencies are consulting with the CFPB regarding this 
proposal and will continue this consultation in developing a final 
rule.
    The agencies propose to make the proposal, if adopted, effective on 
publication of the final rule in the Federal Register.\32\
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    \32\ The Riegle Community Development and Regulatory Improvement 
Act of 1994, Public Law 103-325, 108 Stat. 2163 (Riegle Act) 
provides that rules imposing additional reporting, disclosures, or 
other new requirements on IDIs generally must take effect on the 
first day of a calendar quarter that begins on or after the date on 
which the regulations are published in final form. 12 U.S.C. 
4802(b). As discussed further in the Section IV of the SUPPLEMENTARY 
INFORMATION, the proposed rule does not impose any new requirements 
on IDIs, and, as such, the effective date requirement of the Riegle 
Act is inapplicable. Additionally, the 30-day delayed effective date 
required under the Administrative Procedure Act (APA) is waived 
pursuant to 5 U.S.C. 553(d)(1), which provides a waiver when a 
substantive rule grants or recognizes an exception or relieves a 
restriction. The proposed rule would exempt certain transactions 
from the Title XI appraisal requirements. Consequently, the proposed 
rule meets the requirements for waiver set forth in the APA.
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    Question 1. The agencies invite comment on the proposed effective 
date, including whether this time period is appropriate and, if not, 
why.
Definition of Commercial Real Estate Transaction
    The proposed $400,000 threshold would apply only to transactions 
defined as ``commercial real estate transactions.'' Under the proposed 
definition, a commercial real estate transaction would include any 
``real estate-related financial transaction,'' as defined in the Title 
XI appraisal regulations, excluding any loans secured by a 1-to-4 
family residential property,\33\ but including loans that finance the 
construction of buildings with 1-to-4 dwelling units and that do not 
include permanent financing.\34\ Accordingly, the definition would 
include a loan extended to a consumer to finance the initial 
construction \35\ of the consumer's dwelling, but exclude loans that 
provide both initial construction funding and permanent financing.\36\
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    \33\ A 1-to-4 family residential property is a property 
containing one, two, three, or four individual dwelling units, 
including manufactured homes permanently affixed to the underlying 
land (when deemed to be real property under state law). See OCC: 12 
CFR part 34, subpart D, appendix A; Board: 12 CFR part 208, appendix 
C; FDIC: 12 CFR part 365, subpart A, appendix A.
    \34\ The second part of the definition is intended to clarify, 
not be an exception to, the first part.
    \35\ ``Initial construction'' refers to construction of a new 
dwelling, as opposed to improvements on an existing dwelling. This 
is intended to be consistent with the meaning of this phrase in 
provisions of TILA and its implementing regulation, Regulation Z. 
See, e.g., 15 U.S.C. 1602(x); 12 CFR 1026.2(a)(24).
    \36\ The agencies propose to exclude consumer ``construction-to-
permanent'' loans because these loans are, in effect, for the 
purchase of 1-to-4 family residential property, which would 
otherwise be subject to the $250,000 threshold. This carve-out for 
construction-to-permanent financing would avoid the anomaly of 
requiring appraisals for permanent financing of 1-to-4 family 
residential properties above $250,000 while allowing an evaluation 
for permanent financing (at or below $400,000) that is preceded by a 
construction phrase.
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    The proposed definition would largely capture the following four 
categories of loans secured by real estate in the Consolidated Reports 
of Condition and Income (Call Report) \37\ (FFIEC 031; RCFD 1410), 
namely loans that are: (1) For construction, land development, and 
other land loans; (2) secured by farmland; (3) secured by residential 
properties with five or more units; or (4) secured by nonfarm 
nonresidential properties. However, loans that provide both initial 
construction funding and permanent financing and are reported as 
construction, land development, and other land loans during the 
construction phase would be excluded from the definition.
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    \37\ See https://www.ffiec.gov/pdf/FFIEC_forms/FFIEC031_201703_f.pdf.
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    The definition generally aligns with the categories of transactions 
to which

[[Page 35483]]

agency guidance on commercial real estate lending applies.\38\ The 
agencies are treating construction-only loans to consumers as 
commercial real estate transactions to maintain consistency with other 
regulations and guidance that address construction loans to consumers 
in other contexts.
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    \38\ Real Estate Lending: Interagency Statement on Prudent Risk 
Management for Commercial Real Estate Lending, OCC Bulletin 2015-51 
(December 18, 2015); Statement on Prudent Risk Management for 
Commercial Real Estate Lending, Board SR Letter 15-17 (December 18, 
2015); Statement on Prudent Risk Management for CRE Lending, FDIC 
FIL-62-2015 (December 18, 2015); Guidance on Prudent Loan Workouts, 
OCC Bulletin 2009-32 (October 30, 2009); Policy Statement on Prudent 
Commercial Real Estate Loan Workouts, Board SR Letter 09-07 (October 
30, 2009); Policy Statement on Prudent Commercial Real Estate Loan 
Workouts, FDIC FIL-61-2009 (October 30, 2009); Concentrations in 
Commercial Real Estate Lending, Sound Risk Management Practices, 71 
FR 74580 (December 12, 2006).
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    Supervisory experience indicates that financial institutions 
generally administer construction loans to consumers in a way similar 
to construction loans to businesses. Therefore, subjecting most 
construction loans to the same threshold would minimize regulatory 
burden. This treatment would also be consistent with other mortgage-
related rules, which exempt consumer construction loans from various 
consumer protection requirements.\39\ The agencies believe that 
promoting consistency in definitions and structure across different 
regulations can reduce confusion and regulatory burden for financial 
institutions.
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    \39\ 78 FR 10368 (February 13, 2013) (exempting transactions to 
finance the initial construction of a dwelling from the higher-
priced mortgage appraisal rule); 78 FR 4725 (January 22, 2013) 
(exempting transactions to finance the initial construction of a 
dwelling from the higher-priced mortgage escrow requirements); 78 FR 
6408 (January 30, 2013) (exempting transactions to finance the 
initial construction of a dwelling from the ability-to-repay 
requirements); 78 FR 6856 (January 31, 2013) (exempting transactions 
to finance the initial construction of a dwelling from the high-cost 
mortgage loan term restrictions and disclosure requirements in the 
Home Ownership and Equity Protections Act); 76 FR 79772 (December 
22, 2011) (exempting loans with maturity of 12 months or less for 
the construction primary dwelling from the balloon payment 
limitations).
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    Moreover, including all 1-to-4 family residential construction-only 
loans in the proposed definition of commercial real estate transactions 
is consistent with the agencies' longstanding practice under the Title 
XI appraisal regulations of treating construction loans for 1-to-4 
family residential properties as ``nonresidential'' for purposes of the 
requirement that certified appraisers be used for ``nonresidential'' 
federally related transactions.\40\
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    \40\ See OCC: 12 CFR 34.43(d); Board: 12 CFR 225.63(d)(2); FDIC: 
12 CFR 323.3(d)(2). The agencies have long subjected such loans to 
this requirement, as opposed to permitting licensed appraisers, 
which is the case for typical 1-to-4 family residential properties.
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    As discussed further below, financial institutions report 
information about consumer construction loans aggregated with other 
construction loans through the Call Report.\41\ Thus, much of the 
supervisory information that the agencies receive, including the basis 
for the analysis presented below, aggregates consumer construction 
loans with other construction loans secured by 1-to-4 residential 
properties.
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    \41\ See series RCFD F158 and F159.
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    Question 2. The agencies invite comment on the proposed definition 
of commercial real estate transaction.
    Question 3. The proposed definition of commercial real estate 
transaction would include loans to consumers for the initial 
construction of their dwelling or transactions financing the 
construction of any building with 1-to-4 dwelling units, so long as the 
loan does not include permanent financing, with the effect of 
permitting these loans to qualify for the higher $400,000 threshold. 
The agencies invite comment on the consumer, regulatory burden, and 
other implications of the proposal. What would be the implications of 
not including these loans in the definition, which would leave the 
current $250,000 threshold in place?
    Question 4. The agencies invite comment on the consumer, regulatory 
burden, and other implications of the proposed exclusion of 
construction-to-permanent loans from the definition of commercial real 
estate transaction, meaning that the current $250,000 threshold would 
apply. What would be the implications of including construction-to-
permanent loans in the definition of commercial real estate 
transaction, thus allowing these loans to qualify for the higher 
$400,000 threshold?
Threshold Increase
    The agencies propose to increase the threshold in the Title XI 
appraisal regulations for commercial real estate transactions from 
$250,000 to $400,000. In determining the level of increase, the 
agencies considered the change in prices for commercial real estate 
measured by the Federal Reserve Commercial Real Estate Price Index 
(``CRE Index''). The CRE Index \42\ is a direct measure of the changes 
in commercial real estate prices in the United States.\43\ The CRE 
Index is comprised of data from the CoStar Commercial Repeat Sale 
Index,\44\ which uses repeat sale regression analysis of 1.7 million 
commercial property sales records to compare the change in price for 
the same property between its most recent and previous sale 
transactions.\45\ The data incorporated into this index covers 
properties across the country and across all price ranges,\46\ from 
before 1994 through the present.
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    \42\ The Board publishes data on the flow of funds and levels of 
financial assets and liabilities, by sector and financial 
instrument; full balance sheets, including net worth, for households 
and nonprofit organizations, nonfinancial corporate businesses, and 
nonfinancial noncorporate businesses; Integrated Macroeconomic 
Accounts; and additional supplemental detail. See, Board of 
Governors of the Federal Reserve System, Financial Accounts of the 
United States, https://www.federalreserve.gov/releases/z1/current/default.htm.
    \43\ The CRE Index is quarterly and not seasonally adjusted. See 
Board of Governors of the Federal Reserve System, Series analyzer 
for FL075035503.Q, https://www.federalreserve.gov/apps/fof/SeriesAnalyzer.aspx?s=FL075035503&t=&bc=:FI075035503,FL075035503&suf=Q; Board of Governors of the Federal Reserve System, Series 
Structure, https://www.federalreserve.gov/apps/fof/SeriesStructure.aspx.
    \44\ Board of Governors of the Federal Reserve System, Series 
analyzer for FL075035503.Q, https://www.federalreserve.gov/apps/fof/SeriesAnalyzer.aspx?s=FL075035503&t=&bc=:FI075035503,FL075035503&suf=Q. Data for years prior to 1996 are comprised of a weighted average 
of three appraisal-based commercial property series from National 
Real Estate Investor. Id.
    \45\ CoStar, Federal Reserve's Flow of Funds to Incorporate 
CoStar Group's Price Indices, CoStar (June 4, 2012), http://www.costar.com/News/Article/Federal-Reserves-Flow-of-Funds-To-Incorporate-CoStar-Groups-Price-Indices/138998.
    \46\ See id.
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    Based on a review of the CRE Index, prices for commercial real 
estate have increased since 1994, resulting in an increased proportion 
of commercial real estate transactions exceeding the threshold level 
today compared to 1994. Based on the change in the CRE Index, a 
commercial property that sold for $250,000 as of June 30, 1994 would be 
expected to sell for approximately $830,000 as of December 2016. 
However, as shown below in Table 1, the price of commercial real estate 
can be particularly volatile. For example, the CRE Index indicates a 
commercial property that sold for $250,000 in 1994 would be expected to 
sell for approximately $412,000 in December 2003, $711,000 in December 
2007, and $423,000 in March 2010, when commercial real estate prices 
were at their lowest point in the most recent downturn.
    In proposing to raise the commercial real estate threshold to 
$400,000 the agencies are approximating prices at the low point of the 
most recent cycle, which occurred in 2010. This more conservative 
approach is appropriate because it takes into consideration the

[[Page 35484]]

volatility in actual prices of commercial real estate over time.
    This figure is also consistent with general measures of inflation 
across the economy since 1994, when the current threshold of $250,000 
was set. The agencies considered general inflation indices, including 
the Consumer Price Index (CPI) \47\ and the Personal Consumption 
Expenditures Price Index (PCE).\48\ Certain price changes tracked by 
these general indices indirectly affect commercial real estate values. 
For example, the change in rents for multifamily housing affects the 
value of underlying properties, and the change in prices of consumer 
products affects the value of retail and warehouse space. While these 
indices are not directly based on changes in commercial real estate 
prices, general inflation is a component of the change in commercial 
real estate values.
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    \47\ The CPI, which is published by the Bureau of Labor 
Statistics (BLS), is a measure of the average change over time in 
the prices paid by urban consumers for a market basket of goods and 
services. This series is published monthly and is not seasonally 
adjusted. See U.S. Dept. of Labor Statistics, Consumer Price Index, 
https://www.bls.gov/cpi/.
    \48\ The PCE, which is published by the Bureau of Economic 
Analysis within the U.S. Department of Commerce, is the broadest 
measure of the average change over time of the price of consumer 
goods and services. This series is published monthly and is 
seasonally adjusted. See U.S. Department of Commerce, Bureau of 
Economic Analysis, Consumer Spending, https://www.bea.gov/national/consumer_spending.htm; Federal Reserve Bank of San Francisco, PCE 
Inflation Dispersion, http://www.frbsf.org/economic-research/indicators-data/pce-personal-consumption-expenditure-price-index-pcepi/.
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    As indicated in the table below, when adjusting a $250,000 basket 
of goods under the CPI and PCE from 1994 dollars to 2017 dollars and 
using a lowest point in the cycle adjustment for the prices for 
commercial real estate under the CRE Index, each of the indices 
considered approximately tracks the $400,000 proposed threshold.

 Table 1--Inflation Adjustments of $250,000 at June 30, 1994, for the CRE Index; July 1994 for the CPI Index and
                                         July 1, 1994, for the PCE Index
----------------------------------------------------------------------------------------------------------------
                                                                                                     Adjusted
              Index source:                      Index series:             Dated adjusted to          amount
----------------------------------------------------------------------------------------------------------------
CRE Index...............................  Flow of Funds.............  December 2016.............        $830,674
                                                                      March 2010................         423,659
                                                                      December 2007.............         711,367
                                                                      December 2003.............         412,194
CPI.....................................  All items, US.............  March 2017................         401,166
PCE.....................................  All products..............  March 2017................         373,706
----------------------------------------------------------------------------------------------------------------

    Question 5. The agencies invite comment on the proposed level of 
$400,000 for the threshold at or below which regulated institutions 
would not be required to obtain appraisals for commercial real estate 
transactions.
    Question 6. How would having three threshold levels ($250,000 for 
all transactions, $400,000 for commercial real estate transactions, and 
$1 million for qualifying business loans) rather than two threshold 
levels applicable to Title XI appraisals within the appraisal 
regulations affect burden to applicable institutions?
Safety and Soundness Considerations for Increasing the Threshold for 
Commercial Real Estate Transactions
    Under Title XI, the agencies may set a threshold at or below which 
an appraisal performed by a state certified or licensed appraiser is 
not required if they determine in writing that such a threshold level 
does not pose a threat to the safety and soundness of financial 
institutions.\49\ Analysis of supervisory experience and available data 
indicates that the proposed threshold level of $400,000 for commercial 
real estate transactions would not pose a threat to the safety and 
soundness of financial institutions.
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    \49\ 12 U.S.C. 3341(b).
---------------------------------------------------------------------------

    Many variables, including changing market conditions and various 
loan underwriting practices, may affect an institution's loss 
experience. The $250,000 threshold has been applicable to commercial 
real estate transactions since 1994. Analysis of supervisory 
information concerning losses on commercial real estate transactions 
suggests that faulty valuations of the underlying real estate 
collateral have not been a material cause of losses in connection with 
transactions at or below $250,000. In the last three decades, the 
banking industry suffered two crises in which poorly underwritten and 
administered commercial real estate loans were a key feature in 
elevated levels of loan losses and bank failures.\50\ Supervisory 
experience and a review of material loss reviews \51\ covering those 
decades suggest that larger acquisition, construction, and development 
\52\ transactions were more likely to be troublesome due to the lack of 
appropriate underwriting and administration of issues unique to larger 
properties, such as longer construction periods, extended ``lease up'' 
periods (the time required to lease a building after construction), and 
the more complex nature of the construction of such properties. The 
agencies have no evidence that increasing the appraisal threshold to 
$400,000 for commercial real estate transactions would materially 
increase the risk of loss on such transactions.
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    \50\ See, e.g., FDIC, History of the Eighties--Lessons for the 
Future, Chapter 3: Commercial Real Estate and the Banking Crises of 
the 1980s and Early 1990s, available at https://www.fdic.gov/bank/historical/history/137_165.pdf; FDIC, Office of the Inspector 
General, EVAL-13-002, Comprehensive Study on the Impact of the 
Failure of Insured Depository Institutions 50, Table 6 (January 
2013), available at https://www.fdicig.gov/reports13/13-002EV.pdf.
    \51\ Section 38(k) of the FDI Act, as amended, provides that if 
the Deposit Insurance Fund incurs a ``material loss'' with respect 
to an IDI, the Inspector General of the appropriate regulator (which 
for the OCC is the Inspector General of the Department of the 
Treasury) shall prepare a report to that agency, identifying the 
cause of failure and reviewing the agency's supervision of the 
institution. 12 U.S.C. 1831o(k).
    \52\ Acquisition, development and construction refers to 
transactions that finance construction projects including land, site 
development, and vertical construction. This type of financing is 
typically recorded in the land or construction categories of the 
Call Report.
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Coverage of the Threshold
    The agencies' analysis of available data \53\ related to commercial 
real estate lending at financial institutions suggests that an increase 
in the threshold would not pose a safety and soundness risk to 
financial institutions.
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    \53\ The agencies have examined data from a number of different 
sources to evaluate the impact of the proposed change in the 
appraisal threshold on the safety and soundness of financial 
institutions, as no single data source is sufficient alone to fully 
analyze the impact.
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    In order to consider the potential impact of the proposed threshold

[[Page 35485]]

change on safety and soundness, the agencies considered how the 
coverage of transactions exempted by the threshold would change, both 
in terms of number of transactions and aggregate value. The agencies 
considered three different metrics to estimate the overall coverage of 
the existing threshold and the proposed threshold: The number of 
commercial real estate transactions at or under the threshold as a 
share of the number of all commercial real estate transactions; the 
dollar volume of commercial real estate transactions at or under the 
threshold as a share of the total dollar volume of all commercial real 
estate transactions; and the dollar volume of commercial real estate 
transactions at or under the threshold relative to IDIs' capital and 
the allowance for loan and lease losses, which act as a buffer to 
absorb losses, as explained below. The agencies examined data reported 
on the Call Report \54\ and data from the CoStar Comps database to 
estimate the volume of commercial real estate transactions covered by 
the existing threshold and increased thresholds.
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    \54\ The agencies used data reported on Schedule RC-C and RC-C 
Part II of the Call Report. Schedule RC-C includes the dollar volume 
of all loans secured by real estate, reported in the five 
categories: (1) For construction, land development, and other land 
loans (RCFD F158 and F159); (2) secured by farmland (RCFD 1420); (3) 
secured by residential properties with five or more units (RCFD 
1460); or (4) secured by nonfarm nonresidential properties (RCFD 
F160 and F161); and (5) secured by residential properties with fewer 
than five dwelling units (RCFD 1797, 5367, and 5368). As discussed 
earlier in this SUPPLEMENTARY INFORMATION, the fifth category would 
not be included in the definition of commercial real estate 
transaction. Schedule RC-C Part II, Loans to Small Businesses and 
Farms, includes the number and amount currently outstanding in each 
case reported in groupings by loan amount of loans secured by 
nonfarm, nonresidential real estate (NFNR), with original amounts of 
$1,000,000 or less and loans secured by farmland with original 
amounts of $500,000 or less. Institutions do not report information 
on the size of land and construction or multifamily loans. See 
FFIEC, Consolidated Reports of Condition and Income for a Bank with 
Domestic and Foreign Offices--FFIEC 031, https://www.ffiec.gov/pdf/FFIEC_forms/FFIEC031_201703_f.pdf.
---------------------------------------------------------------------------

Analysis of Call Report Data
    The agencies' analysis of data reported on the Call Report suggests 
that the threshold for commercial real estate transactions could be 
raised without exceeding the risk that these transactions posed when 
the thresholds were established in 1994.
    All FDIC-insured depository institutions report information about 
loans on their balance sheets by category of loan,\55\ but because IDIs 
do not report on loans in all of the categories that would be included 
in the definition of commercial real estate transaction by loan size, 
the agencies used loans secured by NFNR as a proxy for commercial real 
estate transactions in this analysis.\56\ Data on NFNR loans are an 
effective proxy because the vast majority of commercial real estate 
transactions are in the NFNR category. NFNR loans should mirror trends 
across all categories of commercial real estate transactions.
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    \55\ See FDIC, Bank Financial Reports, Consolidated Reports of 
Condition and Income, https://www.fdic.gov/regulations/resources/call/index.html. (``Every national bank, state member bank, insured 
state nonmember bank, and savings association (`institution') is 
required to file a Call Report as of the close of business on the 
last day of each calendar quarter, i.e., the report date. The 
specific reporting requirements depend upon the size of the 
institution, the nature of its activities, and whether it has any 
foreign offices.'').
    \56\ Although farmland is reported by size of loan, such loans 
were also excluded from the analysis, because they comprise a very 
small percent of overall commercial real estate transactions and are 
unlikely to materially affect the analysis. Moreover, the majority 
of farmland loans are considered qualifying business loans and are 
eligible for the higher $1,000,000 threshold.
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    IDIs report information on NFNR loans in the Call Report by three 
separate size categories: (1) Loans with original amounts of $100,000 
or less; (2) loans with original amounts of more than $100,000, but 
$250,000 or less; and (3) loans with original amounts of more than 
$250,000, but $1,000,000 or less. They separately report the dollar 
amount of all NFNR loans, including those over $1,000,000. Using this 
data, the agencies calculated the dollar amount of NFNR loans at or 
under the current $250,000 threshold as a percentage of the dollar 
amount of all NFNR loans.
    According to Call Report data, when the threshold for real-estate 
related financial transactions was raised from $100,000 to $250,000 in 
1994, approximately 18 percent of the dollar volume of all NFNR loans 
reported by IDIs had original loan amounts of $250,000 or less. As of 
the fourth quarter of 2016, approximately 4 percent of the dollar 
volume of such loans had original loan amounts of $250,000 or less. 
This analysis suggests that a larger proportion of commercial real 
estate transactions now require appraisals than when the threshold was 
last raised.
    In contemplating an increase in the threshold for commercial real 
estate transactions, the agencies also used Call Report data to 
consider the transactions exempted from the appraisal threshold as a 
share of equity capital plus the allowance for loan and lease losses 
(the allowance), which is a measure of the potential concentration risk 
that these transactions could pose to the financial well-being of 
institutions as a whole. In 1994, NFNR loans with original loan amounts 
of $250,000 or less represented in the aggregate approximately 14 
percent of IDIs' equity capital plus the allowance. By the fourth 
quarter of 2016, such loans represented only about 3 percent of IDIs' 
equity capital plus the allowance.
    To determine whether concentration risk would be similar for small 
institutions, the agencies separately considered the percentage of NFNR 
transactions exempted from the appraisal threshold as a share of equity 
capital plus the allowance for IDIs with assets of less than $1 
billion. This analysis produced similar results. Approximately 30 
percent of the dollar volume of all NFNR loans in such smaller 
institutions had original loan amounts of $250,000 or less in 1994. By 
the fourth quarter of 2016, however, only about 11 percent of the 
dollar volume of such loans had original loan amounts of $250,000 or 
less. In 1994, the dollar volume of smaller IDIs' NFNR loans with 
original loan amounts of $250,000 or less represented approximately 33 
percent of equity capital plus the allowance. These loans represented 
only about 18 percent of IDIs' equity capital plus the allowance by the 
fourth quarter of 2016.
    Because IDIs report loans on the Call Report aggregated into only 
the three categories mentioned above (less than $100,000, $100,000 to 
$250,000, and $250,000 to $1,000,000), the agencies cannot use Call 
Report data to determine the precise percentage or number of 
transactions that would be exempted by the proposed $400,000 threshold 
or the precise impact of a $400,000 threshold on equity capital plus 
the allowance.
Analysis of CoStar Comps Data
    As described below, the agencies have used the CoStar Comps 
database to estimate this impact. The CoStar Comps database \57\ 
provides sales value data on specific commercial real estate 
transactions. While there are some limitations regarding use of the 
CoStar Comps database, as detailed below, the database contains 
information on sales values for individual transactions, so it can be 
used to estimate the number and

[[Page 35486]]

percentage of transactions that would become exempt under the proposed 
threshold change (i.e., those above $250,000, but less than 
$400,000).\58\
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    \57\ The CoStar Comps database is comprised of sales data 
involving commercial real estate properties. The agencies have 
limited their analysis to arms-length completed sales, where the 
price is provided. The agencies have also limited the sample to 
properties that were financed. Owner-occupied properties and sales 
of coops and condominiums were excluded. The sample was also limited 
to existing buildings. Land includes only raw land defined as land 
held for development or held for investment.
    \58\ This same analysis could not be performed using Call Report 
data because, as described above, transactions reported for purposes 
of the Call Report are either reported in groupings of large value 
ranges or not reported by size at all.
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    The CoStar Comps database contains data for transactions involving 
nonresidential commercial mortgages, multifamily and land. The CoStar 
Comps database is derived from sales data and reflects the total 
transaction amount, as opposed to the loan amount. For purposes of this 
analysis, the agencies included only financed transactions and assumed 
a loan-to-value ratio of 85 percent for nonresidential and multifamily 
commercial mortgages and a loan-to-value ratio of 65 percent for raw 
land transactions \59\ to arrive at an estimated loan amount which 
would be equivalent to the ``transaction value'' under the Title XI 
appraisal regulations. While the CoStar Comps database has some 
limitations for the purposes of evaluating the proposed increase,\60\ 
it provides information that can be used to estimate the dollar volume 
and number of commercial real estate transactions that would 
potentially be exempted by the proposed threshold increase.
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    \59\ The Interagency Guidelines for Real Estate Lending provides 
that institutions' loan-to-value limits should not exceed 85 percent 
for loans secured by improved property and 65 percent for loans 
secured by raw land. See OCC: 12 CFR part 34, subpart D, appendix A; 
Board: 12 CFR part 208, appendix C; FDIC: 12 CFR part 365, subpart 
A, appendix A.
    \60\ For example, the database tends to underrepresent sales of 
smaller properties and transactions in rural markets, and includes 
transactions that are not financed by depository institutions.
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    An analysis of the CoStar Comps database suggests that increasing 
the threshold to $400,000 would significantly increase the number of 
commercial real estate transactions exempted from the Title XI 
appraisal requirements, but the portion of the total dollar size of 
commercial real estate transactions that would remain exempted by the 
threshold would be minimal. The percentage of commercial properties 
with loans in the CoStar Comps database that would be exempted from the 
Title XI appraisal regulations by the threshold would increase from 17 
percent to 28 percent if the threshold were raised from $250,000 to 
$400,000. However, the total dollar volume of loans for commercial 
properties in the CoStar Comps database would only increase from 0.7 
percent to 1.5 percent.
    Exempting an additional 11 percent of commercial real estate 
transactions would provide burden relief as sought by some of the 
EGRPRA commenters. The 0.8 percentage point increase in the dollar 
volume of commercial real estate transactions that the CoStar data 
suggests would be exempted from the appraisal requirements under the 
proposed threshold is unlikely to expose financial institutions to 
increased safety and soundness risk.
Analysis of Charge-Off Rates
    In addition to assessing changes in the magnitude of transactions 
covered by the appraisal threshold, the agencies assessed trends in the 
loss rate experience of commercial real estate transactions.
    While the agencies do not regularly collect data on rates of loss 
for commercial real estate by the size of loans, they do collect net 
charge-off \61\ data for commercial real estate loans on the Call 
Report. The agencies considered aggregate net charge-off rates for 
commercial real estate loans in determining whether the threshold would 
pose a threat to the safety and soundness of financial 
institutions.\62\
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    \61\ Net charge-offs are charge-offs minus recoveries.
    \62\ Net charge-offs represent losses to financial institutions, 
which, in the aggregate, can pose a threat to safety and soundness.
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    In order to evaluate the impact of commercial real estate lending 
on the safety and soundness of the banking system generally, the 
agencies compared peak net charge-off rates for two periods: 1991 to 
1994 and 2007 to 2012. These periods represent two distress cycles when 
aggregate net charge-offs rose to their highest levels. The agencies 
separately examined charge-off rates on lending for all commercial real 
estate categories covering construction, multifamily, nonfarm, 
nonresidential, and farmland. In order to evaluate whether commercial 
real estate lending may have a disparate impact on the safety and 
soundness of IDIs of varying sizes, the agencies examined peak charge-
off rates on loans for all IDIs, IDIs under one billion dollars in 
total assets, IDIs with total assets between one billion dollars and 
ten billion dollars, and IDIs with total assets of more than ten 
billion dollars.
    The analysis showed that aggregate peak net charge-off rates for 
the most recent cycle were generally no worse than those recorded for 
the prior cycle, with the exception of construction loans. Moreover, 
aggregate commercial real estate loan loss rates for banks less than $1 
billion (which would reasonably be expected to have a larger proportion 
of small loans, given their lower legal lending limits due to their 
smaller size) were lower than for larger banks as a group.
    This data suggests that the loss experience associated with 
commercial real estate loans for the banking system as a whole has 
stayed at a relatively consistent rate through multiple credit cycles. 
Thus, banking system safety and soundness concerns associated with the 
commercial real estate loan loss rates have not increased. However, 
commercial real estate loan charge-off rates during periods of economic 
stress have and will continue to vary across individual IDIs based on 
location, collateral, quality of underwriting and risk management, and 
other factors. Thus commercial real estate loan concentration risk at 
individual institutions remains a focus for the banking agencies.
    Question 7. The agencies invite comment on the safety and soundness 
impact of the proposed $400,000 threshold for commercial real estate 
transactions.
    Question 8. The agencies invite comment on the data used in this 
analysis, and what alternative sources of data would be appropriate for 
this analysis.

B. Use of Evaluations

    The Title XI appraisal regulations require regulated institutions 
to obtain evaluations for three categories of real estate-related 
financial transactions that the agencies have determined do not require 
a Title XI appraisal, including real-estate related financial 
transactions at or below the $250,000 threshold and qualifying business 
loans at or below the $1,000,000 threshold. Similarly, the agencies 
propose to require that institutions entering into commercial real 
estate transactions at or below the proposed $400,000 threshold obtain 
evaluations that are consistent with safe and sound banking practices 
for such transactions.\63\
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    \63\ When a below-threshold transaction also qualifies for an 
exemption from the appraisal requirements for a reason other than 
being below one of the thresholds or a qualifying existing extension 
of credit, no evaluation is required.
---------------------------------------------------------------------------

    An evaluation provides a general estimate of the value of real 
estate, but is not subject to the same requirements as a Title XI 
appraisal. An evaluation should provide appropriate information to 
enable the institution to make a prudent decision regarding the 
transaction. Through the Guidelines, the agencies have provided 
guidance to regulated institutions on their expectations regarding when 
and how evaluations should be used. The

[[Page 35487]]

Guidelines describe the transactions for which financial institutions 
are required to obtain an evaluation, and recommend that institutions 
develop policies and procedures for identifying when to obtain 
appraisals for such transactions.
    Institutions should conduct evaluations consistent with the 
provisions in the Guidelines.\64\ As described in the Guidelines, 
evaluations should 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.\65\ Evaluations may be completed by a 
bank employee or by a third party, as explained by the Interagency 
Advisory on Use of Evaluations in Real Estate-Related Financial 
Transactions.\66\ Guidance on achieving independence in the collateral 
valuation program can be found in the Guidelines, among other 
sources.\67\ The Guidelines state that an evaluation should provide an 
estimate of the property's market value or sufficient information and 
analysis to support the credit decision. The Guidelines also describe 
the minimum content that an evaluation should contain.
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    \64\ Guidelines at 75 FR 77461.
    \65\ Interagency Appraisal and Evaluations Guidelines, 75 FR 
77450, at 77458 (December 10, 2010).
    \66\ Interagency Advisory on Use of Evaluations in Real Estate-
Related Financial Transactions, OCC Bulletin 2016-8 (March 4, 2016); 
Board SR Letter 16-05 (March 4, 2016); Supervisory Expectations for 
Evaluations, FDIC FIL-16-2016 (March 4, 2016).
    \67\ Guidelines at 75 FR 77457-58. See also Valuation 
Independence rules in Regulation Z, which apply to all creditors and 
cover extensions of consumer credit that are or will be secured by a 
consumer's principal dwelling: Board: 12 CFR 226.42; CFPB: 12 CFR 
1026.42.
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    In evaluating this proposal, the agencies considered the impact to 
the financial system of the proposal, and specifically the impact to 
financial institutions and borrowers of obtaining evaluations instead 
of Title XI appraisals. Based on information from industry 
participants, the cost of third-party evaluations of commercial real 
estate generally ranges from $500 to over $1,500, whereas the cost of 
appraisals of such properties generally ranges from $1,000 to over 
$3,000. Commercial real estate transactions with transaction values 
above $250,000 but at or below $400,000 (affected transactions), are 
likely to involve smaller and less complex properties, and appraisals 
and evaluations on such properties would likely be at the lower end of 
the cost range. This third-party pricing information suggests a savings 
of several hundred dollars per affected transaction.
    The agencies also considered the costs in terms of time to obtain 
and process appraisals and evaluations. There may be less delay in 
finding appropriate personnel to perform an evaluation than to perform 
a Title XI appraisal, particularly in rural areas. As described in the 
Guidelines, financial institutions should review the property valuation 
prior to entering into the transaction. Financial institutions require 
less time to review evaluations than to review appraisals, because 
evaluations contain less detailed information. The agencies estimate 
that, on average, the review process for an appraisal would take 
approximately forty minutes and the review process for an evaluation 
would take approximately ten minutes. Thus, for affected transactions, 
the proposed rule would alleviate approximately thirty minutes of 
employee time per transaction, in addition to the reduced delay and the 
cost savings of obtaining an evaluation instead of an appraisal.
    In considering the aggregate effect of this proposal, the agencies 
considered the number of affected transactions. As previously 
discussed, the agencies estimate that the number of commercial real 
estate transactions that would be exempted by the threshold is expected 
to increase by approximately 11 percent under the proposed rule. Thus, 
while the precise number of affected transactions and the precise cost 
reduction per transaction cannot be determined, the proposed rule is 
expected to lead to significant cost savings for institutions that 
engage in commercial real estate lending.
    Question 9. The agencies invite comment on the proposed requirement 
that regulated institutions obtain evaluations for commercial real 
estate transactions at or below the $400,000 threshold.
    Question 10. What type of additional guidance, if any, do 
institutions need to support the increased use of evaluations?
    Question 11. To what extent does the use of evaluations reduce 
burden and cost over the use of appraisals? To what extent are 
evaluations currently done by in-house staff versus outsourced to 
appraisers or other qualified professionals?

C. State Certified Appraiser Required

    The current Title XI appraisal regulations, require that ``[a]ll 
federally related transactions having a transaction value of $250,000 
or more, other than those involving appraisals of 1-to-4 family 
residential properties, shall require an appraisal prepared by a State 
certified appraiser.'' \68\ In order to make this paragraph consistent 
with the other proposed changes to the appraisal regulations, the 
agencies are proposing a change to its wording to introduce the 
$400,000 threshold and use the term ``commercial real estate 
transaction.'' The amendment to this provision would be a technical 
change that would not alter any substantive requirement.
---------------------------------------------------------------------------

    \68\ OCC: 12 CFR 34.43(d); Board: 12 CFR 225.63(d)(2); FDIC: 12 
CFR 323.3(d)(2).
---------------------------------------------------------------------------

III. Appraisal Threshold for Qualifying Business Loans

    As noted above, in the 2017 EGRPRA Report to Congress, the agencies 
stated their intention to gather more information about the 
appropriateness of increasing the $1 million threshold for qualifying 
business loans. The agencies are not proposing an increase in the 
business loan threshold at this time, but the agencies invite comment 
on the following questions concerning the qualifying business loan 
exemption:
    Question 12. The agencies invite comment and supporting data on the 
appropriateness of raising the current $1,000,000 threshold for 
qualifying business loans and the associated implications for safety 
and soundness.
    Question 13. What unique risks do institutions associate with 
qualifying business loans?
    Question 14. What percentage of total real estate lending at 
financial institutions, by number of loans and dollar volume of 
lending, are qualifying business loans?
    Question 15. What is the average size of a qualifying business loan 
at financial institutions? What are the incidences of default on 
qualifying business loans compared to other commercial real estate 
transactions that institutions have observed over time?
    Question 16. The agencies invite comment on the clarity of the 
application of the current threshold for qualifying business loans, and 
on any difficulty that financial institutions have experienced in 
interpreting the limitation on source of repayment.

IV. Request for Comments

    The Agencies invite comment on all aspects of the proposed 
rulemaking.
    Question 17. As discussed earlier, the agencies have articulated 
several bases for declining to propose an increase in the residential 
threshold. The agencies request comment on whether there are other 
factors that should be considered in evaluating the current appraisal 
threshold for 1-to-4 family residential properties.

[[Page 35488]]

V. Regulatory Analysis

A. Regulatory Flexibility Act

    OCC: The Regulatory Flexibility Act (RFA), 5 U.S.C. 601 et seq., 
generally requires that, in connection with a rulemaking, an agency 
prepare and make available for public comment a regulatory flexibility 
analysis that describes the impact of the rule on small entities. 
However, the regulatory flexibility analysis otherwise required under 
the RFA is not required if an agency certifies that the rule will not 
have a significant economic impact on a substantial number of small 
entities (defined in regulations promulgated by the Small Business 
Administration (SBA) to include commercial banks and savings 
institutions, and trust companies, with assets of $550 million or less 
and $38.5 million or less, respectively) and publishes its 
certification and a brief explanatory statement in the Federal Register 
together with the rule.
    The OCC currently supervises approximately 956 small entities. Data 
currently available to the OCC are not sufficient to estimate how many 
OCC-supervised small entities make CRE loans in amounts that fall 
between the current and proposed thresholds. Therefore, we cannot 
estimate how many small entities may be affected by the increase 
threshold. However, because the proposal does not contain any new 
recordkeeping, reporting, or compliance requirements, the proposal will 
not impose costs on any OCC-supervised institutions. Accordingly, the 
OCC certifies that the proposed rule will not have a significant 
economic impact on a substantial number of small entities.
    Board: The RFA,\69\ requires an agency either to provide an initial 
regulatory flexibility analysis with a proposed rule or certify that 
the proposed rule will not have a significant economic impact on a 
substantial number of small entities. The proposed threshold increase 
applies to certain IDIs and non-bank entities that make loans secured 
by commercial real estate.\70\ The SBA establishes size standards that 
define which entities are small businesses for purposes of the RFA.\71\ 
The size standard to be considered a small business is: $550 million or 
less in assets for banks and other depository institutions; and $38.5 
million or less in annual revenues for the majority of non-bank 
entities that are likely to be subject to the proposed regulation.\72\ 
Based on the Board's analysis, and for the reasons stated below, the 
proposed rule may have a significant positive economic impact on a 
substantial number of small entities. Accordingly, the Board is 
publishing an initial regulatory flexibility analysis. The Board will 
conduct a final regulatory flexibility analysis after consideration of 
comments received during the public comment period.
---------------------------------------------------------------------------

    \69\ 5 U.S.C. 601 et seq.
    \70\ For its RFA analysis, the Board considered all Board-
regulated creditors to which the proposed rule would apply.
    \71\ U.S. SBA, Table of Small Business Size Standards Matched to 
North American Industry Classification System Codes, available at 
https://www.sba.gov/sites/default/files/files/Size_Standards_Table.pdf.
    \72\ Asset size and annual revenues are calculated according to 
SBA regulations. See 13 CFR 121 et seq.
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    The Board requests public comment on all aspects of this analysis.
1. Reasons for the Proposed Rule
    In response to comments received in the EGRPRA process, the 
agencies are proposing to increase the threshold from $250,000 to 
$400,000 at or below which a Title XI appraisal is not required for 
commercial real estate transactions. Because commercial real estate 
prices have increased since 1994, when the current $250,000 threshold 
was established, a smaller percentage of commercial real estate 
transactions are currently exempted from the Title XI appraisal 
requirements than when the threshold was established. This threshold 
adjustment is intended to reduce the regulatory burden associated with 
extending credit secured by commercial real estate in a manner that is 
consistent with the safety and soundness of financial institutions.
2. Statement of Objectives and Legal Basis
    As discussed above, the agencies' objective in proposing this 
threshold increase is to reduce the regulatory burden associated with 
extending credit in a safe and sound manner by reducing the number of 
commercial real estate transactions that are subject to the Title XI 
appraisal requirements.
    Title XI explicitly authorizes the agencies to establish a 
threshold level at or below which a Title XI appraisal is not required 
if the agencies determine in writing that the threshold does not 
represent a threat to the safety and soundness of financial 
institutions and receive concurrence from the CFPB that such threshold 
level provides reasonable protection for consumers who purchase 1-to-4 
unit single-family homes.\73\ Based on available data and supervisory 
experience, the agencies tailored the size and scope of the proposed 
threshold increase to ensure that it would not pose a threat to the 
safety and soundness of financial institutions or erode protections for 
consumers who purchase 1-to-4 unit single-family homes.
---------------------------------------------------------------------------

    \73\ 12 U.S.C. 3341(b).
---------------------------------------------------------------------------

    The Board's proposed rule would apply to state chartered banks that 
are members of the Federal Reserve System (state member banks), as well 
as bank holding companies and nonbank subsidiaries of bank holding 
companies that engage in lending. There are approximately 601 state 
member banks and 35 nonbank lenders regulated by the Board that meet 
the SBA definition of small entities and would be subject to the 
proposed rule. Data currently available to the Board do not allow for a 
precise estimate of the number of small entities that would be affected 
by the proposed rule because the number of small entities that will 
engage in commercial real estate transactions within the proposed 
threshold is unknown.
3. Projected Reporting, Recordkeeping and Other Compliance Requirements
    The proposed rule would reduce reporting, recordkeeping, and other 
compliance requirements for small entities. For transactions at or 
below the proposed threshold, regulated institutions would be given the 
option to obtain an evaluation of the property instead of an appraisal. 
Unlike appraisals, evaluations may be performed by a lender's own 
employees and are not required to comply with USPAP. As discussed in 
detail in Section II.B of the SUPPLEMENTARY INFORMATION, the cost of 
obtaining appraisals and evaluations can vary widely depending on the 
size and complexity of the property, the party performing the 
valuation, and market conditions where the property is located. 
Additionally, the costs of obtaining appraisals and evaluations may be 
passed on to borrowers. Because of this variation in cost and practice, 
it is not possible to precisely determine the cost savings that 
regulated institutions will experience due to the decreased cost of 
obtaining an evaluation rather than an appraisal. However, based on 
information available to the Board, it is likely that small entities 
and borrowers engaging in commercial real estate transactions could 
experience significant cost reductions.
    In addition to costing less to obtain than appraisals, evaluations 
also require less time to review than appraisals because they contain 
less detailed information. As discussed further in Section II.B of the 
SUPPLEMENTARY

[[Page 35489]]

INFORMATION, an appraisal takes approximately forty minutes to review 
and an evaluation takes approximately ten minutes to review. Thus, the 
proposed rule would alleviate approximately thirty minutes of employee 
time per affected transaction for which the lender obtains an 
evaluation instead of an appraisal.
    As previously discussed, the Board estimates that the percentage of 
commercial real estate transactions that would be exempted by the 
threshold is expected to increase by approximately 11 percent under the 
proposed rule. The Board expects this percentage to be higher for small 
entities, because a higher percentage of their loan portfolios are 
likely to be made up of small, below-threshold loans than those of 
larger entities. Thus, while the precise number of transactions that 
will be affected and the precise cost reduction per transaction cannot 
be determined, the proposed rule is expected to have a significant 
positive economic impact on small entities that engage in commercial 
real estate lending.
4. Identification of Duplicative, Overlapping, or Conflicting Federal 
Regulations
    The Board has not identified any federal statutes or regulations 
that would duplicate, overlap, or conflict with the proposed revisions.
5. Discussion of Significant Alternatives
    The agencies considered additional burden-reducing measures, such 
as increasing the commercial threshold to a higher dollar amount and 
increasing the residential and business loan thresholds, but have not 
proposed such measures at this time for the safety and soundness and 
consumer protection reasons previously discussed. For transactions 
exempted from the Title XI appraisal requirements, the proposed rule 
would require regulated institutions to get an evaluation if they do 
not get an appraisal. The agencies believe this requirement is 
necessary to protect the safety and soundness of financial 
institutions, which is a legal prerequisite to the establishment of any 
threshold. The Board is not aware of any other significant alternatives 
that would reduce burden on small entities without sacrificing the 
safety and soundness of financial institutions or consumer protections.
    FDIC: The 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 describing the 
impact of the proposed rule on small entities.\74\ 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. The SBA has defined ``small 
entities'' to include banking organizations with total assets less than 
or equal to $550 million.\75\ For the reasons described below and 
pursuant to section 605(b) of the RFA, the FDIC certifies that the 
final rule will not have a significant economic impact on a substantial 
number of small entities.
---------------------------------------------------------------------------

    \74\ 5 U.S.C. 601 et seq.
    \75\ 13 CFR 121.201 (as amended, effective December 2, 2014).
---------------------------------------------------------------------------

    The FDIC supervises 3,744 depository institutions,\76\ of which, 
3,028 are defined as small banking entities by the terms of the 
RFA.\77\ According to the Call Report, 3,010 small entities reported 
holding some volume of real estate related financial transactions that 
meet the proposed rule's definition of a commercial real estate 
transaction.\78\ Therefore, 3,010 small entities could be affected by 
the proposed rule.
---------------------------------------------------------------------------

    \76\ FDIC-supervised institutions are set forth in 12 U.S.C. 
1813(q)(2).
    \77\ FDIC Call Report, March 31, 2017.
    \78\ The proposed definition of ``Commercial Real Estate 
Transaction'' would largely capture the following four categories of 
loans secured by real estate in the Call Report (FFIEC 031; RCFD 
1410), namely loans that are: (1) For construction, land 
development, and other land loans; (2) secured by farmland; (3) 
secured by residential properties with five or more units; or (4) 
secured by nonfarm nonresidential properties. However, loans that 
provide both initial construction funding and permanent financing 
and are reported as construction, land development, and other land 
loans during the construction phase would be excluded from the 
definition.
---------------------------------------------------------------------------

    The proposed rule will raise the appraisal threshold for commercial 
real estate transactions from $250,000 to $400,000. Any commercial real 
estate transaction with a value in excess of the $400,000 threshold is 
required to have an appraisal by a state licensed or state certified 
appraiser. Any commercial real estate transaction at or below the 
$400,000 threshold requires an evaluation.
    To estimate the dollar volume of commercial real estate 
transactions the proposed change could potentially affect, the FDIC 
used information on the dollar volume and number of loans in the Call 
Report for small institutions from two categories of loans included in 
the definition of a commercial real estate transaction. The Call Report 
data reflect that 4.55 percent of the dollar volume of nonfarm, 
nonresidential loans secured by real estate has an original loan amount 
between $1 and $250,000, while 11.81 percent have an original loan 
amount between $250,000 and $1,000,000. The Call Report data also 
reflects that 8.85 percent of the dollar volume of agricultural loans 
secured by farmland has an original loan amount between $1 and 
$250,000, while 7.49 percent have an original loan amount between 
$250,000 and $500,000.\79\ Assuming that the original amount of 
nonfarm, nonresidential loans secured by real estate and the original 
amount of agricultural loans secured by farmland are normally 
distributed, the FDIC estimates that between 6.08 percent and 12.95 
percent of loan volume is at or below the $400,000 threshold for these 
categories, respectively.
---------------------------------------------------------------------------

    \79\ FDIC Call Report data, March 31, 2017.
---------------------------------------------------------------------------

    Therefore, raising the appraisal threshold from $250,000 to 
$400,000 for commercial real estate transactions could affect an 
estimated 1.53 percent to 4.10 percent of the dollar volume of all 
commercial real estate transactions originated each year. This estimate 
assumes that the distribution of loans for the other loan categories 
within the proposed definition of commercial real estate transactions 
is similar to those loans secured by nonfarm, nonresidential properties 
or farmland.
    The proposed rule is likely to reduce valuation review costs for 
covered institutions. The FDIC estimates that it takes a loan officer 
an average of 40 minutes to review an appraisal to ensure that it meets 
that standards set forth in Title XI, but 10 minutes to perform a 
similar review of an evaluation, which does not need to meet the Title 
XI standards for appraisals. The proposed rule increases the number of 
commercial real estate transactions that would require an evaluation by 
raising the appraisal threshold from $250,000 to $400,000. Assuming 
that 15 percent of the outstanding balance of commercial real estate 
transactions for small entities gets renewed or replaced by new 
originations each year, the FDIC estimates that small entities 
originate $31.9 billion in new commercial real estate transactions each 
year. Assuming that 1.53 percent to 4.10 percent of annual originations 
represent loans with an origination amount greater than $250,000 but 
not more than $400,000, the FDIC estimates that the proposed rule will 
affect approximately 1,504 to 4,040 loans per year,\80\ or 0.5 percent 
to 1.33 percent of loans on average for small FDIC-supervised 
institutions.

[[Page 35490]]

Therefore, based on an estimated hourly rate, the proposed rule would 
reduce loan review costs for small entities by $51,625 to $138,673, on 
average, each year.\81\ If lenders opt to not utilize an evaluation and 
require an appraisal on commercial real estate transaction greater than 
$250,000 but not more than $400,000 any reduction in costs would be 
smaller.
---------------------------------------------------------------------------

    \80\ Multiplying $31.9 billion by 1.53 percent then dividing the 
product by an average loan amount of $325,000 equals 1,504 loans and 
multiplying $31.9 billion by 4.10 percent then dividing the product 
by an average loan amount of $325,000 equals 4,040 loans.
    \81\ The FDIC estimates that the average hourly compensation for 
a loan officer is $68.65 an hour. The hourly compensation estimate 
is based on published compensation rates for Credit Counselors and 
Loan Officers ($43.40). The estimate includes the March 2017 75th 
percentile hourly wage rate reported by the BLS, National Industry-
Specific Occupational Employment and Wage Estimates. The reported 
hourly wage rate is adjusted for changes in the CPI-U between May 
2016 and March 2017 (1.83 percent) and grossed up by 155.3 percent 
to account for non-monetary compensation as reported by the March 
2017 Employer Costs for Employee Compensation Data. Based on this 
estimate, loan review costs would decline between $51,625 (1,504 
loans multiplied by 30 minutes and multiplied by $68.65 per hour) 
and $138,673 (4,040 loans multiplied by 30 minutes and multiplied by 
$68.65 per hour).
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    Any associated recordkeeping costs are unlikely to change for small 
FDIC-supervised entities as the amount of labor required to satisfy 
documentation requirements for an evaluation or an appraisal is 
estimated to be the same at about five minutes for either an appraisal 
or evaluation.
    The proposed rule also is likely to reduce the loan origination 
costs associated with real estate appraisals for commercial real estate 
borrowers. The FDIC assumes that these costs are always paid by the 
borrower for this analysis. Anecdotal information from industry 
participants indicates that a commercial real estate appraisal costs 
between $1,000 to over $3,000, or about $2,000 on average, and a 
commercial real estate evaluation costs between $500 to over $1,500, or 
about $1,000 on average. Based on the prior assumptions, the FDIC 
estimates that the proposed rule will affect approximately 1,504 to 
4,040 transactions per year,\82\ or 0.5 percent to 1.33 percent of 
loans on average for small FDIC-supervised institutions. Therefore, the 
proposed rule could reduce loan origination costs for borrowers doing 
business with small entities by $1.5 to $4.0 million on average per 
year.\83\
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    \82\ Multiplying $31.9 billion by 1.53 percent then dividing the 
product by an average loan amount of $325,000 equals 1,504 loans and 
multiplying $31.9 billion by 4.10 percent then dividing the product 
by an average loan amount of $325,000 equals 4,040 loans.
    \83\ Multiplying 1,504 loans by $1,000 savings equals $1.5 
million and multiplying 4,040 loans by $1,000 savings equals $4.0 
million.
---------------------------------------------------------------------------

    By lowering valuation costs on commercial real estate transactions 
greater than $250,000 but less than or equal to $400,000 for small 
FDIC-supervised institutions, the proposed rule could marginally 
increase lending activity. As discussed previously, commenters in the 
EGRPRA review noted that appraisals can be costly and time consuming. 
By enabling small FDIC-supervised institutions to utilize evaluations 
for more commercial real estate transactions, the proposed rule will 
reduce transaction costs. The reduction in loan origination fees could 
marginally increase commercial real estate lending activity for loans 
with an origination value greater than $250,000 and not more than 
$400,000.

B. Paperwork Reduction Act

    Certain provisions of the proposed rule contain ``collection of 
information'' requirements within the meaning of the Paperwork 
Reduction Act (PRA) of 1995.\84\ In accordance with the requirements of 
the PRA, the agencies may not conduct or sponsor, and the respondent is 
not required to respond to, an information collection unless it 
displays a currently-valid Office of Management and Budget (OMB) 
control number. The OMB control number for the OCC is 1557-0190, the 
Board is 7100-0250, and the FDIC is 3064-0103, which would be extended, 
without revision. The agencies have concluded that the proposed rule 
does not contain any changes to the current information collections, 
however, the agencies are revising the methodology for calculating the 
burden estimates. The information collection requirements contained in 
this proposed rulemaking have been submitted by the OCC and FDIC to OMB 
for review and approval under section 3507(d) of the PRA \85\ and 
section 1320.11 of the OMB's implementing regulations.\86\ The Board 
reviewed the proposed rule under the authority delegated to the Board 
by OMB.
---------------------------------------------------------------------------

    \84\ 44 U.S.C. 3501-3521.
    \85\ 44 U.S.C. 3507(d).
    \86\ 5 CFR 1320.
---------------------------------------------------------------------------

Proposed Information Collection
    Title of Information Collection: Recordkeeping Requirements 
Associated with Real Estate Appraisals and Evaluations.
    Frequency of Response: Event generated.
    Affected Public: Businesses or other for-profit.
    Respondents:
    OCC: National banks, Federal savings associations.
    Board: State member banks (SMBs) and nonbank subsidiaries of bank 
holding companies (BHCs).
    FDIC: Insured state nonmember banks and state savings associations, 
insured state branches of foreign banks.
    General Description of Report: For federally related transactions, 
Title XI requires regulated institutions \87\ to obtain appraisals 
prepared in accordance with USPAP promulgated by the Appraisal 
Standards Board of the Appraisal Foundation. Generally, these standards 
include the methods and techniques used to estimate the market value of 
a property as well as the requirements for reporting such analysis and 
a market value conclusion in the appraisal. Regulated institutions are 
expected to maintain records that demonstrate that appraisals used in 
their real estate-related lending activities comply with these 
regulatory requirements. For commercial real estate transactions 
exempted from the Title XI appraisal requirements by the proposed rule, 
regulated institutions would still be required to obtain an evaluation 
to justify the transaction amount. The agencies estimate that the 
recordkeeping burden associated with evaluations would be the same as 
the recordkeeping burden associated with appraisals for such 
transactions.
---------------------------------------------------------------------------

    \87\ National banks, federal savings associations, SMBs and 
nonbank subsidiaries of BHCs, insured state nonmember banks and 
state savings associations, and insured state branches of foreign 
banks.
---------------------------------------------------------------------------

    Current Action: The threshold change in the proposed rule will 
result in lenders being able to use evaluations instead of appraisals 
for certain transactions. It is estimated that the time required to 
document the review of an appraisal or an evaluation is the same. While 
the rulemaking described in this proposed rule would not change the 
amount of time that institutions spend complying with the Title XI 
appraisal regulation, the agencies are using a more accurate 
methodology for calculating the burden of the information collections 
based on the experience of the agencies. Thus, the PRA burden estimates 
shown here are different from those previously reported. The agencies 
are (1) using the average number of loans per institution as the 
frequency and (2) using 5 minutes as the estimated time per response 
for the appraisals or evaluations.
PRA Burden Estimates
    Estimated average time per response: 5 minutes.
OCC
    Number of Respondents: 1,284.
    Annual Frequency: 1,488.
    Total Estimated Annual Burden: 159,216 hours.

[[Page 35491]]

Board
    Number of Respondents: 828 SMBs; 1,215 nonbank subsidiaries of 
BHCs.
    Annual Frequency: 419; 25.
    Total Estimated Annual Burden: 28,911 hours; 2,531 hours.
FDIC
    Number of Respondents: 3,744.
    Annual Frequency: 141.
    Total Estimated Annual Burden: 43,992 hours.
    Comments are invited on:
    (a) Whether the collections of information are necessary for the 
proper performance of the agencies' functions, including whether the 
information has practical utility;
    (b) The accuracy of the estimates of the burden of the information 
collections, including the validity of the methodology and assumptions 
used;
    (c) Ways to enhance the quality, utility, and clarity of the 
information to be collected;
    (d) Ways to minimize the burden of the information collections on 
respondents, including through the use of automated collection 
techniques or other forms of information technology; and
    (e) Estimates of capital or start-up costs and costs of operation, 
maintenance, and purchase of services to provide information.
    All comments will become a matter of public record. Comments on 
aspects of this notice that may affect reporting, recordkeeping, or 
disclosure requirements and burden estimates should be sent to the 
addresses listed in the ADDRESSES section of this document. A copy of 
the comments may also be submitted to the OMB desk officer for the 
agencies: by mail to U.S. Office of Management and Budget, 725 17th 
Street NW., #[thinsp]10235, Washington, DC 20503; by facsimile to (202) 
395-5806; or by email to: [email protected], Attention, 
Federal Banking Agency Desk Officer.

C. Riegle Act

    The Riegle Act requires that each of the agencies, in determining 
the effective date and administrative compliance requirements for new 
regulations that impose additional reporting, disclosure, or other 
requirements on IDIs, consider, consistent with principles of safety 
and soundness and the public interest, any administrative burdens that 
such regulations would place on depository institutions, including 
small depository institutions, and customers of depository 
institutions, as well as the benefits of such regulations.\88\ In 
addition, in order to provide an adequate transition period, new 
regulations that impose additional reporting, disclosures, or other new 
requirements on IDIs generally must take effect on the first day of a 
calendar quarter that begins on or after the date on which the 
regulations are published in final form.\89\
---------------------------------------------------------------------------

    \88\ 12 U.S.C. 4802(a).
    \89\ 12 U.S.C. 4802(b).
---------------------------------------------------------------------------

    The proposed rule would reduce burden and would not impose any 
reporting, disclosure, or other new requirements on IDIs. For 
transactions exempted from the Title XI appraisal requirements by the 
proposed rule (i.e., commercial real estate transactions between 
$250,000 and $400,000), lenders would be required to get an evaluation 
if they chose not to get an appraisal. However, the agencies do not 
view the option to obtain an evaluation instead of an appraisal as a 
new or additional requirement for purposes of the Riegle Act. First, 
the process of obtaining an evaluation is not new since IDIs already 
get evaluations for transactions at or below the current $250,000-
threshold. Second, for commercial real estate transactions between 
$250,000 and $400,000, IDIs could continue to get appraisals instead of 
evaluations. Because the proposed rule would impose no new requirements 
on IDIs, the agencies are not required by the Riegle Act to consider 
the administrative burdens and benefits of the rule or delay its 
effective date.
    Because delaying the effective date of the rule is not required and 
would serve no purpose, the agencies propose to make the threshold 
increase effective on the first day after publication of the final rule 
in the Federal Register. Additionally, although not required by the 
Riegle Act, the agencies did consider the administrative costs and 
benefits of the rule while developing the proposal. In designing the 
scope of the threshold increase, the agencies chose to align the 
definition of commercial real estate transaction with industry 
practice, regulatory guidance, and the categories used in the Call 
Report in order to reduce the administrative burden of determining 
which transactions were exempted by the rule. The agencies also 
considered the cost savings that IDIs would experience by obtaining 
evaluations instead of appraisals and set the proposed threshold at a 
level designed to provide significant burden relief without sacrificing 
safety and soundness. The agencies note that comment on these matters 
has been solicited in questions 2 through 14 in Section II, and in the 
RFA discussion in Section IV, of the SUPPLEMENTARY INFORMATION, and 
that the requirements of the Riegle Act will be considered as part of 
the overall rulemaking process. In addition, the agencies invite any 
other comments that further will inform the agencies' consideration of 
the Riegle Act.

D. Solicitation of Comments on Use of Plain Language

    Section 722 of the Gramm-Leach-Bliley Act \90\ requires the 
agencies to use plain language in all proposed and final rules 
published after January 1, 2000. Agencies invite comment on how to make 
these proposed rules easier to understand. For example:
---------------------------------------------------------------------------

    \90\ Pub. L. 106-102, section 722, 113 Stat. 1338 1471 (1999).
---------------------------------------------------------------------------

     Have the agencies organized the material to suit your 
needs? If not, how could this material be better organized?
     Are the requirements in the proposed rules clearly stated? 
If not, how could the proposed rules be stated more clearly?
     Do the proposed rules contain language or jargon that is 
not clear? If so, which language requires clarification?
     Would a different format (grouping and order of sections, 
use of headings, paragraphing) make the proposed rules easier to 
understand? If so, what changes to the format would make the proposed 
rules easier to understand?
     What else could the agencies do to make the regulation 
easier to understand?

E. Unfunded Mandates Act

OCC Unfunded Mandates Reform Act of 1995 Determination
    The OCC has analyzed the proposed rule under the factors in the 
Unfunded Mandates Reform Act of 1995 (UMRA) (2 U.S.C. 1532). Under this 
analysis, the OCC considered whether the proposed rule includes a 
federal mandate that may result in the expenditure by state, local, and 
tribal governments, in the aggregate, or by the private sector, of $100 
million or more in any one year (adjusted annually for inflation).
    The proposed rule does not impose new requirements or include new 
mandates. Therefore, we conclude that the proposed rule will not result 
in an expenditure of $100 million or more by state, local, and tribal 
governments, or by the private sector, in any one year.

List of Subjects

12 CFR Part 34

    Appraisal, Appraiser, Banks, Banking, Consumer protection, Credit, 
Mortgages,

[[Page 35492]]

National banks, Reporting and recordkeeping requirements, Savings 
associations, Truth in lending.

12 CFR Part 225

    Administrative practice and procedure, Banks, banking, Federal 
Reserve System, Capital planning, Holding companies, Reporting and 
recordkeeping requirements, Securities, Stress testing

12 CFR Part 323

    Banks, banking, Mortgages, Reporting and recordkeeping 
requirements, Savings associations.

Office of the Comptroller of the Currency, 12 CFR Part 34

    For the reasons set forth in the joint preamble, the OCC proposes 
to amend part 34 of chapter I of title 12 of the Code of Federal 
Regulations as follows:

PART 34--REAL ESTATE LENDING AND APPRISALS

0
1. The authority citation for part 34 continues to read as follows:

    Authority: 12 U.S.C. 1, 25b, 29, 93a, 371, 1462a, 1463, 1464, 
1465, 1701j-3, 1828(o), 3331 et seq., 5101 et seq., and 
5412(b)(2)(B), and 15 U.S.C. 1639h.

0
2. Section 34.42 is amended by redesignating paragraphs (e) through (m) 
as paragraphs (f) through (n), respectively, and by adding a new 
paragraph (e) to read as follows:


Sec.  34.42  Definitions.

* * * * *
    (e) Commercial real estate transaction means a real estate-related 
financial transaction that is not secured by a 1-to-4 family 
residential property. A real estate-related financial transaction to 
finance the initial construction of a 1-to-4 family residential 
property that does not include permanent financing is a commercial real 
estate transaction.
* * * * *
0
3. Section 34.43 is amended by:
0
a. Removing the word ``or'' at the end of paragraph (a)(11);
0
b. Revising paragraph (a)(12);
0
c. Adding paragraph (a)(13); and
0
d. Revising paragraphs (b) and (d)(2).
    The revisions and addition read as follows:


Sec.  34.43  Appraisals required; transactions requiring a State 
certified or licensed appraiser.

    (a) * * *
    (12) The OCC determines that the services of an appraiser are not 
necessary in order to protect Federal financial and public policy 
interests in real estate-related financial transactions or to protect 
the safety and soundness of the institution; or
    (13) The transaction is a commercial real estate transaction that 
has a transaction value of $400,000 or less.
    (b) Evaluations required. For a transaction that does not require 
the services of a State certified or licensed appraiser under paragraph 
(a)(1), (a)(5), (a)(7), or (a)(13) of this section, the institution 
shall obtain an appropriate evaluation of real property collateral that 
is consistent with safe and sound banking practices.
* * * * *
    (d) * * *
    (2) Commercial real estate transactions of more than $400,000. All 
federally related transactions that are commercial real estate 
transactions having a transaction value of more than $400,000 shall 
require an appraisal prepared by a State certified appraiser.
* * * * *

Federal Reserve Board, 12 CFR Part 225

    For the reasons set forth in the joint preamble, the Board amends 
part 225 of chapter II of title 12 of the Code of Federal Regulations 
as follows:

PART 225--BANK HOLDING COMPANIES AND CHANGE IN BANK CONTROL 
(REGULATION Y)

0
4. The authority citation for part 225 continues to read as follows:

    Authority: 12 U.S.C. 1817(j)(13), 1818, 1828(o), 1831i, 1831p-1, 
1843(c)(8), 1844(b), 1972(l), 3106, 3108, 3310, 3331-3351, 3906, 
3907, and 3909; 15 U.S.C. 1681s, 1681w, 6801 and 6805.

0
5. Section 225.62 is amended by redesignating paragraphs (e) through 
(m) as paragraphs (f) through (n), respectively, and by adding a new 
paragraph (e) to read as follows:


Sec.  225.62  Definitions.

* * * * *
    (e) Commercial real estate transaction means a real estate-related 
financial transaction that is not secured by a 1-to-4 family 
residential property. A real estate-related financial transaction to 
finance the initial construction of a 1-to-4 family residential 
property that does not include permanent financing is a commercial real 
estate transaction.
* * * * *
0
6. Section 225.63 is amended by:
0
a. Removing the word ``or'' at the end of paragraph (a)(12);
0
b. Revising paragraph (a)(13);
0
c. Adding paragraph (a)(14);
0
d. Revising paragraph (b); and
0
e. Revising paragraph (d)(2).
    The revisions and addition read as follows:


Sec.  225.63  Appraisals required; transactions requiring a State 
certified or licensed appraiser.

    (a) * * *
    (13) The Board determines that the services of an appraiser are not 
necessary in order to protect Federal financial and public policy 
interests in real estate-related financial transactions or to protect 
the safety and soundness of the institution; or
    (14) The transaction is a commercial real estate transaction that 
has a transaction value of $400,000 or less.
    (b) Evaluations required. For a transaction that does not require 
the services of a State certified or licensed appraiser under paragraph 
(a)(1), (a)(5), (a)(7), or (a)(14) of this section, the institution 
shall obtain an appropriate evaluation of real property collateral that 
is consistent with safe and sound banking practices.
* * * * *
    (d) * * *
    (2) Commercial real estate transactions of more than $400,000. All 
federally related transactions that are commercial real estate 
transactions having a transaction value of more than $400,000 shall 
require an appraisal prepared by a State certified appraiser.
* * * * *

Federal Deposit Insurance Corporation, 12 CFR Part 323

    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:

PART 323--APPRAISALS

0
7. Revise the authority citation for part 323 to read as follows:

    Authority: 12 U.S.C. 1818, 1819 [``Seventh'' and ``Tenth''], 
1831p-1 and 3331 et seq.

0
8. Revise the authority citation for subpart A of part 323 to read as 
follows:

    Authority: This subpart is issued under 12 U.S.C. 1818, 1819 
[``Seventh'' and ``Tenth''], 1831p-1 and title XI of the Financial 
Institutions Reform, Recovery, and Enforcement Act of 1989 
(``FIRREA'') (Pub. L. 101-73, 103 Stat. 183, 12 U.S.C. 3331 et seq. 
(1989)).

0
9. Section 323.2 is amended by redesignating paragraphs (e) through (m) 
as paragraphs (f) through (n), respectively, and by adding a new 
paragraph (e) to read as follows:


Sec.  323.2  Definitions.

* * * * *
    (e) Commercial real estate transaction means a real estate-related 
financial transaction that is not secured by a 1-to-4 family 
residential property. A real

[[Page 35493]]

estate-related financial transaction to finance the initial 
construction of a 1-to-4 family residential property that does not 
include permanent financing is a commercial real estate transaction.
* * * * *
0
4. Section 323.3 is amended by:
0
a. Removing the word ``or'' at the end of paragraph (a)(11);
0
b. Revising paragraph (a)(12);
0
c. Adding paragraph (a)(13);
0
d. Revising paragraph (b); and
0
e. Revising paragraph (d)(2).
    The revisions and addition read as follows:


Sec.  323.3  Appraisals required; transactions requiring a State 
certified or licensed appraiser.

    (a) * * *
    (12) The FDIC determines that the services of an appraiser are not 
necessary in order to protect Federal financial and public policy 
interests in real estate-related financial transactions or to protect 
the safety and soundness of the institution; or
    (13) The transaction is a commercial real estate transaction that 
has a transaction value of $400,000 or less.
    (b) Evaluations required. For a transaction that does not require 
the services of a State certified or licensed appraiser under paragraph 
(a)(1), (a)(5), (a)(7), or (a)(13) of this section, the institution 
shall obtain an appropriate evaluation of real property collateral that 
is consistent with safe and sound banking practices.
* * * * *
    (d) * * *
    (2) Commercial real estate transactions of more than $400,000. All 
federally related transactions that are commercial real estate 
transactions having a transaction value of more than $400,000 shall 
require an appraisal prepared by a State certified appraiser.
* * * * *

    Dated: July 18, 2017.
Keith A. Noreika,
Acting Comptroller of the Currency.

    By order of the Board of Governors of the Federal Reserve 
System, July 18, 2017.
Margaret McCloskey Shanks,
Deputy Secretary of the Board.

    Dated at Washington, DC, this 18th of July, 2017.

    By order of the Board of Directors.

Federal Deposit Insurance Corporation.
Robert E. Feldman,
Executive Secretary.
[FR Doc. 2017-15748 Filed 7-28-17; 8:45 am]
BILLING CODE P