[Federal Register Volume 85, Number 84 (Thursday, April 30, 2020)]
[Rules and Regulations]
[Pages 23909-23917]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-08433]
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NATIONAL CREDIT UNION ADMINISTRATION
12 CFR Part 722
RIN 3133-AE98
Real Estate Appraisals
AGENCY: National Credit Union Administration (NCUA).
ACTION: Final rule.
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SUMMARY: The NCUA Board (Board) is amending the agency's regulation
requiring appraisals for certain residential real-estate related
transactions. The final rule increases the threshold level below which
appraisals are not required for residential real-estate related
transactions from $250,000 to $400,000. Instead of an appraisal, and
consistent with the requirement for other transactions that fall below
applicable appraisal thresholds, federally insured credit unions
(FICUs) are required to obtain written estimates of market value of the
real estate collateral consistent with safe and sound practices. For
ease of reference, this final rule explicitly incorporates the existing
statutory requirement that appraisals be subject to appropriate review
for compliance with the Uniform Standards of Professional Appraisal
Practice (USPAP). This final rule is consistent with the final rule,
effective October 9, 2019, issued by the Board of Governors of the
Federal Reserve System, the Federal Deposit Insurance Corporation, and
the Office of the Comptroller of the Currency (federal banking
agencies) that increases the threshold level at or below which
appraisals are not required for residential real estate transactions
from $250,000 to $400,000.
DATES: The final rule is effective April 30, 2020.
FOR FURTHER INFORMATION CONTACT:
Technical information:
Kenneth Acu[ntilde]a, Senior Credit Specialist, (703) 518-6613, Office
of Examination and Insurance
Uduak Essien, Director--Credit Markets, (703) 518-6399, Office of
Examination and Insurance
Legal information:
Gira Bose, Staff Attorney, (703) 518-6562, Office of General
Counsel National Credit Union Administration, 1775 Duke Street,
Alexandria, VA 22314.
SUPPLEMENTARY INFORMATION:
I. Introduction
II. Final Rule
III. Legal Authority
IV. Discussion of Public Comments Received on the Proposed Rule
V. Effective Date
VI. Regulatory Procedures
I. Introduction
A. Background
In November 2019, the Board invited comment on a notice of proposed
rulemaking \1\ (proposal or proposed rule) that would amend the NCUA's
appraisal regulation promulgated pursuant to Title XI of the Financial
Institutions Reform, Recovery, and Enforcement Act of 1989 (Title
XI).\2\ Specifically, the proposed rule would increase the monetary
threshold below which FICUs would not be required to obtain appraisals
in connection with residential real estate transactions from $250,000
to $400,000. Instead of an appraisal, and consistent with the
requirement for other transactions that fall below applicable appraisal
thresholds, the proposal would require FICUs to obtain written
estimates of market value of the real estate collateral consistent with
safe and sound practices. In addition, the proposed rule would amend
the agency's appraisal regulation to explicitly incorporate the
existing statutory requirement that appraisals be subject to
appropriate review for compliance with the Uniform Standards of
Professional Appraisal Practice (USPAP), as required by section 1473(e)
of the Dodd Frank Wall Street Reform and Consumer Protection Act (the
Dodd Frank Act).\3\
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\1\ 84 FR 65707 (Nov. 29, 2019).
\2\ 12 U.S.C. 3331 et seq.
\3\ Public Law 111-203, 124 Stat. 1376, codified at 12 U.S.C.
3339(3).
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B. Summary of Proposed Rule
As noted in the proposed rule, the price of residential real estate
has increased over time, but the residential appraisal threshold has
not been adjusted since 2001.\4\ Further, the Board estimated under the
proposal, the percentage of transactions exempted from the appraisal
requirement would
[[Page 23910]]
be restored to the level it was following the last threshold increase
in 2001. The proposed residential appraisal threshold level of $400,000
would exempt a similar number of transactions and dollar volume of
transactions as did the current threshold of $250,000 when it was set
in 2001 thereby restoring the level of exempted transactions. The Board
stated it believes increasing the appraisal threshold for residential
real estate transactions will provide meaningful burden reduction for
FICUs, while maintaining federal public policy interests in real-estate
related transactions and the safety and soundness of FICUs.
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\4\ 66 FR 58656 (Nov. 23, 2001). The rule was effective March 1,
2002.
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Based on the NCUA's data analysis and supervisory experience, as
set forth in the proposed rule, the increase in the appraisal threshold
in the 2001 residential appraisal final rule did not result in a
material increase in risk to safety and soundness. The Board estimated
that the proposed rule would exempt from appraisal requirements
approximately 46,000 residential real estate transactions, worth a
combined $14 billion, equating to approximately 0.9 percent of FICU
assets.\5\ The Board estimated that approximately 77 percent of
transactions, for a total of 55 percent of the dollar amount of
transactions, are currently not subject to the NCUA's residential
appraisal requirement. This is estimated to increase to 94 percent of
transactions and 83 percent of the dollar amount with the increased
threshold. In the proposed rule, the Board noted that in 2001, an
estimated 95 percent of residential transactions and 80 percent of the
dollar amount of residential transactions were exempt when the current
$250,000 threshold was set.\6\ The NCUA's current appraisal regulation
requires FICUs to obtain written estimates of market value for all
real-estate related transactions that do not require an appraisal
pursuant to Title XI (Title XI appraisal), unless explicitly exempted
from written estimates of market value requirements.\7\ As an important
prudential safeguard, written estimates of market value must be
prepared by qualified, experienced, and independent individuals.\8\ In
addition, through the Interagency Appraisal and Evaluation Guidelines
(Interagency Guidelines),\9\ the NCUA has provided guidance to FICUs on
its expectations regarding when and how written estimates of market
value should be used.\10\
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\5\ Supra note 1, at 65712. Assets as of December 2019 Call
Report.
\6\ Supra note 4, at 65711.
\7\ See 12 CFR 722.3(d).
\8\ Id.
\9\ Interagency Appraisal and Evaluations Guidelines at 75 FR
77458 (Dec. 10, 2010).
\10\ Interagency Guidelines at 77460.
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II. Final Rule
This final rule follows publication of the November 29, 2019,
proposed rule. After carefully considering the comments and conducting
further analysis, the Board is adopting the final rule as proposed, and
is increasing the residential real estate appraisal threshold from
$250,000 to $400,000. As discussed in the proposal, and further
detailed below in response to comments, increasing the residential real
estate appraisal threshold will provide meaningful regulatory relief
for FICUs while maintaining their safety and soundness and providing
reasonable protection for consumers. This final rule also adopts
without change the proposed conforming amendment to the NCUA's
appraisal regulations explicitly incorporating the Dodd Frank Act
amendment to Title XI that appraisals be subject to appropriate review
for compliance with USPAP,\11\ as well as a conforming amendment to
remove additional requirements for the appraisal exemption for certain
residential real estate transactions in rural areas.
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\11\ Public Law 111-203, 124 Stat. 1376, codified at 12 U.S.C.
3339(3).
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III. Legal Authority
Title XI directs each federal financial institutions regulatory
agency \12\ to require regulated institutions to obtain appraisals
meeting minimum standards for certain real estate-related transactions.
The purpose of Title XI is to protect federal financial and public
policy interests \13\ in real estate-related transactions by requiring
that real estate appraisals used in connection with 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.\14\
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\12\ ``Federal financial institutions regulatory agencies'' mean
the Board of Governors of the Federal Reserve System; the Federal
Deposit Insurance Corporation (FDIC); the Office of the Comptroller
of the Currency (OCC); the NCUA, and formerly the Office of Thrift
Supervision (OTS). 12 U.S.C. 3350(6).
\13\ These interests include those stemming from the federal
government's role 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. 100-10001, pt. 1, at 19
(1988); 133 Cong. Rec. 33047-33048 (1987).
\14\ 12 U.S.C. 1331.
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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.\15\ The NCUA has authority to determine those
real estate-related financial transactions that do not require the
services of a state-certified or state-licensed appraiser and are
therefore exempt from the Title XI appraisal requirements. Such exempt
real estate-related financial transactions are not federally related
transactions under the statutory or regulatory definitions because they
are not required to have Title XI appraisals.\16\
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\15\ 12 U.S.C. 3350(4) (defining ``federally related
transaction'').
\16\ See 59 FR 29482 (June 7, 1994).
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The NCUA has exercised this authority by exempting several
categories of real estate-related financial transactions from the Title
XI appraisal requirements, including transactions at or below certain
designated dollar thresholds.\17\ The NCUA has determined that these
categories of transactions do not require appraisals by state-certified
or state-licensed appraisers in order to protect federal financial and
public policy interests or to satisfy principles of safety and
soundness.
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\17\ See 12 CFR 722.3(a).
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Title XI expressly authorizes the NCUA to establish dollar
threshold levels at or below which Title XI appraisals are not required
if: (1) The NCUA determines, in writing, that the threshold does not
represent a threat to the safety and soundness of financial
institutions; and (2) the NCUA receives concurrence from the Consumer
Financial Protection Bureau (CFPB) that such threshold level provides
reasonable protection for consumers who purchase ``1-4 unit single-
family residences.'' \18\ As noted above, transactions below the
threshold level are exempt from the Title XI appraisal requirements and
thus are not deemed ``federally related transactions.''
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\18\ 12 U.S.C. 3341(b).
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IV. Discussion of Public Comments Received on the Proposed Rule
A. The Public Comments, Generally
The NCUA received 27 comments following publication of the November
29, 2019 proposed rule. Of the 27 comments received, 22 were in support
of and five were in opposition to the proposed increase to the
appraisal
[[Page 23911]]
threshold for residential real estate transactions.\19\
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\19\ One commenter opposed to the rule did not provide a comment
letter in response to the Board's proposed rule, but provided
instead their response to the federal banking agencies' December
2018 proposal to increase the residential real estate threshold for
their regulated financial institutions. Where relevant, their
comments have been discussed in this preamble to the final rule.
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The five comments received in opposition to the proposed rule came
from appraisal companies, appraisal trade organizations, and one
individual. They expressed concern that the proposal would reduce the
safety and soundness of credit unions and would not provide adequate
consumer protections.
In contrast, comments received from credit unions, credit union
trade associations, state credit union leagues, state credit union
regulators and others supported the proposal, stating that it would
reduce regulatory burden, reduce member costs, increase access to
credit, and would provide reasonable protection for consumers.
B. Discussion of Specific Comments on the Proposed Rule
The Board requested comment on all aspects of the proposed rule and
posed a number of specific questions related to the consumer protection
aspect of appraisals and the analysis for the proposed rule and written
estimates of market value. All comments received were in response to
the proposed increase in the monetary threshold for residential real
estate transactions. No comments were received regarding the proposed
conforming amendment to the NCUA's appraisal regulations explicitly
incorporating the Dodd Frank Act amendment to Title XI that appraisals
be subject to appropriate review for compliance with USPAP. Commenters'
rationale for opposing or supporting the $400,000 threshold are
discussed below.
1. Threshold Level.
a. ``At or below'' Standard. The final rule adopted by the federal
banking agencies sets a threshold level at or below $400,000. One
credit union trade association encouraged the NCUA to adopt the same
``at or below'' language to maintain consistency with the federal
banking agencies. Upon consideration, the Board has determined to keep
the rule as proposed in order to be consistent with the NCUA's
appraisal threshold for non-residential real estate transactions.\20\
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\20\ 12 CFR 722.3(b)(1) (requiring appraisals for non-
residential transactions at or above $1,000,000, which thus exempts
such transactions below $1,000,000).
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b. Accounting for regional variations. Three commenters, two from
the perspective of communities with house prices significantly lower
than the proposed increased threshold and one from the perspective of a
community with sales prices that largely exceed it, suggested the Board
should consider an approach that takes into account regional home price
variations rather than adopt a single figure nationwide. The Board
believes that adopting such a regional approach would only add
unnecessary regulatory burden and complexity by introducing numerous
threshold levels across the country. In addition, FICUs and borrowers
retain the option to obtain appraisals on exempt transactions, and some
credit union commenters indicated that they would continue using
appraisals for transactions below the threshold.
c. General support and concerns. Commenters supporting the proposed
increase generally stated that written estimates of market value are
adequate substitutes for appraisals for transactions below the proposed
$400,000 threshold. Nevertheless, one credit union league stated that
many of its members would continue to use appraisals even on loans
eligible for written estimates of market value. A credit union trade
association noted favorably that the rule is flexible enough that
consumers and FICUs would still have the option of ordering an
appraisal. Two state appraiser coalitions expressed concern that
raising the threshold would exempt most transactions in their service
area and lead to almost all real estate-related transactions being
exempt from appraisal requirements in some regions or metropolitan
statistical areas.
2. Safety and soundness. The majority of commenters opposed to the
$400,000 threshold expressed concern that the proposal increases risk
for residential real estate transactions and would negatively affect
safety and soundness. These commenters generally posited that
appraisals offer an important safety and soundness tool because
appraisals provide an unbiased opinion on the value of collateral, and
without this valuation, credit unions are exposed to increased risk.
One commenter stated that by focusing on the total dollar volume of
loans originated, rather than the total volume of transactional
activity, the proposal interprets safety and soundness as only a
monetary safeguard and not as a safeguard on the volume of lending
activity.
In contrast, commenters supportive of the proposed rule did not
foresee an increased risk to FICUs or individual transactions. Most
individual credit union commenters noted that their policies and
procedures are designed to mitigate risk, and in those instances where
they currently use written estimates of market value, such estimates
are performed by individuals who are independent from the loan process
and are qualified and experienced in home valuation. A few commenters
noted that while they support the proposed threshold increase, they
would continue to prioritize sound underwriting practices, guide their
decisions by the best interests of their members, and use business
judgment in deciding when, and if, appraisals are necessary for
transactions below the threshold. One commenter stated that the
historically sound valuation practices of the credit union industry
warrant the increased appraisal threshold. Several commenters expressly
agreed with the safety and soundness considerations discussed in the
proposed rule. Many commenters stated that the increased threshold
would eliminate the competitive disadvantage that FICUs now face since
the federal banking agencies raised the residential real estate
transaction threshold for banks.
After taking into account the comments discussed above, the Board
maintains that the threshold level of $400,000 for residential real
estate transactions does not pose a threat to the safety and soundness
of FICUs. First, the $400,000 threshold would exempt a similar number
of transactions and dollar volume of transactions as did the current
threshold of $250,000 when it was set in 2001.\21\ Raising the
threshold in 2001 did not result in a material increase in risk to
safety and soundness. Second, the new threshold would not introduce
significant additional risk to the credit union system. Based on 2018
Home Mortgage Disclosure Act (HMDA) data, the new
[[Page 23912]]
threshold would only incrementally exempt real estate-secured loans
granted each year, worth approximately $14 billion, which equates to
approximately 0.9 percent of FICU assets as of the December 31, 2019
Statement of Financial Condition (referred to as the Call Report).
Third, FICUs' residential real estate-secured loans have performed well
with relatively low delinquencies and net charge-off rates in an
analysis of performance from 1994 to 2018. This period, which included
two major recessionary periods, shows the prior threshold changes in
1995 and 2001 did not have a negative impact on loan performance.\22\
Furthermore, based on supervisory experience and analysis of material
loss reviews conducted by the NCUA's Inspector General, appraisals have
not been a substantial factor in any material FICU failures. The Board
has also taken into consideration that $400,000 is a reasonable limit
that is consistent with the general appreciation in home prices since
the last threshold increase.\23\ Finally, the NCUA's appraisal
regulations require FICUs to obtain written estimates of market value
for all real estate-related financial transactions that do not require
a Title XI appraisal, unless the real estate-related financial
transaction is explicitly exempt from written estimates of market value
requirements.\24\
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\21\ The NCUA conducted analyses using 2018 data reported under
the Home Mortgage Disclosure Act (HMDA), which requires a variety of
financial institutions to maintain, report, and publicly disclose
loan-level information about residential mortgage originations.
Information reported under HMDA includes various data points
relevant to the NCUA's analysis, including loan size, loan type,
property type, property location, and secondary market purchaser.
While the HMDA data has limitations, including that certain low-
volume originators and originators located in rural areas are not
required to report, the Board believes it provides a representative
sample of the universe of mortgage originations, including
transactions subject to the NCUA's appraisal requirement. The NCUA
used 2018 HMDA data to estimate the effect of the residential
threshold increase. The NCUA used HMDA data to determine the number
of transactions and dollar volume of transactions that would be
affected relative to: (1) Total FICU originations reported in the
HMDA data; and (2) transactions originated by NCUA-insured
institutions that were not sold to a government-sponsored enterprise
(GSE) or otherwise insured or guaranteed by a U.S. government agency
(regulated transactions).
\22\ Net charge-offs are charge-offs minus recoveries. Net
charge-offs represent losses to financial institutions.
\23\ Based on analysis of residential home prices using the S&P
Case-Shiller Home Price Index, FHFA Index, as well as the Bureau of
Labor Statistics Consumer Price Index.
\24\ See 12 CFR 722.3(d).
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Written estimates of market value performed in accordance with the
NCUA's regulations provide FICUs with suitable alternatives to
appraisals.\25\ In the agency's supervisory experience, written
estimates of market value have provided sufficient information to
enable FICUs to make prudent lending decisions.
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\25\ 12 CFR 722.3(d)(2).
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For all these reasons, the Board concludes that past threshold
increases did not adversely impact safety and soundness, and the
current increase of the residential appraisal threshold to $400,000
does not represent a threat to the safety and soundness of FICUs.\26\
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\26\ 12 U.S.C. 3341(b).
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3. Consumer protection.
a. Consumer protections, in general. All five commenters that
opposed the increased threshold raised consumer protection concerns.
One stated that the proposal contradicts the position taken by the
federal banking agencies and the NCUA in their 2017 Economic Growth and
Regulatory Paperwork Reduction Act \27\ (EGRPRA) report to Congress, at
which time the federal financial regulators opted not to change the
threshold based on considerations of safety and soundness and consumer
protection. The same commenter stated that the proposed rule ignores
congressional intent as reflected in the Economic Growth, Regulatory
Relief, and Consumer Protection Act,\28\ (EGRRCPA) in which Congress
chose only to raise the threshold for rural areas on a case-by-case
basis for individual transactions in which the lender was unable to
secure the services of an appraiser. One commenter noted that lower-
income and first-time homebuyers would be particularly impacted by not
having an unbiased party value the purchase price.
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\27\ 12 U.S.C. 3311.
\28\ Public Law 115-174, Title I, Section 103, codified at 12
U.S.C. 3356 (effective May 24, 2018).
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In proposing the increase in the appraisal threshold, the Board
stated that while appraisals can provide protection to consumers by
facilitating the informed use of credit and helping to ensure that the
estimated value of the property supports the loan amount, written
estimates of market value have also provided these benefits for FICUs
and borrowers for transactions below the current $250,000 threshold.
FICUs have used written estimates of market value for transactions
below the applicable appraisal thresholds since the issuance of the
first rule implementing Title XI.
With this final rule, the percentage of transactions exempted from
the appraisal requirement would be restored to the same level following
the last threshold increase in 2001. As an additional safeguard, under
Title XI, the NCUA must receive CFPB concurrence that the residential
appraisal threshold level provides reasonable protection for consumers
who purchase ``1-4 unit single-family residences.'' \29\ By letter
dated April 8, 2020, the CFPB Director provided this concurrence.
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\29\ 12 U.S.C. 3341(b).
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The NCUA recognizes that it decided against proposing a residential
appraisal threshold increase during the EGRPRA process due to safety
and soundness and consumer protection concerns. The NCUA has
reconsidered this decision based on comments received to date from
FICUs and state credit union regulators, and in light of the recent
action by the federal banking agencies to increase the residential real
estate appraisal threshold for banks. The Board believes that consumer
protection and safety and soundness concerns are addressed and
supported by the rationale as put forth in the proposed rule and in
this preamble to the final rule.
The NCUA also recognizes that Congress recently amended Title XI to
provide a narrow, self-effectuating appraisal exemption for rural
transactions meeting certain requirements. However, the Board also
observes that Congress did not amend the NCUA's long-standing authority
in Title XI to establish a threshold level at or below which a
certified or licensed appraiser is not required to perform an appraisal
in connection with federally related transactions. Through the EGRRCPA
amendment, Congress mandated that rural transactions meeting specific
statutory criteria be exempted from the appraisal regulations; however,
there is no indication that Congress intended to restrict the NCUA's
authority to provide additional exemptions pursuant to its existing
authority. Notably, unlike the analysis conducted pursuant to this
rulemaking, the EGRRCPA amendment did not require a safety and
soundness determination or CFPB concurrence.\30\
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\30\ 12 U.S.C. 3341(b).
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With regard to the comment that an appraiser is the only unbiased
party to a residential real estate transaction, this is not reflective
of the agency's supervisory experience or regulatory expectations. As
is the case currently for transactions under the threshold exemptions,
written estimates of market value generally must be performed by
individuals who are independent of the loan production and collection
processes, with no direct, indirect, or prospective interest, financial
or otherwise, in the property or the transaction.\31\ Written estimates
of market value must also be conducted by individuals qualified and
experienced to perform such estimates for the type and amount of credit
being considered.\32\ Furthermore, the Valuation Independence Rule,
which implements the Dodd Frank Act independence provisions, requires a
valuation to be based on the independent judgment of the person
preparing the valuation. The use of coercion, extortion, inducement,
bribery, or intimidation of, compensation or instruction to, or
collusion with a person that either prepares valuations or perform
valuation management functions is prohibited.\33\
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\31\ 12 CFR 722.3(d)(2).
\32\ Id.
\33\ 12 CFR 226.42(c).
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[[Page 23913]]
The Valuation Independence Rule applies to both appraisals and
written estimates of market value. During the supervisory review of a
FICU's real estate lending activities, the NCUA's examiners assess the
adequacy of risk management practices, including the independence of
the collateral valuation function.
b. Specific requests for consumer protection comments. In addition
to requesting comment on all aspects of the rule, the Board asked
particularly about specific aspects of consumer protection raised by
the proposal. The Board asked commenters how often FICUs use internal
staff to prepare written estimates of market value and what valuation
information, if any, would be lost if more written estimates of market
value were performed rather than appraisals. The Board also requested
comment on the extent to which appraisals and written estimates of
market value provide benefits or protections for borrowers that are
purchasing 1-to-4 family residential property and the nature and
magnitude of the differences, if any, in consumer protection. The Board
was also interested in knowing how well consumers have understood
written estimates of market value and whether there are any concerns in
this area that the Board should take into account. Finally, the Board
asked for input on the extent to which useful and accurate property
valuation information is readily available to borrowers through public
sources.
Several credit union commenters stated that all of their written
estimates of market value are performed by individuals who are
independent of the loan or production process and have the necessary
qualifications and experience. One credit union commenter stated
specifically that it does not use internal staff to prepare written
estimates of market value, as did one credit union trade association
based on a survey of its members. In terms of the valuation information
that would be lost if more written estimates of market value were
performed rather than appraisals, two commenters, one supportive of the
rule and one opposed, noted that the physical inspection of a property
is the primary benefit of an appraisal to consumers. One commenter
stated that appraisers conduct rigorous analysis of property features,
such as number of bedrooms and proximity to open space, which may have
an impact on a property's future marketability. On the other hand, one
commenter noted that buyers conduct their own visual inspections and
professional home inspections are a typical part of most transactions.
One credit union association, while supportive of the rule, stated that
its members anticipated the loss of valuable information, such as the
composition of a property's interior and data on comparable properties,
with the use of written estimates of market value instead of
appraisals. This commenter stated that many of its credit union members
would continue using appraisals on properties for which written
estimates of market value would be allowed.
In response to the comments concerning on-site inspections of real
estate, the Board notes that USPAP does not require an on-site
inspection of the subject property.\34\ However, USPAP states that
inspections are often conducted and that some appraisers use third
parties to conduct inspections.\35\ Property valuations, whether
appraisals or written estimates of market value, should contain
sufficient information and analysis to support the FICU's decision to
engage in a particular transaction, including information relating to
the actual physical condition and characteristics of the property. The
appraiser's physical inspection of a property can provide additional
information on the features of the property to the buyer, however, the
primary purpose of the appraisal is to value the collateral behind the
loan. As USPAP states, ``the appraiser's inspection commonly is limited
to those things readily observable without the use of special testing
or equipment.'' \36\ Furthermore, ``an inspection conducted by an
appraiser is usually not the equivalent of an inspection by an
inspection professional (e.g. a structural engineer, [or] home
inspector).'' \37\
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\34\ 2020-21 USPAP, Advisory Opinion 2 at 69.
\35\ Id.
\36\ Id.
\37\ Id.
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While there is no requirement for a physical inspection with either
an appraisal or a written estimate of market value, the Interagency
Guidelines state that safe and sound written estimates of market value
should be supported by a physical inspection of the property or any
alternative method to confirm the property's condition, depending on
transaction risks.\38\ In the event a borrower requires further
information about the physical condition of a property, the borrower
always retains the option of engaging a licensed property or building
inspector.
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\38\ Interagency Guidelines at 77461. In addition, the Dodd
Frank Act requires each creditor to furnish to an applicant a copy
of any and all written appraisals and valuations developed in
connection with the applicant's application for a loan that is
secured or would have been secured by a first lien on a dwelling
promptly upon completion, but in no case later than 3 days prior to
the closing of the loan, whether the creditor grants or denies the
applicant's request for credit or the application is incomplete or
withdrawn. 15 U.S.C. 1691.
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One appraisal organization stated that the proposal would lead more
consumers to lose out on the benefits of an appraisal that has been
conducted in accordance with the USPAP. This commenter pointed out that
there are other benefits reflected in an appraisal as a result of the
appraiser acting in an ethical manner informed by the education,
competency, qualifications and training that are required of USPAP
compliant appraisers.
One commenter noted that lenders are increasingly willing to rely
on automated valuation models (AVM) for which the federal financial
regulators have not yet promulgated regulations despite the Dodd Frank
Act requirement to do so. As a result, the commenter posits that the
AVM represents a ``black box'' approach that may not be fully
understood by lenders or comprehensible to prospective homeowners.
While USPAP itself does not apply to written estimates of market
value, the Board believes that the regulatory framework requiring
independence, qualifications, and experience, combined with the
agency's longstanding supervisory experience with written estimates of
market value, provides sufficient basis for raising the residential
real estate appraisal threshold while maintaining reasonable consumer
protection. In fact, the NCUA's supervisory experience shows that many
FICUs still use appraisals for situations when only a written estimate
of market value was required. These reasons include institutional
preference, underwriting to secondary market standards for flexibility,
ease of valuation policy implementation and, as the Interagency
Guidelines recommend, for transactions with elevated risk.\39\ As
additional independent analysis, the NCUA reviewed the current
residential real estate underwriting practices of over 120 FICUs \40\
to confirm whether FICUs will continue to obtain appraisals for
transactions under the threshold. The review found that 60 percent of
these FICUs obtained appraisals in a majority of their residential real
estate transactions below the current threshold of $250,000. Similar
reasons as listed
[[Page 23914]]
above were cited for obtaining appraisals when not required.
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\39\ Interagency Guidelines, Appendix A.
\40\ The NCUA reviewed a sample of open examinations across all
of its regional offices for a defined, limited period to gather
feedback on typical FICU practices for real estate appraisals under
the $250,000 threshold.
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Moreover, although limited in scope, the higher priced mortgage
loan rule (HPML rule), requires lenders for certain HPMLs secured by a
consumer's principal dwelling to obtain an appraisal--and in some
cases, two appraisals--that include an interior property visit, and
provide free copies to the consumer.\41\ The HPML Rule applies to
certain higher-risk transactions. Thus, for a select group of loans,
the HPML Rule requires that the information in an appraisal will be
available for some first time or low-income borrowers mentioned by some
commenters as being most affected by the threshold increase.
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\41\ 15 U.S.C. 1639h.
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With regard to the increasing use of AVMs in the valuation
industry, the Board believes that technology and data present an
opportunity to improve and expand upon current property valuation
methods. AVMs cannot be the sole source of collateral valuation, but
may be used in the process of generating an appraisal, written estimate
of market value, or even for credit union portfolio management
purposes. The federal banking agencies and the NCUA have issued a
public notice regarding the AVM rulemaking required by the Dodd Frank
Act.\42\ As long as AVMs are subject to quality controls, such as
testing for accuracy and rigorous analysis of the algorithms that drive
them, there are many advancements that computer-based applications can
make. As these automated models become more sophisticated and
widespread in the market, it is important that they be used to promote
fair lending and greater and more equitable access to credit.\43\
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\42\ The federal banking agencies, the NCUA, the Federal Housing
Finance Agency and the Consumer Financial Protection Bureau, in
consultation with the Appraisal Subcommittee and the Appraisal
Standards Board of the Appraisal Foundation, are required to
promulgate regulations to enumerate quality control standards for
automated valuation models. Section 1473(q) of the Dodd-Frank Act
requires that automated valuation models used to estimate collateral
value for mortgage lending comply with quality control standards
designed to ensure a high level of confidence in the estimates
produced by automated valuation models; protect against manipulation
of data; seek to avoid conflicts of interest; require random sample
testing and reviews; and account for other factors the agencies deem
appropriate. Public notice available at https://www.reginfo.gov/public/do/eAgendaViewRule?pubId=201910&RIN=3133-AE23.
\43\ This is consistent with the NCUA's longstanding regulatory
requirement that federal credit unions may not consider lending
policies which have the effect of discriminating on the basis of
certain characteristics of the borrower, or rely on appraisals that
they know or should know are based upon criteria, as enumerated in
the NCUA's regulations, that have a discriminatory effect. 12 CFR
701.31.
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On the extent to which appraisals and written estimates of market
value provide benefits or protections to borrowers who are purchasing
1-to-4 family residential property, a commenter stated that appraisals
protect against an inaccurate valuation of a property and requested
that the Board provide another valuation option to protect the
consumer. This commenter did not reference written estimates of market
value, but, as noted above, both appraisals and written estimates of
market value provide a reliable estimate of the market value of a
property and must be performed by qualified individuals. As set forth
in the Interagency Guidelines, written estimates of market value should
contain sufficient information and analysis to support the valuation of
the property.\44\ In addition, lenders must provide borrowers with a
copy of all appraisals and written estimates of market value developed
in connection with an application for a first-lien loan secured by a
dwelling.\45\ Both consumers and lenders may always order an appraisal
in the event of a dispute arising out of a written estimate of market
value.
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\44\ Interagency Guidelines at 77461.
\45\ 12 CFR 1002.14, 78 FR 7216 (January 31, 2013) (implementing
amendment to the Equal Credit Opportunity Act (ECOA)), 15 U.S.C.
1691 et seq., by the Dodd Frank Act section 1474. 15 U.S.C. 1691(e).
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Some commenters stated the nature and magnitude of the differences
in consumer protection between appraisals and written estimates of
market value revolve largely around the physical inspections and USPAP
protections discussed above. Commenters also noted that, with
appraisals consumers have a direct mechanism for lodging a complaint
for a faulty appraisal.
With respect to consumer recourse, lenders can order appraisals
when disputes arise with written estimates of market value. In
addition, the failure to comply with the independence requirements of
the Valuation Independence Rule can result in civil liability.\46\ From
a supervisory standpoint, the NCUA can address deficiencies in a credit
union's valuation process through informal or formal enforcement
actions. Borrowers may also file a complaint through the NCUA's
complaint process as well as through the CFPB's process. Therefore, the
Board does not expect the increased threshold to materially affect
options for consumer recourse.
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\46\ 15 U.S.C. 1639e(k); 15 U.S.C. 1640.
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With regard to how well consumers have understood written estimates
of market value and any related concerns the Board should take into
account, two appraisal organizations stated that appraisals are more
standardized than written estimates of market value, thus, making it
easier for consumers to understand and compare appraisals. On the other
hand, one credit union stated that appraisals are not user-friendly and
have led to consumers disputing appraised values due to a
misunderstanding of the contents of appraisals. The same commenter
suggested that written estimates of market value could be drafted in
such a way as to be more helpful to borrowers. One commenter asked the
Board to provide additional guidance for credit unions on what
constitutes an adequate written estimate of market value. One commenter
stated that they would strongly support the NCUA creating a model form
with a safe harbor from liability for unintentional and nonmaterial
errors.
Based on the agency's supervisory experience and observations on
the use of written estimates of market value, the Board does not
believe that it is necessary to provide a model form for written
estimates of market value at this time. The Interagency Guidelines
encourage regulated institutions to establish policies and procedures
for determining an appropriate collateral valuation method for a given
transaction considering associated risks.\47\ The Interagency
Guidelines also set forth the information that a sufficient written
estimate of market value should contain to support a credit decision,
including, at a minimum, the location and description of the property,
an estimate of the property's market value, the methods used to confirm
the property's physical condition, the analysis that was performed
along with the supporting information used to value the property, any
supplemental information that was considered when using an analytical
method or technological tool, and all sources of information used to
arrive at the property valuation.\48\ The Board reiterates that FICUs
have been utilizing written estimates of market value under the
$250,000 threshold since 2001. It has not been the agency's experience
that the existing Interagency Guidelines are insufficient or that
written estimates of market value for transactions under the $250,000
threshold harm consumers because they are not standardized. Although
the Board recognizes that written estimates of market value are not
subject to the same uniform
[[Page 23915]]
standards as appraisals,\49\ in terms of structure and content or the
preparer's training and credentialing requirements, written estimates
of market value provide sufficient consumer protections for
transactions under $400,000.\50\
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\47\ Interagency Guidelines at 77461.
\48\ Id.
\49\ USPAP does not prescribe a model form, but institutions
often use template forms, such as Fannie Mae Form 1004/Freddie Mac
Form 70, known as the Uniform Residential Appraisal Report.
\50\ 12 U.S.C. 3341(b).
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All commenters who discussed the extent to which useful and
accurate property valuation information is readily available to
borrowers through public sources acknowledged the broad availability of
consumer-facing property valuation information through public sources,
including websites such as Zillow, Trulia, and Realtor.com and the
Multiple Listing Service. However, one appraisal organization commented
that many of these consumer-facing tools are not necessarily useful to
consumers or lenders in determining property values--rather they are
designed for marketing purposes. Some individual credit union
commenters specifically referenced the usefulness of publicly available
tax assessed valuations (known as TAVs) in helping them determine
property valuations and in making relatively conservative lending
decisions. The Board finds that, although all sources of publicly
available valuation information might not always accurately reflect the
market value of a particular property, consumers can use a variety of
available information to learn more about the availability of and the
potential range of values for properties in a particular area or
market.
4. Time and cost of appraisals.
The Board asked for comments on whether the proposed rule would
lead to cost savings for FICUs and/or borrowers as well as reduce the
time to close loans. Responses to this point were mixed. Many
commenters who supported the proposed threshold noted that it would
increase access to credit, reduce the regulatory burden on credit
unions, and lead to cost savings for members. Some commenters who
opposed the rule mentioned the cost savings do not outweigh consumer
considerations and those commenters disputed the materiality of time
savings.
Lenders generally require consumers to pay for costs associated
with obtaining appraisals, which can include fees paid to appraisers
and appraisal firms and fees charged by the Appraisal Management
Companies (AMC) that lenders often use to administer the appraisal
process. A few credit union commenters provided time and cost estimates
of appraisals as evidence of borrowers' potential savings. These
commenters stated that appraisals generally cost between $500 and
$1,000 and take up to four weeks to receive. One credit union commenter
stated that in its rural area, appraisals could take up to eight weeks
and range from $600 to $1,100.
In contrast, one commenter opposed to the proposed rule stated that
the average cost of an appraisal is $446 with an average turnaround
time of 9 days, or 18 days if a lender orders an appraisal through an
AMC. Another commenter stated that the average price of an appraisal is
$331 with an average turnaround time of 5 days. Some appraiser
organizations commented that, regarding time and cost savings, the fee
structure between appraisers and AMCs is not transparent to the
consumer. They also noted that it is unfair to blame appraisers for the
time that elapses before an appraisal is even requested, and, to the
extent that appraisers affect timeliness of closing, this is often
because of issues with the property that are not discovered until the
inspection phase. One commenter noted that complaints about appraiser
access in recent years have more to do with increased loan demand due
to falling interest rates rather than appraiser supply issues. Some
commenters noted that accurate data is not available on the cost and
turnaround time for written estimates of market value, so it is not
clear how much consumers and credit unions save.
The Board considered the comments relating to the amount of time it
takes credit unions to receive a completed appraisal and the
appraisal's related cost. The time it takes to complete a written
estimate of market value may often be shorter than the time it takes to
receive a Title XI appraisal, particularly in rural areas. In addition,
written estimates of market value generally cost less than Title XI
appraisals for the same properties. The Board believes, based on
information available on the cost of written estimates of market value
and appraisals, that there are likely to be time and cost savings for
FICUs and borrowers where a written estimate of market value, as
opposed to an appraisal, is obtained.
A few commenters supporting the proposed threshold increase
specifically discussed the impact of the proposal on FICUs serving
rural communities. These commenters stated that it is difficult to get
an appraisal for a reasonable cost and in a reasonable time in rural
areas. One commenter noted that it serves a community in which there is
no appraiser within 100 miles, and thus appraisers will often wait for
enough transactions to justify the travel necessary to conduct a
physical inspection of the property. Feedback from commenters is
consistent with the Board's experience as appraisals for properties in
high cost of living areas and rural areas tend to be more expensive
than in low cost of living and urban areas. The Department of Veterans
Affairs' (DVA) appraiser fee schedule by state ranges from a low of
$425 in South Carolina to a high of $875 in Montana. In addition, based
on DVA schedules and feedback from commenters, turnaround time and
costs for appraisals is higher for rural areas than urban areas. The
Board estimates the $400,000 threshold would provide burden relief in
terms of transaction volume and dollar amount to rural areas at a
proportional rate to the burden reduction overall. However, the Board
estimates the proportional amount of relief in terms of time and cost
savings to credit unions and borrowers would exceed the burden relief
in urban areas.
5. Other comments.
Hearing request. One group of state appraiser organizations
submitted a copy of the comment letter that it sent to the federal
banking agencies in response to their proposed rule to increase the
residential real estate appraisal threshold. The letter to the federal
banking agencies included a request for a hearing to more fully explore
these issues. Separately, an appraisal organization strongly suggested
that the Board conduct hearings to solicit more views. The Board
declines to hold a hearing on this rulemaking. The Board does not
believe that a hearing would elicit information that could not have
been submitted through the notice and comment process. The Board has
thoroughly considered all comment letters, including those submitted by
these two organizations.
6. Comments beyond the scope of the rule.
One commenter noted that many residential real estate contracts
include appraisal contingency clauses, which would not be available to
consumers without an appraisal. Another commenter, however, raised the
possibility of a valuation contingency clause in future residential
contracts.\51\
[[Page 23916]]
An appraisal contingency is an agreement confirming property valuation
between the seller and the buyer not the financing institution.
Furthermore, the appraisal contingency referenced by the commenter is
outside the scope of this rulemaking.
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\51\ The CFPB, in its concurrence to the federal banking
agencies' final residential real estate appraisal rule, acknowledged
the potential benefit of appraisal contingency clauses in the
context of the few appraisals that come in below the contract price,
but did not find them to be a significant enough consumer protection
to outweigh the benefit of raising the threshold. Available at
https://files.consumerfinance.gov/f/documents/cfpb_firrea-concurrence_2019_08.pdf.
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Two commenters requested that the NCUA add a de minimis threshold
to the requirement that transactions that are partially insured or
guaranteed by a U.S. government agency or sponsored agency have written
estimates of market value. The proposed rule did not make any changes
to the provision regarding transactions partially insured or guaranteed
by a U.S. government agency or a U.S. government sponsored agency.
Accordingly, the Board declines to make any changes to this provision
in this final rule.
One commenter requested the agency clarify the definition of
``complex.'' Under the NCUA's current appraisal regulation, a
residential real estate transaction at or above the $250,000 threshold
(not including any amount of the transaction that is guaranteed or
insured by a U.S. government agency or government sponsored agency)
that is deemed ``complex,'' must be accompanied by an appraisal from a
state-certified appraiser, as opposed to a state-licensed appraiser who
is not certified. The current regulation also provides that a FICU may
presume that appraisals of 1-to-4 family residential properties are not
complex unless the credit union has readily available information that
a given appraisal will be complex. The commenter requested further
clarity on what is considered ``readily available information.'' The
proposed rule did not make any changes to this presumption or to the
definition of ``complex.''
The Board declines to consider these suggested changes to the
regulation at this time as they are beyond the scope of the rule.
C. Final Rule
Based on the above analysis and consideration of the comments, the
Board determines it is appropriate to adopt the proposed increase in
the threshold below which appraisals for residential real estate
transactions are not required from $250,000 to $400,000. In addition,
the Board adopts the proposed conforming changes regarding review of
appraisals for compliance with USPAP and the removal of additional
requirements for the appraisal exemption for certain transactions in
rural areas for the reasons stated in the proposed rule. As discussed
in the proposed rule, the additional requirements associated with the
appraisal exemption for certain residential real estate transactions
will be unnecessary once the threshold for all residential appraisals
is raised to $400,000.\52\ Removing these requirements from the
regulation will reduce confusion for FICUs but does not affect the
validity of this authority under the 2018 legislation. Neither
provision substantively alters the rights or obligations of FICUs or
other parties, which are addressed in the relevant statutes.
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\52\ 84 FR at 65709.
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V. Effective Date
All provisions of the rule are effective upon publication of the
final rule in the Federal Register. The 30-day delayed effective date
required under the Administrative Procedure Act is waived pursuant to 5
U.S.C. 553(d)(1) and (3), which provides an exception to the 30-day
delayed effective date requirement when a substantive rule grants or
recognizes an exemption or relieves a restriction. The amendment to
increase the residential appraisal threshold exempts additional
transactions from the agency's appraisal requirement, which would have
the effect of relieving restrictions, and the final rule incorporates
the existing statutory requirement that appraisals be subject to
appropriate review for compliance with USPAP for ease of reference and
removes additional requirements relating to residential real estate
transactions in rural areas.
VI. Regulatory Procedures
A. Regulatory Flexibility Act
The Regulatory Flexibility Act (RFA) generally requires that, in
connection with a final rule, an agency prepare a final regulatory
flexibility analysis that describes the impact of a rule on small
entities. A regulatory flexibility analysis is not required, however,
if the agency certifies that the rule will not have a significant
economic impact on a substantial number of small entities (defined for
purposes of the RFA to include credit unions with assets less than $100
million) and publishes its certification and a short, explanatory
statement in the Federal Register together with the rule.
Data currently available to the NCUA are not sufficient to estimate
how many small credit unions make residential real estate loans in
amounts that fall between the current and amended thresholds.
Therefore, the NCUA cannot estimate how many small entities may be
affected by the increased threshold and how significant the reduction
in burden may be for such small entities. The NCUA believes, however,
that the threshold increase will meaningfully reduce burden for small
credit unions. Accordingly, the NCUA certifies that the final rule will
not have a significant economic impact on a substantial number of small
credit unions.
B. Paperwork Reduction Act
The Paperwork Reduction Act of 1995 (PRA) applies to rulemakings in
which an agency by rule creates a new paperwork burden on regulated
entities or modifies an existing burden (44 U.S.C. 3507(d)). For
purposes of the PRA, a paperwork burden may take the form of a
reporting, recordkeeping, or third-party disclosure requirement,
referred to as an information collection. The NCUA may not conduct or
sponsor, and the respondent is not required to respond to, an
information collection unless it displays a valid Office of Management
and Budget (OMB) control number.
This final rule increases the threshold from $250,000 to $400,000
for a residential real estate transaction on which an appraisal is
required. Transaction values of less than $400,000 do not require an
appraisal, but a written estimate of market value. The information
collection requirement of this part is that the FICU retain a record of
either the appraisal or written estimate of market value, whichever
applies. Even though the threshold has increased, the proposal will not
result in a change in burden. This recordkeeping requirement is cleared
under OMB control number 3133-0125. There are no new information
collection requirements associated with this final rule.
C. Executive Order 13132
Executive Order 13132 encourages independent regulatory agencies to
consider the impact of their actions on state and local interests. In
adherence to fundamental federalism principles, the NCUA, an
independent regulatory agency as defined in 44 U.S.C. 3502(5),
voluntarily complies with the executive order. This rulemaking will not
have a substantial direct effect on the states, on the connection
between the national government and the states, or on the distribution
of power and responsibilities among the various levels of government.
The NCUA has determined that this final rule does not constitute a
policy that has federalism implications for purposes of the executive
order.
[[Page 23917]]
D. Assessment of Federal Regulations and Policies on Families
The NCUA has determined that this final rule will not affect family
well-being within the meaning of Section 54 of the Treasury and General
Government Appropriations Act of 1999.
E. Small Business Regulatory Enforcement Fairness Act
The Small Business Regulatory Enforcement Fairness Act of 1996
(SBREFA) generally provides for congressional review of agency rules. A
reporting requirement is triggered in instances where the NCUA issues a
final rule as defined by section 551 of the Administrative Procedure
Act. An agency rule, in addition to being subject to congressional
oversight, may also be subject to a delayed effective date if the rule
is a ``major rule.'' The NCUA does not believe this rule is a ``major
rule'' within the meaning of the relevant sections of SBREFA. As
required by SBREFA, the NCUA has submitted this final rule to the OMB
for it to determine if the final rule is a ``major rule'' for purposes
of SBREFA. The NCUA also will file appropriate reports with Congress
and the Government Accountability Office so this rule may be reviewed.
List of Subjects in 12 CFR Part 722
Appraisal, Appraiser, Credit unions, Mortgages, Reporting and
recordkeeping requirements, Truth in lending.
By the National Credit Union Administration Board on April 16,
2020.
Gerard Poliquin,
Secretary of the Board.
For the reasons discussed above, the NCUA Board amends 12 CFR part
722 as follows:
PART 722--APPRAISALS
0
1. The authority citation for part 722 continues to read as follows:
Authority: 12 U.S.C. 1766, 1789, and 3331 et seq. Section
722.3(a) is also issued under 15 U.S.C. 1639h.
0
2. Amend Sec. 722.3 by:
0
a. Revising paragraphs (b)(2) and (c)(1); and
0
b. Removing paragraph (f).
The revisions read as follows:
Sec. 722.3 Appraisals and written estimates of market value
requirements for real estate-related financial transactions.
* * * * *
(b) * * *
(2) The transaction is complex, involves a residential real estate
transaction, and $400,000 or more of the transaction value is not
insured or guaranteed by a United States government agency or United
States government sponsored agency.
(c) * * * (1) An appraisal performed by a state-certified appraiser
or a state-licensed appraiser is required for any real estate-related
financial transaction not exempt under paragraph (a) of this section in
which the transaction is not complex, involves a residential real
estate transaction, and $400,000 or more of the transaction value is
not insured or guaranteed by a United States government agency or
United States government sponsored agency.
* * * * *
0
3. Amend Sec. 722.4 by:
0
a. Redesignating paragraphs (c), (d), and (e) as (d), (e), and (f),
respectively;
0
b. Adding a new paragraph (c); and
0
c. In newly designated paragraph (e) removing the text ``Sec.
722.2(f)'' and adding in its place the text ``Sec. 722.2''.
The addition reads as follows:
Sec. 722.4 Minimum appraisal standards.
* * * * *
(c) Be subject to appropriate review for compliance with the
Uniform Standards of Professional Appraisal Practice.
* * * * *
[FR Doc. 2020-08433 Filed 4-29-20; 8:45 am]
BILLING CODE 7535-01-P