Final Rule from Federal Agencies Raises CRE Appraisal Threshold to $500,000 — Evaluations Are in the Commercial Spotlight
By Jesse Rivera, CEO at New Vista Solutions
On April 2, 2018, three top federal banking regulators (The Federal Reserve, FDIC and OCC) released a new rule that increases the full appraisal exemption level on commercial real estate loans from $250,000 to $500,000 — a bit higher than the $400,000 limit proposed by the agencies last year.
This is a welcomed change for commercial lenders who have expressed concerns that the current $250,000 threshold, put in place in 1994, did not reflect the increased market values of commercial property in recent years.
In the final rule document, page 11, the agencies state, “Increasing the commercial real estate appraisal threshold will provide regulatory relief for financial institutions by removing the appraisal requirement for a material number of transactions without threatening the safety and soundness of financial institutions”.
Although commercial transactions at or below loan amounts of $500,000 will now be exempt from Title XI appraisal requirements, the new rule states that loan providers must obtain an evaluation of the real property collateral that is consistent with safe and sound banking practices.
Evaluations, according to the Agencies’ press release, “provide a market value estimate of the real estate pledged as collateral, but do not have to comply with the Uniform Standards of Professional Appraiser Practices and do not require completion by a state licensed or certified appraiser.”
The Agencies’ rule doesn’t include residential property — that threshold will remain at $250,000. The document defines a commercial real estate transaction as a real estate-related financial transaction that is not secured by a single 1-to-4 family residential property, including single 1-to-4 family construction loans. The rule does provide, however, that a construction loan secured by multiple 1-to-4 family properties would be considered a commercial transaction.
The appraisal threshold for real estate-secured business loans (qualifying business loans, or QBLs) also remains unchanged at $1,000,000. All QBLs with transaction values over $1,000,000 require a Title XI appraisal. QBLs are not dependent on the sale of, or rental income derived from, real estate as the primary source of repayment.
This new rule will not only reduce the cost of determining the market value of a commercial property on loan amounts at or below the threshold, but will relieve the strain of finding qualified appraisers in rural areas. It will also significantly reduce the turn-around time for assessing market value.
The lending community has reacted favorably to the Agencies’ ruling. The American Bankers Association and the Independent Community Bankers of America® (ICBA) have strongly supported an increase in the CRE appraisal threshold.
Camden R. Fine, President and CEO of the ICBA, said, “ICBA commends the federal banking regulators for helping to ease regulatory burdens on community banks by allowing more institutions to use evaluations instead of appraisals. The higher thresholds better reflect the rising cost of commercial real estate in urban communities while providing much-needed alternatives in rural areas, where there is a shortage of licensed appraisers and often few comparable sales of similar properties.”
Providers of evaluation products are gearing up for an increase in order activity. As commercial lenders become more familiar with the evaluation process versus the laborious process of attaining a Title XI appraisal, they’ll need to rely on providers whose products are compliant with Interagency Guidelines that pertain to evaluations (Interagency Appraisal and Evaluation Guidelines).
The new rule will be effective upon publication in the Federal Register, which is expected to happen very soon.
New Vista Solutions offers a suite of evaluation products for commercial lenders. For more information, visit our website at NewVistaSolutions.com.