Compliance Blog

Jul 31, 2019

NCUA Increases Commercial Loan Appraisal Threshold!

Greetings Compliance friends!

In their July Board meeting, NCUA's Board approved a final rule, which increases the loan value threshold for when a commercial real estate appraisal is not required from $250,000 to $1,000,000. In addition to the threshold adjustment, the final rule also includes an exemption for real estate transactions in rural areas as well as other clarifying revisions and amendments. NAFCU previously blogged about the proposed rule and examination expectations which may provide additional information. This is a welcome relief for credit unions and presents a good opportunity to review NCUA’s appraisal rules, which we have not blogged about in some time.

Appraisal Thresholds. Section 722.3 generally requires an appraisal for federally related real estate transactions unless an exception applies. The Final Rule amends several of these exceptions, the first being a threshold exception. NCUA's appraisal rules do not apply to most residential loans if the transaction value is $250,000 or less. Generally, any residential loan with a transactional value of $26,700 or less requires only a “written valuation” that meets specific requirements under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA). A residential loan valued between $26,700 and $250,000 only requires a formal appraisal if it is a "higher-priced" mortgage loan, and most residential loans of $250,001 or more require a formal appraisal. See, 12 Part 1026, Supp. I, Comment 35(c)(2)(ii)-3(vi). As previously discussed, an appraisal is required for non-residential loans valued at $1,000,000 or more.

Appraisal Requirements. For residential transactions requiring an appraisal, section 722.3(c) requires that the appraisal be "performed by a state certified or licensed appraiser." For non-residential transactions carrying a value above the newly established $1,000,000 threshold, an appraisal may only be performed by a state-certified appraiser. See, 12 CFR §722.3(b). Similarly, if the transaction is “complex” as newly defined in the final rule, then the appraisal may only be performed by a state-certified appraiser. The rule defines a complex transaction as one in which “the property to be appraised, the form of ownership or market conditions are atypical.” Credit unions may assume that a residential real estate transaction is not complex unless information to the contrary becomes readily available. Under the current rule, complex was limited to 1-to-4 family residential properties. While the requirements are the same, the final rule removes this limitation and reformats the definition to include the presumption that transactions are not complex. See, 84 Fed. Reg. 35528.

Exception For Rural Areas. Section 103 of the Economic Growth, Regulatory Relief, and Consumer Protection Act (the EGRRCP Act) amended FIRREA to exempt federally related, rural real estate transactions valued below $400,000 from the appraisal requirement if no state-certified or state-licensed appraiser is available. Although these changes will be integrated into new section 722.3(f) of NCUA’s appraisal rule, the final rule explains that this exemption is self-implementing through the passage of the EGRRCP Act, thus credit unions may use this exemption immediately. See, 84 Fed. Reg. 35534.

Exception For Government-Backed Loans. The Final Rule also changes the exception for real estate loans that are partially or fully guaranteed by a U.S. government agency or sponsored agency. Under the current section 722.3(a)(7), such loans received a categorical exemption from the appraisal and written evaluation requirements of part 722. Going forward, NCUA establishes a new threshold, whereby loans with a transactional value less than $1,000,000 remain exempt from NCUA’s appraisal requirements. It is important to keep in mind that credit unions may still be required to follow any applicable appraisal requirements of the government guarantee or insurance program associated with the loan. See, 84 Fed. Reg. 35530.

Written Valuations. The Final Rule also presents other more minor modifications to the exceptions listed in section 722.3(a). For exempt transactions, section 722.3(d) provides that a written valuation may be performed in lieu of a formal appraisal. The current rule requires that any written valuations be completed by an uninterested, qualified and experienced party. Given the threshold increase, the Final Rule strengthens this language and introduces an additional independence prong. Here is an excerpt from the preamble explaining NCUA’s rationale:

“…The final rule has also strengthened the independence requirements for persons performing written estimates of market value as compared to the current rule. The Board believes that an enhanced independence requirement for written estimates of market value is an important prudential safeguard, as the final rule permits commercial real estate transactions that are less than $1 million to have a written estimate of market value instead of a state-certified appraisal. Accordingly, under the final rule, the individual performing a written estimate of market value must be independent of the loan production and collection process. If independence cannot be achieved, the credit union must be able to demonstrate clearly that it has prudent safeguards to isolate its collateral valuation program from influence or interference from the loan production process and collection process.”

See, 84 Fed. Reg. 5533.

These amendments go into effect on October 22, 2019. For additional information, Appendix A to the Interagency Appraisal and Evaluation Guidelines, provides guidance on compliance with the FIRREA rules. The guidance was joined by NCUA, and attached to Letter to Credit Unions 2010-23. Appendix B of the Interagency Guide also provides minimum requirements for written estimates of market value. Members can learn more about the final rule in NAFCU's Final Regulation Summary.