NASCUS Comments on Proposed Rule: Real Estate Appraisals (RIN 3133-AE98)

January 28, 2020

Gerard Poliquin

Secretary of the Board

National Credit Union Administration

1775 Duke Street

Alexandria, VA 22314

Re: NASCUS Comments on Proposed Rule: Real Estate Appraisals (RIN 3133-AE98)

Dear Mr. Poliquin:

The National Association of State Credit Union Supervisors (NASCUS)[1] submits the following comments in response to the National Credit Union Administration’s (NCUA’s) request for comments on Proposed Rule: Real Estate Appraisals (RIN 3133-AE98).[2] NCUA’s proposal would increase the threshold level below which licensed or certified appraisals (appraisals) would not be required for residential real estate-related transactions from $250,000 to $400,000. Consistent with the requirement for other transactions that fall below applicable appraisal thresholds, federally insured credit unions (FICUs) would be required to obtain written estimates of market value of the real estate collateral in a manner consistent with safe and sound banking practices in lieu of an appraisal. The proposal would also explicitly codify the longstanding practice of adherence to the statutory requirement that appraisals be subject to appropriate review for compliance with the Uniform Standards of Professional Appraisal Practice (USPAP).[3] NCUA’s proposal is consistent with the final appraisal rule for banks issued by the Federal Banking Agencies (FBAs) that increases the threshold level at or below which appraisals are not required for residential real estate transactions from $250,000 to $400,000.[4]

As NCUA Chairman Rodney Hood noted in a November 25, 2019 editorial, it has been 17 years since the appraisal threshold was last raised.[5] At the time of the increase to $250,000 the median price for existing home sales was $170,800. In 2019, the median had increased to $285,300. We agree it is prudent to review, and raise, that threshold today.

NASCUS recognizes the important role appraisals play in both safe and sound underwriting as well as protecting credit union members. After careful review of the proposed changes to residential real estate appraisal rules, we support the proposed amendments to NCUA Rules and Regulations Part 722. We commend NCUA on the thoroughness of the agency’s review of the issues related to appraisals for residential real estate loans. Properly calibrated appraisal supervision should balance safety and soundness, consumer protections, and the ability of borrowers and lenders to close transactions in an efficient and cost-effective manner.

As discussed in more detail below, we find the proposed rule satisfies all three of the above public policy considerations while establishing a threshold appropriate for today’s residential real estate market.

Raising the Threshold Would Not Compromise Safety and Soundness

Title XI expressly authorizes NCUA to establish thresholds at or below which appraisals are not required so long as such a threshold would not represent a threat to the safety and soundness of FICUs.[6] As the prudential regulators for federally insured state-chartered credit unions (FISCUs), state regulators would never concur with a rule that unduly risked the safety and soundness of a state credit union. The proposed rule does not present a risk to the safety and soundness of FICUs.

We base our conclusion in large part on the following four considerations:

  • The general supervisory experience of state regulators and historical credit union performance demonstrates credit unions can manage an increased appraisal threshold.

In general, credit unions tend to be relationship lenders. The membership relationship between the credit union and the member borrower provides risk mitigation benefits that combine with a generally conservative risk tolerance in credit unions to mitigate the overall risk in credit union real estate lending. As one stakeholder characterized it, credit unions are more likely to bet on the member than to bet on the deal.

This member centric and conservative approach to lending was evident during the height of the 2007-2010 recession. Throughout the financial crisis credit union failure rates lagged behind other marketplace participants. For example, in 2008 credit unions failed at 1/3 the rate of some financial service entities and by 2010 had a failure rate 1/5 of some non-credit union entities.[7] Furthermore, as NCUA notes, a review of NCUA Inspector General Material Loss Reviews (MLRs) reveals that out of 27 MLRs, only 14 were residential real estate related and none of those 14 resulted from the lack of appraisals.[8]

The review of credit union performance during the 2008 recession and the determinations of the MLRs that utilizing alternatives to appraisals did not contribute to credit union failures support the conclusion of regulators based on supervisory experience that raising the threshold to $400,000 would not negatively affect safety and soundness.

  • NCUA’s thorough analysis of credit union data establishes that the FICU system can manage an increase in the appraisal threshold.

In addition to the general supervisory experience of state and federal regulators, NCUA also provides a thorough analysis of credit union performance data that supports the conclusion that raising the appraisal is a prudent supervisory decision. A review of the charge-off data from 1994 to 2018 demonstrated that FICU residential real estate charge-offs did not increase when the appraisal threshold was previously increased from $50,000 to $100,000 in 1995, or when the threshold was increased to $250,000 in 2001.[9]

NCUA’s data on the number of transactions that would be exempted from appraisals under the proposed rule compared to the current number of covered transactions as well as the number of covered transactions in 2001 when the threshold was last increased is particularly compelling. Under the proposed rule, NCUA estimates that 94% of transactions and 83% of the dollar amount of credit union residential real estate transactions would be exempt from the appraisal requirement. While those numbers represent an increase from the current number of exempt loans, they are consistent with the number of exempt loans in 2001 when the threshold was raised.[10] Finally, NCUA’s proposed rule would only exempt an additional 46,000 transactions representing $14 billion in residential real estate transactions from appraisal requirements. This equates to approximately 0.9% of FICU assets.[11]

Taken together, NCUA’s data points clearly support the conclusion that the credit union system, and state and federal supervision, can safely manage the increase in the appraisal asset threshold.

  • Regulatory requirements for credit unions to obtain written estimations of market value for transactions below the threshold mitigate risk that the underlying collateral does not support the loan.

Some parties opposed to increasing the appraisal threshold imply that in absence of an appraisal, lending decisions are made absent any prudent methodologies to establish a value for the residential property. This is simply not the case.

NCUA and state regulators generally require credit unions to obtain a written estimate of market value for any transaction for which an appraisal was not obtained.[12] The written estimate of market value must be performed by an individual with the requisite experience and qualifications, who is independent of the loan process, and who has no direct or indirect financial or other interest in the property or the transaction.[13] Credit unions are expected to have policies and procedures establishing the process for selecting a valuation method commensurate with the risk presented by the prospective loan. Supervisory expectations further mandate that:

“[a]n evaluation must be consistent with safe and sound banking practices and should support the institution’s decision to engage in the transaction. An institution should be able to demonstrate that an evaluation, whether prepared by an individual or supported by an analytical method or a technological tool, provides a reliable estimate of the collateral’s market value as of a stated effective date prior to the decision to enter into a transaction.”[14]

Regardless of the valuation method utilized by the credit union, state and federal examiners review credit union lending practices to ensure safe and sound underwriting.

In some cases, the alternative method of establishing the value of a residential real estate property may result in a more conservative valuation than that resulting from an appraisal. For example, after appropriate due diligence, some credit unions use a jurisdiction’s Tax Assessed Valuation (TAV) to establish the value of potential collateral for a residential mortgage loan. In many jurisdictions, this alternative, recognized by FBAs since 1994 and by NCUA since 2003, may produce valuations that are substantially lower than an appraisal’s market value determination, in turn leading to more conservative lending decisions.

Ultimately, the issue from a supervisory perspective is to have in place a reliable method for substantiating that the underlying collateral value supports the amount of the loan. Appraisals are not the sole method for so doing, and therefore raising the appraisal threshold while continuing to require an alternative valuation methodology satisfies expectations for safe and sound lending practices.

  • The practice of credit unions voluntarily obtaining appraisals for otherwise exempt transactions also mitigates risks of an increased threshold.

Credit unions, like their banking counterparts, maintain internal policies and procedures requiring appraisals for certain residential real estate transactions below the current $250,000 threshold. These internal policies address prospective loans where the underlying property or some characteristic of the transaction presents unique challenges. For example, a FISCU often voluntarily obtains appraisals for transactions below the threshold in cases where:

  • the credit history of the member presents elevated risk or otherwise complicates underwriting;
  • unique or complicated geographic locations of the underlying property presents valuation challenges;
  • certain loan products or property types are involved such as vacation properties; or
  • certain loan-to-value ratios are triggered.

There is no evidence to suggest that raising the threshold would adversely affect credit union practices of voluntarily obtaining appraisals for more complex, unique, or exotic loans.

Raising the Threshold Does Not Adversely Affect Consumer Protection

The collective experience of state and federal regulators indicates that valuations, like appraisals, can protect consumers by ensuring the value of the property is commensurate with the loan amount. To ensure careful consideration is given to consumer protection, Title XI requires NCUA receive the concurrence from the Consumer Financial Protection Bureau (CFPB or Bureau) that the threshold provides reasonable protection for consumers who purchase 1 to 4-unit single-family residences.[15] While the CFPB has yet to opine on the NCUA proposal, the Bureau did provide concurrence that an identical increase in the appraisal threshold to $400,000 for banks would not adversely affect consumers. The CFPB agreed that the existence of alternative valuation requirements and the practice of voluntarily obtaining appraisals in some cases provided protections for the borrower.[16] The CFPB also found compelling the fact that time and cost savings would likely accrue to some borrowers.[17]

The CFPB did note, and NASCUS concedes, that the raising of the appraisal threshold might mean some borrowers could possibly lose the benefit of the “appraisal contingency” in standard home purchase contracts. However, as the CFPB also notes, borrowers may seek to have similar renegotiation contingency clauses included in the purchase contracts for valuations that fail to meet the purchase price. Furthermore consumers, like lenders, are free to seek an appraisal if circumstances related to the property or the loan give rise to concerns related to the true value of the property.[18]

The fact is that in today’s marketplace, a prospective borrower has access to broad area of information on home values, sales prices, trends, tax assessments, and other data with which to make informed credit decisions. In addition, pursuant to the Equal Credit Opportunity Act (ECOA), prospective borrowers would receive free copies the valuations performed for exempt transactions to the same extent as they receive appraisals for covered transactions.[19] In addition, as previously noted, a prospective borrower could still elect to independently purchase an appraisal if they wish, essentially giving the consumer the option to voluntarily pay the cost of an appraisal, a cost currently imposed upon the consumer. For those reasons, and those stated above, the increase in the appraisal threshold will not compromise consumer protection.

Consumers Might Benefit from an Increase in the Threshold

Raising the appraisal threshold from $250,000 to $400,000 might also provide tangible benefits to consumers. In some cases, the flexibility for a credit union to use an alternative valuation method may save the borrower hundreds of dollars compared to the cost of obtaining an appraisal. While precise data on potential cost savings is scarce, the FBAs cited information submitted in response to the now finalized proposal to raise the bank threshold to $400,000. The FBAs noted that commenters suggested the cost savings could be in the range of $450 to $600 and some stakeholders suggested to NASCUS cost savings in the range of $500 to $1,000 in some areas.[20] Consistent with those estimates, NCUA cites the cost of an appraisal as between $375 and $900.[21]

Prospective borrowers and credit unions would also save valuable time on transactions where alternatives to an appraisal could be appropriately used. Appraisal alternatives such as the TAV, or custom methodologies can save consumers anywhere from 1-5 days in many markets and several weeks in some markets.[22] In fact, in some rural markets, the cost and time savings to borrowers can be substantial as shortages of certified or licensed appraisers create extensive delays and substantial price increases.[23]

Raising the appraisal threshold will save borrowers and lenders time and money, creating a more efficient and cost-effective home mortgage market.

NASCUS appreciates the opportunity to submit comments to NCUA on the agency’s proposed rulemaking to raise the Title XI appraisal threshold for real estate related transactions. We support the NCUA’s proposed rulemaking. NASCUS would support an even higher threshold and believes there is merit to considering $500,000 as a threshold. However, we do not fault NCUA for taking a more cautious approach. State regulators remain committed to working with NCUA to ensure all lending is conducted in a safe, sound and efficient manner. We encourage NCUA to continue working with state agencies to address appraisals.

 

Sincerely,

 

– signature redacted for electronic publication –

 

Brian Knight

Executive Vice President & General C

[1] NASCUS is the professional association of the nation’s 45 state credit union regulatory agencies that charter and supervise over 2,000 state credit unions. NASCUS membership includes state regulatory agencies, state chartered and federally chartered credit unions, and other important stakeholders in the state system. State chartered credit unions hold nearly half the $1.5 trillion assets in the credit union system and are proud to represent nearly half of the 117 million credit union members.

[2] NCUA Proposed Rule on Real Estate Appraisals, 84 Fed. Reg. 65707 (November 29, 2019).

[3] Dodd-Frank Act, section 1473, Public Law 111– 203, 124 Stat. 1376.

[4] Real Estate Appraisals, 84 Fed. Reg. 53579 (October 8, 2019). The final rule was issued by Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency. The rule became effective October 9, 2019.

[5] Honorable Rodney Hood, “Why Credit Unions Need a Higher Appraisal Threshold for Mortgages”, Credit Union Journal, November 25, 2019. Accessed at https://www.cujournal.com/opinion/why-credit-unions-need-a-higher-appraisal-threshold-for-mortgages.

[6] 12 U.S.C. 3341(b).

[7] Matt Cropp, “In Pictures – Banks vs. Credit Unions in the Financial Crisis”, The Motely Fool, published November 22, 2011. Accessed at https://www.fool.com/investing/general/2011/11/22/in-pictures-banks-vs-credit-unions-in-the-financia.aspx.

[8] 84 Fed. Reg. 65712 (November 29, 2019).

[9] 84 Fed. Reg. 65712 (November 29, 2019).

[10] Id. See Table 2. NCUA estimates that approximately 77% of transactions representing 55% of the total dollar amount are currently exempted. In 2001, 95% residential transactions and 80% of the dollar amount were exempted.

[11] Id. at 65712.

[12] 12 C.F.R. 722.3(d).

[13] Ibid.

[14] NCUA LTCU 10-CU-23 “Best Practices in Real Estate Appraisals” incorporating “Interagency Appraisal and Evaluations Guidelines”, December 2, 2010, at p. 12. Available at: https://www.ncua.gov/files/letters-credit-unions/LCU2010-23Encl.pdf.

[15] 12 U.S.C. 3341(b).

[16] CFPB letter to the Federal Bank Agencies, August 5, 2019. Available at https://files.consumerfinance.gov/f/documents/cfpb_firrea-concurrence_2019_08.pdf.

[17] Ibid.

[18] See footnote 20 of CFPB letter to Federal Bank Agencies. We note that the fact that alternative valuation contingency clauses are not commonplace may further indicate consumer confidence in the value-to-loan aspect of the transaction and therefore by further proof that consumer protection is not at risk in these transactions.

[19] 15 U.S.C. 1691

[20] Federal Banking Agencies Final Rule, “Real Estate Appraisals”, 84 Fed. Reg. 53579 (October 8, 2019). NASCUS stakeholder comments received from FISCU members of NASCUS in response to call for comments on proposed appraisal rule.

[21] 84 Fed. Reg. 65709 (November 29, 2019).

[22] Ibid.

[23] Congress recognized the problems for borrowers and lenders being caused by shortages of appraisers and responded by authorizing the Appraisal Subcommittee (ASC)of the Federal Financial Institutions Examination Council (FFIEC) to waive, with the concurrence of the FFIEC, any requirement related to Title XI waivers. In 2019, the ASC and the FFIEC granted a temporary waiver to the state of North Dakota based on a showing of a shortage of certified or licensed appraisers in rural sections of the state. See Appraisal Subcommittee; Final Order Granting in Part Temporary Waiver Relief 84 Fed. Reg. 38631 (August 7, 2019).