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Dodd-Frank rollback weakens appraisal standards

One of the largely unknown provisions of banking regulatory-relief bill, S. 2155, signed into law by President Donald Trump last month, will loosen the standards around appraisals in rural areas.

Under the new law, which is known as the Economic Growth, Regulatory Relief and Consumer Protection Act, smaller banks and credit unions will now be free to waive an appraisal for rural properties valued under $400,000, when they can’t find an appraiser in a timely manner. Bill Garber, director of government and external relations for the Appraisal Institute, spoke with Scotsman Guide News about the particulars of this change and why he’s concerned about a general move in the industry to weaken risk-management standards.

Will there be many instances where a qualifying bank or credit union will be able to waive an appraisal as a result of this law change?

billgarberNot really. Most loans are sold into the secondary market. It is a fairly narrow provision. They are basically looking at rural areas where banks are holding the loans in their portfolio.

The community banks, particularly ICBA [the Independent Community Bankers of America], they were the primary drivers of this. They have been complaining for years about not being able to find appraisers and having their deals slowed down or scuttled because of various accessibility concerns. I think some of that is puffed up, but there are a few markets where there have been some issues. There have been persistent complaints. And you have got members of Congress that are in some of the markets where these complaints have been vociferous, like in the upper Midwest. They have been trying to be responsive.

And what is the Appraisal Institute’s position on the exemption?

It is not something that we support obviously. We don’t support turning away from appraisals. We have tried to make sort of a bad situation better, and I think we have done that. I would say at the outset, at least it involves appraisal. It is not an outright exemption. You had people who were calling for an outright rural-appraisal exemption at $400,000. I am calling it an allowance.

I know the bill calls it an exemption, but it is really an allowance. When they can’t find an appraiser, then they can move on. [S. 2155] requires the banks to contact appraisers on their approved-appraiser list. Not every bank has an approved-appraiser list first of all, so they will have to set that up. They will have to actually engage local appraisers. The bill further requires that the banks engage in customary fees and customary turnaround times.

So, there is some structure around it now. It is narrow. There aren’t many loans that are held in portfolio below $400,000. Most are sold in the secondary market or are guaranteed by an agency. But there are some out there.

This exception is confined then to smaller bank and credit union lending, and to portfolio loans under $400,000?

That is right, and confined to rural areas. So it is even further narrowed. It is not many, and we worked hard to get clarifying provisions added, and we were happy that they were. There are some unresolved questions. I would expect that the bank regulators will continue to require the bank to complete an evaluation [of the property’s value] to have on file. That is not explicitly stated in the bill, but that is stated throughout the appraisal and evaluation requirements throughout the bank regulatory requirements.

That will need to be confirmed that the bank regulators expect that the banks, if they are not doing an appraisal, that they have something on file. They call that an evaluation. The other important point is the applicability of the regulation that requires the disclosure of the evaluation or appraisals used in underwriting the loan to the consumer. I would expect that the [Consumer Financial Protection Bureau] will require that those rules remain in effect. Even with this allowance, I expect that the banks are still going to be required to disclose to the consumer whatever evaluation was done by the bank. That will need to be clarified in rule-making or advisory comments from the agencies. 

Are you concerned that once this exemption is implemented, it will be expanded at some future point to allow all lenders in all areas to waive appraisals for properties purchased under a certain amount? This first change would, in other words, be a starting off point for a general loosening in standards.

Yes. We have had continuing concerns with what has been a pendulum swinging back to regulatory relief and loosening risk-management requirements. This is part of that wave. It really started with the discussions of the bank regulators about the appraisal threshold levels. There is another thing important to remember too that is important to this provision. Appraisals are already exempted to up to $250,000 under previous bank-regulatory requirements. The banks could do evaluations below $250,000 regardless of rural, urban, suburban, commercial, residential, you name it. This is only an incremental change to that. It is from $250 to $400 that was additional to what was already allowed to be done without an appraisal. This goes back to all the different exemptions to appraisal requirements that have been on the books for more than 20 years. 

It is part of an ongoing wave, the pendulum swinging back, an anti-regulatory movement. We have had some concerns with that. We don’t want to lose sight with important safety and soundness safeguards, like appraisals.

So this change in the law emerged from an ongoing review by bank regulators?

They started to evaluate whether they wanted to raise that appraisal threshold level from $250,000 to some figure. That was a three-year review that the bank regulators undertook, and opted not to change it. They left it untouched at $250,000 for residential, but they have increased the commercial real estate appraisal threshold level just in the last month in a half to $500,000. That was increased from $250,000 to $500,000. Up to $500,000 on the commercial side, you can now do these evaluations without an appraisal being prepared.

The other thing too is that Fannie Mae and Freddie Mac have taken some steps to waive appraisals in certain instances, both in loan purchases and in refinances. That has been ongoing for the last 18 months. They have said, well, we are doing that in very low-risk situations, like where they have a good borrower credit, where they have a good capacity to repay the loan, and they are comfortable with the property. They have previous information about it on file. That is all well and good, but what we are seeing is that Fannie and Freddie are competing with one another based on reducing their risk-management requirements.

You are seeing Freddie get very aggressive in waiving appraisals. I have seen ads where they are promoting the appraisal free mortgages. It is kind of a market-share play that they are undertaking. Of course Fannie is the larger player, but they are not going to just let Freddie do that. They are not going to just let Freddie step in there and take market share from them, and so they are going to race to the bottom. Our view is, haven’t we learned the lesson from the last 15 years? That is the last thing we should be doing with groups in conservatorship is allowing them to take risks, particularly on risk management when it comes to safety and soundness issues.  

Could Congress have made changes that would help ease the shortage of appraisers in rural areas?

We need to make it an attractive proposition for appraisers to work in those markets. That comes down to issues like the regulatory environment for appraisers, the profitability of being an appraiser, the fees that are being paid in the market. This [the regulatory environment] is putting added pressure on the appraiser-service providers, and I don’t thinking it is helping to address the underlying concern that people are raising, which is the accessibility issue. How are we going to get new people into the industry or the next generation if we are waiving ourselves out of the process?   


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