In recent remarks to a community banking conference, St. Louis Federal Reserve President James Bullard joined the chorus of voices within the banking sector suggesting one way to ease the regulatory burden of banks would be to raise the threshold for when an appraisal is required.
“Inflation adjustment alone suggests that the threshold in 2015 should be higher,” Bullard explained. “We estimate the number of required appraisals would decline significantly.” The threshold currently stands at $250,000 transaction value for any real estate and $1 million for owner-occupied commercial real estate loans, but some proposals would double the threshold, at least for real estate.
As the federal banking agencies get deeper into the Economic Growth and Regulatory Paperwork Reduction Act process, the Appraisal Institute has been the singular voice cautioning against increasing the threshold, pointing out problems identified in bank failures relating to appraisal management by banks, and at the same time how many banks have learned from past mistakes and embraced the appraisal process by hiring qualified appraisers to manage valuation risk management activities. These operations are helping banks make better informed real estate lending decisions.
Some community banks have made raising the appraisal threshold a big priority, testifying in Congress, as well as during EGRPRA field hearings advancing the proposed increase. The next EGRPRA hearing takes place Oct. 19 at the Federal Reserve Bank of Chicago, and we expect the issue of raising the appraisal threshold to be a hot topic.
Still, the issue runs much deeper than the issues that appear on the surface. Some banks are looking to avoid a fundamental risk management process in large sectors of the real estate market, not only because of an inability to find qualified appraisers, or the cost of the appraisal itself but because of the increased burdens surrounding the appraisal and the appraisal license. Like appraisal service providers, institutionally employed appraisers face a myriad of compliance obligations in maintaining their licenses to prepare appraisals and appraisal reviews, and even obtain licenses in some cases. This realm has become extremely complicated and convoluted for banks from a practice, licensing and management standpoint.
All of these calls for avoidance should tell us something about our regulatory structure, pointing strongly to a need for modernization. Regulatory relief should be advanced not just for banks, but for valuation professionals who are progressively boxed into a corner in the face of rules and regulatory obligations. The current push to opt out of the appraisal process is but one more indication of the need for a fresh look at the appraisal regulatory structure and identifying more efficient and effective systems and operations.