U.S. bank regulators are considering easing commercial real estate appraisal requirements, a move that could benefit borrowers. Regulators have concluded that the threshold for mandatory appraisals on commercial property, which hasn’t been raised since 1994, should be increased from $250,000 to $400,000. The residential threshold of $250,000 would remain unchanged.
Small Business Borrowers Benefit
The proposed adjustment is based on an internal review of rules at the Federal Reserve, Office of the Comptroller of the Currency, and the FDIC under the Economic Growth and Regulatory Paperwork Reduction Act. The change would be welcome news to small business owners, as they would see a reduction in their borrowing costs. Banks would also benefit, particularly those in more rural areas where appraisers can be difficult to find. Properties that could be affected include warehouses, farms, rental housing, and a multitude of small businesses.
Evaluations vs. Appraisal
It’s important to note that, even if the threshold adjustment is approved, evaluations would still be required to satisfy lending regulations on those properties that no longer depend on an appraisal.
Evaluations are generally required for nearly all lending transactions secured by real estate and they currently can be used in lieu of appraisals for transactions where:
- The loan amount is $250,000 or less.
- The transaction is a business loan of $1 million or less, and the primary source of repayment is not real estate rental or sale income.
- There is no new money advanced in an existing credit extension (except for closing costs).
- New money is advanced in an existing credit extension, but there’s no material change to the property that threatens the adequacy of the collateral.
The services of an appraiser are presently required on any loan of $1 million or more, on commercial loans over $250,000 (except for one- to four-family properties), and complex residential loans of $250,000 or more.
Pros and Cons of a New Threshold
Proponents of the new rules say it will help a lot of small and mid-sized borrowers – especially those in rural areas where obtaining appraisals is not as efficient as in larger markets – who need a speedy approval process. They see it as a positive move, creating a customer-centric model that drives out inefficiencies of the current regulations.
Opponents understand that lenders are not happy that commercial appraisals can take a long time to complete and cost the borrower thousands of dollars, but also feel they are the only reliable way to measure a property’s worth. They’re also concerned about the impact of the new threshold on the appraisal industry. Those who support the change counter that it can often be difficult finding an appraiser in rural areas.
What’s certain is that the new administration has indicated its desire to ease regulations on lending, especially for small businesses, and the Federal Reserve has said it’s interested in alleviating some of the burdens that appraisal requirements bring with them. It’s also worth noting that it’s been over 20 years since regulators increased the appraisal threshold from $100,000 to $250,000. In any event, time will tell which side prevails.