The National Credit Union Administration’s (NCUA) new appraisal threshold rule for commercial real estate loans will go into effect on October 22, 2019. Under the NCUA’s new appraisal rule, credit unions will not be required to obtain an appraisal for commercial real estate transactions less than $1 million. The new rule sharply increases the appraisal threshold, which the NCUA previously set at $250,000.
As a basis for the increase, the NCUA noted that the appraisal rule had not been updated since 2001. Since that time, the rising values of commercial properties have resulted in a higher proportion of commercial real estate transactions requiring an appraisal, leading to increased burden in time and cost for credit unions. The NCUA, however, stressed that the appraisal rule balances safety and soundness concerns with necessary reductions in regulatory burdens to address credit unions’ rising costs.
In conjunction with raising the transaction amount threshold, the new appraisal rule also eliminates the prior rule’s categorical exemption from the appraisal requirement altogether for commercial transactions that are partially or fully guaranteed by a U.S. government agency or a sponsored agency. In addressing this change, the NCUA noted that most U.S. government guaranty and insurance programs currently require appraisals so the elimination of the exemption should not materially increase the burden on credit unions.
The new rule also requires credit unions to use their own judgment, “consistent with safe and sound lending practices,” to determine whether a full appraisal by a state-certified appraiser should be obtained for a given transaction that falls below the $1 million threshold. Even if a transaction falls below the $1 million threshold and a full appraisal is not obtained, written estimates of value from an independent third party are still required in many cases. The new rule strengthens the independence requirement for written estimates, requiring the person giving the written estimate to be unbiased and independent of the loan production and collection process.
Credit unions and credit union trade organizations praised the new rule for its potential to reduce regulatory burdens, reduce member costs, and increase access to credit. The NCUA noted in the text to the new appraisal rule that banks, however, submitted comments criticizing the rule for creating an “imbalance in the commercial real estate market between credit unions and banks.” Banks are subject to a $500,000 threshold for general commercial real estate transactions, under regulations issued by the OCC, Federal Reserve, and FDIC.
The new appraisal rule may give credit unions an advantage to continue to increase their presence in the business lending market. Credit unions, however, should be careful to create adequate policies and procedures to address situations where safety and soundness concerns require an appraisal for transactions that fall below the $1 million threshold. A recent report on fraud in small and mid-size business lending revealed that fraud in small business lending impacts credit unions at twice the rate of larger banks.