Banks, appraisers assail NCUA rule as 'bad public policy'
The National Credit Union Administration on Thursday approved a controversial proposed rule regarding appraisals for commercial real estate loans, triggering a double-barreled rebuke from bankers and appraisers but garnering broad credit union support.
The revised rule increases the threshold for requiring an appraisal for a CRE loan from $250,000 to $1 million. That’s twice as high as the threshold for banks, though it affects only a tiny class of credit union assets.
The National Association of Federally-Insured Credit Unions was quick to declare its support for the regulation “as it better aligns credit unions' standards with those contemplated by the other banking regulators and provides meaningful relief for rural areas,” Director of Regulatory Affairs Ann Kossachev said in a press release.
The Credit Union National Association and the National Association of State Credit Union Supervisors also applauded Thursday’s move.
“CUNA advocated strongly to raise the threshold for required appraisals for commercials loans to $1 million from $250,000, which will provide relief for credit unions,” Chief Advocacy Officer Ryan Donavan said in a statement to Credit Union Journal.
The NCUA’s governing board, which met at the agency's headquarters in Alexandria, Va., for its regular monthly meeting, approved the rule in a 2-1 vote, with board member Todd Harper casting the lone "no" ballot.
Bankers labeled the move as bad public policy. Appraisers called it reckless.
“This is an outlandish scenario for anyone who cares about the safety and soundness of the nation’s commercial real estate lending system, and it could recreate conditions that led to the financial crisis of the late 2000s,” Appraisal Institute President Stephen S. Wagner said in a press release.
Banking industry regulators doubled their appraisal threshold to $500,000 in April 2018. They’re also weighing a proposal to increase the threshold for residential loans from $250,000 to $400,000.
Before Thursday’s vote, the credit union threshold had never been higher than banks’, and for long stretches had been lower. Even now, select bank CRE loans up to $1 million in value that are secured by real estate do not require a certified appraisal.
“Appraisers don’t want fewer paid extensive appraisals,” former NCUA Chairman Dennis Dollar said in an email. “It is a matter of economic interest, and their position is totally what one would expect of a trade association for appraisers … NCUA’s action does not impact underwriting, which is the key safety-and-soundness component in business lending, not the appraisal on smaller business loans less than $1 million.”
According to the NCUA, increasing the threshold to $1 million will exempt about two-thirds of credit unions’ CRE loans from the need to obtain an appraisal, so the regulatory-relief component is significant. At the same time, CRE remains a relatively small part of most credit unions’ balance sheets, comprising about 4% of the industry’s $1.5 trillion in assets.
“Rethinking the appraisal rule is an example of regulatory reform that is positive and can help boost economic activity and job creation, particularly in some of our nation’s more hard-pressed areas,” NCUA Chairman Rodney Hood said.
Even under the new rule, some CRE loans under $1 million in value would still require an appraisal if they’re deemed complex or if $250,000 or more of the value is left unprotected by insurance or a loan guarantee.
While the new rule doesn’t require appraisals, it does call for written estimates by an individual qualified to perform such a task and who has no financial interest in the property in question.
Despite these safeguards, bankers said, the NCUA is pushing the regulatory envelope.
“Eliminating the parity between NCUA and other financial regulators is bad public policy that will lead to a buildup of risk in less-regulated credit unions that already have weaker capital standards than banks,” Ken Clayton, head of the American Bankers Association’s office of legislative affairs, said Thursday in a statement to Credit Union Journal. “This rule is just one more reason why lawmakers need to take a hard look at NCUA for failing to exercise its congressionally-mandated oversight of the credit union industry.”
Wagner of the Appraisal Institute said the NCUA’s higher threshold “could create a regulatory arms race.”
“The bank regulatory agencies — despite already determining otherwise — will face pressure to establish a corresponding threshold level to the NCUA’s level,” Wagner said.
In other actions, the board also approved a rule updating the NCUA’s regulations regarding fidelity bonds, as well as a proposed policy statement that would allow individuals convicted of certain minor offenses to return to work in the credit union industry without applying for the board’s approval. The unanimous vote on the policy statement came less than a month after Hood urged financial institutions in an editorial to rethink hiring practices that close the door on “applicants with a checkered past.”