NCUA appraisal plan is far from risky
The National Credit Union Administration’s proposal to raise the appraisal threshold for credit union nonresidential real estate loans is the type of deregulatory action that deserves praise by those who oppose unnecessary and overly burdensome regulation.
Without question, raising the threshold from $250,000 to $1 million will address appraiser capacity issues that have plagued smaller, underserved markets. In addition, it will prevent unnecessary delays in loan closings and reduce costs for borrowers, all while posing no safety and soundness risk to the U.S. economy or American consumers.
Taking into account years of historically sound valuation practices, credit unions have proved adept at determining whether to use an appraisal or a market value estimation when approving commercial loans valued up to $1 million. Leaving the current threshold of $250,000 in place is tantamount to supporting regulation simply for the sake of regulation — or, to put it bluntly, an infatuation with piling needless, cumbersome and time-consuming paperwork onto consumers.
While opponents of the NCUA’s appraisal proposal argue its passage would recreate the conditions that led to the financial crisis, revive risky lending practices, and overall fulfill Chicken Little’s “sky is falling” prophecy, I cannot help but feel they have been in a deep, deep slumber for the past 11 years. And despite claims to the contrary, there’s little reason to believe that the bank regulators will follow suit in raising their own threshold to meet a new NCUA standard.
Certainly, the 2008 financial crisis was a serious downturn for many American families, but credit unions did not contribute to the crisis. At no time in our nation’s history has the credit union industry posed a safety and soundness risk to our financial system — let alone for its portfolio of nonresidential real estate loans.
As the NCUA noted in its proposal, commercial loans represent only 5.7% of credit unions’ total assets, and less than 53% of their total net worth. For context, commercial loans represent 25% percent of bank total assets and 267% of their Tier 1 capital.
While the NCUA’s proposal would reduce the number of nonresidential real estate loans requiring appraisals, nearly 90% of the total dollar amount of those loans will still be subject to an appraisal. Yet the overall caseload would decrease by 39%, providing significant relief to credit unions and savings for their members.
The proposal invokes no substantive change that puts credit unions, consumers or the economy at risk. In fact, the NCUA notes that any emerging risks can be properly accounted for “through sound risk management practices” by the credit union.
Over the past three decades, poorly underwritten and administered commercial real estate loans by the banking industry were a key component in increased levels of loan losses and contributed to the failure of financial institutions. The same is not true for credit unions.
Until banks reform their corporate structures, divert profits back to customers instead of shareholders, and grant their customers voting rights, credit unions will remain starkly different — and the banking regulators must treat them as such.
For the NCUA, it should be full steam ahead toward raising the appraisal threshold for nonresidential real estate loans made by credit unions. We fully support their efforts to do so, as this proposal is the right move for credit unions, consumers and the U.S. economy.