NCUA’s appraisal plan ignores lessons of last crisis
The National Credit Union Administration’s board of directors is about to take radical action that could significantly damage the nation’s commercial real estate market — and many bankers aren’t aware of it.
The NCUA board may take up this topic as early as its next monthly meeting, scheduled for May 23. Regulators will consider quadrupling — from $250,000 to $1 million — the appraisal threshold for nonresidential real estate loans. The appraisal threshold is the loan amount below which appraisals are not required. Increasing the threshold would drastically increase the number of nonresidential real estate loans that would not require an appraisal.
Bankers, commercial lenders, real estate developers and anyone else involved in the nation’s commercial real estate market should be deeply concerned about the outrageous idea. Why? Because the NCUA’s proposal could recreate conditions that led to the financial crisis of the late 2000s.
The NCUA says its proposal will “provide a measure of regulatory relief and increased clarity.” In fact, the proposed rule is written purely through the lens of regulatory relief — completely ignoring safety and soundness. It ignores the fact that the United States suffered through a financial crisis less than a decade ago. If anything, current market conditions beg for heightened due diligence by regulated institutions today — not a loosening of a fundamental risk management activity.
The proposal would significantly increase the number of credit union loans not requiring an appraisal — with the proportion exempted rising from 27% to 66%. That’s right: Two-thirds of commercial loans issued by credit unions no longer would require an appraisal, what is considered the gold standard for real estate valuation. This change isn’t insignificant: Last year credit unions made $67 billion in commercial loans in this country.
Raising the threshold to such a high level will result in a dramatic loss in appraisal independence and risk mitigation. Optionality for real estate appraisal in commercial lending will result in a return to the loan production-driven environment seen during the lead-up to the financial crisis, where appraisal and risk mitigation were thrust aside to make more — not better — loans.
Here’s another problem: The federal banking regulatory agencies — the Federal Deposit Insurance Corp., the Office of the Comptroller of the Currency and the Federal Reserve Board — last year approved increasing the commercial appraisal threshold from $250,000 to $500,000. So, if approved, the NCUA proposal could create a regulatory arms race between the agencies and the NCUA.
The result could be a catastrophic lack of risk mitigation. At that point, the NCUA — the agency with the least direct experience in overseeing business and commercial real estate lending — effectively would be driving the appraisal policies for the entire financial regulatory system. If the NCUA board approves its proposal, the bank regulatory agencies — despite already determining otherwise — would face pressure to establish a corresponding threshold level to the NCUA’s level.
And it gets worse. Legislation signed into law last December links commercial appraisal threshold levels for two of the Small Business Administration’s most popular loan programs to those established by the federal banking regulatory agencies. Therefore, the NCUA proposal will likely impact not just credit unions and banks, but SBA lenders and risks associated with SBA loans. Nearly all SBA loans would then be subject to a no-appraisal or evaluation loophole. And if the bank regulators were to raise their threshold to $1 million due to pressure from financial institutions, it’s more than likely that SBA would follow suit as well.
All of this raises the question: Has the NCUA learned nothing from the last crisis?
Sadly, none of that seems to matter. Barring some unforeseen event, the NCUA’s board likely will approve its proposal at its May 23 meeting. And that could mean bad news for anyone who cares about the safety and soundness of the nation’s commercial lending system.