WASHINGTON -- Federal regulators today will propose two significant rollbacks in real estate appraisal requirements as part of President Clinton's campaign to spur lending.
Under the changes:
* The threshold on loans needing appraisals would rise to $250,000 from the current 100,000.
Business loans of less than $1 million would be exempt from appraisals if real state is not the primary source of repayment.
Bankers Praise Move
The banking industry welcomed the changes, which are expected to spur lending by cutting the cost of credit and reducing the time it takes to get a loan.
"It certainly should have a favorable impact, encouraging borrowers who may be on the fence," said Bill Nicholson, director of commercial real state at Barnett Banks in Jacksonville, Fla.
James D. Mclaughlin, director of agency relations at the American Bankers Association, called the new $250,000 cutoff wonderful."
The two proposals are the most important among several scheduled to be announced today by the three federal banking agencies and the Office of Thrift Supervision.
The plan, outlined in a 67-page draft obtained by American Banker, is the guts of President Clinton's ongoing campaign to end the credit crunch.
Other moves to spur lending have already been announced, such as allowing banks to make a limited number of loans that do not have documentation supporting the credit decision.
"In the experience of the agencies, the appraisal requirement has adversely affected the ability of small- and medium-sized businesses to obtain credit," the proposal states.
Under the plan, business loans of less than $1 million will not need appraisals so long as the sale of, or rental income from, the real estate collateral is not the primary source of repayment. Lenders will have to document the ability of the borrower to repay the loan from business operations.
Aspects of Proposal
The proposal would also allow bankers to:
* Deviate from uniform standards on property evaluation. The agencies plan to repeal the appraisal standards issued in 1990 and will then rely on the appraisal industry's standards.
* Use appraisals prepared for other financial services institutions.
* Skip a new appraisal when extending existing loans as long as there has been no material change in market conditions or the property's condition.
* Skip an appraisal when real estate is taken as collateral in what is called an "abundance of caution." This exemption exists today, but regulators said it is being interpreted too narrowly. To widen the exemption, regulators are proposing that a loan's terms may be improved by the real estate.
* Skip an appraisal if a loan is not secured by real estate but is used to purchase property.
* Skip an appraisal if a loan is guaranteed or insured by, or meets the qualifications of, a federal agency or a government-sponsored enterprise.
To avert a repeat of the savings and loan industry's collapse, Congress in 1989 told the regulators to require appraisals on real estate-backed loans. The agencies originally said any real estate-related loan over $50,000 must be appraised by a certified or licensed appraiser. In the spring of 1992, against stiff opposition from appraisers, the agencies doubled the threshold, to $100,000.
The move to $250,000 will surely stir the appraisers' ire, but there is little they can do as Congress in December 1992 said the regulators are free to set the threshold at any level they want.
Donald E. Kelly, vice president for Washington operations of the Appraisal Institute, said in an interview that permitting more loans to be made without appraisals will lead to more bad loans.
"It looks like the administration bought into something that is not going to give them or the bankers what they are after." he said.
While most bankers endorse the changes, some said they would have little impact.
"We're going to get [appraisals] anyway because the credit quality issue is important to us," said David Stimpson, president and chief executive officer, First of America Mortgage Co., Kalamazoo, Mich. "I don't see that it is going to have a major effect on us."
The regulators do not know how many loans between $100,000 and $250,000 will be affected by the proposed changes. In fact, in their proposal regulators ask bankers to provide this data in five pages of specific questions.
The proposal will be put out for public comment for 45 days.