FDIC raises appraisal threshold to $250,000 for real estate loans.

WASHINGTON -- The Federal Deposit Insurance Corp. on Tuesday approved a rule freeing all real estate loans under $250,000 from certified appraisals.

Although the threshold was doubled to $100,000 in 1990, many bankers said it still slowed lending and drove up borrower costs.

Banking regulators proposed the increase to $250,000 last June as a way to free up more credit.

The new rule also exempts business loans below $1 million from the appraisal requirement as long as the real estate backing the loan is the primary source of repayment.

Lee Swanson, president of the State Bank of Cross Plains, Wis., said the rule is a breath of fresh air in the world of paperwork.

"We were hopeful that the regulators would stick to their guns on this one," he said. "It makes our life a little easier, and it's one less thing our clients need to pay for."

Consumer activists and the appraisal industry fought the plan, insisting that raising the threshold would threaten the safety and soundness of banks.

The controversial change prompted more than 19,000 letters over two separate comment periods.

An FDIC staff paper concludes that the loss rate on residential real estate loans over $250,000 is 0.13%, compared with 0.11% on such loans less than $250,000.

The loss rate is 1.32% on commercial real estate loans over $250,000 and 0.72% on such loans under $250,000, the FDIC said.

The Federal Reserve Board approved the rule in March; the other agencies are expected to soon follow.

Comptroller of the Currency Eugene Ludwig praised the rule at the FDIC's open meeting yesterday, saying it "will provide benefits for depository institutions and customers alike."

Mr. Ludwig said raising the threshold will reduce regulatory requirements without threatening safety and soundness. But, he warned, "banks and thrifts will still be responsible for exercising prudence."

Independent Bankers Association of America president John Shivers said the decision is a great help to small businesses and consumers.

"It's about time," said Mr. Shivers, who is also president of Southwest Bank, Fort Worth. "The agencies have been dragging their feet on this."

Although most bankers are happy with the threshold, some say they'll still have a problem with the Federal National Mortgage Association and the Federal Home Loan Mortgage Corp. Fannie Mae and Freddie Mac require certified appraisals on all real estate loans.

"For volume lenders, this won't change their lives," said Brian Smith, director of policy for the Savings and Community Bankers of America.

Robert F. Mialovich, associate director of the FDIC, said the rule will be effective when it is published in the Federal Register, expected to be any day.

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