Tag Archives: FIRREA

A REAL-WORLD SCENARIO AND HOW FIRREA ADDRESSES IT

August 2, 2018 – First, thanks to a bank client for sharing some real-world situations with me and allowing me to post them to my blog.  Also, thanks to the regulators for providing anonymous explanations of how FIRREA applies.

SCENARIO – Any City USA – We financed one 4-plex (units cannot be sold individually) and eventually there may be more than four 4-plex properties.  At what point do we consider this tract development, therefore would need discounted cash flow analysis completed?

Assumption – Ignore any land for future development

Assumption – All development occurs in same development

FIRREA Application Under Several Situations:

First 4-Plex – This is a SINGLE 1-4  Family residential property.  Therefore, the $250,000 threshold applies and an evaluation is required if the loan amount is $250,000 or lower.  As always, the bank can choose to order an appraisal.  If the loan amount is above $250,000 then an appraisal is required.

Two 4-Plexes at once – This falls under Commercial Real Estate Transaction and the new $500,000 threshold.  A loan amount at or below the threshold requires an evaluation and above the threshold requires an appraisal.

Five or more 4-Plexes – This meets the definition of Tract Development and  would need a discounted cash flow analysis completed.  Some exceptions are possible, but generally a DCF analysis is performed.  The $500,000 threshold applies as to whether the DCF is done in an evaluation or appraisal.

With the new definition of Commercial Real Estate Transaction and the new threshold of $500,000, the above project shows the realm of possibilities.

As always, please contact me if you want  to discuss this.

Also, as always, I encourage you to contact the authors of the 2018 interagency bulletin that introduced the new definition and threshold.  They can give an ‘official’ opinion on how to handle your particular situation.  You do not need to provide a borrower’s name or such.  They simply want to help you follow FIRREA correctly.

I will be posting a few more scenarios over the next few weeks….check back often:)

And remember, Spend Forward, Use Forward!

 

REVISIONS MADE TO TITLE XI OF FIRREA

April 2, 2018 (UPDATED) – The Agencies have finally released ‘The Final Rule’ for updates to FIRREA.  A copy of the document can be found at:

https://www.fdic.gov/news/board/2018/2018-03-20-notice-sum-c-fr.pdf

The main change is increasing the de minimus level for commercial real estate transactions from $250,000 to $500,000.  Although this might seem significant, it is basically an adjustment for inflation from the last change to $250,000 in 1994.

Also, the definition of ‘commercial real estate transaction’ has been updated.

The changes are not in effect until published in the Federal Register,  I will update this post when this occurs.  UPDATE – This document is now live as it is in the Federal Register.

Financial institutions should update their appraisal/evaluation policies accordingly.

 

AGENCIES PROPOSE TO INCREASE ONLY ONE THRESHOLD A SMALL AMOUNT

July 24, 2017 – The Federal Agencies published the following on July 19th:

The FDIC, the Board of Governors of the Federal Reserve System, and the Office of the Comptroller of the Currency (the Agencies) are jointly issuing a notice of proposed rulemaking titled Real Estate Appraisals (Appraisal NPR) that will be published in the Federal Register for a 60-day comment period. The Appraisal NPR proposes to increase the current appraisal threshold for commercial real estate (CRE) transactions from $250,000 to $400,000. The Appraisal NPR addresses comments received during the Economic Growth and Regulatory Paperwork Reduction Act (EGRPRA) review process, which requires that, not less than once every ten years, the Agencies, along with the Federal Financial Institutions Examination Council, conduct a review of the Agencies’ regulations to identify outdated or otherwise unnecessary or burdensome regulatory requirements.

You can get their full 60-page report at:

https://www.fdic.gov/news/board/2017/2017-07-18-notice-dis-a-fr.pdf

The one thing I found amusing was their statement that it takes about 40 minutes to review an appraisal.  Who did they survey?

I have reviewed over 4,000 commercial appraisal reports for the past 25 years.  I consider myself extremely fast.  Plus, many times I am reviewing reports of the same appraisers I have seen 10 or 20 or 50 times before.  That helps to speed up reviews as we know where everything is in a report.

In all of the time studies I have been part of or heard about for the past 25 years, the average time to perform a Compliance Checklist is 2 hours and to perform a Technical Review is 4-8 hours.

But, that is not an important issue.  The only suggestion being made is to increase the $250,000 threshold for all commercial loans up to $400,000.  The business loan exemption will stay at $1,000,000 and the residential (1-4 units) loan exemption will stay at $250,000.

These are minor changes and quite surprising to me.  Based on inflation alone (which they present in their report), I would increase the $250,000 to $500,000 and the $1,000,000 to $2,000,000.  Based on the stats they present, this would keep appraisal volume at 1994 levels (appraisal volume has increased steadily over the past 23 years).

If I really had my way, I would eliminate appraisals for all business loans and residential loans.  Appraisers know that the value when a new loan is made is meaningless.  These type of loans are based on credit not real estate.  The banks only need to know the real estate value years in the future when a foreclosure might occur.

Which, of course, always brings us back to my call for America to adopt Mortgage Lending Value/Long-Term Sustainable Value…..but, I digress.

Remember, you have the opportunity to send in your opinion to the Agencies.  This is probably the first time in 23 years that your opinion has been asked for in regard to FIRREA.  And, it will be the last time for another 10 years.  Speak up…this is the time to do such.

5 STATES DOWN, 45 TO GO

May 19, 2017 – I was notified this week that Illinois has had a law on their books that allows licensed appraisers to perform non-USPAP Evaluations.  I have no clue how long it has been there.  Maybe someone from Illinois knows and can tell me.  So, we are actually at 5 states now, albeit Virginia has a technical glitch that will delay the law for a year.  Following is an excerpt from the law (I will add emphasis to the key words) and additional explanation I have received from my ‘sources.’  (oh geez I sound like the Fake News Media!)

225 ILCS 458/5-5a – “It is unlawful for a person to …. (ii) develop a
real estate appraisal, (iii) practice as a real estate appraiser… without a license issued under this Act.”
225 ILCS 458/5-5g – “This act does not apply to”….
[1] an employee, officer, director, or member of a credit or loan
committee of a financial institution or any other person engaged by a financial institution when performing an evaluation of real property for the sole use of the financial institution in a transaction for which the financial institution would not be required to use the services of a State licensed or State certified appraiser pursuant to federal regulations adopted under Title XI of the federal Financial Institutions Reform, Recovery, and Enforcement Act of 1989… (emphasis added)
The state board has confirmed to several people that state-certified appraisers are permitted to perform non-USPAP compliant evaluations when engaged by an institution.  The only caveat is that the appraiser cannot sign as an appraiser, reference their state credential or any appraisal related designations.

CONGRATS VIRGINIA! 4 DOWN, 46 TO GO

March 27, 2017 – I’ve been campaigning since 1994 to get states to pass laws that allow licensed appraisers to perform non-USPAP compliant Evaluations.  After 23 years, we now have the 4th state to invoke such a law.  Congrats to Virginia and all of its appraisers that can now complete on a level playing field.

We have a long way to go.  But, hopefully, this is gaining steam and appraisers in every state will get to work on getting similar laws passed sooner than later.   Florida and North Carolina have similar laws up for consideration right now.

Just fyi, I think the Tennessee law is the best, but the Indiana wording is very good, too.

My alter ego, Johnny Evaluationseed, is proud to see such progress:)

If you are trying to get this law passed in your state, please feel free to contact me.  I would be glad to help in any way I can.  In a few days I will be posting a list of Q&As that address the typical opposition to these laws.  I hope you find it useful.  Feel free to use it, albeit I would appreciate knowing where it is being passed around.  Just curious which states are considering the law is all:)

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ADDED April 27, 2017 – There has been some confusion among appraisers.  I received the following explanation which I think clarifies the law.  I hope it helps.

The new law very clearly says that “The provisions of this chapter DO NOT APPLY” to an appraiser performing an evaluation.   So once you make the determination that: 1) you are an appraiser; and 2) that you are performing an evaluation as permitted in the law, then the rest of the law in the chapter does not apply, including anything related to USPAP compliance.   At that point (appraiser performing an evaluation), you are 100% outside of the appraiser licensing law and the VREAB would have absolutely ZERO jurisdiction over you as it relates to ANYTHING.

 

Agencies Finalize EGRPRA Review with Joint Report to Congress

March 22, 2017 – After about 2 years, FFIEC has finally published their report that includes dealing with appraisal issues.

The link is below.   Pages 28 to 40 deal with appraisal issues.  Albeit, appraisals are discussed a bit in a few other places.  As noted, these are NOT final and official changes.

In general, if the proposal does not change, this is a big win for appraisers.  The small increase in a single threshold will not have a major affect on appraisal volume.

https://www.occ.gov/news-issuances/news-releases/2017/nr-ia-2017-33a.pdf?utm_campaign=ABA-Newsbytes-032217-HTML&utm_medium=email&utm_source=Eloqua

TRANSACTION VALUE

February 17, 2017 – I received the following question:

QUESTION:  I had an appraisal/FDIC interpretation question in regards to the $250,000 transaction value from fil10082a and thought I’d reach out and see if you could provide any input.

Example:  An individual identified a situation where there’s an existing $1,300,000 loan and a borrower is requesting another $200,000 for improvements.  Is the “transaction value” (as defined in FDIC fil10082a) $200,000, which is the new subsequent request OR is it equal to the new exposure of $1,500,000?  All else equal (market values have held, no material property deterioration, etc.), no new appraisal would be required if the transaction value is under $250,000.

Any input you could provide would be appreciated.

ANSWER:  The transaction amount is the total $1.5 Million.

Assuming no change in market conditions or collateral protection, an evaluation is permitted and an appraisal is not required.

However, you should consider getting an appraisal if there were potential credit risk management concerns.

Also, regulators want banks to have a policy on when to obtain appraisals even though an evaluation is permitted.

ADDITIONAL NOTE – There is no dollar threshold for loan renewals, refinancings, or subsequent transactions.  The $250,000 and $1,000,000 thresholds only apply to New Loans.

 

WELLS FARGO FINED $190MM TO SETTLE CUSTOMER FRAUD CASE

September 8, 2016 (Update September 21) – Today, Wells Fargo announced it has terminated 5,300 (!!!) employees that created fake accounts and generated fees from the likes of you and me.

http://www.aol.com/article/finance/2016/09/08/wells-fargo-fined-190m-to-settle-customer-fraud-case/21468423/

In the Summer of 2008, the OCC asked me two questions – 1) Did I think banks had learned their lesson, and 2) What would the OCC need to do to stop the bad behavior at banks.

The first answer was an emphatic ‘No.’  I said once the cycle went back to lending, banks would make the same mistakes and break the same laws.  Today is evidence of that.

The second question instantly brought China to my mind.  Hang the CEOs in the Square:)  I told the OCC they needed to enforce their FIRREA fines to the maximum dollar amount.  But, more importantly, they needed to place the violators in prison.  Until CEOs and senior managers and loan officers and so on see their peers being led out of their buildings in handcuffs, they will not change.  My audience was shocked at the answer.  But, I still believe it today.  And I think most of America does, too.

(UPDATE – The manager of the 5,300 employees is being given a $125 Million (!!!) severance package.  I doubt any of the 5,300 employees that got axed received a huge severance package.  Why would they pay her $125 Million after she caused them a $185 Million fine?  I would say it is hush money.  Just imagine how many managers above her she can take down.  They say everyone has a price.   Also, the CEO apologized, but said he would not resign.  Why not?  Maybe when he is taking out in handcuffs he will resign.  The only way to apparently punish this, and any other bad banks, is to stop banking with them.)

As a friend asked when I shared the Wells Fargo story today – will the government prosecute any of those 5,300 employees?  I seriously doubt it.  But, more importantly, why hasn’t the CEO, President, Board of Directors and so on resigned by this evening?

(UPDATE – Whether you are a fan of Elizabeth Warren or not, she was 100% on target with the following:
http://usat.ly/2cBRx12

Wells Fargo CEO John Stumpf told the Senate Banking Committee he was “deeply sorry” Tuesday over allegations the bank opened millions of accounts without customers’ permission in order to meet aggressive sales quotas.Sen. Elizabeth Warren was having none of it.The Massachusetts senator has built a reputation for being tough on shady Wall Street dealings and the executives she believes are responsible. But she took it to the next level with Stumpf.”OK, so you haven’t resigned. You haven’t returned a single nickel of your personal earnings. You haven’t fired a single senior executive,” Warren said. “Instead, evidently, your definition of accountable is to push the blame to your low-level employees who don’t have the money for a fancy P.R. firm to defend themselves. It’s gutless leadership.”)

The $185MM fine is a few weeks of profit probably.  I propose that companies give up ALL of their income for a year or more.  Once they have no profits and management gets no bonuses and shareholders get no dividends and so on, maybe, and only maybe, will change come about.

Also, as I have mentioned over the years, we must get rid of the FDIC deposit insurance.  Once that is gone, the public would only place their money in banks they can trust.  Right now the FDIC deposit insurance does two things – it let’s banks have our money to do risky things with and it places most of our wealth in a place that the US Government can one day ‘freeze’ instantly and either just take it or limit what we can do with it going forward.

Having worked on the inside and seen the evils of the financial industry, I continue to tell the masses that if they only knew how corrupt most banks were they would put their money elsewhere.  My experience is it is usually a few dozen senior managers that are criminal and a certain number of their employees follow suit.  I never expected to see 5,300 employees in the same bank rob the public so blatantly and for so long.  I should be surprised, but I am no longer surprised by the evil doings of the financial industry.

The only surprise is Wells Fargo may have displaced Jamie Dimon and Chase as the most crooked bank on Earth:)

Lastly, let me be clear that there are tens of thousands of GOOD, HONEST bank and credit union employees in this country.  Community banks especially help the local people greatly.  These are the people of Main Street as they call us.  That is very different from the people of Wall Street which commit most of the crimes and make an entire industry look bad.

One key point is that we should not blindly trust banks.  They do not have our interest in mind, no matter how much they say otherwise.  Their goal is to make more and more money and to do that they must take it from us.  Regretfully, many times they break the law to take it from us.  Like any business, be careful.  Ask a lot of questions.  Only you can take care of yourself.  Don’t trust someone else to do what is in your best interest.  Caveat Emptor is somewhat appropriate in this situation.

Also, for those who want to get rid of the Dodd-Frank Act., remember it gave us the Consumer Financial Protection Bureau (CFPB).  The CFPB caught Wells Fargo.  They have caught many other banks that are robbing the innocent public every day.  Banks complain about added regulation.  No wonder!  They get caught virtually every day violating a number of laws!  The more crimes they commit, the more regulation they deserve.  Earn the public’s trust and regulation will go away.  Continue to deceive us and you get what you deserve.

Accountants, Bankers, Politicians…..they all scare me and it isn’t even Halloween, yet:)

THERE ARE NO MANDATORY STATES

August 23, 2016 – Per the Appraisal Subcommittee’s (ASC) website, ‘State statutes governing appraiser certification and licensing can be characterized in three ways:

Mandatory (Man) – Certified/licensed appraisers required for any service for which an opinion of value (evaluation or appraisal) for real property is developed;

Mandatory for Federally Related Transactions (M/FRT) – Certified/licensed appraisers required to perform appraisals in any federally related transactions and real estate related financial transactions when Federal law requires the services of such appraisers; and

Voluntary (Vol) – Certified/licensed appraisers not required for any appraisal/evaluation assignments. If appraisers wish to perform appraisals in such federally related transactions and real estate related transactions, appraisers can choose to become certified/licensed and submit to the State’s regulatory jurisdiction.’

I contend that there are no Mandatory States because it conflicts with Federal law to require someone be certified/licensed to perform an evaluation.  The States argue they can ‘add to’ the requirements of Federal law (in this case FIRREA).  Myself, and many others, argue they are not ‘adding to,’ but are in conflict with Federal law – Federal law trumping State law.

Per the ASC website, I count 4 Voluntary States, 13 Mandatory for FRT States, and 38 Mandatory States.  The total includes DC and territories.  Everyone can agree that 17 States clearly are not Mandatory.  It is the 38 States that claim to be Mandatory that I contend cannot be mandatory.

The debate comes down to Federal Preemption – the displacement of U.S. State law by  U.S. Federal law.  FIRREA does not require an evaluator be a State certified/licensed appraiser.  The question becomes, can a State require you to be a certified/licensed appraiser in order to prepare an evaluation?

One item that is clear and not up for debate is that FIRREA requires an evaluation provide an opinion of Market Value ‘As Is’ of Real Estate Only.  The key point being an evaluation does provide market value – just like an appraisal.

As to who can perform evaluations, pertinent quotes from the December, 2010 Interagency Appraisal and Evaluation Guidelines follow:

Persons who perform evaluations should possess the appropriate appraisal or collateral valuation education, expertise, and experience relevant to the type of property being valued. Such persons may include appraisers, real estate lending professionals, agricultural extension agents, or foresters.31

31 Although not required, an institution may use state certified or licensed appraisers to perform evaluations.  (Emphasis added)

From here, we are back to Federal Preemption.  Does it apply or not?  I am aware of one case that has decided this question.  I will provide its reference and the Judge’s quotes below.  As with any case ruling, it can be argued that it only applies to this specific set of circumstances, only in this jurisdiction, etc.  However, it is a Federal Judge and it decides if the State of Pennsylvania can require appraisal licensing for people performing evaluations.  And it decides if Federal Preemption applies.  There is a good chance other Judges around the country would refer to his case.

Let’s start with the exact reference from the copy that was provided to me:

2004 WL 764834

Only the Westlaw citation is currently available.

United States District Court,

E.D. Pennsylvania.

FIDELITY NATIONAL INFORMATION SOLUTIONS, INC., Market Intelligence, Inc., and Pennsylvania Bankers Association, Plaintiffs,

v.

George D. SINCLAIR, et al., Defendants.

No. Civ.A. 02-6928. | March 31, 2004.

Yes, this case is 12 years old.  I am surprised it hasn’t been brought up more often in this debate as to who can perform evaluations in each State.   I will let you read the entire document as it is too long to cut and paste it here.  It ebbs and flows and the Judge does a great job of addressing many arguments from both sides.  In the end, Federal Preemption is the main issue and the Judge says this:

‘...The federal financial regulatory agencies, pursuant to the Congressional authority granted under 12 U.S.C. § 3341(b), have exempted federally related real estate transactions under $250,000 from the state certified real estate appraiser requirement. Insofar as these federally related, but expressly exempt transactions are concerned, REACA is preempted by FIRREA. For all other transactions that are non-federally related either because they do not involve a federal financial institution regulatory agency or the Resolution Trust Corporation, or because they have been designated by the federal financial institution regulatory agencies as not requiring “the services of an appraiser” as set forth in 12 U.S.C. § 3350(4), such non-federally related transactions are outside the scope of FIRREA and are subject to state regulation. …’

REACA stands for the Pennsylvania Real Estate Appraisers Certification Act.

So, there you have it.  Federal Preemption DOES apply and States (at least Pennsylvania for sure) cannot require appraiser certification/licensure to perform evaluations.  Therefore, NO State can be Mandatory.  They can require appraiser certification/licensure for most, but not all, products that provide opinions of value.

Although I am not sure where the money is in such a case, I would hope someone would file a suit against all of the so-called Mandatory States and force them to change their laws to note the exception for evaluations.  Maybe organizations like ABA would do it to assist their members.

Lastly, I have heard of some State Attorney Generals trying to strong arm financial institutions into only using certified/licensed appraisers to perform evaluations.  This is laughable and hopefully there can be push back in one way or another.  Legal Counsel at the Federally-Regulated banks I worked at made it clear that no State was going to get into our files anyway since we were regulated by the Federal Agencies.  But, States will be States and try to throw their weight around.

I recall one State who attempted this with me.  They didn’t like us doing evaluations in their State without being licensed appraisers.  It wasn’t Illinois, but let’s just say it was and the property was in that State.  I replied I am located in Ohio.  I am licensed in Kentucky.  The client got the evaluation report off of the internet from a server located in California.  Please let me know when Illinois has any jurisdiction over anything going on in those States:)  I never heard back:)

As always, I appreciate your thoughts.  I would be very interested in any other settled cases that exist and address the issue of Federal Preemption in regard to evaluations.  Email me if you want a copy of the case I have referred to in this post.

 

CONGRATS INDIANA! 3 DOWN, 47 TO GO

March 30, 2016 – I’ve been campaigning since 1994 to get states to pass laws that allow licensed appraisers to perform non-USPAP compliant Evaluations.  After 22 years, we finally have the third State to invoke such a law.  Congrats to Indiana and all of its appraisers that can now compete on a level playing field.

We have a long way to go.  But, hopefully, this is gaining steam and appraisers in every state will get to work on getting similar laws passed sooner than later.   I think the Tennessee law is the best, but the Indiana wording is very good, too.

The following is from the Appraisal Institute’s Appraiser News Online:

Indiana Law Allows Appraisers to Perform Evaluations

Indiana became the third state to allow state-licensed and state-certified appraisers to perform evaluations without having to comply with the Uniform Standards of Professional Appraisal Practice when Gov. Mike Pence signed SB 300 into law March 21.

Under the provisions of the bill, the requirements of Indiana’s existing appraiser licensing and certification law, including USPAP-compliance requirements, will not apply to:

“The performance of an evaluation of real property by an employee, an officer, a director, or a member of a credit or loan committee of a financial institution, or by any other person engaged by a financial institution, in a transaction for which the financial institution would not be required to use the services of a state licensed appraiser under regulations adopted under title XO of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989.”

Under the new law, state-licensed and state-certified appraisers will be able compete with other providers of evaluation services, including brokers and salespersons, and will not have to comply with USPAP when performing evaluations for transactions in which a federally regulated institution is not required to obtain a USPAP-compliant appraisal.

The other two states that currently have similar allowances for state-licensed and state-certified appraisers are Tennessee and Georgia.