The doubling of the appraisal exemption from $250,000 to $500,000 instituted earlier this month could not have occurred at a better time. Though far from a panacea for inherent inefficiencies in small-balance lending (SBL) among commercial banks, the new mandate for commercial evaluations represents a sizable dollar and sense opportunity. It cracks open a door to lower CRE lending costs and shorter round-trip times on small loan originations. And the new rule will help financial institutions better defend against a relentless assault from non-bank lenders that threatens the dominion over the SBL space that institutions have historically maintained.
The new threshold also throws a large-sized bone to a greater number of bank borrowers in the form of savings of $1,000 or more on the cost of an appraisal.
This all comes about because the federal agencies were convinced that allowing greater use of commercial evaluations could produce regulatory relief without threatening the safety and soundness of financial institutions.1
Commercial banks have clearly received the message. We have observed that many of our clients have embraced the higher exemption level and have set out to revise their appraisal policies and procedures, while still others have already raised their evaluation procurement activity.
Although the $500,000 threshold now provides ample new incentive for banks to seize cost savings, we think the mother lode of dollar savings actually lies elsewhere, i.e., not with the irregular flow of loan originations but, instead, via subsequent transactions on lower-risk loans involving renewals, extensions and portfolio maintenance – both under and – yes – over the exemption level.
While many institutions have traditionally employed the mandated exemption amount on renewals, banks are not bound to it.2 The fact is there is no statutory dollar ceiling for commercial evaluations on renewals and the like where no new monies are extended.
A bank’s CRE loan portfolio is a wellspring for a sizable and recurring stream of potential cost savings on loans with relatively low credit risk. 3
The new rule will clearly relieve some of the regulatory burden among banks. However in order to maximize their opportunity to save on lending costs year after year, banks might also consider relaxing their restraints and use evaluations on larger-sized renewal loans that meet acceptable risk criteria.
For an overview of Boxwood’s FieldSmart commercial evaluations, see this page.
1 The agencies estimated a 16% increase in the number of CRE transactions that would be exempted by the higher threshold level and lead to significant cost savings on lower-risk transactions.
2 As a result, banks pursue widely differing appraisal-related policies on non-financial transactions. In a Boxwood client survey last year, a plurality of bankers indicated that they use commercial evaluations on loan renewals of $1 million or more (involving typical property types with relatively low credit risk), but more than one-third of respondents conformed to the prevailing ($250,000) dollar threshold.
3 Conventional risk criteria for employing evaluations in lieu of appraisals include the property type, complexity of the collateral, LTV, location, income-producing versus owner-occupied, and market dynamics among other considerations.