By Rodney E. Hood
In underserved and rural areas of the United States, entrepreneurs have a pressing need for business loans. The question is: what’s the best mechanism for putting more money into the hands of those who can make a difference by launching business ventures, creating jobs, and driving economic growth?
There’s no simple answer to that question. However, one tool we can use to expand access to loans is available right now: rethinking regulatory policies that stand in the way of productive borrowing and lending.
That’s the thinking behind the recent decision of the National Credit Union Administration, the independent regulatory agency I lead, to raise the appraisal threshold for non-residential real estate loans provided by federally insured credit unions. The Board approved the final rule, which will take effect 90 days after publication in the Federal Register, at its July open meeting.
‘Substantial Study’
Under the previous rules for credit unions, a commercial real estate transaction of more than $250,000 required the property to be appraised by a certified appraiser. Transactions for properties with valuations below this number did not require an appraisal. That threshold has been in place since 2002.
By contrast, since 1994, banks have only been required to get an appraisal for certain commercial real estate transactions over $1 million, and the threshold for all other commercial real estate transactions was recently raised to $500,000.
After substantial study and consultation, the NCUA raised the commercial real estate transaction threshold for credit unions to $1 million. This is a commonsense reform that should allow credit unions to safely provide more borrowers with lower costs and quicker turnaround times for commercial property loans, especially in underserved and rural areas.
One Example
To better understand why this matters, consider a rural community in the Midwest where certified property appraisers are scarce. A local borrower seeking a loan to buy commercial property may wait weeks to have a certified appraiser travel to his location to provide a physical inspection and to estimate the property’s value, at a cost of several thousand dollars. This creates higher costs and delays for lenders and borrowers.
The $250,000 threshold limit had been in place for nearly 20 years. But real estate values have changed dramatically over that time, as a result of demand, inflation and growth. Some adjustment to the threshold for appraisals was warranted on those terms alone.
We can also expect that exempting commercial property transactions of less than $1 million from that regulatory burden could spur more lending in areas that need an economic boost. Raising the threshold will give credit union lenders and borrowers in rural areas greater flexibility. It will reduce the number of loans held in limbo while parties wait for appraisals to be completed. This will allow faster loan processing and make more loans possible.
Criticism Founded on Misunderstandings
I should note this reform has received some criticism, much of which seems founded on misunderstandings that should be clarified.
First, this change applies only to commercial real estate, not to residential transactions. Second, it applies only to real estate transactions, not to loans for other types of business assets.
Commercial real estate lending represents a relatively small proportion of credit union assets, and 75 to 90 percent of the amount of these loans would still need an appraisal by a certified appraiser. Moreover, credit unions will continue to be responsible for adhering to all appropriate risk-management practices for underwriting commercial real estate loans, including the use of written estimates of the property value conducted by a qualified person independent of the transaction. That’s a critically important part of keeping faith with the borrowers, members, and communities these institutions serve. It’s also why this sensible regulatory relief will not lead to undue risk to credit unions or the Share Insurance Fund.
Great Care Taken
We have taken great care over the last year to listen to both the supporters of raising the appraisal threshold and to its critics. We took their perspectives into account and weighed their concerns carefully in crafting this rule. We wanted to ensure that whatever action we took was prudent and that would facilitate lending while ensuring the safety and soundness of the financial institutions under our watch.
A smarter approach to regulation requires reviewing existing rules and considering how they can be made to work better. Rethinking the appraisal rule is an example of a positive regulatory reform that will bring substantial benefits to both borrowers and lenders, which could help boost job creation and economic activity in some of the nation’s more hard-pressed areas. It’s a sound and timely step.
Rodney E. Hood is Chairman of the National Credit Union Administration. For info: www.ncua.gov.