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EVP SOLUTIONS

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Human Expertise

The De Minimis Change is No Small Matter

Is your bank ready to handle a 30% increase in residential property evaluations? According to the OCC, Board, and FDIC (collectively, the Agencies), that’s roughly how many more there will be if their proposed increase in the de minimis loan amount from $250,000 to $400,000 takes effect.

Before you answer, however, there are two key questions to consider:

  1. Will handling the increase result in all of your staff operating at their highest and best use?
  2. Is your current system already in need of an update due to compliance concerns?

Highest and Best Use

This is a term of great import in property valuations. It essentially means that the best use of a property is that which will result in the highest value for the property. The term, however, certainly has implications as a general economic theory.

For example, is making site visits for transactions that fall under the de minimis threshold the highest and best use of your production staff? Might their time be better allocated toward producing new business? What about your appraisal staff? Might their time be better allocated to larger residential loans and more complex commercial transactions?

Our research shows that lenders spend a minimum of five hours on a single evaluation. Calculate the hourly wage for all the people who touch the transaction over that time, and all of a sudden the no-cost internal evaluation process gets very expensive.

Compliance

There are two passages in the ABA’s response to the proposed increase that I believe are worth considering First:

ABA believes that the first priority that must be considered is the continued protection of banks by the implementation of strong risk management practices.

Note that they said “the first priority.” But that’s not all. They go on to say that increasing the de minimis threshold

“…would be accompanied by the required implantation of effective risk-control measures by depository institutions.”

Webster’s defines implantation as “establish and set permanent / to set permanently in the consciousness or habit patterns.”

I see these two comments together as a warning that this is not business as usual and that current controls across the industry are inadequate. Your advocate is telling your regulators that their members – you – have weaknesses in evaluation production and control structure. How likely is it that the regulators are going to overlook those weaknesses versus making sure those holes are plugged?

So what are those holes in current evaluation processes? The first and easiest to fix is that some institutions are simply not doing them. Second, some are still relying on realtor estimates and tax values. Third, there isn’t clear separation between production staff and the people doing the evaluations. Fourth, and the one that is sure to ruffle the most feathers, is the use of AVMs.

Let me start by saying that I am not declaring AVMs to be noncompliant. I am, however, saying the industry needs to take a hard look at whether or not they are.

Let’s start with another excerpt from the ABA’s response:

When institutions decide to forego obtaining an appraisal by state-certified or licensed appraisers, the rule would require that institutions obtain an evaluation of the real property collateral that is consistent with safe and sound banking practices.

So what qualifies as “safe and sound banking practice” when it comes to evaluations? According to the Interagency Appraisal and Evaluation Guidelines (IAG):

“It would not be acceptable for an institution to base an evaluation on unsupported assumptions, such as a property is in “average” condition…”

And here, in Appendix B dealing specifically with the use of AVMs:

“…the results of an AVM would need to address a property’s actual physical condition, and therefore, could not be based on an unsupported assumption, such as a property is in “average” condition.”

It is certainly possible that an AVM exists that takes into account and makes adjustments for “a property’s actual physical condition.”

Does yours?

If so, you’ve found something I’ve been unable to find. If not, and you haven’t had any issues with compliance, are you confident that will continue to be the case moving forward?

Regardless of the method you currently use to perform or obtain residential evaluations, there are causes for concern as the demand for them expands. If you want to take a look at other options, we would love to talk to you about EVP-Evals. It combines a first-of-its-kind inspection app to allow the homeowner to complete the inspection with an actual property appraisal. For $99.

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The De Minimis Change is No Small Matter

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