NCUA Board Member Todd M. Harper Remarks - Proposed Residential Real Estate Appraisal Rule

As Prepared for Delivery on November 21, 2019

Thank you Chairman Hood, and thank you Larry, Kenneth, and Rachel for your informative presentations.

I must admit that I approach this proposed rule with some real skepticism and genuine doubt.  While the goals of targeted regulatory relief and greater uniformity among regulators are desirable, we also must ensure that any rule change protects the safety and soundness of individual credit unions and the entire system as well as provides consumer protection.  In other words, we should take measured steps to ensure that we aren’t just jumping over a cliff.

If we finalize the threshold as proposed, 94 percent of residential mortgages underwritten by insured credit unions would be eligible for the appraisal exemption.  In comparison, only 72 percent of mortgages by insured banks and thrifts are eligible for a written estimate of market value instead of an appraisal.  Thus, the proportion of residential loans exempted is significantly higher in the credit union system.

Additionally, we now have experienced an economic expansion that has lasted more than a decade, the longest in history.  Because we will eventually experience an economic downturn and because that downturn seems likely to occur sooner rather than later, I have apprehensions that we may be loosening regulatory standards at the wrong point in the economic cycle.

While the proposed rule before us may produce some consumer benefits, there are also downsides we need to consider and other actions that we could take that would be more meaningful.

Obtaining an estimate of a property’s worth is a key part of the mortgage underwriting process.  Typically, because of federal regulations or the securitization-eligibility standards imposed by Fannie Mae and Freddie Mac, lenders obtain an appraisal to determine the value of the collateral for a mortgage.  An appraisal helps to verify a property’s value for the buyer, seller, lender, investor, and others.

To provide this assurance, Congress recognized in the Dodd-Frank Wall Street Reform and Consumer Protection Act that appraisers must operate as unbiased arbiters.  The statute, therefore, strengthened independence standards and increased sanctions for violating such standards.  The law also improved federal oversight of the appraisal industry.  I am concerned that the proposed rulemaking we are considering today could negatively affect the progress we made in both those areas.

Additionally, written estimates of market value are less regulated than appraisals.  Under this proposed rule, written estimates of market value may be completed within the credit union. Therefore, an imprudent lender may take actions to increase loan volume by decreasing quality control standards, as was the case in the last financial crisis.  After all, we know that if you give opioid addicts prescription pads, there is a greater likelihood that they will write their own prescriptions to feed their bad habits.

Accordingly, I have three initial questions for staff.

• First, I would like to know what requirements are in place to ensure that individuals preparing written estimates of market value are qualified, competent, and independent of the loan production function within a credit union.
• Will the NCUA have power to take action if credit unions do not follow these requirements?
• What paths will consumers who may be affected by faulty written estimates of market value have to complain and seek restitution?

Another long-standing concern that I have relates to automated valuation models, or AVMs.  As I understand, the estimates produced by AVMs may be used in developing a written estimate of market value.

Congress recognized that there were problems in AVMs,¹ and recently I experienced the problem firsthand when buying a new home.  Within a month of purchasing the house with my partner, I received an unsolicited estimate produced by a widely known company that uses AVMs.  Under this estimate, our property had gained more than 10 percent in value even though we had made no improvements.  My personal experience demonstrates the shortcomings of AVMs.

To enhance confidence in the results produced by automated valuation models, as part of the Dodd-Frank Act, Congress added a new requirement to federal appraisal rules to ensure that AVMs adhere to quality control standards designed to ensure a high level of confidence in the estimates produced.  To implement these standards, the law required the NCUA, the federal banking agencies, and the Appraisal Subcommittee to develop rules.

The altering of the appraisal threshold for federally related transactions is a discretionary action, but the AVM rulemaking was mandatory.  More than nine years have passed since the Dodd-Frank Act became law.  In my view, it is long past time for regulators to complete their work on the AVM rulemaking.  In voting for this proposed rule today, I am hoping that we will see positive momentum on the AVM rulemaking in the near future because it is interconnected to the proposed rule before us.

Additionally, the rule before us may provide some consumer benefit in terms of cost savings, but an even greater benefit to consumers would occur if we adopted a rule on appraisal report portability.² An appraisal portability regulation would allow consumers to shop for rates with lenders by using just one appraisal, instead of ordering a separate appraisal with each lender.  Shopping for rates using one appraisal could lower mortgage costs over the long term and result in substantial savings for consumers.

The Dodd-Frank Act amended the Truth in Lending Act to allow regulators to develop an appraisal portability rule.  However, regulators, including the NCUA, have yet to act on this discretionary power.  In voting for this proposed rule today, I am hoping that we might take action on this long-dormant policy matter.

Before I close, I do have a few more questions for staff.

• First, the Dodd-Frank Act put in place prohibitions on the use of a broker price opinion as the primary basis to determine the value of a consumer’s principal dwelling.  Will this prohibition remain in place if this appraisal threshold rule is finalized as proposed?
• Second, credit union system loans are increasingly concentrated in real estate.  In 2002, when this the residential appraisal threshold was last updated, just under 43 percent of federally insured credit union loans were in real estate.  In 2019, that figure grew to nearly 50 percent.  This increase in concentration within the system might lead to problems if the proposed rule moves forward.  As such, I would like to know whether we plan to conduct a more detailed economic analysis of this proposal on the safety and soundness of the credit union system and individual credit unions before considering a final rule.
• Finally, the preamble to the proposed rules notes that if a credit union decides to obtain a written evaluation of market value instead of an appraisal, a borrower may still choose to obtain an appraisal before closing the transaction.  At what point in the process would the consumer learn that piece of information?  Would it be disclosed as the underwriting process begins or at the closing table?  One would give a consumer the time to get an appraisal before closing the loan and the other would not.

Again, thank you all for those very helpful answers.  Although I still have concerns about this matter, I will vote for the proposed rule to move the process forward with the expectations that we will work to address my other concerns before considering a final rule on increasing appraisal thresholds.