NADCO Conference Recap Follow Up. The Conference recap I issued in May covered the Amendment to the Interagency Guidance on Appraisals and Evaluations for Financial Institutions, effective April 2, 2018. As a refresher, this amendment raises the threshold for required appraisals from $250,000 to $500,000 and could affect how SBA loans are handled.
The problem: SBA cannot align its existing $250,000 threshold with the new guidance because SBA’s threshold was established by statute.
Some Background. In December 2010, Interagency Appraisal and Evaluation Guidelines were issued by the Office of the Comptroller of the Currency (OCC), the Board of Governors of the Federal Reserve System (FRB), the Federal Deposit Insurance Corporation (FDIC), the Office of Thrift Supervision (OTS) and the National Credit Union Administration (NCUA), stating that real estate appraisals were required for loans greater than $250,000 secured by real estate. Loans under $250,000 involving commercial real estate didn’t require an appraisal, but a real estate evaluation was needed.
Appraisal guidelines for financial institutions are written by their regulatory authorities, e.g., the Interagencies that can change them from time-to-time. SBA isn’t a party to the Interagency Guidelines. SBA’s requirements for appraisals are established by law. For 504 loans, Title V, Section 502 E ii of the Small Business Investment Act requires an appraisal if the estimated value of commercial real estate serving as collateral is more than $250,000, or if an appraisal is necessary to evaluate creditworthiness. For 7(a) loans, the same language is in Section 3 E ii of the Small Business Act.
That’s the law until Congress passes and the president signs a new law affecting the Small Business Investment Act and the Small Business Act.
Until the new Interagency Guidelines, legislation governing SBA loans was pretty much in step with commercial lending guidelines so issues were rare. But now we have two sets of threshold guidelines – $250,000 and $500,000 – in effect at the same time.
So What Are the Issues? For 7(a) loans, lenders might not be aware that although they can make a conventional commercial loan involving real estate of $300,000 without an appraisal, an SBA 7(a) loan of $300,000 now requires an appraisal. A PLP loan guaranty might be in jeopardy if the lender follows Interagency Guidelines instead of federal law.
Importantly for 504 loans: It’s possible that a financial institution might not order an appraisal if the commercial real estate component is under $500,000. But the CDC must order one. And while most 504 projects are over $500,000, conflicts might seem to be rare, but:
- Smaller projects are affected
- Mixed use projects are affected. Let’s say the loan’s real estate component is $450,000 and there’s another $300,000 or so in equipment. The financial Institution doesn’t require an appraisal. The CDC must.
What to Do? Be Proactive. Educate your lenders: the threshold for appraisals for SBA loans is still CRE with a value of $250,000 or more. Educate your staff on SBA Appraisal Requirements.
Until there’s a change in the law, that’s the deal!
JRB Associate, CDC/504 Programs