| Washington Mutual Bank
From: LaPlante,
Andy
Sent: Wednesday, May 04, 2005 8:41 PM
To: regs.comments@federalreserve.gov; Comments; regs.comments@occ.treas.gov;
regs.comments@ots.treas.gov
Subject: EGRPRA
RE: Response to February 3, 2005 Request for Burden
Reduction Recommendations; Money Laundering, Safety
and Soundness, and Securities Rules; Economic Growth
and Regulatory Paperwork Reduction Act of 1996 Review
To Whom It May Concern:
Thank you for the opportunity to provide comments and
suggestions on regulatory burden reduction published
in Vol. 70 of the Federal Register starting at page
5571. We would like to specifically address the
implications of the sections of 12 CFR requiring full
appraisals in conjunction with certain federally related
real estate related transactions.
The history of these regulations began in 1989 with
Title XI of the Financial Institutions Reform, Recover
and Enforcement Act (FIRREA). The Act required
the supervising agencies to adopt regulations on federally
regulated financial institution’s use of real
estate appraisals. The agencies adopted regulations
in 1990 which required that appraisals be performed
by State certified or licensed appraisers in real estate-related
transactions. The regulations did allow several
exemptions, the most commonly used exemption has become
known as “the de minimus” exemption, which
exempted transactions in which “The transaction
value is $250,000 or less [CFR 564.3(a)(1)].”
Since this de minimus exemption was adopted, the economic
climate, the available technology and the capital markets
have changed dramatically. These changes have
made the $250,000 de minimus exemption obsolete. It
no longer contributes to the safety and soundness of
the financial institutions regulated by the OCC, Board,
FDIC, and OTS (“the Agencies”), and has
further, become anti-competitive.
Washington Mutual Bank has recently performed an analysis
of both our single family prime lending products and
home equity lending products. This analysis was
based on very recent data (February 2005) and forecasts
future losses by origination loan amount. The
results of this analysis show that the $250,000 de
minimus level is not a good predictor of over-all loan
performance.
The anticipated loss rates are higher for loans with
extremely low or high origination balances, and lower
for loans originated in the middle range (see attached
charts). Our data shows that expected losses
are lower in middle range of roughly $200,000 to $500,000
for single family prime products, and $100,000 to $400,000
for home equity lending products. Further, loans
with very low origination balances (less than $100,000)
have a substantially higher loss rate than those of
loan originated in the $600,000+ range.
This is due to the fact that collateral risk is made
up of several elements:
· Value (dollar value)
· Marketability
· Viability (longer term marketability)
· Suitability (as collateral for a
specified loan program)
While, the de minimus only addresses the first element.
In addition to not contributing to the safety and soundness
of the Agency-regulated financial institutions, the
de minimus poses a significant competitive disadvantage
to the regulated institutions.
Institutions not regulated by the Agencies are better
able to take advantage of the newer valuation technologies. Requiring
an appraisal by a State licensed or certified appraiser
for virtually every transaction with a transaction
value of over $250,000 increases significantly to the
processing time and origination cost to the potential
borrower. For example, non-Agency regulated institutions
are able to offer the enhanced speed and reduced cost
of Automated Valuation Models (AVMs). Traditional
appraisals represent a cost to the borrower of approximately
$300 and take 5-10 business days to complete. An
AVM is usually under $100 and can be completed in minutes.
Requiring a full appraisal on low risk loans is analogous
to requiring the potential client to provide and pay
for a full physical when applying for company sponsored
health insurance. Yes, it would contribute somewhat
to good decisioning on the individual transaction,
but if a competitor had analyzed the risk of the entire
pool and was able to offer competitive pricing without
requiring a full physical, the physical would comprise
a significant obstacle to competition.
Because the $250,000 transaction value exemption contributes
a significant competitive disadvantage to Agency-regulated
financial institutions, without a commensurate contribution
to the safety and soundness of those institutions,
Washington Mutual Bank strongly recommends that the
de minimus exemption be raised to at least $500,000
for loans secured by residential real estate.
Sincerely,
Mark R. Hillis
Chief Credit Officer
|
