FDIC
Federal Register Citations 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 institutions 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.