An Appraisal Change May Spur Small Business Lending
It’s no surprise that since President Donald Trump took office, he has been keen on lowering restrictions on lending. His newest endeavor seeks to knock down government constraints on business loans. U.S. bank regulators have tentatively agreed to ease an appraisal requirement that could help commercial real estate borrowers, according to those familiar with talks among the agencies.
Regulators have decided the threshold for requiring appraisals on commercial property should be increased from $250,000 to $400,000. Meanwhile the threshold for residential real estate would remain at $250,000.
So what does that mean for small businesses looking for financing? The change could cut costs for small-business borrowers at a time when Trump has put an exacting focus on helping that sector. At the same time, appraisers would be hurt because their licensed services would no longer be needed on commercial real estate loans for less than $400,000, often including small businesses, warehouses, rental housing and farms.
The move stems from an ongoing internal review of rules at the Federal Reserve, Office of the Comptroller of the Currency and Federal Deposit Insurance Corporation under a program known as the Economic Growth and Regulatory Paperwork Reduction Act, which ensures that Federal financial regulators perform a comprehensive review of regulations to identify outdated or otherwise unnecessary regulatory requirements imposed on financial institutions. The appraisal standards have been publicly listed as one of the regulations under review, though the agencies haven’t yet indicated when they’ll finish.
Community Bankers
Trump has issued orders and made comments in favor of easing regulations on lending — especially for small businesses. Last week, the president sat down with community bankers at the White House to find out how his administration can clear obstacles to their lending. So this change could be easier for regulators to pursue than more controversial efforts.
Federal Reserve Chair Janet Yellen said in September that the agencies were exploring potential options for alleviating some burdens of appraisal requirements. It’s been more than twenty years since regulators increased the appraisal threshold, then moving it from $100,000 to the current $250,000.
Because it hasn’t been raised since 1994, some consider the change more of an adjustment that amounts to a correction. These kinds of loans are vital for small businesses.
Rising Costs
The Independent Community Bankers of America argued for a $500,000 trigger in a letter to regulators last year, citing the many years that have passed since the last change and saying an update is needed “to reflect the rising costs of real estate particularly in many urban markets.”
Another argument for the change: It can be hard to find an appraiser in some rural areas.
Appraisal fees for commercial property routinely exceed $2,000. In cases where an appraisal isn’t required, some type of evaluation of the property’s worth is still needed to satisfy lending regulations.
Banks may be frustrated that commercial appraisals can take a long time and cost the borrowers thousands of dollars, but that it’s the only reliable way to measure a property’s worth. There are a lot of things you don’t know by not having somebody go out and inspect the property. Raising the threshold could put a lot of appraisers out of work, particularly in non-coastal states where many properties would fall below the mark.
Helping Small Businesses
At the end of the day, the hope is that lowering this threshold will increase small business lending – costs to the borrower will be lowered and it will be easier to get a loan.
Even with this new adjustment, there are still many other obstacles to getting financing for your business. Alternative lending still continues to be the easiest and fastest way to get a loan. That’s why the Rising 7 Capital team continues to be committed to helping you get the financing you need to succeed.