Wasn't quite sure where to put this but:

§ 34.42 Definitions.
* * * * *
(k)
Residential real estate transaction means a real estate-related financial transaction that is secured by a single 1-to-4 family residential property.


So if we secure a $390,000 loan with the borrower's primary residence and their 1-4 rental the transaction would not be exempt under the $400,000 threshold and we would be required to get an appraisal? Am I reading that correctly?

Hmmm....that would be unfortunate.

Since we sell to Fannie, this doesn't really help us.

We sell to Freddie but we also have in -house loans and HELOCs.

This scenario would not affect most of our conventional loans but I'm mostly thinking about those bridge loans secured by the property being purchased and the current property where the balance of the bridge loan will be refinanced after the proceeds from the sale of the current property is applied to the loan.

Or those pesky commercial loans where 2 or more 1-4 rental properties are taken as security.

After reading footnotes 30 and 31 in the document submitted for Federal Register publication, I'd say you are reading it correctly, Dan. Those footnotes also suggest that the current $250,000 threshold for residential appraisals also only applies when the security is a single 1-to-4 family residential property.

Footnotes ----- DUHHHHH...… thanks John.

Just to be clear, in the example Dan gave, an appraisal would NOT be required because it is under $500,000 and considered a "commercial real estate transaction." Right?

Footnote 30 - 83 FR 15019-01 (April 9, 2018) (“commercial real estate transaction” is defined as a “real estate-related financial transaction that is not secured by a single 1-to-4 family residential property”).

Inherent_Risk, I agree that the example Dan gave in the OP would not require an appraisal because there are multiple 1-4 family residential properties, which is included in the definition of a "commercial real estate transaction."

From the April 2018 CRE Final Rule: "The agencies have included the term ‘‘single’’ in the definition to clarify that only transactions secured by one 1-to-4 family residential property are excluded from the definition of ‘‘commercial real estate transaction,’’ whether financing construction or for other purposes."

Based on guidance I received from my EIC.

Consumer purpose loans secured by 2 or more 1-4 residential properties are not eligible for the threshold exemptions, regardless of transaction amount.

Loans secured by 2 or more 1-4 residential properties would still meet the commercial real estate transaction definition and be exempt up to $500,000, or if it met the definition of a qualifying business loan the threshold would increase to $1,000,000.

PS. He made a point to caution about using notes with cross collateralization clauses.

Dan, I agree with your EIC. The April 2018 interagency rule explains that they only transaction excluded from the definition of "commercial real estate transaction" is when there is just one 1-to-4 family residential property. To me, the preamble seems pretty clear on that, based on what I quoted previously. In addition, the April 2018 final rule provides an example of a loan to construct multiple properties and then says this:

"By contrast, transactions secured by multiple 1-to-4 family properties are more likely to be transactions to real estate developers or investors in rental properties."

Based on this discussion in the April 208 final rule, it seems to me they created a bright line test for commercial RE transactions vs residential RE transaction in that one single 1-to-4 family is residential and everything else is commercial. In their justification they even seem to acknowledge that not all loans with multiple properties will be commercial, per se, as they say "multiple 1-to-4 family properties are more likely to be real estate developers or investors.

To me, I don't see any gaps between the new rule for residential RE transactions vs the 2018 guidance on commercial RE transactions.

The old rule did make that distinction, but it was made clearer (by defining "residential real estate transaction") in the most recent rule, which, for the record, was published today (see https://www.federalregister.gov/d/2019-21376), and the increased threshold for residential real estate transactions goes into effect tomorrow, 10/9/2019.

I have managed to totally confuse myself on all this. Can someone let me know if I have the following scenarios correct?

1. Consumer Purpose loan secured by a single 1-4 family residential property with a transaction value of less than $400,000.
Requires an evaluation

2. Consumer Purpose loan secured by 2 or more 1-4 family residential properties with a transaction value of less than $500,000.
Requires an evaluation



3. Business Purpose loan secured by a single 1-4 family residential property:
-transaction value of more than $1 million requires an appraisal
-transaction value of more than $400,00 but less than $1million and is not dependent on sale or rental income for repayment requires an evaluation
-transaction value $400,000 or less requires an evaluation

4. Business purpose loan secured by 2 or more 1-4 family residential properties:
- transaction value more than $1million requires an appraisal
- transaction value of more than $500,000 but less than $1 million and is not dependent on sale or rental income for repayment requires an evaluation
-transaction value $500,000 or less requires an evaluation

That's the way I understand it.

2. Consumer Purpose loan secured by 2 or more 1-4 family residential properties with a transaction value of less than $500,000.
Requires an evaluation

I don't agree with this statement. Did you mean to say Commercial instead of Consumer? If so then I would agree.

A consumer loan secured by 2 or more 1-4 residential properties would not be eligible for the appraisal exemption.

No, I meant consumer.

Does the $400,000 appraisal threshold apply to any consumer purpose loan even if the "collateral" falls under the definition of Commercial Real Estate Transaction?

Dan, I don't think I agree with you. The April 2018 final rule says this: "The final rule defines commercial real estate transaction as a real estate-related financial transaction that is not secured by a single 1-to-4 family residential property."

In addition, the April 2018 final rule states: " This change addresses potential confusion about whether a loan for the construction of multiple residential properties would meet the definition of “commercial real estate transaction;” a loan that is secured by multiple 1-to-4 family residential properties (for example, a loan to construct multiple properties in a residential neighborhood) would meet the definition of commercial real estate transaction and thus be subject to the higher threshold."

In other words, I see it as 1) a single 1-to-4 family falls in the $400,000 exemption while 2) more than one 1-4 family residential properties fall into the $500,000 exemption. This rule seems to base the exemptions on the number of 1-4 family residential properties rather than the true purpose.

2 or more 1-4 residential properties would defer to the commercial threshold, would it not?

Also, if you are not doing QMs or fall under one of the other exclusions - don't loose sight of 1026.35(c) if you have an HPML.

That's how I see it, Randy. The prefatory text to the April 2018 final rule talks about how loans with multiple 1-4 family properties are "more likely" to be commercial transactions, which seem (to me) to imply that they just drew a line in the sand regardless of some specific situations that may have a "purpose" different than the appraisal rule definitions.

I guess you need to clarify how securing a consumer purpose loan with 2 1-4 residential properties would be securing the loan with Commercial Real Estate.

OK, I'm going to have to go back and re-read a couple citations. Apparently I've got my wires crossed somewhere.

Just to be clear - You are saying if I secure a consumer purpose loan with the consumer's primary residence and with his vacation home I now have a Commercial Real Estate Transaction?

It appears that way. The April 2018 final rule appears to acknowledge that some consumer purpose loans will be affected, though the number of consumer loans affected is not considered material.

"Regarding consumer protection concerns, the agencies do not expect that this increase will affect a significant number of consumer transactions. As discussed in more detail below, the final rule is only raising the threshold for commercial real estate transactions. This definition was revised to exclude construction loans secured by a single 1-to-4 family residential property, which would have included construction loans to consumers. As a result of this change, the final rule will not affect a material number of consumer transactions."

The way I read both rules (for residential real estate transactions and commercial real estate transactions) is that the definitions don't align with the loan purpose definitions we are used to in other regs (like Z). It seems to me that the appraisal rule definitions draw a hard line in the sand:

a single 1-4 family property = residential real estate transaction (i.e. $400,000 threshold)
multiple 1-4 family properties = commercial real estate transaction (i.e. $500,000 threshold)

Thank you all for helping me understand this. That's why I tried to put out some scenarios that we will run into, makes it easier to understand and explain to others.

the definitions don't align with the loan purpose definitions

And therein is where I got my wires crossed.

Thanks for the clarification.

well, darn, I just presented this and I was on the same lines as Dan in my interpretation. Now that I read this and re-read the commercial rules, I need to correct my information. Thank you guys for the discussion.

Well, one thing we haven't mentioned is how confusing this will be for your lenders. If we call a consumer loan secured by a primary residence and a second home a commercial loan, then I can see some lenders wanting to call the same loan commercial for other intents and purposes. Therefore, while I believe the residential real estate exemption ($400,000) only applies to single 1-4 family residential property, I can see where some will just tell their lenders to follow the $400,000 threshold for ALL consumer-purpose loans, even though some consumer loans, by definition, are commercial real estate transactions, and could qualify for the $500,000 threshold.

In other words, it may be simpler to use a more conservative $400,000 threshold for ALL consumer-purpose loans than to try to train lenders that some consumer-purpose loans have a threshold to $400,000, while others have a threshold of $500,000.

I'm not sure if anyone will actually do this, but I can see where this might be the easier procedure.