The Consumer Financial Protection Bureau has issued its regulations, amending Regulation Z, concerning requirements for appraisals for higher- priced mortgage loans. The regulations were issued on January 18, 2013 and will become effective on January 18, 2014.
The rules were issued jointly with the Federal Reserve Board, the OCC, the FDIC, the NCUA, and the Federal Housing Finance Agency.
These rules were adopted in response to requirements of the Dodd Frank Act to establish appraisal requirements for “higher-risk” mortgage loans. In developing the actual rules, the CFPB and the agencies opted to apply the rules to “higher-priced” mortgage loans (“HPML”) because the two definitions are substantially similar, and lenders already have familiarity with the “higher-priced” mortgage definition. The rules establish a general requirement that a written appraisal be obtained in connection with making an HPML. The written appraisal must be performed by a certified or licensed appraiser, and it must involve a physical property visit of the interior of the property by the appraiser.
As defined in the rules, an HPML is a closed-end consumer credit transaction secured by the consumer’s principal dwelling with an interest rate that exceeds the average prime offer rate for a comparable transaction as of the date the interest rate is set by (i) 1.5 or more percentage points for conventional loans, (ii) 2.5 or more percentage points for jumbo loans, and (iii) 3.5 or more percentage points for loans secured by a subordinate lien. The appraisal requirements do not apply to (a) a qualified mortgage, (b) a loan secured by a new manufactured home, (c) a loan secured by a mobile home, boat, or trailer, (c) a loan to finance initial construction of a dwelling, (d) a bridge loan with maturity of 12 months or less for the purpose of acquiring a consumer’s principal dwelling, or (e) a reverse-mortgage.
At the time of the consumer’s application for the loan, the applicant must be provided with a notice advising of the purpose of the appraisal and that the lender will provide the applicant with a copy of the written appraisal. This notice must be provided to the consumer no later than the third business day after receipt of the consumer’s application for an HPML. The lender may charge a fee for conducting the appraisal, but may not charge an additional fee for providing the required copy of the appraisal to the applicant. The copy of the written appraisal must be provided to the applicant at least three (3) business days before consummation of the loan, or if the loan is not consummated, within 30 days of the date that the lender determines that the loan will not be consummated. The applicant must be notified that the applicant may obtain an appraisal from another appraiser, at the applicant’s expense. The rules provide sample forms of the required notice.
There is an additional requirement that two (2) written appraisals be obtained under certain circumstances. The two (2) appraisal requirement applies when (a) the seller acquired the property 90 or fewer days prior to the date of the consumer’s contract to acquire the property and the consumer’s contract price exceeds the seller’s acquisition price by more than ten (10) percent, or (b) the seller acquired the property 91 to 180 days prior to the date of the consumer’s contract to acquire the property and the price in the consumer’s contract price exceeds the seller’s acquisition price by more than 20 percent. Each of the 2 appraisals must be performed by a different appraiser, and at least 1 of the appraisals must include analysis of (i) the difference between the price at which the seller acquired the property and the consumer’s contract price, (ii) changes in market conditions between the date the seller acquired the property and the date of the consumer’s contract, and (iii) any improvements made to the property between the date the seller acquired the property and the date of the consumer’s contract. The cost of only one (1) of the appraisals may be charged to the consumer/applicant. The other appraisal will be an expense of the lender.
The lender must exercise reasonable diligence in making a determination as to whether the requirement for obtaining 2 appraisals applies to a given loan. The rule requires that the determination be made based upon “written source documents” and a list of examples of the types of written documents is included in an appendix to the rule. Among the types of documents listed in the appendix are a copy of the recorded deed under which seller took title, property tax bills, owner’s title insurance policies, settlement statements from the seller’s acquisition of the property, and sales price data recorded in a multiple listing service.
Certain types of transactions are exempt from the two (2) appraisal requirement, including (1) property acquired by the consumer from a local, State or Federal government agency, (2) property acquired from a person who acquired title through foreclosure, deed-in-lieu of foreclosure or other judicial or non-judicial proceeding relating to a mortgage loan default, (3) property acquired from a non-profit entity as part of a local, State, or Federal government program through which the non-profit entity may acquire title to foreclosed properties for resale, (4) property acquired by inheritance or a divorce decree, (5) property acquired from an employer or relocation agency in connection with an employee relocation, (6) property acquired from a servicemember pursuant to a deployment or change of station order, (7) property located in a designated federal disaster area as recognized by the Federal financial institution regulatory agencies, and (8) property located in a rural county.
The requirements of this rule are quite complex, and should be examined and carefully analyzed in light of the impact on an institution’s lending practices and procedures, particularly as they relate to HPML’s.