Written by Bernadette Clair, Regulatory Compliance Counsel
Earlier this month, federal financial regulatory agencies including the CFPB and NCUA, issued a proposed rule to establish new appraisal requirements for higher-risk mortgage loans. The proposed revisions to Regulation Z would implement new TILA section 129H, added to TILA by Dodd-Frank section 1471. The CFPB’s press release on the proposed rule is available here.
Keep in mind that the CFPB has also issued a separate proposed rule on appraisals under Regulation B. That proposal would require mortgage lenders to provide home loan applicants with copies of written appraisals and other home value estimates developed in connection with the application. See our August 20th blog for more details on the Regulation B proposed rule on appraisals.
Under the Regulation Z proposed rule, creditors would have to comply with new appraisal requirements before making a higher-risk mortgage loan. Here are some of the basics from the proposal:
“Higher-risk mortgage loan.” Under the proposed rule, a “higher-risk mortgage loan” is generally defined as a closed-end consumer credit transaction secured by the consumer’s principal dwelling with an APR exceeding certain statutory thresholds. In general, loans would be “higher-risk mortgage loans” if the APR exceeds the average prime offer rate (APOR) by 1.5 percent for first-lien loans, 2.5 percent for first-lien jumbo loans, and 3.5 percent for subordinate lien loans. Sound familiar? These rate thresholds are similar to the rate triggers currently in Regulation Z for “higher-priced mortgage loans,” a category of loans to which special consumer protections apply under section 1026.35.
What new appraisal requirements are proposed for “higher-risk mortgage loans?” Under the proposed rule, the following requirements must be met to make a higher-risk mortgage loan:
- The creditor obtains a written appraisal;
- The appraisal is performed by a certified or licensed appraiser;
- The appraiser conducts a physical property visit of the interior of the property;
- At application, the applicant is provided with a statement regarding the purpose of the appraisal, that the creditor will provide the applicant a copy of any written appraisal, and that the applicant may choose to have a separate appraisal conducted at the expense of the applicant; and
- The creditor provides the consumer with a free copy of any written appraisals obtained for the transaction at least three (3) business days before closing.
In addition, the proposed rule would require a higher-risk mortgage loan creditor to obtain an additional written appraisal, at no cost to the borrower, under the following circumstances:
- The higher-risk mortgage loan will finance the acquisition of the consumer’s principal dwelling;
- The seller is selling what will become the consumer’s principal dwelling acquired the home within 180 days prior to the consumer’s purchase agreement (measured from the date of the consumer’s purchase agreement); and
- The consumer is acquiring the home for a higher price than the seller paid.
The additional written appraisal, from a different licensed or certified appraiser, generally must include an analysis of the difference in sale prices (i.e., the sale price paid by the seller and the acquisition price of the property as set forth in the consumer’s purchase agreement), changes in market conditions, and any improvements made to the property between the date of the previous sale and the current sale. This requirement is designed to address fraudulent property flipping by seeking to ensure that the value of the property being used as collateral for the loan legitimately increased.
For complete details, the proposed rule is available here.