On August 15, 2012, the CFPB released two proposed rules that would implement provisions of the Dodd-Frank Act. If finalized, each rule would require lenders to conduct more property appraisals at their own expense and to provide all appraisals and property “valuation” materials to borrowers.
Mandatory Appraisals for “Higher Risk Mortgage Loans”
The CFPB first proposes to amend Regulation Z and its Official Staff Commentary to require lenders to obtain and disclose particular property appraisals to borrowers seeking “higher risk mortgage loans.” A loan qualifies as a “higher-risk mortgage loan” under the proposed rule if the annual percentage rate for the loan exceeds a variable rate measured by the average prime offer rate by 1.5 percent for first lien loans, 2.5 percent for first lien jumbo loans (generally those exceeding $417,000), and 3.5 percent for subordinate lien loans.
In substance, the proposed rule would require lenders to conduct property appraisals for covered loans—no such current obligation exists. In some cases, the costs of those appraisals are not recoverable from the borrower. Under the proposed rule, lenders may not issue a higher-risk mortgage loan without first obtaining at least one written appraisal by a certified or licensed appraiser, who must conduct an appraisal in conformity with standards set by the proposed rule, which include a physical property visit and an inspection of the interior of the property. A second appraisal, performed by a different appraiser, is required—at no cost to the borrower—if the property will be the borrower’s principal residence and the seller purchased the home for less than the proposed purchase price within 180 days prior to the date of the purchase agreement between the borrower and the seller. The second appraisal must provide an analysis of the difference in purchase prices as between the seller and the borrower, including any changes in market conditions and any improvements made to the property explaining the difference in purchase prices.
In addition to imposing new appraisal requirements, the proposed rule also requires new disclosures to the borrower. Within three days of application, the lender would have to provide the borrower with a statement regarding the purpose of the required appraisal(s). The lender will also have to inform the borrower that the lender will provide a free copy of any appraisals obtained for the transaction to the borrower at least three days before closing (and actually provide those documents).
Comments on the proposed rule are due October 15, 2012. A final rule is expected early next year. The proposed rule is available online here.
Mandatory Disclosure of Appraisals and Related Documents
Concurrently with its proposed changes to Regulation Z, the CFPB is also proposing to implement changes to Regulation B, which implements the ECOA. The Proposed Rule would require residential mortgage lenders for first lien mortgages to provide residential loan applicants with copies of all written appraisals obtained in connection with the proposed transaction, as well as other property value estimates developed in connection with the loan application.
Although not a major departure from current regulatory requirements, the proposed rule does impose new obligations to produce a wide variety of documents and creates non-recoverable costs to lenders. Under the current regulatory scheme, borrowers are entitled to obtain appraisals used in connection with their application, but must request them. Under the proposed rule, the lender would be responsible for automatically providing appraisals as well as any property “valuations” developed for the loan. These new disclosure requirements would apply regardless of whether credit is extended, denied, or whether the borrower’s application is incomplete or withdrawn.
The addition of “valuations” to the current regulatory scheme, which contemplates only the disclosure of appraisals, creates an entirely new obligation for lenders. This new category of documents is broadly defined to include “any estimate of the value of a dwelling developed in connection with a creditor’s decision to provide credit, including those values developed pursuant to a policy of a government sponsored enterprise or by an automated valuation model, a broker price opinion, or other methodology or mechanism.” The CFPB has explained that this definition includes at least:
- Reports prepared by an appraiser (whether or not certified and licensed), including written comments and other documents submitted to the creditor in support of the person’s estimate or opinion of the property’s value;
- Documents prepared by the creditor’s staff that assigns value to the property, if a third-party appraisal report has not been used;
- Internal review documents reflecting that the creditor’s valuation is different from a valuation in a third party’s appraisal report (or different from valuations that are publicly available or valuations such as manufacturers’ invoices for mobile homes);
- Values developed pursuant to a methodology or mechanism required by a government sponsored enterprise, including written comments and other documents submitted to the creditor in support of the estimate of the property’s value;
- Values developed by an automated valuation model, including written comments and other documents submitted to the creditor in support of the estimate of the property’s value; and
- Broker price opinions prepared by a real estate broker, agent, or sales person, including written comments and other documents submitted to the creditor in support of the estimate of the property’s value.
Excluded from the definition are:
- Internal documents, that merely restate the estimated value of the dwelling contained in a written appraisal or valuation being provided to the applicant;
- Governmental agency statements of appraised value that are publically available; and
- Valuations lists that are publically available (such as published sales prices or mortgage amounts, tax assessments, and retail price ranges) and valuations such as manufacturers’ invoices for mobile homes.
Moreover, within three days of application, lenders will have to inform the applicants of their right to receive these documents. Creditors would then be required to provide those documents to consumers “promptly” (typically within 30 days), but in no case later than three days prior to closing.
Finally, the proposed rule eliminates the lender’s right to charge the borrower a fee to obtain appraisals and related documents. Currently, lenders may pass on their costs, such as the cost of the appraisal or valuation, printing and postage, when providing a borrower with requested appraisals or valuations. Under the proposed rule, lenders may still charge borrowers reasonable fees for conducting appraisals and valuations, but can no longer charge any fee for generating and distributing those materials to the borrower—which would be mandatory.
Comments are due by October 15, 2012. A final rule is expected early next year. The proposed rule is available online here.