The federal banking agencies together with the CFPB and the Federal Housing Finance Agency have issued a proposed rule that would establish new appraisal requirements for higher-risk mortgage loans as provided in the Dodd-Frank Act. The proposal released on August 15 would amend Regulation Z to require creditors to obtain an appraisal or appraisals meeting certain specified standards, give applicants a copy of the written appraisals and provide applicants with a notification regarding the use of the appraisals. Under the Dodd-Frank Act, a mortgage loan is higher-risk if it is secured by a consumer’s home and has an interest rate above a certain threshold. The applicable threshold depends on whether the mortgage loan is a first- or subordinatelien loan and whether the loan is a jumbo loan based on the original principal amount. In general, loans are higher-risk mortgage loans if the annual percentage rate exceeds the average prime offer rate for a comparable transaction (to be published by the CFPB) by 1.5% for first-lien loans, 2.5% for first-lien jumbo loans, and 3.5% for subordinate-lien loans. The definition of higher-risk mortgage expressly excludes qualified mortgages and reverse mortgage loans that are qualified mortgages, as defined in the Truth in Lending Act. The proposed rule would also exempt loans secured solely by residential structures, such as many types of manufactured homes, which more closely resemble titled vehicle loans. Comments on the proposed rule are due by October 15.
Nutter Notes: The proposed rule implements Section 1471 of the Dodd-Frank Act, which amended the Truth in Lending Act to impose appraisal requirements on higher-risk mortgages. The proposed rule would require a creditor that makes a higher-risk mortgage loan to use a licensed or certified appraiser to prepare a written report based on a physical inspection of the interior of the mortgaged property. The proposed rule also would require creditors to disclose to applicants for higher-risk mortgage loans information about the purpose of the appraisal and provide consumers with a free copy of any appraisal report. Creditors would have to obtain an additional appraisal from a different certified or licensed appraiser if the purpose of the higher-risk mortgage loan is to finance the purchase or acquisition of a mortgaged property from a seller within 180 days of the purchase or acquisition of the property by that seller at a price that was lower than the current sale price of the property. The additional appraisal would include an analysis of the difference in sale prices, 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 meant to discourage fraudulent property flipping by seeking to ensure that the value of the property being used as collateral for the loan legitimately increased.