Two proposals to implement new appraisal standards under the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act") were released by federal financial agencies on August 15. The first would establish new appraisal requirements for higher-risk mortgage loans. The second would increase consumer access to appraisal and valuation reports in all first-lien mortgage transactions. Both proposals are subject to a 60-day comment period, and are expected to be finalized by early next year.
Appraisals for Higher-Risk Mortgage Loans
Under this proposal, which was issued jointly by six federal financial regulatory agencies and would amend Regulation Z (Truth-in-Lending), a creditor may make a "higher-risk mortgage loan" only if it follows certain new conditions regarding the appraisal of the real property securing the loan. A "higher-risk mortgage loan" is generally defined as a closed-end consumer credit transaction secured by a principal dwelling with an annual percentage rate that exceeds the "average prime offer rate" ("APOR") by 1.5 percent for a first-lien loan, 2.5 percent for a first-lien jumbo loan, and 3.5 percent for a subordinate-lien loan. (The APOR is determined by the Consumer Financial Protection Bureau based on average interest rates, points, and other loan pricing terms for low risk loans by a representative sample of mortgage lenders.) The proposed rule would exclude from the definition of "higher-risk mortgage loan" the following: a "qualified mortgage," yet to be defined under the "ability-to-repay" regulations; a reverse mortgage; and a loan secured solely by a residential structure.
The proposed rule would require a lender making a higher-risk mortgage loan to obtain an appraisal from a certified or licensed appraiser. That appraiser would be required to make a physical inspection of the interior of the residence in connection with such appraisal.
The proposed rule provides that the creditor would have to provide the consumer with a statement at loan application regarding the purpose of the appraisal, that the creditor will provide the applicant with a copy of any written appraisal report, and that the consumer may choose to have a separate appraisal done at the consumer’s expense. The lender would be required to provide a free copy of the appraiser’s report at least three business days before closing.
The proposed rule would require a lender to obtain a second appraisal from an equally qualified appraiser, at no cost to the consumer, under certain circumstances. This requirement is intended to prevent fraudulent property flipping. In particular, a second appraisal would be required where: (i) the higher-risk mortgage loan would finance the purchase of the consumer’s principal residence; (ii) the seller of the residential property acquired such property less than 180 days before the date of the consumer’s purchase contract; and (iii) the consumer is paying more than the seller paid.
The second appraisal would have to be performed by another appraiser and would have to analyze the difference in prices, any changes in market conditions, and any improvements made by the seller.
Mandatory Disclosure of Written Appraisals and Valuations
The Consumer Financial Protection Bureau ("CFPB") has proposed regulatory changes to implement amendments made to the Equal Credit Opportunity Act ("ECOA") under the Dodd-Frank Act. In particular, the CFPB’s proposal would amend Regulation B, which implements ECOA, to require creditors to provide first-lien mortgage applicants with a copy of all written appraisals and valuations promptly after receiving an appraisal or valuation, but in no case later than three business days prior to the closing of the mortgage. Regulation B currently allows a creditor to provide an appraisal report only if requested by the applicant.
In addition, the proposal would require creditors to notify an applicant, within three business days of receiving his or her application, of that person’s right to receive a copy of the written appraisal or valuation developed in connection with the application. The proposal would allow an applicant to waive the requirement to receive the appraisal within three business days prior to consummation of the mortgage, but the applicant who waives this requirement would still be entitled to a copy of the written appraisal or valuation at or prior to closing. Finally, the proposed new rules would prohibit creditors from charging additional fees for providing a copy of a written appraisal or valuation, but a creditor could still seek reimbursement for the cost of the appraisal or valuation unless otherwise required by law.
Importantly, the proposal broadens the scope of the current requirement to provide copies of "an appraisal report" to include "all written appraisals and valuations developed." "Valuation" is defined under the proposed rules as "any estimate of the value of a dwelling developed in connection with a creditor’s decision to provide credit." Hence, the proposed rule covers more types of documents that would have to be provided to the loan applicant. It should also be noted that the proposed rule would apply to applications for credit to be secured by a first lien on a dwelling. The current rule applies to credit secured by a first lien or subordinate lien on a dwelling.