by Amy Kleinschmit, Director of Compliance

This final rule was issued jointly by the Federal Reserve Board, CFPB, FDIC, FHFA, NCUA, and OCC. The final rule implements requirements from the Dodd-Frank Act, specifically, section 1471 of the Dodd-Frank Act’s Title XIV, which establishes appraisal requirements that apply to “higher-risk mortgages.”  For mortgages with an annual percentage rate that exceeds the average prime offer rate by a specified percentage, the final rule requires creditors to obtain an appraisal or appraisals meeting certain specified standards, provide applicants with a notification regarding the use of the appraisals, and give applicants a copy of the written appraisals that was used.

EFFECTIVE DATE: January 18, 2014.

Link to final rule and summaries from CFPB: http://www.consumerfinance.gov/regulations/appraisals-for-higher-priced-mortgage-loans/

To reduce some confusion, this final rule uses the same term and definition of “higher-priced mortgage loans” as was previously discussed in the prior Memo article summarizing escrow account requirements.  In the Dodd-Frank Act these requirements related to “higher-risk mortgages.”  That term was used in the proposal and had it been adopted as proposed, we would have been dealing with “higher-priced,” “higher-risk” and “high cost” mortgages all under Regulation Z – just a little confusing. 

With regard to this final rule, a “higher-priced mortgage loan” is defined as a “closed-end consumer credit transaction secured by the consumer’s principal dwelling with an annual percentage rate that exceeds the average prime offer rate for a comparable transaction as of the date the interest rate is set: (i) By 1.5 or more percentage points, for a loan secured by a first lien with a principal obligation at consummation that does not exceed the limit in effect as of the date the transaction’s interest rate is set for the maximum principal obligation eligible for purchase by Freddie Mac; (ii) By 2.5 or more percentage points, for a loan secured by a first lien with a principal obligation at consummation that exceeds the limit in effect as of the date the transaction’s interest rate is set for the maximum principal obligation eligible for purchase by Freddie Mac; or (iii) By 3.5 or more percentage points, for a loan secured by a subordinate lien.”

This rule requires that before a creditor extends a “higher-priced mortgage loan” as defined above, they must obtain a written appraisal of the property to be mortgaged before consummation.  This appraisal must be performed by a certified or licensed appraiser, who conducts a “physical visit of the interior of the property that will secure the transaction.” The final rule does contain a safe harbor that an appraisal meets the requirements of this final rule if the creditor meets all of these criteria:

·         “Orders that the appraiser perform the appraisal in conformity with the Uniform Standards of Professional Appraisal Practice and title XI of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989, as amended (12 U.S.C. 3331 et seq.), and any implementing regulations in effect at the time the appraiser signs the appraiser’s certification;

·         Verifies through the National Registry that the appraiser who signed the appraiser’s certification was a certified or licensed appraiser in the State in which the appraised property is located as of the date the appraiser signed the appraiser’s certification;

·         Confirms that the elements set forth in appendix N to Regulation Z are addressed in the written appraisal; and

·         Has no actual knowledge contrary to the facts or certifications contained in the written appraisal.”

Appendix N, as include above as a requirement meet the safe harbor, contains nine factors that the creditor must confirm in the written appraisal. These factors include confirming that the written appraisal identifies the creditor who ordered the appraisal and the property and the interest being appraised; indicates whether the contract price was analyzed; addresses conditions in the property’s neighborhood; addresses the condition of the property and any improvements to the property; indicates which valuation approaches were used, and includes a reconciliation if more than one valuation approach was used; provides an opinion of the property’s market value and an effective date for the opinion; indicates that a physical property visit of the interior of the property was performed; includes a certification signed by the appraiser that the appraisal was prepared in accordance with the requirements of the Uniform Standards of Professional Appraisal Practice; and includes a certification signed by the appraiser that the appraisal was prepared in accordance with the requirements of title XI of the Financial Institutions Reform, Recovery and Enforcement Act of 1989, as amended (12 U.S.C. 3331 et seq.), and any implementing regulations.

Two appraisals. The final rule requires an additional appraisal (two written appraisals) for higher-priced mortgage loans if the seller acquired the property 90 or fewer days prior to the consumer buying the property and the price exceeds the seller’s acquisition price by more than 10 percent; or if the seller acquired the property 91 to 180 days prior consumer buying the property and the price exceeds the seller’s acquisition price by more than 20 percent.

A creditor must obtain two written appraisals unless the creditor can demonstrate by exercising “reasonable diligence” that the requirement to obtain two appraisals does not apply.  Or in other words, if the creditor cannot demonstrate that the two appraisal requirement does not apply, then the creditor must obtain two written appraisals before extending a higher-priced mortgage.  This “reasonable diligence” determination needs to be based on information contained in written source documents.  The final rule includes appendix O which lists the documents that this “reasonable diligence determination” can be based on.  There are ten such documents listed in Appendix O, which include a copy of the recorded deed from the seller; a copy of a property tax bill; or a copy of any owner’s title insurance policy obtained by the seller.  This “due diligence” must be based on documents, relying on oral statements of interested parties, such as the consumer, seller or mortgage broker, does not constitute reasonable diligence.

If this situation arises, and two written appraisals are required, the two appraisals cannot be performed by the same certified or licensed appraiser and each appraisal must meet the requirements discussed above.  The appraisal must be conducted independently of each other, therefore, if the two certified or licensed appraisers are affiliated, such as by being employed by the same appraisal firm, then whether they have conducted the appraisal independently of each other must be determined based on the facts and circumstances of the particular case known to the creditor.  Also, there is additional analysis that one of the two required appraisals must include in the report that is specified in the final rule.

If the creditor must obtain two appraisals pursuant to this rule, the creditor can charge the consumer for only one of the appraisals.  This includes a prohibition from imposing a fee specifically for that appraisal or by marking up the interest rate or any other fees payable by the consumer in connection with the higher-priced mortgage loan.

There are eight exceptions to this two appraisal requirement found in the final rule.  Some of these exceptions include extensions of credit when the consumer acquires the property from a local, State or Federal government agency; from a person who acquired title to the property through foreclosure, deed-in-lieu of foreclosure, or other similar judicial or non-judicial procedure as a result of the person’s exercise of rights as the holder of a defaulted mortgage loan; from a person who acquired title to the property by inheritance or pursuant to a court order of dissolution of marriage, civil union, or domestic partnership, or of partition of joint or marital assets to which the seller was a party; or located in a rural county, as defined in 12 CFR 1026.35(b)(2)(iv)(A).  The CFPB will publish a table of rural counties. (Please do not confuse these exceptions to the second appraisal requirement with the exceptions discussed below)

Disclosure requirement. The creditor must provide the following disclosure to consumers that apply for a higher-priced mortgage loan, “We may order an appraisal to determine the property’s value and charge you for this appraisal.  We will give you a copy of any appraisal, even if your loan does not close.  You can pay for an additional appraisal for your own use at your own cost.” As you may recall from reading the Memo article on Regulation B appraisal requirements, a disclosure was required under that final rule too, thus, this final rule provides that “Compliance with the disclosure requirement in Regulation B, 12 CFR 1002.14(a)(2), satisfies the requirements of this paragraph.”  The disclosure must be delivered or placed in the mail no later than the third business day after the creditor receives the consumer’s application for a higher-priced mortgage loan.  If initially, it is not a higher-priced loan application, but it is determined later that the loan will be higher-priced the disclosure must be provided at that time.

Copy of appraisal(s). This final rule also requires that the creditor provide a copy of any written appraisal that is performed in connection with a higher-priced mortgage loan.  The appraisal(s) must be provided no later than three business days prior to consummation of the loan or, if the loan is not consummated, no later than 30 days after the creditor determines that the loan will not be consummated. Unlike appraisal requirements under Regulation B, the consumer cannot waive these timing requirements.

A creditor cannot charge the consumer for a copy of a written appraisal that is required to be given under this final rule, this includes imposing a fee specifically for a required copy of an appraisal or by marking up the interest rate or any other fees payable by the consumer in connection with the higher-priced mortgage loan.

Exceptions.  A creditor is not required to comply with the requirements of this final rule, such as obtain a appraisal, or in some situations two appraisals, provide notice and copies in the following types of transactions: a qualified mortgage as defined in 12 CFR 1026.43(e); a transaction secured by a new manufactured home; a transaction secured by a mobile home, boat, or trailer; a transaction to finance the initial construction of a dwelling; a loan with maturity of 12 months or less, if the purpose of the loan is a “bridge” loan connected with the acquisition of a dwelling intended to become the consumer’s principal dwelling; a reverse-mortgage transaction subject to 12 CFR 1026.33(a).”

A “qualified mortgage” is a new term that is found under separate rulemaking also recently issued by the CFPB, a summary of this rule will appear separately in the Memo.  Also, with regard to “manufactured home” a transaction secured by a new manufactured home, regardless of whether the transaction is also secured by the land on which it is sited, is not a “higher-priced mortgage loan” that is subject to the appraisal requirements.  The term manufactured home has the same meaning as in HUD regulation 24 CFR 3280.2.  However, a mobile home does not include manufactured homes - two different things.  In reference to construction loans, the appraisal requirements do apply to permanent financing that replaces a construction loan, whether the permanent financing is extended by the same or a different creditor, unless the permanent financing is otherwise exempt from the appraisal requirements of this final rule.

Also, please note that these exceptions apply only to the appraisal requirements under this final rule for higher-priced mortgage loans, not to be confused with other exceptions that relate to escrow requirements for higher-priced mortgage loans (they are different) and appraisal requirements under other rules and regulations.

Should you have any questions or concerns on this or any other compliance topic, please do not hesitate to contact Amy Kleinschmit at akleinschmit@cuad.coop or 701.214.9721.