New Appraisal Rules Proposed for High-Risk Mortgages
Six principal regulators of banks and credit unions have issued proposed rules to establish a new appraisal requirement for “higher-risk mortgage loans.” The rules which will be published in the Federal Register” allow for a mandatory 60 day comment period.
The Dodd-Frank Wall Street Reform and Consumer Protection Act passed in 2010 establishes a new section in the Truth in Lending Act (TILA) which does not permit a creditor to extend credit in the form of a higher-risk mortgage loan to any consumer without first obtaining a written appraisal performed by a qualified appraiser who conducts a physical interior inspection of the property.
The new section defines a “higher risk” mortgage with reference to the annual percentage rate (APR) of the transaction with thresholds substantially similar to rate triggers in Regulation Z. In general the definition includes loans where 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. The proposal would exclude “qualified mortgages” from the definition when the rules for that category are finalized. The regulatory agencies also propose to rely on their exemption authority under Dodd-Frank to exclude reverse mortgage loans and loans secured solely by residential structures such as many types of manufactured homes from the requirements.
The proposed rules also require a second appraisal by a different qualified appraiser if the property will be the consumer’s principal dwelling or if the seller acquired the property within the previous 180 days at a lower price than the sales price at which it is currently being sold. The second appraisal must include “an analysis of the difference in sale prices, changes in market conditions, and any improvements made to the property” between the two transaction dates.
Other proposed parts of the new rules include a provision requiring the applicant be provided a statement regarding the purpose of the appraisal at application and receive a copy of any written appraisal at least three days before closing. The applicant may also choose to have a separate appraisal conducted at his/her own expense.
The regulators proposing the new regulations are the Consumer Financial Protection Bureau (CFPB), the Federal Reserve Board of Governors, the Federal Deposit Insurance Corporation, Federal Housing Finance Agency, National Credit Union Administration, and the Office of Comptroller of the Currency.
In asking for comments the agencies specifically requested those addressing a proposed amendment to the method of calculating the APR that is being proposed as part of other mortgage-related proposals issued for comment by CFPB. It is proposing to adopt a simpler and more inclusive finance charge calculation for closed-end credit secured by real property or a dwelling. The Agencies also note that the CFPB is seeking comment on whether replacing APR with an alternative metric may be warranted to determine whether a loan is covered by the 2012 HOEPA Proposal as well as the proposal to implement the Dodd-Frank Act’s escrow requirements. One possible alternative metric is the transaction coverage rate (TCR) which would exclude all prepaid finance charges not retained by the creditor, a mortgage broker, or an affiliate of either.
The public will have 60 days, until October 15, 2012, to review the proposed regulations.