Lenders will be required to obtain a written appraisal from a certified or licensed appraiser and meet other requirements before making a higher-priced mortgage loan under a joint rule approved by the Federal Deposit Insurance Corp. (FDIC) board on Jan. 15.
The final rule, “Appraisals for Higher-Priced Mortgage Loans,” includes important changes in response to public comments. Notably, while Dodd-Frank specified certain protections for “higher-risk mortgage loans,” the final rule adopted the term “higher-priced mortgage loans,” a category of mortgage loan defined under the Truth in Lending Act (TILA). Commenters noted that the terms had similar definitions, and they urged the six regulatory agencies tasked with writing the rule to harmonize those definitions to avoid confusion.
The final rule exempts several types of loans such as temporary bridge loans, construction loans, loans for new manufactured homes and others from the appraisal requirements. The rule also provides exemptions from requirements regarding a second appraisal to facilitate loans in rural areas and for other transactions.
Based on public comments, the agencies plan to seek additional comments to consider further exemptions for streamlined refinance programs and small-dollar loans, and to seek clarification for the applicability of the final rule to certain other property types.
The rule will take effective on Jan. 18, 2014.
What the rule says
Section 1471 of the Dodd-Frank Act added section 129H to the Truth in Lending Act (TILA), setting forth appraisal requirements applicable to higher-risk mortgage loans. The FDIC, Consumer Financial Protection Bureau (CFPB) and four other federal agencies proposed a rule to implement the requirements last year.
To implement the statutory definition of “higher-risk mortgage,” the final rule uses the term “higher-priced mortgage loan,” a term already in use under the CFPB’s Regulation Z with a meaning substantially similar to the meaning of “higher-risk mortgage” in the Dodd-Frank Act.
Unless the loan qualifies for an exemption, the final rule allows a creditor to originate a higher-priced mortgage loan only if: 1) the creditor obtains a written appraisal; 2) the appraisal is performed by a certified or licensed appraiser; and 3) the appraiser conducts a physical property visit of the interior of the property.
The following requirements also apply with respect to higher-priced mortgage loans subject to the final rule:
At application, the consumer must be provided with a statement regarding the purpose of the appraisal, that the creditor will provide the applicant a copy of any written appraisal, and that the applicant may choose to have a separate appraisal conducted for the applicant’s own use at his or her own expense; and
The consumer must be provided with a free copy of any written appraisals obtained for the transaction at least three business days before consummation.
In addition, the final rule implements the Dodd-Frank’s requirement that the creditor of a higher-risk mortgage obtain an additional written appraisal, at no cost to the borrower, when the higher-risk mortgage will finance the purchase of the consumer’s principal dwelling and there has been an increase in the purchase price from a prior sale that took place within 180 days of the current sale.
The final rule also sets thresholds for the increase that will trigger an additional appraisal. An additional appraisal will be required for a higher-priced mortgage loan that is not otherwise exempt if either:
The seller is reselling the property within 90 days of acquiring it and the resale price exceeds the seller’s acquisition price by more than 10 percent; or
The seller is reselling the property within 91 to 180 days of acquiring it and the resale price exceeds the seller’s acquisition price by more than 20 percent.
The additional written appraisal, from a different licensed or certified appraiser, generally must 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.
Consistent with the statute, “qualified mortgages” — as defined by the CFPB in a separate rulemaking — are exempt from the requirements of the rule. In addition, the final rule excludes the following classes of loans from coverage of the higher-risk mortgage appraisal rule:
1) Transactions secured by a new manufactured home;
2) Transactions secured by a mobile home, boat or trailer;
3) Transactions to finance the initial construction of a dwelling;
4) Loans with maturities 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; and
5) Reverse mortgage loans.
Exemptions from additional appraisal requirement
The final rule provides exemptions from the additional appraisal requirement for subsequent sale transactions occurring within 180 days of the first purchase transaction for: 1) extensions of credit that finance the sale of property by a local, state or federal government agency; 2) a residential dwelling acquired in connection with liquidating a mortgage through foreclosure; 3) transactions by a non-profit approved to purchase real estate owned as part of a government program; 4) transactions involving a seller who acquired property by inheritance, divorce or dissolution of civil union/domestic partnership; 5) an employer or relocation agency in connection with employee relocation; and 6) a service member with permanent change of station orders.
Exemptions also would be provided for property located in a federally-designated disaster area with an agency waiver and “rural” property as defined in the CFPB’s escrow and ability-to-repay final rules.
“Higher-risk” and “higher-priced”
TILA section 129H(f) defines a “higher-risk mortgage” as a residential mortgage loan secured by a principal dwelling with an annual percentage rate (APR) that exceeds the average prime offer rate (APOR) for a comparable transaction by a specified percentage as of the date the interest rate is set.
Consistent with Dodd-Frank, the agency’s proposed rule provided that a “higher-risk mortgage loan” is a closed-end consumer credit transaction with an APR that exceeds the APOR by 1.5 percentage points for first-lien conventional mortgages, 2.5 percentage points for first-lien jumbo mortgages and 3.5 percentage points for subordinate-lien mortgages.
The proposal noted that the “higher-risk mortgage loan” definition set forth in Dodd-Frank is similar to the definition of “higher-priced mortgage loan,” a category of mortgage loan defined under TILA. Several commenters urged regulators to harmonize the APR triggers set forth in the two definitions.
The regulators explained that, to avoid confusion, the final rule adopts the proposed definition but replaces the term “higher-risk mortgage loan” with the term “higher-priced mortgage loan.” The final rule also makes certain changes to the existing “higher-priced mortgage loan” definition.
The proposed regulations included a request for comments on an alternative method of determining coverage based on the transaction coverage rate (TCR) rather than the APR. Unlike the APR, the TCR would include all prepaid finance charges not retained by the creditor, a mortgage broker or an affiliate of either. The TCR was intended to address a possible expansion of the definition of “finance charge” used to calculate the APR, which the CFPB proposed in its rulemaking to integrate mortgage disclosures required by TILA and the Real Estate Settlement Procedures Act (RESPA).
The final rule does not replace the APR with the TCR. The agencies said they will instead determine subsequently whether it will be necessary to again address this issue, if and when the CFPB adopts the more inclusive definition of finance charge proposed in the TILA-RESPA mortgage disclosures proposal. The CFPB has said it plans to finalize the TILA-RESPA disclosures rule in September.
Safe harbor adopted
The agencies proposed a safe harbor that would establish affirmative steps for creditors to follow to satisfy statutory obligations under section 129H. This was done to address compliance uncertainties. Regulators noted that commenters generally supported such a safe harbor.
Under the final rule, a creditor would be deemed to have obtained a written appraisal that meets general appraisal requirements if the creditor:
Orders the appraiser to perform the appraisal in conformity with the Uniform Standards of Professional Appraisal Practice (USPAP), Title XI of the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA), 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 holds a valid appraisal license or certification in the State in which the appraised property is located;
Confirms that certain elements set forth in the final rule are addressed in the written appraisal; and
Has no actual knowledge to the contrary of facts or certifications contained in the written appraisal.
Additional rulemaking expected
The agencies received comments in support of two additional exemptions from the rule’s requirements for streamlined refinancings and small-dollar loans. Commenters contended that such exemptions would help to keep borrowers in their homes, reduce the number of delinquent loans, and encourage the rehabilitation and re-introduction to the marketplace of foreclosed or otherwise unavailable property.
The FDIC said the agencies will seek comment on a streamlined refinancing exemption and a small dollar loan exemption after the appraisal final rule has been issued. The forthcoming proposal is expected to seek clarification on whether it is appropriate to apply the appraisal rule for higher-risk mortgage loans to loans secured by certain property types such as cooperatives and non-purchase money loans for manufactured housing.