One of the many changes heading our way in January 2014 (on the 18th, to be precise) is an amendment to Reg. Z incorporating new provisions concerning appraisals for higher-priced mortgages. Here’s a plain-English breakdown of what’s required.
The NCUA, FDIC, Federal Reserve Board Federal Housing Finance Board and the Consumer Finance Protection Bureau have issued a joint final rule that requires creditors to:
- obtain an appraisal, and in some cases a second appraisal, which meets specific standards;
- provide the applicant with a notice regarding the use of the appraisal; and
- provide the applicant with a copy of the appraisal.
Higher-priced mortgages, as defined in section 1026.35 of Regulation Z, are closed-end mortgage loans secured by the applicant’s primary dwelling and which have an APR that exceeds the average prime offer rate for a comparable transaction as of the date the interest rate is set by:
- 1.5 or more percentage points for loans secured by a first lien with a loan amount at consummation that does not exceed the limit in effect as of the date the transaction’s interest rate is set for the maximum loan amount eligible for purchase by Freddie Mac;
- 2.5 or more percentage points for loans secured by a first lien with a loan amount at consummation that exceeds the limit in effect as of the date the transaction’s interest rate is set for the maximum loan amount eligible for purchase by Freddie Mac; or
- 3.5 or more percentage points for loans secured by a subordinate lien.
However, certain mortgage loans are excluded from this appraisal rule for higher-priced mortgages. They are:
- Qualified mortgages as defined Regulation Z, section 1026.43(e);
- Transactions secured by new manufactured homes;
- Transactions secured by a mobile home, boat or trailer;
- Loans to finance the initial construction of a dwelling;
- Bridge loans for the purchase of the applicant’s primary welling and with maturities of 12 months or less; and
- Reverse mortgage loans.
The agencies have also issued a proposed rule that could add several other exceptions to this list: (1) transactions secured only by a used manufactured home and not the land on which it sits; (2) certain streamlined refinances; and (3) loans of $25,000 or less.
If you originate a higher-priced mortgage you must obtain the following items before funding the loan:
- A written appraisal performed by a certified or licensed appraiser who conducts a physical inspection of the interior of the property. Drive-by appraisals do not satisfy this requirement; and
- An additional appraisal from a different certified or licensed appraiser if the higher-priced mortgage meets one of the following conditions: (1) 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%; or (2) 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%.
The additional appraisal must be conducted at no cost to the applicant(s). Plus, at least one of the appraisals must include an analysis of the difference in the two sales prices, changes in the market conditions, and any improvements made to the property between the date of the previous sale and the current sale. If you are not able to determine the prior sales date and/or prior sales price, two appraisals must be obtained. See Appendix B to this subpart for the list of acceptable documents to use to confirm the prior sales date and/or price.
The new rule contains the following list of exempt situations where an additional appraisal is not required:
- Acquisitions from a local, State or Federal government agency;
- Acquisitions from a non-profit entity as part of a local, State or Federal government program;
- Acquisitions from person who acquired the property through a foreclosure, deed-in-lieu of foreclosure or other similar judicial or non-judicial legal proceeding;
- Acquisitions from a seller who acquired the property through an inheritance, divorce action, or similar action;
- Acquisitions from an employer or relocation agency in connection with the relocation of an employee;
- Acquisitions from a servicemember who has been deployed or relocated;
- Acquisitions of properties in designated federal disaster areas; and
- Acquisitions of properties located in a rural county as defined in section 1026.35(b)(2)(iv)(A).
You must provide applicants of higher-priced mortgages with the following items:
- A written notice that states, “We may order an appraisal to determine the property’s value and charge you for this appraisal. We will give you a copy 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 an alternative, you can elect to provide the notice required in Regulation B, section 1002.14(a)(2). This notice must be delivered or put in the mail no later than the third business day after you receive the applicant’s credit application. A proposed rule would clarify that “business day for the purpose of this new rule would include every day except Sundays and Federal holidays. If you determine that the loan is a higher-priced mortgage after you receive the application, you must deliver or mail this notice within 3 business days of the determination that the loan is a higher-priced mortgage); and
- One copy of each appraisal conducted in accordance with the above requirements. The appraisal copy must be provided at no charge and must be provided to the applicant no later than three days prior to the closing. The copy may be provided in an electronic format, if you have obtained the consumer’s consent in accordance with the E-Sign Act.
If you obtain an appraisal in accordance with the following conditions it is considered to be in compliance with this appraisal requirement:
- You require that the appraiser perform the appraisal in accordance with the Uniform Standards f Professional Appraisal Practice and title XI of FIRREA;
- You verify through the National Registry (for State certified and licensed appraisers) that the appraiser who signs the appraiser’s certification was a certified or licensed appraiser in the State in which the property is located on the date of the certification;
- You confirm that the elements identified in Appendix A to this rule are addressed in the written appraisal; and
- You have no actual knowledge of any information that is contrary to the facts or certifications contained in the written appraisal.
The new rule can be found in Subpart G to Part 34 of Regulation Z beginning with section 34.201. Appendix C to the new subpart contains the Official Staff Interpretations.