New Appraisal Rules Proposed for High-Risk Mortgages

by devteam August 16th, 2012 | Share

<pSix principal regulators of banks and credit unions have issued proposed rulesrnto establish a new appraisal requirement for “higher-risk mortgage loans.”  The rules which will be published in the Federal Register” allow for a mandatoryrn60 day comment period.</p

ThernDodd-Frank Wall Street Reform and Consumer Protection Act passed in 2010 establishesrna new section in the Truth in Lending Act (TILA) which does not permit arncreditor to extend credit in the form of a higher-risk mortgage loan to anyrnconsumer without first obtaining a written appraisal performed by a qualifiedrnappraiser who conducts a physical interior inspection of the property.  </p

Thernnew section defines a “higher risk” mortgage with reference to the annualrnpercentage rate (APR) of the transaction with thresholds substantially similarrnto rate triggers in Regulation Z.   In general the definition includes loans wherernthe APR exceeds the average prime offer rate (APOR) by 1.5 percent forrnfirst-lien loans, 2.5 percent for first-lien jumbo loans, and 3.5 percent forrnsubordinate-lien loans.  The proposalrnwould exclude “qualified mortgages” from the definition when the rules for thatrncategory are finalized.  The regulatoryrnagencies also propose to rely on their exemption authority under Dodd-Frank tornexclude reverse mortgage loans and loans secured solely by residentialrnstructures such as many types of manufactured homes from the requirements.</p

Thernproposed rules also require a second appraisal by a different qualified appraiser</bif the property will be the consumer's principal dwelling or if the seller acquiredrnthe property within the previous 180 days at a lower price than the sales pricernat which it is currently being sold.  Thernsecond appraisal must include "an analysis of the difference in sale prices,rnchanges in market conditions, and any improvements made to the property"rnbetween the two transaction dates. </p

Otherrnproposed parts of the new rules include a provision requiring the applicant be providedrna statement regarding the purpose of the appraisal at application and receive arncopy of any written appraisal at least three days before closing.  The applicant may also choose to have arnseparate appraisal conducted at his/her own expense.</p

Thernregulators proposing the new regulations are the Consumer Financial ProtectionrnBureau (CFPB), the Federal Reserve Board of Governors, the Federal DepositrnInsurance Corporation, Federal Housing Finance Agency, National Credit UnionrnAdministration, and the Office of Comptroller of the Currency.</p

Inrnasking for comments the agencies specifically requested those addressing arnproposed amendment to the method of calculating the APR that is being proposedrnas part of other mortgage-related proposals issued for comment by CFPB.  It is proposing to adopt a simpler and more inclusivernfinance charge calculation for closed-end credit secured by real property or arndwelling.  The Agencies also note thatrnthe CFPB is seeking comment on whether replacing APR with an alternative metricrnmay be warranted to determine whether a loan is covered by the 2012 HOEPArnProposal as well as the proposal to implement the Dodd-Frank Act’s escrowrnrequirements.  One possible alternativernmetric is the transaction coverage rate (TCR) which would exclude all prepaidrnfinance charges not retained by the creditor, a mortgage broker, or anrnaffiliate of either. </p

Thernpublic will have 60 days, until October 15, 2012, to review the proposed regulations.rn

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About the Author


Steven A Feinberg (@CPAsteve) of Appletree Business Services LLC, is a PASBA member accountant located in Londonderry, New Hampshire.

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