On the same day, the CFPB issued a final rule implementing an amendment to the Equal Credit Opportunity Act ("ECOA"), revising Regulation B’s provisions regarding appraisals (the "ECOA Appraisal Rule"). The amendment to the ECOA also was enacted as part of the Dodd-Frank Act.
Both the HPML Appraisal Rule and the ECOA Appraisal Rule will become effective January 18, 2014.
The HPML Appraisal Rule
An HPML is a closed-end consumer credit transaction secured by the borrower’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 by:
- 1.5 or more percentage points, for a conforming first-lien mortgage loan;
- 2.5 or more percentage points, for a non-conforming first-lien mortgage loan; or
- 3.5 or more percentage points, for a loan secured by a subordinate lien.
HPML’s do not include "qualified mortgages"2, transactions to finance the initial construction of a dwelling, "bridge loans" with terms of 12-months or less, certain reverse-mortgage transactions3, or home equity-lines of credit. The HPML Appraisal Rule excludes a few additional classes of loans from its appraisal requirements, including transactions secured by new manufactured homes4; or a mobile home, boat, or trailer.
Regulation Z has been amended to require additional appraisal requirements for HPMLs, once the HPML Appraisal Rule is effective. For certain HPMLs, the new appraisal requirements must be met before an extension of credit is made (unless a certain exemption applies). These conditions include the following:
- Obtaining a written appraisal, performed by a certified or licensed appraiser, who conducts a physical property visit of the interior of the property.
- Obtaining an additional appraisal from a different certified or licensed appraiser, at no cost to the borrower, if the HPML finances the purchase or acquisition of a consumer’s principal dwelling and there has been an increase in the purchase price from a prior sale that took place within 180 days (a section aimed at fraudulent flipping). Thresholds do apply. An additional appraisal will also be required if 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 if within 91 to 180 days, the resale price exceeds the seller’s acquisition price by more than 20 percent. An additional appraisal must also be obtained if, after reasonable due diligence, a prior sale date or price cannot be determined. Additional information relating to changes in market conditions and property improvements must also be included in the additional appraisal.
- The creditor of the HPML also must provide the applicant, at the time of the initial application, with a statement that any appraisal prepared for the mortgage is for the sole use of the creditor, and the applicant may have a separate appraisal conducted at the applicant’s expense; and at least three days prior to closing, the creditor must, without charge, provide the applicant with one copy of each appraisal conducted in compliance with the HPML Appraisal Rule.
The ECOA Appraisal Rule
The ECOA Appraisal Rule amends Regulation B to implement an ECOA amendment regarding appraisals and other valuations in connection with applications for credit, secured by a first lien on a dwelling. The ECOA Appraisal Rule requires creditors to:
- notify applicants within three business days of receiving an application of their right to receive a copy of any appraisals developed; and
- provide applicants a copy of each appraisal and other written valuations promptly upon their completion or three business days before the earlier of consummation of the transaction (for closed-end credit) or account opening (for open-end credit), whichever is earlier.
The ECOA Appraisal Rule also permits applicants to waive the timing requirements to receive copies of appraisals and prohibits creditors from charging for the copies of appraisals and other written valuations; however, creditors may charge applicants reasonable fees for the cost of the appraisals or other written valuations unless applicable law provides otherwise. Importantly, the ECOA Appraisal Rule will also apply to credit unions.
We recommend that all financial institutions begin preparing policies and procedures that effectively address the requirements of the HPML Appraisal Rule and the ECOA Appraisal Rule and work closely with their legal counsel to ensure compliance in order to avoid adverse findings on future examinations.
A complete version of the HPML Appraisal Rule is available here: and a complete version of the ECOA Appraisal Rule is available here. These new rules together with several other final rules relating to mortgage credit, implementing requirements of Title XIV of the Dodd-Frank Act, will make 2013 a watershed year for banking regulation.
1See "residential mortgage loan", as defined by TILA section 103(cc)(5), 15 U.S.C. 1602(cc)(5)
2As defined by new TILA section 129C, 15 U.S.C. 1639c(b)(2)(A); 12 C.F.R. 1026.43(e)
3Reverse mortgage has the same meaning as in 12 C.F.R. 1026.33(a)
4Manufactured home has the same meaning as in 24 C.F.R. § 3280.2