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Proposed New Rules on Appraisals

The Consumer Financial Protection Bureau has announced proposed changes to Regulation B and to Regulation Z to implement Sections 1474 and 1471 of Dodd Frank. The Regulation B change will affect all applications for first-lien secured loans on dwellings and, therefore, will have the greatest impact of the two.

Regulation B
At present, Section 1002.14 of Regulation B requires a creditor to provide an applicant for a loan for a lien to be secured by a dwelling either a notice that the applicant may obtain a copy of any appraisal report obtained by the creditor upon request or a copy of the appraisal report. Also, the creditor must be consistent and either always provide the notice or the appraisal report. Whether the notice or the appraisal report is provided, it must be done before consummation if the loan is consummated or prior to a notice of adverse action is provided if the loan is denied.

The proposed new rule expands the old rule in several respects. First, it clarifies that the term appraisal includes valuations and reports from automated valuation models. For the purpose of the new rule, an appraisal will be any written information bearing on the value of a dwelling that is used in the underwriting of a loan. The new rule carries forward the definition of dwelling from the old rule. A dwelling is fundamentally any structure that is used for 1-4 family occupancy whether it is attached to land or not. It includes mobile homes, condominiums, houseboats and the like. The question is whether the structure is someone’s dwelling. Credit unions were exempt from the old rules because they were subject to a similar different rule. They are not exempt from the proposed new rules. One advantageous change is that the proposed new rules only apply to applications for first-lien secured loans. The present rule applies to all residence secured loans; so, if the new rule is finalized as written, the appraisal delivery requirements on junior lien loans will go away.

Pursuant to the proposed new rule, a creditor will be required to provide to an applicant for a loan to be secured by a first-lien on a dwelling with a notice that the applicant may receive a copy of the appraisal or valuation that the creditor will obtain upon request and that the applicant may also obtain an appraisal on its own. That notice must be provided within three business days after the receipt of the loan application. There is nothing in the proposal that would exempt providing the notice if the loan is denied before the notice is required as there is for the early disclosures under Regulation Z and RESPA. Then when the creditor obtains an appraisal or valuation, it must be provided to the applicant promptly (within 30 business days) or at least three business days before closing, whichever is the first to occur. The applicant may waive the three days before closing requirement, but the appraisal or valuation must then be provided at or before closing. If a loan is denied and no appraisal was obtained but the applicant requests a copy of the appraisal, the creditor may simply inform the applicant that no appraisal was obtained.

Finally, remember that Regulation B is not just a consumer regulation but applies to all credit transactions. Accordingly, the appraisal delivery rules apply regardless of whether the loan is for a consumer or a commercial purpose. If there are multiple applicants, delivery of the notice and the appraisal to either of the applicants satisfies the requirements, but if a principal applicant can be determined, delivery should be to that person. If the loan request is for a renewal or extension of an existing loan and the creditor relies upon a prior appraisal in making the credit decision that prior appraisal does not have to be provided, but any new appraisal or valuation would be; and under the appraisal rules in almost all cases, a new valuation would be required. A creditor may still require that a loan applicant pay a reasonable cost for an appraisal or valuation, but the creditor may not require the applicant to pay for the production or mailing of the applicant’s copy. My guess is that the cost of the second copy will be passed on in most cases to the appraiser. The lender will require the appraiser to provide at least two copies of each appraisal without increasing the cost of the appraisal over what it is when one copy is provided.

Regulation Z
The change to Regulation Z had to be the brain child of a politician. The proposal adds a new section to Regulation Z that requires if a lender makes a “higher-risk mortgage loan” for the purpose of acquiring a dwelling that will become the applicant’s principal residence and the seller of the dwelling acquired it 180 days or less before entering into the contract of sale with the applicant, then, the creditor must obtain two separate appraisals. Depending on the variation of the proposal that is adopted, at least one of the appraisals must justify any price difference between the price at which the property was purchased and the price for which it is being sold, considering any repairs or additions to the property and any fluctuation in the market price in the intervening period. For all practical purposes, a higher-risk mortgage loan is the same as a higher-priced mortgage loan under Section 1026.35. Under the new Regulation B rules, both appraisals would have to be provided to the applicant; however, the creditor may charge the applicant for only one of them. Also, if the sun and moon collide at midnight of the day before the day of closing, the creditor must order a third appraisal.
The above article was provided to Andrews Hooper Pavlik PLC (AHP) courtesy of TriComply, the compliance arm of TriNovus. AHP does not guarantee accuracy of the information provided in the article and it should not be construed as professional advice. If you have any questions regarding this article, please contact Randy Morse, CPA, partner and leader of AHP’s Financial Institution practice. AHP provides a broad range of accounting, auditing, tax, and consulting services to financial institutions throughout the state of Michigan and beyond.

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