On August 15, 2012, six federal financial regulatory agencies issued a proposed rule to establish new appraisal requirements for "higher-risk mortgage loans." The proposed rule has been issued by the Board of Governors of the Federal Reserve System, the Consumer Financial Protection Bureau (Bureau), the Federal Deposit Insurance Corporation, the Federal Housing Finance Agency, the National Credit Union Administration, and the Office of the Comptroller of the Currency.
The proposed rule would implement amendments to the Truth in Lending Act (TILA) enacted by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank). Under the Dodd-Frank, mortgage loans are higher-risk if they are secured by a consumer's home and have interest rates above a certain threshold.
For higher-risk mortgage loans, the proposed rule would require creditors to use a licensed or certified appraiser who prepares a written report based on a physical inspection of the interior of the property. The proposed rule also would require creditors to disclose to applicants information about the purpose of the appraisal and provide consumers with a free copy of any appraisal report.
Creditors would have to obtain an additional appraisal at no cost to the consumer for a home-purchase higher-risk mortgage loan if the seller acquired the property for a lower price during the past six months. This requirement is meant to address fraudulent property flipping by seeking to ensure that the value of the property being used as collateral for the loan legitimately increased.
The aforementioned agencies are seeking comments from the public on all aspects of the proposal. The public will have 60 days, or until October 15, 2012, to review and comment on most of the proposal.
IN THIS ARTICLE
"Higher Risk" Mortgage Loans
Additional Written Appraisal
Calculating the Annual Percentage Rate
Replacing the Annual Percentage Rate
On July 21, 2010, Dodd-Frank was signed into law. Section 1471 of Dodd-Frank establishes a new TILA section 129H, which sets forth appraisal requirements applicable to “higher-risk mortgages.”
Specifically, new TILA section 129H does not permit a creditor to extend credit in the form of a higher-risk mortgage loan to any consumer without first:
- 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 if the purpose of the higher-risk mortgage loan is to finance the purchase or acquisition of a mortgaged property from a seller within 180 days of the purchase or acquisition of the
- Property by that seller at a price that was lower than the current sale price of the property. (The additional appraisal 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.)
- Providing the applicant, at the time of the initial mortgage application, with a statement that any appraisal prepared for the mortgage is for the sole use of the creditor, and that the applicant may choose to have a separate appraisal conducted at the applicant’s expense.
- Providing the applicant with one copy of each appraisal conducted in accordance with TILA section 129H without charge, at least three (3) days prior to the transaction closing date.
"Higher Risk" Mortgage Loans
The new TILA section 129H(f) defines a “higher-risk mortgage” with reference to the annual percentage rate (APR) for the transaction. A higher-risk mortgage is a “residential mortgage loan” secured by a principal dwelling with an APR that exceeds the average prime offer rate (APOR) for a comparable transaction as of the date the interest rate is set, as follows:
- By 1.5 or more percentage points, for a first lien residential mortgage loan with an original principal obligation amount that does not exceed the amount for the maximum limitation on the original principal obligation of a mortgage in effect for a residence of the applicable size, as of the date of such interest rate set, pursuant to the sixth sentence of section 305(a)(2) of the Federal Home Loan Mortgage Corporation Act (12 U.S.C. 1454).