TILA Examination Procedures - Revised!

On May 2, 2011, the Office of Thrift Supervision (OTS) issued revisions to its examination procedures. The OTS has revised its examination procedures for closed-end loans as a result of recent Federal Reserve Board (FRB) revisions to Regulation Z, which implements the Truth in Lending Act (TILA).

Specifically, the revised procedures cover:

(1) Loan Originator Compensation: The prohibition on payments to loan originators, including mortgage brokers and loan officers employed by depository institutions, based on the terms of the transaction, other than the loan amount;

(2) Mortgage Disclosure Improvement Act: Required disclosure of payment examples if the loan's interest rate or payments can change and a statement that a consumer is not guaranteed to be able to refinance the transaction in the future;

(3) Appraiser Independence: Requirements for appraiser independence for consumer credit transactions secured by a consumer's principal dwelling, whether a closed-end loan or a home equity line of credit; and

(4) Helping Families Save Their Homes Act: Requirements that consumers receive notice when their mortgage loan has been sold or transferred. Examiners will be required to evaluate whether savings associations meet specific requirements.

LOAN ORIGINATOR COMPENSATION

Revised Examination Criteria

• A loan originator, including mortgage brokers and mortgage loan officers employed by depository institutions, may not receive compensation that is based on the interest rate of the loan (i.e., a yield spread premium) or other loan terms. Loan originators can continue to receive compensation that is based on a percentage of loan amount.

• A loan originator that receives compensation directly from the consumer may not receive compensation from the lender or another party.

• A loan originator may not direct or "steer" a consumer to a mortgage loan that is not in the consumer's interest in order to increase the loan originator's compensation.
• A loan originator can obtain a "safe harbor" for compliance with the anti-steering requirement by presenting the consumer with loan options that include: 1) the loan with the lowest interest rate; 2) the loan with the lowest interest rate without any risky features (such as prepayment penalties, negative amortization or a balloon payment in the first seven years); and 3) the loan with the lowest total dollar amount for origination points or fees and discount points.

MORTGAGE DISCLOSURE IMPROVEMENT ACT

Revised Examination Criteria

The Mortgage Disclosure Improvement Act (MDIA) of 2008 amended the TILA to require that borrowers are alerted to the risk of payment increases before they take out mortgages with variable rates or payments. This amendment requires that lenders' cost disclosures include a payment summary in the form of a table, stating the following:

• The initial interest rate and the corresponding monthly payment;

• For adjustable-rate or step-rate loans, the maximum interest rate and payment that can occur during the first five years and a "worst case" example showing the maximum rate and payment possible over the life of the loan; and,
• The fact that consumers might not be able to avoid increased payments by refinancing their loans.

APPRAISER INDEPENDENCE 

Revised Examination Criteria

The Dodd-Frank Wall Street Reform and Consumer Protection Act amended the TILA to include several provisions that protect the integrity of the appraisal process when the consumer's home secures the loan, whether a closed-end loan or a home equity line of credit. 

Specifically, the appraisal independence provisions:

• Prohibit coercion, bribery and other similar actions designed to cause appraisers to base the appraised value of properties on factors other than their independent judgment;

• Prohibit appraisers and appraisal management companies from having a financial or other interest in the property or the credit transaction;

• Prohibit a creditor from extending credit, if it knows, before consummation, of coercion or a conflict of interest;

• Require that creditors or settlement service providers that have information about appraiser misconduct file reports with the appropriate state licensing authorities; and,
• Require the payment of reasonable and customary compensation to appraisers who are not employees of the creditors or of the appraisal management company hired by the creditors.

HELPING FAMILIES SAVE THEIR HOMES ACT 

Revised Examination Criteria

The Helping Families Save Their Homes Act amended the TILA to require that consumers be notified of the sale or transfer of their mortgage loan. 

The purchaser or assignee that acquires the loan must provide the required disclosures no later than 30 days after the date on which it acquired the loan.

VISIT LIBRARY

Office of Thrift Supervision (OTS)
Consumer Affairs Laws and Regulations:
Examination Handbook - Section 1305
May 2011

Appraiser Independence Requirements - AIRs on April 1, 2011

On April 1, 2011, a new industry acronym will be officially born: AIR -which stands for Appraiser Independence Requirements. AIR replaces the Home Valuation Code of Conduct (HVCC), which will have no further force or effect. 

The term "AIR" actually has been around for some time, used by Fannie and Freddie in their development of HVCC. Its requirements pertain to all loans sold to Fannie Mae and Freddie Mac originated for the acquisition or refinancing of 1-4 unit, primary residential properties.  

The FRB issued an interim final rule on AIR, effective December 27, 2010. However, compliance was optional until April 1, 2011. Furthermore, the FRB has removed the 2008 Appraisal Independence Rules [12 CFR 226.36(b)] effective April 1, 2011. Section 1472 of Dodd-Frank essentially codifies the 2008 Appraisal Independence Rules and expands on the protections that they provide.

As part of Dodd-Frank, the GSEs are required to review rules of appraiser independence. That is, implementation of AIR is specifically required by Dodd-Frank. Both Fannie and Freddie will continue to issue future rules about AIR, such as those relating to conflicts of interest and fee disclosure by appraisal management companies (AMCs).

In an effort to provide greater protection to the consumer, as well as prevent the "over-appraisals" alleged to have contributed to the recent mortgage meltdown, Dodd-Frank and the FRB's regulatory mandates may seem to be overreaching. But the structure of AIR is really just a more precise version of HVCC.

AIR is here to stay, so let's get more familiar with it!

Who Is Subject To AIR

Financial institutions that have been subject to the HVCC will incur minimal changes. The requirements have the biggest impact on banks and credit unions that have not implemented HVCC and now must implement the AIR procedures.

In-house appraisal departments and AMCs must determine how they will be in compliance with the appraiser compensation requirements.

 Appraiser Independence

• Prohibition on coercion and other similar actions are designed to cause appraisers to base the appraised value of properties on factors other than their independent judgment.

• Prohibition on appraisers and appraisal management companies hired by lenders from having financial or other interests in the properties or the credit transactions.

• Prohibition on creditors from extending credit based on appraisals if they know beforehand of violations involving appraiser coercion or conflicts of interest, unless the creditors determine that the values of the properties are not materially misstated.

• Requirement that creditors or settlement service providers, who have information about appraiser misconduct, file reports with the appropriate state licensing authorities.
• Requirement of customary and reasonable compensation to appraisers who are not employees of the creditors or of the appraisal management companies hired by the creditors (i.e., "customary and reasonable compensation" for appraisal services performed in the market area of the property being appraised).
  
  

Appraiser Coercion

No creditor or mortgage broker (or their affiliates) may directly or indirectly "coerce" - or otherwise encourage - an appraiser to misstate or misrepresent the value of a principal dwelling.

Examples

• Implying to an appraiser that current or future retention of the appraiser depends on the amount at which the appraiser values a consumer's principal dwelling.

• Excluding an appraiser from consideration for future engagement because the appraiser reports a value of a consumer's principal dwelling that does not meet or exceed a minimum threshold.

• Telling an appraiser a minimum reported value of a consumer's principal dwelling that is needed to approve the loan.

• Failing to compensate an appraiser because the appraiser does not value a consumer's principal dwelling at or above a certain amount.
• Conditioning an appraiser's compensation on loan consummation.

 Appraiser Non-Coercion

Examples

• Asking an appraiser to consider additional information about a consumer's principal dwelling or about comparable properties.

• Requesting an appraiser to provide additional information about the basis for a valuation.

• Requesting that an appraiser correct factual errors in a valuation.

• Obtaining multiple appraisals of a consumer's principal dwelling, so long as the creditor adheres to a policy of selecting the most reliable appraisal, rather than the appraisal that states the highest value.

• Withholding compensation from an appraiser for breach of contract or substandard performance of services as provided by contract.
• Taking action permitted or required by applicable federal or state statute, regulation, or agency guidance.
  

 Material Misstatement Voids Transaction

If a creditor who knows - at or before loan consummation - of a violation of misrepresentation in connection with an appraisal, the creditor is prohibited from extending credit based on such appraisal, unless the creditor documents that it has acted with reasonable diligence to determine that the appraisal does not materially misstate or misrepresent the value of the dwelling.

A misstatement or misrepresentation is not material if it does not affect the credit decision or the terms on which credit is extended.

Nuances

• AMCs are regulated just as individual appraisers are regulated.

• HELOCs and portfolio loan origination procedures must comply with appraiser independence practices, such as prohibiting individuals involved in loan production from various forms of contact to the appraisal process.

• In-house appraisal staff compensation and fee arrangements must be evaluated for compliance.

• Small institutions with assets of $250M or less must separate appraisal and loan production staff.

• Appraisers and AMCs may only receive customary and reasonable compensation, using at least a 3-part test: 

1. the fee must be reasonably related to recent rates paid for appraisals in a relevant geographical market;  
2. the fee is commensurate with the property type and scope of work; and, if applicable 
3. the fee is established by third party requirements, not including fees paid by an AMC (i.e., such as a fee survey).
   

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Appraisal Activities, Dodd-Frank
Title XIV - Mortgage Reform and Anti-Predatory Lending Act
Subtitle F - July 21, 2010

New Appraisal and Evaluation Guidelines

On December 2, 2010, the federal financial regulatory agencies issued new Appraisal and Evaluation Guidelines, the purpose of which is to reflect changes in appraisal and evaluation practices.

The Guidelines replace the 1994 guidelines and explain the agencies' minimum regulatory standards for appraisals, incorporating the agencies' recent supervisory issuances on appraisal practices, addressing advancements in information technology used in collateral valuation practices, and clarifying standards for the industry's appropriate use of analytical methods and technological tools in developing evaluations.

The Guidelines clarify that:

(1) an analytical method or technological tool, such as an automated valuation model, cannot be substituted for an appraisal when the transaction requires an appraisal, and (2) there are "enhanced" requirements for collateral valuation methods for transactions that permit the use of an evaluation.

Review appraisal and evaluation programs to ensure they are consistent with the Guidelines.

GUIDELINES

• Recognize that while borrowers' ability to repay real estate loans according to reasonable terms remains the primary consideration in a lending decision, sound collateral valuation practices are an integral part of the loan underwriting process.

• Update and replace existing supervisory guidance to reflect developments regarding appraisals and evaluations as well as changes in appraisal standards and advancements in regulated institutions' collateral valuation methods.

• Clarify that collateral valuation methods that use an analytical method or technological tool, such as an automated valuation model, cannot be substituted for an appraisal when the transaction requires an appraisal.

• Enhance the requirements for collateral valuation methods for transactions that permit the use of an evaluation and specify that valuation methods that do not provide a property's market value, such as a broker price opinion, are not acceptable as an evaluation.

• Instruct institutions to file a complaint with the appropriate state appraiser regulatory officials when they suspect that a state certified or licensed appraiser fails to comply with the Uniform Standards of Professional Appraisal Practices, applicable laws, or engages in other unethical or unprofessional conduct, and to file a suspicious activity report (SAR) with the Financial Crimes Enforcement Network when the suspicious activity meets the SAR filing criteria.

APPENDICES

The appendices are particularly interesting and relevant to appraisal and evaluation practices. It is important to become familiar with the guidelines and implement them accordingly.

Appendix A
Appraisal Exemptions

1. Appraisal Threshold

2. Abundance of Caution

3. Loans Not Secured by Real Estate

4. Liens for Purposes Other Than the Real Estate's Value

5. Real Estate-Secured Business Loans

6. Leases

7. Renewals, Refinancings, and Other Subsequent Transactions Loan Workouts or Restructurings.

8. Transactions Involving Real Estate Notes

9. Transactions Insured or Guaranteed by a U.S. Government Agency or U.S. Government-sponsored Agency

10. Transactions that Qualify for Sale to, or Meet the Appraisal Standards of, a U.S. Government Agency or U.S. Government-sponsored Agency

11. Transactions by Regulated Institutions as Fiduciaries

12. Appraisals Not Necessary to Protect Federal Financial and Public Policy Interests or the Safety and Soundness of Financial Institutions

Appendix B
Evaluations Based on Analytical Methods or Technological Tools

Automated Valuation Models (AVMs)
Selecting an AVM(s)
Determining AVM Use
Validating AVM Results
Tax Assessment Valuations (TAVs)

Appendix C
Deductions and Discounts

Proposed Construction or Renovation
Partially Leased Buildings
Non-market Lease Terms
Tract Developments with Unsold Units: Raw Land, Developed Lots, Attached or Detached Single-family Homes, Condominiums

Appendix D
Glossary of Terms

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Appraisal and Evaluation Guidelines
Interagency
December 2, 2010

LENDERS COMPLIANCE GROUP is the first full-service, mortgage risk management firm in the country, specializing exclusively in mortgage compliance and offering a full suite of hands-on and automated services in residential mortgage banking.

FRB: Appraisal Independence - Interim Final Rule

On October 28, 2010, the Federal Reserve Board published an interim final rule in response to revision requirements to the Truth in Lending Act (TILA), pursuant to the mandates of the Dodd-Frank Wall Street Reform and Consumer Protection Act. TILA Section 129E establishes new requirements for appraisal independence for consumer credit transactions secured by the consumer's principal dwelling.

The amendments ensure that real estate appraisals used to support creditors' underwriting decisions are based on the appraiser's independent professional judgment, free of any influence or pressure that may be exerted by parties that have an interest in the transaction. The amendments also seek to ensure that creditors and their agents pay customary and reasonable fees to appraisers.

The interim final rule applies to a person who extends credit or provides services in connection with a consumer credit transaction secured by a consumer's principal dwelling. Although TILA and Regulation Z generally apply only to persons to whom the obligation is initially made payable and that regularly engage in extending consumer credit, TILA Section 129E and the interim final rule apply to persons that provide services without regard to whether they also extend consumer credit by originating mortgage loans. Thus, the interim final rule applies to creditors, appraisal management companies, appraisers, mortgage brokers, realtors, title insurers and other firms that provide settlement services.

Specifically, the interim final rule applies to appraisals for any consumer credit transaction secured by the consumer's principal dwelling. Covering consumer credit transactions is consistent with the scope of TILA generally, which only applies to credit extended for personal, family or household purposes. The revisions provide a broader scope, as required by Section 1472 of the Dodd-Frank Act, which does not limit coverage to closed-end loans and also covers HELOCs.

Finally, with a few exceptions, the interim final rule applies to any person who performs valuation services, performs valuation management functions, and to any valuation of the consumer's principal dwelling, not just to a licensed or certified ''appraiser,'' an ''appraisal management company,'' or to a formal ''appraisal.''

The Board seeks comment on this interim final rule.

Dates:
Effective: December 27, 2010
Compliance Date: April 1, 2011
Comments Deadline: December 27, 2010

HIGHLIGHTS

Coercion and prohibited extensions of credit.

-Prohibits covered persons from engaging in coercion, bribery, and other similar actions designed to cause anyone who prepares a valuation to base the value of the property on factors other than the person's independent judgment.

-Prohibits a creditor from extending credit based on a valuation if the creditor knows, at or before consummation, that (a) coercion or other similar conduct has occurred, or (b) that the person who prepares a valuation or who performs valuation management services has a prohibited interest in the property or the transaction as discussed below, unless the creditor uses reasonable diligence to determine that the valuation does not materially misstate the value of the property.

Conflicts of interest.

-Provides that a person who prepares a valuation or who performs valuation management services may not have an interest, financial or otherwise, in the property or the transaction. The Dodd-Frank Act does not expressly ban the use of in-house appraisers or affiliates. However, because the Act prohibits appraisers from having an ''indirect financial interest'' in the transaction, it is possible to interpret the Act to prohibit creditors from using in house staff appraisers and affiliated appraisal management companies (AMCs).

-Clarifies that an employment relationship or affiliation does not, by itself, violate the prohibition.

-Establishes a safe harbor and specific criteria for establishing firewalls between the appraisal function and the loan production function, to prevent conflicts of interest. Special guidance on firewalls is provided for small institutions, because they likely cannot completely separate appraisal and loan production staff. Small institutions are those with assets of $250 million or less.

Mandatory reporting of appraiser misconduct.

-Provides that a creditor or settlement service provider involved in the transaction who has a reasonable basis to believe that an appraiser has not complied with ethical or professional requirements for appraisers under applicable federal or state law, or the Uniform Standards of Appraisal Practice (USPAP) must report the failure to comply to the appropriate state licensing agency.

-Limits the duty to report compliance failures to those that are likely to affect the value assigned to the property.

-Provides that a person has a ''reasonable basis'' to believe an appraiser has not complied with the law or applicable standards, only if the person has knowledge or evidence that would lead a reasonable person under the circumstances to believe that a material failure to comply has occurred.

Customary and reasonable rate of compensation for fee appraisers.

-A creditor and its agent must pay a fee appraiser at a rate that is reasonable and customary in the geographic market where the property is located. The rule provides two presumptions of compliance. Under the first, a creditor and its agent is presumed to have paid a customary and reasonable fee if the fee is reasonably related to recent rates paid for appraisal services in the relevant geographic market, and, in setting the fee, the creditor or its agent has:

· Taken into account specific factors, which include, for example, the type of property and the scope of work; and

· Not engaged in any anti-competitive actions, in violation of state or federal law, that affect the appraisal fee, such as price fixing or restricting others from entering the market.

-A creditor or its agent would also be presumed to comply if it establishes a fee by relying on rates established by third party information, such as the appraisal fee schedule issued by the Veteran's Administration, and/or fee surveys and reports that are performed by an independent third party (the Act provides that these surveys and reports must not include fees paid by AMCs).

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Federal Reserve Board
Interim Final Rule - Appraiser Independence
Federal Register, Vol. 75, No. 208
October 28, 2010

LENDERS COMPLIANCE GROUP is the first full-service, mortgage risk management firm in the country, specializing exclusively in mortgage compliance and offering a full suite of hands-on and automated services in residential mortgage banking.