Pitfalls to Avoid When Developing a Risk Assessment for Fair Lending- Part Two

In part one of this series, we made the argument that a risk assessment should be performed individually for the area of Fair Lending.   When performing the risk assessment there are several pitfalls that must be avoided. 

Policies and Procedures

The review of the bank’s policies and particularly, its procedures is a basic and critical part to any risk assessment in the area of Fair Lending.     

Potential Pitfall:  Policies and procedures can be fully in compliance with regulatory requirements and still have the potential for Fair Lending issues.  Review of the policies and procedures must consider both compliance with the requirements of regulations and the impact on customers!

First these documents should be reviewed to determine that all of the required information is up to date and correct.  In this review, it is important that regulatory requirements such as “grossing” up, spousal signature rules and Fair Lending principles are included.  This review should also include view of procedures to ensure that they match policies.  

The second phase of the review should be completed to ensure that policies and procedures do not present the possibility of disparate impact.  In this review, the goal is to review the policies and procedures to determine the level of discretion allowed and how this discretion can be checked against Fair Lending risk.  For example, do the procedures require documentation of delays in processing loans?  Do policies and procedures emphasize the need for secondary review?

 Credit Policies

Credit Policies are an area of particular concern in the Fair lending Assessment.  The review of credit policies should also be completed in two phases

Potential Pitfall: Credit policies should reflect the idea that the bank has made a reasoned decision about how it is meeting the credit needs of its community.  Policies that are fully compliant can become outdated quickly.  Review of credit policies should consider the changes in the assessment area and should reflect the business decisions of the Board.      

Credit formulas and guidelines should be reviewed and validated independently to ensure that the data is valid.   Though these validations don’t need to be performed annually, it is a best practice to test the guidelines Vis a Vis adverse action trends at the bank.  Guidelines that yield an extremely high number of loan declines may need study and possibly adjustment. 

In the second phase a comparison between the credit policies, the strategic plan of the bank and current economic data should be completed.  The purpose of this review is to determine that the bank’s credit policies and procedures match the credit needs of the community.   It is imperative that the Bank be able to document the business reasons for the list of products being offered.  For example, a decision by a Bank not to offer home equity loans when there is strong need for such loans in an assessment area, may be called into question during a Fair Lending examination.  A best practice is to have the economic data to show that these loans are not economically feasible at the bank. 

Credit Decision Process

The credit decision process from the time of application to ultimately credit decision or withdrawal by the applicant should be assessed with an eye towards eliminating the ability of single bank employee from thwarting the will of the Board by engaging in illegal behavior  

Potential Pitfall:  When reviewing adverse actions and withdrawals for timely notices, it is possible to overlook the warning signs of Fair Lending issues. 

The review of adverse actions generally includes a check to make sure that notices are given within the timeframes required by Regulation B.  In addition a good review includes a check to determine that the information given is sufficient for the applicant to understand the issues that cause an adverse decision.   However, a best practice is also to review for Fair Lending ‘warning signs”.  For example, an extremely low rate of adverse actions is a strong indicator or pre-screening.  A high rate of withdrawals among protected groups is a strong indicator of discouragement. 

It is a best practice to review the credit decision process to determine the ability of an individual to make credit decisions without oversight.  The more autonomy those loan officers have, the more the system for secondary review should be empowered.  

 Lending Decisions

The traditional Fair Lending analysis focuses on a review of the approvals versus declines at the Bank.  A common practice is to review “matched pairs” which compares the low rated credit approvals with highly rated declines (loans that were barely declined). 

Potential Pitfall:  If this is the heart of the analysis, then the bank is not getting the full story!  The analysis must look at the applicant’s total experience to ensure that all are getting the same considerations. 

The analysis should consider:  

·         Application to decision time-trends for members in protected classes

·         Comparative analysis- close decisions to approve versus decline

·         Pricing  Analysis

·         Special considerations

o   Insufficient collateral frequently being given as a reason for decline

o   Large number of declines in a certain product area

o   High number of approvals versus a small number of declines  

If all of the above is not part of the analysis that is being performed, then your bank may have potential Fair Lending issues that are going undetected.  

Vendor Management

Banks are being charged with knowing and managing the results obtained from their vendors.  The regulatory agencies have made it clear that in every area from indirect auto lending to appraisals, that they expect banks to monitor the results that they are getting form vendors. 

Potential Pitfall:  The review of vendors stops with a background check.  The best practices require that the Bank pay attention to the results of the vendor’s efforts.  There has to be a general check that results are reasonable and consistent

The assessment must consider whether the results being produced are consistent and reliable.  For example, are appraisals being reviewed and compared to complaints?   Is it possible that certain appraisers consistently yield lower property values in certain income tracts?  Are flood insurance determinations being updated to match changes in the flood map?  The bank will be held accountable for the misbehavior of its vendors!      

UDAAP Review

The risk assessment should include a review of the potential for UDAAP.  This is an area that is growing in scope and influence. 

Potential Pitfall:  UDAAP is far reaching and can be easily overlooked.  

The assessment should consider whether there is consistency in advertising and actual disclosures.  The risk assessment must look at the Bank’s products/operations from the point of view of the consumer. 

Customer complaints are an area of focus for regulators in the near future!  Make sure that complaints are getting categorized and reported to the Board.  If no complaints have been received, there should be at least a policy and procedures in place to handle these once they do appear!      

Advertising

Many community banks use testimonials as part of their marketing.  The relationship with the community is after all, one of the strengths of being a community bank. 

Potential Pitfall:   A risk assessment that exclusively covers direct compliance with Reg. Z and DD may overlook Fair Lending concerns in advertising. 

Risk assessment should cover the reasons for the advertising and the markets that you are attempting to reach.  Has the bank considered expanding advertising to nontraditional communities?   Are there communities within the Bank’s assessment area that are left out of the advertising and marketing? 

Strategic Plan

Examiners expect that the Bank has direct knowledge of the credit needs of the assessment area.  This should be considered as part of the risk assessment

Potential Pitfall:  Without considering the overall strategy of the Bank, it is difficult to get the full picture of how the bank is addressing Fair Lending within its community   

The strategic plan is most often not considered as part of the Fair Lending assessment.  However, it is clear that examiners will start considering a bank’s strategy in offering products to its community as a consideration of Fair Lending effectiveness. 

We believe that a Fair Lending risk assessment is a critical component of effective compliance management. 

Pitfalls to Avoid When Developing a Risk Assessment for Fair Lending – Part One

It is surprising that very few of our clients actually prepare a risk assessment for the Fair Lending area.  Generally, if there is a risk assessment, Fair Lending is including in the overall lending compliance risk assessment.  We advise our clients that this is a mistake!   Fair lending is definitely going to be a point of emphasis for examiners and regulators in the near future.  We strongly advise that now is the time to start developing a risk assessment for this important and growingly critical area.  

Why Fair Lending as a Separate Risk Assessment?

Of course when we speak of this topic, we must first qualify that there is no one Fair Lending law.  There are of course, a series of laws that come together to create the umbrella that we call Fair Lending.  These include: 

·         Reg. B  ECOA

·         Reg. C  HMDCA

·         Reg. Z   Truth in Lending

·         Reg. BB  CRA

·         Reg. Z Advertising

·         UDAAP

·         Reg. DD  Advertising

·         State Laws   

Logically, one could assume that since each of these areas are covered in the risk assessments of lending and/or operational compliance, that there is no need to do a separate Fair Lending assessment. 

Fair Lending is not like any Other Area of Compliance

But when they are considered for Fair Lending purposes, these laws come together like no other set of laws.    Then Fair Lending review looks at the impact of practices at a bank to determine whether a violation has occurred.  Fair Lending is in fact, one of the areas of compliance where you may have met all of the requirements of a regulation and still have a violation!  Consider a credit scoring system that requires a minimum disposable income of $1,200 per month.  Suppose further that this minimum is applied equally and fairly to all applicants.  In the case where the minimum disposable income in one neighborhood of a bank’s assessment area is $900, that whole section would be excluded.  Suppose further that the section of the assessment area that is excluded includes the low-to moderate income tracts.  A serious Fair Lending concern has been born!  This is true even though there is nothing illegal or generally wrong about the $1,200 minimum. 

Moreover, when considering whether or not Fair Lending or UDAPP concerns exists at a Bank, examiners will consider everything form the relationship that the Bank has with its community, the marketing of specific products and the overall impact on protected classes.   A “low cost” checking account that is being marketed to low to moderate income populations as an alternative to  check cashing outlets can be a noble idea.  However, if there are fees on the account that kick in to try to discourage certain behaviors, then what was once a noble idea can become a UDAAP concern!  

Fair Lending Examinations Will Consider a Banks’ Relationship with its Vendors

It has become increasingly obvious that Examiners will review a Bank’s oversight of its vendors.  [1]  The expectation is that the Bank must be aware of the reputation of its vendors and must make an effort to determine that the service being provided is one that complies with all applicable laws and standards.  The CFPB specifically addressed the issue of indirect auto lending and its Fair Lending implications earlier this year.  [2]  It is clear that the findings of Fair Lending problems and violations of the Equal Credit Opportunity Act will be addressed not only to the lender with the problem, but also to the financial institution that is funding the lender.  

Over the past 5 years, one of the areas that will continue to receive close scrutiny is appraisals.  Recent changes in Reg. Z for appraisals on high cost mortgages are a direct result of the financial crisis that we experienced and the role that fraudulent appraisals played.   While generally, inflated values of properties were a major concern, the flip side of bad appraisal practices is a Fair Lending concern.  When an appraiser constantly evaluates home prices at levels that are at the low end of the market, the expectation is that Banks will conduct research to ensure that these values are reasonable.   There should be clearly documented reasons for the property value conclusion.   Moreover, when review of the appraisal report is performed, the Bank is expected to watch out terms that have been banned for some time (e.g. “pride of ownership”).  You would be surprised how often these terms work their way back into appraisal reports.  Pictures of the residents in a neighborhood are forbidden in an appraisal, and yet we see these pictures in appraisal reports from time to time.  

Going forward, Banks will be held accountable for the work performed for them by third party vendors.  This is an area that should be considered as part of the overall risk assessment of Fair Lending

Complaints, Social Media and Fair lending

Another area that examiners will emphasize is the bank’s overall administration of the complaints process.   Most of our clients already have a complaints log and a policy in place that requires staff to respond to a  complaint in a reasonable time.  However, the expectation in the near future will be for banks to compile and categorize complaints and to report the results of this effort to the Board.  Do the complaints represent a pattern?  Are your customers trying to tell you something about the level of fees being charged?  Maybe there is a branch where discouragement is happening inadvertently.   The point is the complaints received should be analyzed for patterns and concerns. In addition, there should be evidence that the patterns noticed are being discussed with the Board.  

As many Banks use social media these days, a whole new possible area of receiving complaints has opened up.  The expectation is that someone at the bank will review social media for the possibility of serious complaints that must be answered and included in the aforementioned analysis.  

Advertising and Image in the Community

Many banks are proud of their rich history and want to use it as a part of marketing.   There is absolutely nothing wrong with doing and that- as long as the bank is sensitive to the possibility that during its lifetime, the make-up of its assessment area may have changed significantly.  Pictures and references to turn of the century events in which a bank was involved may entirely different connotations depending on person or persons viewing the material.  We had clients whose advertising campaign mad direct references to the fact that they had been in the community for over 100 years.   The marketing material produced showed various scenes from the community over the years.  Unfortunately since the ad campaign focused on history it, did not include pictures from the present day.  The community had significantly changed in racial and social economic make up over the years.  The advertising campaign was roundly criticized by the community and the regulators and the bank narrowly avoided enforcement action.  It is clear that the intent of the program was not to insult anyone, but nevertheless great insult was taken! 

 Fair Lending is an Area that Requires a Separate Risk Assessment

 Fair Lending has always been an examination area that is subjective.  Over the past few years, this area has become increasingly complex. The regulators have made it clear that this will be an area of emphasis that has the potential for enforcement action.   It is therefore, critical for banks to perform a risk assessment in this area.   

In Part Two of this Blog we will discuss a formula for developing a risk assessment for community banks. 

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[1] CFPB Bulletin 2012-3

[2] CFPB Bulletin 2013-2

Performing a Risk Assessment of Your Compliance Program

Many of our clients have heard of enterprise wide risk assessments and the need to develop risk assessments for various areas of operations of their respective banks.  However, one of the areas that we find that often gets overlooked is the Compliance Management program itself.  It is our opinion that right now is the time for our clients to perform a risk assessment of Compliance Management.  Moreover, in doing so, we suggest that the risk assessment take an entirely different approach than in the past.  

Traditional Approach

The tried and true approach to assessing the effectiveness of a Compliance Management program is to review the traditional pillars:            

a.       Policies and procedures – policies established by the Board and procedures written by senior management to implement the policies. 

b.      Management information systems and reporting – A system or series of reports that adequately detail the operations of the Bank and allow staff to accurately report to the Board

c.       Audit – This includes both internal controls and an independent review of the performance of the bank’s staff vis a vis the requirements of the applicable regulations and bank policies

d.      Training- Ongoing training of the Board, management and staff.  

The traditional risk assessment would determine that policies and procedures are in place, that reports are accurate and sufficient.  Audits are performed by independent firms and training is generally done by a combination of online classes and the occasional conference or outside training class.  

While it is tried and true to look at these areas when doing a risk assessment, we submit to our clients that assessing risk in your compliance program is a whole new ball of wax!  This will be particularly true in 2014 and beyond as a whole number of regulations will begin to affect the banking industry.      

New regulations and new approaches from the regulators  

The development of the CFPB means that there are new ways that regulators are looking at the stratosphere of regulations that cover banking.  For example, UDAAP claims can be brought in various ways areas ranging from advertising to flood insurance. [1]  In addition, it is clear that the regulators are also looking to ensure that financial institutions are watching their vendors and consultants. For example, the CFPB has issued direct guidance about indirect auto financing and its impact of Fair Lending examinations. 

Another area that will receive close and direct scrutiny is the area customer complaints.  It is clear that the regulators now expect that banks will do more than simply resolve complaints and keep track of them on a log.  The expectation is that the types of complaints being received will be compiled and sorted and then reported to the Board.  The manner in which complaints are resolved and reported to the Board is being considered by examiners.  As many banks participate in social media, complaints can now come from various and sometimes unexpected places.   

Overall, there is a whole new universe of expectations in the compliance are even for community banks.  While the CFPB deals directly with the large mega banks, it is clear that they will provide the template for regulators at all financial institutions.    

Exempt Today does not mean Exempt Tomorrow

While many of the CFPB regulations have carve outs and safe harbors for smaller banks, they also have triggers that kick in and these triggers must be monitored.  A prime example of a regulation with triggers is the ability to repay rule.  Generally these rules allow a safe harbor for qualified mortgages that are not high priced.  However, in the current environment, it is easily conceivable that high priced mortgages[2] will creep into your banks portfolio.   It is not enough to look at the regulation, decide that your bank exempt and to move on until the next audit.  Today’s Compliance Programs has to be nimble and dynamic.  There must be a process to determine whether or not regulatory requirements have been trigger and new procedures should be implemented.  

Dynamic Risk Assessment

For community banks, not only does the possibility of new regulatory requirements exits, but also new takes on established regulations.    UDAAP and the Fair Lending regulations have become an area of emphasis for regulators.  While both of these areas have been a part of the compliance world for some time, there is a new and different take on these rules apply.  Fair Lending has been expanded to include the activity of vendors.  This is clear both from the CFPB guidance on debt collection previous mentioned and from a renewed emphasis on vendor management generally in examinations.  Do you test the results that you are getting on appraisals to ensure that the results don’t present a fair lending issue?   Are there prohibited phrases buried in appraisals.  You will be held responsible if there are even if you might be unaware!  UDAAP can be raised in a number of different ways from advertising inconsistency to debt collection practices.  

The application of regulations that apply to community banks is dynamic and so must the risk assessment of compliance be dynamic. 

Some Light at the End of the Tunnel

The CFPB has released guidance that states the more that you self-identify and correct the better for you![3]  This is clearly not a carte blanche to reveal all violations and expect that there will be no enforcement actions.  It does indicate the more that you can show that your Compliance Program has the ability to sniff out trouble coupled with the ability to affect change, the less likely that the examiners will recommend enforcement action.  Put another way, the more that you can find problems, determine the source of the problem and fix the problem, the longer it might be between examinations.   The implications of this guidance are that your compliance program has to be ready to take on change in the regulations, changes in the banks overall operations and changes in the banking universe in real time and address any problems found.  

Does your program have the ability to assess risk and determine mitigation? 

Do you have the ability and “bandwidth” to perform a risk assessment of your Compliance Program?  Even for a small community bank, the risk assessment should be updated at a minimum semi-annually. 

A review of regulations that potentially impact the bank and what to look out for should be included in the risk assessment.  It is critical that the Compliance role at banks become proactive and be involved in all areas of operations at the bank.  For example, the compliance department should be part of the vendor management program as well as the product development process.  

The Compliance programs has to begin to do more than look at what the current compliance situation is, it also has to be able to project future concerns or questions that must be answered.  Therefore, the Compliance program should also consider the strategic plan and should consider trends within the banks assessment area.  

Why not perform a compliance Risk assessment?   

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[1] The CFPB issued guidance on the collection of debts and UDAAP in July 2013

[2] Higher-priced. Qualified Mortgages under the General and Temporary definitions are considered higher-priced if they have an APR that exceeds the APOR by 1.5 percentage points or more for first-lien loans and 3.5 percentage points or more for subordinate-lien loans.

[3] CFBP Bulletin 2013-06

Upcoming Changes in regulation Z- Flipping Property Means greater Documentation!

The practice of “flipping” real estate has been a tried and true method of make a quick profit on the quick sale of real estate for many years.  In the traditional “flip” an investor buys a somewhat devalued and distressed property, makes renovations and improvements to the property and then quickly resells the newly improved property at a handsome profit.   Generally this transaction works because the investor has a keen eye for properties that have hidden values that can be highlighted with a little bit of effort.  These transactions, generally called “flips” because the investor holds the property only briefly and flips or sells it within a short period (6-12 months), can be very profitable.  They are also high risk, because if the property does not sell in the projected time period or for the projected “flip” price, then the investor can suffer losses. 

There is of course a much darker side to “flipping”.  Unscrupulous investors working in conjunction with corrupt appraisers and sadly, in some cases crooked bankers, abused the system for their own personal gain.  BY engaging in a scheme to artificially inflate prices of worthless property, and taking profits from sham sales of real estate, the process of flipping became a major contributor to the financial woes that many in banking industry are still feeling.   It is the dark side of flipping that has led to the changes in Regulation Z appraisal requirements that will go into effect in January 2014.  

To combat this practice, when a high-priced loan is used to finance the purchase of a flipped property, a new appraisal from a different appraiser must be ordered.  In addition to being a standard appraisal, the new report must address: 

·         The difference in the original sales price and the subsequent sales price

·         Changes in market conditions

·         Property improvements the seller made

Flips and the Appraisal Requirements

In this case, the CFPB appears to be concerned about the use of a High Price Mortgage for the purchase of a flipped house.  Wow!  That seems like a mouthful!   Let’s break it down.  

A high priced mortgage is defined as:

• A first-lien mortgage (other than a jumbo loan) with an annual percentage rate (APR) that exceeds the Average Prime Offer Rate (APOR) published by the Bureau at the time the APR is set by 1.5 percentage points or more.  OR;
• It is a first-lien jumbo loan with an APR that exceeds the APOR at the time the APR is set by 2.5 percentage points or more. A loan is a jumbo loan when the principal balance exceeds the limit in effect as of the date the transaction’s rate is set for the maximum principal obligation eligible for purchase by Freddie Mac. (Comment 35(a)(1)-3)   OR;

·         It is a subordinate-lien with an APR that exceeds the APOR at the time the APR is set by 3.5 percentage points or more.

So the first question that must be determined is whether or not the loan that is being used to purchase the property is a high priced mortgage.  If not, then the rule does not apply.   In addition there are specific exemptions from the regulation that include:  

·         Qualified Mortgages, as defined in Regulation Z § 1026.43(e). For more information on Qualified Mortgages,

·         Reverse mortgages

·         Bridge loans (for 12 months or less)

·         Loans for initial construction of a dwelling (not limited to loans of 12 months or less)

·         Loans secured by new manufactured homes

·         Loans secured by boats, trailers, and mobile homes

So if the loan used to purchase the property is in any of these categories, the additional appraisal requirements do not apply.   

To complete step one; the requirements will apply when a high priced mortgage with a maturity of greater than 12 months is used to purchase a “flipped” property.

What is a Flipped Property? 

There are two categories that trigger the regulation.  

1.       A sale within 90 days of the original purchase that has an increase in value more than 10 percent;

2.       A sale within 180 days of the original purpose that has increase in value more than 20 percent. 

In other words, if it looks feels and acts like a flip, then it is!   The methods used to count the days from the purchase to the sale are rather straight forward.  We recommend that banks use the date that the deed of trust for the sale of the property is recorded.   This is the day that the property becomes the legal assets of the owner and is the most straight forward manner to determine the day that the “clock starts”. 

The regulation allows a bank can use the date that a purchase agreement is signed as the date that the property is sold and the deed of trust date as the acquisition date.   So for example, a property that is

Acquired (Deed of Trust) January 1, 2013 and then sold (purchase agreement) dated April 2, 2013[1] is a potential flip.  The next question would be what the original purchase price and the subsequent sale.   Again, the regulation is straight forward.  The amount that the purchaser pays for the house (without financing) is the purchase price.  To determine the original purchase price, you can use the deed of trust amount, or the previous sales agreement.  The point here is that the price being paid does not include financing.

So back to our example, when the house was acquired the buyer paid $400,000.  When the house was sold on April 2, 2013 if the price was more than $440,000, then the potential for a required additional appraisal exists. 

Few and Far between

One of the things that the regulation makes clear is that there should very few of these transactions as the use of a high priced mortgage to buy a flipped property is not an optimal transaction.   It should also be clear that when a bank does engage in these transactions it will serve as a red flag for regulators. 

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[1] You start counting the day after the acquisition

Did you know that Regulation Z and the ECOA intersect at the Corner of Appraisal and Valuation?  

Our clients are all acutely aware of the fact that starting in 2014, a number of regulations will come into effect.   However, there are several places where some of these new rules collide and create a great deal of confusion.  One such area is the convergence of the mortgage requirement for High Priced mortgages in Reg. Z versus the valuation requirements in Reg. B.  

Regulation Z and Higher Priced Mortgages

The appraisal rule for Reg. Z applies to higher priced mortgages which are defined as:

·         A first-lien mortgage (other than a jumbo loan) with an annual percentage rate (APR) that exceeds the Average Prime Offer Rate (APOR) published by the Bureau at the time the APR is set by 1.5 percentage points or more.  OR;

·        A first-lien jumbo loan with an APR that exceeds the APOR at the time the APR is set by 2.5 percentage points or more. A loan is a jumbo loan when the principal balance exceeds the limit in effect as of the date the transaction’s rate is set for the maximum principal obligation eligible for purchase by Freddie Mac. (Comment 35(a)(1)-3)   OR;

·        A subordinate-lien with an APR that exceeds the APOR at the time the APR is set by 3.5 percentage points or more.

So if you make a loan that is a higher priced mortgage, then the appraisal rule comes into play.  The rule itself requires that when you make a higher priced mortgage, you must:

1.       Disclose to consumers within three business days after receiving the consumers’ applications that they are entitled to a free copy of any appraisal the creditor orders and also can hire their own appraiser at their own expense for their own use. (§ 1026.35(c)(5))

2.       Obtain a written appraisal performed by certified or licensed appraiser in conformity with the USPAP and Title XI of FIRREA and its implementing regulations. (§§ 1026.35(c)(1)(i) and 35(c)(3)(i))

3.       Have the appraiser visit the interior of the property and provide a written report (§ 1026.35(c)(3))

4.       Deliver copies of appraisals to applicants no later than three business days before consummation (§ 1026.35(c)(6)(ii)) (Italics added)

 

Regulation B and the Valuations Rule

The new ECOA Valuations Rule amends the appraisal provisions of ECOA’s Regulation B. It updates current ECOA rules to say that you must provide applicants for first-lien loans on a dwelling with copies of appraisals, as well as other written valuations, developed in connection with the application, whether or not the applicants request copies.

To comply with this rule you must:

1.       You have three business days to notify the applicant of the right to receive a copy of appraisals.

2.       You must promptly share copies of appraisals and other written valuations with the applicant.

3.       Promptly means promptly upon completion, or at least three business days before consummation (for closed-end credit) or account opening (for open-end credit), whichever is earlier.

4.       The applicant can waive the right to receive copies of the appraisal or other written valuations in advance of the closing, but in those cases, you must still deliver the copies at or prior to consummation or account opening.

If you do not consummate the loan or open the account and the applicant has provided a waiver, you have 30 days after you determine that the loan will not consummate or open to send the applicant a copy of the appraisal and other written valuations.

Putting the two rules together

 The two rules do very much overlap, and can be very confusing.  In the end though, they tend to work together and the message from both is that when there is a dwelling that will be used as collateral, then you should expect to prepare a copy of the appraisal that you are using and get it to the applicant.   The table below is a basic depiction of  the requirements of the regulations side by side

	Reg. Z *	High Cost	Reg. B *	Appraisal to customer	Waived?
First Lien	Yes	NO	Yes	Promptly on Completion	Yes-then at  Consummation
First Lien	Yes	Yes	Yes	Promptly on Completion	Cannot be waived for Reg. Z- 3 days before consummation
Subordinate Lien	Yes	No	NA	NA	NA
Subordinate Lien	Yes	Yes	NA	3 days before Consummation	Cannot be waived
Declined/Withdrawn First	Yes	No	Yes	30 Days from the date of decline or withdrawal	Cannot be waived
Declined/Withdrawn First	Yes	Yes	Yes	30 Days from the date of decline or withdrawal	Cannot be waived
Declined/Withdrawn Subordinate	Yes	No	NA	At Request of applicant	Cannot be waived
Declined/Withdrawn Subordinate	Yes	Yes	NA	30 Days from the date of decline or withdrawal	Cannot be waived

*  Refers only to the appraisal/validation rule

For our clients, we advise that the best practice will be that when the collateral is a dwelling, then a copy of the appraisal or valuation should be made available to the customer promptly upon completion.  The regulation defines a dwelling as:

 A residential structure that contains one to four units whether or not that structure is attached to real property. The term includes, but is not limited to, individual condominium units, mobile homes, and manufactured homes.[1]

Regulation B does not exclude non-owner occupied homes from the valuation requirements.  Moreover, of all of the consumer regulations, the ECOA is the most expansive and covers commercial transactions.  Therefore, we recommend that as a matter of practice, prepare and give appraisals and valuations every time a dwelling is given as a piece of property. 

Waivers

What about the case where the applicant decides that they do not want a copy of the appraisal or they do not want to wait three business days after receiving the appraisal for the deal to close.  Can they waive the requirement?   If the loan is a first lien on a dwelling then the only waiver that can be invoked is in the case of a non-high priced mortgage.  In this case, the customer may receive his/her copy of the appraisal at the time of consummation.  In the case of a high priced mortgage, there is no waiver and the valuation must be received three business days before consummation.  

In our opinion, allowing waivers to customers is not the best practice.  Instead, as soon as the appraisal or valuation is completed, it is best to get it to the customer in all cases.  

 

NEXT:  Flips and Appraisals

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[1] CFPB 1002.14(c)