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)