What is the new Higher Priced Mortgage appraisal Rule and How is it different from the Reg. B Valuations Rule?    

Introduction

2014 marks the beginning of several changes to regulations affecting banks and other financial institutions.   Two similar new regulations that will start having impact in 2014 are the appraisal rule (Reg. Z)  and the Valuations Rule (Reg. B).    Both of these regulations deal directly with the need to give applicants for loans a copy of the appraisal or valuation that is used to evaluate the property being pledged as collateral for a loan.  Both of these changes require that the appraisal/valuation be done quickly and a copy of the results should be delivered to the applicant immediately thereafter.   [1]

Different Applications

When considering these two rules there are  few differences to keep in mind.   The rules  for Regulation Z (appraisal rule) apply for Higher priced Mortgages (“HPML”).  A loan is a higher priced loan if it:

·         It is 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. 

·         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)

·         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.[2]

 

On the other hand, Regulation B applies to ALL transactions that involve a lien on a dwelling for whatever purpose (although the valuations rule applies only to first liens) .  Remember, Regulation B covers ALL lending so even if the loan is for a commercial purpose, such as a small business loan with the borrower pledging her home as collateral, regulation B applies and the valuations rule applies.     

The CFPB’s Small Entity Compliance Guide describes the biggest difference between the regulations as follows:

·         First, while the ECOA Valuations Rule does not apply to subordinate liens, the HPML Appraisal Rule does apply to subordinate liens.

·         Second, while the ECOA Valuations Rule covers any transactions secured by a dwelling for any purpose, the HPML Appraisal Rule applies only when the covered loan is for a consumer purpose and is secured by a principal dwelling.

·         Third, while the ECOA Valuations Rule does not exempt any types of transactions secured by a first lien on a dwelling, the HPML Appraisal Rule exempts several types of transactions.

From our point of view, if an  application will include a first lien on a dwelling, then loan staff should prepare to deliver a copy of the appraisal or valuation to the applicant. 

Requirements of the regulation. 

Each of the regulations has specific requirements for notification to customers.  However, the requirements for the type of valuation that must be done is somewhat different.   Under Regulation Z, when a loan is considered a HPML, then very specific requirements for the appraisal kick in.  Included in the requirements are the need for a site inspection by the appraiser.   Remember, this requirement will apply to HPML whether they are first or subordinate lines.    The specific requirements of the regulation are as follows: 

·         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))

·         Obtain a written appraisal performed by a 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))

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

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

 

 

Under the Regulation B valuations regulation, the requirements are similar:

 

·         When you receive an applicant’s application, you have three business days to notify the applicant of the right to receive a copy of appraisals.

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

·         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.

·         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 [3]

Reg. B does not detail the type of appraisal that is needed.  However, there is a comment in the guidance that points out that if a financial institutions uses the appraisal standard set out in Regulation z, they will meet the standards in Regulation B.   therefore, as a practical matter, setting the standards at the Regulation Z level would appear to be the most prudent course of action.  

 

Why are they doing this?

As with all regulations that appear to significantly impact, the mode or method doing business, our clients tend to ask – “why are they (the regulators”) doing this to us” ?   The answer as with almost all consumer regulations is that they are designed to correct some past bad behavior.   There is little doubt that  inaccurate and in some cases, downright fraudulent valuations and appraisals of property were significant contributors to the financial crisis.  In the case of regulation B, these changes reflect the traditional twin goals of the Equal credit opportunity Act; to increase credit opportunity for protected classes and to increase borrower education. 

The idea here is to give the applicant clear and concise information about the value of the property that they will be using as collateral.  Further, it is an opportunity to ensure that property valuation is not impacted by illegal discrimination or fraud.  

What’s Next

Although there are some exceptions to each of these rules, we suggest that they represent the best practices standard that the regulatory agencies will use going forward.   Therefore, even if there are some exceptions that might get you “off the hook” today, the time is now to start implementing practices that include giving copies of the valuations to applicants.   Going above and beyond the requirements of the regulations will never be viewed as a bad thing by regulators. 

The following chart was developed after a cursory review of the regulations and is for information purposes only.  You should always consult with your compliance professional before taking action.   VCM assumes no liability for the accuracy of the chart.

 

Loan Type	Purpose	HPML	Reg. Z	Regulation B
Purchase  Mortgage	Consumer	Yes	Yes	Yes
Purchase  Mortgage	Commercial	No	No	Yes
Refinancing	Consumer	Yes	Yes	Yes
Refinancing	Commercial	No	No	No
Secondary Lien	Consumer	Yes	Yes	No
Secondary Lien	Commercial	No	Yes	No
HELOC –First Lien	Consumer	No	No	Yes
HELOC –First Lien	Commercial	No	No	Yes

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[1] The assumption in this article is that the financial institution will issue on qualified mortgages. 

[2] You can find an online APOR rate spread calculator, which automatically imports the applicable APOR to compare with APR, at http://www.ffiec.gov/ratespread/newcalc.aspx.

[3] The Official Interpretations of the regulation provide examples for guidance. (See “When must copies of valuations be provided to applicants?” on page 17 on the CFPB guidance)