Financial Regulatory Agencies Issue Rule on Appraising “High-Risk” Mortgages

In mid-January, federal regulators published a final rule implementing new appraisal requirements for higher-priced mortgage loans.

The new regulation, – authored by the Federal Reserve, the Consumer Financial Protection 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 – modifies the Truth in Lending Act as mandated by Dodd-Frank. It goes into effect on January 18, 2014.

For your reference, a look at key elements:

1. Clear definition of “high-risk mortgage:”

“The rule uses the term ‘higher-priced mortgage loan,’ which covers: (i) a loan for which the APR exceeds the average prime offer rate (an average market rate) by 1.5 percent for a first-lien loan, (ii) 2.5 percent for a first-lien jumbo loan, and (iii) 3.5 percent for a subordinate-lien loan.” (BuckleySandler)

2. On-site appraisal required for all high-risk loans:

“[N]ew TILA section 129H prohibits a creditor from extending credit in the form of a higher-risk mortgage loan to any consumer without first [o]btaining a written appraisal performed by a certified or licensed appraiser who conducts a physical property visit of the interior of the property.” (Katten Muchin Rosenman)

3. Special rules intended to address fraudulent flipping:

“The Final Rule includes special appraisal requirements in connection with certain HPMLs where the security property has been resold within a 180 day period. If an HPML is being extended for a property acquired within the previous 180 days and is being resold at a higher price, the creditor may not extend the loan unless it obtains, prior to consummation, an additional appraisal, under certain conditions.” (BuckleySandler)

4. A number of important exemptions:

“The rule exempts several types of loans, such as qualified mortgages, temporary bridge loans and construction loans, loans for new manufactured homes, and loans for mobile homes, trailers and boats that are dwellings. The rule also has exemptions from the second appraisal requirement to facilitate loans in rural areas and other transactions.” (Katten Muchin Rosenman)

5. Bottom line: the more things change…

“The rule may have little practical effect, however, because it contains exemptions for various categories of loans, including ones that are deemed qualified mortgages under the ability-to-repay requirements. Once the ability-to-repay rule is implemented on January 10, 2014, it is anticipated that at least initially mortgage lenders will confine the loans that they make to qualified mortgages.” (Ballard Spahr)

The updates:

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