Final Rules Issued by the Consumer Financial Protection Bureau: Part One

By now I’m sure you are all familiar with the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 — a large sweeping law covering many aspects of consumer lending and finance. Part of this new law mandated the creation of the Consumer Financial Protection Bureau (CFPB). It took some time to get this bureau set up and fully functional, but in January 2012, President Obama appointed Rich Cordray to be its first director.


The CFPB’s central mission is to make markets for consumer financial products and services work for Americans — whether they are applying for a mortgage, choosing among credit cards, or using any number of other consumer financial products. So the appraisal industry is one small, but important, part of the world of consumer lending that the CFPB will look to improve. Here are some of their stated responsibilities:

• Conduct rule-making, supervision, and enforcement for Federal consumer financial protection laws
• Restrict unfair, deceptive, or abusive acts or practices
• Take consumer complaints
• Promote financial education
• Research consumer behavior
• Monitor financial markets for new risks to consumers
• Enforce laws that outlaw discrimination and other unfair treatment in consumer finance

To fulfill this mission, the CFPB will update and change federal regulations dealing with consumer lending. Last month, it added three rules that could have a direct effect on appraisers. I’ll give you a summary here and then you can follow the link below to the CFPB website if you want more detailed information.

The first final rule I want to discuss is referred to as “Appraisals for Higher-Priced Mortgage Loans” and amends Regulation Z (Truth in Lending Act or TILA) jointly with the Federal Reserve Board, FDIC, FHFA, NCUA, and OCC. The revisions to Regulation Z implement a new provision requiring appraisals for “higher-risk mortgages” that was added to TILA by the Dodd-Frank Act. High-risk mortgages are defined as mortgages with an annual percentage rate that exceeds the average prime offer rate by a specified percentage, in other words sub-prime mortgages. The final rule requires creditors to obtain an appraisal or appraisals meeting certain specified standards, provide applicants with a notification regarding the use of the appraisals, and give applicants a copy of the written appraisals used. This new rule will take effect Jan. 18, 2014.

As described below, the rule does not cover all higher priced mortgages. The rule’s consumer protections include:

• The lender has to use a certified or licensed appraiser to value the property.
• The appraiser has to see the inside of the home.
• Three days before the loan closes, the lender must give the borrower a free copy of all appraisals it obtained.

This part is really interesting. An additional appraisal is required when the home being purchased is a “flip.” A flip is defined for this rule as:

• A seller who bought the home less than six months ago.
• The buyer is paying a certain amount more than the seller paid for the home:

o 10% more if the seller bought the home within the past 90 days.
o 20% more if the seller bought the home in the past 91 to 180 days.

This second appraisal must also include an inside inspection of the home. The lender cannot charge the borrower for this second appraisal. Not all flips are subject to this requirement. Flips in rural areas, for example, are exempt.

The rule for higher-priced mortgage loans does not apply to all home loans. The rule does not apply when a buyer is applying for a higher-priced mortgage that is:

• A reverse mortgage.
• A “qualified mortgage” under the Bureau’s rules.
• To buy a new manufactured home.
• For a boat, trailer, or mobile home that is not a manufactured home.
• For construction of a new home.
• A temporary bridge loan for 12 months or less.

Check back tomorrow for Part 2 of this series.

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