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

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The second final rule that the CFPB will implement is referred to as “Disclosure and Delivery Requirements for Copies of Appraisals and Other Written Valuations” and amends Regulation B (Equal Credit Opportunity Act). In general, this new rule amends the current Regulation B rules about providing appraisals to applicants/borrowers as required by the Dodd-Frank Act. This revision to Regulation B now requires creditors in all cases to give applicants copies of all appraisals and other written valuations (which can include AVMs, desktop valuations, and so on) developed in connection with an application for a loan to be secured by a first lien on a dwelling. It also requires creditors to notify applicants in writing that copies of appraisals will be provided to them promptly. This rule will take effect Jan. 18, 2014.

Note that the amended provision covers only applications for credit to be secured by a first lien on a dwelling, which is a change from the current rule that covers all types of properties and loans. The new rule:

• Requires creditors to notify applicants within three business days of receiving an application of their right to receive a copy of appraisals developed.

• Requires creditors to provide applicants a copy of each appraisal and other written valuation promptly upon their completion or three business days before consummation (for closed-end credit) or account opening (for open-end credit), whichever is earlier.

• Permits applicants to waive the timing requirement for providing these copies. However, applicants who waive the timing requirement must be given a copy of all appraisals and other written valuations at or prior to consummation or account opening, or if the transaction is not consummated or the account is not opened, no later than 30 days after the creditor determines the transaction will not be consummated or the account will not be opened.

• Prohibits creditors from charging for the copy of appraisals and other written valuations, but permits creditors to charge applicants reasonable fees for the cost of the appraisals or other written valuation unless applicable law provides otherwise.

This doesn’t seem to be anything different than what has been discussed since the passage of the Dodd-Frank Act. The disclosure requirements of this rule overlap with the rule on appraisals for higher-priced mortgage loans discussed above. The same appraisal notice can be used to satisfy both this rule and the TILA rule, in transactions where both rules apply.

The third new rule I want to mention is another amendment to Regulation Z (Truth in Lending) and is referred to as the “Ability to Repay and Qualified Mortgage Standards”. Regulation Z prohibits a creditor from making a higher priced mortgage loan without regard to the consumer’s ability to repay the loan. The practice of lenders making “sub-prime” loans that consumers were not able to repay is considered a major contributor to the financial crisis. This rule builds on the existing regulation designed to prevent that practice in the future and becomes effective Jan. 10, 2014.

This rule goes into great detail defining a “Qualified Mortgage” (QM) because the Dodd-Frank Act provides that “qualified mortgages” are entitled to a presumption that the creditor making the loan satisfied the ability-to-repay requirements. So this rule applies to mortgages that don’t meet the requirements of a QM. Indeed, under the existing regulations that were adopted in 2008, only higher priced mortgage loans are subject to an ability-to-repay requirement.

This final rule defines loans made under the following circumstances as not meeting the requirements to be a QM. Included are loans with negative amortization, interest-only payments, balloon payments, or terms exceeding 30 years. Also, so-called “no-doc” loans, where the creditor does not verify income or assets, cannot be qualified mortgages. Finally, a loan generally cannot be a qualified mortgage if the points and fees paid by the consumer exceed 3% of the total loan amount, although certain “bona fide discount points” are excluded for prime loans.

The rule implements Dodd-Frank sections 1411 and 1412, which generally require creditors to make a reasonable, good faith determination of a consumer’s ability to repay any consumer credit transaction secured by a dwelling (excluding an open-end credit plan, timeshare plan, reverse mortgage, or temporary loan) and establishes certain protections from liability under this requirement for “qualified mortgages.” It also implements section 1414 of the Dodd-Frank Act, which limits prepayment penalties. Finally, this rule requires creditors to retain evidence of compliance with the rule for three years after a covered loan is consummated.

Once it is determined that a loan in not a qualified mortgage the final rule describes certain minimum requirements for creditors to make ability-to-repay determinations, but does not dictate that they follow particular underwriting models. At a minimum, creditors generally must consider eight underwriting factors:

1. Current or reasonably expected income or assets
2. Current employment status
3. The monthly payment on the covered transaction
4. The monthly payment on any simultaneous loan
5. The monthly payment for mortgage-related obligations
6. Current debt obligations, alimony, and child support
7. The monthly debt-to-income ratio or residual income
8. Credit history

Creditors must generally use reasonably reliable third-party records to verify the information they use to evaluate the factors.

A final point worth noting is that this rule also provides special rules to encourage creditors to refinance “non-standard mortgages”—which include various types of mortgages that can lead to payment shock and result in default—into “standard mortgages” with fixed rates for at least five years that reduce consumers’ monthly payments.

Will these rules have a huge impact on you as an appraiser? It’s not likely. However, it is important to know what rules the lender must follow in order to have a better understanding of specific requirements they may make when assigning the appraisal. Most of what falls under these rules has been normal business practice for quite a while, but the CFPB is now drawing-up and implementing the rules to make it formal.

These rules do contain some possible good news for appraisers. For sub-prime loans, the rules require the use of a certified or licensed appraiser doing an interior inspection. Also, when it is determined the property is being flipped, a second full appraisal is required. These requirements could generate more assignments if and when the sub-prime market gets rolling again. On the reverse side, the last rule I discussed will cause a loan to fall out of that coveted “Qualified Mortgage” status if all the points and fees exceed 3% of the loan amount. This may force lenders to try to cut costs (the appraisal is part of the costs) to make sure the mortgage they’re writing remains qualified.

The CFPB is continuing to review all the regulations related to consumer lending and issuing rules as needed. It also posts many proposed rules on its website. For complete explanations of the rules I mentioned above and to see everything the CFPB is working on, follow this link.

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