New appraisal rules further swell regulatory pipeline

appraise

New federal regulations will make appraisals more accessible to home buyers and, for certain loans, end “drive-by” appraisals and others not made on site.

Hot on the heels of proposed regulations for mortgage servicing and more transparent mortgage cost disclosures, the Consumer Financial Protection Bureau’s (CFPB) latest rule is designed to help inform mortgage applicants how a creditor arrives at a property’s value and make it easier to determine if a discriminatory appraisal is responsible for a mortgage application denial.

The rule applies only to first mortgages and would amend the Equal Credit Opportunity Act, which prohibits discrimination based on race, national origin, sex, or other protected groups.

Tentatively due to finalize by January 2013, the proposed regulations would:

• Require that lenders notify applicants of their right to receive a copy of written appraisals generated in connection with their mortgage application. Lenders must disclose the right within three business days of receiving an application.

• Require lenders to provide mortgage applicants a free copy of all written appraisals promptly after receiving the appraisal, but no later than three business days before the close of escrow.

• Allow applicants to waive the timing requirement to receive appraisals at least three days before closing, provided a copy of the appraisal is provided prior to or at closing.

• Prohibit lenders from charging a fee for the appraisal copy. Lenders can charge applicants for the appraisal itself.

Public comment on the rule ends Oct. 15, 2012.

Appraisers and appraisals on ‘high cost’ mortgages

CFPB also joined forces with other federal regulatory agencies – the Department of the Treasury’s Office of the Comptroller of the Currency (OCC), Board Of Governors Of Federal Reserve System (The Fed), the National Credit Union Administration (NCUA) and the Federal Deposit Insurance Corporation (FDIC) – to set rules for appraisals on higher-risk mortgages – mortgages with interest rates at least 1.5 percentage points above the market average.

For those loans, the proposed rule would require lenders to use a licensed or certified appraiser who prepares a written report based on a physical inspection of the interior of the property.

That eliminates drive-bys and computerized automatic valuation model (AVMs) of the housing boom, as well as broker price opinions (BPOs) that became popular with the housing market crash. Critics argued those “appraisals” weren’t always accurate.

Also, creditors would have to obtain an additional appraisal at no cost to the consumer for a high-risk home-purchase loan if the seller acquired the property for a lower price during the past six months.

The provision is designed to protect against flipping schemes by those who buy a property, makes cosmetic repairs and attempts to sell it at an inflated price.

That provision is designed to address flipping fraud by ensuring the value of the property has legitimately increased in value.

The provision is likely to have little impact. High-risk loans made up only 3.2 percent of all mortgages in 2010, according to the Federal Reserve.

The proposal is also open to public comment until Oct. 15, 2012.

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