Recently, the six “heavy hitters” of the federal regulatory agencies (i.e., The Federal Reserve, OCC, CFPB, FDIC, FHFA, and NCIA) jointly proposed a new rule to institute additional appraisal requirements for what are defined as "higher-risk mortgage loans." The proposal would enact clauses to the Truth in Lending Act made into law by the sweeping Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. Under the definitions of the Reform Act, mortgage loans are considered “ higher-risk “ if they are:
- Secured by a consumer's home
- Are given interest rates above a pre-ordained limit.
Such limits are spelled out as when the APR exceeds the average prime offer rate (“APOR”) by 1.5% for first-lien loans, 2.5% for first-lien jumbo loans, and 3.5% for subordinate-lien loans.
For these types of loans, the pending regulation would necessitate banks and other creditors to use a (state) licensed or certified appraiser who would draft a written report based on an inspection of both the interior and exterior of the subject property. In addition, it would also require banks and other lenders to disclose to the potential borrower’s information about the purpose of the appraisal and provide consumers - free of charge- with a copy of the completed appraisal report. In a nutshell, a high risk loan (as defined by above) requires an appraisal, which must be provided to the borrower. It eliminates drive-bys , exterior inspections, or other valuation methods that are sometimes used by lenders to set the LTV. Additionally, this appraisal disclosure must be provided 3 days prior to closing. The borrower would have the right to have his own appraisal performed (if not satisfied with the value) at their expense.
The bigger issue from this proposal is that all banks and other lenders would be required to “…obtain an additional appraisal at no cost to the consumer for a home-purchase higher-risk mortgage loan if the seller acquired the property for a lower price during the past six months…”
The defined purpose of this is stated as addressing fraudulent property “flipping“, by ensuring that the property value for the loan collateral actually increased. The second (and remember, at bank cost) appraisal has to have "an analysis of the difference in sale prices, changes in market conditions, and any improvements made to the property" between the two transaction dates.” Again, this is to attempt to mitigate flipping of properties by solidifying (as best as possible) their value.
As usual, there is a 60 day public comment period regarding this. The cut off for this latest venture is October 15, 2012.
The downside to this, obviously, is the cost involved to the lender. While there may be a point to the additional disclosures regarding loans to high risk (and I’m actually more troubled by the definition of that than anything else) loan borrowers, the inevitable outcome of this kind of regulation will be lenders pulling back from these types of loans as they become increasingly unprofitable; fewer borrowers will be qualified for the products that lenders will be open to offering based on their bottom line. And that hurts everyone in the end. The full text of the proposal can be read here.