I. INTRODUCTION
The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) amended the Truth-in-Lending Act (TILA) to require rules for appraisals on principal residences securing higher-priced mortgage loans (HPML). Mortgage loans are HPMLs if they are secured by a consumer’s principal dwelling and have interest rates above certain thresholds, as outlined in section II. below.
A creditor originating a higher-priced first-lien or subordinate-lien loan covered by the HPML Appraisal Rule, must:
The final rule applies to applications received on or after January 18, 2014, irrespective of the loan closing date.
II. LOANS COVERED
The HPML Appraisal Rule applies to higher-priced, first-lien or subordinate-lien closed-end loans secured by a consumer’s principal dwelling, which are not otherwise exempt under the rule.
A loan is “high-priced” if:
III. EXEMPTED LOANS
A. General Exemptions
The rule exempts the following loans from all of its requirements:
B. Exemption for Extensions of Credit of $25,000 or Less
The Agencies have exempted extensions of credit of $25,000 or less, indexed every year for inflation, from the HPML appraisal rules. The annual threshold adjustment for inflation is based on the percentage increase of the Consumer Price Index for Urban Wage Earners and Clerical Workers. The exemption level will increase to $34,200, effective January 1, 2026.
C. Exemptions for Certain Refinancings
The Agencies have also exempted certain types of refinancings with characteristics common to refinance products often referred to as “streamlined refinances” from the HMPL appraisal rules. The final rule exempts a refinancing when the holder of the credit risk of the existing obligation remains the same on the refinancing. In addition, the periodic payments under the refinance loan must not result in negative amortization, cover only interest on the loan, or result in a balloon payment. Finally the proceeds from the refinance loan may only be used to pay off the existing obligation and to pay closing or settlement charges.
D. Exemptions for Transactions Secured in Whole or in Part by a Manufactured Home
All loans secured in whole or in part by a manufactured home will be exempt from the HPML appraisal rules for 18 months, until July 18, 2015. For loan applications received on or after July 18, 2015, the following changes will apply:
Transactions secured by a new manufactured home and land will be exempt from the requirement that the appraisal include a physical inspection of the interior of the property, but will be subject to all other HPML appraisal requirements.
Transactions secured by an existing (used) manufactured home and land will not be exempt from the rules.
Transactions secured solely by a manufactured home and not land will be exempt from the rules if the creditor gives the consumer one of three types of information about the home’s value:
E. Exemption for Qualified Mortgages
Under the final rule, the exemption for qualified mortgages applies to either:
IV. HPML APPRAISAL RULE COMPLIANCE
Creditors originating a covered HPML must:
A. Additional Appraisal for Certain Higher-Priced Mortgage Loans
Additional requirements apply in certain cases when a home is being resold within 180 days of its acquisition by the seller above certain price thresholds. These types of transactions may be commonly described as “flips.”
Unless an exemption applies, a creditor may not extend a higher-priced mortgage loan to a consumer to finance the acquisition of the consumer’s principal dwelling without obtaining, prior to consummation, two written appraisals, if:
(i) The seller acquired the property 90 or fewer days prior to the date of the consumer’s agreement to acquire the property and the price in the consumer’s agreement to acquire the property exceeds the seller’s acquisition price by more than 10 percent; or
(ii) The seller acquired the property 91 to 180 days prior to the date of the consumer’s agreement to acquire the property and the price in the consumer’s agreement to acquire the property exceeds the seller’s acquisition price by more than 20 percent.
B. Different Certified or Licensed Appraisers
The two appraisals required under these circumstances may not be performed by the same certified or licensed appraiser. The additional appraisal must meet the same requirements as the first appraisal (written report by a certified or licensed appraiser in compliance with USPAP and FIRREA based upon an interior property visit).
One of the two required appraisals must include an analysis of:
(i) The difference between the price at which the seller acquired the property and the price that the consumer is obligated to pay to acquire the property, as specified in the consumer’s agreement to acquire the property from the seller;
(ii) Changes in market conditions between the date the seller acquired the property and the date of the consumer’s agreement to acquire the property; and
(iii) Any improvements made to the property between the date the seller acquired the property and the date of the consumer’s agreement to acquire the property.
C. No Charge for the Additional Appraisal
If the creditor must obtain two appraisals, the creditor may charge the consumer for only one of the appraisals.
D. Creditor’s Determination of Prior Sale Date and Price
1. Reasonable diligence
An exemption from the requirement to obtain an additional appraisal applies if the creditor can demonstrate by exercising reasonable diligence that the requirement to obtain two appraisals does not apply. A creditor acts with reasonable diligence if the creditor bases its determination on information contained in written source documents (See written source documents referenced in section IV. (F), below).
The requirement to obtain an additional appraisal does not apply if any exists:
2. Inability to determine prior sale date or price – modified requirements for additional appraisal
If, after exercising reasonable diligence, a creditor cannot determine whether the conditions requiring two written appraisals are present, one of the two appraisals shall include an analysis of the factors set forth in section IV. (B) above only to the extent that the information necessary for the appraiser to perform the analysis can be determined.
E. Exemptions From The Additional Appraisal Requirement.
The additional appraisal required does not apply to extensions of credit that finance a consumer’s acquisition of property from:
An additional appraisal is also not required for a covered HPML used to acquire a property:
F. Illustrative Written Source Documents for HPML Appraisal Rules
A creditor acts with reasonable diligence if the creditor bases its determination on information contained in written source documents, such as:
G. Calculating the 180-day Period for Prior Sales
For purposes of calculating the 180-day period for prior sales, the acquisition date is the day the seller became the legal owner of the property (based on state law). The purchase date is the day the consumer and the seller sign a home purchase agreement. If the seller and the consumer sign the purchase agreement on two different days, use the latter of the two dates. Start with the day after the acquisition date and count up to and including the purchase date.
V. REQUIRED APPRAISALS - “SAFE HARBOR”
In Appendix N to Regulation Z, the HPML Appraisal Rule provides a list of steps a creditor can take to ensure that any required appraisal meets the requirements of the rule. When the creditor takes each of the steps in this list for an appraisal, the creditor will be eligible for the “safe harbor” protection for that appraisal. A creditor may gain safe harbor protection for an appraisal by complying with the following four steps:
1. When ordering the appraisal:
2. Confirm that the appraisal:
3. Check the status of the appraiser by using the National Registry to verify that the appraiser is certified or licensed in the state where the property is located on the date he or she signed the appraiser’s certification.
4. Be aware that the safe harbor applies only if the bank does not have actual knowledge contrary to the facts or certifications contained in the written appraisal.
A creditor may outsource the appraisal review to a third party, but remains responsible for complying with requirements of the rule. If the creditor relies on the third party, if the third party fails to follow the rule, the creditor is responsible for any violation.
VI. REQUIRED CONSUMER DISCLOSURES
A. Multiple Applicants
When two or more consumers apply for a loan covered by the HPML Appraisal Rule, the creditor is required to give the disclosure to only one of the consumers and is required to give the copy of each required appraisal to only one of the consumers.
B. Text of Disclosures
A creditor shall disclose the following statement, in writing, to a consumer who applies for a higher-priced mortgage loan.
“We may order an appraisal to determine the property’s value and charge you for this appraisal. We will give you a copy of any appraisal, even if your loan does not close. You can pay for an additional appraisal for your own use at your own cost.”
For a first-lien transaction, the creditor may also add the word “promptly” to the disclosure, indicating to the consumer that the creditor will “promptly” give them a copy of any appraisal. As a result, the disclosure will match the disclosure required to be used to comply with the Equal Credit Opportunity Act (ECOA) Valuations Rule.
C. Timing of Disclosure
The disclosure required under the HPML Appraisal Rule must be delivered or placed in the mail no later than the third business day after the creditor receives the consumer’s application for a higher-priced mortgage loan subject to the rule. In the case of a loan that is not a higher-priced mortgage loan subject to the rule at the time of application, but which becomes a higher-priced mortgage loan subject to the rule after application, the disclosure must be delivered or placed in the mail not later than the third business day after the creditor determines that the loan is a higher-priced mortgage loan subject to the rule.
For purposes of the deadlines for delivering the initial disclosure on appraisals and also for delivering a copy of the appraisal, a “business day” is defined as when “the creditor’s offices are open to the public for carrying on substantially all of its business functions.”
D. Delivering Copy of Appraisals to Applicants
A creditor must provide to the consumer a copy of any written appraisal performed in connection with a higher-priced mortgage loan pursuant to the HPML Appraisal Rule. The copy of each written appraisal required under the HPML Appraisal Rule shall be provided by the creditor to the consumer:
E. Delivery of Copies of Appraisals
A copy of a written appraisal required by the HPML Appraisal Rule may be provided to the applicant in electronic form, subject to compliance with the consumer consent and other applicable provisions of the Electronic Signatures in Global and National Commerce Act (E-Sign Act).
F. No Charge for Copy of Appraisal
A creditor shall not charge the consumer for a copy of the written appraisal required to be provided to the consumer pursuant to the HPML Appraisal Rule.
VII. OVERLAP BETWEEN HPML APPRAISAL RULE AND ECOA VALUATIONS RULE
When originating first-lien mortgages covered by the HPML Appraisal Rule, a creditor must also consider the ECOA Valuations Rule.
Under the ECOA valuation rule, a creditor must notify mortgage loan applicants within three business days of receiving an application of their right to receive a copy of appraisals developed in connection with the making of the loan. Creditors also must provide an applicant with a copy of each appraisal and other written valuation promptly upon its completion, or three business days prior to the loan closing (for closed-end credit) or at the opening of the account (for open-end credit), whichever is earlier. The rule does permit the consumer to waive the timing requirement, but if this is done, the creditor must still provide the applicant with a copy of all appraisals and other written valuations at closing or when the account is opened.
For first-lien HPMLs that are covered by the HPML Appraisal Rule, the disclosure requirements overlap with the ECOA Valuations Rule. The bank can use the disclosure under the ECOA Valuations Rule to satisfy the requirements of the HPML Appraisal Rule.
The ECOA Valuations Rule imposes a different deadline structure for providing copies of appraisals to consumers. Under the ECOA Valuations Rule, the copies of appraisals must be provided “promptly upon completion” or three business days before closing, whichever is earlier. As a result, if the appraisal is completed early in the application process, then the “promptly upon completion” deadline will come first, since it will be earlier than the three business days before closing deadline under this rule.
In addition, the applicant can waive the deadline under the ECOA Valuations Rule and elect to receive the copies at closing, whereas the applicant cannot waive the three business days before closing deadline under the HPML Appraisal Rule.
If the transaction is subject to both rules, then the bank must comply with the earlier deadline.
VIII. ADDITIONAL REVISIONS PROPOSED
The federal banking agencies have issued a proposal for further clarification of the final HPML Appraisal Rule. The amendments proposed by the agencies would exempt transactions secured by existing manufactured homes and not land; certain “streamlined” refinancings; and transactions of $25,000 or less from the final rule.