Appraisals for High-Priced Mortgage Loans
The Consumer Financial Protection Bureau has issued a rule that amends “Regulation Z” appraisal requirements for High-Priced Mortgage Loans (HPML). Regulation Z requires lenders to disclose all the specifics of a loan to the loan applicant, including how much interest will be charged. It also give consumers the right to cancel transactions that involve a lien on their home. Regulation Z is intended to promote the informed use of credit by borrowers. The new provision requires that appraisals for high risk mortgages meet certain standards and that a copy of any appraisals are provided, for free, to the loan applicant. The new rules came into effect on January 18, 2014.
High-priced mortgage loans are those made on principal residential dwellings with an annual percentage rate (APR) that is above the average prime offer rate (APOR) by varying percentages for a comparable transaction on the date the interest rate is being set. The percentages are 1.5% for first-lien conventional or conforming loans, 2.5% for first-lien jumbo loans and 3.5% for subordinate-lien loans.
New Regulations on High-Priced Mortgage Loans
The new regulations require that lenders meet some criteria before they can offer credit on high-priced mortgage loans. Lenders must obtain a written appraisal made by a certified or licensed appraiser who has physically visited the property. They must obtain a second written appraisal from a different certified or licensed appraiser if the property is going to be financed at a higher price than the seller paid within 180 days of the seller’s purchase. Disclosures for the second appraisal include an analysis of the difference in sale prices, any changes to market conditions and any improvements that have been made to the property between the previous and current sale.
The new regulations state that creditors determine what constitutes a high-priced mortgage loan either by comparing the APR with the APOR or by finding the “transaction coverage rate” (TCR), which does not include prepaid finance charges not retained by the lender, mortgage broker or any affiliate of the two. Creditors must provide a copy of each appraisal to a prospective borrower, without charge, at least three days prior to the loan closing date. Lenders must also supply a borrower with a statement that any appraisal made for a mortgage is for the sole use of the lender and that the borrower may choose to have a separate appraisal done at their own expense.
Certain type of loans are not subject to the amendments of Regulation Z. These include all Qualified Mortgages, reverse mortgages, loans on newly manufactured homes, mobile homes, trailers and boats, loans that finance the building of a new home, bridge loans with maturities of 12 months or less and improvements made to a property made between a previous and current sale.