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Legislation Introduced to Reduce Mortgage Appraisal Requirements in Rural Communities
On July 13, Representative David Kustoff (R-Tenn.) introduced legislation intended to decrease costs and delays when obtaining a mortgage by reducing appraisal requirements. As set forth in a July 13 press release issued by Rep. Kustoff’s office, the Securing Access to Affordable Mortgage Act of 2017 (H.R. 3221) would (i) ease “unfair” appraisal requirements, which would benefit rural communities where there is a demonstrated lack of qualified appraisers, and (ii) assist prospective homebuyers by decreasing costs and delays. H.R. 3221 would increase access to affordable mortgages by excluding loans of $250,000 or less from property appraisal requirements through new exemptions under the Financial Institutions Reform, Recovery and Enforcement Act of 1989 and the Truth in Lending Act.
As previously discussed in InfoBytes, earlier this year several financial agencies jointly issued an Interagency Advisory to address concerns regarding the shortage of certified and licensed appraisers, particularly in rural areas.
Financial Agencies Issue Advisory Addressing Appraiser Availability
On May 31, the FDIC, the Board of Governors of the Federal Reserve, the OCC, and the NCUA issued FIL-19-2017 to discuss two possible methods for addressing appraiser shortages: (i) temporary practice permits and (ii) temporary waivers. The resulting Interagency Advisory addresses concerns raised pursuant to the Economic Growth and Regulatory Paperwork Reduction Act process regarding the shortage of certified and licensed appraisers, particularly in rural areas. The advisory states that “[t]emporary practice permits could allow state certified or licensed appraisers to provide their services in states where they are not certified or licensed, including those experiencing a shortage of appraisers.” The advisory further states that temporary waivers may also be granted thus improving the timeliness of appraisals in those areas. The advisory applies to all FDIC-supervised institutions.
Fannie Mae Announces New Tools for Lenders
On October 19, Fannie Mae announced four changes: (i) the availability of trended credit data, which may allow a more thorough analysis of borrowers’ credit history; (ii) the availability of nontraditional credit history in Desktop Underwriter; (iii) a new tool, Fannie Mae Connect, which provides a self-service reporting and data analytics portal for customers and business partners; and (iv) the ability to validate a borrower’s income in Desktop Underwriter using data provided by Equifax’s The Work Number®. These changes follow Fannie Mae’s April notification regarding the integration of Collateral Underwriter, an appraisal and analysis application, with Desktop Underwriter and EarlyCheck – an integration intended to help lenders more effectively manage risk, underwrite strong loans, and build their businesses.
Fannie Mae Provides New Appraisal Tool For Lenders
On October 20, Fannie Mae announced that its proprietary appraisal and analysis application, Collateral Underwriter, will become available to lenders in early 2015. Currently, Fannie Mae uses the tool to “analyze appraisals when a lender delivers a loan,” and the Agency anticipates that by providing greater certainty around repurchase rise, the tool will help “lenders expand access to mortgage credit.” Ultimately, Collateral Underwriter will allow lenders to evaluate the appraisal of a loan, address any potential issues, and then close and deliver the loan to Fannie Mae.
Fannie Mae, Freddie Mac Clarify Rural Property Appraisal Requirements
On April 1, Freddie Mac issued Bulletin 2014-05, and on March 25, Fannie Mae issued Lender Letter LL-2014-02, in response to directives from the FHFA to clarify certain requirements related to appraisals for properties located in rural areas. In the clarifying documents, Fannie Mae and Freddie Mac state that they do not require the use of third-party vendors such as appraisal management companies to order appraisals or to comply with requirements that the mortgage production function and the appraisal ordering and quality assurance functions remain separate. In addition, both Fannie Mae and Freddie Mac provide a small lender exception to the separation requirement. The guidance documents also state that a residential property in a market that contains properties or land uses that are non-residential in nature, is not necessarily ineligible for sale to Fannie Mae or Freddie Mac. Both entities assert that they will purchase a mortgage secured by a property that is unique or may not conform to its neighborhood, provided an appraiser is able to evaluate and report on how the characteristics of the market area and unique property features affect the value and the marketability of the subject property. The guidance documents also advise sellers that in areas with less real estate activity, such as rural market areas, appraisers may, with documented support, use comparable sales that are older than 12 months, or that are a considerable distance from the subject property or not similar to the subject property.
Federal Regulators Propose Framework for State Supervision of Appraisal Management Companies
On March 24, the Federal Reserve Board, the OCC, the FDIC, the CFPB, the FHFA, and the NCUA proposed a rule to implement the Dodd-Frank Act’s minimum requirements for registration and supervision of Appraisal Management Companies (AMCs). While current federal regulations mandate that appraisals conducted for federally related transactions must comply with the Uniform Standards of Professional Appraisal Practice (USPAP), this rule would represent the first affirmative federal obligations relating to the registration, supervision, and conduct of AMCs.
Generally, the proposed rule would establish a framework for the registration and supervision of AMCs by individual states that choose to participate, and for state reporting to the Appraisal Subcommittee (ASC) of the Federal Financial Institutions Examination Council (FFIEC). Although state participation is optional, AMCs would be prohibited from providing appraisal management services for federally related transactions in states that do not establish such a program.
Comments on the proposal will be due 60 days following publication in the Federal Register.
Scope of Proposal
The proposal defines an AMC as any person that (i) provides appraisal management services to creditors or secondary mortgage market participants; (ii) provides such services in connection with valuing a consumer’s principal dwelling as security for a consumer credit transaction (including consumer credit transactions incorporated into securitizations); and (iii) within a given year, oversees an appraiser panel of more than 15 state-certified or state-licensed appraisers in a state or 25 or more state-certified or state-licensed appraisers in two or more States. “Appraisal management services” include, among other things, recruiting, selecting, and retaining appraisers and contracting with state-certified or –licensed appraisers to perform appraisal assignments. Notably, the rule would apply to appraisals for any consumer credit transaction secured by the consumer’s principal dwelling, whereas current federal regulations apply only to appraisals for transactions that involve an entity regulated by a federal financial regulatory agency and that require the services of an appraiser (federally related transactions).
The definition of AMC does not cover commercial real estate transactions or securitizations involving commercial real estate mortgages and would not apply to a department or division of an entity when such a department or division provides appraisal management services only to that entity. However, affiliate AMCs would be covered, even if they only provide services to their affiliated entity.
Minimum Requirements for State Supervision Programs
The rule would require participating states to implement, within 36 months after the final rule takes effect, a licensing program within a state agency that has authority to: (i) review and approve or deny an AMC’s application for initial registration; (ii) review and renew or refuse to renew an AMC’s registration periodically; (iii) examine the books and records of an AMC operating in the state and require the AMC to submit reports, information, and documents; (iv) verify that the appraisers on the AMC’s appraiser list, network, panel, or roster hold valid state certifications or licenses, as applicable; (v) conduct investigations of AMCs to assess potential violations of applicable appraisal-related laws, regulations, or orders; (vi) discipline, suspend, terminate, and refuse to renew the registration of an AMC that violates applicable appraisal-related laws, regulations, or orders; and (vii) report an AMC’s violation of applicable appraisal-related laws, regulations, or orders, as well as disciplinary and enforcement actions and other relevant information about an AMC’s operations, to the ASC.
Requirements for AMCs
The rule would require an AMC to register with, and be subject to supervision by, a state appraiser certifying and licensing agency in each state in which the AMC operates. As proposed, an AMC that is a subsidiary owned and controlled by a federally regulated insured depository institution or an insured credit union would be exempt from state registration requirements.
In addition, an all AMCs would be required to (i) use only state-certified or state-licensed appraisers for federally related transactions; (ii) establish processes and controls reasonably designed to ensure that the AMC engages appraisers who have the requisite education, expertise, and experience necessary to complete competently the assignment for the particular market and property type; (iii) establish processes and controls reasonably designed to ensure that the AMC conducts its appraisal management services in accordance with TILA requirements relating to appraisal independence; and (iv) require appraisers to perform appraisal assignments in accordance with USPAP.
Agencies Finalize Exemptions To Higher-Priced Mortgage Loan Appraisal Requirements
On December 12, the Federal Reserve Board, the CFPB, the FDIC, the FHFA, the NCUA, and the OCC, issued a final rule supplementing their January 2013 interagency appraisal rule. As described in detail in our Special Alert, the January 2013 rule amended Regulation Z to require creditors to obtain appraisals for a subset of loans called Higher-Priced Mortgage Loans (HPMLs) and to notify consumers who apply for these loans of their right to a copy of the appraisal. Those new requirements take effect January 18, 2014.
The supplemental final rule, which takes effect on the same date, exempts certain transactions from the HPML appraisal requirements. First, all loans secured in whole or in part by a manufactured home are fully exempt until July 18, 2015. After that date: (i) transactions secured by a new manufactured home and land are exempt only from the requirement that the appraisal include a physical review of the interior of the property; (ii) transactions secured by an existing manufactured home and land are not exempt from any HPML appraisal requirements; and (iii) transactions secured by a manufactured home but not land are exempt from all HPML appraisal requirements, provided the creditor provides the consumer with certain specified information about the home’s value. Second, the supplemental final rule exempts streamlined refinances—i.e. refinancing transactions where the holder of the successor credit risk also held the credit risk of the original credit obligation—so long as the consumer does not take any cash out and the new loan does have negative amortization, interest only, or balloon payments. Third, the supplemental final rule exempts “small dollar” transactions of $25,000 or less, indexed annually for inflation.
HUD Updates REO Policies
On December 6, HUD issued Mortgagee Letter 2013-44, which updates HUD’s policies on (i) the use of an FHA-insured mortgage to purchase a HUD REO property; and (ii) the use of distressed properties in determining the market value of REO properties. With regard to the first, the letter provides a chart of conditions that trigger a requirement for the mortgagee to order a new appraisal. According to the letter, if a new appraisal is ordered, then (i) the original appraisal ordered by HUD may not be used to underwrite the loan; (ii) HUD will not reimburse the mortgagee for the cost of the new appraisal and the borrower/purchaser can be charged for the expense of the new appraisal as part of the borrower’s closing costs; (iii) the mortgagee must provide a written justification for ordering a new appraisal; and (iv) the mortgagee must retain copies of all appraisals available to the mortgagee in its loan file. With regard to establishing market value of REO properties, the letter details the conditions implicit in HUD’s characterization that a market value price should “reflect the price appropriate for properties sold in a competitive and open market, under all conditions requisite to a fair sale, with the buyer and seller each acting prudently and knowledgeably, and assuming the price is not affected by undue stimulus.” In addition, the letter states that, when considering sales to be used as comparables, the appraiser must note the conditions of sale and the motivations of the sellers and purchasers, and that in developing an opinion of market value, REO sales and pre-foreclosure sales transactions should only be chosen as comparables if there is compelling evidence in the market to warrant their use. Mortgagees are required to implement the policy changes in the letter by February 4, 2014.
Freddie Mac Updates Tools and Policies Regarding Disclosure of Property Valuation
On October 8, Freddie Mac issued Bulletin 2013-20, which (i) announces tools and systems that provide estimates of property value generated by Freddie Mac’s proprietary automated property valuation model and (ii) updates requirements related to disclosure of property valuation information. Freddie Mac explains that its property value estimates can help sellers/servicers identify potentially inflated appraised values that may need additional review early in the origination process and also can be used to determine property values for Freddie Mac modifications or refinances, but that use of the valuation information may impact seller/servicers’ obligation to comply with the revised valuation disclosure requirements finalized by the CFPB earlier this year. For sellers, the Bulletin states that Freddie Mac will be adding disclaimers about the property value estimate, and provides additional options for system-to-system users. For servicers, Freddie Mac plans to provide supporting text for use in complying with the new disclosure requirements and to provide to borrowers. The Bulletin identifies certain other changes related to the use of property valuation data.
Special Alert: CFPB Finalizes Additional Amendments to ATR/QM Rule; Agencies Propose Appraisal Rule Amendments
On July 10, the Consumer Financial Protection Bureau ("Bureau") finalized important amendments (the "Amendments") to its ability-to-repay / qualified mortgage rule (the "QM / ATR Rule") that are intended to ease certain compliance challenges with making qualified mortgages ("QMs"). In response to industry concerns on the extensive underwriting requirements in Regulation Z's new Appendix Q, the Bureau acknowledged that certain of its provisions were "not well-suited to function as regulatory requirements" and, as a result, finalized major revisions to the methodology for determining a consumer's monthly debt and income for purposes of making a QM under the 43% debt-to-income ("DTI") underwriting alternative.
The Amendments, which had been proposed in April of this year (the "April Proposal"), also finalize clarifications to its mortgage servicing and escrows rules that were issued this January. Like the mortgage rules themselves, the Amendments will take effect on January 10, 2014.
Separately, on the same date, the Bureau, together with the Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, Federal Housing Finance Agency, National Credit Union Administration, and Office of the Comptroller of the Currency (the "Agencies") issued proposed amendments to their January 2013 final rule governing appraisal practices.
Click here to read the special alert.
Questions regarding the matters discussed in this Alert may be directed to any of our lawyers listed below, or to any other BuckleySandler attorney with whom you have consulted in the past.
- Jeffrey P. Naimon, (202) 349-8030, jnaimon@buckleyfirm.com
- Clinton R. Rockwell, (310) 424-3901, crockwell@buckleyfirm.com
- John P. Kromer, (202) 349-8040, jkromer@buckleyfirm.com
- Joseph M. Kolar, (202) 349-8020, jkolar@buckleyfirm.com
- Jon Langlois (202) 349-8045, jlanglois@buckleyfirm.com