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The CFPB released its long-awaited final rule laying out how lenders must ensure borrowers have the ability to repay a loan, including creating a carve-out for qualified mortgages.
January 10 -
New proposals would require appraisals for "higher-risk" mortgages, and compel lenders to notify borrowers of their right to an appraisal report. But loans meeting the special QM standard would enjoy a lighter touch.
August 15
WASHINGTON — Federal regulators have signed off on stricter appraisal requirements for higher-cost mortgages, but have also expanded the types of loans that will be exempt from the new standards.
The final rule released Tuesday generally requires appraisals for non-jumbo loans with rates at least 1.5 percentage points higher than prime rates. The trigger for jumbo loans is 2.5 points, and 3.5 points for junior liens. The written appraisal must include a physical inspection of a home's interior and a second appraisal is required if the seller had just purchased the home 180 days earlier.
But it also added new loan classes that do not have to comply with the appraisal requirements, in addition to reverse mortgages and the large universe of loans expected to satisfy the Consumer Financial Protection Bureau's "qualified mortgage" rule. The appraisals rule also slightly altered the definition of covered loans to achieve consistency with price triggers used in other regulations.
"The approach we've taken will reduce the burden that would have been attached to having two very similar but potentially confusing definitions," Comptroller of the Currency Thomas Curry said at a public meeting of the Federal Deposit Insurance Corp. board of directors. (The board met Tuesday to approve the rule, which will be issued jointly with five other agencies.)
The rule, mandated by the Dodd-Frank Act, requires creditors to obtain a written appraisal and provide a copy to borrowers at least three business days before closing. When an application is submitted, a lender must notify the borrower that the appraisal will take place and that the applicant has the option to foot the bill for a separate appraisal.
For sales of homes that had just recently been purchased by the seller at a lower price, a second appraisal is meant to prevent fraudulent behavior related to home-flipping. The second appraisal — which cannot be conducted by the first appraiser — must include an analysis of the two different sales prices, as well as changes in market conditions and property improvements made since the previous purchase.
The rule "will help ensure that borrowers who are paying higher-cost mortgage loans pay a fair-market price for their homes and obtain a free copy of their appraisal before becoming financially obligated," FDIC Chairman Martin Gruenberg said at the board meeting.
In their August proposal, the regulators had initially defined the loans subject to the appraisal requirements as "higher-risk mortgages." But to avoid any confusion, the final rule states that that definition is the same as "higher-priced mortgage loans," which is a designation used in prior lending regulations.
Yet the new appraisal regime may not apply to a great portion of the mortgage market. As required by Dodd-Frank, the regulators exempted so-called "qualified mortgages," a new category of ultra-safe loans that satisfy CFPB rules for determining a borrower's repayment ability, from the appraisal standards.
And the agencies went further in granting exemptions compared to their proposal. They had initially excluded just QM loans, reverse mortgages and loans for certain manufactured homes. But the final rule also exempted initial construction loans; financing for mobile homes, boats and trailers; and short-term "bridge" loans with no more than a year maturity.
Meanwhile, unlike the proposal, the final rule also includes other categories of loans that are exempt from the second appraisal. Those include properties in certain rural areas or designated disaster zones; instances when a government agency is reselling a property; dwellings acquired through foreclosure; purchases of foreclosed properties by a non-profit participating in a public program; homes purchased through divorce or inheritance; and sales involving service members with new orders.
A second appraisal is also not required when the difference in sales price between two recent transactions is small. That "de minimis" exemption applies to sales that occur 90 or fewer days from the previous purchase when the price difference is less than 10%, and to sales 91 to 180 days after the previous purchase when the price difference is less than 20%.
