Regulators Exempt Some Higher-Priced Mortgage Loans from New Appraisal Requirements

Earlier this month, six federal regulatory agencies (the CFPB, Federal Reserve, FDIC, FHFA, OCC, and NCUA) made a final rule to amend the Dodd-Frank Act of 2010 appraisal requirements for higher-risk home loans, adding exemptions from appraisal requirements for loans of $25,000 or less, manufactured homes, and some streamlined refinancing options.

The new exemptions come just in time, as the Higher-Priced Mortgage Loan (HPML) Appraisal Rules under the Truth in Lending Act take effect on January 18.

In a joint press release, the regulators said these exemptions are designed to save consumers time and money while still making sure home loans are financially safe.

The new appraisal requirements apply to some higher-cost mortgages, usually those with an annual percentage rate that exceeds the average prime rate by a certain percentage. The Dodd-Frank Act requires that creditors obtain written appraisals based on physically viewing the home’s interior before the loan is finalized.

Starting January 18, HPML lenders must use a certified or licensed appraiser to conduct an appraisal that is in compliance with standards, and prepare a written report based on a visit and physical inspection of the home.

The HPML rule will also require lenders to disclose the purpose of the appraisal as for the sole use of the lender, informing borrowers that they may choose to have a separate appraisal conducted at their own expense.

Lenders must also give borrowers a free copy of the appraisal at least three days before the loan closes.

Residential home loans are considered higher-risk if the loan is secured by a principal home and the APR is over the average prime rate (APOR) for a comparable transaction by 1.5 or more points for a first mortgage loan with a balance not exceeding the amount for a jumbo loan; 2.5 points or more for a first jumbo loan; or by 3.5 or more points for a subordinate loan.

Qualified mortgages and reverse mortgages that meet qualified mortgage guidelines are excluded from the definition of a higher-risk loan.

To qualify for the new streamlined refinance exemption, creditors must be refinancing their own existing loan. The payments under the loan cannot be interest only, cause negative amortization, or create a balloon payment. The proceeds of the refinancing may only be used to pay off the existing loan and cover settlement or closing costs, not for a cash-out refinance.

The final rule has special provisions for manufactured homes, as these properties may present unique problems in determining appropriate valuation. To make sure access to affordable housing is not hindered, the requirements for these home loans will not take effect until July 18, 2015.

Mortgages for manufactured homes will be subject to an 18-month temporary exemption. Applications filed on or after July 18, 2015 for loans secured by a new manufactured home will be exempt from the interior appraisal, and loans secured by an existing manufactured home will not be exempt.