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From Banking and Finance Law Daily, December 11, 2013

FDIC approves exceptions from higher-risk mortgage appraisal requirements

By Richard A. Roth, J.D.

The Federal Deposit Insurance Corporation has approved amendments to mortgage regulations that will provide exceptions to the appraisal requirements to creditors making some higher-risk mortgage loans. The joint FDIC, Federal Reserve Board, Office of the Comptroller of the Currency, Consumer Financial Protection Bureau, National Credit Union Administration, and Federal Housing Finance Agency amendments will apply to three types of transactions:

  • loans secured by existing manufactured homes but not land;

  • some streamlined refinancings; and

  • loans of no more than $25,000.

The Dodd-Frank Act amended the Truth in Lending Act by generally prohibiting lenders from making higher-risk mortgages without first obtaining a satisfactory appraisal (see 15 U.S.C. §1639h). The prohibition applies to residential mortgage loans that do not meet the criteria for qualified mortgages and that have an annual percentage rate that exceeds the average prime offer rate by specified percentage rates.

The appraisal must be made by a certified or licensed appraiser who has physically visited the interior of the residence. The borrower must be informed of the purpose of the appraisal and of his right to obtain his own appraisal if he chooses, and he must be given a written copy of the report. In situations that could be characterized as “flipping,” the lender is required to obtain a second written appraisal at no additional charge to the borrower. These requirements take effect Jan. 18, 2014.

Need for exceptions. According to an FDIC staff memorandum, commenters to the original rule that implemented the appraisal requirements suggested that these exceptions would help reduce delinquencies and foreclosures. Once the original rule was adopted, a supplemental proposal asked for comments on the exceptions.

The FDIC staff memo outlined the three exceptions that would be created principally by amendments to 12 C.F.R. §1026.35.

Manufactured homes. Until July 18, 2015, all loans secured by manufactured homes will be exempt from the appraisal requirements. After that date, loans secured by new manufactured homes will be subject to the appraisal requirements except for the requirement that the appraiser physically visit the home’s interior. Transactions secured by a used manufactured home and the land on which it is located will be subject to all of the appraisal requirements. Loans secured by a used home but not the land will be exempt from all of the requirements if the creditor provides the borrower:

  • the manufacturer’s invoice showing the cost of the home;

  • a cost estimate of the home’s value from an independent cost service provider; or

  • a valuation conducted by a person who is trained in valuing manufactured homes and has no interest in any part of the transaction.

Streamlined refinancings. A refinancing of a loan secured by a borrower’s principal residence by loan from the same creditor is exempt from all of the appraisal requirements. This is referred to as a streamlined refinancing.

To qualify, the new loan must not allow negative amortization or interest-only payments and must not require a balloon payment. Also, cash-out transactions are prohibited; the loan must be used only to repay the existing loan and closing or settlement charges.

Small dollar loans. A loan of $25,000 or less is exempt from all of the appraisal requirements. The amount is to be adjusted for inflation annually.

MainStory: TopStory ConsumerCredit DoddFrankAct Loans Mortgages

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