A new rule, effective Jan. 18, makes the appraisal and loan underwriting process substantially more transparent for the average borrower. Specifically, an amendment to Regulation B, one of the regulatory provisions pursuant to the implementation of the Equal Credit Opportunity Act, forces lenders to disclose to borrowers, in writing, that they are entitled to a copy of “any and all appraisals and other written valuations developed in connection with the applicant’s application for a loan that is or would be secured by a first lien on a dwelling.”
The Equal Credit Opportunity Act is a federal law dating back to 1974 that makes it illegal for lenders to discriminate on the basis of race, color, religion, sex, national origin, marital status, or age provided the borrower is legally capable of entering into a binding contract. Until recently, Regulation B of that law merely required lenders to make appraisal information available to the borrower upon request. It did not provide an affirmative obligation on lenders to notify borrowers of their right to obtain any and all appraisal documents. This requirement, added by regulation in 1991, was originally intended to enable borrowers to determine whether an applied-for loan may have been improperly denied because of illegal discrimination.
The new rule is enacted as a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, part of a broad, sweeping reform of financial services following the collapse of the mortgage and real estate market. Implementation will be overseen by the Consumer Financial Protection Bureau, the agency created by that piece of legislation.
Specifically, the new rules require lenders to promptly deliver any and all documents relating to the appraisal of a property that is or would be secured by a first-position lien on a home. In no case may the copies be provided more than three days prior to the close. The requirement applies whether the lender has approved or denied the loan application.
Borrowers may waive the requirement that the documents be provided to them three days prior to close (unless state law has a more stringent requirement). For most residential buyers, however, it’s difficult to imagine why they would want to do this. Having the appraisal documents in hand allows the borrower time to discover any errors or improprieties that may have crept into the real estate appraisal process.
The disclosure requirements apply to any loan that results or would result in a first-position lien on the property, to include reverse mortgages and construction loans. The new rule does not apply to second mortgages, though, or to second lien home equity lines of credit.
Why It Matters
Access to appraisals and the supporting documents may possibly make it easier for borrowers to discover incidents of unlawful discrimination. But that’s not the only possible benefit to the borrower. The documents also provide an additional opportunity for quality control and a check and balance over the appraisal process. For example, it enables borrowers to quickly determine the thoroughness and professionalism of the appraisers:
- Did the lender use a licensed and bonded appraiser?
- How experienced is the appraiser?
- Is the appraiser familiar with the neighborhood? Or does he or she routinely work far away?
- Did the appraisal include adequate and relevant comps?
- Were any of the comps artificially depressed because of a motivated seller situation?
- Did the appraiser take into account all available information on the property?
- Did the appraiser properly credit the valuation of a property equipped with a new roof, a solar system, home theater/structured wiring, hot tubs or other valuable and desirable amenities?
According to the discussion of public commentary published in the Federal Register, most industry groups were generally supportive of the new disclosure requirements. Professional appraiser groups tended to support the measure in the belief the disclosures would discourage lenders from using low-priced, inexperienced or corrupt appraisers in the underwriting process. Real estate groups also tended to support the measure.
Lenders had raised some concerns about the measure, based on arguments that the rule was redundant, that bankers were already having trouble keeping up with the steady flow of new regulations coming from Washington, and that the rule could impose unanticipated liabilities. For example, some lenders expressed concern that by disclosing the appraisal documents they relied on to make the decision on the loan, consumers might construe that as a warrant that the house was, indeed, worth that much. They also feared courts might follow that line of reasoning, leading to a potential new source of risk for the lender. However, the CFPB rejected those arguments, stating that if such an issue were a problem, it’s already a problem under the existing rules, because lenders must already disclose appraisal documents on request. The new rules do nothing to change that.
Read More: realestate.com