Billing Code: 4810-AM-P 4810-33-P 6210-01-P 6714-01-P 7535-01-P 4810-AM-P DEPARTMENT OF THE TREASURY Office of the Comptroller of the Currency 12 CFR Parts 34 and 164 [Docket No. OCC-2012-0013] RIN 1557-AD62 BOARD OF GOVERNORS OF FEDERAL RESERVE SYSTEM 12 CFR Part 226 [Docket No. R-1443] RIN 7100-AD90 NATIONAL CREDIT UNION ADMINISTRATION 12 CFR Part 722 RIN 3133-AE04 BUREAU OF CONSUMER FINANCIAL PROTECTION 12 CFR Part 1026 [Docket No. CFPB-2012-0031] RIN 3170-AA11 FEDERAL HOUSING FINANCE AGENCY 1 12 CFR Part 1222 RIN 2590-AA58 Appraisals for Higher-Priced Mortgage Loans AGENCIES: Board of Governors of the Federal Reserve System (Board); Bureau of Consumer Financial Protection (Bureau); Federal Deposit Insurance Corporation (FDIC); Federal Housing Finance Agency (FHFA); National Credit Union Administration (NCUA); and Office of the Comptroller of the Currency, Treasury (OCC). ACTION: Final rule; official staff commentary. SUMMARY: The Board, Bureau, FDIC, FHFA, NCUA, and OCC (collectively, the Agencies) are issuing a final rule to amend Regulation Z, which implements the Truth in Lending Act (TILA), and the official interpretation to the regulation. The revisions to Regulation Z implement a new provision requiring appraisals for “higher-risk mortgages” that was added to TILA by the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act or Act). For mortgages with an annual percentage rate that exceeds the average prime offer rate by a specified percentage, the final rule requires creditors to obtain an appraisal or appraisals meeting certain specified standards, provide applicants with a notification regarding the use of the appraisals, and give applicants a copy of the written appraisals used. EFFECTIVE DATES: This final rule is effective on January 18, 2014. FOR FURTHER INFORMATION CONTACT: Board: Lorna Neill or Mandie Aubrey, Counsels, Division of Consumer and Community Affairs, at (202) 452-3667, or Carmen Holly, Supervisory Financial Analyst, Division of 2 Banking Supervision and Regulation, at (202) 973-6122, Board of Governors of the Federal Reserve System, Washington, DC 20551. Bureau: Owen Bonheimer, Counsel, or William W. Matchneer, Senior Counsel, Division of Research, Markets, and Regulations, Bureau of Consumer Financial Protection, 1700 G Street, N.W., Washington, DC 20552, at (202) 435-7000. FDIC: Beverlea S. Gardner, Senior Examination Specialist, Risk Management Section, at (202) 898-3640, Sumaya A. Muraywid, Examination Specialist, Risk Management Section, at (573) 875-6620, Glenn S. Gimble, Senior Policy Analyst, Division of Consumer Protection, at (202) 898-6865, Sandra S. Barker, Senior Policy Analyst, Division of Consumer Protection, at (202 898-3615, Mark Mellon, Counsel, Legal Division, at (202) 898-3884, or Kimberly Stock, th Counsel, Legal Division, at (202) 898-3815, or 550 17 St, N.W., Washington, DC 20429. FHFA: Susan Cooper, Senior Policy Analyst, (202) 649-3121, Lori Bowes, Policy Analyst, Office of Housing and Regulatory Policy, (202) 649-3111, Ming-Yuen Meyer-Fong, Assistant General Counsel, Office of General Counsel, (202) 649-3078, or Sharron P.A. Levine, Associate General Counsel, Office of General Counsel, (202) 649-3496, Federal Housing Finance Agency, 400 Seventh Street, S.W., Washington, DC, 20024. NCUA: John Brolin and Pamela Yu, Staff Attorneys, or Frank Kressman, Associate General Counsel, Office of General Counsel, at (703) 518-6540, or Vincent Vieten, Program Officer, Office of Examination and Insurance, at (703) 518-6360, or 1775 Duke Street, Alexandria, Virginia, 22314. OCC: Robert L. Parson, Appraisal Policy Specialist, (202) 649-6423, G. Kevin Lawton, Appraiser (Real Estate Specialist), (202) 649-7152, Carolyn B. Engelhardt, Bank Examiner (Risk Specialist – Credit), (202) 649-6404, Charlotte M. Bahin, Senior Counsel or Mitchell Plave, 3 Special Counsel, Legislative & Regulatory Activities Division, (202) 649-5490, Krista LaBelle, Special Counsel, Community and Consumer Law Division, (202) 649-6350, or 250 E Street S.W., Washington D.C. 20219. SUPPLEMENTARY INFORMATION: I. Background In general, the Truth in Lending Act (TILA), 15 U.S.C. 1601 et seq., seeks to promote the informed use of consumer credit by requiring disclosures about its costs and terms. TILA requires additional disclosures for loans secured by consumers’ homes and permits consumers to rescind certain transactions that involve their principal dwelling. For most types of creditors, TILA directs the Bureau to prescribe regulations to carry out the purposes of the law and specifically authorizes the Bureau to issue regulations that contain such classifications, differentiations, or other provisions, or that provide for such adjustments and exceptions for any class of transactions, that in the Bureau’s judgment are necessary or proper to effectuate the 1 purposes of TILA, or prevent circumvention or evasion of TILA. 15 U.S.C. 1604(a). For most types of creditors and most provisions of the statute, TILA is implemented by the Bureau’s Regulation Z. See 12 CFR part 1026. Official Interpretations provide guidance to creditors in applying the rules to specific transactions and interpret the requirements of the regulation. See 12 CFR part 1026, Supp. I. However, as explained in the section-by-section analysis of this SUPPLEMENTARY INFORMATION, the new appraisal section of TILA addressed in this final rule (TILA section 129H, 15 U.S.C. 1639h) is implemented not only for all affected 1 For motor vehicle dealers as defined in section 1029 of the Dodd-Frank Act, TILA directs the Board to prescribe regulations to carry out the purposes of TILA and authorizes the Board to issue regulations that contain such classifications, differentiations, or other provisions, or that provide for such adjustments and exceptions for any class of transactions, that in the Board’s judgment are necessary or proper to effectuate the purposes of TILA, or prevent circumvention or evasion of TILA. 15 U.S.C. 5519; 15 U.S.C. 1604(a). 4 creditors by the Bureau’s Regulation Z, but also, for creditors overseen by the OCC and the Board, respectively, by OCC regulations and the Board’s Regulation Z. See 12 CFR parts 34 and 164 (OCC regulations) and part 226 (the Board’s Regulation Z). The Bureau’s, the OCC’s and the Board’s versions of the appraisal rules and corresponding official interpretations are substantively identical. The FDIC, NCUA, and FHFA are adopting the Bureau’s version of the regulations under this final rule. 2 The Dodd-Frank Act was signed into law on July 21, 2010. Section 1471 of the Dodd- Frank Act’s Title XIV, Subtitle F (Appraisal Activities), added a new TILA section 129H, 15 U.S.C. 1639h, which establishes appraisal requirements that apply to “higher-risk mortgages.” Specifically, new TILA section 129H prohibits a creditor from extending credit in the form of a higher-risk mortgage loan to any consumer without first: • Obtaining a written appraisal performed by a certified or licensed appraiser who conducts a physical property visit of the interior of the property. • Obtaining an additional appraisal from a different certified or licensed appraiser if the higher-risk mortgage finances the purchase or acquisition of a property from a seller at a higher price than the seller paid, within 180 days of the seller’s purchase or acquisition. The additional appraisal must include an analysis of the difference in sale prices, changes in market conditions, and any improvements made to the property between the date of the previous sale and the current sale. A creditor of a “higher-risk mortgage” must also: 2 Public Law 111-203, 124 Stat. 1376 (Dodd-Frank Act). 5 • Provide the applicant, at the time of the initial mortgage application, with a statement that any appraisal prepared for the mortgage is for the sole use of the creditor, and that the applicant may choose to have a separate appraisal conducted at the applicant’s expense. • Provide the applicant with one copy of each appraisal conducted in accordance with TILA section 129H without charge, at least three (3) days prior to the transaction closing date. New TILA section 129H(f) defines a “higher-risk mortgage” with reference to the annual percentage rate (APR) for the transaction. A higher-risk mortgage is a “residential mortgage 3 loan” secured by a principal dwelling with an APR that exceeds the average prime offer rate (APOR) for a comparable transaction as of the date the interest rate is set— • By 1.5 or more percentage points, for a first lien residential mortgage loan with an original principal obligation amount that does not exceed the amount for the maximum limitation on the original principal obligation of a mortgage in effect for a residence of the applicable size, as of the date of the interest rate set, pursuant to the sixth sentence of section 305(a)(2) of the Federal Home Loan Mortgage Corporation Act (12 U.S.C. 1454); • By 2.5 or more percentage points, for a first lien residential mortgage loan having an original principal obligation amount that exceeds the amount for the maximum limitation on the original principal obligation of a mortgage in effect for a residence of the applicable size, as of the date of the interest rate set, pursuant to the sixth sentence of section 305(a)(2) of the Federal Home Loan Mortgage Corporation Act (12 U.S.C. 1454); or 3 See Dodd-Frank Act, § 1401; TILA section 103(cc)(5), 15 U.S.C. 1602(cc)(5) (defining “residential mortgage loan”). 6 • By 3.5 or more percentage points, for a subordinate lien residential mortgage loan. The definition of “higher-risk mortgage” expressly excludes “qualified mortgages,” as defined in TILA section 129C, and “reverse mortgage loans that are qualified mortgages,” as defined in TILA section 129C. 15 U.S.C. 1639c. New TILA section 103(cc)(5) defines the term “residential mortgage loan” as any consumer credit transaction that is secured by a mortgage, deed of trust, or other equivalent consensual security interest on a dwelling or on residential real property that includes a dwelling, other than a consumer credit transaction under an open-end credit plan. 15 U.S.C. 1602(cc)(5). New TILA section 129H(b)(4)(A) requires the Agencies jointly to prescribe regulations to implement the property appraisal requirements for higher-risk mortgages. 15 U.S.C. 1639h(b)(4)(A). The Dodd-Frank Act requires that final regulations to implement these provisions be issued within 18 months of the transfer of functions to the Bureau pursuant to 4 section 1062 of the Act, or January 21, 2013. These regulations are to take effect 12 months 5 after issuance. The Agencies published proposed regulations on September 5, 2012, that would implement these higher-risk mortgage appraisal provisions. 77 FR 54722 (Sept. 5, 2012). The comment period closed on October 15, 2012. The Agencies received more than 200 comment letters regarding the proposal from banks, credit unions, other creditors, appraisers, appraisal management companies, industry trade associations, consumer groups, and others. 4 See Dodd-Frank Act, § 1400(c)(1). 5 See id. 7 II. Summary of the Final Rule Loans Covered To implement the statutory definition of “higher-risk mortgage,” the final rule uses the term “higher-priced mortgage loan” (HPML), a term already in use under the Bureau’s Regulation Z with a meaning substantially similar to the meaning of “higher-risk mortgage” in the Dodd-Frank Act. In response to commenters, the Agencies are using the term HPML to refer generally to the loans that could be subject to this final rule because they are closed-end credit and meet the statutory rate triggers, but the Agencies are separately exempting several types of HPML transactions from the rule. The term “higher-risk mortgage” encompasses a closed-end consumer credit transaction secured by a principal dwelling with an APR exceeding certain statutory thresholds. These rate thresholds are substantially similar to rate triggers that have 6 been in use under Regulation Z for HPMLs. Specifically, consistent with TILA section 129H, a loan is a “higher-priced mortgage loan” under the final rule if the APR exceeds the APOR by 1.5 percent for first-lien conventional or conforming loans, 2.5 percent for first-lien jumbo loans, and 7 3.5 percent for subordinate-lien loans. Consistent with the statute, the final rule exempts “qualified mortgages” from the requirements of the rule. Qualified mortgages are defined in § 1026.43(e) of the Bureau’s final rule implementing the Dodd-Frank Act’s ability-to-repay requirements in TILA section 129C 8 (2013 ATR Final Rule). 15 U.S.C. 1639c. 6 Added to Regulation Z by the Board pursuant to the Home Ownership and Equity Protection Act of 1994 (HOEPA), the HPML rules address unfair or deceptive practices in connection with subprime mortgages. See 73 FR 44522, July 30, 2008; 12 CFR 1026.35. 7 The existing HPML rules apply the 2.5 percent over APOR trigger for jumbo loans only with respect to a requirement to establish escrow accounts. See 12 CFR 1026.35(b)(3)(v). 8 The Bureau released the 2013 ATR Final Rule on January 10, 2013, under Docket No. CFPB-2011-0008, CFPB- 2012-0022, RIN 3170-AA17, at http://consumerfinance.gov/Regulations. 8 In addition, the final rule excludes the following classes of loans from coverage of the higher-risk mortgage appraisal rule: (1) transactions secured by a new manufactured home; (2) transactions secured by a mobile home, boat, or trailer; (3) transactions to finance the initial construction of a dwelling; (4) loans with maturities of 12 months or less, if the purpose of the loan is a “bridge” loan connected with the acquisition of a dwelling intended to become the consumer’s principal dwelling; and (5) reverse mortgage loans. For reasons discussed more fully in the section-by-section analysis of § 1026.35(a)(1), below, the proposal included a request for comments on an alternative method of determining coverage based on the “transaction coverage rate” or TCR, rather than the APR. Unlike the APR, the TCR would exclude all prepaid finance charges not retained by the creditor, a 9 mortgage broker, or an affiliate of either. This change was proposed to address a possible expansion of the definition of “finance charge” used to calculate the APR, proposed by the 10 Bureau in its rulemaking to integrate mortgage disclosures (2012 TILA-RESPA Proposal ). Accordingly, the proposal defined “higher-risk mortgage loan” (termed “higher-priced mortgage loan” in this final rule) in the alternative as calculated by either the TCR or APR, with comment sought on both approaches. As explained more fully in the section-by-section analysis of § 1026.35(a)(1), below, the final rule requires creditors to determine whether a loan is an HPML by comparing the APR to the APOR. The Agencies are not at this time adopting the proposed alternative of replacing the 9 See 75 FR 58539, 58660-62 (Sept. 24, 2010); 76 FR 11598, 11609, 11620, 11626 (March 2, 2011). 10 See 77 FR 51116 (Aug. 23, 2012). 9 APR with the TCR and comparing the TCR to the APOR. The Agencies will consider the merits of any modifications to this approach and public comments on this matter if and when the Bureau adopts the more inclusive definition of finance charge proposed in the 2012 TILA- RESPA Proposal. Finally, based on public comments, the Agencies intend to publish a supplemental proposal to request comment on possible exemptions for “streamlined” refinance programs and small dollar loans, as well as to seek comment on whether application of the HPML appraisal rule to loans secured by certain other property types, such as existing manufactured homes, is appropriate. Requirements that Apply to All Appraisals Performed for Non-Exempt HPMLs Consistent with the statute, the final rule allows a creditor to originate an HPML that is not otherwise exempt from the appraisal rules only if the following conditions are met: • The creditor obtains a written appraisal; • The appraisal is performed by a certified or licensed appraiser; and • The appraiser conducts a physical property visit of the interior of the property. Also consistent with the statute, the following requirements also apply with respect to HPMLs subject to the final rule: • At application, the consumer must be provided with a statement regarding the purpose of the appraisal, that the creditor will provide the applicant a copy of any written appraisal, and that the applicant may choose to have a separate appraisal conducted for the applicant’s own use at his or her own expense; and • The consumer must be provided with a free copy of any written appraisals obtained for the transaction at least three (3) business days before consummation. 10