Today, the federal financial institution agencies (the FDIC, Fed, OCC, and NCUA), the CFPB, and the Federal Housing Finance Agency adopted a joint final rule to implement Dodd-Frank appraisal requirements for higher-priced mortgage loans under the Truth in Lending Act. The final rule is effective on January 18, 2014.

The rule may have little practical effect, however, because it contains exemptions for various categories of loans, including ones that are deemed qualified mortgages under the ability-to-repay requirements. Once the ability-to-repay rule is implemented on January 10, 2014, it is anticipated that at least initially mortgage lenders will confine the loans that they make to qualified mortgages.

The final rule establishes requirements for obtaining an appraisal on the security property before a lender may make a higher-priced mortgage loan. The final rule uses a modified version of the current definition of “higher-priced mortgage loan” under Regulation Z. A loan meets this definition if it is secured by the consumer's principal dwelling and the annual percentage rate exceeds the applicable average prime offer rate by 1.5 percentage points for a first-lien non-jumbo loan, 2.5 percentage points for a first-lien jumbo loan, or 3.5 percentage points for a junior-lien loan.

(This modified definition currently is used for determining a loan that is subject to the existing escrow account requirements for higher-priced mortgage loans.)

The final rule includes a safe harbor under which a lender that takes certain steps in obtaining an appraisal will be deemed to have complied with the final rule’s requirements.

The final rule will require that an additional appraisal be obtained when the seller acquires the property at a lower price within 180 days of the date that the borrower contracts to purchase the property. This requirement is subject to exceptions, including those based on a limited increase in the acquisition price. The final rule also includes requirements to provide a copy of the appraisal to the borrower whether or not the loan closes, and to provide the borrower with a related disclosure.

In addition to qualified mortgages, other examples of loans that are exempted from the rule include transactions to finance the initial construction of a dwelling, bridge loans with a term of 12 months or less, and reverse mortgage loans.

Ballard Spahr’s Mortgage Banking Group combines broad regulatory experience assisting clients in both the residential and commercial mortgage industries with formidable skill in litigation and depth in enforcement actions and transactions. For more information on the appraisal rule for higher-priced mortgage loans, contact Richard J. Andreano, Jr., at 202.661.2271 or andreanor@ballardspahr.com, John D. Socknat at 202.661.2253 or socknatj@ballardspahr.com, or Michael S. Waldron at 202.661.2234 or waldronm@ballardspahr.com.