Agencies Adopt Final Rules Exempting Certain Higher-Price Mortgage Loans from Appraisal Requirements

On Thursday, December 12, 2013, the Federal Reserve Board, the Consumer Financial Protection Bureau, the Federal Deposit Insurance Corporation, the Federal Housing Finance Agency, the National Credit Union Administration, and the Office of the Comptroller of the Currency issued a final rule that creates exemptions from certain appraisal requirements for a subset of higher-priced mortgage loans.  The exemptions are intended to save borrowers time and money while still ensuring that the loans are financially sound.

The appraisal requirements for higher-priced mortgages were established by Section 1471 of the Dodd-Frank Wall Street Reform and Consumer Protection Act.  Under Section 1471, closed-end mortgage loans are considered to be higher-priced if they are secured by a consumer's home and have interest rates above a certain threshold.  Section 1471 requires creditors to obtain a written appraisal based on a physical visit of the home's interior before making these loans.

The final rule provides that loans of $25,000 or less and certain "streamlined" refinancings are exempt from the Section 1471 appraisal requirements, which go into effect on January 18, 2014.

In addition, the final rule contains special provisions for manufactured homes, which can present unique issues in determining the appropriate valuation method.  To ensure that access to affordable housing options is not hindered while creditors make the necessary adjustments, the requirements for manufactured home loans will not become effective for 18 months.  Starting on July 18, 2015, loans secured by an existing manufactured home and land will be subject to the Section 1471 appraisal requirements.  Loans secured by a new manufactured home and land will be exempt only from the requirement that the appraiser visit the home's interior.  For loans secured by manufactured homes without land, creditors will be allowed to use other valuation methods without an appraisal, such as using third-party valuation services or "book values."

Read the Federal Reserve Board press release

Read the Federal Deposit Insurance Corporation press release

Read the Office of the Comptroller of the Currency press release

SEC Proposes New Exemptions from Registration for Small Offerings of Securities

On Wednesday, December 18, 2013, the Securities and Exchange Commission (the “SEC”) proposed amendments to Regulation A pursuant to Section 401 of the Jumpstart Our Business Startups Act.  In its current form, Regulation A provides an exemption from registration for small offerings of securities up to $5 million within a 12-month period.  The proposed amendments would increase the exemption to offerings of securities up to $50 million within a 12-month period.

The proposed amendments would update and expand the Regulation A exemption by creating the following two tiers of Regulation A offerings:

  • Tier 1, which would consist of those offerings already covered by Regulation A – namely securities offerings of up to $5 million in a 12-month period, including up to $1.5 million for the account of selling security-holders.
  • Tier 2, which would consist of securities offerings of up to $50 million in a 12-month period, including up to $15 million for the account of selling security-holders.

For offerings up to $5 million, an offering company would be able elect whether to proceed under Tier 1 or 2.  Under both Tier 1 and Tier 2, companies would be subject to basic requirements, including ones addressing issuer eligibility and disclosure that are drawn from the existing provisions of Regulation A.

The proposed rules also would update Regulation A to among other things:

  • Permit companies to submit draft offering statements for nonpublic SEC review prior to filing.
  • Permit the use of “testing the waters” solicitation materials both before and after filing of the offering statement.
  • Update the qualification, communications, and offering process in Regulation A to reflect analogous provisions of the Securities Act registration process, including requiring electronic filing of offering materials.

In addition to these basic requirements, companies conducting Tier 2 offerings would be subject to the following requirements:

  • Investors would be limited to purchasing no more than 10 percent of the greater of the investor’s annual income or net worth.
  • The financial statements included in the offering circular would be required to be audited.
  • The company would be required to file annual and semiannual ongoing reports and current event updates that are similar to the requirements for public company reporting.

As is currently the case, under the proposed amendments the exemption provided by Regulation A would be available to companies organized in and with their principal place of business in the United States or Canada.  The exemption would not be available to companies that:

  • Are already SEC reporting companies and certain investment companies.
  • Have no specific business plan or purpose or have indicated their business plan is to engage in a merger or acquisition with an unidentified company.
  • Are seeking to offer and sell asset-backed securities or fractional undivided interests in oil, gas, or other mineral rights.
  • Have not filed the ongoing reports required by the proposed rules during the preceding two years.
  • Are or have been subject to a SEC order revoking the company’s registration under the Exchange Act during the preceding five years.
  • Are disqualified under the proposed “bad actor” disqualification rules.

Under the current Regulation A, offerings are subject to registration and qualification requirements in the states where the offering is conducted unless a state-level exemption is available.  This has been identified by the U.S. General Accounting Office and market participants as a central factor for the limited use of current Regulation A.

In view of the range of investor protections provided under the proposal, state securities law requirements would be preempted for Tier 2 offerings.  The SEC’s proposing release also explores alternative approaches to addressing this matter, including the coordinated review program proposed by the North American Securities Administrators Association.

Read the SEC press release

Topics:  Affordable Housing, Appraisal, Blue Sky Laws, CFPB, Dodd-Frank, FDIC, Federal Reserve, FHFA, Financial Regulatory Reform, Investor Protection, JOBS Act, Mobile Homes, Mortgages, NCUA, Real Estate Market, Regulation A, SEC, Secured Loans

Published In: General Business Updates, Finance & Banking Updates, Residential Real Estate Updates, Securities Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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