Appraisal Scoop

Consumer Financial Protection Bureau Issues Rule to Protect Consumers from Irresponsible Mortgage Lending

Rule Requires Lenders Ensure Borrowers Have the Ability to Repay Their Mortgage

WASHINGTON, D.C. – Today the Consumer Financial Protection Bureau (CFPB) adopted a new rule that will protect consumers from irresponsible mortgage lending by requiring lenders to ensure prospective buyers have the ability to repay their mortgage. The rule also protects borrowers from risky lending practices such as “no doc” and “interest only” features that contributed to many homeowners ending up in delinquency and foreclosure after the 2008 housing collapse.

“When consumers sit down at the closing table, they shouldn’t be set up to fail with mortgages they can’t afford,” said CFPB Director Richard Cordray. “Our Ability-to-Repay rule protects borrowers from the kinds of risky lending practices that resulted in so many families losing their homes. This common-sense rule ensures responsible borrowers get responsible loans.”

Leading up to the mortgage crisis, certain lenders originated mortgages to consumers without considering their ability to repay the loans. The gradual deterioration in underwriting standards led to dramatic increases in mortgage delinquencies and rates of foreclosures. What followed was the collapse of the housing market in 2008 and the subsequent financial crisis. The 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act created broad-based changes to how creditors make loans and included new ability-to-repay requirements, which the CFPB is charged with implementing.

Ability to Repay

In the years leading up to the financial crisis, lenders too often offered mortgages to consumers who could not afford them. Under the Ability-to-Repay rule announced today, all new mortgages must comply with basic requirements that protect consumers from taking on loans they don’t have the financial means to pay back. Among the features of the new rule:

• Financial information has to be supplied and verified: Lenders must look at a consumer’s financial information. A lender generally must document: a borrower’s employment status; income and assets; current debt obligations; credit history; monthly payments on the mortgage; monthly payments on any other mortgages on the same property; and monthly payments for mortgage-related obligations. This means that lenders can no longer offer no-doc, low-doc loans, where lenders made quick sales by not requiring documentation, then offloaded these risky mortgages by selling them to investors.
• A borrower has to have sufficient assets or income to pay back the loan: Lenders must evaluate and conclude that the borrower can repay the loan. For example, lenders may look at the consumer’s debt-to-income ratio – their total monthly debt divided by their total monthly gross income. Knowing how much money a consumer earns and is expected to earn, and knowing how much they already owe, helps a lender determine how much more debt a consumer can take on.
• Teaser rates can no longer mask the true cost of a mortgage: Lenders can’t base their evaluation of a consumer’s ability to repay on teaser rates. Lenders will have to determine the consumer’s ability to repay both the principal and the interest over the long term − not just during an introductory period when the rate may be lower.

Qualified Mortgages

Lenders will be presumed to have complied with the Ability-to-Repay rule if they issue “Qualified Mortgages.” These loans must meet certain requirements which prohibit or limit the risky features that harmed consumers in the recent mortgage crisis. If a lender complies with the clear criteria of a Qualified Mortgage, consumers will have greater assurance that they can pay back the loan. Among the features of a Qualified Mortgage:

• No excess upfront points and fees: A Qualified Mortgage limits points and fees including those used to compensate loan originators, such as loan officers and brokers. When lenders tack on excessive points and fees to the origination costs, consumers end up paying a lot more than planned.
• No toxic loan features: A Qualified Mortgage cannot have risky loan features, such as terms that exceed 30 years, interest-only payments, or negative-amortization payments where the principal amount increases. In the lead up to the crisis, too many consumers took on risky loans that they didn’t understand. They didn’t realize their debt or payments could increase, or that they weren’t building any equity in the home.
• Cap on how much income can go toward debt: Qualified Mortgages generally will be provided to people who have debt-to-income ratios less than or equal to 43 percent. This requirement helps ensure consumers are only getting what they can likely afford. Before the crisis, many consumers took on mortgages that raised their debt levels so high that it was nearly impossible for them to repay the mortgage considering all their financial obligations. For a temporary, transitional period, loans that do not have a 43 percent debt-to-income ratio but meet government affordability or other standards − such as that they are eligible for purchase by the Federal National Mortgage Association (Fannie Mae) or the Federal Home Loan Mortgage Corporation (Freddie Mac) − will be considered Qualified Mortgages.

There are two kinds of Qualified Mortgages that have different protective features for a consumer and different legal consequences for the lender. The first, Qualified Mortgages with a rebuttable presumption, are higher-priced loans. These loans are generally given to consumers with insufficient or weak credit history. Legally, lenders that offer these loans are presumed to have determined that the borrower had an ability to repay the loan. Consumers can challenge that presumption, though, by proving that they did not, in fact, have sufficient income to pay the mortgage and their other living expenses. 

The second, Qualified Mortgages that have a safe harbor status, are generally lower-priced loans. They are generally prime loans that are given to consumers who are considered to be less risky. They will also offer lenders the greatest legal certainty that they are complying with the new Ability-to-Repay rule. Consumers can legally challenge their lender if they believe the loan does not meet the definition of a Qualified Mortgage.

The Ability-to-Repay rule does not affect the rights of a consumer to challenge a lender for violating any other federal consumer protection laws.

Today, the CFPB is also releasing proposed amendments to its Ability-to-Repay rule. These amendments would, among other things, exempt certain nonprofit creditors that work with low- and moderate-income consumers. The proposed amendments would also make exceptions for certain homeownership stabilization programs − such as those that offer loans made in connection with the Making Home Affordable program − which help consumers avoid foreclosure. The proposed amendments would also provide Qualified Mortgage status for certain loans made and held in portfolio by small creditors, such as community banks and credit unions. Finally, today’s proposed amendments invite comment on how to calculate loan origination compensation under the points and fees provision of Qualified Mortgages.

The proposed amendments, if adopted, would be finalized this spring and go into effect at the same time as the Ability-to-Repay rule in January 2014. The CFPB is dedicated to working with industry and consumers for a smooth transition to the new rule. To help creditors with compliance, the CFPB will, among other things, be publishing plain-language translations of the regulation for lenders in booklet and video form, issuing implementation guides, and, in coordination with other agencies, releasing materials that help lenders understand supervisory expectations. As the effective date approaches, the CFPB will give consumers information about their new rights under these rules.

The rule and proposed amendments will be available on Thursday at: http://www.consumerfinance.gov/regulations

A factsheet further explaining the new rule is at: http://files.consumerfinance.gov/f/201301_cfpb_ability-to-repay-factsheet.pdf

A summary of the final Ability-to-Repay rule is at: http://files.consumerfinance.gov/f/201301_cfpb_ability-to-repay-summary.pdf

SOURCE: CFPB Website

Appraisal Institute-ASA-ASFMRA-NAIFA reply regarding the pending Interim Final Rule on TILA

Here is the official comment letter of the Appraisal Institute-ASA-ASFMRA-NAIFA on the pending Interim Final Rule on TILA and customary and reasonable fees.

Download JointLetterToFederalReserveTILAAppraisalProvisions

This letter is divided into two parts: 

Part I provides brief, general observations regarding the impact of the HVCC and HOEPA’s anti-coercion provisions. 

Part II contains specific positions and recommendations regarding the contents of the interim final rule. 

You will note that in Part II they address the issue of “customary and reasonable” residential appraiser fees in great detail given this provision’s central importance to the new law’s appraisal independence requirements. 

"While implementation of the other aspects of the appraisal independence section are discussed in somewhat less detail, our organizations regard them as being of comparable public policy and consumer protection importance. We hope you find our comments helpful and responsive to the specific questions the Fed asked in connection with the conference call."

Here are several  excerpts from the letter:

 Customary And Reasonable Appraiser Fees: As we discussed during the September 8 conference call, the Dodd-Frank Act contains a provision requiring “customary and reasonable” fees be paid to appraisers to reflect what an appraiser would typically earn for an assignment absent the involvement of an appraisal management company (AMC). Under the Act, evidence for such fees may be established by objective third-party information, such as government agency fee schedules, academic studies, and independent private sector surveys. This issue is extremely important given evidence that indicates wide divergence between fees paid to appraisers through appraisal management companies and those retained directly by financial institutions. While some AMCs pay full fees and charge for their services on a “cost-plus” basis, many do not. Many of our members report having to accept reduce fees by as much as 50 percent since the inception of the Home Valuation Code of Conduct.

 Prohibitions on Conflicts of Interest: The Fed asks whether “small banks” should be exempt from the appraisal independence and anti-conflict of interest provisions of the Dodd-Frank Act. In a word, our answer is an emphatic “no”. Because many of our members operate small valuation firms, we appreciate the difficulty that small businesses sometimes experience in meeting federal and state requirements. Nevertheless, we believe that consumers whose collateralized loans are made by small banks would be ill-served by exempting those banks from the appraiser independence requirements. Clearly, mid-size and large financial institutions with in-house appraisal departments have the resources to establish “fire walls” between those departments and their mortgage production departments. If small financial institutions lack such resources, they can readily go outside the bank and hire independent appraisers. We do not believe that this represents an unreasonable requirement.

Mandatory Reporting of USPAP Violations: The Fed asks whether clarification is required in connection with new TILA section 129E(e), which requires individuals involved in a collateralized consumer credit transaction to report an appraiser’s violation of USPAP, federal and state appraisal laws or who is otherwise engaging in “unethical or unprofessional conduct” to his or her state appraiser licensing agency. We strongly believe that clarification is essential if frivolous complaints against appraisers and wasted investigative efforts by state appraiser licensing agencies are to be avoided.

 Our organizations support appraiser accountability. If an appraiser violates USPAP or otherwise engages in unprofessional conduct, we want these violations examined and the appraiser sanctioned if the alleged misbehavior is confirmed. However, because the language of the mandatory reporting provision is general in nature, we urge the Fed to establish specific ground rules that would govern and circumscribe the reporting of alleged appraiser misconduct. We believe that those ground rules should describe, as concretely as possible, and provide examples of, the acts of appraisers which might constitute a possible violation of the behavior addressed in the statute’s mandatory reporting language. Without such guidelines, a torrent of unfounded complaints to state appraiser licensing agencies could be unleashed – based, for example, on nothing more than an appraiser’s refusal to provide a desired opinion of value. Indeed, an unscrupulous user of appraisal services or even a disappointed borrower could use an unfocused and generalized mandatory reporting requirement, as a means to undermine the independence and objectivity of the appraiser.

HUD-1 Line Charges:  We urge the Fed, in its interim final regulations, to require that when an appraisal is procured through an AMC or through any other third party, that consumers are provided with clear and timely information on how the appraisal fee is to be split between the appraiser and the AMC or other third party. The consumer is entitled to such transparency. While we continue to seek clarification from HUD/FHA that under RESPA, the portion of appraisal fees collected by AMCs are, in reality, loan origination costs and should not be reported on the Appraisal line of the HUD-1 form, we strongly urge that the interim final rule require creditors to provide clear and timely information to consumer-borrowers showing appraisal costs broken-out between the fee actually paid to the appraiser and the administrative fee paid to the AMC.

Finally, we strongly oppose the recommendation of one interest group that the Federal Reserve delay promulgating interim final rules to implement the “customary and reasonable fee” provisions of the statute

.

We believe that delaying implementation would violate the clear words of the statute which state that “for purposes of this section,” the Fed shall prescribe interim final regulations no later than 90 days after the date of enactment of this section…” (emphasis added). The “customary and reasonable fee” provision (129E(i)) is a part of “this section” (i.e., section 1472).

  Click here for the full TILA Appraisal Provisions Letter

Appraisal Organizations Seek Clarification from HUD on "New RESPA Rule FAQs Regarding Appraisal Fee Reporting

" . . .the current interpretations found in the “New RESPA Rule FAQs” contributes to a significant problem facing real estate appraisal companies and independent real estate appraisers today – forced fee reductions and widespread “cramdowns” in fees to appraisers, by as much as 50 percent, according to our members in a recent survey."

That's part of what the most recent letter from the Appraisal Institute, American Society of Appraisers, the ASFMRA, and NAIFA had to say! . . .

"Oh behalf of the more than 35,000 members of our professional appraisal organizations, we urge HUD to clarify how fees charged for mortgage-related appraisals and for appraisal processing services are to be reported under the Real Estate Settlement Procedures Act (RESPA). Based on our review of the “New RESPA Rule FAQs” and other relevant documents, we seek confirmation of our conclusion that fees charged by Appraisal Management Companies (AMCs) for ordering and processing mortgage-related appraisals are correctly reported as “Origination” or “Other Settlement Services” fees in Blocks 1 or 3 of the Good Faith estimate (GFE); and on the “origination charge” line 801 of the HUD-1"

"We believe a clarification by HUD is necessary to avoid consumers paying unnecessarily for services reported on the Appraisal line of the HUD-1 that are actually part of a lender’s cost of doing business. Many consumers today are under a false impression that appraisal costs have increased in recent months, when in fact, many thousands of appraisers are being denied customary and reasonable fees in their local market.1 The reason for the reported increase is simple – many lenders have added AMC processing charges – traditionally regarded as a cost of originating a loan – to the Appraisal line of the HUD-1. We do not believe this practice is fair to consumers, as “lumping” these fees together may result in misleading information to the consumer"

"Further, we are concerned the current interpretations found in the “New RESPA Rule FAQs” contributes to a significant problem facing real estate appraisal companies and independent real estate appraisers today – "forced fee reductions and widespread “cramdowns” in fees to appraisers, by as much as 50 percent, according to our members in a recent survey."

For the complete document click here

PR: a la mode releases inaugural edition of the national Appraisal Fee Reference™, critical for FHA and RESPA compliance

Press Release: February 17, 2010  Oklahoma City, OK —  

a la mode, inc., the dominant provider of appraisal-related technology and services to the mortgage industry, today released the first public edition of The Appraisal Fee Reference™.  The AFR™ is the authoritative national analysis of independent appraisal fees, and is just one of the monthly data sets published as part of a la mode's Appraisal Industry Analytics™ practice.  

Using the data from hundreds of thousands of verified and validated appraisals, the AFR reports the median appraisal fees for each of the 3,221 counties and districts in the fifty states, the District of Columbia, Puerto Rico, and Guam.  

The timing of the release is critical, since FHA's recently implemented guidelines require that participating lenders ensure that appraisers are paid "reasonable and customary" fees, independent of what may be added on by appraisal management companies, or AMCs.  Only by using the AFR can a lender or appraiser objectively determine what is a 'customary' fee, and decide whether the appraiser is being offered less than that by an AMC. Appraisers and the National Association of Realtors have complained loudly about the issue in recent months, which appears to have prompted the issuance of the new mortgagee rules by FHA.

For compliance with HUD's new 2010 RESPA rules and the revised Good Faith Estimate, the AFR gives a lender a defensible basis for estimating closing costs on a GFE for loans using independent fee appraisers.  Lenders utilizing the Mercury Network (http://www.mercuryvmp.com) also receive additional data sets for GFE compliance.

"Of course," noted Dave Biggers, a la mode's chairman, "Knowing what's customary or commonly expected is only the first step.  As in any business, only the person performing the actual work would be able to say what is reasonable or required for a specific request.  In real estate that's especially true since every property is different.  The key is that the AFR provides lenders and appraisers alike a logical, legally defensible starting point for that fee discussion and for GFE estimation."

As for the actual report, the February 2010 edition of the AFR reveals several interesting fee statistics.  For example, the most expensive counties to get an appraisal were not in the major cities.  Instead, the 50 most expensive locations were dominated by counties in Alaska, Hawaii, and Wyoming. 

Of the locations with the lowest fees, appraisers in Ohio were represented disproportionately, with 18 of the bottom 50 slots being taken by counties in the state.  Four nearby states -- Pennsylvania, Kentucky, Illinois, and Wisconsin -- also had three to four counties each in the bottom 50.

Perhaps not surprisingly then, the East North Central census division, comprising Illinois, Indiana, Michigan, Ohio, and Wisconsin, ranked at the very bottom of the nine divisions nationally, with a median fee of $300.  The Pacific division was most healthy overall for appraisers, with a median of $400.

When looking at the larger census regions, the West and South fared best for appraisers with median fees of $375 and $350, respectively.  The Midwest and Northeast did more poorly, with both showing medians of $325.  

Nationwide, the median observed appraisal fee was $350, with an average of $351.

For more information, visit www.mercuryvmp.com/analytics.

How Many of you Have $10,000 Just Lying Around? - S. 2452 Home Ownership Preservation and Protection Act

I read one of Pat Egger's articles up here a few weeks ago and it had a Marvel Comics image and spoke of appraisers picking a side.  The Homeownership Preservation and Protection act seems to be at face value, a good thing. 

Here is a break down using the Library of Congresses Thomas system:

The following summary is provided by the Congressional Research Service, which is a nonpartisan government entity that serves Congress and is run by the Library of Congress.  The summary is taken from the official website THOMAS.  This is the date introduced to the committee.  It is still in its very beginning stages.

Home Ownership Preservation and Protection Act of 2007 - Amends the Truth in Lending Act to redefine high-cost mortgages and attendant lending practices.  Sets forth a new formula for points and fees for open-end loans, and provides for bona fide discount points.

Sounds harmless at this point, like most things written by politicians you have to dig into the meat of the bill to see who is at the short end of the stick. 

Prohibits: (1) prepayment penalties; (2) balloon payments; (3) yield spread premiums; (4) acceleration or debt; (5) evasions, structuring of transactions, and reciprocal arrangements; and (6) modification and deferral fees.

Here again, sounds like it has the consumer at heart.  God knows the entire home owning public was set out to dry with these types of problems. 

Prohibits creditors from financing, in connection with a high-cost mortgage, any prepayment fee or penalty, or any points or fees.

Since many homeowners are not savvy enough to catch these things, I can see why this would be a good thing.  It will result in lower profit margins for the lenders, but they make excessively much money as it is.

Prohibits an originator from making or arranging a high-cost mortgage loan that involves a refinancing of a prior existing home mortgage loan unless the new loan will provide a net tangible benefit to the consumer.

It is sad that common sense like this is required of a bill, but obviously lenders are predatory and one sided in regards to profit

Click Here To Continue Reading . . . .

Connecting the Dots…The Importance of Timely and Effective Suspicious Activity Reports

There is often a financial connection to crime, and Suspicious Activity Reports (SARs) play a critical role in exposing the financial links to illicit activities and fighting financial crimes. For the suspicious activity reporting system to be effective, SARs must be complete, accurate, and timely.

Download Connecting_the_Dots_SARs.pdf

This article highlights the importance of SARs, provides examples of how various agencies use SARs, discusses common deficiencies in SAR filings, and provides tips on what makes an effective SAR.

Source: Connecting the Dots…The Importance of Timely and Effective Suspicious Activity Reports

Title Insurance: Actions Needed to Improve Oversight of the Title Industry and Better Protect Consumers

The GAO's investigation of competition in the title industry report has been released, and its results are staggering. The 74-page report digs deep into the competitive issues surrounding the real estate industry, with title insurance serving as a jumping-off point for a detailed discussion of affiliated arrangements and referral practices among all of the players.

The report also looks at enforcement from the state and federal level and finds it to be lacking. Click here to look at what changes the GAO is recommending to Congress and HUD and how RESPA is at the heart of them all.

• Click here for an Abstract of the report.
• Click here for the complete report.

Connecticut gives kickback disclosure law the nod

A Connecticut bill that would require real estate agents to provide every homebuyer with a disclosure stating that they are not receiving any kickbacks on the transaction is moving forward, as a House Committee has recently voted unanimously to pass the bill. Read on to learn what the industry had to say about the legislation at a recent public hearing.

Click here to read the full story.

Lender Urges Creation of "National Valuation Registry"

It is "up to us as an industry, to take a lot of action ourselves," says Richard Wohl, president, IndyMac Bank, Pasadena, Calif., noting that this is both a "good time and a bad time to be addressing mortgage fraud." The industry is in a "pronounced down cycle," says Wohl, conceding: "I've seen deals that we push in our shop that should never have come through the front door."

In arguing for better data sharing, he says the industry needs to create a national valuation registry, like MERS (Mortgage Electronic Registry Service); a national database where appraisal information would be attached to each file."

The mortgage industry spends $3 billion to $4 billion on appraisals, compared with $6 billion in fraud losses each year, figures Wohl, so "doesn't it makes sense to share that $3 billion of work product to help prevent that $6 billion in losses?"

Click here to read the complete Inman News Article.

Are real estate appraisals outmoded?

The real estate appraisal system is broken and needs to be fixed . . .according to Marcie Geffner, a real estate reporter in Los Angeles, and contributor to Inman News.  In her recent article Real estate appraisals are outmoded she says:

"The fundamental problem is the conflict of interest among the lender who selects the appraiser, the borrower who pays for the appraisal and the investor who relies on the adequacy of the appraiser's opinion. Lenders are in a powerful position to pressure the appraiser to "hit" pre-ordained numbers since, as a group, lenders don't suffer the consequences of inflated valuations. Rather, the loans are sold to investors, who have become so mesmerized by the prospect of high returns that they've willingly ignored the reality that too many of the loans are justified by fictional appraisals."

Offered as solutions to the problems, she suggests :

• Allowing buyers to directly select the appraiser and pay for the appraisal
• Using In-house appraisers that are employees of the lender
• More enforcement of current laws and increased regulatory audits
• Rethinking of "traditional" appraisal methods in favor of more sophisticated analysis.

See if you agree or disagree with her assessment of the appraisal industry and the direction it should take!  Click here for the complete article.