[Federal Register Volume 77, Number 172 (Wednesday, September 5, 2012)]
[Proposed Rules]
[Pages 54722-54775]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-20432]



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Vol. 77

Wednesday,

No. 172

September 5, 2012

Part III





Department of the Treasury





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Office of the Comptroller of the Currency





12 CFR Parts 34 and 164





Board of Governors of Federal Reserve System





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12 CFR Part 226





National Credit Union Administration





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12 CFR Part 722





Bureau of Consumer Financial Protection





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12 CFR Part 1026





Federal Housing Finance Agency





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12 CFR Part 1222





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Appraisals for Higher-Risk Mortgage Loans; Proposed Rule

  Federal Register / Vol. 77 , No. 172 / Wednesday, September 5, 2012 / 
Proposed Rules  

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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

12 CFR Part 1222

RIN 2590-AA58


Appraisals for Higher-Risk 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: Proposed rule; request for public comment.

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SUMMARY: The Board, Bureau, FDIC, FHFA, NCUA, and OCC (collectively, 
the Agencies) are proposing to amend Regulation Z, which implements the 
Truth in Lending Act (TILA), and the official interpretation to the 
regulation. The proposed revisions to Regulation Z would implement a 
new TILA provision requiring appraisals for ``higher-risk mortgages'' 
that was added to TILA as part of the Dodd-Frank Wall Street Reform and 
Consumer Protection Act. For mortgages with an annual percentage rate 
that exceeds the average prime offer rate by a specified percentage, 
the proposed rule would require 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.

DATES: Comments must be received on or before October 15, 2012, except 
that comments on the Paperwork Reduction Act analysis in part VIII of 
the Supplementary Information must be received on or before November 5, 
2012.

ADDRESSES: Interested parties are encouraged to submit written comments 
jointly to all of the Agencies. Commenters are encouraged to use the 
title ``Appraisals for Higher-Risk Mortgage Loans'' to facilitate the 
organization and distribution of comments among the Agencies. 
Commenters also are encouraged to identify the number of the specific 
question for comment to which they are responding. Interested parties 
are invited to submit written comments to:
    Board: You may submit comments, identified by Docket No. R-1443 or 
RIN 7100-AD90, by any of the following methods:
     Agency Web Site: http://www.federalreserve.gov. Follow the 
instructions for submitting comments at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
     Email: [email protected]. Include the 
docket number in the subject line of the message.
     Fax: (202) 452-3819 or (202) 452-3102.
     Mail: Address to Robert deV. Frierson, Secretary, Board of 
Governors of the Federal Reserve System, 20th Street and Constitution 
Avenue NW., Washington, DC 20551.
    All public comments will be made available on the Board's Web site 
at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as 
submitted, unless modified for technical reasons. Accordingly, comments 
will not be edited to remove any identifying or contact information. 
Public comments may also be viewed electronically or in paper in Room 
MP-500 of the Board's Martin Building (20th and C Streets, NW.) between 
9:00 a.m. and 5:00 p.m. on weekdays.
    Bureau: You may submit comments, identified by Docket No. CFPB-
2012-0031 or RIN 3170-AA11, by any of the following methods:
     Electronic: http://www.regulations.gov. Follow the 
instructions for submitting comments.
     Mail: Monica Jackson, Office of the Executive Secretary, 
Bureau of Consumer Financial Protection, 1700 G Street NW., Washington, 
DC 20552.
     Hand Delivery/Courier in Lieu of Mail: Monica Jackson, 
Office of the Executive Secretary, Bureau of Consumer Financial 
Protection, 1700 G Street NW., Washington, DC 20552.
    All submissions must include the agency name and docket number or 
Regulatory Information Number (RIN) for this rulemaking. In general, 
all comments received will be posted without change to http://www.regulations.gov. In addition, comments will be available for public 
inspection and copying at 1700 G Street NW., Washington, DC 20552, on 
official business days between the hours of 10 a.m. and 5 p.m. Eastern 
Time. You can make an appointment to inspect the documents by 
telephoning (202) 435-7275.
    All comments, including attachments and other supporting materials, 
will become part of the public record and subject to public disclosure. 
Sensitive personal information, such as account numbers or social 
security numbers, should not be included. Comments will not be edited 
to remove any identifying or contact information.
    FDIC: You may submit comments by any of the following methods:
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
     Agency Web site: http://www.FDIC.gov/regulations/laws/federal/propose.html
     Mail: Robert E. Feldman, Executive Secretary, Attention: 
Comments/Legal ESS, Federal Deposit Insurance Corporation, 550 17th 
Street NW., Washington, DC 20429.
     Hand Delivered/Courier: The guard station at the rear of 
the 550 17th Street Building (located on F Street), on business days 
between 7:00 a.m. and 5:00 p.m.
     Email: [email protected].
    Comments submitted must include ``FDIC'' and ``Truth in Lending Act 
(Regulation Z).'' Comments received will be posted without change to 
http://www.FDIC.gov/regulations/laws/federal/propose.html, including 
any personal information provided.
    FHFA: You may submit your comments, identified by regulatory 
information number (RIN) 2590-AA58, by any of the following methods:
     Email: Comments to Alfred M. Pollard, General Counsel, may 
be sent by email to [email protected]. Please include ``RIN 2590-
AA58'' in the subject line of the message.

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     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments. If you submit your 
comment to the Federal eRulemaking Portal, please also send it by email 
to FHFA at [email protected] to ensure timely receipt by the Agency. 
Please include ``RIN 2590-AA58'' in the subject line of the message.
     Hand Delivered/Courier: The hand delivery address is: 
Alfred M. Pollard, General Counsel, Attention: Comments/RIN 2590-AA58, 
Federal Housing Finance Agency, Eighth Floor, 400 Seventh Street SW., 
Washington, DC 20024. The package should be logged in at the Guard 
Desk, First Floor, on business days between 9 a.m. and 5 p.m.
     U.S. Mail, United Parcel Service, Federal Express, or 
Other Mail Service: The mailing address for comments is: Alfred M. 
Pollard, General Counsel, Attention: Comments/RIN 2590-AA58, Federal 
Housing Finance Agency, Eighth Floor, 400 Seventh Street SW., 
Washington, DC 20024.
    Copies of all comments will be posted without change, including any 
personal information you provide, such as your name, address, and phone 
number, on the FHFA Internet Web site at http://www.fhfa.gov. In 
addition, copies of all comments received will be available for 
examination by the public on business days between the hours of 10 a.m. 
and 3 p.m., Eastern Time, at the Federal Housing Finance Agency, Eighth 
Floor, 400 Seventh Street SW., Washington, DC 20024. To make an 
appointment to inspect comments, please call the Office of General 
Counsel at (202) 649-3804.
    NCUA: You may submit comments, identified by RIN 3133-AE04, by any 
of the following methods (Please send comments by one method only):
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
     NCUA Web Site: http://www.ncua.gov/Legal/Regs/Pages/PropRegs.aspx. Follow the instructions for submitting comments.
     Email: Address to [email protected]. Include ``[Your 
name] Comments on Appraisals for High Risk Mortgage Loans'' in the 
email subject line.
     Fax: (703) 518-6319. Use the subject line described above 
for email.
     Mail: Address to Mary Rupp, Secretary of the Board, 
National Credit Union Administration, 1775 Duke Street, Alexandria, 
Virginia 22314-3428.
     Hand Delivery/Courier in Lieu of Mail: Same as mail 
address.
    You can view all public comments on NCUA's Web site at http://www.ncua.gov/Legal/Regs/Pages/PropRegs.aspx as submitted, except for 
those we cannot post for technical reasons. NCUA will not edit or 
remove any identifying or contact information from the public comments 
submitted. You may inspect paper copies of comments in NCUA's law 
library at 1775 Duke Street, Alexandria, Virginia 22314, by appointment 
weekdays between 9:00 a.m. and 3:00 p.m. To make an appointment, call 
(703) 518-6546 or send an email to [email protected].
    OCC: Because paper mail in the Washington, DC area and at the OCC 
is subject to delay, commenters are encouraged to submit comments by 
the Federal eRulemaking Portal or email, if possible. Please use the 
title ``Appraisals for Higher-Risk Mortgage Loans'' to facilitate the 
organization and distribution of the comments. You may submit comments 
by any of the following methods:
     Federal eRulemaking Portal--``regulations.gov'': Go to 
http://www.regulations.gov. Click ``Advanced Search''. Select 
``Document Type'' of ``Proposed Rule'', and in ``By Keyword or ID'' 
box, enter Docket ID ``OCC-2012-0013'', and click ``Search''. If 
proposed rules for more than one agency are listed, in the ``Agency'' 
column, locate the notice of proposed rulemaking for the OCC. Comments 
can be filtered by Agency using the filtering tools on the left side of 
the screen. In the ``Actions'' column, click on ``Submit a Comment'' or 
``Open Docket Folder'' to submit or view public comments and to view 
supporting and related materials for this rulemaking action. Click on 
the ``Help'' tab on the Regulations.gov home page to get information on 
using Regulations.gov, including instructions for submitting or viewing 
public comments, viewing other supporting and related materials, and 
viewing the docket after the close of the comment period.
     Email: [email protected].
     Mail: Office of the Comptroller of the Currency, 250 E 
Street SW., Mail Stop 2-3, Washington, DC 20219.
     Fax: (202) 874-5274.
     Hand Delivery/Courier: 250 E Street SW., Mail Stop 2-3, 
Washington, DC 20219.
    You must include ``OCC'' as the agency name and ``Docket ID OCC-
2012-0013'' in your comment. In general, OCC will enter all comments 
received into the docket and publish them on the Regulations.gov Web 
site without change, including any business or personal information 
that you provide such as name and address information, email addresses, 
or phone numbers. Comments received, including attachments and other 
supporting materials, are part of the public record and subject to 
public disclosure. Do not enclose any information in your comment or 
supporting materials that you consider confidential or inappropriate 
for public disclosure.
    You may review comments and other related materials that pertain to 
this notice of proposed rulemaking by any of the following methods:
     Viewing Comments Electronically: Go to http://www.regulations.gov. Click ``Advanced Search''. Select ``Document 
Type'' of ``Public Submission'', and in ``By Keyword or ID'' box enter 
Docket ID ``OCC-2012-0013'', and click ``Search''. If comments from 
more than one agency are listed, the ``Agency'' column will indicate 
which comments were received by the OCC. Comments can be filtered by 
Agency using the filtering tools on the left side of the screen.
     Viewing Comments Personally: You may personally inspect 
and photocopy comments at the OCC, 250 E Street SW., Washington, DC. 
For security reasons, the OCC requires that visitors make an 
appointment to inspect comments. You may do so by calling (202) 874-
4700. Upon arrival, visitors will be required to present valid 
government-issued photo identification and to submit to security 
screening in order to inspect and photocopy comments.
    You may also view or request available background documents and 
project summaries using the methods described above.

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 Banking Supervision and Regulation, at 
(202) 973-6122, Board of Governors of the Federal Reserve System, 
Washington, DC 20551.
    Bureau: Michael Scherzer or John Brolin, Counsels, or William W. 
Matchneer, Senior Counsel, Division of Research, Markets, and 
Regulations, Bureau of Consumer Financial Protection, 1700 G Street 
NW., 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, Mark Mellon, Counsel, Legal Division, at (202) 898-
3884, or Kimberly Stock,

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Counsel, Legal Division, at (202) 898-3815, or 550 17th St NW., 
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, or Ming-Yuen Meyer-Fong, Assistant General Counsel, Office of 
General Counsel, (202) 649-3078, Federal Housing Finance Agency, 400 
Seventh Street SW., Washington, DC 20024.
    NCUA: Chrisanthy Loizos 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) 874-5411, 
Carolyn B. Engelhardt, Bank Examiner (Risk Specialist--Credit), (202) 
874-4917, Charlotte M. Bahin, Senior Counsel or Mitchell Plave, Special 
Counsel, Legislative & Regulatory Activities Division, (202) 874-5090, 
Krista LaBelle, Counsel, Community and Consumer Law, (202) 874-5750.

SUPPLEMENTARY INFORMATION:

I. Overview

    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, among other things, 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 
purposes of TILA, or prevent circumvention or evasion of TILA.\1\ 15 
U.S.C. 1604(a). TILA is implemented by the Bureau's Regulation Z, 12 
CFR part 1026, and the Board's Regulation Z, 12 CFR part 226. Official 
Interpretations provide guidance to creditors in applying the rules to 
specific transactions and interprets the requirements of the 
regulation. See 12 CFR parts 226, Supp. I, and 1026, Supp. I.
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    \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).
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    On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer 
Protection Act (the Dodd-Frank Act) \2\ was signed into law. Section 
1471 of the Dodd-Frank Act establishes a new TILA section 129H, which 
sets forth appraisal requirements applicable to ``higher-risk 
mortgages.'' Specifically, new TILA section 129H does not permit a 
creditor to extend credit in the form of a higher-risk mortgage loan to 
any consumer without first:
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    \2\ Public Law 111-203, 124 Stat. 1376.
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     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 purpose of the higher-risk 
mortgage loan is to finance the purchase or acquisition of a mortgaged 
property from a seller within 180 days of the purchase or acquisition 
of the property by that seller at a price that was lower than the 
current sale price of the property. 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.
     Providing 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.
     Providing 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 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 such 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 such 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); and
     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, as well as 
reverse mortgage loans that are qualified mortgages as defined in TILA 
section 129C.
    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 to jointly 
prescribe regulations to implement the property appraisal requirements 
for higher-risk mortgages. 15 U.S.C. 1639h(b)(4)(A). Section 1400 of 
the Dodd-Frank Act requires that final regulations to implement these 
provisions be issued by January 21, 2013.

II. Summary of the Proposed Rule

    The Agencies issue this proposal to implement the appraisal 
requirements for extensions of credit for ``higher-risk mortgage 
loans'' required by the Dodd-Frank Act, Title XIV, Subtitle F 
(Appraisal Activities). As required by the Act, this proposal was 
developed jointly by the Board, the Bureau, the FHFA, the FDIC, the 
NCUA, and the OCC. The Act generally defines a ``higher-risk mortgage'' 
as 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 currently in 
Regulation Z for ``higher-priced mortgage loans,'' a category of loans 
to which special consumer protections

[[Page 54725]]

apply.\3\ In general, loans are ``higher-risk mortgage loans'' under 
this proposed rule if the APR exceeds the APOR by 1.5 percent for 
first-lien loans, 2.5 percent for first-lien jumbo loans, and 3.5 
percent for subordinate-lien loans.\4\
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    \3\ Added to Regulation Z by the Board pursuant to the Home 
Ownership and Equity Protection Act of 1994 (HOEPA), the ``higher-
priced mortgage loan'' rules address unfair or deceptive practices 
in connection with subprime mortgages. See 73 FR 44522, July 30, 
2008; 12 CFR 1026.35.
    \4\ The ``higher-priced mortgage loan'' 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).
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    Consistent with the statute, the proposal would exclude ``qualified 
mortgages'' from the definition of higher-risk mortgage loan. The 
Bureau will define ``qualified mortgage'' when it finalizes the 
proposed rule issued by the Board to implement the Dodd-Frank Act's 
ability-to-repay requirements in TILA section 129C. 15 U.S.C. 1639c; 76 
FR 27390, May 11, 2011 (2011 ATR Proposal). In addition, the Agencies 
propose to rely on exemption authority granted by the Dodd-Frank Act to 
exempt the following additional classes of loans: (1) reverse mortgage 
loans; and (2) loans secured solely by residential structures, such as 
many types of manufactured homes.
    Consistent with the statute, the proposal would allow a creditor to 
make a higher-risk mortgage loan only if the following conditions are 
met:
     The creditor obtains a written appraisal;
     The appraisal is performed by a certified or licensed 
appraiser;
     The appraiser conducts a physical property visit of the 
interior of the property;
     At application, the applicant is 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 at the expense of the 
applicant; and
     The creditor provides the consumer with a free copy of any 
written appraisals obtained for the transaction at least three (3) 
business days before closing.
    In addition, as required by the Act, the proposal would require a 
higher-risk mortgage loan creditor to obtain an additional written 
appraisal, at no cost to the borrower, under the following 
circumstances:
     The higher-risk mortgage loan will finance the acquisition 
of the consumer's principal dwelling;
     The seller is selling what will become the consumer's 
principal dwelling acquired the home within 180 days prior to the 
consumer's purchase agreement (measured from the date of the consumer's 
purchase agreement); and
     The consumer is acquiring the home for a higher price than 
the seller paid, although comment is requested on whether a threshold 
price increase would be appropriate.
    The additional written appraisal, from a different licensed or 
certified appraiser, generally must include the following information: 
an analysis of the difference in sale prices (i.e., the sale price paid 
by the seller and the acquisition price of the property as set forth in 
the consumer's purchase agreement), changes in market conditions, and 
any improvements made to the property between the date of the previous 
sale and the current sale.
    The proposal also includes a request for comments to address a 
proposed amendment to the method of calculation of the APR that is 
being proposed as part of other mortgage-related proposals issued for 
comment by the Bureau. In the Bureau's proposal to integrate mortgage 
disclosures (2012 TILA-RESPA Proposal), the Bureau is proposing to 
adopt a more simple and inclusive finance charge calculation for 
closed-end credit secured by real property or a dwelling.\5\ As the 
finance charge is integral to the calculation of the APR, the Agencies 
believe it is possible that a more inclusive finance charge could 
increase the number of loans covered by this rule. The Agencies note 
that the Bureau currently is seeking data to assist in assessing 
potential impacts of a more inclusive finance charge in connection with 
the 2012 TILA-RESPA Proposal and its proposal to implement the Dodd-
Frank Act provision related to ``high-cost mortgages'' (2012 HOEPA 
Proposal).\6\
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    \5\ See 2012 TILA-RESPA Proposal, pp. 101-127, 725-28, 905-11 
(published July 9, 2012), available at http://files.consumerfinance.gov/f/201207_cfpb_proposed-rule_integrated-mortgage-disclosures.pdf.
    \6\ See 2012 HOEPA Proposal, pp. 44, 149-211 (published July 9, 
2012), available at http://files.consumerfinance.gov/f/201207_cfpb_proposed-rule_high-cost-mortgage-protections.pdf.
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    The Agencies also note that the Bureau is seeking comment on 
whether replacing APR with an alternative metric may be warranted to 
determine whether a loan is covered by the 2012 HOEPA Proposal,\7\ as 
well as by the proposal to implement the Dodd-Frank Act's escrow 
requirements in TILA section 129D. 15 U.S.C. 1639d; 76 FR 11598, March 
2, 2011 (2011 Escrow Proposal). The alternative metric would also have 
implications for the 2011 ATR Proposal. One possible alternative metric 
discussed in those proposals is the ``transaction coverage rate'' 
(TCR), which would exclude all prepaid finance charges not retained by 
the creditor, a mortgage broker, or an affiliate of either.\8\ The new 
rate triggers for both ``high-cost mortgages'' and ``higher-risk 
mortgages'' under the Dodd-Frank Act are based on the percentage by 
which the APR exceeds APOR. Given this similarity, the Agencies also 
seek comment as to whether a modification should be considered for this 
rule as well, and if so, what type of modification. Accordingly, 
higher-risk mortgage loan is defined in the alternative as calculated 
by either the TCR or APR, with comment sought on both approaches. As 
explained further below in the section-by-section analysis of the 
Supplementary Information, the Agencies are relying on their exemption 
authority under section 1471 of the Dodd-Frank Act to propose an 
alternative definition of higher-risk mortgage. TILA section 
129H(b)(4)(B), 15 U.S.C. 1639h(b)(4)(B).
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    \7\ See 2012 HOEPA Proposal at 39-50, 218, 246.
    \8\ See 75 FR 58539, 58660-62 (Sept. 24, 2010); 76 FR 11598, 
11609, 11620, 11626 (March 2, 2011).
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III. Legal Authority

    As noted above, TILA section 129H(b)(4)(A), added by the Dodd-Frank 
Act, requires the Agencies to jointly prescribe regulations 
implementing section 129H. 15 U.S.C. 1639h(b)(4)(A). In addition, TILA 
section 129H(b)(4)(B), grants the Agencies the authority to jointly 
exempt, by rule, a class of loans from the requirements of TILA section 
129H(a) or section 129H(b) if the Agencies determine that the exemption 
is in the public interest and promotes the safety and soundness of 
creditors. 15 U.S.C. 1639h(b)(4)(B).

IV. Section-by-Section Analysis

    For ease of reference, the Supplementary Information refers to the 
section numbers of the rules that would be published in the Bureau's 
Regulation Z at 12 CFR 1026.XX. As explained further in the section-by-
section analysis of Sec.  1026.XX(e), the rules would be published 
separately by the Board, the Bureau and the OCC. No substantive 
difference among the three sets of rules is intended. The NCUA and FHFA 
propose to adopt the rules as published in the Bureau's Regulation Z at 
12 CFR 1026.XX, by cross-referencing these rules in 12 CFR 722.3 and 12 
CFR part 1222, respectively. The FDIC proposes to not cross-reference 
the Bureau's Regulation Z at 12 CFR 1026.XX.

[[Page 54726]]

Section 1026.XX Appraisals for Higher-Risk Mortgage Loans

XX(a) Definitions
    Proposed Sec.  1026.XX(a) sets forth four definitions, discussed 
below, for purposes of Sec.  1026.XX. The Agencies request comment on 
whether additional terms should be defined for purposes of this rule, 
and how best to define those terms in a manner consistent with TILA 
section 129H.
XX(a)(1) Certified or Licensed Appraiser
    TILA section 129H(b)(3) defines ``certified or licensed appraiser'' 
as a person who ``(A) is, at a minimum, certified or licensed by the 
State in which the property to be appraised is located; and (B) 
performs each appraisal in conformity with the Uniform Standards of 
Professional Appraisal Practice and title XI of the Financial 
Institutions Reform, Recovery, and Enforcement Act of 1989, and the 
regulations prescribed under such title, as in effect on the date of 
the appraisal.'' 15 U.S.C. 1639h(b)(3). Consistent with the statute, 
proposed Sec.  1026.XX(a)(1) would define ``certified or licensed 
appraiser'' as a person who is certified or licensed by the State 
agency in the State in which the property that secures the transaction 
is located, and who performs the appraisal in conformity with the 
Uniform Standards of Professional Appraisal Practice (USPAP) and the 
requirements applicable to appraisers in title XI of the Financial 
Institutions Reform, Recovery, and Enforcement Act of 1989, as amended 
(FIRREA title XI) (12 U.S.C. 3331 et seq.), and any implementing 
regulations, in effect at the time the appraiser signs the appraiser's 
certification.
    Proposed Sec.  1026.XX(a)(1) generally mirrors the statutory 
language in TILA section 129H(b)(3) regarding State licensing and 
certification. However, the proposed definition uses the defined term 
``State agency'' to clarify that the appraiser must be certified or 
licensed by a State agency that meets the standards of FIRREA title XI. 
Specifically, proposed Sec.  1026.XX(a)(4) defines the term ``State 
agency'' to mean a ``State appraiser certifying and licensing agency'' 
recognized in accordance with section 1118(b) of FIRREA title XI (12 
U.S.C. 3347(b)) and any implementing regulations.\9\ See also section-
by-section analysis of Sec.  1026.XX(a)(4), below.
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    \9\ If the Appraisal Subcommittee of the Federal Financial 
Institutions Examination Council issues certain written findings 
concerning, among other things, a State agency's failure to 
recognize and enforce FIRREA title XI standards, appraiser 
certifications and licenses issued by that State are not recognized 
for purposes of title XI and appraisals performed by appraisers 
certified or licensed by that State are not acceptable for 
federally-related transactions. 12 U.S.C. 3347(b).
---------------------------------------------------------------------------

Uniform Standards of Professional Appraisal Practice (USPAP)
    Proposed Sec.  1026.XX(a)(1) uses the term ``Uniform Standards of 
Professional Appraisal Practice.'' Proposed comment XX(a)(1)-1 
clarifies that USPAP refers to the professional appraisal standards 
established by the Appraisal Standards Board of the ``Appraisal 
Foundation,'' as defined in FIRREA section 1121(9). 12 U.S.C. 3350(9). 
The Agencies believe that this terminology is appropriate for 
consistency with the existing definition in FIRREA title XI.
    TILA section 129H(b)(3) would require that the appraisal be 
performed in conformity with USPAP ``as in effect on the date of the 
appraisal.'' 15 U.S.C. 1639h(b)(3). The proposed definition of 
``certified or licensed appraiser'' and proposed comment XX(a)(1)-1 
clarify that the ``date of appraisal'' is the date on which the 
appraiser signs the appraiser's certification. Thus, the relevant 
edition of USPAP is the one in effect at the time the appraiser signs 
the appraiser's certification.
    Appraiser's certification. Proposed comment XX(a)(1)-2 clarifies 
that the term ``appraiser's certification'' refers to the certification 
that must be signed by the appraiser for each appraisal assignment as 
specified in USPAP Standards Rule 2-3.\10\
---------------------------------------------------------------------------

    \10\ See Appraisal Standards Bd., Appraisal Fdn., Standards Rule 
2-3, USPAP (2012-2013 ed.) at U-29, available at http://www.uspap.org.
---------------------------------------------------------------------------

FIRREA and Implementing Regulations
    As previously noted, TILA section 129H(b)(3) defines ``certified or 
licensed appraiser'' as a person who is certified or licensed as an 
appraiser and ``performs each appraisal in accordance with [USPAP] and 
title XI of [FIRREA], and the regulations prescribed under such title, 
as in effect on the date of the appraisal.'' 15 U.S.C. 1639h(b)(3). 
Proposed Sec.  1026.XX(a)(1) provides that the relevant provisions of 
FIRREA title XI and its implementing regulations are those selected 
portions of FIRREA title XI requirements ``applicable to appraisers,'' 
in effect at the time the appraiser signs the appraiser's 
certification. As discussed in more detail below, proposed comment 
XX(a)(1)-3 clarifies that the relevant standards ``applicable to 
appraisers'' are found in regulations prescribed under FIRREA section 
1110 (12 U.S.C. 3339) ``that relate to an appraiser's development and 
reporting of the appraisal,'' but not those that relate to the review 
of the appraisal under paragraph (3) of FIRREA section 1110.
    Section 1110 of FIRREA directs each Federal financial institutions 
regulatory agency (i.e., each Federal banking agency \11\) to prescribe 
``appropriate standards for the performance of real estate appraisals 
in connection with federally related transactions under the 
jurisdiction of each such agency or instrumentality.'' 12 U.S.C. 3339. 
These standards must require, at a minimum--(1) that real estate 
appraisals be performed in accordance with generally accepted appraisal 
standards as evidenced by the appraisal standards promulgated by the 
Appraisal Standards Board of the Appraisal Foundation; and (2) that 
such appraisals shall be written appraisals. 12 U.S.C. 3339(1) and (2). 
The Dodd-Frank Act added a third standard--that real estate appraisals 
be subject to appropriate review for compliance with USPAP--for which 
the Federal banking agencies must prescribe implementing regulations. 
FIRREA section 1110(3), 12 U.S.C. 3339(3). FIRREA section 1110 also 
provides that each Federal banking agency may require compliance with 
additional standards if the agency determines in writing that 
additional standards are required to properly carry out its statutory 
responsibilities. 12 U.S.C. 3339. Accordingly, the Federal banking 
agencies have prescribed appraisal regulations implementing FIRREA 
title XI that set forth, among other requirements, minimum standards 
for the performance of real estate appraisals in connection with 
``federally related transactions,'' which are defined as real estate-
related financial transactions that a Federal banking agency engages 
in, contracts for, or regulates, and that require the services of an 
appraiser.\12\ 12 U.S.C. 3339, 3350(4).
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    \11\ The Federal banking agencies are the Board, the FDIC, the 
OCC, and the NCUA.
    \12\ See OCC: 12 CFR part 34, Subpart C; FRB: 12 CFR part 208, 
subpart E, and 12 CFR part 225, subpart G; FDIC: 12 CFR part 323; 
and NCUA: 12 CFR part 722.
---------------------------------------------------------------------------

    The Agencies are proposing to interpret the ``certified or licensed 
appraiser'' definition in TILA section 129H(b)(3) to incorporate 
provisions of the Federal banking agencies' requirements in FIRREA 
title XI and implementing regulations ``applicable to appraisers,'' 
which the Agencies have clarified through proposed comment XX(a)(1)-3 
as the regulations that ``relate to an appraiser's development and 
reporting of the appraisal.'' While the Federal banking agencies' 
requirements, pursuant to this authority

[[Page 54727]]

and their authority to establish safety and soundness regulations, 
apply to an institution's ordering and review of an appraisal, the 
Agencies propose that the definition of ``certified or licensed 
appraiser'' incorporate only FIRREA title XI's minimum standards 
related to the appraiser's performance of the appraisal.
    The Agencies propose this interpretation on the grounds that it is 
consistent with TILA section 129H. 15 U.S.C. 1639h. Congress included 
language requiring that appraisals be performed in conformity with 
FIRREA within the definition of ``certified or licensed appraiser'' 
under TILA section 129H(b)(3). 15 U.S.C. 1639h(b)(3). Thus, the 
Agencies believe that Congress intended to limit FIRREA's requirements 
to those that apply to the appraiser's performance of the appraisal, 
rather than the FIRREA requirements that apply to a creditor's ordering 
and review of the appraisal.
    Proposed comment XX(a)(1)-3 would also clarify that the 
requirements of FIRREA section 1110(3) that relate to the ``appropriate 
review'' of appraisals are not relevant for purposes of whether an 
appraiser is a certified or licensed appraiser under proposed Sec.  
1026.XX(a)(1). The Agencies do not propose to interpret ``certified or 
licensed appraiser'' to include regulations related to appraisal review 
under FIRREA section 1110(3) because these requirements relate to an 
institution's responsibilities after receiving the appraisal, rather 
than to how the certified or licensed appraiser performs the appraisal.
    The Agencies recognize that FIRREA title XI applies by its terms to 
``federally related transactions'' involving a narrower category of 
institutions than the group of lenders that fall within TILA's 
definition of ``creditor.'' \13\ However, by cross-referencing FIRREA 
in the definition of ``certified or licensed appraiser,'' the Agencies 
believe that Congress intended all creditors that extend higher-risk 
mortgage loans, such as independent mortgage banks, to obtain 
appraisals from appraisers who conform to the standards in FIRREA 
related to the development and reporting of the appraisal.
---------------------------------------------------------------------------

    \13\ TILA section 103(g), 15 U.S.C. 1602(g) (implemented by 
Sec.  1026.2(a)(17)).
---------------------------------------------------------------------------

    Question 1: The Agencies invite comment on this interpretation. For 
example, do commenters believe that Congress intended that FIRREA title 
XI requirements would only apply to the subset of higher-risk mortgage 
loans that are already covered by FIRREA (i.e., federally related 
transactions with a transaction value greater than $250,000 not 
otherwise exempted from FIRREA's appraisal requirements \14\)? If so, 
do commenters believe the longstanding existence of USPAP Advisory 
Opinion 30 lends support to this approach? \15\
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    \14\ Under title XI of FIRREA, the Federal banking agencies were 
granted the authority to identify categories of real estate-related 
financial transactions that do not require the services of an 
appraiser to protect Federal financial and public policy interests 
or to satisfy principles of safe and sound lending (e.g., 
transactions with a transaction value equal to or less than $250,000 
do not require the services of an appraiser under the Federal 
banking agencies' regulations). For a discussion of these regulatory 
exemptions, see Interagency Appraisal and Evaluation Guidelines, 75 
FR 77450, 77465-68 (Dec. 10, 2010).
    \15\ USPAP Advisory Opinion 30 is a long-standing advisory 
opinion issued by the Appraisal Standards Board of the Appraisal 
Foundation, which holds that USPAP creates an obligation for 
appraisers to recognize and adhere to applicable assignment 
conditions, including, for federally related transactions, FIRREA 
title XI and the regulations prescribed under such title. See 
Appraisal Standards Bd., Appraisal Fdn., Advisory Op. 30, available 
at http://www.uspap.org.
---------------------------------------------------------------------------

    The Agencies have not identified specific FIRREA regulations that 
relate to the appraiser's development and reporting of the appraisal. 
The Federal banking agencies' regulations implementing title XI of 
FIRREA include ``minimum standards'' requiring, for example, that the 
appraisal be based on the definition of market value in their 
regulations,\16\ and that appraisals be performed by State-licensed or 
certified appraisers in accordance with their FIRREA regulations. The 
Federal banking agencies' regulations also include standards on 
``appraiser independence,'' including that the appraiser not have a 
direct or indirect interest, financial or otherwise, in the property 
being appraised.
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    \16\ The Federal banking agencies' appraisal regulations define 
``market value'' to mean the most probable price which a property 
should bring in a competitive and open market under all conditions 
requisite to a fair sale, the buyer and seller each acting prudently 
and knowledgeably, and assuming the price is not affected by undue 
stimulus. See OCC: 12 CFR 34.42(g); FDIC: 12 CFR 323.2(g); FRB: 12 
CFR 225.62(g); and NCUA: 12 CFR 722.2(g). Implicit in this 
definition is the consummation of a sale as of a specified date and 
the passing of title from seller to buyer under conditions whereby--
(1) buyer and seller are typically motivated; (2) both parties are 
well informed or well advised, and acting in what they consider 
their own best interest; (3) a reasonable time is allowed for 
exposure in the open market; (4) payment is made in terms of cash in 
U.S. dollars or in terms of financial arrangements comparable 
thereto; and (5) the price represents the normal consideration for 
the property sold unaffected by special or creative financing or 
sales concessions granted by anyone associated with the sale. Id.
---------------------------------------------------------------------------

    Question 2: The Agencies request comment on whether a final rule 
should address any particular FIRREA requirements applicable to 
appraisers related to the development and reporting of the appraisal.
    ``Certified'' versus ``licensed'' appraiser. Neither TILA section 
129H nor the proposed rule defines the individual terms ``certified 
appraiser'' and ``licensed appraiser,'' or specifies when a certified 
appraiser or a licensed appraiser must be used. Instead, the proposed 
rule, consistent with paragraphs (b)(1) and (b)(2) of TILA section 
129H, would require that creditors obtain an appraisal performed by ``a 
certified or licensed appraiser.'' See proposed Sec.  1026.XX(a)(1); 15 
U.S.C. 1639h(b)(1), (b)(2). Certified and licensed appraisers generally 
differ based on the examination, education, and experience requirements 
necessary to obtain each credential. Existing State and Federal law and 
regulations require the use of a certified appraiser rather than a 
licensed appraiser for certain types of transactions. For example, the 
Federal banking agencies' FIRREA appraisal regulations define ``State 
certified appraiser'' \17\ and ``State licensed appraiser,'' \18\ and 
specify the use of a certified appraiser based on the complexity of the 
residential property and the dollar amount of the transaction.\19\ 
Several State agencies do not issue licensed appraiser credentials and 
issue different certified appraiser credentials (i.e., a certified 
residential appraiser and a certified general appraiser) based on the 
type of property.
---------------------------------------------------------------------------

    \17\ See OCC: 12 CFR 34.42(j); FDIC: 12 CFR 323.2(j); FRB: 12 
CFR 225.62(j); and NCUA: 12 CFR 722.2(j).
    \18\ See OCC: 12 CFR 34.42(k); FDIC: 12 CFR 323.2(k); FRB: 12 
CFR 225.62(k); and NCUA: 12 CFR 722.2(k).
    \19\ For example, the Federal banking agencies' appraisal 
regulations require that a ``State certified appraiser'' be used for 
``[a]ll federally related transactions having a transaction value of 
$1,000,000 or more'' and for ``[a]ll complex 1-to 4 family 
residential property appraisals rendered in connection with 
federally related transactions * * * if the transaction value is 
$250,000 or more.'' See, e.g., OCC: 12 CFR 34.43(d).
---------------------------------------------------------------------------

    Question 3: The Agencies request comment on whether the rule should 
address the issue of when a creditor must use a certified appraiser 
rather than a licensed appraiser.
    Further, the proposed rule does not specify competency standards. 
In selecting an appraiser for a particular appraisal assignment, 
creditors typically consider an appraiser's experience, knowledge, and 
educational background to determine the individual's competency to 
appraise a particular property and in a particular market. The 
Competency Rule in USPAP requires appraisers to determine, prior to 
accepting an assignment, that they can perform the assignment 
competently.

[[Page 54728]]

See USPAP, Competency Rule.\20\ The Federal banking agencies' FIRREA 
appraisal regulations provide that a State certified or licensed 
appraiser may not be considered competent solely by virtue of being 
certified or licensed.\21\
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    \20\ See Appraisal Standards Bd., Appraisal Fdn., Competency 
Rule, USPAP (2012-2013 ed.) at U-11.
    \21\ See OCC: 12 CFR 34.46(b); FDIC: 12 CFR 323.6(b); FRB: 12 
CFR 225.66(b); and NCUA: 12 CFR 722.6(b).
---------------------------------------------------------------------------

    Question 4: The Agencies request comment on whether the rule should 
address the issue of appraiser competency.
    The Agencies acknowledge that creditors not otherwise subject to 
FIRREA title XI may have questions about how to comply with the 
requirement to obtain an appraisal from a ``certified or licensed 
appraiser'' who performs an appraisal in conformity with the 
requirements applicable to appraisers in title XI of FIRREA and any 
implementing regulations. The Agencies also note that all creditors, 
including those already subject to FIRREA, may have questions about how 
FIRREA regulations relating to the development and reporting of the 
appraisal may be interpreted for purposes of applying TILA's civil 
liability provisions, see TILA section 139, 15 U.S.C. 1640, including 
the liability provision for willful failures to obtain an appraisal as 
required by TILA section 129H. See TILA section 129H(e), 15 U.S.C. 
1639h(e). To address these concerns, the Agencies are proposing a safe 
harbor for compliance with TILA section 129H at Sec.  1026.XX(b)(2). 
See the section-by-section analysis of proposed Sec.  1026.XX(b)(2), 
below.
XX(a)(2) Higher-Risk Mortgage Loans
    New TILA section 129H(f) defines a ``higher-risk mortgage'' as a 
residential mortgage loan secured by a principal dwelling with an APR 
that exceeds the APOR for a comparable transaction by a specified 
percentage as of the date the interest rate is set. 15 U.S.C. 1639(f). 
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).
    Proposed Sec.  1026.XX(a)(2) would define the term ``higher-risk 
mortgage loan'' for purposes of Sec.  1026.XX. Consistent with TILA 
sections 129H(f) and 103(cc)(5), proposed Sec.  1026.XX(a)(2)(i) 
provides that a ``higher-risk mortgage loan'' is a closed-end consumer 
credit transaction secured by the consumer's principal dwelling with an 
APR that exceeds the APOR for a comparable transaction as of the date 
the interest rate is set by a specified percentage depending on the 
type of transaction. The proposed rule uses the phrase ``a closed-end 
consumer credit transaction secured by the consumer's principal 
dwelling'' in place of the statutory term ``residential mortgage loan'' 
throughout Sec.  1026.XX(a)(2). The Agencies have elected to 
incorporate the substantive elements of the statutory definition of 
``residential mortgage loan'' into the proposed definition of ``higher-
risk mortgage loan'' rather than using the term itself to avoid 
inadvertent confusion of the term ``residential mortgage loan'' with 
the term ``residential mortgage transaction,'' which is an established 
term used throughout Regulation Z and defined in Sec.  1026.2(a)(24). 
Compare 15 U.S.C. 1602(cc)(5) (defining ``residential mortgage loan'') 
with 12 CFR 1026.2(a)(24) (defining ``residential mortgage 
transaction''). Accordingly, the proposed regulation text differs from 
the express statutory language, but with no intended substantive change 
to the scope of TILA section 129H.
Principal Dwelling
    Proposed comment XX(a)(2)(i)-1 clarifies that, consistent with 
other sections of Regulation Z, under proposed Sec.  1026.XX(a)(2)(i) a 
consumer can have only one principal dwelling at a time. Proposed 
comment XX(a)(2)(i)-1 states that the term ``principal dwelling'' has 
the same meaning as in Sec.  1026.2(a)(24), and expressly cross 
references existing comment 2(a)(24)-3, which further explains the 
meaning of the term. Consistent with this comment, a vacation home or 
other second home would not be a principal dwelling. However, if a 
consumer buys or builds a new dwelling that will become the consumer's 
principal dwelling within a year or upon the completion of 
construction, the proposed comment clarifies that the new dwelling is 
considered the principal dwelling.

Average Prime Offer Rate

    Proposed comment XX(a)(2)(i)-2 would cross-reference existing 
comment 35(a)(2)-1 for guidance on APORs. Existing comment 35(a)(2)-1 
clarifies that APORs are APRs derived from average interest rates, 
points, and other loan pricing terms currently offered to consumers by 
a representative sample of creditors for mortgage transactions that 
have low-risk pricing characteristics. Other pricing terms include 
commonly used indices, margins, and initial fixed-rate periods for 
variable-rate transactions. Relevant pricing characteristics include a 
consumer's credit history and transaction characteristics such as the 
loan-to-value ratio, owner-occupant status, and purpose of the 
transaction. Currently, to obtain APORs, the Board, which currently 
publishes the APORs, uses a survey of creditors that both meets the 
criteria of Sec.  1026.35(a)(2) and provides pricing terms for at least 
two types of variable rate transactions and at least two types of non-
variable rate transactions. An example of such a survey, and the survey 
that is currently used to calculate APORs, is the Freddie Mac Primary 
Mortgage Market Survey.[supreg] As of the date of this proposed rule, 
the table of APORs is published by the Board; however, the Bureau will 
assume the responsibility for publishing all of the elements of the 
table in the future.
Comparable Transaction
    Proposed comment XX(a)(2)(i)-3 cross-references guidance in 
existing comments 35(a)(2)-2 and 35(a)(2)-4 regarding how to identify 
the ``comparable transaction'' in determining whether a transaction 
meets the definition of a ``higher-risk mortgage loan'' under Sec.  
1026.XX(a)(2)(i). As these comments indicate, the table of APORs 
published by the Bureau will provide guidance to creditors in 
determining how to use the table to identify which APOR is applicable 
to a particular mortgage transaction. Consistent with the Board's 
current practices, the Bureau intends to publish on the internet, in 
table form, APORs for a wide variety of mortgage transaction types 
based on available information. For example, the Board publishes a 
separate APOR for at least two types of variable rate transactions and 
at least two types of non-variable rate transactions. APORs are APRs 
derived from average interest rates, points and other loan pricing 
terms currently offered to consumers by a representative sample of 
creditors for mortgage transactions that have low-risk pricing 
characteristics. Currently, the Board calculates an APR, consistent 
with Regulation Z (see 12 CFR 1026.22 and appendix J to part 1026), for 
each transaction type for which pricing terms are available from a 
survey, and estimates APRs for other types of transactions for which 
direct survey data are not available based on the loan pricing terms 
available in the survey and other information. However, data are not 
available for some types of mortgage transactions, including reverse 
mortgages. In addition, the Board publishes on the internet the

[[Page 54729]]

methodology it uses to arrive at these estimates.\22\
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    \22\ See http://www.ffiec.gov/ratespread/newcalchelp.aspx#9.
---------------------------------------------------------------------------

Date APR is Set

    Proposed comment XX(a)(2)(i)-4 would cross-reference existing 
comment 35(a)(2)-3 for guidance on the date the APR is set. Existing 
comment 35(a)(2)-3 clarifies that a transaction's APR is compared to 
the APOR as of the date the transaction's interest rate is set (or 
``locked'') before consummation. The comment notes that sometimes a 
creditor sets the interest rate initially and then re-sets it at a 
different level before consummation. Accordingly, under the proposal, 
for purposes of Sec.  1026.XX(a)(2)(i), the creditor should use the 
last date the interest rate for the mortgage is set before 
consummation.

``Higher-Risk Mortgage Loan'' Versus ``Higher-Priced Mortgage Loan''

    TILA section 129H(f) defines the term ``higher-risk mortgage'' in a 
similar manner to the existing Regulation Z definition of ``higher-
priced mortgage loan.'' 12 CFR 1026.35(a). However, the statutory 
definition of higher-risk mortgage differs from the existing regulatory 
definition of higher-priced mortgage loan in several important 
respects. First, the statutory definition of higher-risk mortgage 
expressly excludes loans that meet the definition of a ``qualified 
mortgage'' under TILA section 129C. In addition, the statutory 
definition of higher-risk mortgage includes an additional 2.5 
percentage point threshold for first-lien jumbo mortgage loans, while 
the definition of higher-priced mortgage loan contains this threshold 
only for purposes of applying the requirement to establish escrow 
accounts for higher-priced mortgage loans. Compare TILA section 
129H(f)(2), 15 U.S.C. 1639h(f)(2), with 12 CFR 1026.35(a)(1) and 
1026.35(b)(3). The Agencies have concerns that the use of two such 
similar terms within the same regulation may cause confusion to both 
consumers and industry. However, given that the definitions of the two 
terms differ in significant ways, the Agencies are proposing, 
consistent with the statute, to define and use the term ``higher-risk 
mortgage loan'' when establishing the scope of proposed Sec.  1026.XX.
    Question 5: The Agencies request comment on whether the concurrent 
use of the defined terms ``higher-risk mortgage loan'' and ``higher-
priced mortgage loan'' in different portions of Regulation Z may 
confuse industry or consumers and, if so, what alternative approach the 
Agencies could take to implementing the statutory definition of 
``higher-risk mortgage loan'' consistent with the requirements of TILA 
section 129H. 15 U.S.C. 1639h.
    In addition, proposed Sec.  1026.XX uses the term ``higher-risk 
mortgage loan'' instead of the statutory term ``higher-risk mortgage'' 
for clarity and consistency with Sec.  1026.35, which uses the term 
``higher-priced mortgage loan.'' 12 CFR 1026.35(a).

XX(a)(2)(i)(A) and (a)(2)(i)(B)

Trigger for First Lien Loans
    Consistent with TILA section 129H(f)(2)(A)-(B), paragraphs 
(a)(2)(i)(A) and (a)(2)(i)(B) of proposed Sec.  1026.XX set the 
following thresholds for the amount by which the APR must exceed the 
applicable APOR for a loan secured by a first lien to qualify as a 
higher-risk mortgage loan:
     By 1.5 or more percentage points, for a loan with a 
principal obligation at consummation that does not exceed the limit in 
effect as of the date the transaction's interest rate is set for the 
maximum principal obligation eligible for purchase by Freddie Mac.
     By 2.5 or more percentage points, for a loan with a 
principal obligation at consummation that exceeds the limit in effect 
as of the date the transaction's interest rate is set for the maximum 
principal obligation eligible for purchase by Freddie Mac.
    Paragraphs (a)(2)(i)(A) and (a)(2)(i)(B) of proposed Sec.  1026.XX 
include several non-substantive changes from the statutory language for 
clarity and consistency with Sec.  1026.35(b)(3)(v). For an exemption 
from the requirement to escrow for property taxes and insurance for 
``higher-priced mortgage loans,'' Sec.  1026.35(b)(3)(v) defines a 
``jumbo'' loan as: ``[A] transaction with a principal obligation at 
consummation that exceeds the limit in effect as of the date the 
transaction's interest rate is set for the maximum principal obligation 
eligible for purchase by Freddie Mac.'' In particular, the proposal 
would use the phrase ``for a loan secured by a first lien with'' in 
place of the statutory phrase ``in the case of a first lien residential 
mortgage loan having.'' See 15 U.S.C. 1639h(f)(2)(A)-(B). As discussed 
above, all of the elements of the statutory definition of the term 
``residential mortgage loan'' are incorporated into proposed Sec.  
1026.XX(a)(2)(i). The proposed rule also uses the phrase ``for the 
maximum principal obligation eligible for purchase by Freddie Mac'' in 
place of the statutory phrase ``pursuant to the sixth sentence of 
section 305(a)(2) the Federal Home Loan Mortgage Corporation Act,'' for 
consistency with Sec.  1026.35(b)(3)(v) and without intended 
substantive change.

XX(a)(2)(i)(C)

Trigger for Subordinate-Lien Loans
    Consistent with TILA section 129H(f)(2)(C), proposed Sec.  
1026.XX(a)(2)(i)(C) provides that the APR must exceed the applicable 
APOR by 3.5 or more percentage points for a loan secured by a 
subordinate lien to qualify as a higher-risk mortgage loan. In 
addition, for the reasons discussed above, proposed Sec.  
1026.XX(a)(2)(i)(C) uses the phrase ``for a loan secured by a 
subordinate lien'' in place of the statutory phrase ``for a subordinate 
lien residential mortgage loan.'' 15 U.S.C. 1639h(f)(2)(C).
Alternative Calculation Method: Transaction Coverage Rate
    In the Bureau's 2012 TILA-RESPA Proposal, the Bureau is proposing 
to adopt a simpler and more inclusive finance charge calculation for 
closed-end credit secured by real property or a dwelling.\23\ The 
finance charge is integral to the calculation of the APR, which is 
designed to serve as a benchmark in TILA disclosures for consumers to 
evaluate the overall cost of credit.
---------------------------------------------------------------------------

    \23\ See 2012 TILA-RESPA Proposal, pp. 101-127, 725-28, 905-11 
(July 9, 2012), available at http://files.consumerfinance.gov/f/201207_cfpb_proposed-rule_integrated-mortgage-disclosures.pdf). 
This proposal is similar to the simpler, more inclusive finance 
charge proposed by the Board in its 2009 proposed amendments to 
Regulation Z containing comprehensive changes to the disclosures for 
closed-end credit secured by real property or a consumer's dwelling. 
See 74 FR 43232, 43241-45 (Aug. 26, 2009).
---------------------------------------------------------------------------

    Currently, TILA and Regulation Z allow creditors to exclude various 
fees or charges from the finance charge, including most real estate-
related closing costs. Consumer groups, creditors, and some government 
agencies have long been dissatisfied with the ``some fees in, some fees 
out'' approach to the finance charge. The 2012 TILA-RESPA Proposal 
would maintain TILA's definition of a finance charge as a fee or charge 
payable directly or indirectly by the consumer and imposed directly or 
indirectly by the creditor as an incident to the extension of credit. 
However, the proposal would require the creditor to include in the 
finance charge most charges by third parties. The Bureau's 2012 TILA-
RESPA proposal discusses the potential benefits to consumers of making 
the APR a more accurate and useful comparison tool and to industry

[[Page 54730]]

of using simpler calculations to reduce compliance burden and 
litigation risk.\24\
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    \24\ See 2012 TILA-RESPA Proposal at 101-27, 600-08.
---------------------------------------------------------------------------

    A simpler and more inclusive finance charge, however, would 
increase the APR for most mortgage loans. However, the Agencies 
currently lack sufficient data to model the amount by which this change 
would increase the APR or how the increase in turn would affect the 
number of loans that will exceed the statutory threshold for higher-
risk mortgages. The Agencies note that the Bureau is seeking data to 
assist in assessing potential impacts of a more inclusive finance 
charge in connection with the Bureau's 2012 TILA-RESPA Proposal \25\ 
and its 2012 HOEPA Proposal.\26\
---------------------------------------------------------------------------

    \25\ See 2012 TILA-RESPA Proposal at, e.g., 101-12.
    \26\ See 2012 HOEPA Proposal, pp. 44, 149-211 (July 9, 2012), 
available at http://files.consumerfinance.gov/f/201207_cfpb_proposed-rule_high-cost-mortgage-protections.pdf.
---------------------------------------------------------------------------

    Under TILA section 129H(f), to determine whether a loan is a 
higher-risk mortgage loan, the loan's APR is measured against the 
benchmark APOR. 15 U.S.C. 1639h(f). The APOR is not a market wide 
average of the APR but, instead, is derived from average interest 
rates, points, and other loan pricing terms such as margins and 
indices. Currently, the APOR is based on the Freddie Mac Primary 
Mortgage Market Survey (PMMS) of pricing by a representative sample of 
creditors on transactions with low-risk pricing characteristics. There 
are some important differences between the fees and charges used in the 
calculation of the APR and APOR. In particular, the APOR consistently 
includes the contract interest rate and ``total points,'' \27\ but the 
reporting of other origination fees is not consistently included. Thus, 
the APOR derived from such surveys likely understates the actual cost 
to consumers of the low-risk loans intended to form the benchmark.
---------------------------------------------------------------------------

    \27\ Freddie Mac defines ``total points'' to include both 
``discount [points] and origination fees that have historically 
averaged around one point.'' See http://www.freddiemac.com/pmms/abtpmms.htm. The Agencies understand that it is not clear that 
survey respondents are consistent in their reporting or in including 
origination fees not expressed as a point.
---------------------------------------------------------------------------

    By contrast, the finance charge used to calculate the APR currently 
includes both discount points and origination fees, together with most 
other charges the creditor retains and certain third-party charges. By 
including additional creditor and third-party charges, the proposed 
more inclusive finance charge would widen the disparity between APR and 
APOR and potentially push more loans into the ``higher-risk mortgage 
loan'' category, though by how much is uncertain.
    As noted, the Bureau, in connection with its 2012 TILA-RESPA 
Proposal, is proposing a more inclusive finance charge. The Agencies 
are aware that the more inclusive finance charge has implications for 
several rulemakings, including this proposal regarding higher-risk 
mortgage appraisal rules, the Bureau's 2012 HOEPA Proposal,\28\ as well 
as the 2011 ATR Proposal and the 2011 Escrow Proposal. Each of these 
proposals separately discusses the impacts of the more inclusive 
finance charge and potential modifications, and the Agencies believe 
that it is helpful to do so in this proposal as well. This approach 
permits assessment of the impacts and the merits of any modifications 
on a rule-by-rule basis.
---------------------------------------------------------------------------

    \28\ See 2012 HOEPA Proposal (July 9, 2012), available at http://files.consumerfinance.gov/f/201207_cfpb_proposed-rule_high-cost-mortgage-protections.pdf.
---------------------------------------------------------------------------

    Question 6: Accordingly, this proposal seeks comment on whether and 
how to account for the implications of a more inclusive finance charge 
on the scope of higher-risk mortgage coverage.
    If the Bureau adopts a more inclusive finance charge, one way 
potentially to reduce the disparity between the resulting APR and the 
APOR for purposes of different regulatory thresholds would be to modify 
the numeric threshold that triggers coverage. The Bureau sought comment 
on such an approach in the 2012 HOEPA proposal, as one of two 
alternatives, but lacked the data necessary to propose a specific 
numeric modification. The Agencies similarly lack such data for higher-
risk mortgages. However, unlike the Bureau's authority to adjust the 
threshold triggers in HOEPA, TILA section 129H does not give the 
Agencies express authority to revise the numeric threshold triggers for 
purposes of determining which loans are higher-risk mortgage loans. 15 
U.S.C. 1639h. See also TILA section 103(bb)(2)(A) and (B), 15 U.S.C. 
1639h(bb)(2)(A) and (B).
    An alternative approach would be to use a ``transaction coverage 
rate'' (TCR) for the APR as the metric for determining whether a 
closed-end loan is a higher-risk mortgage loan subject to Sec.  
1026.XX. This is the other alternative on which the Bureau seeks 
comment in the 2012 HOEPA Proposal.\29\ Under this approach, the TCR 
would be calculated in a manner similar to how the APR is calculated, 
except that the prepaid finance charge used for the TCR calculation 
would include only charges retained by the creditor, a mortgage broker, 
or an affiliate of either.\30\ The TCR would not reflect other closing 
costs that would be included in the broader finance charge for purposes 
of calculating the APR that would be disclosed to consumers. For 
example, the APR resulting from the proposed more inclusive finance 
charge would reflect third-party charges such as title insurance 
premiums, but the TCR would not. See 75 FR 58539, 58661; 76 FR 11598, 
11626. Thus, a creditor would calculate the TCR to determine coverage, 
but the new APR would be used for consumer disclosures.
---------------------------------------------------------------------------

    \29\ See 2012 HOEPA Proposal at 39-50, 218, 246. The transaction 
coverage rate has been proposed previously by the Board for 
substantially similar reasons in a proposal related to mortgages in 
2010, see 75 FR 58539, 58660-62, Sept. 24, 2010 (2010 Mortgage 
Proposal), and 2011 Escrow Proposal, see 76 FR 11598, 11609, 11620, 
11626, March 2, 2011.
    \30\ See 2012 HOEPA Proposal at 46-47. The wording of the 
Board's proposed definition of ``transaction coverage rate'' varied 
slightly between the 2010 Mortgage Proposal and the 2011 Escrow 
Proposal as to treatment of charges retained by mortgage broker 
affiliates. In its 2012 HOEPA Proposal, the Bureau proposes to use 
the 2011 Escrow Proposal version, which would include charges 
retained by broker affiliates. The Agencies believe that this 
approach is consistent with the rationale articulated by the Board 
in its earlier proposals and with certain other parts of the Dodd-
Frank Act that distinguish between charges retained by the creditor, 
mortgage broker, or affiliates of either company. See, e.g., Dodd-
Frank Act section 1403.
---------------------------------------------------------------------------

    If the Bureau adopts a more inclusive finance charge, the Agencies 
will consider whether to adopt the TCR in this rule. This alternative 
would allow creditors to exclude some fees from the ``rate'' used to 
determine if a loan is a ``higher-risk mortgage loan.'' By excluding 
these fees, it is possible fewer loans would be covered by the rule. 
Accordingly, to adopt the TCR, the Agencies would rely on their 
authority to exempt a class of loans from the requirements of the rule 
if the Agencies determine the exemption is in the public interest and 
promotes the safety and soundness of creditors. TILA section 
129H(b)(4)(B), 15 U.S.C. 1639h(b)(4)(B). The Agencies believe that use 
of the TCR could have both advantages and disadvantages with respect to 
being in the public interest and promoting the safety and soundness of 
creditors. One advantage would be that loans that Congress may not have 
intended to be treated as higher-risk mortgage loans would remain not 
covered by the higher-risk mortgage appraisal requirements. On the 
other hand, some loans that Congress intended to be treated as higher-
risk mortgages might end up not being covered by the higher-risk 
mortgage

[[Page 54731]]

appraisal requirements. This is because the TCR as proposed would 
exclude some third-party fees that are currently included in the 
finance charge, such as upfront mortgage guaranty insurance premiums 
paid to independent third-party providers. The Agencies expect to 
analyze the potential differential as data become available.
    Another potential disadvantage is that adopting a TCR for 
determining coverage would require a creditor to make an additional 
calculation to determine whether a loan is subject to TILA section 
129H. Creditors would continue to be required to calculate the APR to 
provide required disclosures to the consumer. Additionally, creditors 
would have to calculate the TCR to determine whether the loan is 
subject to the requirements of this rule. On the other hand, if the 
Bureau adopts both the more inclusive finance charge and the TCR 
modification in a final rule pursuant to the 2012 HOEPA Proposal and 
2011 Escrow Proposal, adopting the TCR modification in the higher-risk 
mortgage rule could ensure consistency across rules.
    Question 7: Comments are invited on both the potential for TCR to 
introduce additional complexity in enforcement and litigation contexts 
\31\ and any possible additional burden for the industry.
---------------------------------------------------------------------------

    \31\ Agency examiners and enforcement staff, as well as 
consumers seeking to determine whether they are entitled to the 
higher-risk mortgage protections, would have to know how to 
determine and calculate the TCR and how to verify a creditor's TCR 
calculation to ascertain whether the appraisal protections should 
apply to a given transaction.
---------------------------------------------------------------------------

    In light of the uncertainty regarding whether the Bureau will adopt 
a more inclusive finance charge and the potential impact of that 
change, the Agencies have proposed two alternative versions of Sec.  
1026.XX(a)(2)(i), similar to those proposed by the Bureau in connection 
with the 2012 HOEPA Proposal. Alternative 1 would define the threshold 
for higher-risk mortgages based on APR. Alternative 2 would use TCR. 
The Agencies would not adopt Alternative 2 if the Bureau does not 
change the definition of finance charge. As noted above, if the 
Agencies were to adopt Alternative 2, the Agencies would rely on their 
exemption authority set forth in TILA section 129H(b)(4)(B). 15 U.S.C. 
1639h(b)(4)(B). The Agencies would reference the definition of 
``transaction coverage rate'' provided in the Board's proposed Sec.  
226.45(a)(2)(i), proposed by the Bureau to be codified in Sec.  
1026.35(a)(2)(i), along with the guidance provided in its associated 
commentary. The Agencies also would reference the definition of 
``average prime offer rate'' proposed by the Bureau to be codified in 
Sec.  1026.35(a)(2)(ii). This is the approach to defining TCR (and 
APOR) that the Bureau is proposing in the 2012 HOEPA Proposal. See 2012 
HOEPA Proposal at 46-47, 218.\32\
---------------------------------------------------------------------------

    \32\ In the Board's 2010 Mortgage Proposal, the definition of 
``transaction coverage rate'' was proposed in Sec.  226.35(a)(2)(i), 
and the definition of ``average prime offer rate'' in existing Sec.  
226.35(a)(2) would have been redesignated as Sec.  226.35(a)(2)(ii) 
for organizational purposes. The Board's 2011 Escrow Proposal 
contained parallel provisions, although they were set forth in a 
proposed new Sec.  226.45(a)(2)(i) and (ii).
---------------------------------------------------------------------------

    Again, the Agencies do not currently have sufficient data to model 
the impact of the more inclusive finance charge on coverage of the 
higher-risk mortgage loan requirements.\33\ Similarly, the Agencies 
lack data to assess whether the benefits and costs of those 
requirements are significantly different as to the loans that would be 
affected by the more inclusive finance charge.
---------------------------------------------------------------------------

    \33\ In its 2009 mortgage proposal, the Board relied on a 2008 
survey of closing costs conducted by Bankrate.com that contains data 
for hypothetical $200,000 loans in urban areas. See 74 FR 43232, 
43244 (Aug. 26, 2009). Based on that data, the Board estimated that 
3 percent of loans would be reclassified as ``higher-priced loans'' 
(which are similar to ``higher-risk mortgages'') if the definition 
of finance charge was expanded. See id. The Agencies are considering 
the 2010 version of that survey; however, the data being sought by 
the Bureau in its 2012 TILA-RESPA Proposal and 2012 HOEPA Proposal 
as described above would provide more representative information 
regarding closing and settlement costs that would allow for a more 
refined analysis of the proposals.
---------------------------------------------------------------------------

    Question 8: The Agencies therefore seek comment on the impacts the 
proposed more inclusive finance charge would have on application of the 
higher-risk mortgage loan requirements, and whether it would be in the 
public interest and promote the safety and soundness of creditors to 
modify the triggers for higher-risk mortgage loans to approximate more 
closely the coverage levels under the finance charge and APR as 
currently calculated.
    Question 9: If potential modifications are warranted, the Agencies 
also seek comment on what methods may be appropriate, including use of 
the TCR in lieu of APR, or other methods commenters may suggest. The 
appraisal provisions of the Dodd-Frank Act are intended to protect 
lenders, consumers and investors against fraudulent and inaccurate 
appraisals. With this in mind, commenters are invited to address the 
relative costs and benefits of any modification in the context of the 
higher-risk mortgage loan appraisal proposal, including any potential 
impact on the market. Where possible, comments should include 
supporting data. In particular, data regarding the amount of charges 
currently considered prepaid finance charges and the amount of charges 
currently excluded from the finance charge would enable the Agencies to 
make an informed assessment of the impacts a more inclusive finance 
charge would have on the higher-risk mortgage loan rule, and may be 
useful as well to the Bureau in considering other affected rules.

XX(a)(2)(ii)

Exclusions from the Definition of Higher-Risk Mortgage Loan
    Consistent with the express language of TILA section 129H(f) and 
pursuant to the Agencies' general exemption authority set forth in TILA 
section 129H(b)(4)(B), the proposed rule would expressly exclude 
certain classes of consumer credit transactions from the definition of 
higher-risk mortgage loan. 15 U.S.C. 1639h(b)(4)(B) and (f). 
Specifically, proposed Sec.  1026.XX(a)(2)(ii)) excludes from the 
definition of higher-risk mortgage loan the following:
     Any loan that is a qualified mortgage loan as defined in 
Sec.  1026.43(e);
     A reverse-mortgage transaction as defined in Sec.  
1026.33(a).
     A loan secured solely by a residential structure.
    Each of these proposed exclusions from the definition of higher-
risk mortgage loan is discussed in more detail below.

XX(a)(2)(ii)(A)

Qualified Mortgage Loans
    TILA section 129H(f) expressly excludes from the definition of 
higher-risk mortgage any loan that is a qualified mortgage as defined 
in TILA section 129C and a reverse mortgage loan that is a qualified 
mortgage as defined in TILA section 129C. 15 U.S.C. 1639(f). Rather 
than implement one exclusion for qualified mortgages and a separate 
exclusion for any reverse mortgage loans that may be defined by the 
Bureau as qualified mortgages, proposed Sec.  1026.XX(a)(2)(ii) would 
exclude a qualified mortgage loan as defined in Sec.  1026.43(e) which 
would cover all qualified mortgages as defined by TILA section 129C as 
implemented in regulations of the Bureau. The Agencies believe that 
this single broad exclusion promotes clarity because the broader term 
``qualified mortgage'' as defined in Sec.  226.43(e) of the 2011 ATR 
Proposal, includes any reverse mortgage loan that the Bureau may define 
by regulation as a qualified mortgage.
    The Agencies note that as of the date of this proposal, the Bureau 
has not yet

[[Page 54732]]

issued final rules implementing TILA section 129C's definition of 
``qualified mortgage.'' Prior to the transfer of authority regarding 
TILA section 129C to the Bureau under the Dodd-Frank Act, the Board 
issued the 2011 ATR Proposal, which, among other things, would have 
defined a ``qualified mortgage'' in a new subsection 12 CFR 226.43(e). 
See 76 FR 27390, 27484-85 (May 11, 2011). The Bureau expects to issue a 
final rule implementing, among other things, the definition of 
``qualified mortgage,'' based on the 2011 ATR Proposal.\34\
---------------------------------------------------------------------------

    \34\ The cross-reference in the proposed regulation text assumes 
that the Bureau's final rule regarding qualified mortgages will use 
the same numbering as in the 2011 ATR Proposal (updated to reflect 
that the Bureau's Regulation Z is set forth in 12 CFR 1026 rather 
than 12 CFR 226). If the numbering of the Bureau's final rule 
regarding qualified mortgages differs from the 2011 ATR Proposal, 
the Agencies will update the numbering of the cross-reference to the 
definition of ``qualified mortgage'' when finalizing this proposal.
---------------------------------------------------------------------------

XX(a)(2)(ii)(B)

Reverse Mortgage Transactions
    Proposed Sec.  1026.XX(a)(2)(ii)(B) would exclude reverse mortgage 
transactions as defined in Sec.  1026.33(a) from the definition of 
``higher-risk mortgage loan.'' TILA section 129H(b)(4)(B) authorizes 
the Agencies to jointly exempt, by rule, a class of loans from the 
requirements of TILA sections 129H(a) or 129H(b) if the Agencies 
determine that the exemption is in the public interest and promotes the 
safety and soundness of creditors. 15 U.S.C. 1639h(b)(4)(B).
    Today, the vast majority of reverse mortgage transactions made in 
the United States are insured by the Federal Housing Administration 
(FHA) as part of the U.S. Department of Housing and Urban Development's 
(HUD) Home Equity Conversion Mortgage (HECM) Program.\35\ To originate 
reverse mortgage transactions under HUD's HECM program, a lender must 
adhere to specific standards, including appraisal requirements similar 
to those required under proposed Sec.  1026.XX.\36\ Moreover, the FHA's 
HECM program provides protections to both the lender and the borrower. 
Lenders are guaranteed that they will be repaid in full when the home 
is sold, regardless of the loan balance or home value at repayment.\37\ 
Borrowers are guaranteed that they will be able to access their 
authorized loan funds in the future (subject to the terms of the loan), 
even if the loan balance exceeds the value of the home or if the lender 
experiences financial difficulty.\38\ Borrowers or their estates are 
not liable for loan balances that exceed the value of the home at 
repayment--FHA insurance covers this risk.\39\
---------------------------------------------------------------------------

    \35\ See CFPB, Reverse Mortgages: Report to Congress 14, 70-99 
(June 28, 2012), available at http://www.consumerfinance.gov/reports/reverse-mortgages-report.
    \36\ See 24 CFR 206.1 et seq., and HUD Handbooks 4235.1 and 
4330.1 (chapter 13).
    \37\ See, e.g., CFPB, Reverse Mortgages: Report to Congress 18.
    \38\ Id.
    \39\ Id.
---------------------------------------------------------------------------

    Another reason that the Agencies propose to exclude reverse 
mortgage transactions from the definition of higher-risk mortgage loan 
is that a methodology for determining APORs for reverse mortgage 
transactions does not currently exist. As explained in the discussion 
of proposed Sec.  1026.XX(a)(2)(i) above, determining whether a given 
transaction constitutes a ``higher-risk mortgage loan'' requires 
lenders to compare a transaction's APR with a published APOR. See 
comments 35(a)(2)-2 and 35(a)(2)-4. The Board currently publishes APORs 
for types of mortgage transactions potentially subject to proposed 
Sec.  1026.XX. However, the Board does not currently publish APORs for 
reverse mortgages because reverse mortgages are exempt from the rules 
applicable to ``higher-priced mortgage loans'' in Sec.  1026.35, for 
which the APOR was designed. See Sec.  1026.35(a)(2)-(3) .
    The Agencies are concerned that providing a permanent exemption for 
reverse mortgage transactions that are not qualified mortgages would 
eliminate the consumer protections provided by this rule to populations 
that rely on such products. Reverse mortgages are complex products that 
present consumers with a number of issues to evaluate that are 
different from a typical mortgage transaction, and the potential for 
reemergence of private reverse mortgage products in the market warrants 
careful evaluation from a consumer protection standpoint. However, the 
Agencies believe that exempting reverse mortgage transactions until the 
Agencies have additional time to study reverse mortgages is in the 
public interest and promotes the safety and soundness of creditors. The 
Agencies believe that this exemption is in the public interest because, 
without a clear way to determine whether a given reverse mortgage is a 
``higher-risk mortgage loan,'' creditors face legal uncertainty that 
may impact credit availability. In addition, the costs associated with 
legal uncertainty could negatively impact a creditor's safety and 
soundness.
    The Agencies request comment on the appropriateness of this 
exemption. Additionally, the Agencies seek comment on whether available 
indices exist that track the APR for reverse mortgages and could be 
used by the Bureau to develop and publish an APOR for these 
transactions, or whether such an index could be developed. For example, 
HUD publishes information on HECMs, including the contract rate.\40\ 
The contract rate does not cover closing costs and insurance associated 
with reverse mortgages and included in a reverse mortgage APR, but 
nonetheless may be a starting point for developing a ``higher-risk 
mortgage loan'' threshold for reverse mortgages similar to the APOR 
metric used for forward mortgages.
---------------------------------------------------------------------------

    \40\ See http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/rmra/oe/rpts/hecm/hecmmenu (``Home Equity Conversion 
Mortgage Characteristics'').
---------------------------------------------------------------------------

    Question 10: The Agencies request comment on whether this approach 
could be used to develop an index that tracks reverse mortgages. The 
Agencies also seek specific suggestions for other approaches to 
developing an index for reverse mortgages.

XX(a)(2)(ii)(C)

Loans Secured Solely by a Residential Structure
    The Agencies propose in Sec.  1026.XX(a)(2)(ii)(C) to exclude from 
the definition of higher-risk mortgage loan any loan secured solely by 
a residential structure. The Agencies believe that TILA section 129H 
was intended to apply only to loans secured at least in part by real 
estate. 15 U.S.C. 1639h. TILA section 129H requires appraisals for 
higher-risk mortgage loans that conform with, among other provisions, 
FIRREA title XI. Id.; 12 U.S.C. 3331 et seq. FIRREA title XI governs 
appraisals that involve real estate related transactions.\41\ 
Additionally, TILA section 129H requires that appraisals be performed 
by a ``certified or licensed appraiser.'' TILA section 129H(b)(1), 15 
U.S.C. 1639h(b)(1). The term ``certified or licensed appraiser'' has 
historically been used in Federal regulations to refer to appraisers 
who are credentialed to appraise real estate.\42\
---------------------------------------------------------------------------

    \41\ 12 U.S.C. 3331.
    \42\ See, e.g., 12 CFR 225.63. Under the regulations 
implementing FIRREA title XI, ``real estate'' is defined in part as 
``an identified parcel or tract of land, with improvements. * * *'' 
12 CFR 225.62(h).
---------------------------------------------------------------------------

    Further, the Agencies believe that excluding any loan secured 
solely by a residential structure from the definition of higher-risk 
mortgage loan is appropriate pursuant to the exemption authority under 
TILA section 129H(b)(4)(B). The Agencies understand

[[Page 54733]]

that loans secured solely by a residential structure, such as a 
manufactured home, typically more closely resemble titled vehicle 
loans. For example, manufactured housing industry representatives 
indicated during outreach calls with the Agencies that traditional real 
estate appraisals performed by a ``certified or licensed appraiser,'' 
as defined in TILA section 129H(b)(3) and proposed Sec.  1026.XX(a)(1), 
are not appropriate or feasible for the majority of manufactured home 
financing transactions. They indicated that, typically, for new 
manufactured homes, the home value is based on the sales price listed 
on the manufactured home's wholesale invoice to the retailer. The 
wholesale invoice details the cost of the home at the point of 
manufacture, adding proprietary allowances and calculations to arrive 
at a ``maximum sales price.'' The manufacturer certifies the 
authenticity of the invoice and the accuracy of the price paid by the 
retailer. For used manufactured homes, the home value is most commonly 
based on the price guides published by trade journals for manufactured 
homes. Certain variations exist, depending on a number of factors, such 
as whether the used home is being moved.
    In addition, the sales price solely for a manufactured home, but 
not the land to which it is attached, is typically lower than the cost 
of both a manufactured home and the land to which it is attached. This 
may make requiring appraisals with interior property visits extremely 
expensive relative to the cost of the manufactured home. Taken 
together, these factors could significantly increase costs for 
consumers and industry and constrain lending in this area of the 
housing market. Therefore, the Agencies believe that excluding such 
transactions from the definition of higher-risk mortgage loan is in the 
public interest and promotes the safety and soundness of creditors.
    At the same time, the Agencies understand based on informal 
outreach that, for manufactured home loans secured by both a 
manufactured home and the land to which the home is attached, 
appraisals performed by certified or licensed appraisers are feasible 
and that many creditors order such appraisals in underwriting these 
transactions. Therefore, the Agencies propose to exclude from the rule 
only loans secured ``solely'' by a residential structure.\43\ 
Accordingly, proposed comment XX(a)(2)(ii)(C)-1 clarifies that, under 
Sec.  1026.XX(a)(2)(ii)(C), loans secured solely by a residential 
structure cannot be ``higher-risk mortgage loans.'' Thus, for example, 
a loan secured by a manufactured home and the land on which it is sited 
could be a ``higher-risk mortgage loan.'' By contrast, a loan secured 
solely by a manufactured home cannot be a ``higher-risk mortgage 
loan.''
---------------------------------------------------------------------------

    \43\ The Agencies are proposing to exclude from the definition 
of ``higher-risk mortgage loan'' any loans secured solely by a 
``residential structure,'' as that term is used in Regulation Z's 
definition of ``dwelling.'' See 12 CFR 1026.2(a)(19). The provision 
excludes loans that are not secured in whole or in part by land. 
Thus, for example, loans secured by manufactured homes that are not 
also secured by the land on which they are sited are excluded from 
the definition of higher-risk mortgage loan, regardless of whether 
the manufactured home itself is deemed to be personal property or 
real property under applicable state law.
---------------------------------------------------------------------------

    Question 11: The Agencies request comment on whether this proposed 
exclusion is appropriate, and if not, reasonable methods by which 
creditors could comply with the requirements of this proposed rule when 
providing loans secured solely by a residential structure. In 
particular, the Agencies request comment on whether, rather than an 
appraisal performed by a certified or licensed appraiser, some 
alternative standards for valuing residential structures securing 
higher-risk mortgage loans might be feasible and appropriate to include 
as part of the final rule.
Other Exclusions from the Definition of Higher-Risk Mortgage Loan
    Construction loans. In construction loan transactions, an interior 
visit of the property securing the loan is generally not feasible 
because construction loans provide financing for homes that are 
proposed to be built or are in the process of being built. At the same 
time, the Agencies recognize that construction loans that meet the 
pricing thresholds for higher-risk mortgage loans may pose many of the 
same risks to consumers as other types of loans meeting those 
thresholds.
    Question 12: The Agencies request comment on whether to exclude 
construction loans from the definition of higher-risk mortgage loan. If 
not, the Agencies seek comment on whether any additional compliance 
guidance is needed for applying TILA section 129H's appraisal rules to 
construction loans. Alternatively, the Agencies request comment on 
whether construction loans should be exempt only from the requirement 
to conduct an interior visit of the property, and be subject to all 
other appraisal requirements under the proposed rule.
    Bridge loans. Bridge loans are short-term loans typically used when 
a consumer is buying a new home before selling the consumer's existing 
home. Usually secured by the existing home, a bridge loan provides 
financing for the new home (often in the form of the downpayment) or 
mortgage payment assistance until the consumer can sell the existing 
home and secure permanent financing. Bridge loans normally carry higher 
interest rates, points and fees than conventional mortgages, regardless 
of the consumer's creditworthiness.
    The Agencies are concerned about the burden to both creditors and 
consumers of imposing TILA section 129H's heightened appraisal 
requirements on short-term financing of this nature. As noted, the 
Agencies recognize that rates on bridge loans are often higher than on 
long-term home mortgages, so bridge loans may be more likely to meet 
the ``higher-risk mortgage loan'' triggers. However, these loans may be 
useful and even necessary for many consumers. Higher-risk mortgage 
loans under TILA section 129H would generally be a credit option for 
less creditworthy consumers, who may be more vulnerable than others and 
in need of enhanced consumer protections, such as TILA section 129H's 
special appraisal requirements. However, a bridge loan consumer could 
be subject to rates that would exceed the higher-risk mortgage loan 
thresholds even if the consumer would qualify for a non-higher-risk 
mortgage loan when seeking permanent financing. It is unclear that 
Congress intended TILA section 129H to apply to loans simply because 
they have higher rates, regardless of the consumer's creditworthiness 
or the purpose of the loan.
    Question 13: For these reasons, the Agencies request comment on 
whether to exclude bridge loans from the definition of higher-risk 
mortgage loan. If not, the Agencies seek comment on whether any 
additional compliance guidance is needed for applying TILA section 
129H's appraisal rules to bridge loans.
    Question 14: The Agencies also request comment on whether other 
classes of loans should be excluded from the definition of higher-risk 
mortgage loan.

XX(a)(3) National Registry

    As discussed in more detail below, to qualify for the safe harbor 
provided in proposed Sec.  1026.XX(b)(2)(iii) a creditor must verify 
through the ``National Registry'' that the appraiser is a certified or 
licensed appraiser in the State in which the property is located as of 
the date the appraiser signs the appraiser's certification. Under 
FIRREA section 1109, the Appraisal Subcommittee of

[[Page 54734]]

the Federal Financial Institutions Examination Council (FFIEC) is 
required to maintain a registry of State certified and licensed 
appraisers eligible to perform appraisals in connection with federally 
related transactions. 12 U.S.C. 3338. For purposes of qualifying for 
the safe harbor, the proposed rule would require that a creditor must 
verify that the appraiser holds a valid appraisal license or 
certification through the registry maintained by the Appraisal 
Subcommittee. Thus, proposed Sec.  1026.XX(a)(3) would provide that the 
term ``National Registry'' means the database of information about 
State certified and licensed appraisers maintained by the Appraisal 
Subcommittee of the FFIEC.

XX(a)(4) State Agency

    TILA section 129H(b)(3)(A) provides that, among other things, a 
certified or licensed appraiser means a person who is certified or 
licensed by the ``State'' in which the property to be appraised is 
located. 15 U.S.C. 1639h(b)(3)(A). As discussed above, proposed Sec.  
1026.XX(a)(1) would further clarify that, among other things, a 
certified or licensed appraiser means a person certified or licensed by 
the ``State agency'' in the State in which the property that secures 
the transaction is located. Under FIRREA section 1118, the Appraisal 
Subcommittee of the FFIEC is responsible for recognizing each State's 
appraiser certifying and licensing agency for the purpose of 
determining whether the agency is in compliance with the appraiser 
certifying and licensing requirements of FIRREA title XI. 12 U.S.C. 
3347. In addition, FIRREA section 1120(a) prohibits a financial 
institution from obtaining an appraisal from a person the financial 
institution knows is not a State certified or licensed appraiser in 
connection with a federally related transaction. 12 U.S.C. 3349(a). 
Accordingly, Sec.  1026.XX(a)(4) would define the term ``State agency'' 
as a ``State appraiser certifying and licensing agency'' recognized in 
accordance with section 1118(b) of FIRREA and any implementing 
regulations.

XX(b) Appraisals Required for Higher-Risk Mortgage Loans

XX(b)(1) In General
    Consistent with TILA section 129H(a) and (b)(1), proposed Sec.  
1026.XX(b)(1) provides that a creditor shall not extend a higher-risk 
mortgage loan to a consumer without obtaining, prior to consummation, a 
written appraisal performed by a certified or licensed appraiser who 
conducts a physical visit of the interior of the property that will 
secure the transaction. 15 U.S.C. 1639h(b)(1).
XX(b)(2) Safe Harbor
    TILA section 129H(b)(1) requires that appraisals mandated by 
section 129H be performed by ``a certified or licensed appraiser'' who 
conducts a physical property visit of the interior of the mortgaged 
property. 15 U.S.C. 1639h(b)(1). TILA section 129H(b)(3) goes on to 
define a ``certified or licensed'' appraiser in some detail. 15 U.S.C. 
1639h(b)(3). The statute, however, is silent as to how creditors should 
determine whether the written appraisals they have obtained comply with 
the statutory requirements under TILA section 129H(b)(1) and (b)(3). To 
address compliance uncertainties discussed in more detail below, the 
Agencies are proposing a safe harbor in Sec.  1026.XX(b)(2) that 
establishes affirmative steps that creditors may follow to satisfy 
their statutory obligations under TILA section 129H.
    TILA section 129H(b)(3) defines a ``certified or licensed 
appraiser'' as a person who is (1) certified or licensed by the State 
in which the property to be appraised is located, and (2) performs each 
appraisal in conformity with USPAP and the requirements applicable to 
appraisers in FIRREA title XI, and the regulations prescribed under 
such title, as in effect on the date of the appraisal. 15 U.S.C. 
1639h(b)(3). These two elements of the definition of ``certified or 
licensed appraiser'' are discussed in more detail below.
Certified or Licensed in the State in Which the Property is Located
    State certification and licensing of real estate appraisers has 
become a nationwide practice largely as a result of FIRREA title XI. 
Pursuant to FIRREA title XI, entities engaging in certain ``federally 
related transactions'' involving real estate are required to obtain 
written appraisals performed by an appraiser who is certified or 
licensed by the appropriate State. 12 U.S.C. 3339, 3341. As noted, to 
facilitate identification of appraisers meeting this requirement, the 
Appraisal Subcommittee of the FFIEC maintains an on-line National 
Registry of appraisers identifying all federally recognized State 
certifications or licenses held by U.S. appraisers.\44\ 12 U.S.C. 3332, 
3338.
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    \44\ The Agencies are proposing to interpret the state 
certification or licensing requirement under TILA section 129H(b)(3) 
to mean certification or licensing by a state agency that is 
recognized for purposes of credentialing appraisers to perform 
appraisals required for federally related transactions pursuant to 
FIRREA title XI.
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Performs Appraisals in Conformity With USPAP and FIRREA
    Again, TILA section 129H(b)(3) also defines ``certified or licensed 
appraiser'' as a person who performs each appraisal in accordance with 
USPAP and FIRREA title XI, and the regulations prescribed under such 
title, in effect on the date of the appraisal. 15 U.S.C. 1639h(b)(3). 
USPAP is a set of standards promulgated and interpreted by the 
Appraisal Standards Board of the Appraisal Foundation, providing 
generally accepted and recognized standards of appraisal practice for 
appraisers preparing various types of property valuations.\45\ USPAP 
provides guiding standards, not specific methodologies, and application 
of USPAP in each appraisal engagement involves the application of 
professional expertise and judgment.
---------------------------------------------------------------------------

    \45\ See Appraisal Standards Bd., Appraisal Fdn., USPAP (2012-
2013 ed.) available at http://www.uspap.org.
---------------------------------------------------------------------------

    FIRREA title XI and the regulations prescribed thereunder regulate 
entities engaging in real estate-related financial transactions that 
are engaged in, contracted for, or regulated by the Federal banking 
agencies. See 12 U.S.C. 3339, 3350. Pursuant to FIRREA title XI, the 
Federal banking agencies have issued regulations requiring insured 
depository institutions and their affiliates, bank holding companies 
and their affiliates, and insured credit unions to obtain written 
appraisals prepared by a State certified or licensed appraiser in 
accordance with USPAP in connection with federally related 
transactions, including loans secured by real estate, exceeding certain 
dollar thresholds.\46\ Specifically, the banking agencies have issued 
regulations exempting most federally related transactions with a 
transaction value of $250,000 or less from the requirement to obtain an 
appraisal.\47\ In addition, the Federal banking agencies have issued a 
number of guidelines providing formal supervisory guidance on 
implementation and application of these appraisal requirements.\48\
---------------------------------------------------------------------------

    \46\ See OCC: 12 CFR Part 34, Subpart C; FRB: 12 CFR part 208, 
subpart E, and 12 CFR part 225, subpart G; FDIC: 12 CFR part 323; 
and NCUA: 12 CFR part 722.
    \47\ See OCC: 12 CFR 34.43(a)(1); FDIC: 12 CFR 323.3(a)(1); FRB: 
12 CFR 225.63(a)(1); and NCUA: 12 CFR 722.3(a)(1) (implementing 
FIRREA section 1113, 12 U.S.C. 3342).
    \48\ See, e.g., Interagency Appraisal and Evaluation Guidelines, 
75 FR 77450 (Dec. 10, 2010).
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    The scope of creditors subject to FIRREA title XI is narrower than 
the scope of creditors subject to TILA, and FIRREA title XI and the 
rules issued

[[Page 54735]]

thereunder do not by their terms directly regulate the conduct of 
appraisers. However, the Agencies are proposing to interpret TILA 
section 129H(b)(3)(B) to expand the applicability of certain FIRREA 
title XI requirements to cover creditors providing higher-risk mortgage 
loans, pursuant to the mandates of TILA section 129H. 15 U.S.C. 
1639h(b)(3)(B). Similarly, the Agencies are proposing to interpret the 
statute to expand the applicability of these FIRREA title XI 
requirements to cover higher-risk mortgage loans that are otherwise 
exempt from the FIRREA title XI appraisal requirements, such as higher-
risk mortgage loans of $250,000 or less.
    The statute does not specifically address Congress's intent in 
referencing USPAP and FIRREA title XI. Congress could have amended 
FIRREA title XI directly to expand the scope of the statute to subject 
all creditors to its requirements. Instead, Congress inserted language 
into TILA requiring that the appraisers who perform appraisals in 
connection with higher-risk mortgage loans comply with USPAP and FIRREA 
title XI. However, the statute is silent as to the extent of creditors' 
obligations under the statute to evaluate appraisers' compliance.
    Practically speaking, a creditor seeking to determine to a 
certainty whether an appraiser complied with USPAP for a residential 
appraisal would face an almost insurmountable challenge. An appraisal 
performed in accordance with USPAP represents an expert opinion of 
value. Not only does USPAP require extensive application of 
professional judgment, it also establishes standards for the scope of 
inquiry and analysis to be performed that cannot be verified absent 
substantially re-performing the appraisal. Conclusive verification of 
FIRREA title XI compliance (which itself incorporates USPAP) poses 
similar problems. On an even more basic level, it may not be possible 
for a creditor to determine conclusively whether the appraiser actually 
performed the interior visit required by TILA section 129H(a). 
Moreover, TILA subjects creditors to significant liability and risk of 
litigation, including private actions and class actions for actual and 
statutory damages and attorneys' fees. 15 U.S.C. 1640. If TILA section 
129H is construed to require creditors to assume liability for the 
appraiser's compliance with these obligations, the Agencies are 
concerned that it would unduly increase the cost and restrict the 
availability of higher-risk mortgage loans. Absent clear language 
requiring such a construction, the Agencies do not believe that the 
statute should be construed to intend this result.
    Accordingly, the Agencies are proposing a safe harbor, described in 
more detail below, for creditors to ensure compliance with proposed 
Sec.  1026.XX(b)(1) (implementing TILA section 129H(a) and (b)(1), 15 
U.S.C. 1639h(a) and (b)(1)) when the appraiser certifies compliance 
with USPAP and applicable FIRREA title XI requirements. The Agencies 
note that a certification of USPAP compliance is already an element of 
the Uniform Residential Appraisal Report (URAR) form used as a matter 
of practice in the industry.
    The Agencies believe that the safe harbor will be particularly 
useful to consumers, industry, and courts with regard to the statutory 
requirement that the appraisal be obtained from a ``certified or 
licensed appraiser'' who conducts each appraisal in compliance with 
USPAP and FIRREA title XI. While determining whether an appraiser is 
licensed or certified by a particular State is straightforward, USPAP 
and FIRREA provide a broad set of professional standards and 
requirements. The appraisal process involves the application of 
subjective judgment to a variety of information points about individual 
properties; thus, application of these professional standards is often 
highly context-specific.
    The Agencies believe the safe harbor requirements provide 
reasonable protections to consumers and compliance guidance to 
creditors. Specifically, under the safe harbor in proposed Sec.  
1026.XX(b)(2), a creditor is deemed to have obtained a written 
appraisal that meets the requirements of Sec.  1026.XX(b)(1) if the 
creditor:
     Orders that the appraiser perform the appraisal in 
conformity with USPAP and FIRREA title XI, and any implementing 
regulations, in effect at the time the appraiser signs the appraiser's 
certification (Sec.  1026.XX(b)(2)(i));
     Verifies through the National Registry that the appraiser 
who signed the appraiser's certification holds a valid appraisal 
license or certification in the State in which the appraised property 
is located (Sec.  1026.XX(b)(2)(ii));
     Confirms that the elements set forth in appendix N to part 
1026 are addressed in the written appraisal (Sec.  1026.XX(b)(2)(iii)); 
and
     Has no actual knowledge to the contrary of facts or 
certifications contained in the written appraisal (Sec.  
1026.XX(b)(2)(iv)).
    Proposed comment XX(b)(2)-1 clarifies that a creditor that 
satisfies the conditions in Sec.  1026.XX(b)(2)(i)-(iv) will be deemed 
to have complied with the appraisal requirements of Sec.  
1026.XX(b)(1). In addition, the proposed comment further clarifies that 
a creditor that does not satisfy the conditions in Sec.  
1026.XX(b)(2)(i)-(iv) does not necessarily violate the appraisal 
requirements of Sec.  1026.XX(b)(1).
    Proposed appendix N to part 1026 provides that, to qualify for the 
safe harbor provided in Sec.  1026.XX(b)(2), a creditor must check to 
confirm that the written appraisal:
     Identifies the creditor who ordered the appraisal and the 
property and the interest being appraised.
     Indicates whether the contract price was analyzed.
     Addresses conditions in the property's neighborhood.
     Addresses the condition of the property and any 
improvements to the property.
     Indicates which valuation approaches were used, and 
includes a reconciliation if more than one valuation approach was used.
     Provides an opinion of the property's market value and an 
effective date for the opinion.
     Indicates that a physical property visit of the interior 
of the property was performed.
     Includes a certification signed by the appraiser that the 
appraisal was prepared in accordance with the requirements of USPAP.
     Includes a certification signed by the appraiser that the 
appraisal was prepared in accordance with the requirements of FIRREA 
title XI, as amended, and any implementing regulations.
    Other than the certification for compliance with FIRREA title XI, 
the items in appendix N are derived from the URAR form used as a matter 
of practice in the residential mortgage industry. Compliance with the 
appendix N safe harbor review would require the creditor to check the 
key elements of the written appraisal and the appraiser's certification 
on its face for completeness and internal consistency. The proposed 
rule would not require the creditor to make any independent judgment 
about or perform any independent analysis of the conclusions and 
factual statements in the written appraisal. As discussed above, 
imposing such obligations on the creditor would effectively require it 
to re-appraise the property. Accordingly, proposed comment 
XX(b)(2)(iii) clarifies that a creditor need not look beyond the face 
of the written appraisal and the appraiser's certification to confirm 
that the elements in appendix N are included in the written appraisal.

[[Page 54736]]

However, if the creditor has actual knowledge to the contrary of facts 
or certifications contained in the written appraisal, the safe harbor 
does not apply.
    Question 15: The Agencies request comment on the appropriateness of 
the safe harbor, the list of requirements a creditor must satisfy to 
receive the safe harbor under Sec.  1026.XX(b)(2) and appendix N, and 
whether the proposed safe harbor should be included in the rule. In 
addition, the Agencies request comment on whether particular types of 
transactions exist for which certain information in proposed appendix N 
would be especially difficult for an appraiser to include in the 
written appraisal. If so, in these cases, the Agencies seek comment on 
what alternative information, if any, might be appropriate to require 
creditors to confirm is included in the appraisal.

XX(b)(3) Additional Appraisal for Certain Higher-Risk Mortgage Loans

XX(b)(3)(i) In General
    Under TILA section 129H(b)(2), a creditor must obtain a ``second 
appraisal'' from a different certified or licensed appraiser if the 
higher-risk mortgage loan will ``finance the purchase or acquisition of 
the mortgaged property from a seller within 180 days of the purchase or 
acquisition of such property by the seller at a price that was lower 
than the current sale price of the property.'' 15 U.S.C. 
1639h(b)(2)(A). The Agencies have implemented this requirement through 
proposed Sec.  1026.XX(b)(3). The Agencies have interpreted ``second 
appraisal'' to mean an appraisal in addition to the one required under 
proposed Sec.  1026.XX(b)(1). Thus, a creditor would be required to 
obtain two appraisals before extending a higher-risk mortgage loan to 
finance a consumer's acquisition of the property. This approach is 
consistent with regulations promulgated by HUD to address property 
flipping in single-family mortgage insurance programs of the FHA. See 
24 CFR 203.37a; 68 FR 23370, May 1, 2003; 71 FR 33138, June 7, 2006 
(FHA Anti-Flipping Rule, or FHA Rule). In general, under the FHA Anti-
Flipping Rule, properties that have been resold within certain recent 
time periods are ineligible as security for FHA-insured mortgage 
financing. Specifically, as with TILA section 129H(b)(2) and proposed 
Sec.  1026.XX(b)(3), the FHA Anti-Flipping Rule requires creditors to 
determine information about a property's sales history and obtain 
justification (including, in certain cases, an additional appraisal 
obtained at no cost to the borrower) supporting an increase in resale 
price.
    When a higher-risk mortgage loan will finance a consumer's 
acquisition of the property, proposed Sec.  1026.XX(b)(3) would require 
creditors to apply additional scrutiny to properties being resold for a 
higher price within a 180-day period. The Agencies believe that the 
intent of TILA section 129H(b)(2), as implemented in proposed Sec.  
1026.XX(b)(3), is to discourage property flipping scams, a practice in 
which a seller resells a property at an artificially inflated price 
within a short time period after purchasing it, typically after some 
minor renovations and frequently relying on an inflated appraisal to 
support the increase in value.\49\ 15 U.S.C. 1639h(b)(2). Consumers who 
purchase flipped properties at inflated values can be financially 
disadvantaged if, for example, they incur mortgage debt that exceeds 
the value of their dwelling. The Agencies recognize that a property may 
be resold at a higher price within a short timeframe for legitimate 
reasons, such as when a seller makes valuable improvements to the 
property or market prices increase. Thus, to ensure the appropriateness 
of an increased sales price, proposed Sec.  1026.XX(b)(3)(i), 
implementing TILA section 129H(b)(2)(A), would require an additional 
appraisal analyzing the property's resale price before a creditor 
extends a higher-risk mortgage loan to finance the consumer's 
acquisition of the property. 15 U.S.C. 1639H(b)(2)(A).
---------------------------------------------------------------------------

    \49\ See U.S. House of Reps., Comm. on Fin. Servs., Report on 
H.R. 1728, Mortgage Reform and Anti-Predatory Lending Act, No. 111-
94, 59 (May 4, 2009) (House Report); Federal Bureau of 
Investigation, 2010 Mortgage Fraud Report Year in Review 18 (August 
2011), available at http://www.fbi.gov/stats-services/publications/mortgage-fraud-2010/mortgage-fraud-report-2010.
---------------------------------------------------------------------------

    The Agencies have replaced the term ``second appraisal'' with 
``additional appraisal'' throughout the proposed rule and commentary. 
The Agencies are proposing this change because the term, ``second,'' 
may imply that the additional appraisal must be obtained after the 
first appraisal. Creditors may find it more efficient to order two 
appraisals at the same time and the Agencies do not intend to imply 
that, if two appraisals are required under proposed Sec.  
1026.XX(b)(3), they must be obtained in any particular order. In 
addition, creditors may not be able easily to identify which of those 
two is the ``second appraisal'' for purposes of complying with the 
prohibition on charging the consumer for any ``second appraisal'' under 
TILA section 129H(b)(2)(B), as discussed in more detail in the section-
by-section analysis of proposed Sec.  1026.XX(b)(3)(v), below. 15 
U.S.C. 1639h(b)(2)(B). The Agencies do not believe that using the 
phrase ``additional appraisal'' would change the substantive 
requirements of TILA section 129H(b)(2)(A).
    Question 16: The Agencies invite comment on this interpretation and 
whether the phrase, ``additional appraisal,'' should be used in the 
rule.
    Proposed Sec.  1026.XX(b)(3) does not specify which of the two 
required appraisals a creditor must rely on in extending a higher-risk 
mortgage loan if the appraisals provide different opinions of value. 
The Agencies recognize that creditors ordering two appraisals from 
different certified or licensed appraisers may receive appraisals 
providing different opinions. However, TILA section 129H does not 
require that the creditor use any particular appraisal, and the 
Agencies believe that a creditor should retain discretion to select the 
most reliable valuation, consistent with applicable safety and 
soundness obligations and prudential guidance. 15 U.S.C. 1639h. This 
position is consistent with the interim final rule on valuation 
independence published by the Board on October 28, 2010,\50\ which 
implemented new requirements in TILA section 129E to ensure the 
independence of appraisals and other property valuation types for 
consumer credit transactions secured by the consumer's principal 
dwelling. 15 U.S.C. 1639e.
---------------------------------------------------------------------------

    \50\ 75 FR 66554 (Oct. 28, 2010); 12 CFR Sec.  1026.42(c)(3)(iv) 
(obtaining multiple valuations for the consumer's principal dwelling 
to select the most reliable valuation does not violate the general 
prohibitions on coercion of persons preparing valuations or 
mischaracterizing the value assigned to a consumer's principal 
dwelling).
---------------------------------------------------------------------------

    Proposed comment XX(b)(3)(i)-1 clarifies that an appraisal 
previously obtained in connection with the seller's acquisition or the 
financing of the seller's acquisition of the property cannot be used as 
one of the two required appraisals under Sec.  1026.XX(b)(3). The 
Agencies believe that this clarification is consistent with the 
statutory purpose of TILA section 129H of mitigating fraud on the part 
of parties to the transaction. 15 U.S.C. 1639h.
    Question 17: The Agencies request comment on this proposed 
clarification.
    In addition, proposed Sec.  1026.XX(b)(3)(i) would require that the 
creditor obtain the additional appraisal prior to consummation of the 
higher-risk mortgage loan. TILA section 129H(b)(2) does not 
specifically require that the additional appraisal be obtained

[[Page 54737]]

prior to consummation of the higher-risk mortgage loan, but the 
Agencies believe that this proposed timing requirement is necessary to 
effectuate the statute's policy of requiring creditors to apply greater 
scrutiny to potentially flipped properties that will secure the 
transaction. 15 U.S.C. 1639h(b)(2).
Potential Exemptions From the Additional Appraisal Requirement
    TILA section 129H(b)(4)(B) permits the Agencies to jointly exempt a 
class of loans from the additional appraisal requirement if the 
Agencies determine the exemption ``is in the public interest and 
promotes the safety and soundness of creditors.'' 15 U.S.C. 
1639h(b)(4)(B).
    Question 18: The Agencies invite commenters to submit data and 
other information supporting whether exempting any classes of higher-
risk mortgage loans from the additional appraisal requirement would be 
in the public interest and promote the safety and soundness of 
creditors. Exemptions to be considered may include higher-risk mortgage 
loans made in rural areas where finding two independent appraisers may 
be difficult, as well as the types of transactions that are currently 
exempted from the restrictions on FHA insurance applicable to property 
resales in the FHA Anti-Flipping Rule, including, among others, sales 
by government agencies of certain properties, sales of properties 
acquired by inheritance, and sales by State- and federally-chartered 
financial institutions. See, e.g., 24 CFR 203.37a(c).
    Regarding a potential exemption from the additional appraisal 
requirement for higher-risk mortgage loans in ``rural'' areas, a number 
of industry representatives asserted during outreach with the Agencies 
that creditors making higher-risk mortgage loans in rural areas might 
have particular difficulty finding two competent appraisers in order to 
comply with the additional appraisal requirements of TILA section 129H. 
15 U.S.C. 1639h; see also section-by-section analysis of Sec.  
1026.XX(b)(3)(ii) (discussing the requirement that the two appraisals 
required be performed by two different appraisers), below.
    Question 19: Accordingly, the Agencies request comment on whether, 
in the final rule, the Agencies should rely on the exemption authority 
in TILA section 129H(b)(4)(B) to exempt higher-risk mortgage loans made 
in ``rural'' areas from the additional appraisal requirement. 15 U.S.C. 
1639h(b)(4)(B). If so, the Agencies request comment on whether the rule 
should use the same definition of ``rural'' that is provided in the 
2011 ATR Proposal.\51\ The Agencies also request that commenters 
provide data or other information to help demonstrate how such an 
exemption would serve the public interest and promote the safety and 
soundness of creditors.
---------------------------------------------------------------------------

    \51\ As of the date of this proposal, the Bureau has not yet 
issued final rules implementing TILA section 129C. 15 U.S.C. 1639c. 
Prior to the transfer of authority regarding TILA section 129C to 
the Bureau pursuant the Dodd-Frank Act, the Board issued a proposed 
rule on qualified mortgages (2011 ATR Proposal) that, among other 
things, would have defined the term ``rural'' in a new Sec.  
1026.43(f)(2)(i). See 76 FR 27390 (May 11, 2011). The Bureau expects 
to issue a final rule implementing, among other things, the 
definition of ``rural'' and ``qualified mortgage'' based on the 2011 
ATR Proposal. This proposed rule assumes that the Bureau's final 
rule regarding qualified mortgages and defining the term rural will 
use the same numbering as in the 2011 ATR Proposal (updated to 
reflect that the Bureau's Regulation Z is set forth in 12 CFR 1026 
rather than 12 CFR 226). If the numbering of the Bureau's final rule 
regarding qualified mortgages and defining the term rural differs 
from the Board's 2011 ATR Proposal, the Agencies will update the 
numbering of the cross-reference to the definition of ``qualified 
mortgage'' when finalizing this proposal.
---------------------------------------------------------------------------

Purchase or Acquisition of the Consumer's Principal Dwelling
    Under TILA section 129H(b)(2)(A), an additional appraisal would be 
required ``if the purpose of a higher-risk mortgage loan is to finance 
the purchase or acquisition of the mortgaged property'' from a person 
who is reselling the property within 180 days of purchasing or 
acquiring the property at a price lower than the current sale price. 15 
U.S.C. 1639h(b)(2)(A). As discussed in the section-by-section analysis 
of proposed Sec.  1026.XX(a)(2), higher-risk mortgage loans are defined 
by TILA section 129H(f) as loans secured by a consumer's principal 
dwelling. 15 U.S.C. 1639h(f). Thus, the additional appraisal 
requirement would not apply to refinances, home-equity loans, or 
subordinate liens that do not finance the consumer's purchase or 
acquisition of a principal dwelling. Accordingly, proposed Sec.  
1026.XX(b)(3)(i) would require an additional appraisal only when the 
purpose of a higher-risk mortgage loan is to finance the acquisition of 
the consumer's ``principal dwelling.''
    In addition, the proposal does not use the statutory term ``the 
mortgaged property.'' TILA section 129H(b)(2)(A), 15 U.S.C. 
1639h(b)(2)(A). The Agencies have made this change to be consistent 
with Regulation Z, which elsewhere uses the term ``principal 
dwelling.'' Although a property that the consumer has not yet acquired 
will not at that time be the consumer's actual dwelling, existing 
commentary to Regulation Z explains that the term ``principal 
dwelling'' refers to properties that will become the consumer's 
principal dwelling within a year. As noted in the section-by-section 
analysis of proposed Sec.  1026.XX(a)(2) (defining ``higher-risk 
mortgage loan''), proposed comment XX(a)(2)(i)-1 cross-references the 
existing commentary on the meaning of ``principal dwelling.'' When 
referring to the date on which the seller acquired the ``property,'' 
however, the Agencies propose to use the term ``property'' rather than 
``principal dwelling'' because the subject property may not have been 
used as a principal dwelling when the seller acquired and owned it. The 
Agencies intend the term ``principal dwelling'' and ``property'' to 
refer to the same property.

XX(b)(3)(i)(A)

Criteria for Whether an Additional Appraisal is Required--Date of 
Acquisition
    ``Acquisition'' by the seller. To refer to the events in which the 
seller purchased or acquired the dwelling at issue, proposed Sec.  
1026.XX(b)(3) generally uses the term ``acquisition'' instead of the 
longer statutory phrase ``purchase or acquisition.'' The Agencies are 
proposing to use the sole term ``acquisition'' because this term, as 
clarified in proposed comment XX(b)(3)-1, includes acquisition of legal 
title to the property, including by purchase. The Agencies have defined 
``acquisition'' broadly in order to encompass the broad statutory 
phrase ``purchase or acquisition.'' Thus, as proposed, the additional 
appraisal rule in Sec.  1026.XX(b)(3) would apply to the sale of a 
property previously acquired by the seller through a non-purchase 
acquisition, such as inheritance, divorce, or gift.
    The Agencies question, however, whether an additional appraisal 
should be required for transactions in which the seller may not have 
the same motive to earn a quick profit on a short-term investment.
    Question 20: The Agencies request that commenters who support 
applying the rule to higher-risk mortgage transactions where the seller 
acquired the property without purchasing it explain how doing so would 
be consistent with the statutory goal of addressing flipping scams. 
Moreover, if the final rule covers sales of properties acquired by the 
seller through non-purchase acquisitions, the Agencies request comment 
on how a creditor should calculate the seller's ``acquisition price.'' 
For example, in a case where the seller acquired the

[[Page 54738]]

property by inheritance, the ``sale price'' could be ``zero,'' which 
could make a subsequent sale offered at any price within 180 days 
subject to the additional appraisal requirement.
    ``Acquisition'' by the consumer. For consistency throughout the 
proposal, the Agencies have used the term ``acquisition'' to refer to 
acquisitions by both the seller and the consumer. However, as noted 
above with respect to non-purchase acquisitions by the seller, the 
Agencies acknowledge that the term ``acquisition'' may be over-
inclusive in describing the consumer's transaction, because non-
purchase acquisitions by the consumer do not readily appear to trigger 
the additional appraisal requirement. If the consumer acquired the 
property by means other than a purchase, he or she likely would not 
seek a higher-risk mortgage loan to ``finance'' the acquisition. 
Further, TILA section 129H(b)(2) would apply only if a creditor extends 
a higher-risk mortgage loan to finance the consumer's acquisition of a 
property from a seller who paid a price lower than the consumer's 
price. 15 U.S.C. 1639h(b)(2). If the consumer pays a nominal amount to 
acquire the property, the Agencies question how frequently the 
additional appraisal requirement would be triggered--because the 
seller's acquisition price likely would not be lower than the 
consumer's ``price.''
    Question 21: The Agencies invite comment on whether any non-
purchase acquisitions by the consumer may implicate the additional 
appraisal requirement. If the rule covers non-purchase acquisitions by 
the consumer, the Agencies invite comment on how a creditor should 
calculate the consumer's ``sale price.''
    Question 22: The Agencies also seek comment on whether the term 
``acquisition'' should be clarified to address situations in which a 
consumer previously held a partial interest in the property, and is 
acquiring the remainder of the interest from the seller. The Agencies 
do not expect that fraudulent property flipping schemes would likely 
occur in this context, but request comment on whether additional 
clarification about partial interests is warranted.
    In this regard, the Agencies note that existing commentary in 
Regulation Z clarifies that a ``residential mortgage transaction'' does 
not include transactions involving the consumer's principal dwelling 
when the consumer had previously purchased and acquired some interest 
in the dwelling, even though the consumer had not acquired full legal 
title, such as when one joint owner purchases the other owner's joint 
interest. See Regulation Z comments 2(a)(24)-5(i) and -5(ii); see also 
section-by-section analysis of Sec.  1026.XX(a)(X) (defining ``higher-
risk mortgage loan'' and discussing the distinctions between the term 
``residential mortgage transaction'' in Regulation Z and ``residential 
mortgage loan'' in the Dodd-Frank Act).
    Question 23: In general, the Agencies invite comment on whether the 
term ``acquisition'' is the appropriate term to use in connection with 
both the seller and higher-risk mortgage consumer. The Agencies may 
further clarify the term or use a different term, such as ``purchase.''
    Seller. The Agencies have used the term ``seller'' throughout 
proposed Sec.  1026.XX(b)(3) to refer to the party conveying the 
property to the consumer. The Agencies have used this term to conform 
to the reference to ``sale price'' in TILA section 129H(b)(2)(A), but 
the Agencies recognize that another term may be more appropriate if any 
categories of non-sale acquisitions by the consumer exist that should 
appropriately be covered by the rule.
    Agreement. In addition, the Agencies have referred to the 
consumer's ``agreement'' to acquire the property throughout proposed 
Sec.  1026.XX(b)(3) to reflect that a ``sale price,'' as referenced in 
TILA section 129H(b)(2)(A), is typically contained in a legally binding 
agreement or contract between a buyer and a seller. However, the 
Agencies recognize that an alternate term may be more appropriate if 
categories of consumer acquisitions not obtained through an 
``agreement'' should appropriately be covered by the rule.
    180-day acquisition timeframe. TILA section 129H(b)(2)(A) would 
require creditors to obtain an additional appraisal for higher-risk 
mortgage loans that will finance the consumer's purchase or acquisition 
of the mortgaged property if the following two conditions are met: (1) 
the consumer is financing the purchase or acquisition of the mortgaged 
property from a seller within 180 days of the seller's purchase or 
acquisition of the property; and (2) the seller purchased or acquired 
the property at a price that was lower than the current sale price of 
the property. 15 U.S.C. 1639h(b)(2)(A).
    For a creditor to determine whether the first condition is met, the 
creditor would compare two dates: the date of the consumer's 
acquisition and the date of the seller's acquisition. However, TILA 
section 129H(b)(2)(A) does not provide specific dates that a creditor 
must use to perform this comparison. 15 U.S.C. 1639h(b)(2)(A). To 
implement this provision, the Agencies propose in Sec.  
1026.XX(b)(3)(i)(B) to require that the creditor compare (1) the date 
on which the consumer entered into the agreement to acquire the 
property from the seller, and (2) the date on which the seller acquired 
the property. Proposed comment XX(b)(3)(i)(A)-1 provides an 
illustration in which the creditor determines the seller acquired the 
property on April 17, 2012, and the consumer's acquisition agreement is 
dated October 15, 2012; an additional appraisal would not be required 
because 181 days would have elapsed between the two dates.
    Date of the consumer's agreement to acquire the property. Regarding 
the date of the consumer's acquisition, TILA refers to the date on 
which the higher-risk mortgage loan is to ``finance the purchase or 
acquisition of the mortgaged property.'' TILA section 129H(b)(2)(A), 15 
U.S.C. 1639h(b)(2)(A). The Agencies have interpreted this term to refer 
to ``the date of the consumer's agreement to acquire the property.'' 
Proposed comment XX(b)(3)(i)(A)-2 explains that, in determining this 
date, the creditor should use a copy of the agreement itself provided 
by the consumer to the creditor, and use the date on which the consumer 
and the seller signed the agreement. If the two dates are different, 
the creditor should use the date on which the last party signed the 
agreement.
    The Agencies believe that use of the date on which the consumer and 
the seller agreed on the purchase transaction best accomplishes the 
purposes of the statute. This approach is substantially similar to 
existing creditor practice under the FHA Anti-Flipping Rule, which uses 
the date of execution of the consumer's sales contract to determine 
whether the restrictions on FHA insurance applicable to property 
resales are triggered. See 24 CFR 203.37a(b)(1). The Agencies have not 
interpreted the date of the consumer's acquisition to refer to the 
actual date of title transfer to the consumer under State law, or the 
date of consummation of the higher-risk mortgage loan, because it would 
be difficult if not impossible for creditors to determine, at the time 
that they must order an appraisal or appraisals to comply with Sec.  
1026.XX, when title transfer or consummation will occur. The actual 
date of title transfer typically depends on whether a creditor 
consummates financing for the consumer's purchase. Various factors 
considered in the underwriting decision, including a review of 
appraisals, will affect whether the creditor extends the loan. In 
addition, the Agencies are concerned that even if a creditor could 
identify a

[[Page 54739]]

date certain by which the loan would be consummated or title would be 
transferred to the consumer, the creditor could potentially set a date 
that exceeds the 180-day time period to circumvent the requirements of 
Sec.  1026.XX(b)(3).
    Proposed comment XX(b)(3)(i)(A)-2 clarifies that the date the 
consumer and the seller agreed on the purchase transaction, as 
evidenced by the date the last party signed the agreement, may not 
necessarily be the date on which the consumer became contractually 
obligated under State law to acquire the property. It may be difficult 
for a creditor to determine the date on which the consumer became 
legally obligated under the acquisition agreement as a matter of State 
law. Using the date on which the consumer and the seller agreed on the 
purchase transaction, as evidenced by their signature and the date on 
the agreement, avoids operational and other potential issues because 
the Agencies expect that this date would be facially apparent from the 
signature dates on the acquisition agreement.
    Question 24: The Agencies seek comment on whether this approach 
provides sufficient clarity to creditors on how to comply while also 
providing consumers with adequate protection.
    Date the seller acquired the property. Regarding the date of the 
seller's acquisition, TILA section 129H(b)(2)(A) refers to the date of 
that person's ``purchase or acquisition'' of the property being 
financed by the higher-risk mortgage loan. 15 U.S.C. 1639h(b)(2)(A). 
Accordingly, proposed Sec.  1026.XX(b)(3)(i)(A) refers to the date on 
which the seller ``acquired'' the property. Proposed comment 
XX(b)(3)(i)-3 clarifies that this refers to the date on which the 
seller became the legal owner of the property under State law, which 
the Agencies understand to be, in most cases, the date on which the 
seller acquired title. The Agencies have interpreted TILA section 
129H(b)(2)(A) in this manner because the Agencies understand that 
creditors, in most cases, will not extend credit to finance the 
acquisition of a property from a seller who cannot demonstrate clear 
title. 15 U.S.C. 1639h(b)(2)(A). Also, as discussed above, the Agencies 
have proposed to use the single term ``acquisition'' because this term 
is generally understood to include acquisition of legal title to the 
property, including by purchase. See section-by-section analysis of 
proposed Sec.  1026.XX(b)(3)(i)(A) (discussing the use of the term 
``acquisition'' and ``acquire'' in the proposed rule).
    To assist creditors with identifying the date on which the seller 
acquired title to the property, proposed comment XX(b)(3)(i)(A)-3 
explains that the creditor may rely on records that provide information 
as to the date on which the seller became vested as the legal owner of 
the property pursuant to applicable State law; as explained in proposed 
comments XX(b)(3)(vi)(A)-1 and -2 and proposed comment XX(b)(3)(vi)(B)-
1, the creditor may determine this date through reasonable diligence, 
requiring reliance on a written source document. The reasonable 
diligence standard is discussed further below under the section-by-
section analysis of Sec.  1026.XX(b)(3)(vi)(A) and (B).

XX(b)(3)(i)(B)

Criteria for Whether an Additional Appraisal is Required--Acquisition 
Price
    TILA section 129H(b)(2)(A) would require creditors to obtain an 
additional appraisal if the seller acquired the property ``at a price 
that was lower than the current sale price of the property'' within the 
past 180 days. 15 U.S.C. 1639h(b)(2)(A). To determine whether this 
statutory condition has been met, a creditor would have to compare the 
current sale price with the price at which the seller acquired the 
property. Accordingly, proposed Sec.  1026.XX(b)(3)(i)(B) implements 
this requirement by requiring the creditor to compare the price paid by 
the seller to acquire the property with the price that the consumer is 
obligated to pay to acquire with property, as specified in the 
consumer's agreement to acquire the property. Thus, if the price paid 
by the seller to acquire the property is lower than the price in the 
consumer's acquisition agreement by a certain amount or percentage to 
be determined by the Agencies in the final rule, and the seller 
acquired the property 180 or fewer days prior to the date of the 
consumer's acquisition agreement, the creditor would be required to 
obtain an additional appraisal before extending a higher-risk mortgage 
loan to finance the consumer's acquisition of the property. See 
section-by-section analysis of Sec.  1026.XX(b)(3)(i)(B) discussing the 
exemption for ``small'' price increases, below.
    Price at which the seller acquired the property. TILA section 
129H(b)(2)(A) refers to a property that the seller previously purchased 
or acquired ``at a price.'' 15 U.S.C. 1639h(b)(2)(A). Proposed Sec.  
1026.XX(b)(3)(i)(B) refers to the price at which the seller acquired 
the property; proposed comment XX(b)(3)(i)(B)-1 clarifies that the 
seller's acquisition price refers to the amount paid by the seller to 
acquire the property. The proposed comment also explains that the price 
at which the seller acquired the property does not include the cost of 
financing the property. This comment is intended to clarify that the 
creditor should consider only the price of the property, not the total 
cost of financing the property.
    Question 25: The Agencies invite comment on whether additional 
clarification is needed regarding how a creditor should identify the 
price at which the seller acquired the property. See also the section-
by-section analysis of proposed Sec.  1026.XX(b)(3)(i)(A) (discussing 
non-purchase acquisitions by the seller).
    Question 26: The Agencies are interested in receiving comment on 
how a creditor would calculate the price paid by a seller to acquire a 
property as part of a bulk sale that is later resold to a higher-risk 
mortgage consumer. The Agencies understand that, in bulk sales, a sales 
price might be assigned to individual properties for tax or accounting 
reasons, but the Agencies request comment on whether guidance may be 
needed for determining the sales price of a such property for purposes 
of proposed Sec.  1026.XX(b)(3)(i)(B). The Agencies request comment on 
any operational challenges that might arise for creditors in 
determining purchase prices for homes purchased as part of a bulk sale 
transaction. The Agencies also invite commenters' views on whether any 
challenges presented could impede neighborhood revitalization in any 
way, and, if so, whether the Agencies should consider an exemption from 
the additional appraisal requirement for these types of transactions 
altogether.
    Proposed comment XX(b)(3)(i)(B)-1 contains a cross-reference to 
proposed comment XX(b)(3)(vi)(A)-1, which explains how a creditor 
should determine the seller's acquisition price through reasonable 
diligence. Proposed comment XX(b)(3)(i)(B)-1 also contains a cross-
reference to proposed comment XX(b)(3)(vi)(B)-1, which explains how a 
creditor may proceed with the transaction if the creditor is unable to 
determine the seller's acquisition price following reasonable 
diligence. These proposed comments are discussed in more detail in the 
section-by-section analysis of Sec.  1026.XX(b)(3)(vi)(A), below. The 
Agencies understand that, in some cases, a creditor performing typical 
underwriting and documentation procedures may have difficulty 
ascertaining the date and price at which the seller acquired the 
property being financed through a higher-risk mortgage loan. The 
Agencies believe that, based on recent data

[[Page 54740]]

provided by the FHFA, most property resales would not trigger the 
proposal's conditions requiring an additional appraisal. According to 
estimates provided by FHFA, approximately five percent of single-family 
property sales in 2010 reflected situations in which the same property 
had been sold within a 180-day period.\52\ However, in some 
circumstances, creditors may face obstacles in attempting to determine 
the necessary transaction date and price information. For example, a 
creditor may be unable to determine information about the seller's 
acquisition because of lag times in recording public records. The 
Agencies also understand that some documents frequently reviewed by 
creditors as part of their mortgage underwriting procedures may report 
the date of the seller's acquisition, but report on only nominal 
amounts of compensation, rather than the actual sales price. Moreover, 
several ``non-disclosure'' jurisdictions do not make the price at which 
a seller acquired a property publicly available. In light of these 
difficulties, the Agencies are proposing a standard of reasonable 
diligence in determining the seller's acquisition date and price, and 
are also proposing modifications to the additional appraisal 
requirement when reasonable diligence does not provide sufficient 
information about the seller's acquisition date and price. See the 
section-by-section analysis of proposed Sec.  1026.XX(b)(3)(vi)(A) 
(reasonable diligence) below.
---------------------------------------------------------------------------

    \52\ Based on county recorder information from select counties 
licensed to FHFA by DataQuick Information Systems.
---------------------------------------------------------------------------

    Price the consumer is obligated to pay to acquire the property. 
TILA section 129H(b)(2)(A) refers to the ``current sale price of the 
property'' being financed by a higher-risk mortgage loan. 15 U.S.C. 
1639h(b)(2)(A). Proposed Sec.  1026.XX(b)(3)(i)(B) refers to ``the 
price that the consumer is obligated to pay to acquire the property, as 
specified in the consumer's agreement to acquire the property from the 
seller.'' Proposed comment XX(b)(3)(i)(B)-2 clarifies that the price 
the consumer is obligated to pay to acquire the property is the price 
indicated on the consumer's agreement with the seller to acquire the 
property that is signed and dated by both the consumer and the seller. 
Proposed comment XX(b)(3)(i)(B)-2 also explains that the price at which 
the consumer is obligated to pay to acquire the property from the 
seller does not include the cost of financing the property to clarify 
that a creditor should only consider the sale price of the property as 
reflected in the consumer's acquisition agreement. In addition, the 
proposed comment refers to proposed comment XX(b)(3)(i)(A)-2 (date of 
the consumer's agreement to acquire the property) to indicate that this 
document will be the same document that a creditor may rely on to 
determine the date of the consumer's agreement to acquire the property. 
Proposed comment XX(b)(3)(i)(B)-2 explains that the creditor is not 
obligated to determine whether and to what extent the agreement is 
legally binding on both parties. The Agencies expect that the price the 
consumer is obligated to pay to acquire the property will be facially 
apparent from the consumer's acquisition agreement.
    Question 27: The Agencies solicit comment on whether the price at 
which the consumer is obligated to pay to acquire the property, as 
reflected in the consumer's acquisition agreement, provides sufficient 
clarity to creditors on how to comply while providing consumers 
adequate protection.
    Exemption for small price increases. TILA section 129H(b)(2)(A) 
provides that an additional appraisal is required when the price at 
which the seller purchased or acquired the property was ``lower'' than 
the current sale price, but TILA does not define the term ``lower.'' 15 
U.S.C. 1639h(b)(2)(A). Thus, as written, the statute would require an 
additional appraisal for any price increase above the seller's 
acquisition price. The Agencies do not believe that the public interest 
or the safety and soundness of creditors would be served if the law is 
implemented to require an additional appraisal for relatively small 
increases in price. Accordingly, the Agencies are proposing an 
exemption to the additional appraisal requirement for relatively small 
increases in the price. Proposed Sec.  1026.XX(b)(3)(i) contains a 
placeholder for the amount by which the price at which the seller 
acquired the property was lower than the resale price: ``The seller 
acquired the property 180 or fewer days prior to the date of the 
consumer's agreement to acquire the property from the seller; and [t]he 
price at which the seller acquired the property was lower than the 
price that the consumer is obligated to pay to acquire the property, as 
specified in the consumer's agreement to acquire the property from the 
seller, by an amount equal to or greater than [XX]''. Although the 
proposal does not contain a particular price threshold, the Agencies 
may develop one in the final rule based on public comments received in 
response to this proposal.
    Question 28: The Agencies solicit comment on whether it would be in 
the public interest and promote the safety and soundness of creditors 
to include an exemption for transactions that have a sale price that 
exceeds the seller's purchase price by a particular amount.
    The Agencies recognize that there are a variety of ways to 
determine what constitutes a ``small'' price increase. One approach 
would be to use a fixed dollar value test. For example, during outreach 
with the Agencies for this proposal, some consumer advocates suggested 
requiring an additional appraisal if the resale price is greater than 
the price at which the seller acquired the property by $1,000.00 or 
more. A second approach would be to use a fixed percentage test. During 
informal outreach, different small and regional lender representatives 
suggested that an exemption for a 10, 15, or 20 percent price increase 
would be appropriate, with one large lender representative suggesting 
25 percent.
    Question 29: In light of the diverging views on an appropriate 
exception, the Agencies have elected to seek public comment on what an 
appropriate threshold would be rather than provide a particular amount 
or formula in the proposal. In particular, the Agencies seek comment on 
whether a fixed dollar amount, a fixed percentage, or some alternate 
approach \53\ should be used to determine an exempt price increase, and 
what specific price threshold would be appropriate. The Agencies 
request that commenters support their recommendations with specific 
data, where possible.
---------------------------------------------------------------------------

    \53\ The Agencies have considered requiring that creditors use a 
housing price index as a reference point for normal increases in 
price due to appreciation in housing values. For example, the rule 
could require an additional appraisal if the current sale price 
exceeds the prior sale price by a percentage greater than a 
percentage change in value of a housing price index for the relevant 
residential housing market since the date the seller acquired the 
property. While using a price index would account for natural price 
fluctuations in a particular market better than the fixed dollar or 
percentage approaches described above, the Agencies believe such a 
requirement could be burdensome for industry and provide little 
benefit to consumers. The movement of an index covering all property 
sales in a particular market area may not provide accurate or useful 
information about the proper valuation of a single property, 
especially if that property is atypical in any significant aspect.
---------------------------------------------------------------------------

XX(b)(3)(ii) Different Appraisers

    Consistent with TILA section 129H(b)(2)(A), proposed Sec.  
1026.XX(b)(3)(ii) would require an additional appraisal from a 
``different'' certified or licensed appraiser. 15 U.S.C. 
1639h(b)(2)(A). Proposed Sec.  1026.XX(b)(3)(ii) provides that the two 
appraisals that would be required by Sec.  1026.XX(b)(3)(i) may not be 
performed by the same certified or licensed appraiser. Proposed Sec.  
1026.XX(b)(3)(ii) would not impose any additional

[[Page 54741]]

conditions regarding the identity of the appraisers. During informal 
outreach conducted by the Agencies, some participants suggested that 
the Agencies impose additional requirements regarding the appraiser 
performing the second valuation for the higher-risk mortgage loan, such 
as a requirement that the second appraiser not have knowledge of the 
first appraisal. Outreach participants indicated that this requirement 
would minimize undue pressure to value the property at a price similar 
to the first appraiser. The Agencies have not proposed any additional 
conditions on what it means to obtain an appraisal from a different 
certified or licensed appraiser because the Agencies expect that the 
valuation independence requirements in Regulation Z will be sufficient 
to ensure that the second appraiser performs an independent valuation.
    In 2010 the Board implemented TILA section 129E through an interim 
final rule, which established new requirements for valuation 
independence for consumer credit transactions secured by the consumer's 
principal dwelling. See 12 CFR 1026.42; 75 FR 66554 (Oct. 28, 2010). 
The Board explained that the new requirements in TILA were designed to 
ensure that real estate appraisals used to support creditors' 
underwriting decisions are based on the appraiser's independent 
professional judgment, free of any influence or pressure that may be 
exerted by parties that have an interest in the transaction. Among 
other things, the valuation independence requirements generally 
prohibit:
     Creditors and providers of settlement services from 
attempting directly or indirectly to cause the value assigned to a 
consumer's principal dwelling to be based on any factor other than the 
independent judgment of the person preparing the valuation through 
coercion, extortion, inducement, bribery, or intimidation of, 
compensation or instruction to, or collusion with a person that 
prepares valuations (Sec.  1026.42(c)(1));
     Persons preparing valuations from materially 
misrepresenting the value of the consumer's principal dwelling (Sec.  
1026.42(c)(2)(i));
     Persons preparing a valuation or performing valuation 
management functions for a covered transaction from having a direct or 
indirect interest, financial or otherwise, in the property or 
transaction for which the valuation is or will be performed (Sec.  
1026.42(d)(1)(i)); and
     Creditors from extending credit if the creditor knows, at 
or before consummation, of a violation of Sec.  1026.42(c) or 
1026.42(d), unless the creditor documents that it has acted with 
reasonable diligence to determine that the valuation does not 
materially misstate or misrepresent the value of the consumer's 
principal dwelling (Sec.  1026.42(e)).
    Question 30: The Agencies seek comment on whether the rule should 
include additional conditions on how the creditor must obtain the 
additional appraisal under Sec.  1026.XX(b)(3)(i). For example, should 
the rule prohibit the creditor from obtaining the two appraisals from 
appraisers employed by the same appraisal firm, or from two appraisers 
who receive the assignments for the two required appraisals from the 
same appraisal management company?
XX(b)(3)(iii) Relationship to Paragraph (b)(1)
    Proposed Sec.  1026.XX(b)(3)(ii) would require that the additional 
appraisal meet the requirements of the first appraisal, which includes 
the requirements that the appraisal be performed by a certified or 
licensed appraiser who conducts a physical visit of the interior of the 
mortgaged property. The Agencies believe that this approach best 
effectuates the purposes of the statute. TILA section 129H(b)(1) 
provides that, ``Subject to the rules prescribed under paragraph (4), 
an appraisal of property to be secured by a higher-risk mortgage does 
not meet the requirements of this section unless it is performed by a 
certified or licensed appraiser who conducts a physical property visit 
of the interior of the mortgaged property''. 15 U.S.C. 1639h(b)(1). The 
``second appraisal'' required under TILA section 129H(b)(2)(A) is ``an 
appraisal of property to be secured by a higher-risk mortgage'' under 
TILA section 129H(b)(1). 15 U.S.C. 1639h(b)(1), (b)(2)(A). Therefore, 
to meet the requirements of TILA section 129H, the additional appraisal 
would be required to be ``performed by a certified or licensed 
appraiser who conducts a physical visit of the interior of the property 
that will secure the transaction.'' TILA section 129H(b)(1), 15 U.S.C. 
1639h(b)(1). In addition, under TILA section 129H(b)(2)(A), the 
additional appraisal must analyze several elements, including ``any 
improvements made to the property between the date of the previous sale 
and the current sale.'' 15 U.S.C. 1639h(b)(2)(A). The Agencies believe 
that the purposes of the statute would be best implemented by requiring 
the second appraiser to perform a physical interior property visit to 
analyze any improvements made to the property. Without an on-site 
visit, the second appraiser would have difficulty confirming that any 
improvements identified by the seller or the first appraiser were made. 
Thus, proposed Sec.  1026.XX(b)(3)(iii) provides that if the conditions 
in proposed Sec.  1026.XX(b)(3)(i) are present, the creditor must 
obtain an additional appraisal that meets the requirements of the first 
appraisal, as provided in proposed Sec.  1026.XX(b)(1).
XX(b)(3)(iv) Requirements for the Additional Appraisal
    TILA section 129H(b)(2)(A) would require that the additional 
appraisal ``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.'' 15 U.S.C. 
1639h(b)(2)(A). Proposed Sec.  1026.XX(b)(3)(iv)(A) would require that 
the additional appraisal include an analysis of the difference between 
the price at which the seller acquired the property and the price the 
consumer is obligated to pay to acquire the property, as specified in 
the consumer's acquisition agreement. In addition, proposed Sec.  
1026.XX(b)(3)(iv)(B)-(C) would require that the additional appraisal 
include an analysis of changes in market conditions and improvements 
made to the property between the date of the seller's acquisition of 
the property and the date of the consumer's agreement to acquire the 
property. For consistency with the statute, the Agencies have listed 
the requirement to analyze the difference in sale prices as an element 
distinct from the analysis of changes in market conditions and any 
improvements made to the property.
    Question 31: The Agencies invite comment on this interpretation and 
whether the rule should adopt an alternate approach.
    For consistency throughout the proposal, proposed Sec.  
1026.XX(b)(3)(iv)(A) uses the terms ``the price at which the seller 
acquired the property'' and the ``price the consumer is obligated to 
pay to acquire the property, as specified in the consumer's agreement 
to acquire the property from the seller'' as the prices that the 
additional appraisal must analyze. These are the same criteria that a 
creditor would analyze to determine whether the seller acquired the 
property at a price lower than the current sale price in proposed Sec.  
1026.XX(b)(3)(i)(B). Similarly, paragraphs (b)(3)(iv)(B) and 
(b)(3)(iv)(C) of proposed Sec.  1026.XX(b)(3)(iv) use the terms ``date 
the seller acquired the property'' and

[[Page 54742]]

the ``date of the consumer's agreement to acquire the property'' as the 
dates the additional appraisal must analyze in considering changes in 
market conditions and any improvements made to the property. These are 
the same dates that a creditor would analyze to determine whether the 
property is being resold within the 180-day period in proposed Sec.  
1026.XX(b)(3)(i)(B). Proposed comment XX(b)(3)(iv)-1 contains cross-
references to other proposed comments that clarify how a creditor would 
identify the relevant dates and prices.
    Question 32: The Agencies invite comment on this terminology and 
whether additional clarification of these requirements is necessary.
XX(b)(3)(v) No Charge for the Additional Appraisal
    TILA section 129H(b)(2)(B) provides that ``[t]he cost of the second 
appraisal required under subparagraph (A) may not be charged to the 
applicant.'' 15 U.S.C. 1639h(b)(2)(B). Proposed Sec.  1026.XX(b)(3)(v) 
provides that ``[i]f the creditor must obtain two appraisals under 
paragraph (b)(3)(i) of this section, the creditor may charge the 
consumer for only one of the appraisals.'' As clarified in proposed 
comment XX(b)(3)(v)-1, the creditor would be prohibited from imposing a 
fee specifically for that appraisal or by marking up the interest rate 
or any other fees payable by the consumer in connection with the 
higher-risk mortgage loan.
    The proposed comment also explains that the creditor would be 
prohibited from charging the consumer for the ``performance of one of 
the two appraisals required under Sec.  1026.XX(b)(3)(i).'' This 
comment is intended to clarify that the prohibition on charging the 
consumer under Sec.  1026.XX(b)(3)(v) applies to charges for the cost 
of performing the appraisal, not the cost of providing the consumer 
with a copy of the appraisal. As implemented by proposed Sec.  
1026.XX(d)(4), TILA section 129H(c) would prohibit the creditor from 
charging the consumer for one copy of each appraisal conducted pursuant 
to the higher-risk mortgage rule. 15 U.S.C. 1639h(c); see also section-
by-section analysis of proposed Sec.  1026.XX(d)(4), below. As 
discussed above, the Agencies have not used the phrase ``second 
appraisal'' in the proposed rule because, in practice, a creditor 
ordering two appraisals at the same time may not know which of the two 
appraisals would be the ``second'' appraisal. The Agencies understand 
that the additional appraisal could be separately identified because it 
must contain an analysis of elements in proposed Sec.  
1026.XX(b)(3)(iv), but the Agencies also understand that some 
appraisers may perform such an analysis as a matter of routine, and 
that it may be difficult to distinguish the two appraisals on that 
basis.
    Question 33: The Agencies invite comment on the proposed approach 
of permitting the creditor to charge for only one appraisal, and 
whether other ways to identify the ``second appraisal'' as the one that 
cannot be charged to the consumer may exist.
    In addition, proposed Sec.  1026.XX(b)(3)(ii) prohibits the 
creditor from charging ``the consumer'' in place of the statutory term, 
``applicant.'' The Agencies believe that use of the broader term 
``consumer'' is necessary to clarify that the creditor may not charge 
the consumer for the cost of the additional appraisal after 
consummation of the loan.
XX(b)(3)(vi) Creditor's Determinations Under Paragraphs (b)(3)(i)(A) 
and (b)(3)(i)(B) of this Section
XX(b)(3)(vi)(A) Reasonable Diligence
    Proposed Sec.  1026.XX(b)(3)(vi)(A) would require the creditor to 
exercise reasonable diligence to determine whether the criteria in 
paragraphs (b)(3)(i)(A) and (b)(3)(i)(B) of proposed Sec.  1026.XX and 
are met--namely, whether the seller acquired the property 180 or fewer 
days prior to the date of the consumer's agreement to acquire the 
property from the seller, at a price that was lower than the price the 
consumer is obligated to pay, as specified in the consumer's agreement 
to acquire the property from the seller. Although TILA section 129H 
does not include a diligence standard, the Agencies are proposing one 
to implement the statute's requirement that the creditor obtain an 
additional appraisal. To determine whether an additional appraisal is 
required, the creditor would be required to know whether the criteria 
regarding the property's sale prices and dates of acquisition are met. 
The Agencies believe it may be difficult in some cases for a creditor 
to know with absolute certainty whether the criteria in paragraphs 
(b)(3)(i)(A) and (b)(3)(i)(B) of proposed Sec.  1026.XX are met. 
Similarly, a creditor may have difficulty knowing whether it had relied 
on the ``best information'' available in making such a determination, 
which could require that creditors perform an exhaustive review of 
every document that might contain information about a property's sales 
history and unduly limit the availability of credit to higher-risk 
mortgage consumers.
    To meet the proposed reasonable diligence standard, the Agencies 
believe that creditors should be able to rely on written source 
documents that are generally available in the normal course of 
business. Accordingly, proposed comment XX(b)(3)(vi)(A)-1 clarifies 
that a creditor has acted with reasonable diligence to determine when 
the seller acquired the property and whether the price at which the 
seller acquired the property is lower than the price reflected in the 
consumer's acquisition agreement if, for example, the creditor bases 
its determination on information contained in written source documents, 
as discussed below.
    The proposed comment provides a list of written source documents 
that the creditor could use to perform reasonable diligence as follows: 
a copy of the recorded deed from the seller; a copy of a property tax 
bill; a copy of any owner's title insurance policy obtained by the 
seller; a copy of the RESPA settlement statement from the seller's 
acquisition (i.e., the HUD-1 or any successor form \54\); a property 
sales history report or title report from a third-party reporting 
service; sales price data recorded in multiple listing services; tax 
assessment records or transfer tax records obtained from local 
governments; a written appraisal, including a signed appraiser's 
certification stating that the appraisal was performed in conformity 
with USPAP, that shows any prior transactions for the subject property; 
a copy of a title commitment report; or a property abstract.
---------------------------------------------------------------------------

    \54\ As explained in a footnote in the proposed comment, the 
Bureau's 2012 TILA-RESPA Proposal contains a proposed successor form 
to the RESPA settlement statement. See Sec.  1026.38 (Closing 
Disclosure Form) of the Bureau's 2012 TILA-RESPA Proposal, available 
at http://www.consumerfinance.gov/regulations/.
---------------------------------------------------------------------------

    Question 34: The Agencies specifically invite comment on whether 
these or other source documents would provide reliable information 
about a property's sales history.\55\ The Agencies also request comment 
on whether these or other source documents could be relied on in making 
the additional appraisal determination, provided they indicate the 
seller's acquisition date or the seller's acquisition price.
---------------------------------------------------------------------------

    \55\ See also HUD Mortgagee Letter 2003-07 (May 22, 2003) 
(providing examples of documents a creditor could use to comply with 
the time-period restrictions in the FHA Anti-Flipping Rule).
---------------------------------------------------------------------------

    The proposed comment contains a footnote explaining that a ``title 
commitment report'' is a document from a title insurance company 
describing the property interest and status of its title, parties with 
interests in the title and the nature of their claims, issues with the

[[Page 54743]]

title that must be resolved prior to closing of the transaction between 
the parties to the transfer, amount and disposition of the premiums, 
and endorsements on the title policy. The footnote also explains that 
the document is issued by the title insurance company prior to the 
company's issuance of an actual title insurance policy to the 
property's transferee and/or creditor financing the transaction. In 
different jurisdictions, this instrument may be referred to by 
different terms, such as a title commitment, title binder, title 
opinion, or title report.
    Regarding the list of source documents described above, the 
Agencies note that the first four listed items would be voluntarily 
provided directly or indirectly by the seller, rather than collected 
from publicly available sources. Permitting the use of these documents 
presents the risk that the creditor would be presented with altered 
copies. Balanced against this risk is the concern that no information 
sources are publicly available in non-disclosure jurisdictions and 
jurisdictions with significant lag times before public land records are 
updated to reflect new transactions.\56\ The Agencies are concerned 
that, unless the creditor can rely on other sources, such as sources 
provided by the seller, the higher-risk mortgage transaction may not 
proceed at all, or could proceed only with an additional appraisal 
containing a limited form of the analysis that would be required by 
TILA section 129H(b)(2)(A). 15 U.S.C. 1639h(b)(2)(A). (For a discussion 
of how a higher-risk mortgage transaction could proceed with limited 
information about the seller's acquisition, see the section-by-section 
analysis of proposed Sec.  1026.XX(b)(3)(vi)(B), below).
---------------------------------------------------------------------------

    \56\ During informal outreach conducted by the Agencies, 
representatives of large, small, and regional lenders expressed 
concern that in some cases, a creditor may be unable to determine 
the seller's date and price due to information gaps in the public 
record. The Agencies also understand that a creditor may not be able 
to determine prior transaction data because of delays in the 
recording of public records. The Agencies also understand that 
certain ``non-disclosure'' jurisdictions do not make the price at 
which a seller acquired a property available in the public records.
---------------------------------------------------------------------------

    Question 35: The Agencies are particularly interested in whether a 
creditor should be permitted to rely on a signed USPAP-compliant 
written appraisal prepared for the higher-risk mortgage transaction to 
determine the seller's acquisition date and price.
    The Agencies understand that USPAP Standards Rule 1-5 requires 
appraisers to ``analyze all sales of the subject property that occurred 
within the three (3) years prior to the effective date of the 
appraisal'' if that information is available to the appraiser ``in the 
normal course of business.'' \57\ Thus, the Agencies expect that, in 
most cases, a creditor could rely on the first appraisal prepared for 
the higher-risk mortgage transaction to reveal information relevant to 
determining whether an additional appraisal would be required under 
Sec.  1026.XX(b)(3)(i). However, the Agencies are concerned that a 
written appraisal may not be trustworthy if the appraiser were a party 
to a fraudulent flipping scheme.
---------------------------------------------------------------------------

    \57\ Appraisal Standards Bd., Appraisal Fdn., Standards Rule 1-
5, USPAP (2012-2013 ed.).
---------------------------------------------------------------------------

    Question 36: In light of the abuses sought to be prevented by the 
statute, the Agencies invite comment on whether allowing a creditor to 
rely on the appraisal for the requisite information is appropriate and 
whether a creditor could take any specific measures to ensure the 
appraiser is reporting prior sales accurately. The Agencies are 
particularly interested in receiving comment on whether, for creditors 
that are required to select an independent appraiser, such as creditors 
subject to the Federal banking agencies' FIRREA title XI rules, the 
creditor's selection of an independent appraiser is sufficient to 
address the concern that the appraiser may be colluding with a seller 
in perpetrating a fraudulent flipping scheme.
    The Agencies also note that some of the listed documents may not 
necessarily be publicly available. Even in jurisdictions that, at the 
time of the particular loan application, make up-to-date sales 
information publicly available, the Agencies are reluctant to suggest 
that the creditor should have to look further than publicly available 
information that is commonly obtained as part of creditors' current 
loan underwriting processes.
    Question 37: The Agencies question whether other information 
sources are likely to be more easily available or more accurate, and 
request commenters' views on this point.
    Oral statements. Proposed comment XX(b)(3)(vi)(A)-2 explains that 
reliance on oral statements of interested parties, such as the 
consumer, seller, or mortgage broker does not constitute reasonable 
diligence for determining whether an additional appraisal is required 
under Sec.  1026.XX(b)(3)(i). The Agencies do not believe that 
creditors should be permitted to rely on oral statements offered by 
parties to the transaction because they may be engaged in the type of 
fraud the statutory provision was designed to prevent.
    Question 38: However, the Agencies request comment on whether 
circumstances exist in which oral statements offered by parties to the 
transaction could be considered reliable if documented appropriately, 
and how such statements should be documented to ensure greater 
reliability.
XX(b)(3)(vi)(B) Inability To Make the Determination Under Paragraphs 
(b)(3)(i)(A) and (b)(3)(i)(B) of this Section
    In general, the Agencies believe that, based on recent data 
provided by FHFA, most property resales would not trigger the 
proposal's conditions requiring an additional appraisal.\58\ However, 
the Agencies understand that, in some cases, a creditor performing 
typical underwriting and documentation procedures may be unable to 
ascertain through information derived from public records whether the 
conditions in the additional appraisal requirement have been triggered. 
For example, a creditor may be unable to determine information about 
the seller's acquisition because of lag times in recording public 
records. The Agencies also understand that some source documents often 
report only nominal amounts of consideration when describing the 
consideration paid by the current titleholder for the property. 
Moreover, as noted, several ``non-disclosure'' jurisdictions do not 
make the price at which a seller acquired a property publicly 
available. In addition, the creditor may obtain conflicting information 
from written source documents. In these cases, a creditor may be unable 
to determine, based on its reasonable diligence, whether the criteria 
in proposed paragraphs (b)(3)(i)(A) and (b)(3)(i)(B) have been met.
---------------------------------------------------------------------------

    \58\ Based on county recorder information from select counties 
licensed to FHFA by DataQuick Information Systems.
---------------------------------------------------------------------------

    For the reasons discussed below, the Agencies believe that a 
higher-risk mortgage loan creditor should be required to obtain an 
additional appraisal if the creditor cannot determine the seller's 
acquisition price or date based on written source documents. 
Accordingly, proposed Sec.  1026.XX(b)(3)(vi)(B) would require a 
higher-risk mortgage loan creditor that cannot determine the seller's 
acquisition date or price to obtain an additional appraisal.
    Proposed comment XX(b)(3)(vi)(B)-1 provides two examples of how 
this rule would apply: one in which a creditor is

[[Page 54744]]

unable to obtain information on the seller's acquisition price or date 
and the other in which a creditor obtains conflicting information about 
the seller's acquisition price or date. In the first example, proposed 
comment XX(b)(3)(vi)(B)-1.i assumes that a creditor orders and reviews 
the results of a title search showing the seller's acquisition date is 
within the 180-day window, but the seller's acquisition price was not 
included. In this case, the creditor would not be able to determine 
whether the price paid by the seller to acquire the property was lower 
than the price the consumer is obligated to pay under the consumer's 
acquisition agreement, pursuant to Sec.  1026.XX(b)(3)(i)(B). Before 
extending a higher-risk mortgage loan, the creditor must either: (1) 
perform additional diligence to obtain information showing the seller's 
acquisition price and determine whether two written appraisals in 
compliance with Sec.  1026.XX(b)(3) would be required based on that 
information; or (2) obtain two written appraisals in compliance with 
Sec.  1026.XX(b)(3). See also proposed comment XX(b)(3)(vi)(B)-2.
    In the second example, proposed comment XX(b)(3)(vi)(B)-1.ii 
assumes that a creditor reviews the results of a title search 
indicating that the last recorded purchase was more than 180 days 
before the consumer's agreement to acquire the property. This proposed 
comment also assumes that the creditor subsequently receives a written 
appraisal indicating that the seller acquired the property less than 
180 days before the consumer's agreement to acquire the property. In 
this case, the creditor would not be able to determine whether the 
seller acquired the property within 180 days of the date of the 
consumer's agreement to acquire the property from the seller, pursuant 
to Sec.  1026.XX(b)(3)(i)(A). Before extending a higher-risk mortgage 
loan, the creditor must either: (1) perform additional diligence to 
obtain information confirming the seller's acquisition date (and price, 
if within 180 days) and determine whether two written appraisals in 
compliance with Sec.  1026.XX(b)(3) would be required based on that 
information; or (2) obtain two written appraisals in compliance with 
Sec.  1026.XX(b)(3). See also comment XX(b)(3)(vi)(B)-3.
    Under this proposal, when information about a property is not 
available from written source documents, creditors extending higher-
risk mortgage loans will routinely incur increased costs associated 
with obtaining the additional appraisal. One risk of the proposal is 
that, because TILA section 129H(b)(2)(B) prohibits creditors from 
charging their customers for the additional appraisal, 15 U.S.C. 
1639h(b)(2)(B), creditors will simply refrain from engaging in any 
higher-risk mortgage loan transaction where sales history data cannot 
be obtained. See also proposed Sec.  1026.XX(b)(3)(v). In ``non-
disclosure'' jurisdictions, where property sales price information is 
routinely unavailable through public records, this requirement could 
limit the availability of higher-risk mortgage loans.
    The Agencies believe, however, that requiring an additional 
appraisal where creditors are unable to obtain the seller's acquisition 
price and date is necessary to prevent circumvention of the statute. In 
particular, the Agencies are concerned that not requiring an additional 
appraisal in cases of limited information may encourage the 
concentration of fraudulent property flipping in ``non-disclosure'' 
jurisdictions. Similarly, the Agencies are concerned that sellers that 
acquire and sell properties within a short timeframe could take 
advantage of delays in the public recording of property sales to engage 
in fraudulent flipping transactions. The Agencies believe that, where 
the seller's acquisition date in particular is not in the public record 
due to recording delays, it is more reasonable to assume that the 
seller's transaction was sufficiently recent to be covered by the rule 
than not.
    Question 39: The Agencies request comment on whether the enhanced 
protections for consumers afforded by requiring an additional appraisal 
whenever the seller's acquisition date or price cannot be determined 
merit the potential restraint on the availability of higher-risk 
mortgage loans. The Agencies also request comment on whether concerns 
about these potential restraints on credit availability make it 
particularly important to include the first four source documents 
listed in the proposed commentary, even though they would be seller-
provided, and whether these concerns warrant further expanding the 
sources of information creditors may rely on to satisfy the reasonable 
diligence standard under the proposed rule.
    Modified requirements for content of additional appraisal. As 
discussed above, proposed Sec.  1026.XX(b)(3)(vi)(B) would require a 
higher-risk mortgage loan creditor that cannot determine the seller's 
acquisition date or price to obtain an additional appraisal. However, 
proposed Sec.  1026.XX(b)(3)(vi)(B) also provides that the additional 
appraisal in this situation would not have to contain the full analysis 
required for additional appraisals of flipping transactions under 
proposed Sec.  1026.XX(b)(3)(iv)(A)-(C). See TILA section 
129H(b)(2)(A), 15 U.S.C. 1639h(b)(2)(A). Specifically, under proposed 
Sec.  1026.XX(b)(vi)(B), the additional appraisal must include an 
analysis of the elements that would be required in proposed Sec.  
1026.XX(b)(3)(iv)(A)-(C) only to the extent that the creditor knows the 
seller's purchase price and acquisition date. As discussed in the 
section-by-section analysis of proposed Sec.  1026.XX(b)(3)(ii), TILA 
section 129H(b)(2)(A) requires that the additional appraisal analyze 
changes in market conditions, improvements to the property, and the 
difference in sales prices. 15 U.S.C. 1639h(b)(2)(A). An appraiser 
could not perform this analysis if efforts to obtain the seller's 
acquisition date and price were not successful.
    Proposed comment XX(b)(3)(vi)(B)-2 confirms that, in general, the 
additional appraisal required under Sec.  1026.XX(b)(3)(i) should 
include an analysis of the factors listed in Sec.  
1026.XX(b)(3)(iv)(A)-(C). However, the proposed comment also confirms 
that if, following reasonable diligence, a creditor cannot determine 
whether the criteria in Sec.  1026.XX(b)(3)(i)(A) and (B) are met due 
to a lack of information or conflicting information, the required 
additional appraisal must include the analyses required under Sec.  
1026.XX(b)(3)(iv)(A), (B), and (C) only to the extent that the 
information necessary to perform the analysis is known. See section-by-
section analysis of paragraphs (b)(3)(i) and (b)(3)(iv) of proposed 
Sec.  1026.XX. The proposed comment provides two examples. First, 
proposed comment XX(b)(3)(vi)(B)-2.i states that, if a creditor is 
unable, following reasonable diligence, to determine the price at which 
the seller acquired the property, the second written appraisal obtained 
by the creditor is not required to include the analysis under Sec.  
1026.XX(b)(3)(iv)(A) of the difference between the price at which the 
seller acquired the property and the price that the consumer is 
obligated to pay to acquire the property, as specified in the 
consumer's agreement to acquire the property from the seller. The 
proposed comment also explains that the second written appraisal would 
be required to include the analysis under paragraphs (b)(3)(iv)(B) and 
(b)(3)(iv)(C) of proposed Sec.  1026.XX of the changes in market 
conditions and any improvements made to the property between the date 
the

[[Page 54745]]

seller acquired the property and the date of the consumer's agreement 
to acquire the property.
    In addition, the Agencies note that the proposed rule does not 
provide commentary explaining how the creditor would obtain an 
additional appraisal if the creditor is unable to determine the date 
the seller acquired the property but is able to determine the price at 
which the seller acquired the property. Proposed Sec.  
1026.XX(b)(3)(iv)(A) would require creditors to perform ``an analysis 
of the difference between the price at which the seller acquired the 
property and the price that the consumer is obligated to pay to acquire 
the property.''
    Question 40: The Agencies request comment on whether an appraiser 
would be unable to analyze the difference in the price the consumer is 
obligated to pay to acquire the property and the price at which the 
seller acquired the property without knowing when the seller acquired 
the property. If such an analysis is not possible without information 
about when the seller acquired the property, the Agencies invite 
comment on whether the rule should assume the seller acquired the 
property 180 days prior to the date of the consumer's agreement to 
acquire the property.
    The Agencies believe that allowing creditors to comply with a 
modified form of the full analysis where a creditor cannot determine 
information about a property based on its reasonable diligence is a 
reasonable interpretation of the statute. It would be impossible for a 
creditor to obtain an appraisal that complies with the full analysis 
requirement of TILA section 129H(b)(2)(A) concerning the change in 
price, market conditions, and improvements to the property if a 
creditor could not determine when or for how much the prior sale 
occurred.
    In sum, the Agencies' proposed approach to situations in which the 
creditor cannot obtain the necessary information, either due to a lack 
of information or conflicting information, is to require an additional 
appraisal, but, to account for missing or conflicting information, 
require a modified version of the full additional analysis required 
under TILA section 129H(b)(2)(A) and proposed Sec.  1026.XX(b)(3)(iv). 
15 U.S.C. 1639h(b)(2)(A). Among alternative approaches not chosen by 
the Agencies is to prohibit creditors from extending the higher-risk 
mortgage loan altogether under these circumstances. The Agencies 
believe, however, that a flat prohibition would unduly limit the 
availability of higher-risk mortgage loans to consumers.
    Question 41: The Agencies request comment on the proposed approach 
to situations in which the creditor cannot obtain the necessary 
information and whether the rule should address information gaps about 
the flipping transaction in other ways.
XX(c) Required Disclosure
XX(c)(1) In General
    Title XIV of the Dodd-Frank Act added two new appraisal-related 
notification requirements for consumers. First, TILA section 129H(d) 
requires that, at the time of the initial mortgage application for a 
higher-risk mortgage loan, the applicant must be ``provided with a 
statement by the creditor 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 expense of the 
applicant.'' 15 U.S.C. 1639h(d). Proposed Sec.  1026.XX(c) implements 
the new disclosure requirement added by TILA section 129H(d).
    In addition, new section 701(e)(5) of the Equal Credit Opportunity 
Act (ECOA) similarly requires a creditor to notify an applicant in 
writing, at the time of application, of the ``right to receive a copy 
of each written appraisal and valuation'' subject to ECOA section 
701(e). 15 U.S.C. 1691(e)(5). Read together, the revisions to TILA and 
ECOA will require creditors to provide two appraisal disclosures to 
consumers applying for a higher-risk mortgage loan secured by a first 
lien on a consumer's principal dwelling. The Bureau intends to 
implement ECOA section 701(e) separately, using its authority to 
promulgate rules pursuant to section 703(a) of ECOA; however, in 
developing this proposal jointly with the Agencies, the Bureau has been 
cognizant of the need to promote consistency for consumers and reduce 
operational burden for creditors in implementing both the new TILA and 
ECOA appraisal-related disclosure requirements.
    Consumer Testing. In developing this proposal to implement the 
disclosure requirements in TILA section 129H(d), the Agencies have 
relied on consumer testing conducted on behalf of the Bureau as part of 
its development of integrated disclosures under the Real Estate 
Settlement Procedures Act (RESPA) and TILA. While a short summary is 
included below, a more comprehensive discussion of the Bureau's 
consumer testing protocol and procedures has been published in the 
Federal Register as part of the Bureau's 2012 TILA-RESPA Proposal.
    Testing the Appraisal Disclosures. As part of its broader testing 
of integrated mortgage disclosures, the Bureau tested versions of the 
new appraisal-related disclosures required by both TILA and ECOA. The 
Bureau believed that testing both appraisal-related disclosures 
together was important to determine how best to provide these two 
overlapping but separate disclosures in a manner that would minimize 
consumer confusion and improve consumer comprehension. Testing showed 
that consumers tended to find the two notifications confusing when they 
were given together using, in both cases, the language in the statute. 
Consumer comprehension of both appraisal-related disclosures 
significantly improved when a slightly longer plain language version of 
the notifications was provided. The Agencies believe that Congress 
intended the ECOA and TILA notices to work together to provide 
consumers a better understanding of collateral valuations used by the 
creditor in determining whether to extend secured credit to the 
consumer. Based on the results of the consumer testing performed by the 
Bureau, the Agencies are proposing to implement the appraisal 
disclosure required in TILA with a new Sec.  1026.XX(c)(1) that would 
require the following disclosure: ``We may order an appraisal to 
determine the property's value and charge you for this appraisal. We 
will promptly give you a copy of any appraisal, even if your loan does 
not close. You can pay for an additional appraisal for your own use at 
your own cost.''
    While the proposed disclosure is longer than the express statutory 
language provided in section 129H(d), the Agencies believe that the 
additional explanatory text is necessary to promote consumer 
comprehension and to reduce any confusion associated with the ECOA 
appraisal notification that will also have to be given to applicants 
for most higher-risk mortgage loans. The proposed notification is 
accurate because, like the ECOA section 701(e) appraisal requirement, 
TILA section 129H(c) also requires creditors to provide consumers with 
a copy of the appraisals at least three days prior to consummation.
    The proposed disclosure does not include the express language in 
TILA section 129H(d) that ``the appraisal prepared for the mortgage is 
for the sole use of the creditor.'' 15 U.S.C. 1639h(d). The Agencies 
are proposing not to include this express language in the disclosure 
language because, in testing performed by the Bureau, it confused 
consumers. Requirements to disclose

[[Page 54746]]

appraisal information to residential mortgage consumers, such as under 
TILA section 129H(c), are intended to help consumers understand the 
collateral valuation information on which creditors rely in reaching 
decisions on consumers' mortgage applications. 15 U.S.C. 1639h(c). TILA 
section 129H(d) seeks to convey that the valuation conclusions in the 
appraisal are prepared for the benefit of the creditor, not the 
consumer. 15 U.S.C. 1639h(d). The disclosure language proposed by the 
Agencies addresses this point by advising consumers they may obtain an 
additional appraisal at their own cost for their own use. In 
formulating this language without ``sole use'' terminology, the 
Agencies are not suggesting that TILA section 129H should be construed 
to confer upon consumers a status equivalent to an intended third-party 
beneficiary with respect to the valuation conclusion in written 
appraisals obtained by creditors. 15 U.S.C. 1639h.
    Question 42: The Agencies request comment on the proposed language 
and whether additional changes should be made to the text of the 
notification to further enhance consumer comprehension.
    Proposed comment XX(c)(1)-1 clarifies that when two or more 
consumers apply for a loan subject to this section, the creditor is 
required to give the disclosure to only one of the consumers. This 
interpretation is for consistency with comment 14(a)(2)(i)-1 in 
Regulation B, which interprets the requirement in Sec.  
1002.14(a)(2)(i) that creditors notify applicants of the right to 
receive copies of appraisals. 12 CFR 1002.14(a)(2) and comment 
14(a)(2)(i)-1.
XX(c)(2) Timing of Disclosure
    TILA section 129H(c) requires that the disclosure be provided at 
the time of the initial mortgage application. 15 U.S.C. 1639h(c). To be 
consistent with other similar TILA and RESPA notifications provided to 
consumers \59\ and to allow creditors sufficient time to deliver 
written disclosures to applicants, when an application is submitted 
over the phone, by fax, or by mail, proposed Sec.  1026.XX(c)(2) 
requires that the disclosure be delivered not later than the third 
business day after the creditor receives the consumer's application. In 
addition, providing the notification to consumers at the same time as 
other similar notifications allows consumers to read the notification 
in context with other important information that must be delivered not 
later than the third business day after the creditor receives the 
consumer's application. The Agencies believe this interpretation is 
consistent with the requirements of TILA section 129H(d). 15 U.S.C. 
1639h(d).
---------------------------------------------------------------------------

    \59\ See, e.g., 12 CFR 1026.19(a)(1)(i) (``In a mortgage 
transaction subject to the Real Estate Settlement Procedures Act (12 
U.S.C. 2601 et seq.) that is secured by the consumer's dwelling * * 
* the creditor shall make good-faith estimates of the disclosures 
required by section 1026.18 and shall deliver or place them in the 
mail not later than the third business day after the creditor 
receives the consumer's written application.'').
---------------------------------------------------------------------------

    Question 43: The Agencies request comment on whether providing the 
notification at some other time would be more beneficial to consumers, 
and how the notification should be provided when an application is 
submitted by telephone, facsimile or electronically. For example, the 
Agencies solicit comment on whether it would be appropriate to require 
that creditors provide the disclosure at the same time the application 
is received, or even as part of the application.
    Question 44: The Agencies also solicit comment on whether creditors 
who have a reasonable belief that the transaction will not be a higher-
risk mortgage loan at the time of application, but later determine that 
the applicant only qualifies for a higher-risk mortgage loan, should be 
allowed an opportunity to cure and give the required disclosure at some 
later time in the application process.

XX(d) Copy of Appraisals

XX(d)(1) In General
    Consistent with TILA section 129H(c), proposed Sec.  1026.XX(d) 
requires that a creditor must provide a copy of any written appraisal 
performed in connection with a higher-risk mortgage loan to the 
applicant. 15 U.S.C. 1639h(c).
    Similar to proposed comment XX(c)(1)-1, proposed comment XX(d)(1)-1 
clarifies that when two or more consumers apply for a loan subject to 
this section, the creditor is required to give the copy of required 
appraisals to only one of the consumers.
XX(d)(2) Timing
    TILA section 129H(c) requires that the appraisal copy must be 
provided to the consumer at least three (3) days prior to the 
transaction closing date. 15 U.S.C. 1639h(c). Proposed Sec.  
1026.XX(d)(2) requires creditors to provide copies of written 
appraisals pursuant to Sec.  1026.XX(d)(1) no later than ``three 
business days'' prior to consummation of the higher-risk mortgage loan. 
The Agencies believe that requiring that the appraisal be provided 
three (3) business days in advance of consummation is a reasonable 
interpretation of the statute and is consistent with the Agencies' 
interpretation of the statutory term ``days'' used in the Bureau's 
proposed rule amending 12 CFR 1002.14, which implements the appraisal 
requirements of new ECOA section 701(e)(1). See 15 U.S.C. 1691(e)(1); 
and the Bureau's 2012 ECOA Proposal.\60\ In addition, the Agencies' 
interpretation of the term ``days'' to mean ``business days'' is 
consistent with other similar regulatory requirements being proposed 
under the TILA and RESPA. See Bureau's 2012 TILA-RESPA Proposal.
---------------------------------------------------------------------------

    \60\ The Bureau's 2012 ECOA Proposal is available at http://www.consumerfinance.gov/regulations/.
---------------------------------------------------------------------------

    For consistency with the other provisions of Regulation Z, proposed 
Sec.  1026.XX also uses the term ``consummation'' instead of the 
statutory term ``closing'' that is used in TILA section 129H(c). 15 
U.S.C. 1639h(c). The term ``consummation'' is defined in Sec.  
1026.2(a)(13) as the time that a consumer becomes contractually 
obligated on a credit transaction. The Agencies have interpreted the 
two terms as having the same meaning for the purpose of implementing 
TILA section 129H. 15 U.S.C. 1639h.
XX(d)(3) Form of Copy
    Section 1026.31(b) currently provides that the disclosures required 
under subpart E of Regulation Z may be provided to the consumer in 
electronic form, subject to compliance with the consumer-consent and 
other applicable provisions of the Electronic Signatures in Global and 
National Commerce Act (E-Sign Act) (15 U.S.C. 7001 et seq.). The 
Agencies believe that it is also appropriate to allow creditors to 
provide applicants with copies of written appraisals in electronic form 
if the applicant consents to receiving the copies in such form. 
Accordingly, proposed Sec.  1026.XX(d)(3) provides that any copy of a 
written appraisal required by Sec.  1026.XX(d)(1) may be provided to 
the applicant in electronic form, subject to compliance with the 
consumer consent and other applicable provisions of the E-Sign Act.
XX(d)(4) No Charge for Copy of Appraisal
    TILA section 129H(c) provides that a creditor shall provide one (1) 
copy of each appraisal conducted in accordance with this section in 
connection with a higher-risk mortgage to the applicant without charge. 
15 U.S.C. 1639h(c). The Agencies have interpreted this section to 
prohibit creditors from charging consumers for providing a copy of

[[Page 54747]]

written appraisals required for higher-risk mortgage loans. 
Accordingly, proposed Sec.  1026.XX(d)(4) provides that a creditor must 
not charge the applicant for a copy of a written appraisal required to 
be provided to the consumer pursuant to Sec.  1026.XX(d)(1).
    Proposed comment XX(d)(4)-1 clarifies that the creditor is 
prohibited from charging the consumer for any copy of an appraisal 
required to be provided under Sec.  1026.X(d)(1), including by imposing 
a fee specifically for a required copy of an appraisal or by marking up 
the interest rate or any other fees payable by the consumer in 
connection with the higher-risk mortgage loan.
XX(e) Relation to Other Rules
    Proposed paragraph (e) would clarify that the proposed rules were 
developed jointly by the Agencies. The Board proposes to codify its 
higher-risk mortgage appraisal rules at 12 CFR 226.XX et seq.; the 
Bureau proposes to codify its higher-risk mortgage appraisal rules at 
12 CFR 1026.XX et seq.; and the OCC proposes to codify its higher-risk 
mortgage appraisal rules at 12 CFR Part 34 and 12 CFR Part 164. There 
is, however, no substantive difference among the three sets of rules. 
The NCUA and FHFA propose to adopt the rules as published in the 
Bureau's Regulation Z at 12 CFR 1026.XX, by cross-referencing these 
rules in 12 CFR 722.3 and 12 CFR Part 1222, respectively. The FDIC 
proposes to not cross-reference the Bureau's Regulation Z at 12 CFR 
1026.XX.

V. Section 1022(b)(2) of the Dodd-Frank Act

Overview

    In developing the proposed rule, the Bureau has considered 
potential benefits, costs, and impacts to consumers and covered 
persons.\61\ The Bureau is issuing this proposal jointly with the 
Federal banking agencies and FHFA, and has consulted with these 
agencies, the Department of Housing and Urban Development, and the 
Federal Trade Commission, including regarding consistency with any 
prudential, market, or systemic objectives administered by such 
agencies.
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    \61\ Specifically, Section 1022(b)(2)(A) calls for the Bureau to 
consider the potential benefits and costs of a regulation to 
consumers and covered persons, including the potential reduction of 
access by consumers to consumer financial products or services; the 
impact on depository institutions and credit unions with $10 billion 
or less in total assets as described in section 1026 of the Act; and 
the impact on consumers in rural areas.
---------------------------------------------------------------------------

    As discussed above, the proposed rule would implement section 1471 
of the Dodd-Frank Act, which establishes appraisal requirements for 
higher-risk mortgage loans. Consistent with the statute, the proposal 
would allow a creditor to make a higher-risk mortgage loan only if the 
following conditions are met:
     The creditor obtains a written appraisal;
     The appraisal is performed by a certified or licensed 
appraiser;
     The appraiser conducts a physical property visit of the 
interior of the property;
     At application, the applicant is 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 at the expense of the 
applicant; and
     The creditor provides the consumer with a free copy of any 
written appraisals obtained for the transaction at least three (3) 
business days before closing.
    In addition, as required by the Act, the proposal would require a 
higher-risk mortgage loan creditor to obtain an additional written 
appraisal, at no cost to the borrower, under the following 
circumstances:
     The higher-risk mortgage loan will finance the acquisition 
of the consumer's principal dwelling;
     The seller selling what will become the consumer's 
principal dwelling acquired the home within 180 days prior to the 
consumer's purchase agreement (measured from the date of the consumer's 
purchase agreement); and
     The consumer is acquiring the home for a higher price than 
the seller paid, although comment is requested on whether a threshold 
price increase would be appropriate.
    The additional written appraisal, from a different licensed or 
certified appraiser, generally must include the following information: 
an analysis of the difference in sale prices (i.e., the sale price paid 
by the seller and the acquisition price of the property as set forth in 
the consumer's purchase agreement), changes in market conditions, and 
any improvements made to the property between the date of the previous 
sale and the current sale.
    The proposal also includes a request for comments to address a 
proposed amendment to the method of calculation of the APR that is 
being proposed as part of another mortgage-related proposal issued for 
comment by the Bureau. In the Bureau's proposal to integrate mortgage 
disclosures (2012 TILA-RESPA Proposal), the Bureau is proposing to 
adopt a more simple and inclusive finance charge calculation for 
closed-end credit secured by real property or a dwelling.\62\ As the 
finance charge is integral to the calculation of the APR, the Bureau 
believes it is possible that a more inclusive finance charge could 
increase the number of loans covered by this rule. The Bureau currently 
is seeking data to assist in assessing potential impacts of a more 
inclusive finance charge in connection with the 2012 TILA-RESPA and its 
proposal to implement Dodd-Frank Act provision related to ``high-cost'' 
loans (2012 HOEPA Proposal).\63\
---------------------------------------------------------------------------

    \62\ See 2012 TILA-RESPA Proposal, pp. 101-127, 725-28, 905-11 
(published July 9, 2012), available at http://files.consumerfinance.gov/f/201207_cfpb_proposed-rule_integrated-mortgage-disclosures.pdf.
    \63\ See 2012 HOEPA Proposal, pp. 44, 149-211 (published July 9, 
2012), available at http://files.consumerfinance.gov/f/201207_cfpb_proposed-rule_high-cost-mortgage-protections.pdf.
---------------------------------------------------------------------------

    In many respects, the proposed rule would codify mortgage lenders' 
current practices. In outreach calls to industry, all respondents 
reported requiring the use of full-interior appraisals in 95% or more 
of first-lien transactions \64\ and providing copies of appraisals to 
borrowers as a matter of course if a loan is originated.\65\ The 
convention of using full-interior appraisals on first-liens may have 
developed to improve underwriting quality, and the implementation of 
this proposed rule would assure that the practice would continue under 
different market conditions.
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    \64\ Respondents include a large bank, a trade group of smaller 
depository institutions, a credit union, and an independent mortgage 
bank.
    \65\ Respondents include a large bank, a trade group of smaller 
depository institutions, and an independent mortgage bank.
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    The Bureau notes that many of the proposed provisions implement 
self-effectuating amendments to TILA. The costs and benefits of these 
proposed provisions would arise largely or in some cases entirely from 
the statute and not from the proposed rule that implements them. Such 
proposed provisions would provide benefits compared to allowing these 
TILA amendments to take effect alone, however, by clarifying parts of 
the statute that are ambiguous. Greater clarity on these issues should 
reduce the compliance burdens on covered persons by reducing costs for 
attorneys and compliance officers as well as potential costs of over-
compliance and unnecessary litigation. Moreover, the costs that these 
provisions would

[[Page 54748]]

impose beyond those imposed by the statute itself are likely to be 
minimal.
    Section 1022 permits the Bureau to consider the benefits, costs and 
impacts of the proposed rule solely compared to the state of the world 
in which the statute takes effect without an implementing regulation. 
To provide the public better information about the benefits and costs 
of the statute, however, the Bureau has chosen to consider the 
benefits, costs, and impacts of these major provisions of the proposed 
rule against a pre-statutory baseline (i.e., the benefits, costs, and 
impacts of the relevant provisions of the Dodd-Frank Act and the 
regulation combined).\66\
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    \66\ The Bureau has discretion in any rulemaking to choose an 
appropriate scope of analysis with respect to potential benefits and 
costs and an appropriate baseline. The Bureau, as a matter of 
discretion, has chosen to describe a broader range of potential 
effects to more fully inform the rulemaking.
---------------------------------------------------------------------------

    The Bureau has relied on a variety of data sources to analyze the 
potential benefits, costs, and impacts of the proposed rule. However, 
in some instances, the requisite data are not available or are quite 
limited. Data with which to quantify the benefits of the rule are 
particularly limited. As a result, portions of this analysis rely in 
part on general economic principles to provide a qualitative discussion 
of the benefits, costs, and impacts of the proposal.
    The primary source of data used in this analysis is data collected 
under the Home Mortgage Disclosure Act (HMDA).\67\ Because the latest 
wave of complete data available is for loans made in calendar year 
2010, the empirical analysis generally uses the 2010 market as the 
baseline. Data from fourth quarter 2010 bank and thrift Call 
Reports,\68\ fourth quarter 2010 credit union call reports from the 
National Credit Union Administration (NCUA), and de-identified data 
from the National Mortgage Licensing System (NMLS) Mortgage Call 
Reports (MCR) \69\ for the first and second quarter of 2011were also 
used to identify financial institutions and their characteristics. Most 
of the analysis relies on a dataset that merges this depository 
institution financial data from Call Reports to the data from HMDA 
including higher-risk mortgage loan counts that are created from the 
loan-level HMDA dataset. The unit of observation in this analysis is 
the entity: If there are multiple subsidiaries of a parent company then 
their originations are summed and revenues are total revenues for all 
subsidiaries.
---------------------------------------------------------------------------

    \67\ The Home Mortgage Disclosure Act (HMDA), enacted by 
Congress in 1975, as implemented by the Bureau's Regulation C 
requires lending institutions annually to report public loan-level 
data regarding mortgage originations. For more information, see 
http://www.ffiec.gov/hmda. It should be noted that not all mortgage 
lenders report HMDA data. The HMDA data capture roughly 90-95 
percent of lending by the Federal Housing Administration and 75-85 
percent of other first-lien home loans. Depository institutions, 
including credit unions, with assets less than $39 million (in 
2010), for example, and those with branches exclusively in non-
metropolitan areas and those that make no purchase money mortgage 
loans are not required to report to HMDA. Reporting requirements for 
non-depository institutions depend on several factors, including 
whether the company made fewer than 100 purchase money or refinance 
loans, the dollar volume of mortgage lending as share of total 
lending, and whether the institution had at least five applications, 
originations, or purchased loans from metropolitan areas. Robert B. 
Avery, Neil Bhutta, Kenneth P. Brevoort & Glenn B. Canner, The 
Mortgage Market in 2010: Highlights from the Data Reported under the 
Home Mortgage Disclosure Act, 97 Fed. Res. Bull., December 2011, at 
1, 1 n.2.
    \68\ Every national bank, State member bank, and insured 
nonmember bank is required by its primary Federal regulator to file 
consolidated Reports of Condition and Income, also known as Call 
Report data, for each quarter as of the close of business on the 
last day of each calendar quarter (the report date). The specific 
reporting requirements depend upon the size of the bank and whether 
it has any foreign offices. For more information, see http://www2.fdic.gov/call_tfr_rpts/.
    \69\ The Nationwide Mortgage Licensing System is a national 
registry of non-depository financial institutions including mortgage 
loan originators. Portions of the registration information are 
public. The Mortgage Call Report data are reported at the 
institution level and include information on the number and dollar 
amount of loans originated, the number and dollar amount of loans 
brokered.
---------------------------------------------------------------------------

    Other portions of the analysis rely on property-level data 
regarding parcels and their related financing from DataQuick; \70\ data 
on the location of certified appraisers from the Appraisal Subcommittee 
Registry;\71\ and, demographic data from the 2010 American Community 
Survey (ACS).\72\ Tabulations of the DataQuick data are used for 
estimation of the frequency of properties being sold within 180 days of 
a previous sale. The Appraisal Subcommittee's Registry is used to 
describe the availability of appraisers and the ACS is used to 
characterize the frequency of first and subordinate liens in rural and 
urban areas. The Bureau seeks comment on the use of these data sources, 
the appropriateness to this purpose, and alternative or additional 
sources of information.
---------------------------------------------------------------------------

    \70\ DataQuick is database of property characteristics on more 
than 120 million properties and 250 million property transactions.
    \71\ The National Registry is a database containing selected 
information about State certified and licensed real estate 
appraisers. Downloaded February 28, 2012.
    \72\ The American Community Survey is an ongoing survey 
conducted by the United States Census Bureau.
---------------------------------------------------------------------------

    The Bureau requests comment and data on the potential benefits, 
costs, and impacts of this proposal.

Potential Benefits of the Proposed Rule for Covered Persons and 
Consumers

    In a mortgage transaction, the primary beneficiary of an appraisal 
is the creditor, as the appraisal helps the creditor avoid lending 
based on an inflated valuation of the property. Consumers, however, can 
also benefit from an accurate appraisal. Assuming that full-interior 
appraisals conducted by a certified or licensed appraiser are more 
accurate than other valuation methods, the proposal would improve the 
quality of home price estimates for those transactions where such an 
appraisal would not be performed currently. The requirement that a 
second appraisal be conducted in certain circumstances would further 
reduce the likelihood of an inflated sales price for those 
transactions.
    Benefits to covered persons. Transactions where the collateral is 
overvalued expose the creditor to higher default risk. Research has 
shown that lower appraisal quality, defined as the difference between 
price estimates derived via statistical models and the appraised value, 
is associated with higher default rates.\73\ By tightening appraisal 
standards for a class of transactions, the proposed rule may reduce 
default risk for creditors. Furthermore, by requiring the use of full 
interior appraisals in transactions involving high-risk mortgage loans, 
the statute prevents creditors from using less costly and possibly less 
accurate valuation methods in underwriting in order to compete on 
price. Eliminating the ability to use lower cost valuation methods, and 
thereby eliminating price competition on this component of the 
transaction, may benefit firms that prefer to employ more thorough 
valuation methods.
---------------------------------------------------------------------------

    \73\ See Michael Lacour-Little and Stephen Malpezzi, Appraisal 
Quality and Residential Mortgage Default: Evidence from Alaska, 27:2 
Journal of Real Estate Finance Economics 211-33 (2003).
---------------------------------------------------------------------------

    Benefits to consumers. Individual consumers engage in real estate 
transactions infrequently, so developing the expertise to value real 
estate is costly and consumers often rely on experts, such as real 
estate agents, and list prices to make price determinations. These 
methods may not lead a consumer to an accurate valuation of a property. 
For example, there is evidence that real estate agents sell their own 
homes for significantly more than other houses, which suggests that 
sellers may not be able to accurately price the homes that they are 
selling.\74\ Other

[[Page 54749]]

research, this time in a laboratory setting, provides evidence that 
individuals are sensitive to anchor values when estimating home 
prices.\75\ In such cases, an independent signal of the value of the 
home should benefit the consumer. Having a professional valuation as a 
point of reference may help consumers gain a more accurate 
understanding of the home's value and improve overall market 
efficiency, relative to the case where the knowledge of true valuations 
is more limited.\76\
---------------------------------------------------------------------------

    \74\ Levitt, Steven and Chad Syverson. ``Market Distortions When 
Agents are Better Informed: The Value of Information In Real Estate 
Transactions.'' The Review of Economics and Statistics 90 no.4 
(2008): 599-611.
    \75\ Scott, Peter and Colin Lizieri. ``Consumer House Price 
Judgments: New Evidence of Anchoring and Arbitrary Coherence.'' 
Journal of Property Research 29 no. 1 (2012): 49-68.
    \76\ For example, in Quan and Quigley's theoretical model where 
buyers and seller have incomplete information, trades are 
decentralized, and prices are the result of pairwise bargaining, 
``[t]he role of the appraiser is to provide information so that the 
variance of the price distribution is reduced.'' Quan, Daniel and 
John Quigley. ``Price Formation and the Appraisal Function in Real 
Estate Markets.'' Journal of Real Estate Finance and Economics 4 
(1991): 127-146.
---------------------------------------------------------------------------

    If a borrower is prepared to pay an inflated price for a property 
then an appraisal that reflects its value more accurately may prevent 
the transaction from being completed at the inflated price. In addition 
to the direct costs of paying more than the true value for a property, 
buying an overvalue property is associated with higher risk of default. 
If a property that is sold shortly after its previous sale is more 
likely to have an inflated price, since it may have been purchased the 
first time with the intention to improve the property quickly and 
resell it for a profit, the additional appraisal requirement would help 
ensure an accurate estimate of the value of the property. This might be 
especially valuable to a consumer. In the case of subordinate-lien 
transactions, the full-interior appraisal requirement may prevent 
borrowers from extracting too much equity if their property is 
overvalued by other valuation methods.
    Codifying appraisal standards across the industry would likely 
simplify the shopping process for consumers who receive HRM offers. 
First, it may improve their understanding of the determinants of the 
value of the property that they intend to purchase. In cases where a 
loan is denied due to an appraiser valuing the property at less than 
the contract price, the appraisal may provide an itemized explanation 
of why the property was overvalued, which may help the consumer in 
future negotiations or property searches. Second, codifying appraisal 
standards across the industry would simplify the shopping process for 
consumers by making the process of applying for HRM loans more 
consistent between lenders. Full-interior appraisals typically cost 
more than other valuation methods, and appraisal costs are often passed 
on to consumers. Consumers may not understand the differences between 
different appraisal methods or know that different creditors will use 
different methods, and therefore may benefit from the standardization 
the proposal, if adopted, would cause.

Potential Costs of the Proposed Rule for Covered Persons

    The costs of the proposed rule, which are predominantly related to 
compliance, are more readily quantifiable than the benefits and can be 
calculated based on the mix of loans originated by an entity and the 
number of employees at that entity. These compliance costs may be 
considered as the discrete tasks that would be required by the proposed 
rule. These can be separated into costs that are associated with the 
origination of a single higher-risk mortgage loan and the costs of 
reviewing the regulation and training costs calculated per loan officer 
and per institution.
    Costs per higher-risk mortgage loan. The costs of the proposal for 
covered persons that derive from additional appraisals depend on the 
number of appraisals that would be conducted, above and beyond current 
practice, and the degree to which those costs are passed to consumers. 
For HMDA reporters, counts of higher-risk mortgage loans that are 
purchase loans, first-lien refinance loans, or closed-end second loans 
are computed from the loan-level HMDA data. Accepted statistical 
methods are used to project loan counts for non-HMDA reporting 
depository institutions.\77\ Estimates of loan officers can be 
calculated from similar projections of applications per institution.
---------------------------------------------------------------------------

    \77\ Poisson regressions are run, projecting loan volumes in 
these categories on the natural log of characteristics available in 
the Call reports (total 1-4 family residential loan volume 
outstanding, full-time equivalent employees, and assets), separately 
for each category of depository institutions.
---------------------------------------------------------------------------

    The calculation of costs for independent mortgage banks (IMBs) uses 
a slightly different approach.\78\ Consistent with the results from 
HMDA reporting IMBs, the Bureau estimates the costs to IMBs by 
multiplying a cost per loan by the total number of loans originated by 
IMBs.\79\ To obtain a count of full-time equivalent employees, this 
number is imputed for HMDA reporting IMBs based on the number of 
applications (assuming 1.38 days per loan application).\80\
---------------------------------------------------------------------------

    \78\ ``Independent Mortgage Bank'' refers to non-depository 
mortgage lenders.
    \79\ Loan counts and loan amounts were swapped for the one 
institution that reported originating 130,000 loans with total loan 
amounts of $8. Institutions with loan amounts above the maximum 
number of loans reported by an independent mortgage bank in HMDA 
(134,640) had their loan counts replaced by 134,640. This assumes 
that the largest independent mortgage bank in terms of loan counts 
would be a HMDA reporter, which is likely if the firm adheres to the 
originate-to-distribute model, which implies that most loans would 
be home purchase (either purchase or refinance) loans, it would 
originate more than 100 loans, and make at least 5 loans in an MSA 
or have an office in an MSA, which would require it to report to 
HMDA. Federal Financial Institutions Examination Council, A Guide to 
HMDA Reporting: Getting it Right! (June 2010), available at http://www.ffiec.gov/hmda/pdf/2010guide.pdf. (accessed June 11, 2012).
    \80\ Sumit Agarwal and Faye Wang, Perverse Incentives at the 
Banks? Evidence from Loan Officers (Federal Reserve Bank of Chicago 
Working Paper 2009-08).
---------------------------------------------------------------------------

    Based on these data sources, the Bureau estimates that there were 
approximately 280,000 HRMs in 2010. Of these, the Bureau estimates that 
117,000 were purchase money mortgages, 136,000 were first-lien 
refinancings, and 27,000 were closed-end subordinate lien mortgages 
that were not part of a purchase transaction.\81\ The Bureau estimates 
that the probability that full-interior appraisals are conducted as 
part of current practice is 95% for purchase-money transactions, 90% 
for refinance transactions, and 5% for second mortgages. The Bureau 
therefore estimates that the proposal would lead to 45,100 full-
interior appraisals for originations that would not otherwise have a 
full-interior appraisal.\82\
---------------------------------------------------------------------------

    \81\ Purchase money mortgages includes second-lien higher-risk 
mortgage loans that were part of a purchase transaction. The Bureau 
assumes that these loans were part of a transaction where the first-
lien mortgage was not a higher-risk mortgage loan; to the extent 
that any of these second-lien purchase money HRMs were part of a 
transaction where the first lien mortgage was a higher-risk mortgage 
loan the costs imposed by the proposal would be double-counted. 
First-lien refinancings includes loans classified as first-lien 
``home improvement'' loans in HMDA.
    \82\ (5%*117,000) + (10%*136,000)+(95%*27,000) = 45,100
---------------------------------------------------------------------------

    There would also be additional appraisals from the proposed 
requirement that lenders obtain a second full-interior appraisal in 
situations where the home that would secure the higher-risk mortgage is 
being resold within 180 days at a higher price than the previous 
transaction involving the property. Based on estimates from DataQuick, 
the Bureau estimates that the proportion of sales that are resales 
within 180 days is 5%. For the purposes of this calculation the Bureau 
conservatively assumes that all of these

[[Page 54750]]

are at a price higher than the initial sale and therefore subject to 
the second appraisal requirement. The Bureau therefore estimates that 
this provision of the proposal would lead to 5,850 additional full-
interior appraisals.\83\
---------------------------------------------------------------------------

    \83\ (117,000 * 5%) = 5,850
---------------------------------------------------------------------------

    The total effect of the proposal on the number of full-interior 
appraisals is therefore 50,950.\84\
---------------------------------------------------------------------------

    \84\ (45,100) + (5,850) = 50,950
---------------------------------------------------------------------------

    The following discussion considers estimated compliance costs in 
the order in which they arise in the mortgage origination process. 
First, the proposed rule would require that the creditor furnish the 
applicant with the disclosure in proposed Sec.  1026.xx(c)(1)(I).\85\ 
The cost of this disclosure--at most, delivery of a single piece of 
paper with a standardized disclosure that could be delivered with other 
documents or disclosures--would be very low. In addition, the 
disclosure is included in the 2012 TILA-RESPA Loan Estimate integrated 
disclosure form proposal; \86\ if that proposal were adopted, the cost 
of providing the disclosure would be part of the overall costs of 
implementing the integrated disclosure.
---------------------------------------------------------------------------

    \85\ Creditors must disclose the following statement, in 
writing, to a consumer who applies for a higher-risk mortgage loan: 
``We may order an appraisal to determine the property's value and 
charge you for this appraisal. We will promptly give you a copy of 
any appraisal, even if your loan does not close. You can also pay 
for an additional appraisal for your own use at your own cost.''
    \86\ See 2012 TILA-RESPA Proposal, (published July 9, 2012), 
available at http://files.consumerfinance.gov/f/201207_cfpb_proposed-rule_integrated-mortgage-disclosures.pdf.
---------------------------------------------------------------------------

    Second, the loan officer would be required to verify whether a loan 
is a higher-risk mortgage. However, this activity is assumed not to 
introduce any significant costs beyond the regular cost of business 
because creditors already must compare APRs to APOR for a variety of 
compliance purposes, such as determining whether a loan qualifies as a 
``higher-priced mortgage loan'' for purposes of Regulation Z \87\ or to 
determine if a loan is subject to the protections of the Home Ownership 
and Equity Protection Act of 1994 (HOEPA).\88\
---------------------------------------------------------------------------

    \87\ 12 CFR 1026.35.
    \88\ 15 U.S.C. 1639.
---------------------------------------------------------------------------

    The third step is that, in order to satisfy the proposed safe 
harbor provided for at Sec.  1026.XX(b)(2), the creditor would likely 
order and review full-interior appraisals as prescribed by the proposed 
rule. The review process is described in the appendix N of the proposed 
rule, and is assumed to be performed by a loan officer and to take 15 
minutes. Assuming an average total hourly labor cost of loan officers 
of $45.80, the cost of review per additional appraisal is $11.45.\89\ 
With an estimated total number of additional appraisals conducted per 
year of 50,950, the total cost of reviewing those appraisals is 
$583,000 (rounded to the nearest thousand).\90\
---------------------------------------------------------------------------

    \89\ (.25 * $45.80) = $11.45 The hourly wage rate is based on a 
weighted average of loan officer wages at depository institutions of 
$30.66 and at non-depository institution of $31.81, weighted by the 
share of HRMs that the Bureau are originated by each type of 
creditor, and inflated to total labor costs. Wages comprised 67.5% 
of compensation for employees in credit intermediation and related 
fields in Q4 2010, according to the Bureau of Labor Statistics 
Series ID CMU2025220000000D,CMU2025220000000P. http://www.bls.gov/ncs/ect/#tables.
    \90\ ($11.45 * 50,950) = $583,000 (rounded to the nearest 
thousand).
---------------------------------------------------------------------------

    Creditors would also need to determine whether a second appraisal 
would be required for the higher-risk mortgage loan based on prior 
sales involving the property that would secure the loan. This would 
require labor costs to determine, through reasonable diligence, whether 
a sale of the property has occurred in the past 180 days at a price 
lower than the current sale price. The proposal provides that 
reasonable diligence could be performed through reliance on sources 
such as property sales history reports, sales price data from Multiple 
Listing Services or other records, a signed appraisal report that 
includes prior transactions, title abstracts or reports, copies of the 
recorded deed from the seller, or other documentation such as a copy of 
the HUD-1, previous tax bills, or title commitments or binders 
demonstrating the seller's ownership of the property and the date it 
was acquired. Since many of these diligence activities are expected to 
already be carried out for other purposes during the process of closing 
the loan, and would often be curtailed if the loan is not related to a 
purchase, the Bureau estimates that reasonable diligence would take, on 
average, 15 minutes of staff time. The dollar cost per higher-risk 
mortgage loan is therefore $11.45.\91\ With total annual higher-risk 
mortgage loans of 280,000, the total cost per year is estimated to be 
$3,205,000 (rounded to the nearest thousand).\92\
---------------------------------------------------------------------------

    \91\ (.25 * $45.80) = $11.45.
    \92\ ($11.45 * 280,000) = $3,205,000 (rounded to the nearest 
thousand).
---------------------------------------------------------------------------

    The Bureau assumes based on outreach that the direct costs of 
conducting appraisals would be passed through to consumers, except in 
the case of an additional appraisal that would be required by proposed 
Sec.  1026.XX(b)(3) (requiring an additional appraisal for properties 
that are the subject of certain 180-day resales).\93\. The Bureau 
conservatively assumes that the cost of each full-interior appraisal is 
$600.\94\ As noted above, the Bureau estimates that 5,850 second full-
interior appraisals would be required each year under the proposal, for 
a total cost of $3,510,000.\95\
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    \93\ Proposed Sec.  1026.XX(b)(3)(v) would prohibit the creditor 
from charging the consumer the cost of the additional appraisal.
    \94\ Industry appraisal fee information shows median fees 
ranging from $300 to $600.
    \95\ (600 * 5,850) = $3,510,000.
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    Finally, the proposed rule would also require that free copies of 
appraisals be distributed to borrowers three days before the loan is 
closed. Market participants, including a large bank, representatives 
from the Independent Community Bankers of America (ICBA), and a large 
independent mortgage bank \96\ told the Bureau that, in cases where 
loans are closed, copies of the appraisal are sent out 100% of the 
time, so it is assumed that this imposes no incremental cost on 
creditors.
---------------------------------------------------------------------------

    \96\ Interviews conducted on May 15, 2012 and May 24, 2012.
---------------------------------------------------------------------------

    As noted above, the costs of many of the additional appraisals 
would be born by the consumers. This costs increase may lead to a 
reduction in the number of HRMs that are originated. The total losses 
to creditors of this reduction in HRM originations cannot exceed the 
costs of the appraisals, which are estimated below to be roughly 
$27,000,000 per year, as creditors could choose to pay for the 
appraisals, rather than forgo the transactions.
    Costs per institution or loan officer. Aside from the per loan 
costs just described, the Bureau has estimated that each institution 
would incur the one-time cost of reviewing the regulation and one-time 
training costs for all loan officers to become familiar with the 
provisions of the rule.\97\ Since the procedures that would be required 
by the proposed rule such as ordering appraisals and comparing an APR 
to APOR are already familiar to creditor employees, one-time training 
costs are assumed to be 30 minutes. The Bureau estimates that there are 
83,000 loan officers in the United States, of which 62,000 are employed 
at depository institutions and 21,000 are employed at IMBs. Using an 
average hourly labor cost of $45.85, total one-time training costs are 
estimated to be $1,903,000 (rounded to the nearest thousand).\98\
---------------------------------------------------------------------------

    \98\ (83,000 * $45.85 * .5) = $1,903,000 (rounded to the nearest 
thousand)The averages hourly labor cost here is calculated using 
employment share, rather than share of HRM originations.
---------------------------------------------------------------------------

    It is assumed that the regulation is reviewed by lawyers and 
compliance officers. Each person reviewing the

[[Page 54751]]

regulation would need to review 18 pages of text. At three minutes per 
page, this is roughly one hour of review. At all firms, one lawyer is 
assumed to review the regulation. Compliance officer review is assumed 
to vary by size and type of the institutions, and it is assumed that in 
some cases there is no compliance officer review: one compliance 
officer at each independent mortgage bank, two compliance officers at 
each depository institution larger than $10 billion in assets; and half 
a compliance officer (on average) at each depository institution 
smaller than $10 billion in assets. Total hourly labor costs are 
estimated to be: $114.06 for attorneys at depository institutions, 
$43.67 for compliance officers at depository institutions, $113.47 for 
attorneys at IMBs, and $49.48 for compliance officers and IMBs. The 
Bureau estimates therefore that the review cost at depository 
institutions larger than $10 billion in assets is $201.41; at 
depository institutions smaller than $10 billion in assets the cost is 
$135.90; and at IMBs is $162.95.\99\ The Bureau estimates that there 
were 128 depository institutions larger than $10 billion in assets that 
originated mortgages in 2010; 6,825 depository institutions smaller 
than $10 billion in assets, and 2,515 IMBs, so total one-time costs of 
review are $1,363,000 (rounded to the nearest thousand).\100\
---------------------------------------------------------------------------

    \99\ ($114.06) + (2 * 43.67) = $201.41; ($114.06) + (.5 * 
$43.67) = $135.90; ($113.47 + $49.48) = $162.95.
    \100\ (128 * $201.41) + (6,825 * $135.90) + (2,515 * 162.95) = 
$1,363,000 (rounded to the nearest thousand).
---------------------------------------------------------------------------

Potential Costs of the Proposed Rule to Consumers

    The direct pecuniary costs to consumers that would be imposed by 
the proposed rule can be calculated as the incremental cost of having a 
full interior appraisal instead of using another valuation method for 
those loans where the cost of the appraisal is not born by the 
creditor. As described above, the Bureau assumes that consumers would 
pay directly for all appraisals other than the additional appraisals 
that would be required because of a recent sale of the property, for a 
total of 45,100 additional appraisals per year. Assuming, 
conservatively, the consumer pays $600 for an appraisal that would not 
otherwise have been conducted, versus $5 for an alternative valuation, 
gives a total direct costs to consumers of [45,100 * ($600-$5)] = 
$26,835,000 (rounded to the nearest thousand).\101\
---------------------------------------------------------------------------

    \101\ [45,100 * ($600-$5)] = $26,835,000 (rounded to the nearest 
thousand). Industry appraisal fee information shows median fees 
ranging from $300 to $600.
---------------------------------------------------------------------------

Potential Reduction in Access by Consumers to Consumer Financial 
Products or Services

    Some of the costs that would be imposed by the proposed rule are 
likely to be passed on to consumers of HRMs, particularly those who 
would not otherwise have a full-interior appraisal or who would have an 
additional appraisal. This cost increase could be considered a 
reduction in consumers' access to mortgages. However, the impact on 
access to credit is probably negligible. Any costs that derive from the 
additional underwriting requirements incurred under the proposal are 
likely to be very small. More important, for both first and subordinate 
lien loans, are the incremental costs from the difference between the 
full-interior appraisal and alternative valuation method costs.
    However, these are only incremental costs for the fraction of loans 
where this is not already accepted practice. For first liens, full 
interior inspections are common industry practice: passing the cost of 
appraisals on to consumers is current industry practice, and consumers 
appear to accept the appraisal fee so there is unlikely to be a 
significant adverse effect on consumers' access to credit. Furthermore, 
these costs may also be rolled into the loan, up to loan-to-value ratio 
limits, so buyers are unlikely to face short-term liquidity constraints 
that prevent purchasing the home. The impact of the proposed rule on 
higher-risk mortgage loan volumes may be greater for subordinate liens 
because this is where, in practice, the proposed rule would impose a 
change from the status quo, and also because the cost of a full 
interior appraisal is a larger proportion of the loan amount. However, 
changes in loan volume may be mitigated by consumers rolling the 
appraisal costs into the loan or the consumer and the creditor 
splitting the incremental cost of the full-interior appraisal if it is 
profitable for the creditor to do so.

 Impact of the Proposed Rule on Depository Institutions and Credit 
Unions With $10 Billion or Less in Total Assets, As Described in 
Section 1026 \102\
---------------------------------------------------------------------------

    \102\ Approximately 50 banks with under $10 billion in assets 
are affiliates of large banks with over $10 billion in assets and 
subject to Bureau supervisory authority under Section 1025. However, 
these banks are included in this discussion for convenience.
---------------------------------------------------------------------------

    Depository institutions and credit unions with $10 billion or less 
in assets would experience the same types of impacts as those described 
above. The impact on individual institutions would depend on the mix of 
mortgages that these institutions originate, the number of loan 
officers that would need to be trained, and the cost of reviewing the 
regulation. The Bureau estimates that these institutions originated 
160,000 higher-risk mortgage loans in 2010. Assuming the mix of 
purchase money, refinancings, and subordinate lien mortgages was the 
same at these institutions as for the industry as a whole, the Bureau 
estimates that the proposal would require these institutions to have 
25,400 full interior appraisals conducted for transactions that would 
otherwise not have a full-interior appraisal, and 3,350 additional 
full-interior appraisal (as would be required by proposed Sec.  
1026.XX(b)(3)), for a total of 28,750 appraisals).
    The Bureau estimates that the cost to depository institutions and 
credit unions with $10 billion or less in assets of reviewing the 
additional appraisals would be $326,000 (rounded to the nearest 
thousand). This would be $48 per institution per year.\103\
---------------------------------------------------------------------------

    \103\ (28,750 * $45.42 * .25) = $326,000 (rounded to the nearest 
thousand). ($326,000/6,825) = $48.
---------------------------------------------------------------------------

    The Bureau estimates that the cost to depository institutions and 
credit unions with $10 Billion or less in assets of determining whether 
to order a second full-interior appraisal would also be $326,000 
(rounded to the nearest thousand), or $48 per institution per 
year.\104\
---------------------------------------------------------------------------

    \104\ (28,750 * $45.42 * .25) = $326,000 (rounded to the nearest 
thousand).
---------------------------------------------------------------------------

    The Bureau estimates that the cost to depository institutions and 
credit unions with $10 billion or less in assets of conducting second 
full interior appraisals for recent sold properties would be 
$2,010,000, or $295 per institution, per year.\105\
---------------------------------------------------------------------------

    \105\ (3,350 * $600) = $2,010,000; ($2,010,000/6,825) = $ 295.
---------------------------------------------------------------------------

    The Bureau estimates that the one-time training costs to depository 
institutions and credit unions with $10 billion or less would be 
$636,000, or $93 per institution.\106\
---------------------------------------------------------------------------

    \106\ (28,000 * $45.42 * .5) = $636,000.
---------------------------------------------------------------------------

    The Bureau estimates that the one-time costs of reviewing the 
regulation to depository institutions and credit unions with $10 
billion or less are described above, and would be $135.90

[[Page 54752]]

per institution, or $927,000 (rounded to the nearest thousand) in 
total.\107\
---------------------------------------------------------------------------

    \107\ ($114.06) + (.5 * $43.67) = $135.90; ($135.90 * 6,825) = 
$927,000.
---------------------------------------------------------------------------

Significant Alternatives Considered

    In determining what level of review creditors should be required of 
full interior appraisals related to HRMs, two alternatives were 
considered. One alternative considered was to require a full technical 
review of the appraisal that would comply with USPAP3. Such a 
requirement, however, would add substantially to the cost of each 
appraisal, as a USPAP3 compliant review can costs nearly as much as a 
full interior appraisal. Another alternative was to require creditors 
to have USPAP3 compliant reviews conducts on a sample of the appraisals 
carried out on properties related to an HRM loan. Reviewing a sample of 
appraisals, however, would be most useful for creditors making a large 
number of HRMs and employing the same appraisers for a large number of 
those loans. Given the small number of HRMs made each year, the value 
of sampling appraisals for full USPAP3 review is likely to be small.

Impact of the Proposed Rule on Consumers in Rural Areas

    The Bureau does not anticipate that the proposed rule would have a 
unique impact on consumers in rural areas. Table 1 presents some basic 
statistics on rural households' tenure and mortgage behavior from the 
2010 American Community Survey. While the proportion of households that 
own their dwellings (the alternatives are renting or occupying without 
paying rent) differs between rural (29%) and non-rural households 
(43%), conditional on living in an owner occupied property, there is 
not a large difference in the proportion of households with first 
mortgages or contracts (70% in rural areas and 67% in non-rural areas) 
and subordinate liens (5% in rural areas and 4% in non-rural areas). 
Also, conditional on living in owner occupied property, the proportion 
of households that have moved in the past year and own their homes is 
5% for both groups and the proportion of individuals who have moved 
into their own homes conditional on having a mortgage is 5% for both 
groups. This suggests that, conditional on owning a home, rural and 
non-rural households use first and subordinate liens and move at 
similar rates.

 Table 1--Ownership and Mortgage Characteristics of Rural and Non-Rural
                          Households, ACS 2010
------------------------------------------------------------------------
                                        Rural \a\        Not rural \a\
------------------------------------------------------------------------
Number of Households..............         19,052,528        103,502,244
Dwelling Owned or Being Bought....             42.92%             64.51%
Has a First Mortgage or a Contract             29.92%             43.14%
Has a First Mortgage or a                      69.72%             66.87%
 Contract, Conditional on
 Ownership........................
Has a Closed-End Second Mortgage                1.99%              2.80%
 or a Contract....................
Has a Closed-End Second Mortgage                4.65%              4.35%
 or a Contract, Conditional on
 Ownership........................
Moved in in the Past Year,                      5.17%              4.86%
 Conditional on Ownership.........
Moved in in the Past Year,                      6.14%              5.71%
 Conditional on Ownership and
 Having a First Mortgage or
 Contract.........................
------------------------------------------------------------------------
Source: American Community Survey, 2010.
Weighted using household weights (HHWT). Tabulations based on responses
  by person 1.
\a\ Rural defined as households reported to not be in a metro area in
  the METRO variable. Households are considered not rural if they are
  coded: in a metro area, central city; in a metro area, outside central
  city; central city status unknown; not identifiable.

    As mentioned earlier, many small and rural lenders are excluded 
from HMDA reporting. Because of this, the Bureau does not attempt to 
project the number of rural loans in a particular category, such as 
first-lien HRM, subordinate-lien HRM, etc. However, tabulations of 
rural loans \108\ by HMDA reporters may be informative about patterns 
of rural HRM usage. As is shown in table 2, the proportion of both 
first lien purchase and first lien refinance loans are higher among 
loans secured by properties in rural counties than for properties that 
are not in rural counties--10% of rural first lien purchase loans are 
higher-risk mortgage loans while 3% of non-rural first-lien purchase 
loans are higher-risk mortgage loans. This suggests that rural 
borrowers may be more likely to incur the cost of the proposed rule 
than non-rural consumers. This assumes, however, that full-interior 
appraisal probabilities in the absence of the proposed rule are the 
same for rural and non-rural originations.
---------------------------------------------------------------------------

    \108\ Rural is defined as a loan made outside of a micropolitan 
or metropolitan statistical area.

     Table 2--Proportion of Higher-Risk-Mortgage Loans (HRMs) by Rural and Non-Rural Status, HMDA Reporters
----------------------------------------------------------------------------------------------------------------
                                                               Rural                         Non-Rural
                                                 ---------------------------------------------------------------
                                                       % HRM        Total loans        % HRM        Total loans
----------------------------------------------------------------------------------------------------------------
First Lien Purchase Loans.......................            9.88         285,762            3.19       2,224,001
First Lien Refinance Loans......................            5.09         563,210            1.67       4,321,446
Subordinate Liens...............................           12.69          32,958           12.71         185,458
    Total.......................................            7.17         941,590            2.57       6,934,172
----------------------------------------------------------------------------------------------------------------
Source: HMDA 2010.
Rural is defined as a loan made outside of a micropolitan or metropolitan statistical area.
HMDA reporters only.

    One concern that has been raised is that rural creditors may face 
challenges in being able to hire appraisers for full interior 
appraisals, particularly when the second appraisal requirement applies. 
In order to investigate this

[[Page 54753]]

further, the current Appraisal Subcommittee Registry is used and the 
zip code provided by each registered appraiser is geocoded. These 
results are presented in table 3. Assuming that a county has access to 
an appraiser if he or she is registered in that or an adjacent county, 
then the median rural county has access to 107 appraisers. In order to 
obtain two independent appraisals a county must have access to at least 
two appraisers. Only 13 counties fail to meet this requirement; all of 
these counties are in Alaska. When attention is restricted to active 
appraisers, this number of counties increases to 22.
    Although requiring the use of licensed and certified appraisers who 
adhere to the requisite standards may slow down the origination 
process, available data suggest the requirement is unlikely to result 
in widespread inability to originate loans.

   Table 3--Availability of Appraisers by Urban/Rural Status of County
------------------------------------------------------------------------
                                      Rural counties     Urban counties
------------------------------------------------------------------------
Mean Number of Appraisers in                       11                155
 County...........................
Median Number of Appraisers in Own                  6                 39
 County...........................
Mean Number of Appraisers in Own                  188                662
 and Adjacent County..............
Median Number of Appraisers in Own                107                959
 and Adjacent County..............
Number with Less than 2 Appraisers             13 \a\                  0
 in Own or Adjacent Counties......
N.................................               1355               1788
------------------------------------------------------------------------
Source: Appraisal Subcommittee National Registry, downloaded Feb 23,
  2012.
Appraisers include all appraisers registered in the National Registry.
Appraisers were assigned to counties based on the zip code provided to
  the National Registry.
\a\ All counties that do not have 2 or more appraisers in the county or
  adjacent counties are in Alaska.

    A number of industry representatives asserted that they believed 
that creditors making higher-risk mortgage loans in rural areas would 
find it particularly difficult to comply with the second appraisal 
requirements. The Agencies, in the section-by-section analysis under 
the heading ``Potential Exemptions from the Additional Appraisal 
Requirement,'' are requesting comment on whether the final rule, 
relying on the exemption authority provided in TILA section 
129C(b)(4)(B), should provide an exemption from the second appraisal 
requirement for loans made in ``rural'' areas. In addition, the 
Agencies are requesting comment on whether the final rule should use 
the same definition of ``rural'' that is provided in the ability to 
repay and qualified mortgage rulemaking implementing new TILA section 
129C. Accordingly, the Bureau requests that commenters provide data or 
other information to help demonstrate how such an exemption would serve 
the public interest and the promote safety and soundness of creditors.

Potential Use of Transaction Coverage Rate

    As noted in the section-by-section analysis above, the Bureau is 
proposing in its 2012 TILA-RESPA Proposal a simpler, more inclusive 
definition of the finance charge. The broader definition of finance 
charge would likely increase the number of mortgage loans that meet the 
higher-risk mortgage loan trigger.
    As discussed in the Bureau's 2012 TILA-RESPA Proposal, in the 
section-by-section analysis above, and below, the Bureau does not 
currently have sufficient data to model the impact of the more 
expansive definition of finance charge on other affected regulatory 
regimes or the impact of potential modifications to the triggers to 
more closely approximate existing coverage levels. The Bureau is 
working to obtain additional data prior to issuing a final rule and is 
seeking comment on plans for data analysis, and also seeks public 
comment and data submissions on these topics. The 2012 TILA-RESPA 
Proposal provides a qualitative assessment of the benefits and costs of 
expanding the finance charge definition, if the agencies made no 
modifications to the triggers for HRM or other regimes. In order to 
facilitate rule-by-rule consideration of potential modifications, this 
notice provides a qualitative assessment of the impact of potential 
changes to the APR for higher-risk mortgage loans.
    The Bureau's separate proposal to expand the definition of finance 
charge would be expected to increase the number of loans classified as 
higher-risk mortgage loans, as discussed in the section-by-section 
analysis above and in the 2012 TILA-RESPA Proposal. The Agencies are 
seeking comment on whether to adopt a transaction coverage rate (TCR) 
to approximately offset this increase. Were the Agencies to adopt the 
proposed changes, the additional benefits and costs to consumers from 
further increasing the number of loans classified as higher-risk 
mortgage loans would not occur. The benefits and costs to consumers 
with such loans would be the inverse of those described above. In 
addition, because the TCR excludes fees to non-affiliated third-
parties, the TCR might result in some loans not being classified as 
higher-risk mortgage loans that would qualify under an APR threshold 
using the current definition of finance charge.\109\
---------------------------------------------------------------------------

    \109\ The Bureau believes that the margin of differences between 
the TCR and current APR is significantly smaller than the margin 
between the current APR and the APR calculated using the expanded 
finance charge definition because relatively few third-party fees 
would be excluded by the TCR that are not already excluded under 
current rules. The agencies are considering ways to supplement the 
data analysis described above to better assess this issue.
---------------------------------------------------------------------------

    Using different metrics for purposes of disclosures and determining 
coverage of various regulatory regimes may also impose some ongoing 
complexity and compliance burden. The Bureau believes that any such 
effects with regard to transaction coverage rate would be mitigated by 
the fact that both TCR and APR would be easier to compute under the 
expanded definition of finance charge than the APR today using the 
current definition. If the Bureau adopts both the more inclusive 
finance charge and the TCR adjustment in a final rule pursuant to the 
2012 HOEPA Proposal and escrow rule, adopting the TCR adjustment in the 
higher-risk mortgage rule could ensure consistency across rules. In 
addition, the Agencies are seeking comment on whether use of the TCR or 
other trigger modifications should be optional, so that creditors could 
use the broader definition of finance charge to calculate APR and 
points and fees triggers if they would prefer. The Bureau believes 
adoption of the proposed modifications would as a whole reduce the 
economic impacts on creditors of the more expansive definition of 
finance charge proposed in the 2012 TILA-RESPA Proposal.

[[Page 54754]]

Additional Analysis Being Considered and Request for Information

    The Bureau will further consider the benefits, costs and impacts of 
the proposed provisions and additional proposed modifications before 
finalizing the proposal. As noted above, there are a number of areas 
where additional information would allow the Bureau to better estimate 
the benefits, costs, and impacts of this proposal and more fully inform 
the rulemaking. The Bureau asks interested parties to provide comment 
or data on various aspects of the proposed rule, as detailed in the 
section-by-section analysis. The most significant of these include 
information or data addressing:
     Data on lending activity of creditors that are not 
required to report HMDA data, particularly small or rural institutions 
and non-reporting IMBs.
     Nationally representative data on the usage of different 
valuation methods or costs
     Measures to account for potential adoption of a broader 
definition of finance charge, as separately proposed in the Bureau's 
2012 TILA-RESPA Proposal;
    To supplement the information discussed in in this preamble and any 
information that the Bureau may receive from commenters, the Bureau is 
currently working to gather additional data that may be relevant to 
this and other mortgage related rulemakings. These data may include 
additional data from the NMLS and the NMLS MCR, loan file extracts from 
various lenders, and data from the pilot phases of the National 
Mortgage Database. The Bureau expects that each of these datasets will 
be confidential. This section now describes each dataset in turn.
    First, as the sole system supporting licensure/registration of 
mortgage companies for 53 agencies for states and territories and 
mortgage loan originators under the SAFE Act, NMLS contains basic 
identifying information for non-depository mortgage loan origination 
companies. Firms that hold a State license or State registration 
through NMLS are required to complete either a standard or expanded 
Mortgage Call Report (MCR). The Standard MCR includes data on each 
firm's residential mortgage loan activity including applications, 
closed loans, individual mortgage loan originator activity, line of 
credit and other data repurchase information by state. It also includes 
financial information at the company level. The expanded report 
collects more detailed information in each of these areas for those 
firms that sell to Fannie Mae or Freddie Mac.\110\ To date, the Bureau 
has received basic data on the firms in the NMLS and de-identified data 
and tabulations of data from the Mortgage Call Report. These data were 
used, along with data from HMDA, to help estimate the number and 
characteristics of IMBs active in various mortgage activities. In the 
near future, the Bureau may receive additional data on loan activity 
and financial information from the NMLS including loan activity and 
financial information for identified lenders. The Bureau anticipates 
that these data will provide additional information about the number, 
size, type, and level of activity for non-depository lenders engaging 
in various mortgage origination and servicing activities. As such, it 
supplements the Bureau's current data for IMBs reported in HMDA and the 
data already received from NMLS. For example, these new data will 
include information about the number and size of closed-end first and 
second loans originated, fees earned from origination activity, levels 
of servicing, revenue estimates for each firm and other information. 
The Bureau may compile some simple counts and tabulations and conduct 
some basic statistical modeling to better model the levels of various 
activities at various types of firms, such as the frequency of HRM 
loans.
---------------------------------------------------------------------------

    \110\ More information about the Mortgage Call Report can be 
found at http://mortgage.nationwidelicensingsystem.org/slr/common/mcr/Pages/default.aspx.
---------------------------------------------------------------------------

    Second, the Bureau is working to obtain a random selection of loan-
level data from a handful of lenders. The Bureau intends to request 
loan file data from lenders of various sizes and geographic locations 
to construct a representative dataset. In particular, the Bureau will 
request a random sample of ``GFEs'' and ``HUD-1'' forms from loan files 
for closed-end mortgage loans. These forms include data on some or all 
loan characteristics including settlement charges, origination charges, 
appraisal fees, flood certifications, mortgage insurance premiums, 
homeowner's insurance, title charges, balloon payment, prepayment 
penalties, origination charges, and credit charges or points. Through 
conversations with industry, the Bureau believes that such loan files 
exist in standard electronic formats allowing for the creation of a 
representative sample for analysis. The Bureau may use these data to 
further measure the impacts of certain proposed changes. Calculations 
of various categories of settlement and origination charges may help 
the Bureau calculate the various impacts of proposed changes to the 
definitions of finance charges and other aspects of the proposal, 
including loans that would meet the high rate or high risk definitions 
mandating additional consumer protections.
    Third, the Bureau may also use data from the pilot phases of the 
National Mortgage Database (NMDB) to refine its proposals and/or its 
assessments of the benefits costs and impacts of these proposals. The 
NMDB is a comprehensive database, currently under development, of loan-
level information on first lien single-family mortgages. It is designed 
to be a nationally representative sample (1 percent) and contains data 
derived from credit reporting agency data and other administrative 
sources along with data from surveys of mortgage borrowers. The first 
two pilot phases, conducted over the past two years, vetted the data 
development process, successfully pretested the survey component and 
produced a prototype dataset. The initial pilot phases validated that 
credit repository data are both accurate and comprehensive and that the 
survey component yields a representative sample and a sufficient 
response rate. A third pilot is currently being conducted with the 
survey being mailed to holders of five thousand newly originated 
mortgages sampled from the prototype NMDB. Based on the 2011 pilot, a 
response rate of fifty percent or higher is expected. These survey data 
will be combined with the credit repository information of non-
respondents, and then deidentified. Credit repository data will be used 
to minimize non-response bias, and attempts will be made to impute 
missing values. The data from the third pilot will not be made public. 
However, to the extent possible, the data may be analyzed to assist the 
CFPB in its regulatory activities and these analyses will be made 
publically available.
    The survey data from the pilots may be used by the Bureau to 
analyze consumers' shopping behavior regarding mortgages. Questions may 
also assess borrowers' understanding of their loan terms and the 
various charges involved with origination. Tabulations of the survey 
data for various populations and simple regression techniques may be 
used to help the Bureau with its analysis.
    In addition to the comment solicited elsewhere in this proposed 
rule, the Bureau requests commenters to submit data and to provide 
suggestions for additional data to assess the issues discussed above 
and other potential benefits, costs, and impacts of the proposed rule. 
The Bureau also requests comment on the use of the data

[[Page 54755]]

described above. Further, the Bureau seeks information or data on the 
proposed rule's potential impact on consumers in rural areas as 
compared to consumers in urban areas. The Bureau also seeks information 
or data on the potential impact of the proposed rule on depository 
institutions and credit unions with total assets of $10 billion or less 
as described in Dodd-Frank Act section 1026 as compared to depository 
institutions and credit unions with assets that exceed this threshold 
and their affiliates.

VI. Regulatory Flexibility Act

Board

    The Regulatory Flexibility Act (RFA) (5 U.S.C. 601 et seq.) 
requires an agency either to provide an initial regulatory flexibility 
analysis with a proposed rule or certify that the proposed rule will 
not have a significant economic impact on a substantial number of small 
entities. The proposed regulations cover certain banks, other 
depository institutions, and non-bank entities that extend higher-risk 
mortgage loans to consumers. The Small Business Administration (SBA) 
establishes size standards that define which entities are small 
businesses for purposes of the RFA.\111\ The size standard to be 
considered a small business is: $175 million or less in assets for 
banks and other depository institutions; and $7 million or less in 
annual revenues for the majority of nonbank entities that are likely to 
be subject to the proposed regulations. Based on its analysis, and for 
the reasons stated below, the Board believes that the rule will not 
have a significant economic impact on a substantial number of small 
entities. Nevertheless, the Board is publishing an initial regulatory 
flexibility analysis. The Board will, if necessary, conduct a final 
regulatory flexibility analysis after consideration of comments 
received during the public comment period.
---------------------------------------------------------------------------

    \111\ U.S. Small Business Administration, Table of Small 
Business Size Standards Matched to North American Industry 
Classification System Codes, available at http://www.sba.gov/sites/default/files/files/Size_Standards_Table.pdf.
---------------------------------------------------------------------------

    The Board requests public comment on all aspects of this analysis.
A. Reasons for the Proposed Rule
    Section 1471 of the Dodd-Frank Act establishes a new TILA section 
129H, which sets forth appraisal requirements applicable to higher-risk 
mortgages. The Act generally defines ``higher-risk mortgage'' as a 
closed-end consumer loan secured by a principal dwelling with an APR 
that exceeds the APOR by 1.5 percent for first-lien loans, 2.5 percent 
for first-lien jumbo loans, or 3.5 percent for subordinate-liens. The 
definition of higher-risk mortgage expressly excludes qualified 
mortgages, as defined in TILA section 129C, as well as reverse mortgage 
loans that are qualified mortgages as defined in TILA section 129C.
    Specifically, new TILA section 129H does not permit a creditor to 
extend 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 purpose of the higher-risk 
mortgage loan is to finance the purchase or acquisition of a mortgaged 
property from a seller within 180 days of the purchase or acquisition 
of the property by that seller at a price that was lower than the 
current sale price of the property. 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.
     Providing 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.
     Providing 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.
    Section 1400 of the Dodd-Frank Act requires that final regulations 
to implement these provisions be issued by January 21, 2013.
B. Statement of Objectives and Legal Basis
    The SUPPLEMENTARY INFORMATION above contains this information. As 
discussed above, the legal basis for the proposed regulations is new 
TILA sections 129H(b)(4). 15 U.S.C. 1639h(b)(4). New TILA section 129H 
was established by section 1471 of the Dodd-Frank Act.
C. Description of Small Entities to Which the Regulation Applies
    The proposed regulations apply to creditors that make higher-risk 
mortgage loans, as defined above. To estimate the number of small 
entities that will be subject to the requirements of the proposed rule, 
the Board is relying primarily on data from Reports of Condition and 
Income (``Call Reports'') to identify asset size of depository 
institutions and certain subsidiaries of banks and bank companies, as 
well as home lending data reported by respondents subject to the 
reporting requirements of the Home Mortgage Disclosure Act (HMDA). The 
exact number of small entities likely to be affected by the proposal, 
however, is unknown because the Board lacks reliable sources for 
certain information. For example, reliable information is not available 
regarding the extent of mortgage loan origination activity by 
institutions not subject to the reporting requirements of HMDA; such 
institutions are predominantly those that have offices only in rural 
areas or that are very small entities (assets under $40 million as of 
the end of 2010). Moreover, for the majority of HMDA respondents that 
are not depository institutions, neither annual revenue information nor 
exact asset size information is available.
    The Board can, however, provide an estimate of a portion of the 
number of small depository institutions that would be subject to the 
proposed rule. According to the 2011 HMDA data, there are approximately 
1,569 commercial banks, 283 savings and loans, and 1,179 credit unions 
that could be considered small entities and that extend mortgages, and 
therefore are potentially subject to the proposed rule. HMDA data 
indicates that the majority of these institutions extended at least one 
higher-risk mortgage loan in 2011. As noted above, the available data 
are insufficient to estimate the number of non-bank entities that would 
be subject to the proposed rule and that are small as defined by the 
SBA. However, using the size standard set forth by the SBA for 
depository institutions ($175 million or less in assets), the Board can 
estimate based on 2011 HMDA data that about 250 small mortgage 
companies extended mortgages in 2011.
    The number of these small entities that would make higher-risk 
mortgage loans in the future is unknown. The Board believes that of the 
small entities identified, however, the majority would make at least 
one higher-risk mortgage loan, and thus be subject to the proposed 
rule, because the majority have made such loans in the past.
    The Board invites comment regarding the number and type of small 
entities that would be affected by the proposed rule.

[[Page 54756]]

D. Projected Reporting, Recordkeeping and Other Compliance Requirements
    The compliance requirements of the proposed regulations are 
described in detail in the SUPPLEMENTARY INFORMATION above.
    The proposed regulations generally apply to creditors that make 
higher-risk mortgage loans, which are generally mortgages with an 
annual percentage rate that exceeds the average prime offer rate by a 
specified percentage, subject to certain exceptions. The proposed rule 
would generally require 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.
    A creditor would be required to determine if it extends higher-risk 
mortgage loans and, if so, would need to analyze the regulations. The 
creditor would need to establish procedures for identifying mortgages 
subject to the additional appraisal requirements. A creditor making a 
higher-risk mortgage loan would need to obtain a written appraisal 
performed by a certified or licensed appraiser who conducts a physical 
property visit of the interior of the property. Creditors seeking a 
safe harbor for compliance with this requirement would need to
     Order that the appraiser perform the written appraisal in 
conformity with the USPAP and title XI of the FIRREA, and any 
implementing regulations, in effect at the time the appraiser signs the 
appraiser's certification;
     Verify through the National Registry that the appraiser 
who signed the appraiser's certification was a certified or licensed 
appraiser in the State in which the appraised property is located as of 
the date the appraiser signed the appraiser's certification;
     Confirm that the elements set forth in appendix N to this 
part are addressed in the written appraisal; and
     Confirm that it has no actual knowledge to the contrary of 
facts or certifications contained in the written appraisal.
    A creditor would also need to determine whether it is financing the 
purchase or acquisition of a mortgaged property from a seller within 
180 days of the purchase or acquisition of the property by that seller, 
who purchased the property for less than the current sale price. If so, 
the creditor would need to obtain an additional appraisal of the 
property and confirm that the appraisal meets the requirements of the 
first appraisal. The creditor would also need to ensure that the 
additional appraisal included 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.
    Creditors extending higher-risk mortgages also would need to 
design, generate, and provide a new notice to applicants. Specifically, 
they would provide at the time of the initial application the statement 
that the appraisal is for the sole use of the creditor. In addition, 
higher-risk mortgage creditors would have to provide the applicant with 
a copy of each appraisal conducted at least three days prior to closing 
and develop systems for that purpose.
    The Board believes that certain factors might mitigate the economic 
impact of the proposed rule. The Board believes only a small number of 
loans would be affected by the proposed rule. For example, according to 
HMDA data, less than four percent of first-lien mortgage loans in 2010 
or 2011 would be classified as ``higher-risk'' and thus subject to any 
appraisal requirement. Moreover, information collected by the CFPB 
indicates that fewer than five percent of mortgage loans involve a 
property that was previously purchased within 180 days. Thus, 
significantly less than one percent of mortgage loans would be subject 
to the provisions requiring second appraisals.
    In addition, based on outreach, the Board believes that many 
creditors are already obtaining written appraisals performed by 
certified or licensed appraisers who conduct a physical property visit 
of the interior of the property. Creditors may be obtaining such 
appraisals pursuant to other requirements, such as of FIRREA title XI 
or the FHA Anti-Flipping Rule, or they may be obtaining the appraisals 
voluntarily.
    Because of the small number of transactions affected, the Board 
believes the proposed rule is unlikely to have a significant economic 
impact on a substantial number of small entities. The Board seeks 
information and comment on any costs, compliance requirements, or 
changes in operating procedures arising from the application of the 
proposed rule to small institutions.
E. Identification of Duplicative, Overlapping, or Conflicting Federal 
Regulations
    The Board has not identified any Federal statutes or regulations 
that would duplicate, overlap, or conflict with the proposed 
regulations. The proposed rule will work in conjunction with the 
existing requirements of FIRREA title XI and its implementing 
regulations.
F. Discussion of Significant Alternatives
    As noted in the SUPPLEMENTARY INFORMATION, the Board is proposing 
an alternative definition of ``higher-risk mortgage loan'' that would 
allow creditors to exclude some fees from the ``rate'' used to 
determine if a loan is a ``higher-risk mortgage loan.'' By excluding 
these fees, it is possible that fewer loans would be covered by the 
rule, and thus burden on creditors could be reduced. In addition, as 
described in the SUPPLEMENTARY INFORMATION, adopting the alternative 
definition could ensure uniformity and consistency across rules. The 
proposed rule also exempts reverse mortgages and loans secured only by 
a residential structure from the rule's coverage. In addition, the 
proposed rule seeks to establish a less burdensome means for creditors 
to determine that an appraiser has met certain requirements by 
providing creditors with a safe harbor. Lastly, the proposed rule seeks 
to reduce burden by allowing a creditor subject to the additional 
appraisal requirement under TILA section 129H(b)(2) to obtain an 
appraisal that contains the analysis required in TILA section 
129H(b)(2)(A) only to the extent needed information is known. 15 U.S.C. 
1639h(b)(2).
    The Board welcomes comments on any other significant alternatives 
to the proposed rule that accomplish the objectives of section 1471 of 
the Dodd-Frank Act, which establishes new TILA section 129H, and that 
minimize any significant economic impact of the proposed rule on small 
entities.

Bureau

    The Regulatory Flexibility Act (RFA) generally requires an agency 
to conduct an initial regulatory flexibility analysis (IRFA) and a 
final regulatory flexibility analysis (FRFA) of any rule subject to 
notice-and-comment rulemaking requirements, unless the agency certifies 
that the rule will not have a significant economic impact on a 
substantial number of small entities.\112\ The Bureau

[[Page 54757]]

also is subject to certain additional procedures under the RFA 
involving the convening of a panel to consult with small business 
representatives prior to proposing a rule for which an IRFA is 
required.\113\ An IRFA is not required for this proposal because the 
proposal, if adopted, would not have a significant economic impact on a 
substantial number of small entities.
---------------------------------------------------------------------------

    \112\ For purposes of assessing the impacts of the proposed rule 
on small entities, ``small entities'' is defined in the RFA to 
include small businesses, small not-for-profit organizations, and 
small government jurisdictions. 5 U.S.C. 601(6). A ``small 
business'' is determined by application of Small Business 
Administration regulations and reference to the North American 
Industry Classification System (``NAICS'') classifications and size 
standards. 5 U.S.C. 601(3). A ``small organization'' is any ``not-
for-profit enterprise which is independently owned and operated and 
is not dominant in its field.'' 5 U.S.C. 601(4). A ``small 
governmental jurisdiction'' is the government of a city, county, 
town, township, village, school district, or special district with a 
population of less than 50,000. 5 U.S.C. 601(5).
    \113\ 5 U.S.C. 609.
---------------------------------------------------------------------------

A. Summary of Proposed Rule
    The empirical approach to calculating the impact that the proposed 
regulation has on small entities subject to the proposed rule follows 
the methodology, and uses the same data, as the analysis conducted 
under Section 1022(a) of the Dodd-Frank Act. The impact analysis 
focuses on the economic impact of the proposed rule, relative to a pre-
statute baseline, for small depository institutions (DIs) and non-
depository independent mortgage banks (IMBs). The Small Business 
Administration classifies DIs (commercial banks, savings institutions, 
credit unions, and other depository institutions) as small if they have 
assets less than $175 million, and classifies other real estate credit 
firms as small if they have less than $7 million in annual 
revenues.\114\
---------------------------------------------------------------------------

    \114\ 13 CFR Ch. 1.
---------------------------------------------------------------------------

    The proposed rule would implement section 1471 of the Dodd-Frank 
Act, which establishes appraisal requirements for higher-risk mortgage 
loans.\115\ Consistent with the statute, the proposal would allow a 
creditor to make a higher-risk mortgage loan only if the following 
conditions are met:
---------------------------------------------------------------------------

    \115\ The Bureau has proposed separately in the 2012 TILA-RESPA 
Proposal to expand the definition of the finance charge. If that 
change is adopted, it would be expected to increase the number of 
loans classified as higher-risk mortgage loans. The Bureau notes 
that it has accounted for the impacts of this potential change in 
the 2012 TILA-RESPA Proposal, including in that Proposal's Initial 
Regulatory Flexibility Analysis and Small Business Review Panel 
Process. In connection with the proposed definition change, the 
Agencies are seeking comment in this proposal on whether to modify 
the triggers, including by using the transaction coverage rate in 
place of the APR, to offset the impact of a broader definition of 
finance charge on higher-risk mortgage loan coverage levels. As 
discussed in the Dodd-Frank Act section 1022 analysis, adoption of 
those adjustments might impose some one-time implementation costs 
and compliance complexity, but the Bureau believes adoption of the 
proposed modifications would as a whole reduce the economic impacts 
on creditors of the more expansive definition of finance charge 
proposed in the 2012 TILA-RESPA Proposal.
---------------------------------------------------------------------------

     The creditor obtains a written appraisal;
     The appraisal is performed by a certified or licensed 
appraiser;
     The appraiser conducts a physical property visit of the 
interior of the property;
     At application, the applicant is provided with a statement 
regarding the purpose of the appraisal, that the creditor will provide 
the applicant a copy of that any written appraisal, and that the 
applicant may choose to have a separate appraisal conducted at the 
expense of the applicant; and
     The creditor provides the consumer with a free copy of any 
written appraisals obtained for the transaction at least three (3) 
business days before closing.
    In addition, as required by the Act, the proposal would require a 
higher-risk mortgage loan creditor to obtain an additional written 
appraisal, at no cost to the borrower, under the following 
circumstances:
     The higher-risk mortgage loan will finance the acquisition 
of the consumer's principal dwelling;
     The seller selling what will become the consumer's 
principal dwelling acquired the home within 180 days prior to the 
consumer's purchase agreement (measured from the date of the consumer's 
purchase agreement); and
     The consumer is acquiring the home for a higher price than 
the seller paid, although comment is requested on whether a threshold 
price increase would be appropriate.

The additional written appraisal, from a different licensed or 
certified appraiser, generally must include the following information: 
an analysis of the difference in sale prices (i.e., the sale price paid 
by the seller and the acquisition price of the property as set forth in 
the consumer's purchase agreement), changes in market conditions, and 
any improvements made to the property between the date of the previous 
sale and the current sale.

    The proposal also includes a request for comments to address a 
proposed amendment to the method of calculation of the APR that is 
being proposed as part of other mortgage-related proposals issued for 
comment by the Bureau. In the Bureau's proposal to integrate mortgage 
disclosures (2012 TILA-RESPA Proposal), the Bureau is proposing to 
adopt a more simple and inclusive finance charge calculation for 
closed-end credit secured by real property or a dwelling.\116\ As the 
finance charge is integral to the calculation of the APR, the Agencies 
believe it is possible that a more inclusive finance charge could 
increase the number of loans covered by this rule. The Agencies note 
that the Bureau currently is seeking data to assist in assessing 
potential impacts of a more inclusive finance charge in connection with 
the 2012 TILA-RESPA and its proposal to implement Dodd-Frank Act 
provision related to ``high-cost'' loans (2012 HOEPA Proposal).\117\
---------------------------------------------------------------------------

    \116\ See 2012 TILA-RESPA Proposal, pp. 101-127, 725-28, 905-11 
(published July 9, 2012), available at http://files.consumerfinance.gov/f/201207_cfpb_proposed-rule_integrated-mortgage-disclosures.pdf.
    \117\ See 2012 HOEPA Proposal, pp. 44, 149-211 (published July 
9, 2012), available at http://files.consumerfinance.gov/f/201207_cfpb_proposed-rule_high-cost-mortgage-protections.pdf.
---------------------------------------------------------------------------

B. Number and Classes of Affected Entities
    Of the roughly 17,747 depository institutions (including credit 
unions) and IMBs, 13,106 are below the relevant small entity 
thresholds. Of the small institutions, 9,807 are estimated to have 
originated mortgage loans in 2010. While loan counts exist for credit 
unions and HMDA-reporting DIs and IMBs, they must be projected for non-
HMDA reporters. For IMBs, data on revenues exists for 560 of 2,515 
institutions. An accepted statistical method (``nearest neighbor 
matching'') is used to estimate the number of these institutions that 
have less than $7 million in revenues from the MCR.

                                                  Table 4--Counts and Originations of Creditors by Type
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                      Entities that      Small entities
                                                                                                                      originate any      that originate
               Category                 NAICS code    Total entities    Small entity threshold     Small entities     mortgage loans      any mortgage
                                                                                                                           \c\             loans \c\
--------------------------------------------------------------------------------------------------------------------------------------------------------
Commercial Banking \a\...............       522110               6596  $175 million in assets..               3764               6362               3597
Savings Institutions \a\.............       522120               1145  $175 million in assets..                491               1138                487
Credit Unions \b\....................       522130               7491  $175 million in assets..               6569               4359               3441

[[Page 54758]]

 
Real Estate Credit d,e...............       522292               2515  $7 million in revenues..               2282               2515               2282
                                      ------------------------------------------------------------------------------------------------------------------
    Total............................  ...........             17,747  ........................              13106              14374               9807
--------------------------------------------------------------------------------------------------------------------------------------------------------
\a\ Asset size obtained from December 2010 Call Report Data downloaded from SNL. The institutions in the category savings institutions are all thrifts.
\b\ Asset size obtained from December 2010 NCUA Call Reports.
\c\ For HMDA reporters, loan counts from HMDA 2010. For institutions that do not report to HMDA, loan counts projected based on call report data fields
  and counts for HMDA reporters.
\d\ NMLS Mortgage Call Report (MCR) for Q1 and Q2 of 2011. All MCR reporters who originate at least one loan or have positive loan amounts are
  considered to be engaged in real estate credit (instead of purely mortgage brokers).
\e\ Revenues were not missing for 560 of the 2499 institutions. For institutions with missing revenue values revenues were imputed using nearest
  neighbor matching of the count of originations and the count of brokered loans.

C. Analysis
    Although most depository institutions and IMBs are affected by the 
proposed rule, the proposed rule does not have a significant impact on 
a substantial number of small entities, as is demonstrated by the 
burden estimates for small institutions calculated below. For each 
institution the cost of compliance is calculated and then divided by a 
measure of revenue.\118\ For depository institutions, revenue is 
obtained from the appropriate call report. For non-depository 
institutions, the frequency of HRM is not available in the MCR. 
However, data available in HMDA shows that the proportion of HRM in a 
non-DI's originations does not vary by origination volume. As such, 
HMDA data is used in lieu of the MCR data to calculate costs of 
compliance with the proposed rule.
---------------------------------------------------------------------------

    \118\ Revenue has been used in other analyses of economic 
impacts under the RFA. For purposes of this analysis, the Bureau 
uses revenue as a measure of economic impact. In the future, the 
Bureau will consider whether an alternative quantifiable or 
numerical measure may be available that would be more appropriate 
for financial firms.
---------------------------------------------------------------------------

    For small depository institutions, Table 5 reports various 
statistics for the estimated cost of compliance with the proposed rule 
as a percentage of revenues using conservative assumptions. The 
assumptions underlying the Bureau's estimates are explained in the 
table and are generally discussed in more detail in the Section 
1022(b)(2) section. The third column shows that for all small DIs and 
for each category of small DI, the median cost of compliance is between 
0.0% and 0.8% of revenues, and for each category the mean cost of 
compliance is 0.10% or less of revenues. No small thrifts or small 
credit unions, and 0.1% of small banks have cost-to-revenue ratios that 
exceed 1% of revenues.

 Table 5--Cost of Compliance for Depository Institution as a Percentage of Revenues, Institutions Less than $175
                                                Million in Assets
----------------------------------------------------------------------------------------------------------------
                                                                               99th
                                         N           Mean        Median     Percentile   Count >1%    Count >3%
----------------------------------------------------------------------------------------------------------------
All Institutions..................         7672        0.04%        0.02%        0.26%            9            7
Banks.............................         3764        0.08%        0.06%        0.33%            9            7
Thrifts...........................          491        0.10%        0.08%        0.45%            0            0
Credit Unions.....................         3417        0.01%        0.00%        0.07%            0            0
----------------------------------------------------------------------------------------------------------------
Sources: HMDA 2010, bank and thrift Q4 2010 call report (obtained from SNL Financial) and credit union call
  report, and Bureau calculations.
Originations drawn from HMDA 2010 for HMDA reporters and imputed for HMDA non-reporters using call report
  information.
Assumptions: The cost of providing the initial disclosure is $.10. Full-interior appraisals cost $600,
  alternative valuations cost $5. The probability of full-interior appraisals for a transaction is 95% for
  purchase-money transactions, 90% for refinance transactions, and 5% for second mortgages. The proportion of
  resales within 180 days is 5%. Costs of the first full interior appraisal are passed on completely to
  consumers. The review of the appraisal upon receipt takes 15 minutes of loan officer time. Loan officers are
  trained for 1 hour on the regulation beyond what considered customary training. Every 3 years the regulation
  is reviewed for 45 minutes by a lawyer and 0.5 compliance officers. Wages are $29.48 per hour for compliance
  officers, $30.66 for loan officers, and $76.99 for lawyers, and wages are assumed to be 67.5% of total
  compensation.\119\

     
---------------------------------------------------------------------------

    \119\ Wages comprised 67.5% of compensation for employees in 
credit intermediation and related fields in Q4 2010, according to 
the Bureau of Labor Statistics Series ID 
CMU2025220000000D,CMU2025220000000P. http://www.bls.gov/ncs/ect/#tables.
---------------------------------------------------------------------------

    The source of information on the number of HRMs is HMDA, but 
because HMDA does not provide revenue information it is not possible to 
determine which IMBs in HMDA have revenue less than $7 million. While 
most IMBs are small, in order to provide a very conservative estimate 
we evaluate the compliance costs of the smallest IMBs, as measured by 
originations. For IMBs that report HMDA data, Table 6 presents 
estimates of the cost of compliance.\120\ Panel A presents estimates of 
the cost of compliance with the proposed rule for institutions in the 
first quartile (the smallest 25%) of IMBs by number of originations and 
Panel B presents estimates of the cost of compliance for all IMBs. As 
noted above, revenue information is not available for all IMBs so two 
proxies for revenue are employed: (1) 3% of origination dollar volume, 
and (2) the median revenue per origination for MCR reporters that 
report revenue.\121\ Using either proxy, the mean cost of

[[Page 54759]]

compliance is less than 2 percent of total revenues for first quartile 
IMBs and median cost of compliance is below 0.3% of revenues. Using the 
3% of origination dollar volume measure, 9.3% of institutions in the 
first quartile have compliance costs that exceed 1% of revenues and 
4.4% have compliance costs that exceed 3% of revenues. Similarly, using 
the median revenue per loan measure, 11.0% have compliance costs that 
exceed 1% of revenues and 4.4% of have revenues that exceed 3% of 
revenues. Thus, the Bureau believes that, using the more conservative 
proxy, no more than approximately 11% of small IMBs would have 
compliance costs that exceed 1% of revenues, and no more than 
approximately 4.4% would have costs that exceed 3% of revenues.
---------------------------------------------------------------------------

    \120\ Since IMBs tend to originate-to-distribute regardless of 
size or urban/rural status, we believe that revenues per origination 
do not differ substantially between HMDA reporters and non-
reporters. Thus, we believe it reasonable to extrapolate the results 
to HMDA non-reporters.
    \121\ Industry experts estimate that gross revenues per loan are 
approximately 3%.

                            Table 6--Cost of Compliance for IMB, HMDA Reporters Only
----------------------------------------------------------------------------------------------------------------
                                                                               99th
                                        N\a\         Mean        Median     Percentile   Count >1%    Count >3%
----------------------------------------------------------------------------------------------------------------
                                  Panel A: 1st Quartile of HMDA Reporting IMBs
----------------------------------------------------------------------------------------------------------------
Cost Per Origination..............          181       $53.28        $9.50      $695.96  ...........  ...........
Cost Per Application..............          211        $7.97        $5.10       $91.89  ...........  ...........
                                   -----------------------------------------------------------------------------
    Total Cost/(3% of Origination           181        1.17%        0.21%       13.98%           17            8
     Volume)\b\...................
----------------------------------------------------------------------------------------------------------------
(Cost Per Origination)/(Median              181        1.60%        0.29%       20.91%           20            8
 Revenues Per Loan)\c\............
----------------------------------------------------------------------------------------------------------------
                                                Panel B: All IMBs
----------------------------------------------------------------------------------------------------------------
Cost Per Origination..............          819       $17.82        $6.23       $91.89  ...........  ...........
Cost Per Application..............          849        $5.30        $4.30       $21.60  ...........  ...........
                                   -----------------------------------------------------------------------------
    Total Cost/(3% of Origination           819        0.38%        0.11%        3.97%           26           11
     Volume)......................
----------------------------------------------------------------------------------------------------------------
(Cost Per Origination)/(Median              819        0.54%        0.19%        2.76%           32            8
 Revenues Per Loan)...............
----------------------------------------------------------------------------------------------------------------
Source: HMDA 2010.
Number of employees at IMBs imputed by application count divided by 1.38 loan-officer days per application for
  full time loan officers who work 2080 hours per year.
Assumptions: Full-interior appraisal costs $600, alternative valuations cost $5. The probability of full-
  interior appraisals for a transaction are 95% is purchase-money transactions, 90% for refinance transactions,
  and 5% for second mortgages. The proportion of resales within 180 days is 5%. Costs of the first full interior
  appraisal are passed on completely to consumers. The review of the appraisal upon receipt takes 15 minutes of
  loan officer time. Loan officers are trained for 1 hour on the regulation beyond what is considered customary
  training. Every 3 years the regulation is reviewed for 45 minutes by a lawyer and a compliance officer. Wages
  are $33.40 per hour for compliance officers, $31.81 for loan officers, and $76.59 for lawyers, and wages are
  assumed to be 67.5% of total compensation.
\a\ Cost per origination restricted to institutions with positive origination values, cost per application
  restricted to institutions with positive application values, total cost divided by 3% of origination volume
  restricted to institutions with positive origination volume.
\b\ Industry experts estimate that gross revenues per loan are approximately 3% of origination amount. The MBA's
  Mortgage Bankers Performance Report reports that in the 4th quarter of 2010 IMBs and subsidiaries reported
  that total production operating expenses were $4930 per loan, average profits were $1082 per loan, and average
  loan balance was $208,319.
\c\ Median revenue per origination ($3328) calculated using NMLS MCR data from Q1 and Q2 of 2011.

    Because many of the costs imposed by the proposed rule are likely 
to be passed on to consumers, this may result in a decrease in demand 
for mortgage loans. However, any possible decrease in loan amounts is 
likely to be negligible. For both first and subordinate lien loans, the 
incremental costs to consumers are the difference in costs between the 
full-interior appraisal and alternative valuation method costs and 
perhaps some additional underwriting charges to reflect additional 
labor costs. These charges are unlikely to exceed $600. For first 
liens, full interior inspections are common industry practice so for 
the typical transaction additional costs passed on to consumers would 
be small. Furthermore, these costs may also be rolled into the loan, up 
to loan-to-value ratio limits, so short-term liquidity constraints for 
buyers are unlikely to bind. Passing the cost of appraisals on to 
consumers is current industry practice, and consumers appear to accept 
the appraisal fee, so there is unlikely to be an adverse effect on 
demand.
    A more likely impact would be on the volume of higher-risk mortgage 
subordinate liens because this is where, in practice, the proposed rule 
would impose a change from the status quo, and also because the cost of 
a full interior appraisal is a larger proportion of the loan amount. 
However, changes in loan volume may be mitigated by consumers rolling 
the appraisal costs into the loan or the consumer and the creditor 
splitting the incremental cost of the full-interior appraisal if it is 
profitable for the creditor to do so. Similarly, the costs imposed on 
creditors are sufficiently small that they are unlikely to result in a 
decrease in the supply of credit.
D. Certification
    Accordingly, the Director of the Consumer Financial Protection 
Bureau certifies that this proposal, if adopted, would not have a 
significant economic impact on a substantial number of small entities. 
The Bureau requests comment on the analysis above and requests any 
relevant data.

FDIC

    The RFA generally requires that, in connection with a notice of 
proposed rulemaking, an agency prepare and make available for public 
comment an initial regulatory flexibility analysis that describes the 
impact of a proposed rule on small entities.\122\ A regulatory 
flexibility analysis is not required, however, if the agency certifies 
that the rule will not have a significant economic impact on a 
substantial number of small entities (defined in regulations 
promulgated by the Small Business Administration to include banking 
organizations with total assets of less than or equal to $175 million) 
and publishes its certification and a short, explanatory statement in 
the Federal Register together with the rule.
---------------------------------------------------------------------------

    \122\ See 5 U.S.C. 601 et seq.

---------------------------------------------------------------------------

[[Page 54760]]

    As of March 31, 2012, there were approximately 2,571 small FDIC-
supervised banks, which include 2,410 state nonmember banks and 161 
state-chartered savings banks. The FDIC analyzed the 2010 Home Mortgage 
Disclosure Act \123\ (HMDA) dataset to determine how many loans by 
FDIC-supervised banks might qualify as HRMs under section 129H of the 
TILA as added by section 1471 of the Dodd-Frank Act. This analysis 
reflects that only 70 FDIC-supervised banks originated at least 100 
HRMs, with only four banks originating more than 500 HRMs. Further, the 
FDIC-supervised banks that met the definition of a small entity 
originated on average less than 8 HRM loans each in 2010.
---------------------------------------------------------------------------

    \123\ The FDIC based its analysis on the HMDA data, as it 
provided a proxy for the characteristics of HRMs. While the FDIC 
recognizes that fewer higher-price loans were generated in 2010, a 
more historical review is not possible because the average offer 
price (a key data element for this review) was not added until the 
fourth quarter of 2009. The FDIC also recognizes that the HMDA data 
provides information relative to mortgage lending in metropolitan 
statistical areas, but not in rural areas.
---------------------------------------------------------------------------

    The proposed rule could impact small FDIC-supervised institutions 
by:
    1. Requiring an appraisal on real estate financial transactions 
that previously did not require an appraisal,
    2. Mandating that the appraiser conduct a physical visit to the 
interior of the property, and
    3. Requiring a second appraisal at the lender's expense in certain 
situations.
    As for the first potential impact, the FDIC noted that Part 323 of 
the FDIC Rules and Regulations \124\ (Part 323) requires financial 
institutions to obtain an appraisal for federally related transactions 
unless an exemption applies. Part 323 grants an exemption to the 
appraisal requirement for real estate-related financial transactions of 
$250,000 or less. However, Part 323 requires financial institutions to 
obtain an appropriate evaluation that is consistent with safe and sound 
banking practices for such transactions. The proposed NPR will 
supersede this exemption, resulting in creditors having to obtain an 
appraisal for a HRM transaction regardless of the transaction amount. 
The requirement to obtain an appraisal rather than an evaluation does 
not pose a new burden to financial institutions, as they are required 
by Part 323 to obtain some type of valuation of the mortgaged property. 
The proposed NPR merely limits the type of permissible valuation to an 
appraisal for HRMs.
---------------------------------------------------------------------------

    \124\ 12 CFR part 323.
---------------------------------------------------------------------------

    As for the second potential impact, the proposed NPR's requirement 
affects a lender to the extent that a lender must instruct the 
appraiser to conduct a physical visit of the interior of the mortgaged 
property. The USPAP and title XI of FIRREA and the regulations 
prescribed thereunder do not require appraisers to perform on-site 
visits. Instead, USPAP requires appraisers to include a certification 
which clearly states whether the appraiser has or has not personally 
inspected the subject property. During informal outreach conducted by 
the Agencies, outreach participants indicated that many creditors 
require appraisers to perform a physical inspection of the mortgaged 
property. This requirement is documented in the Uniform Residential 
Appraisal Report form used as a matter of practice in the industry, 
which includes a certification that the appraiser performed a complete 
visual inspection of the interior and exterior areas of the subject 
property. Outreach participants indicated that requiring a physical 
visit of the interior of the mortgaged property added on average an 
additional cost of about $50 to the appraisal fee, which is paid by the 
applicant.
    As for the third potential impact, the proposed NPR's requirement 
to conduct a second appraisal for certain transactions should not 
affect many FDIC-supervised banks. As previously indicated, FDIC-
supervised banks that met the definition of a small entity originated 
an average of less than 8 HRM loans each in 2010. According to 
estimates provided by FHFA, about five (5) percent of single-family 
property sales in 2010 reflected situations in which the same property 
had been sold within a 180-day period. This information reflects that 
most small FDIC-supervised banks will have to obtain a second appraisal 
for a nominal amount of transactions at the banks' expense. The 
estimated cost of a second appraisal is between $350 to $600.
    It is the opinion of the FDIC that the proposed rule will not have 
a significant economic impact on a substantial number of small entities 
that it regulates in light of the fact that: (1) Part 323 already 
requires FDIC-supervised depository institutions to obtain some type of 
valuation for real estate-related financial transactions; (2) the 
requirement of conducting a physical visit of the interior of the 
mortgaged property creates a potential burden for an appraiser, rather 
than the lender, with the cost being born by the applicant; and (3) the 
second appraisal requirement should affect a nominal amount of 
transactions. Accordingly, a regulatory flexibility analysis is not 
required.
    The FDIC seeks comment on whether the proposed rule, if adopted in 
final form, would impose undue burdens, or have unintended consequences 
for, small FDIC-supervised institutions and whether there are ways such 
potential burdens or consequences could be minimized in a manner 
consistent with section 129H of TILA.

FHFA

    The proposed rule applies only to institutions in the primary 
mortgage market that originate mortgage loans. FHFA's regulated 
entities--Fannie Mae, Freddie Mac, and the Federal Home Loan Banks--
operate in the secondary mortgage markets. In addition, these entities 
do not come within the meaning of small entities as defined in the 
Regulatory Flexibility Act (See 5 U.S.C. 601(6)).

NCUA

    The RFA generally requires that, in connection with a notice of 
proposed rulemaking, an agency prepare and make available for public 
comment an initial regulatory flexibility analysis that describes the 
impact of a proposed rule on small entities.\125\ A regulatory 
flexibility analysis is not required, however, if the agency certifies 
that the rule will not have a significant economic impact on a 
substantial number of small entities and publishes its certification 
and a short, explanatory statement in the Federal Register together 
with the rule. NCUA defines small entities as small credit unions 
having less than ten million dollars in assets \126\ in contrast to the 
definition of small entities in the rules issued by the Small Business 
Administration (SBA), which include banking organizations with total 
assets of less than or equal to $175 million.
---------------------------------------------------------------------------

    \125\ See 5 U.S.C. 601 et seq.
    \126\ 68 FR 31949 (May 29, 2003).
---------------------------------------------------------------------------

    NCUA staff analyzed the 2010 Home Mortgage Disclosure Act (HMDA) 
dataset to determine how many loans by federally insured credit unions 
(FICUs) might qualify as HRMs under section 129H of the TILA.\127\ As 
of March 31, 2012, there were 2,475 FICUs that met NCUA's small entity 
definition but none of these institutions reported data to HMDA in 
2010. For purposes of this rulemaking and for consistency with the 
Agencies, NCUA reviewed the dataset for FICUs that met the small entity 
standard for banking organizations

[[Page 54761]]

under the SBA's regulations. As of March 31, 2012, there were 
approximately 6,060, FICUs with total assets of $175 million or less. 
Of the FICUs which reported 2010 HMDA data, 452 reported at least one 
HRM. The data reflects that only three FICUs originated at least 100 
HRMs, with no FICUs originating more than 500 HRMs, and eighty-eight 
percent of reporting FICUs originating 10 HRMs or less. Further, FICUs 
that met the SBA's definition of a small entity originated an average 4 
HRM loans each in 2010.\128\ For the reasons provided below, NCUA 
certifies that the proposed rule, if adopted in final form, would not 
have a significant economic impact on a substantial number of small 
entities. Accordingly, a regulatory flexibility analysis is not 
required.
---------------------------------------------------------------------------

    \127\ NCUA based its analysis on the HMDA data, as it provided a 
proxy for the characteristics of HRMs. The analysis is restricted to 
2010 HMDA data because the average offer price (a key data element 
for this review) was not added in the HMDA data until the fourth 
quarter of 2009.
    \128\ With only a fraction of small FICUs reporting data to 
HMDA, NCUA also analyzed FICUs not observed in the HMDA data. Using 
the total number of real estate loans originated by FICUs with less 
than $175M in total assets, NCUA estimated the average number of 
HRMs per real estate loan originated. Using this ratio to 
interpolate the likely number of HRM originations, the analysis 
suggests that small FICUs originate on average less than 2 HRM loans 
each year.
---------------------------------------------------------------------------

    As previously discussed, section 1471 of the Dodd-Frank Act \129\ 
generally requires the Agencies to jointly prescribe regulations that 
require a creditor to:
---------------------------------------------------------------------------

    \129\ Codified at section 129H of the Truth-in-Lending Act, 15 
U.S.C. 1631 et seq.
---------------------------------------------------------------------------

    (i) Obtain a written appraisal for a higher-risk mortgage that is 
prepared by a state licensed or certified appraiser who:
    a. Conducted a physical visit of the interior of the property to be 
mortgage, and
    b. Performed the appraisal in compliance with USPAP and title XI of 
FIRREA, and the regulations prescribed under such title;
    (ii) Obtain, at not cost to the applicant, a second appraisal that 
includes certain analyses from a different certified or licensed 
appraiser if the purpose of a higher-risk mortgage is to finance the 
acquisition of the mortgaged property from a seller within 180 days of 
the seller's acquisition and at a price lower than the current sale 
price of the property;
    (iii) Provide, at the time of the initial mortgage application, the 
applicant 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 by an appraiser of the applicant's 
choosing at the applicant's expense; and
    (iv) Provide the applicant with one (1) copy of each appraisal 
without charge and at least three (3) business days prior to the 
transaction closing date.
    The proposed rule implements the appraisal requirements of section 
1471 of the Dodd-Frank Act. Part 722 of NCUA's Rules and Regulations 
\130\ requires FICUs to obtain an appraisal for federally related 
transactions unless an exemption applies. Part 722 grants an exemption 
to the appraisal requirement for real estate-related financial 
transactions of $250,000 or less. However, part 722 requires FICUs to 
obtain an appropriate evaluation that is consistent with safe and sound 
banking practices for such transactions.
---------------------------------------------------------------------------

    \130\ 12 CFR part 722.
---------------------------------------------------------------------------

    The proposed NPR will supersede this exemption, resulting in FICUs 
having to obtain an appraisal for a HRM transaction regardless of the 
transaction amount. The requirement to obtain an appraisal rather than 
an evaluation does not pose a new burden to financial institutions, as 
they are required by part 722 to obtain some type of valuation of the 
mortgaged property. The proposed NPR merely limits the type of 
permissible valuation to an appraisal for HRMs.
    The proposed NPR's requirement to conduct a physical visit of the 
interior of the mortgaged property potentially adds an additional 
burden to the appraiser. The USPAP and title XI of FIRREA and the 
regulations prescribed thereunder do not require appraisers to perform 
on-site visits. Instead, USPAP requires appraisers to include a 
certification which clearly states whether the appraiser has or has not 
personally inspected the subject property. During informal outreach 
conducted by the Agencies, outreach participants indicated that many 
creditors require appraisers to perform a physical inspection of the 
mortgaged property. This requirement is documented in the Uniform 
Residential Appraisal Report form used as a matter of practice in the 
industry, which includes a certification that the appraiser performed a 
complete visual inspection of the interior and exterior areas of the 
subject property. Outreach participants indicated that requiring a 
physical visit of the interior of the mortgaged property added on 
average an additional cost of about $50 to the appraisal fee, which is 
paid by the applicant.
    In light of the fact that few loans made by FICUs would qualify as 
HRMs, the fact that many creditors already require that an appraiser 
conduct an interior inspection of mortgage collateral property in 
connection with an appraisal; and the fact that requiring an interior 
inspection would add a relatively small amount to the cost of an 
appraisal, the proposed rule will not have a significant economic 
impact on a substantial number of small FICUs, and therefore, no 
regulatory flexibility analysis is required.

OCC

    Pursuant to section 605(b) of the Regulatory Flexibility Act, 5 
U.S.C. 605(b) (RFA), the regulatory flexibility analysis otherwise 
required under section 603 of the RFA is not required if the agency 
certifies that the proposed rule will not, if promulgated, have a 
significant economic impact on a substantial number of small entities 
(defined for purposes of the RFA to include commercial banks, savings 
institutions and other depository credit intermediation with assets 
less than or equal to $175 million \131\ and trust companies with total 
assets of $7 million or less) and publishes its certification and a 
short, explanatory statement in the Federal Register along with its 
proposed rule.
---------------------------------------------------------------------------

    \131\ ``A financial institution's assets are determined by 
averaging the assets reported on its four quarterly financial 
statements for the preceding year.'' See footnote 8 of the U.S. 
Small Business Administration's Table of Size Standards.
---------------------------------------------------------------------------

    Section 1471 of the Dodd-Frank Act establishes a new TILA section 
129H, which sets forth appraisal requirements applicable to higher-risk 
mortgage loans. A ``higher-risk mortgage'' generally is a closed-end 
consumer loan secured by a principal dwelling with an APR that exceeds 
the APOR by 1.5 percent for first-lien loans with a principal amount 
below the conforming loan limit, 2.5 percent for first-lien jumbo 
loans, or 3.5 percent for subordinate-liens. The definition of higher-
risk mortgage loan expressly excludes qualified mortgages, as defined 
in TILA section 129C, as well as reverse mortgage loans that are 
qualified mortgages as defined in TILA section 129C.
    Specifically, new TILA section 129H does not permit a creditor to 
extend 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 written appraisal from a different 
certified or licensed appraiser if the purpose of the higher-risk 
mortgage loan is to finance the purchase or acquisition of a mortgaged 
property from a seller within 180 days of the purchase or acquisition 
of the property by that seller at a price

[[Page 54762]]

that was lower than the current sale price of the property. The 
additional written 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.
     Providing the applicant, at the time of the initial 
mortgage application, with a statement that any written 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.
     Providing 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.
    The OCC currently supervises 1,970 banks (1,281 commercial banks, 
66 trust companies, 576 Federal savings associations and 47 branches or 
agencies of foreign banks). We estimate that less than 1,400 of the 
banks supervised by the OCC are currently originating one- to four-
family residential mortgage loans. Approximately 772 OCC supervised 
banks are small entities based on the SBA's definition of small 
entities for RFA purposes. Of these, the OCC estimates that 465 
originate mortgages and therefore maybe impacted by the proposed rule.
    The OCC classifies the economic impact of total costs on a bank as 
significant if the total costs in a single year are greater than 5 
percent of total salaries and benefits, or greater than 2.5 percent of 
total non-interest expense. The OCC estimates that the average cost per 
small bank will range from a lower bound of approximately $10 thousand 
to an upper bound of approximately $18 thousand. Using the upper bound 
cost estimate, we believe the proposed rule will have a significant 
economic impact on three small banks, which is not a substantial 
number.
    Therefore, we believe the proposed rule will not have a significant 
economic impact on a substantial number of small entities. The OCC 
certifies that the Proposed Rule would not, if promulgated, have a 
significant economic impact on a substantial number of small entities.

VII. Paperwork Reduction Act

    Certain provisions of this proposed rule contain ``collection of 
information'' requirements within the meaning of the Paperwork 
Reduction Act of 1995 (44 U.S.C. 3501 et seq.) (Paperwork Reduction Act 
or PRA). Under the PRA, the Agencies may not conduct or sponsor, and a 
person is not required to respond to, an information collection unless 
the information collection displays a valid Office of Management and 
Budget (OMB) control number. The information collection requirements 
contained in this joint notice of proposed rulemaking have been 
submitted to OMB for review and approval by the Bureau, FDIC, NCUA, and 
OCC under section 3506 of the PRA and section 1320.11 of the OMB's 
implementing regulations (5 CFR part 1320). The Board reviewed the 
proposed rule under the authority delegated to the Board by OMB.
    Title of Information Collection: Higher-Risk Mortgage Appraisals.
    Frequency of Response: Event generated.
    Affected Public: Businesses or other for-profit and not-for-profit 
organizations.\132\
---------------------------------------------------------------------------

    \132\ The burdens on the affected public generally are divided 
in accordance with the Agencies' respective administrative 
enforcement authority under TILA section 108, 15 U.S.C. 1607.
---------------------------------------------------------------------------

    Bureau: Insured depository institutions with more than $10 billion 
in assets, their depository institution affiliates, and certain non-
depository mortgage institutions.\133\
---------------------------------------------------------------------------

    \133\ The Bureau and the Federal Trade Commission (FTC) 
generally both have enforcement authority over non-depository 
institutions for Regulation Z. Accordingly, for purposes of this PRA 
analysis, the Bureau has allocated to itself half of the Bureau's 
estimated burden to non-depository mortgage institutions. The FTC is 
responsible for estimating and reporting to OMB its share of burden 
under this proposal.
---------------------------------------------------------------------------

    FDIC: Insured state non-member banks, insured state branches of 
foreign banks, and certain subsidiaries of these entities.
    OCC: National banks, Federal savings associations, Federal branches 
or agencies of foreign banks, or any operating subsidiary thereof.
    Board: State member banks, uninsured state branches and agencies of 
foreign banks.
    NCUA: Federally insured credit unions.
    Abstract: The collection of information requirements in this 
proposed rule are found in proposed paragraphs (b)(1), (b)(2), (b)(3), 
(c), and (d) of 12 CFR 1026.XX. This information is required to protect 
consumers and promotes the safety and soundness of creditors making 
higher-risk mortgage loans. This information will be used by creditors 
to evaluate real estate collateral in higher-risk mortgage loan 
transactions and by consumers entering these transactions. The 
collections of information are mandatory for creditors making higher-
risk mortgage loans.
    The proposed rule would require that, within three days of 
application, a creditor provide a disclosure that informs consumers 
regarding the purpose of the appraisal, that the creditor will provide 
the consumer a copy of any appraisal, and that the consumer may choose 
to have a separate appraisal conducted at the expense of the consumer 
(Initial Appraisal Disclosure). See proposed 12 CFR 1026.XX(c). If a 
loan meets the definition of a higher-risk mortgage loan, then the 
creditor would be required to obtain a written appraisal prepared by a 
certified or licensed appraiser who conducts a physical visit of the 
interior of the property that will secure the transaction, and send a 
copy of the written appraisal to the consumer (Written Appraisal). See 
proposed 12 CFR 1026.XX(b)(1) and (d). To qualify for the safe harbor 
provided under the proposed rule, a creditor would be required to 
review the written appraisal as specified in the text of the rule and 
appendix N. See proposed 12 CFR 1026.XX(b)(2). If a loan is classified 
as a higher-risk mortgage loan that will finance the acquisition of the 
property to be mortgaged, and the property was acquired within the 
previous 180 days by the seller at a price that was lower than the 
current sale price, then the creditor would be required to obtain an 
additional appraisal that meets the requirements described above 
(Additional Written Appraisal). See proposed 12 CFR 1026.XX(b)(3). The 
Additional Written Appraisal must also analyze: (1) the difference 
between the price at which the seller acquired the property and the 
price the consumer agreed to pay, (2) changes in market conditions 
between the date the seller acquired the property and the date the 
consumer agreed to acquire the property, and (3) any improvements made 
to the property between the date the seller acquired the property and 
the consumer agreed to acquire the property. See proposed 12 CFR 
1026.XX(b)(3)(iv). A creditor would also be required to send a copy of 
the additional written appraisal to the consumer. 12 CFR 1026.XX(d).

Calculation of Estimated Burden

    Under the proposed Initial Appraisal Disclosure, the creditor would 
be required to provide a short, written disclosure within three days of 
application. Because the disclosure may be classified as a warning 
label supplied by the Federal government, the Agencies are assigning it 
no burden for purposes of this PRA analysis.\134\ In

[[Page 54763]]

addition, the Agencies contemplate that once the TILA-RESPA integrated 
disclosure forms are finalized, the appraisal-related disclosure will 
be given as part of those forms. As such, this disclosure should not 
impose additional costs on creditors.
---------------------------------------------------------------------------

    \134\ ``The public disclosure of information originally supplied 
by the Federal government to the recipient for the purpose of 
disclosure to the public is not included within'' the definition of 
``collection of information.'' 5 CFR 1320.3(c)(2).
---------------------------------------------------------------------------

    The estimated burden for the proposed Written Appraisal 
requirements includes the burden the creditor bears to review for 
completeness the written appraisal in order to satisfy the safe harbor 
criteria set forth in the proposed rule and to send a copy of the 
written appraisal to the consumer.
    Under the Additional Written Appraisal requirement, if a loan is 
classified as a higher-risk mortgage loan that will finance the 
acquisition of the property to be mortgaged, and that property was 
acquired within the previous 180 days by the seller at a price that was 
lower than the current sale price, then the creditor would be required 
to obtain an additional written appraisal containing additional 
analyses. The additional written appraisal would have to be prepared by 
a certified or licensed appraiser different from the appraiser 
performing the other written appraisal for the higher-risk mortgage 
loan, and a copy of the additional appraisal must be sent to the 
consumer. The additional appraisal would be required to meet the 
standards of the other written appraisal for the higher-risk mortgage 
loan. Thus, in order to qualify for the safe harbor provided in the 
proposed rule, the written appraisal would also have to be reviewed for 
completeness.
    The agencies estimate that respondents would take, on average, 15 
minutes per appraisal to comply with the proposed disclosure 
requirements under the Written Appraisal requirement. The agencies 
estimate further that respondents would take, on average, 15 minutes 
per HRM to investigate and verify the need for a second appraisal; and 
then an additional 15 minutes to comply, where necessary, with the 
proposed disclosure requirements of the Second Written Appraisal. For 
the small fraction of loans requiring a second appraisal, the burden is 
similar to the prior information collection. The following table 
summarizes these burdens.

Estimated Paperwork Burden

                  Table 7--Summary of Burden Hours for Information Collections in Proposed Rule
----------------------------------------------------------------------------------------------------------------
                                                                  Estimated
                                                 Estimated        number of        Estimated     Estimated total
                                                 number of      appraisals per    burden hours    annual burden
                                                respondents       respondent     per appraisal        hours
                                                         [a]              [b]              [c]    [d] = (a*b*c)
----------------------------------------------------------------------------------------------------------------
                             Review and Provide a Copy of a Full Interior Appraisal
----------------------------------------------------------------------------------------------------------------
Bureau: \135\
    Depository Inst. > $10 B in total assets             128              472             0.25           15,104
     + Depository Inst. Affiliates..........
    Non-Depository Inst.....................           2,515               24             0.25           15,090
FDIC........................................           2,571                8             0.25            5,142
Board \136\.................................             418               24             0.25            2,508
OCC.........................................           1,399               69             0.25           24,133
NCUA........................................           2,437                6             0.25            3,656
                                             -------------------------------------------------------------------
        Total...............................           9,468   ...............  ...............          65,632
----------------------------------------------------------------------------------------------------------------
                             Investigate and Verify Requirement for Second Appraisal
----------------------------------------------------------------------------------------------------------------
Bureau:
    Depository Inst. > $10 B in total assets             128              472             0.25           15,104
     + Depository Inst. Affiliates..........
    Non-Depository Inst.....................           2,515               24             0.25           15,090
FDIC........................................           2,571               15             0.25            9,641
Board.......................................             418               24             0.25            2,508
OCC.........................................           1,399               69             0.25           24,133
NCUA........................................           2,437                6             0.25            3,656
                                             -------------------------------------------------------------------
        Total...............................           9,468   ...............  ...............          70,132
----------------------------------------------------------------------------------------------------------------
                                      Conduct and Provide Second Appraisal
----------------------------------------------------------------------------------------------------------------
Bureau:
    Depository Inst. > $10 B in total assets             128               24             0.25              768
     + Depository Inst. Affiliates..........
    Non-Depository Inst.....................           2,515                1             0.25              629
FDIC........................................           2,571                1             0.25              643
Board.......................................             418                1             0.25              105
OCC.........................................           1,399                3             0.25            1,049
NCUA........................................           2,437              0.3             0.25              183
                                             -------------------------------------------------------------------
        Total...............................           9,468   ...............  ...............           3,376
----------------------------------------------------------------------------------------------------------------
Notes: (1) Respondents include all institutions estimated to originate HRMs.
(2) There may be an additional ongoing burden of roughly 75 hours for privately insured credit unions estimated
  to originate HRMs. The Bureau will assume half of the burden for non-depository institutions and the privately
  insured credit unions.


[[Page 54764]]

    Respondents will also have to review the instructions and legal 
guidance associated with the proposed rule and train loan officers 
regarding the proposed rule. The Agencies estimate that these one-time 
costs are as follows: Bureau 32,754 hours; FDIC: 10,284 hours; Board 
3,344 hours; OCC: 19,586 hours; NCUA: 7,311 hours.\137\
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    \135\ The information collection requirements (ICs) in this 
proposed rule will be incorporated with the Bureau's existing 
collection associated with Truth in Lending Act (Regulation Z) 12 
CFR 1026 (OMB No. 3170-0015).
    \136\ The ICs in this rule will be incorporated with the Board's 
Reporting, Recordkeeping, and Disclosure Requirements associated 
with Regulation Z (Truth in Lending), 12 CFR part 226, and 
Regulation AA (Unfair or Deceptive Acts or Practices), 12 CFR part 
227 (OMB No. 7100-0199). The burden estimates provided in this rule 
pertain only to the ICs associated with this proposed rulemaking.
    \137\ Estimated one-time burden is calculated assuming a fixed 
burden per institution to review the regulations and fixed burden 
per estimated loan officer in training costs. As a result of the 
different size and mortgage activities across institutions, the 
average per-institution one-time burdens vary across the Agencies.
---------------------------------------------------------------------------

Request for Comments on Proposed Information Collection

    Comments are specifically requested concerning: (i) Whether the 
proposed collections of information are necessary for the proper 
performance of the functions of the Agencies, including whether the 
information will have practical utility; (ii) the accuracy of the 
estimated burden associated with the proposed collections of 
information; (iii) how to enhance the quality, utility, and clarity of 
the information to be collected; and (iv) how to minimize the burden of 
complying with the proposed collections of information, including the 
application of automated collection techniques or other forms of 
information technology. All comments will become a matter of public 
record. Comments on the collection of information requirements should 
be sent to the OMB desk officers for the agencies (i.e. ``Desk Officer 
for the Bureau of Consumer Financial Protection''): by mail to U.S. 
Office of Management and Budget, Office of Information and Regulatory 
Affairs, Washington, DC 20503, or by the internet to http://[email protected], with copies to the Agencies at the addresses 
listed in the ADDRESSES section of this Supplementary Information.

FHFA

    The proposed rule does not contain any collections of information 
requiring review by the Office of Management and Budget (OMB) under the 
Paperwork Reduction Act of 1995 (44 U.S.C. 3501, et seq.). Therefore, 
FHFA has not submitted any materials to OMB for review.

List of Subjects

12 CFR Part 34

    Appraisal, Appraiser, Banks, Banking, Consumer protection, Credit, 
Mortgages, National banks, Reporting and recordkeeping requirements, 
Savings associations, Truth in Lending.

12 CFR Part 164

    Appraisals, Mortgages, Reporting and recordkeeping requirements, 
Savings associations, Truth in Lending.

12 CFR Part 226

    Advertising, Appraisal, Appraiser, Consumer protection, Credit, 
Federal Reserve System, Mortgages, Reporting and recordkeeping 
requirements, Truth in lending.

12 CFR Part 722

    Appraisal, Credit, Credit unions, Mortgages, Reporting and 
recordkeeping requirements.

12 CFR Part 1026

    Advertising, Appraisal, Appraiser, Banking, Banks, Consumer 
protection, Credit, Credit unions, Mortgages, National banks, Reporting 
and recordkeeping requirements, Savings associations, Truth in lending.

12 CFR Part 1222

    Government sponsored enterprises, Mortgages, Appraisals.

Text of Proposed Revisions

Department of the Treasury

Office of the Comptroller of the Currency

Authority and Issuance
    For the reasons set forth in the preamble, the OCC proposes to 
amend 12 CFR parts 34 and 164, as follows:

PART 34--REAL ESTATE LENDING AND APPRAISALS

    1. The authority citation for part 34 is revised to read as 
follows:

    Authority:  12 U.S.C. 1 et seq., 25b, 29, 93a, 371, 1463, 1464, 
1465, 1701j-3, 1828(o), 3331 et seq., 5101 et seq., 5412(b)(2)(B) 
and 15 U.S.C. 1639h.

    2. Subpart G to part 34 is added to read as follows:
Subpart G--Appraisals for Higher Risk Mortgage Loans
Sec.
34.201 Authority, purpose and scope.
34.202 Definitions applicable to higher risk mortgage loans.
34.203 Appraisals for higher risk mortgage loans.

Appendix A to Subpart G--Appraisal Safe Harbor Review

Appendix B to Subpart G--OCC Interpretations

Subpart G--Appraisals for Higher Risk Mortgage Loans


Sec.  34.201  Authority, purpose and scope.

    (a) Authority. This subpart is issued by the Office of the 
Comptroller of the Currency under 12 U.S.C. 93a, 12 U.S.C. 1463, 1464 
and 15 U.S.C. 1639h.
    (b) Purpose. The OCC adopts this subpart pursuant to the 
requirements of section 129H of the Truth in Lending Act (15 U.S.C. 
1639h) which provides that a creditor, including a national bank or 
operating subsidiary, a Federal branch or agency or a Federal savings 
association or operating subsidiary, may not extend credit in the form 
of a higher risk mortgage loan without complying with the requirements 
of section 129H of the Truth in Lending Act (15 U.S.C. 1639h) and this 
subpart G.
    (c) Scope. This subpart applies to higher risk mortgage loan 
transactions entered into by national banks and their operating 
subsidiaries, Federal branches and agencies and Federal savings 
associations and operating subsidiaries of savings associations.


Sec.  34.202  Definitions applicable to higher risk mortgage loans.

    For purposes of this subpart:
    (a) Annual percentage rate has the same meaning as determined under 
12 CFR 1026.22.
    (b) Average prime offer rate has the same meaning as in 12 CFR 
1026.35(a)(2)(ii).
    (c) Creditor has the same meaning as in 12 CFR 1026.2(17).
    (d) Reverse mortgage has the same meaning as in 12 CFR 1026.33(a).
    (e) Qualified mortgage has the same meaning as in 12 CFR 
1026.43(e).
    (f) Transaction coverage rate has the same meaning as in 12 CFR 
1026.35(a)(2)(i).


Sec.  34.203  Appraisals for higher risk mortgage loans.

    (a) Definitions. For purposes of this subpart:
    (1) Certified or licensed appraiser means a person who is certified 
or licensed by the State agency in the State in which the property that 
secures the transaction is located, and who performs the appraisal in 
conformity with the Uniform Standards of Professional Appraisal 
Practice and the requirements applicable to appraisers in title XI of 
the Financial Institutions Reform, Recovery, and Enforcement Act of 
1989, as amended (12 U.S.C. 3331 et seq.), and any implementing 
regulations

[[Page 54765]]

in effect at the time the appraiser signs the appraiser's 
certification.
    (2) Except as provided in paragraph (a)(2)(ii) of this section, 
higher-risk mortgage loan means:

Alternative 1: Annual Percentage Rate--Paragraph (a)(2)(i)

    (i) A closed-end consumer credit transaction secured by the 
consumer's principal dwelling with an annual percentage rate, as 
determined under 12 CFR 1026.22, that exceeds the average prime offer 
rate, as defined in 12 CFR 1026.35(a)(2)(ii), for a comparable 
transaction as of the date the interest rate is set:
    (A) By 1.5 or more percentage points, for a loan secured by a first 
lien with a principal obligation at consummation that does not exceed 
the limit in effect as of the date the transaction's interest rate is 
set for the maximum principal obligation eligible for purchase by 
Freddie Mac;
    (B) By 2.5 or more percentage points, for a loan secured by a first 
lien with a principal obligation at consummation that exceeds the limit 
in effect as of the date the transaction's interest rate is set for the 
maximum principal obligation eligible for purchase by Freddie Mac; and
    (C) By 3.5 or more percentage points, for a loan secured by a 
subordinate lien.

Alternative 2: Transaction Coverage Rate--Paragraph (a)(2)(i)

    (i) A closed-end consumer credit transaction secured by the 
consumer's principal dwelling with a transaction coverage rate, as 
defined in 12 CFR 1026.35(a)(2)(i), that exceeds the average prime 
offer rate, as defined in 12 CFR 1026.35(a)(2)(ii), for a comparable 
transaction as of the date the interest rate is set:
    (A) By 1.5 or more percentage points, for a loan secured by a first 
lien with a principal obligation at consummation that does not exceed 
the limit in effect as of the date the transaction's interest rate is 
set for the principal obligation eligible for purchase by Freddie Mac;
    (B) By 2.5 or more percentage points, for a loan secured by a first 
lien with a principal obligation at consummation that exceeds the limit 
in effect as of the date the transaction's interest rate is set for the 
maximum principal obligation eligible for purchase by Freddie Mac; and
    (C) By 3.5 or more percentage points, for a loan secured by a 
subordinate lien.
    (ii) Notwithstanding paragraph (a)(2)(i) of this section, a higher-
risk mortgage loan does not include:
    (A) A qualified mortgage.
    (B) A reverse-mortgage transaction.
    (C) A loan secured solely by a residential structure.
    (3) National Registry means the database of information about State 
certified and licensed appraisers maintained by the Appraisal 
Subcommittee of the Federal Financial Institutions Examination Council.
    (4) State agency means a ``State appraiser certifying and licensing 
agency'' recognized in accordance with section 1118(b) of the Financial 
Institutions Reform, Recovery, and Enforcement Act of 1989 (12 U.S.C. 
3347(b)) and any implementing regulations.
    (b) Appraisals required for higher-risk mortgage loans. (1) In 
general. A creditor shall not extend a higher-risk mortgage loan to a 
consumer without obtaining, prior to consummation, a written appraisal 
of the property to be mortgaged. The appraisal must be performed by a 
certified or licensed appraiser who conducts a physical visit of the 
interior of the property that will secure the transaction.
    (2) Safe harbor. A creditor is deemed to have obtained a written 
appraisal that meets the requirements of paragraph (b)(1) of this 
section if the creditor:
    (i) Orders that the appraiser perform the appraisal in conformity 
with the Uniform Standards of Professional Appraisal Practice and title 
XI of the Financial Institutions Reform, Recovery, and Enforcement Act 
of 1989, as amended (12 U.S.C. 3331 et seq.), and any implementing 
regulations, in effect at the time the appraiser signs the appraiser's 
certification;
    (ii) Verifies through the National Registry that the appraiser who 
signed the appraiser's certification was a certified or licensed 
appraiser in the State in which the appraised property is located as of 
the date the appraiser signed the appraiser's certification;
    (iii) Confirms that the elements set forth in Appendix A to this 
subpart are addressed in the written appraisal; and
    (iv) Has no actual knowledge to the contrary of facts or 
certifications contained in the written appraisal.
    (3) Additional appraisal for certain higher-risk mortgage loans. 
(i) In general. A creditor shall not extend a higher-risk mortgage loan 
to a consumer to finance the acquisition of the consumer's principal 
dwelling without obtaining, prior to consummation, two written 
appraisals, if:
    (A) The seller acquired the property 180 or fewer days prior to the 
date of the consumer's agreement to acquire the property from the 
seller; and
    (B) The price at which the seller acquired the property was lower 
than the price that the consumer is obligated to pay to acquire the 
property, as specified in the consumer's agreement to acquire the 
property from the seller, by an amount equal to or greater than XX.
    (ii) Different appraisers. The two appraisals required under 
paragraph (b)(3)(i) of this section may not be performed by the same 
certified or licensed appraiser.
    (iii) Relationship to paragraph (b)(1) of this section. If two 
appraisals must be obtained under paragraph (b)(3)(i) of this section, 
each appraisal shall meet the requirements of paragraph (b)(1) of this 
section.
    (iv) Requirements for the additional appraisal. In addition to 
meeting the requirements for an appraisal under paragraph (b)(1) of 
this section, the additional appraisal must include an analysis of:
    (A) The difference between the price at which the seller acquired 
the property and the price that the consumer is obligated to pay to 
acquire the property, as specified in the consumer's agreement to 
acquire the property from the seller;
    (B) Changes in market conditions between the date the seller 
acquired the property and the date of the consumer's agreement to 
acquire the property; and
    (C) Any improvements made to the property between the date the 
seller acquired the property and the date of the consumer's agreement 
to acquire the property.
    (v) No charge for the additional appraisal. If the creditor must 
obtain two appraisals under paragraph (b)(3)(i) of this section, the 
creditor may charge the consumer for only one of the appraisals.
    (vi) Creditor's determination under paragraphs (b)(3)(i)(A) and 
(b)(3)(i)(B) of this section.
    (A) Reasonable diligence. A creditor shall exercise reasonable 
diligence to determine whether the criteria in paragraphs (b)(3)(i)(A) 
and (b)(3)(i)(B) of this section are met.
    (B) Inability to make the determination under paragraphs 
(b)(3)(i)(A) and (b)(3)(i)(B) of this section. If, after exercising 
reasonable diligence, a creditor cannot determine whether the criteria 
in paragraphs (b)(3)(i)(A) and (b)(3)(i)(B) of this section are met, 
the creditor shall not extend a higher-risk mortgage loan without 
obtaining, prior to consummation, two written appraisals in accordance 
with paragraphs (b)(3)(ii) through (v) of this section. However, the 
additional appraisal shall include an analysis of the factors in 
paragraph (b)(3)(iv) of this section only to the extent that the 
information necessary for the appraiser

[[Page 54766]]

to perform the analysis can be determined.
    (c) Required disclosure. (1) In general. A creditor shall disclose 
the following statement, in writing, to a consumer who applies for a 
higher-risk mortgage loan: ``We may order an appraisal to determine the 
property's value and charge you for this appraisal. We will promptly 
give you a copy of any appraisal, even if your loan does not close. You 
can pay for an additional appraisal for your own use at your own 
cost.''
    (2) Timing of disclosure. The disclosure required by paragraph 
(c)(1) of this section shall be mailed or delivered not later than the 
third business day after the creditor receives the consumer's 
application. If the disclosure is not provided to the consumer in 
person, the consumer is presumed to have received the disclosures three 
business days after they are mailed or delivered.
    (d) Copy of appraisals. (1) In general. A creditor shall provide to 
the consumer a copy of any written appraisal performed in connection 
with a higher-risk mortgage loan pursuant to the requirements of 
paragraph (b) of this section.
    (2) Timing. A creditor shall provide a copy of each written 
appraisal pursuant to paragraph (d)(1) of this section no later than 
three business days prior to consummation of the higher-risk mortgage 
loan.
    (3) Form of copy. Any copy of a written appraisal required by 
paragraph (d)(1) of this section may be provided to the applicant in 
electronic form, subject to compliance with the consumer consent and 
other applicable provisions of the Electronic Signatures in Global and 
National Commerce Act (E-Sign Act) (15 U.S.C. 7001 et seq.).
    (4) No charge for copy of appraisal. A creditor shall not charge 
the applicant for a copy of a written appraisal required to be provided 
to the consumer pursuant to paragraph (d)(1) of this section.
    (e) Relation to other rules. These rules were developed jointly by 
the Federal Reserve Board (Board), the OCC, the Federal Deposit 
Insurance Corporation, the National Credit Union Administration, the 
Federal Housing Finance Agency, and the Consumer Financial Protection 
Bureau (Bureau). These rules are substantively identical to the Board's 
and the Bureau's higher-risk mortgage appraisal rules published 
separately in 12 CFR 226.43 and 12 CFR 1026.XX.

Appendix A to Subpart G--Appraisal Safe Harbor Review

    To qualify for the safe harbor provided in Sec.  34.203(b)(2) a 
creditor must check the appraisal report to confirm that the written 
appraisal:
    1. Identifies the creditor who ordered the appraisal and the 
property and the interest being appraised.
    2. Indicates whether the contract price was analyzed.
    3. Addresses conditions in the property's neighborhood.
    4. Addresses the condition of the property and any improvements 
to the property.
    5. Indicates which valuation approaches were used, and includes 
a reconciliation if more than one valuation approach was used.
    6. Provides an opinion of the property's market value and an 
effective date for the opinion.
    7. Indicates that a physical property visit of the interior of 
the property was performed.
    8. Includes a certification signed by the appraiser that the 
appraisal was prepared in accordance with the requirements of the 
Uniform Standards of Professional Appraisal Practice.
    9. Includes a certification signed by the appraiser that the 
appraisal was prepared in accordance with the requirements of title 
XI of the Financial Institutions Reform, Recovery and Enforcement 
Act of 1989, as amended (12 U.S.C. 3331 et seq.), and any 
implementing regulations.

Appendix B to Subpart G--OCC Interpretations

Commentary to Sec.  34.203--Appraisals for Higher-Risk Mortgage Loans

    34.203(a) Definitions.
    34.203(a)(1) Certified or licensed appraiser.
    1. USPAP. The Uniform Standards of Professional Appraisal 
Practice (USPAP) are established by the Appraisal Standards Board of 
the Appraisal Foundation (as defined in 12 U.S.C. 3350(9)). Under 
Sec.  34.203(a)(1), the relevant USPAP standards are those found in 
the edition of USPAP in effect at the time the appraiser signs the 
appraiser's certification.
    2. Appraiser's certification. The appraiser's certification 
refers to the certification that must be signed by the appraiser for 
each appraisal assignment. This requirement is specified in USPAP 
Standards Rule 2-3.
    3. FIRREA title XI and implementing regulations. The relevant 
regulations are those prescribed under section 1110 of the Financial 
Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA), 
as amended (12 U.S.C. 3339), that relate to an appraiser's 
development and reporting of the appraisal in effect at the time the 
appraiser signs the appraiser's certification. Paragraph (3) of 
FIRREA section 1110 (12 U.S.C. 3339(3)), which relates to the review 
of appraisals, is not relevant for determining whether an appraiser 
is a certified or licensed appraiser under Sec.  34.203(a)(1).
    34.203(a)(2) Higher-risk mortgage loan.
    Paragraph 34.203(a)(2)(i).
    1. Principal dwelling. The term ``principal dwelling'' has the 
same meaning under Sec.  34.203(a)(2) as under 12 CFR 1026.2(a)(24). 
See the Official Staff Interpretations to the Bureau's Regulation Z 
(Supplement I to Part 1026), comment 2(a)(24)-3.
    2. Average prime offer rate. For guidance on average prime offer 
rates, see the Official Staff Interpretations to the Bureau's 
Regulation Z, comment 35(a)(2)-1.
    3. Comparable transaction. For guidance on determining the 
average prime offer rate for comparable transactions, see the 
Official Staff Interpretations to the Bureau's Regulation Z, 
comments 35(a)(2)-2 and -4.
    4. Rate set. For guidance on the date the annual percentage rate 
is set, see the Official Staff Interpretations to the Bureau's 
Regulation Z, comment 35(a)(2)-3.
    Paragraph 34.203(a)(2)(ii)(C).
    1. Secured solely by a residential structure. Loans secured 
solely by a residential structure cannot be ``higher-risk mortgage 
loans.'' Thus, for example, a loan secured by a manufactured home 
and the land on which it is sited could be a ``higher-risk mortgage 
loan.'' By contrast, a loan secured solely by a manufactured home 
cannot be a ``higher-risk mortgage loan.''
    34.203(b) Appraisals required for higher-risk mortgage loans.
    34.302(b)(1) In general.
    1. Written appraisal--electronic transmission. To satisfy the 
requirement that the appraisal be ``written,'' a creditor may obtain 
the appraisal in paper form or via electronic transmission.
    34.203(b)(2) Safe harbor.
    1. Safe harbor. A creditor that satisfies the conditions in 
Sec.  34.203(b)(2)(i) through (iv) will be deemed to have complied 
with the appraisal requirements of Sec.  34.203(b)(1). A creditor 
that does not satisfy the conditions in Sec.  34.203(b)(2)(i) 
through (iv) does not necessarily violate the appraisal requirements 
of Sec.  34.203(b)(1).
    Paragraph 34.203(b)(2)(iii).
    1. Confirming elements in the appraisal. To confirm that the 
elements in Appendix A to this subpart are included in the written 
appraisal, a creditor need not look beyond the face of the written 
appraisal and the appraiser's certification.
    34.203(b)(3) Additional appraisal for certain higher-risk 
mortgage loans.
    1. Acquisition. For purposes of Sec.  34.203(b)(3), the terms 
``acquisition'' and ``acquire'' refer to the acquisition of legal 
title to the property pursuant to applicable State law, including by 
purchase.
    34.203(b)(3)(i) In general.
    1. Two appraisals. An appraisal that was previously obtained in 
connection with the seller's acquisition or the financing of the 
seller's acquisition of the property does not satisfy the 
requirements of Sec.  34.203 (b)(3).
    Paragraph 34.203(b)(3)(i)(A).
    1. 180-day calculation. The time period described in Sec.  
34.203(b)(3)(i)(A) is calculated by counting the day after the date 
on which the seller acquired the property, up to and including the 
date of the consumer's agreement to acquire the property that 
secures the transaction. See also comments 34.203(b)(3)(i)(A)-2 and 
-3 in this Appendix B. For example, assume that the creditor 
determines that date of the consumer's acquisition agreement is 
October 15, 2012, and that the seller acquired the property on April 
17, 2012. The first day to be counted

[[Page 54767]]

in the 180-day calculation would be April 18, 2012, and the last day 
would be October 15, 2012. In this case, the number of days would be 
181, so an additional appraisal is not required.
    2. Date of the consumer's agreement to acquire the property. For 
the date of the consumer's agreement to acquire the property under 
Sec.  34.203(b)(3)(i)(A), the creditor should use the date on which 
the consumer and the seller signed the agreement provided to the 
creditor by the consumer. The date on which the consumer and the 
seller signed the agreement might not be the date on which the 
consumer became contractually obligated under State law to acquire 
the property. For purposes of Sec.  34.203(b)(3)(i)(A), a creditor 
is not obligated to determine whether and to what extent the 
agreement is legally binding on both parties. If the dates on which 
the consumer and the seller signed the agreement differ, the 
creditor should use the later of the two dates.
    3. Date seller acquired the property. For purposes of Sec.  
34.203(b)(3)(i)(A), the date on which the seller acquired the 
property is the date on which the seller became the legal owner of 
the property pursuant to applicable State law. See also comments 
34.203(b)(3)(vi)(A)-1 and -2 and comment (b)(3)(vi)(B)-1 in this 
Appendix B.
    Paragraph 34.203(b)(3)(i)(B).
    1. Price at which the seller acquired the property. The price at 
which the seller acquired the property refers to the amount paid by 
the seller to acquire the property. The price at which the seller 
acquired the property does not include the cost of financing the 
property. See also comments 34.203(b)(3)(vi)(A)-1 and (b)(3)(vi)(B)-
1 in this Appendix B.
    2. Price the consumer is obligated to pay to acquire the 
property. The price the consumer is obligated to pay to acquire the 
property is the price indicated on the consumer's agreement with the 
seller to acquire the property. See comment 34.203(b)(3)(i)(A)-2 in 
this Appendix B. The price the consumer is obligated to pay to 
acquire the property from the seller does not include the cost of 
financing the property. For purposes of Sec.  34.203(b)(3)(i)(B), a 
creditor is not obligated to determine whether and to what extent 
the agreement is legally binding on both parties.
    34.203(b)(3)(iv) Requirements for the additional appraisal.
    1. Determining acquisition dates and prices used in the analysis 
of the additional appraisal. For guidance on identifying the date 
the seller acquired the property, see comment 34.203(b)(3)(i)(A)-3 
in this Appendix B. For guidance on identifying the date of the 
consumer's agreement to acquire the property, see comment 
34.203(b)(3)(i)(A)-2 in this Appendix B. For guidance on identifying 
the price at which the seller acquired the property, see comment 
34.203(b)(3)(i)(B)-1 in this Appendix B. For guidance on identifying 
the price the consumer is obligated to pay to acquire the property, 
see comment 34.203(b)(3)(i)(B)-2 in this Appendix B.
    34.203(b)(3)(v) No charge for additional appraisal.
    1. Fees and mark-ups. The creditor is prohibited from charging 
the consumer for the performance of one of the two appraisals 
required under Sec.  34.203(b)(3)(i), including by imposing a fee 
specifically for that appraisal or by marking up the interest rate 
or any other fees payable by the consumer in connection with the 
higher-risk mortgage loan.
    Paragraph 34.203(b)(3)(vi) Creditor's determination under 
paragraphs (b)(3)(i)(A) and (b)(3)(i)(B) of this section.
    34.203(b)(3)(vi)(A) In general.
    1. Reasonable diligence--documentation required. A creditor acts 
with reasonable diligence to determine when the seller acquired the 
property and whether the price at which the seller acquired the 
property is lower than the price reflected in the consumer's 
agreement to acquire the property if, for example, the creditor 
bases its determination on information contained in written source 
documents, such as:
    i. A copy of the recorded deed from the seller.
    ii. A copy of a property tax bill.
    iii. A copy of any owner's title insurance policy obtained by 
the seller.
    iv. A copy of the RESPA settlement statement from the seller's 
acquisition (i.e., the HUD-1 or any successor form \138\).
---------------------------------------------------------------------------

    \138\ The Bureau has developed a successor form to the RESPA 
settlement statement as explained in the Bureau's proposal for an 
integrated TILA-RESPA disclosure form. See the Bureau's 2012 TILA-
RESPA Proposal.
---------------------------------------------------------------------------

    v. A property sales history report or title report from a third-
party reporting service.
    vi. Sales price data recorded in multiple listing services.
    vii. Tax assessment records or transfer tax records obtained 
from local governments.
    viii. An appraisal report signed by an appraiser who certifies 
that the appraisal was performed in conformity with USPAP that shows 
any prior transactions for the subject property.
    ix. A copy of a title commitment report \139\ detailing the 
seller's ownership of the property, the date it was acquired, or the 
price at which the seller acquired the property.
---------------------------------------------------------------------------

    \139\ The ``title commitment report'' is a document from a title 
insurance company describing the property interest and status of its 
title, parties with interests in the title and the nature of their 
claims, issues with the title that must be resolved prior to closing 
of the transaction between the parties to the transfer, amount and 
disposition of the premiums, and endorsements on the title policy. 
This document is issued by the title insurance company prior to the 
company's issuance of an actual title insurance policy to the 
property's transferee and/or creditor financing the transaction. In 
different jurisdictions, this instrument may be referred to by 
different terms, such as a title commitment, title binder, title 
opinion, or title report.
---------------------------------------------------------------------------

    x. A property abstract.
    2. Reasonable diligence--oral statements insufficient. Reliance 
on oral statements of interested parties, such as the consumer, 
seller, or mortgage broker, does not constitute reasonable diligence 
under Sec.  34.203(b)(3)(vi)(A).
    34.203(b)(3)(vi)(B) Inability to make the determination under 
paragraphs (b)(3)(i)(A) and (b)(3)(i)(B) of this subpart.
    1. Lack of information and conflicting information--two 
appraisals required. Unless a creditor can demonstrate that the 
requirement to obtain two appraisals under Sec.  34.203(b)(3)(i) 
does not apply, the creditor must obtain two written appraisals in 
compliance with Sec.  34.203(b)(3)(vi)(B). See also comment 
34.203(b)(3)(vi)(B)-2. For example:
    i. Assume a creditor orders and reviews the results of a title 
search and the seller's acquisition price was not included. In this 
case, the creditor would not be able to determine whether the price 
at which the seller acquired the property was lower than the price 
the consumer is obligated to pay under the consumer's acquisition 
agreement, pursuant to Sec.  34.203(b)(3)(i)(B). Before extending a 
higher-risk mortgage loan, the creditor must either: perform 
additional diligence to obtain information showing the seller's 
acquisition price and determine whether two written appraisals would 
be required based on that information; or obtain two written 
appraisals in compliance with Sec.  34.203(b)(3)(vi)(B). See also 
comment 34.203(b)(3)(vi)(B)-2 in this Appendix B.
    ii. Assume a creditor reviews the results of a title search 
indicating that the last recorded purchase was more than 180 days 
before the consumer's agreement to acquire the property. Assume also 
that the creditor subsequently receives an appraisal report 
indicating that the seller acquired the property fewer than 180 days 
before the consumer's agreement to acquire the property. In this 
case, the creditor would not be able to determine whether the seller 
acquired the property within 180 days of the date of the consumer's 
agreement to acquire the property from the seller, pursuant to Sec.  
34.203(b)(3)(i)(A). Before extending a higher-risk mortgage loan, 
the creditor must either: perform additional diligence to obtain 
information confirming the seller's acquisition date and determine 
whether two written appraisals would be required based on that 
information; or obtain two written appraisals in compliance with 
Sec.  34.203(b)(3)(vi)(B). See also comment 34.203(b)(3)(vi)(B)-2 in 
this Appendix B.
    2. Lack of information and conflicting information--requirements 
for the additional appraisal. In general, the additional appraisal 
required under Sec.  34.203(b)(3)(i) should include an analysis of 
the factors listed in Sec.  34.203(b)(3)(iv)(A)-(C). However, if, 
following reasonable diligence, a creditor cannot determine whether 
the criteria in paragraphs (b)(3)(i)(A) and (b)(3)(i)(B) of Sec.  
34.203 are met due to a lack of information or conflicting 
information, the required additional appraisal must include the 
analyses required under Sec.  34.203(b)(3)(iv)(A) through (C) only 
to the extent that the information necessary to perform the analysis 
is known. For example:
    i. Assume that a creditor is able, following reasonable 
diligence, to determine that the date on which the seller acquired 
the property occurred 180 or fewer days prior to the date of the 
consumer's agreement to acquire the property. However, the creditor 
is unable, following reasonable diligence, to determine the price at 
which the seller acquired the property. In this case, the creditor 
is required to obtain an additional written appraisal that includes 
an analysis

[[Page 54768]]

under paragraphs (b)(3)(iv)(B) and (b)(3)(iv)(C) of Sec.  34.203 of 
the changes in market conditions and any improvements made to the 
property between the date the seller acquired the property and the 
date of the consumer's agreement to acquire the property. However, 
the creditor is not required to obtain an additional written 
appraisal that includes analysis under Sec.  34.203(b)(3)(iv)(A) of 
the difference between the price at which the seller acquired the 
property and the price that the consumer is obligated to pay to 
acquire the property.
    34.203(c) Required disclosure.
    34.203(c)(1) In general.
    1. Multiple applicants. When two or more consumers apply for a 
loan subject to this section, the creditor is required to give the 
disclosure to only one of the consumers.
    34.203(d) Copy of appraisals.
    34.203(d)(1) In general.
    1. Multiple applicants. When two or more consumers apply for a 
loan subject to this subpart, the creditor is required to give the 
copy of each required appraisal to only one of the consumers.
    34.203(d)(4) No charge for copy of appraisal.
    1. Fees and mark-ups. The creditor is prohibited from charging 
the consumer for any copy of an appraisal required to be provided 
under Sec.  34.203(d)(1), including by imposing a fee specifically 
for a required copy of an appraisal or by marking up the interest 
rate or any other fees payable by the consumer in connection with 
the higher-risk mortgage loan.

PART 164--APPRAISALS

    3. The authority citation for Part 164 is revised to read as 
follows:

    Authority:  12 U.S.C. 1462, 1462a, 1463, 1464, 1828(m), 3331 et 
seq., 5412(b)(2)(B), 15 U.S.C. 1639h.


Sec. Sec.  164.1-164.8  [Designated as Subpart A]

    4. Sections 164.1 through 164.8 are designated as Subpart A.

Subpart A--Appraisals

    4a. The heading of subpart A is added to read as set forth above.
    5. Subpart B is added to read as follows:

Subpart B--Appraisals for Higher Risk Mortgage Loans

Sec.
164.20 Authority, purpose and scope.
164.21 Application of requirements for higher risk mortgage loans.


164.20  Authority, purpose and scope.

    (a) Authority. This subpart is issued under 12 U.S.C. 1463, 1464 
and 15 U.S.C. 1639h.
    (b) Purpose. This subpart implements section 129H of the Truth in 
Lending Act (15 U.S.C. 1639h), which provides that a creditor, 
including a Federal savings association or its operating subsidiary, 
may not extend credit in the form of a higher risk mortgage loan 
without complying with the requirements of section 129H of the Truth in 
Lending Act (15 U.S.C. 1639h) and the implementing regulations.
    (c) Scope. This subpart applies to higher risk mortgage loan 
transactions entered into by Federal savings associations and operating 
subsidiaries of savings associations.


Sec.  164.21  Application of requirements for higher risk mortgage 
loans.

    Federal savings associations and their operating subsidiaries may 
not extend credit in the form of a higher risk mortgage loan without 
complying with the requirements of Section 129H of the Truth in Lending 
Act (15 U.S.C. 1639h) and the implementing regulations adopted by the 
OCC at 12 CFR Part 34, Subpart G.

Board of Governors of the Federal Reserve System

Authority and Issuance

    For the reasons stated above, the Board of Governors of the Federal 
Reserve System proposes to amend Regulation Z, 12 CFR part 226, as 
follows:

PART 226--TRUTH IN LENDING ACT (REGULATION Z)

    6. The authority citation for part 226 is revised to read as 
follows:

    Authority:  12 U.S.C. 3806; 15 U.S.C. 1604, 1637(c)(5), 1639(l), 
and 1639h; Pub. L. 111-24 section 2, 123 Stat. 1734; Pub. L. 111-
203, 124 Stat. 1376.
    7. New Sec.  226.43 is added to read as follows:


Sec.  226.43--Appraisals  for higher-risk mortgage loans

    (a) Definitions. For purposes of this section:
    (1) Certified or licensed appraiser means a person who is certified 
or licensed by the State agency in the State in which the property that 
secures the transaction is located, and who performs the appraisal in 
conformity with the Uniform Standards of Professional Appraisal 
Practice and the requirements applicable to appraisers in title XI of 
the Financial Institutions Reform, Recovery, and Enforcement Act of 
1989, as amended (12 U.S.C. 3331 et seq.), and any implementing 
regulations, in effect at the time the appraiser signs the appraiser's 
certification.
    (2) Except as provided in paragraph (a)(2)(ii) of this section, 
higher-risk mortgage loan means:

Alternative 1: Annual Percentage Rate--Paragraph (a)(2)(i)

    (i) A closed-end consumer credit transaction secured by the 
consumer's principal dwelling with an annual percentage rate, as 
determined under 12 CFR 1026.22, that exceeds the average prime offer 
rate, as defined in 12 CFR 1026.35(a)(2)(ii), for a comparable 
transaction as of the date the interest rate is set:
    (A) By 1.5 or more percentage points, for a loan secured by a first 
lien with a principal obligation at consummation that does not exceed 
the limit in effect as of the date the transaction's interest rate is 
set for the maximum principal obligation eligible for purchase by 
Freddie Mac;
    (B) By 2.5 or more percentage points, for a loan secured by a first 
lien with a principal obligation at consummation that exceeds the limit 
in effect as of the date the transaction's interest rate is set for the 
maximum principal obligation eligible for purchase by Freddie Mac; and
    (C) By 3.5 or more percentage points, for a loan secured by a 
subordinate lien.

Alternative 2: Transaction Coverage Rate--Paragraph (a)(2)(i)

    (i) A closed-end consumer credit transaction secured by the 
consumer's principal dwelling with a transaction coverage rate, as 
defined in 12 CFR 1026.35(a)(2)(i), that exceeds the average prime 
offer rate, as defined in 12 CFR 1026.35(a)(2)(ii), for a comparable 
transaction as of the date the interest rate is set:
    (A) By 1.5 or more percentage points, for a loan secured by a first 
lien with a principal obligation at consummation that does not exceed 
the limit in effect as of the date the transaction's interest rate is 
set for the principal obligation eligible for purchase by Freddie Mac;
    (B) By 2.5 or more percentage points, for a loan secured by a first 
lien with a principal obligation at consummation that exceeds the limit 
in effect as of the date the transaction's interest rate is set for the 
maximum principal obligation eligible for purchase by Freddie Mac; and
    (C) By 3.5 or more percentage points, for a loan secured by a 
subordinate lien.
    (ii) Notwithstanding paragraph (a)(2)(i) of this section, a higher-
risk mortgage loan does not include:
    (A) A qualified mortgage as defined in 12 CFR 1026.43(e).
    (B) A reverse-mortgage transaction as defined in 12 CFR 1026.33(a).
    (C) A loan secured solely by a residential structure.
    (3) National Registry means the database of information about State

[[Page 54769]]

certified and licensed appraisers maintained by the Appraisal 
Subcommittee of the Federal Financial Institutions Examination Council.
    (4) State agency means a ``State appraiser certifying and licensing 
agency'' recognized in accordance with section 1118(b) of the Financial 
Institutions Reform, Recovery, and Enforcement Act of 1989 (12 U.S.C. 
3347(b)) and any implementing regulations.
    (b) Appraisals required for higher-risk mortgage loans. (1) In 
general. A creditor shall not extend a higher-risk mortgage loan to a 
consumer without obtaining, prior to consummation, a written appraisal 
performed by a certified or licensed appraiser who conducts a physical 
visit of the interior of the property that will secure the transaction.
    (2) Safe harbor. A creditor is deemed to have obtained a written 
appraisal that meets the requirements of paragraph (b)(1) of this 
section if the creditor:
    (i) Orders that the appraiser perform the written appraisal in 
conformity with the Uniform Standards of Professional Appraisal 
Practice and title XI of the Financial Institutions Reform, Recovery, 
and Enforcement Act of 1989, as amended (12 U.S.C. 3331 et seq.), and 
any implementing regulations, in effect at the time the appraiser signs 
the appraiser's certification;
    (ii) Verifies through the National Registry that the appraiser who 
signed the appraiser's certification was a certified or licensed 
appraiser in the State in which the appraised property is located as of 
the date the appraiser signed the appraiser's certification;
    (iii) Confirms that the elements set forth in appendix N to this 
part are addressed in the written appraisal; and
    (iv) Has no actual knowledge to the contrary of facts or 
certifications contained in the written appraisal.
    (3) Additional appraisal for certain higher-risk mortgage loans. 
(i) In general. A creditor shall not extend a higher-risk mortgage loan 
to a consumer to finance the acquisition of the consumer's principal 
dwelling without obtaining, prior to consummation, two written 
appraisals, if:
    (A) The seller acquired the property 180 or fewer days prior to the 
date of the consumer's agreement to acquire the property from the 
seller; and
    (B) The price at which the seller acquired the property was lower 
than the price that the consumer is obligated to pay to acquire the 
property, as specified in the consumer's agreement to acquire the 
property from the seller, by an amount equal to or greater than XX.
    (ii) Different appraisers. The two appraisals required under 
paragraph (b)(3)(i) of this section may not be performed by the same 
certified or licensed appraiser.
    (iii) Relationship to paragraph (b)(1) of this section. If two 
appraisals must be obtained under paragraph (b)(3)(i) of this section, 
each appraisal shall meet the requirements of paragraph (b)(1) of this 
section.
    (iv) Requirements for the additional appraisal. In addition to 
meeting the requirements for an appraisal under paragraph (b)(1) of 
this section, the additional appraisal must include an analysis of:
    (A) The difference between the price at which the seller acquired 
the property and the price that the consumer is obligated to pay to 
acquire the property, as specified in the consumer's agreement to 
acquire the property from the seller;
    (B) Changes in market conditions between the date the seller 
acquired the property and the date of the consumer's agreement to 
acquire the property; and
    (C) Any improvements made to the property between the date the 
seller acquired the property and the date of the consumer's agreement 
to acquire the property.
    (v) No charge for the additional appraisal. If the creditor must 
obtain two appraisals under paragraph (b)(3)(i) of this section, the 
creditor may charge the consumer for only one of the appraisals.
    (vi) Creditor's determination under paragraphs (b)(3)(i)(A) and 
(b)(3)(i)(B) of this section.
    (A) Reasonable diligence. A creditor shall exercise reasonable 
diligence to determine whether the criteria in paragraphs (b)(3)(i)(A) 
and (b)(3)(i)(B) of this section are met.
    (B) Inability to make the determination under paragraphs 
(b)(3)(i)(A) and (b)(3)(i)(B) of this section. If, after exercising 
reasonable diligence, a creditor cannot determine whether the criteria 
in paragraphs (b)(3)(i)(A) and (b)(3)(i)(B) of this section are met, 
the creditor shall not extend a higher-risk mortgage loan without 
obtaining, prior to consummation, two written appraisals in accordance 
with paragraphs (b)(3)(ii) through (v) of this section. However, the 
additional appraisal shall include an analysis of the factors in 
paragraph (b)(3)(iv) of this section only to the extent that the 
information necessary for the appraiser to perform the analysis can be 
determined.
    (c) Required disclosure. (1) In general. A creditor shall disclose 
the following statement, in writing, to a consumer who applies for a 
higher-risk mortgage loan: ``We may order an appraisal to determine the 
property's value and charge you for this appraisal. We will promptly 
give you a copy of any appraisal, even if your loan does not close. You 
can pay for an additional appraisal for your own use at your own 
cost.''
    (2) Timing of disclosure. The disclosure required by paragraph 
(c)(1) of this section shall be mailed or delivered not later than the 
third business day after the creditor receives the consumer's 
application. If the disclosure is not provided to the consumer in 
person, the consumer is presumed to have received the disclosures three 
business days after they are mailed or delivered.
    (d) Copy of appraisals. (1) In general. A creditor shall provide to 
the consumer a copy of any written appraisal performed in connection 
with a higher-risk mortgage loan pursuant to the requirements of 
paragraph (b) of this section.
    (2) Timing. A creditor shall provide a copy of each written 
appraisal pursuant to paragraph (d)(1) of this section no later than 
three business days prior to consummation of the higher-risk mortgage 
loan.
    (3) Form of copy. Any copy of a written appraisal required by 
paragraph (d)(1) of this section may be provided to the applicant in 
electronic form, subject to compliance with the consumer consent and 
other applicable provisions of the Electronic Signatures in Global and 
National Commerce Act (E-Sign Act) (15 U.S.C. 7001 et seq.).
    (4) No charge for copy of appraisal. A creditor shall not charge 
the applicant for a copy of a written appraisal required to be provided 
to the consumer pursuant to paragraph (d)(1) of this section.
    (e) Relation to other rules. These rules were developed jointly by 
the Federal Reserve Board (Board), the Office of the Comptroller of the 
Currency (OCC), the Federal Deposit Insurance Corporation, the National 
Credit Union Administration, the Federal Housing Finance Agency, and 
the Consumer Financial Protection Bureau (Bureau). These rules are 
substantively identical to the OCC's and the Bureau's higher-risk 
mortgage appraisal rules published separately in 12 CFR part 34, 
subpart G and 12 CFR 164.20 through 164.21 (for the OCC), and 12 CFR 
1026.XX (for the Bureau). The Board's rules apply to all creditors who 
are State member banks, bank holding companies and their subsidiaries 
(other than a bank), savings and loan holding companies and their 
subsidiaries (other than a savings and

[[Page 54770]]

loan association), and uninsured state branches and agencies of foreign 
banks. Compliance with the Board's rules satisfies the requirements of 
15 U.S.C. 1639h.
    8. Appendix N to Part 226 is added to read as follows:

Appendix N to Part 226--Appraisal Safe Harbor Review

    To qualify for the safe harbor provided in Sec.  226.43(b)(2) a 
creditor must check the appraisal report to confirm that the written 
appraisal:
    1. Identifies the creditor who ordered the appraisal and the 
property and the interest being appraised.
    2. Indicates whether the contract price was analyzed.
    3. Addresses conditions in the property's neighborhood.
    4. Addresses the condition of the property and any improvements 
to the property.
    5. Indicates which valuation approaches were used, and includes 
a reconciliation if more than one valuation approach was used.
    6. Provides an opinion of the property's market value and an 
effective date for the opinion.
    7. Indicates that a physical property visit of the interior of 
the property was performed.
    8. Includes a certification signed by the appraiser that the 
appraisal was prepared in accordance with the requirements of the 
Uniform Standards of Professional Appraisal Practice.
    9. Includes a certification signed by the appraiser that the 
appraisal was prepared in accordance with the requirements of title 
XI of the Financial Institutions Reform, Recovery and Enforcement 
Act of 1989, as amended (12 U.S.C. 3331 et seq.), and any 
implementing regulations.
    9. In Supplement I to part 226, new Section 226.43--Appraisals for 
Higher-Risk Mortgage Loans is added to read as follows:

Supplement I to Part 226--Official Interpretations

* * * * *

Section 226.43--Appraisals for Higher-Risk Mortgage Loans

    43(a) Definitions.
    43(a)(1) Certified or licensed appraiser.
    1. USPAP. The Uniform Standards of Professional Appraisal 
Practice (USPAP) are established by the Appraisal Standards Board of 
the Appraisal Foundation (as defined in 12 U.S.C. 3350(9)). Under 
Sec.  226.43(a)(1), the relevant USPAP standards are those found in 
the edition of USPAP in effect at the time the appraiser signs the 
appraiser's certification.
    2. Appraiser's certification. The appraiser's certification 
refers to the certification that must be signed by the appraiser for 
each appraisal assignment. This requirement is specified in USPAP 
Standards Rule 2-3.
    3. FIRREA title XI and implementing regulations. The relevant 
regulations are those prescribed under section 1110 of the Financial 
Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA), 
as amended (12 U.S.C. 3339), that relate to an appraiser's 
development and reporting of the appraisal in effect at the time the 
appraiser signs the appraiser's certification. Paragraph (3) of 
FIRREA section 1110 (12 U.S.C. 3339(3)), which relates to the review 
of appraisals, is not relevant for determining whether an appraiser 
is a certified or licensed appraiser under Sec.  226.43(a)(1).
    43(a)(2) Higher-risk mortgage loan.
    Paragraph 43(a)(2)(i).
    1. Principal dwelling. The term ``principal dwelling'' has the 
same meaning under Sec.  226.43(a)(2) as under 12 CFR 1026.2(a)(24). 
See the Official Staff Interpretations to the Bureau's Regulation Z 
(Supplement I to Part 1026), comment 2(a)(24)-3.
    2. Average prime offer rate. For guidance on average prime offer 
rates, see the Official Staff Interpretations to the Bureau's 
Regulation Z, comment 35(a)(2)-1.
    3. Comparable transaction. For guidance on determining the 
average prime offer rate for comparable transactions, see the 
Official Staff Interpretations to the Bureau's Regulation Z, 
comments 35(a)(2)-2 and -4.
    4. Rate set. For guidance on the date the annual percentage rate 
is set, see the Official Staff Interpretations to the Bureau's 
Regulation Z, comment 35(a)(2)-3.
    Paragraph 43(a)(2)(ii)(C).
    1. Secured solely by a residential structure. Loans secured 
solely by a residential structure cannot be ``higher-risk mortgage 
loans.'' Thus, for example, a loan secured by a manufactured home 
and the land on which it is sited could be a ``higher-risk mortgage 
loan.'' By contrast, a loan secured solely by a manufactured home 
cannot be a ``higher-risk mortgage loan.''
    43(b) Appraisals required for higher-risk mortgage loans.
    43(b)(1) In general.
    1. Written appraisal--electronic transmission. To satisfy the 
requirement that the appraisal be ``written,'' a creditor may obtain 
the appraisal in paper form or via electronic transmission.
    43(b)(2) Safe harbor.
    1. Safe harbor. A creditor that satisfies the conditions in 
Sec.  226.43(b)(2)(i) through (iv) will be deemed to have complied 
with the appraisal requirements of Sec.  226.43(b)(1). A creditor 
that does not satisfy the conditions in Sec.  226.43(b)(2)(i) 
through (iv) does not necessarily violate the appraisal requirements 
of Sec.  226.43(b)(1).
    Paragraph 43(b)(2)(iii).
    1. Confirming elements in the appraisal. To confirm that the 
elements in appendix N to this part are included in the written 
appraisal, a creditor need not look beyond the face of the written 
appraisal and the appraiser's certification.
    43(b)(3) Additional appraisal for certain higher-risk mortgage 
loans.
    1. Acquisition. For purposes of Sec.  226.43(b)(3), the terms 
``acquisition'' and ``acquire'' refer to the acquisition of legal 
title to the property pursuant to applicable State law, including by 
purchase.
    43(b)(3)(i) In general.
    1. Two appraisals. An appraisal that was previously obtained in 
connection with the seller's acquisition or the financing of the 
seller's acquisition of the property does not satisfy the 
requirements of Sec.  226.43(b)(3).
    Paragraph 43(b)(3)(i)(A).
    1. 180-day calculation. The time period described in Sec.  
226.43(b)(3)(i)(A) is calculated by counting the day after the date 
on which the seller acquired the property, up to and including the 
date of the consumer's agreement to acquire the property that 
secures the transaction. See also comments 43(b)(3)(i)(A)-2 and -3. 
For example, assume that the creditor determines that date of the 
consumer's acquisition agreement is October 15, 2012, and that the 
seller acquired the property on April 17, 2012. The first day to be 
counted in the 180-day calculation would be April 18, 2012, and the 
last day would be October 15, 2012. In this case, the number of days 
would be 181, so an additional appraisal is not required.
    2. Date of the consumer's agreement to acquire the property. For 
the date of the consumer's agreement to acquire the property under 
Sec.  226.43(b)(3)(i)(A), the creditor should use the date on which 
the consumer and the seller signed the agreement provided to the 
creditor by the consumer. The date on which the consumer and the 
seller signed the agreement might not be the date on which the 
consumer became contractually obligated under State law to acquire 
the property. For purposes of Sec.  226.43(b)(3)(i)(A), a creditor 
is not obligated to determine whether and to what extent the 
agreement is legally binding on both parties. If the dates on which 
the consumer and the seller signed the agreement differ, the 
creditor should use the later of the two dates.
    3. Date seller acquired the property. For purposes of Sec.  
226.43(b)(3)(i)(A), the date on which the seller acquired the 
property is the date on which the seller became the legal owner of 
the property pursuant to applicable State law. See also comments 
43(b)(3)(vi)(A)-1 and -2 and comment (b)(3)(vi)(B)-1.
    Paragraph 43(b)(3)(i)(B).
    1. Price at which the seller acquired the property. The price at 
which the seller acquired the property refers to the amount paid by 
the seller to acquire the property. The price at which the seller 
acquired the property does not include the cost of financing the 
property. See also comments 43(b)(3)(vi)(A)-1 and (b)(3)(vi)(B)-1.
    2. Price the consumer is obligated to pay to acquire the 
property. The price the consumer is obligated to pay to acquire the 
property is the price indicated on the consumer's agreement with the 
seller to acquire the property. See comment 43(b)(3)(i)(A)-2. The 
price the consumer is obligated to pay to acquire the property from 
the seller does not include the cost of financing the property. For 
purposes of Sec.  226.43(b)(3)(i)(B), a creditor is not obligated to 
determine whether and to what extent the agreement is legally 
binding on both parties.
    43(b)(3)(iv) Requirements for the additional appraisal.
    1. Determining acquisition dates and prices used in the analysis 
of the additional appraisal. For guidance on identifying the date 
the seller acquired the property, see comment 43(b)(3)(i)(A)-3. For 
guidance on identifying the date of the consumer's agreement to 
acquire the property, see comment 43(b)(3)(i)(A)-2. For guidance on 
identifying the price at which the seller

[[Page 54771]]

acquired the property, see comment 43(b)(3)(i)(B)-1. For guidance on 
identifying the price the consumer is obligated to pay to acquire 
the property, see comment 43(b)(3)(i)(B)-2.
    43(b)(3)(v) No charge for additional appraisal.
    1. Fees and mark-ups. The creditor is prohibited from charging 
the consumer for the performance of one of the two appraisals 
required under Sec.  226.43(b)(3)(i), including by imposing a fee 
specifically for that appraisal or by marking up the interest rate 
or any other fees payable by the consumer in connection with the 
higher-risk mortgage loan.
    Paragraph 43(b)(3)(vi) Creditor's determination under paragraphs 
(b)(3)(i)(A) and (b)(3)(i)(B) of this section.
    43(b)(3)(vi)(A) In general.
    1. Reasonable diligence--documentation required. A creditor acts 
with reasonable diligence to determine when the seller acquired the 
property and whether the price at which the seller acquired the 
property is lower than the price reflected in the consumer's 
agreement to acquire the property if, for example, the creditor 
bases its determination on information contained in written source 
documents, such as:
    i. A copy of the recorded deed from the seller.
    ii. A copy of a property tax bill.
    iii. A copy of any owner's title insurance policy obtained by 
the seller.
    iv. A copy of the RESPA settlement statement from the seller's 
acquisition (i.e., the HUD-1 or any successor form \140\).
---------------------------------------------------------------------------

    \140\ The Bureau has developed a successor form to the RESPA 
settlement statement as explained in the Bureau's proposal for an 
integrated TILA-RESPA disclosure form. See the Bureau's TILA-RESPA 
Proposal.
---------------------------------------------------------------------------

    v. A property sales history report or title report from a third-
party reporting service.
    vi. Sales price data recorded in multiple listing services.
    vii. Tax assessment records or transfer tax records obtained 
from local governments.
    viii. An appraisal report signed by an appraiser who certifies 
that the appraisal was performed in conformity with USPAP that shows 
any prior transactions for the subject property.
    ix. A copy of a title commitment report \141\ detailing the 
seller's ownership of the property, the date it was acquired, or the 
price at which the seller acquired the property.
---------------------------------------------------------------------------

    \141\ The ``title commitment report'' is a document from a title 
insurance company describing the property interest and status of its 
title, parties with interests in the title and the nature of their 
claims, issues with the title that must be resolved prior to closing 
of the transaction between the parties to the transfer, amount and 
disposition of the premiums, and endorsements on the title policy. 
This document is issued by the title insurance company prior to the 
company's issuance of an actual title insurance policy to the 
property's transferee and/or creditor financing the transaction. In 
different jurisdictions, this instrument may be referred to by 
different terms, such as a title commitment, title binder, title 
opinion, or title report.
---------------------------------------------------------------------------

    x. A property abstract.
    2. Reasonable diligence--oral statements insufficient. Reliance 
on oral statements of interested parties, such as the consumer, 
seller, or mortgage broker, does not constitute reasonable diligence 
under Sec.  226.43(b)(3)(vi)(A).
    43(b)(3)(vi)(B) Inability to make the determination under 
paragraphs (b)(3)(i)(A) and (b)(3)(i)(B) of this section.
    1. Lack of information and conflicting information--two 
appraisals required. Unless a creditor can demonstrate that the 
requirement to obtain two appraisals under Sec.  226.43(b)(3)(i) 
does not apply, the creditor must obtain two written appraisals in 
compliance with Sec.  226.43(b)(3)(vi)(B). See also comment 
43(b)(3)(vi)(B)-2. For example:
    i. Assume a creditor orders and reviews the results of a title 
search and the seller's acquisition price was not included. In this 
case, the creditor would not be able to determine whether the price 
at which the seller acquired the property was lower than the price 
the consumer is obligated to pay under the consumer's acquisition 
agreement, pursuant to Sec.  226.43(b)(3)(i)(B). Before extending a 
higher-risk mortgage loan, the creditor must either: Perform 
additional diligence to obtain information showing the seller's 
acquisition price and determine whether two written appraisals would 
be required based on that information; or obtain two written 
appraisals in compliance with Sec.  226.43(b)(3)(vi)(B). See also 
comment 43(b)(3)(vi)(B)-2.
    ii. Assume a creditor reviews the results of a title search 
indicating that the last recorded purchase was more than 180 days 
before the consumer's agreement to acquire the property. Assume also 
that the creditor subsequently receives an appraisal report 
indicating that the seller acquired the property fewer than 180 days 
before the consumer's agreement to acquire the property. In this 
case, the creditor would not be able to determine whether seller 
acquired the property within 180 days of the date of the consumer's 
agreement to acquire the property from the seller, pursuant to Sec.  
226.43(b)(3)(i)(A). Before extending a higher-risk mortgage loan, 
the creditor must either: Perform additional diligence to obtain 
information confirming the seller's acquisition date and determine 
whether two written appraisals would be required based on that 
information; or obtain two written appraisals in compliance with 
Sec.  226.43(b)(3)(vi)(B). See also comment 43(b)(3)(vi)(B)-2.
    2. Lack of information and conflicting information--requirements 
for the additional appraisal. In general, the additional appraisal 
required under Sec.  226.43(b)(3)(i) should include an analysis of 
the factors listed in Sec.  226.43(b)(3)(iv)(A) through (C). 
However, if, following reasonable diligence, a creditor cannot 
determine whether the criteria in paragraphs (b)(3)(i)(A) and 
(b)(3)(i)(B) of Sec.  226.43 are met due to a lack of information or 
conflicting information, the required additional appraisal must 
include the analyses required under Sec.  226.43(b)(3)(iv)(A) 
through (C) only to the extent that the information necessary to 
perform the analysis is known. For example:
    i. Assume that a creditor is able, following reasonable 
diligence, to determine that the date on which the seller acquired 
the property occurred 180 or fewer days prior to the date of the 
consumer's agreement to acquire the property. However, the creditor 
is unable, following reasonable diligence, to determine the price at 
which the seller acquired the property. In this case, the creditor 
is required to obtain an additional written appraisal that includes 
an analysis under paragraphs (b)(3)(iv)(B) and (b)(3)(iv)(C) of 
Sec.  226.43 of the changes in market conditions and any 
improvements made to the property between the date the seller 
acquired the property and the date of the consumer's agreement to 
acquire the property. However, the creditor is not required to 
obtain an additional written appraisal that includes analysis under 
Sec.  226.43(b)(3)(iv)(A) of the difference between the price at 
which the seller acquired the property and the price that the 
consumer is obligated to pay to acquire the property.
    43(c) Required disclosure.
    43(c)(1) In general.
    1. Multiple applicants. When two or more consumers apply for a 
loan subject to this section, the creditor is required to give the 
disclosure to only one of the consumers.
    43(d) Copy of appraisals.
    43(d)(1) In general.
    1. Multiple applicants. When two or more consumers apply for a 
loan subject to this section, the creditor is required to give the 
copy of each required appraisal to only one of the consumers.
    43(d)(4) No charge for copy of appraisal.
    1. Fees and mark-ups. The creditor is prohibited from charging 
the consumer for any copy of an appraisal required to be provided 
under Sec.  226.43(d)(1), including by imposing a fee specifically 
for a required copy of an appraisal or by marking up the interest 
rate or any other fees payable by the consumer in connection with 
the higher-risk mortgage loan.

National Credit Union Administration

Authority and Issuance

    For the reasons discussed above, NCUA proposes to amend 12 CFR part 
722 as follows:

PART 722--APPRAISALS

    10. The authority citation for part 722 is revised to read as 
follows:

    Authority:  12 U.S.C. 1766, 1789 and 3339.
    Section 722.3(f) is also issued under 15 U.S.C. 1639h.

    11. In Sec.  722.3, add paragraph (f) to read as follows:


Sec.  722.3  Appraisals required; transactions requiring a State 
certified or licensed appraiser.

* * * * *
    (f) Higher-risk mortgages. A credit union may not extend credit to 
a consumer in the form of a higher-risk mortgage as defined in the 
Truth in Lending Act, 15 U.S.C. 1601 et seq., without meeting the 
requirements of 15 U.S.C. 1639h and its implementing

[[Page 54772]]

regulations in Regulation Z, 12 CFR 1026.XX.

Bureau of Consumer Financial Protection

Authority and Issuance

    For the reasons set forth in the preamble, the Bureau proposes to 
amend Regulation Z, 12 CFR part 1026, as follows:

PART 1026--TRUTH IN LENDING ACT (REGULATION Z)

    12. The authority citation for part 1026 continues to read as 
follows:

    Authority:  12 U.S.C. 5512, 5581; 15 U.S.C. 1601 et seq.

Subpart C--Closed-End Credit

    13. New Sec.  1026.XX is added to read as follows:


Sec.  1026.XX  Appraisals for higher-risk mortgage loans.

    (a) Definitions. For purposes of this section:
    (1) Certified or licensed appraiser means a person who is certified 
or licensed by the State agency in the State in which the property that 
secures the transaction is located, and who performs the appraisal in 
conformity with the Uniform Standards of Professional Appraisal 
Practice and the requirements applicable to appraisers in title XI of 
the Financial Institutions Reform, Recovery, and Enforcement Act of 
1989, as amended (12 U.S.C. 3331 et seq.), and any implementing 
regulations in effect at the time the appraiser signs the appraiser's 
certification.
    (2) Except as provided in paragraph (a)(2)(ii) of this section, 
higher-risk mortgage loan means:

Alternative 1: Annual Percentage Rate--Paragraph (a)(2)(i)

    (i) A closed-end consumer credit transaction secured by the 
consumer's principal dwelling with an annual percentage rate, as 
determined under Sec.  1026.22, that exceeds the average prime offer 
rate, as defined in Sec.  1026.35(a)(2)(ii), for a comparable 
transaction as of the date the interest rate is set:
    (A) By 1.5 or more percentage points, for a loan secured by a first 
lien with a principal obligation at consummation that does not exceed 
the limit in effect as of the date the transaction's interest rate is 
set for the maximum principal obligation eligible for purchase by 
Freddie Mac;
    (B) By 2.5 or more percentage points, for a loan secured by a first 
lien with a principal obligation at consummation that exceeds the limit 
in effect as of the date the transaction's interest rate is set for the 
maximum principal obligation eligible for purchase by Freddie Mac; and
    (C) By 3.5 or more percentage points, for a loan secured by a 
subordinate lien.

Alternative 2: Transaction Coverage Rate--Paragraph (a)(2)(i)

    (i) A closed-end consumer credit transaction secured by the 
consumer's principal dwelling with a transaction coverage rate, as 
defined in Sec.  1026.35(a)(2)(i), that exceeds the average prime offer 
rate, as defined in Sec.  1026.35(a)(2)(ii), for a comparable 
transaction as of the date the interest rate is set:
    (A) By 1.5 or more percentage points, for a loan secured by a first 
lien with a principal obligation at consummation that does not exceed 
the limit in effect as of the date the transaction's interest rate is 
set for the maximum principal obligation eligible for purchase by 
Freddie Mac;
    (B) By 2.5 or more percentage points, for a loan secured by a first 
lien with a principal obligation at consummation that exceeds the limit 
in effect as of the date the transaction's interest rate is set for the 
maximum principal obligation eligible for purchase by Freddie Mac; and
    (C) By 3.5 or more percentage points, for a loan secured by a 
subordinate lien.
    (ii) Notwithstanding paragraph (a)(2)(i) of this section, a higher-
risk mortgage loan does not include:
    (A) A qualified mortgage as defined in Sec.  1026.43(e).
    (B) A reverse-mortgage transaction as defined in Sec.  1026.33(a).
    (C) A loan secured solely by a residential structure.
    (3) National Registry means the database of information about State 
certified and licensed appraisers maintained by the Appraisal 
Subcommittee of the Federal Financial Institutions Examination Council.
    (4) State agency means a ``State appraiser certifying and licensing 
agency'' recognized in accordance with section 1118(b) of the Financial 
Institutions Reform, Recovery, and Enforcement Act of 1989 (12 U.S.C. 
3347(b)) and any implementing regulations.
    (b) Appraisals required for higher-risk mortgage loans. (1) In 
general. A creditor shall not extend a higher-risk mortgage loan to a 
consumer without obtaining, prior to consummation, a written appraisal 
of the property to be mortgaged. The appraisal must be performed by a 
certified or licensed appraiser who conducts a physical visit of the 
interior of the property that will secure the transaction.
    (2) Safe harbor. A creditor is deemed to have obtained a written 
appraisal that meets the requirements of paragraph (b)(1) of this 
section if the creditor:
    (i) Orders that the appraiser perform the appraisal in conformity 
with the Uniform Standards of Professional Appraisal Practice and title 
XI of the Financial Institutions Reform, Recovery, and Enforcement Act 
of 1989, as amended (12 U.S.C. 3331 et seq.), and any implementing 
regulations, in effect at the time the appraiser signs the appraiser's 
certification;
    (ii) Verifies through the National Registry that the appraiser who 
signed the appraiser's certification was a certified or licensed 
appraiser in the State in which the appraised property is located as of 
the date the appraiser signed the appraiser's certification;
    (iii) Confirms that the elements set forth in appendix N to this 
part are addressed in the written appraisal; and
    (iv) Has no actual knowledge to the contrary of facts or 
certifications contained in the written appraisal.
    (3) Additional appraisal for certain higher-risk mortgage loans. 
(i) In general. A creditor shall not extend a higher-risk mortgage loan 
to a consumer to finance the acquisition of the consumer's principal 
dwelling without obtaining, prior to consummation, two written 
appraisals, if:
    (A) The seller acquired the property 180 or fewer days prior to the 
date of the consumer's agreement to acquire the property from the 
seller; and
    (B) The price at which the seller acquired the property was lower 
than the price that the consumer is obligated to pay to acquire the 
property, as specified in the consumer's agreement to acquire the 
property from the seller, by an amount equal to or greater than XX.
    (ii) Different appraisers. The two appraisals required under 
paragraph (b)(3)(i) of this section may not be performed by the same 
certified or licensed appraiser.
    (iii) Relationship to paragraph (b)(1) of this section. If two 
appraisals must be obtained under paragraph (b)(3)(i) of this section, 
each appraisal shall meet the requirements of paragraph (b)(1) of this 
section.
    (iv) Requirements for the additional appraisal. In addition to 
meeting the requirements for an appraisal under paragraph (b)(1) of 
this section, the additional appraisal must include an analysis of:
    (A) The difference between the price at which the seller acquired 
the property and the price that the

[[Page 54773]]

consumer is obligated to pay to acquire the property, as specified in 
the consumer's agreement to acquire the property from the seller;
    (B) Changes in market conditions between the date the seller 
acquired the property and the date of the consumer's agreement to 
acquire the property; and
    (C) Any improvements made to the property between the date the 
seller acquired the property and the date of the consumer's agreement 
to acquire the property.
    (v) No charge for the additional appraisal. If the creditor must 
obtain two appraisals under paragraph (b)(3)(i) of this section, the 
creditor may charge the consumer for only one of the appraisals.
    (vi) Creditor's determination under paragraphs (b)(3)(i)(A) and 
(b)(3)(i)(B) of this section.
    (A) Reasonable diligence. A creditor shall exercise reasonable 
diligence to determine whether the criteria in paragraphs (b)(3)(i)(A) 
and (b)(3)(i)(B) of this section are met.
    (B) Inability to make the determination under paragraphs 
(b)(3)(i)(A) and (b)(3)(i)(B) of this section. If, after exercising 
reasonable diligence, a creditor cannot determine whether the criteria 
in paragraphs (b)(3)(i)(A) and (b)(3)(i)(B) of this section are met, 
the creditor shall not extend a higher-risk mortgage loan without 
obtaining, prior to consummation, two written appraisals in accordance 
with paragraphs (b)(3)(ii) through (v) of this section. However, the 
additional appraisal shall include an analysis of the factors in 
paragraph (b)(3)(iv) of this section only to the extent that the 
information necessary for the appraiser to perform the analysis can be 
determined.
    (c) Required disclosure. (1) In general. A creditor shall disclose 
the following statement, in writing, to a consumer who applies for a 
higher-risk mortgage loan: ``We may order an appraisal to determine the 
property's value and charge you for this appraisal. We will promptly 
give you a copy of any appraisal, even if your loan does not close. You 
can pay for an additional appraisal for your own use at your own 
cost.''
    (2) Timing of disclosure. The disclosure required by paragraph 
(c)(1) of this section shall be mailed or delivered not later than the 
third business day after the creditor receives the consumer's 
application. If the disclosure is not provided to the consumer in 
person, the consumer is presumed to have received the disclosures three 
business days after they are mailed or delivered.
    (d) Copy of appraisals. (1) In general. A creditor shall provide to 
the consumer a copy of any written appraisal performed in connection 
with a higher-risk mortgage loan pursuant to the requirements of 
paragraph (b) of this section.
    (2) Timing. A creditor shall provide a copy of each written 
appraisal pursuant to paragraph (d)(1) of this section no later than 
three business days prior to consummation of the higher-risk mortgage 
loan.
    (3) Form of copy. Any copy of a written appraisal required by 
paragraph (d)(1) of this section may be provided to the applicant in 
electronic form, subject to compliance with the consumer consent and 
other applicable provisions of the Electronic Signatures in Global and 
National Commerce Act (E-Sign Act) (15 U.S.C. 7001 et seq.).
    (4) No charge for copy of appraisal. A creditor shall not charge 
the applicant for a copy of a written appraisal required to be provided 
to the consumer pursuant to paragraph (d)(1) of this section.
    (e) Relation to other rules. These rules were developed jointly by 
the Federal Reserve Board (Board), the Office of the Comptroller of the 
Currency (OCC), the Federal Deposit Insurance Corporation, the National 
Credit Union Administration, the Federal Housing Finance Agency, and 
the Bureau. These rules are substantively identical to the Board's and 
the OCC's higher-risk mortgage appraisal rules published separately in 
12 CFR 226.43 (for the Board), 12 CFR part 34, subpart G and 12 CFR 
164.20 through 34.21 (for the OCC).
    14. New Appendix N to Part 1026 is added to read as follows:

Appendix N to Part 1026--Appraisal Safe Harbor Review

    To qualify for the safe harbor provided in Sec.  1026.XX(b)(2) a 
creditor must check to confirm that the written appraisal:
    1. Identifies the creditor who ordered the appraisal and the 
property and the interest being appraised.
    2. Indicates whether the contract price was analyzed.
    3. Addresses conditions in the property's neighborhood.
    4. Addresses the condition of the property and any improvements 
to the property.
    5. Indicates which valuation approaches were used, and includes 
a reconciliation if more than one valuation approach was used.
    6. Provides an opinion of the property's market value and an 
effective date for the opinion.
    7. Indicates that a physical property visit of the interior of 
the property was performed.
    8. Includes a certification signed by the appraiser that the 
appraisal was prepared in accordance with the requirements of the 
Uniform Standards of Professional Appraisal Practice.
    9. Includes a certification signed by the appraiser that the 
appraisal was prepared in accordance with the requirements of title 
XI of the Financial Institutions Reform, Recovery and Enforcement 
Act of 1989, as amended (12 U.S.C. 3331 et seq.), and any 
implementing regulations.

    15. In Supplement I to part 1026, new Section 1026.XX--Appraisals 
for Higher-Risk Mortgage Loans is added to read as follows:

Supplement I to Part 1026--Official Interpretations

* * * * *
    Section 1026.XX--Appraisals for Higher-Risk Mortgage Loans
    XX(a) Definitions.
    XX(a)(1) Certified or licensed appraiser.
    1. USPAP. The Uniform Standards of Professional Appraisal 
Practice (USPAP) are established by the Appraisal Standards Board of 
the Appraisal Foundation (as defined in 12 U.S.C. 3350(9)). Under 
Sec.  1026.XX(a)(1), the relevant USPAP standards are those found in 
the edition of USPAP in effect at the time the appraiser signs the 
appraiser's certification.
    2. Appraiser's certification. The appraiser's certification 
refers to the certification that must be signed by the appraiser for 
each appraisal assignment. This requirement is specified in USPAP 
Standards Rule 2-3.
    3. FIRREA title XI and implementing regulations. The relevant 
regulations are those prescribed under section 1110 of the Financial 
Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA), 
as amended (12 U.S.C. 3339), that relate to an appraiser's 
development and reporting of the appraisal in effect at the time the 
appraiser signs the appraiser's certification. Paragraph (3) of 
FIRREA section 1110 (12 U.S.C. 3339(3)), which relates to the review 
of appraisals, is not relevant for determining whether an appraiser 
is a certified or licensed appraiser under Sec.  1026.XX(a)(1).
    XX(a)(2) Higher-risk mortgage loan.
    Paragraph XX(a)(2)(i).
    1. Principal dwelling. The term ``principal dwelling'' has the 
same meaning under Sec.  1026.XX(a)(2) as under Sec.  1026.2(a)(24). 
See comment 2(a)(24)-3.
    2. Average prime offer rate. For guidance on average prime offer 
rates, see comment 35(a)(2)-1.
    3. Comparable transaction. For guidance on determining the 
average prime offer rate for comparable transactions, see comments 
35(a)(2)-2 and -4.
    4. Rate set. For guidance on the date the annual percentage rate 
is set, see comment 35(a)(2)-3.
    Paragraph XX(a)(2)(ii)(C).
    1. Secured solely by a residential structure. Loans secured 
solely by a residential structure cannot be ``higher-risk mortgage 
loans.'' Thus, for example, a loan secured by a manufactured home 
and the land on which it is sited could be a ``higher-risk mortgage 
loan.'' By contrast, a loan secured solely by a manufactured home 
cannot be a ``higher-risk mortgage loan.''
    XX(b) Appraisals required for higher-risk mortgage loans.

[[Page 54774]]

    XX(b)(1) In general.
    1. Written appraisal--electronic transmission. To satisfy the 
requirement that the appraisal be ``written,'' a creditor may obtain 
the appraisal in paper form or via electronic transmission.
    XX(b)(2) Safe harbor.
    1. Safe harbor. A creditor that satisfies the conditions in 
Sec.  1026.XX(b)(2)(i) through (iv) will be deemed to have complied 
with the appraisal requirements of Sec.  1026.XX(b)(1). A creditor 
that does not satisfy the conditions in Sec.  1026.XX(b)(2)(i) 
through (iv) does not necessarily violate the appraisal requirements 
of Sec.  1026.XX(b)(1).
    Paragraph XX(b)(2)(iii).
    1. Confirming elements in the appraisal. To confirm that the 
elements in appendix N to this part are included in the written 
appraisal, a creditor need not look beyond the face of the written 
appraisal and the appraiser's certification.
    XX(b)(3) Additional appraisal for certain higher-risk mortgage 
loans.
    1. Acquisition. For purposes of Sec.  1026.XX(b)(3), the terms 
``acquisition'' and ``acquire'' refer to the acquisition of legal 
title to the property pursuant to applicable State law, including by 
purchase.
    XX(b)(3)(i) In general.
    1. Two appraisals. An appraisal that was previously obtained in 
connection with the seller's acquisition or the financing of the 
seller's acquisition of the property does not satisfy the 
requirements of Sec.  1026.XX(b)(3).
    Paragraph XX(b)(3)(i)(A).
    1. 180-day calculation. The time period described in Sec.  
1026.XX(b)(3)(i)(A) is calculated by counting the day after the date 
on which the seller acquired the property, up to and including the 
date of the consumer's agreement to acquire the property that 
secures the transaction. See also comments XX(b)(3)(i)(A)-2 and -3. 
For example, assume that the creditor determines that date of the 
consumer's acquisition agreement is October 15, 2012, and that the 
seller acquired the property on April 17, 2012. The first day to be 
counted in the 180-day calculation would be April 18, 2012, and the 
last day would be October 15, 2012. In this case, the number of days 
would be 181, so an additional appraisal is not required.
    2. Date of the consumer's agreement to acquire the property. For 
the date of the consumer's agreement to acquire the property under 
Sec.  1026.XX(b)(3)(i)(A), the creditor should use the date on which 
the consumer and the seller signed the agreement provided to the 
creditor by the consumer. The date on which the consumer and the 
seller signed the agreement might not be the date on which the 
consumer became contractually obligated under State law to acquire 
the property. For purposes of Sec.  1026.XX(b)(3)(i)(A), a creditor 
is not obligated to determine whether and to what extent the 
agreement is legally binding on both parties. If the dates on which 
the consumer and the seller signed the agreement differ, the 
creditor should use the later of the two dates.
    3. Date seller acquired the property. For purposes of Sec.  
1026.XX(b)(3)(i)(A), the date on which the seller acquired the 
property is the date on which the seller became the legal owner of 
the property pursuant to applicable State law. See also comments 
XX(b)(3)(vi)(A)-1 and -2 and comment (b)(3)(vi)(B)-1.
    Paragraph XX(b)(3)(i)(B).
    1. Price at which the seller acquired the property. The price at 
which the seller acquired the property refers to the amount paid by 
the seller to acquire the property. The price at which the seller 
acquired the property does not include the cost of financing the 
property. See also comments XX(b)(3)(vi)(A)-1 and (b)(3)(vi)(B)-1.
    2. Price the consumer is obligated to pay to acquire the 
property. The price the consumer is obligated to pay to acquire the 
property is the price indicated on the consumer's agreement with the 
seller to acquire the property. See comment XX(b)(3)(i)(A)-2. The 
price the consumer is obligated to pay to acquire the property from 
the seller does not include the cost of financing the property. For 
purposes of Sec.  1026.XX(b)(3)(i)(B), a creditor is not obligated 
to determine whether and to what extent the agreement is legally 
binding on both parties.
    XX(b)(3)(iv) Requirements for the additional appraisal.
    1. Determining acquisition dates and prices used in the analysis 
of the additional appraisal. For guidance on identifying the date 
the seller acquired the property, see comment XX(b)(3)(i)(A)-3. For 
guidance on identifying the date of the consumer's agreement to 
acquire the property, see comment XX(b)(3)(i)(A)-2. For guidance on 
identifying the price at which the seller acquired the property, see 
comment XX(b)(3)(i)(B)-1. For guidance on identifying the price the 
consumer is obligated to pay to acquire the property, see comment 
XX(b)(3)(i)(B)-2.
    XX(b)(3)(v) No charge for additional appraisal.
    1. Fees and mark-ups. The creditor is prohibited from charging 
the consumer for the performance of one of the two appraisals 
required under Sec.  1026.XX(b)(3)(i), including by imposing a fee 
specifically for that appraisal or by marking up the interest rate 
or any other fees payable by the consumer in connection with the 
higher-risk mortgage loan.
    Paragraph XX(b)(3)(vi) Creditor's determination under paragraphs 
(b)(3)(i)(A) and (b)(3)(i)(B) of this section.
    XX(b)(3)(vi)(A) In general.
    1. Reasonable diligence--documentation required. A creditor acts 
with reasonable diligence to determine when the seller acquired the 
property and whether the price at which the seller acquired the 
property is lower than the price reflected in the consumer's 
agreement to acquire the property if, for example, the creditor 
bases its determination on information contained in written source 
documents, such as:
    i. A copy of the recorded deed from the seller.
    ii. A copy of a property tax bill.
    iii. A copy of any owner's title insurance policy obtained by 
the seller.
    iv. A copy of the RESPA settlement statement from the seller's 
acquisition (i.e., the HUD-1 or any successor form \142\).
---------------------------------------------------------------------------

    \142\ The Bureau has developed a successor form to the RESPA 
settlement statement as explained in the Bureau's proposal for an 
integrated TILA-RESPA disclosure form. See the Bureau's 2012 TILA-
RESPA Proposal.
---------------------------------------------------------------------------

    v. A property sales history report or title report from a third-
party reporting service.
    vi. Sales price data recorded in multiple listing services.
    vii. Tax assessment records or transfer tax records obtained 
from local governments.
    viii. A written appraisal signed by an appraiser who certifies 
that the appraisal was performed in conformity with USPAP that shows 
any prior transactions for the subject property.
    ix. A copy of a title commitment report \143\ detailing the 
seller's ownership of the property, the date it was acquired, or the 
price at which the seller acquired the property.
---------------------------------------------------------------------------

    \143\ The ``title commitment report'' is a document from a title 
insurance company describing the property interest and status of its 
title, parties with interests in the title and the nature of their 
claims, issues with the title that must be resolved prior to closing 
of the transaction between the parties to the transfer, amount and 
disposition of the premiums, and endorsements on the title policy. 
This document is issued by the title insurance company prior to the 
company's issuance of an actual title insurance policy to the 
property's transferee and/or creditor financing the transaction. In 
different jurisdictions, this instrument may be referred to by 
different terms, such as a title commitment, title binder, title 
opinion, or title report.
---------------------------------------------------------------------------

    x. A property abstract.
    2. Reasonable diligence--oral statements insufficient. Reliance 
on oral statements of interested parties, such as the consumer, 
seller, or mortgage broker, does not constitute reasonable diligence 
under Sec.  1026.XX(b)(3)(vi)(A).
    XX(b)(3)(vi)(B) Inability to make the determination under 
paragraphs (b)(3)(i)(A) and (b)(3)(i)(B) of this section.
    1. Lack of information and conflicting information--two 
appraisals required. Unless a creditor can demonstrate that the 
requirement to obtain two appraisals under Sec.  1026.XX(b)(3)(i) 
does not apply, the creditor must obtain two written appraisals in 
compliance with Sec.  1026.XX(b)(3)(vi)(B). See also comment 
XX(b)(3)(vi)(B)-2. For example:
    i. Assume a creditor orders and reviews the results of a title 
search and the seller's acquisition price was not included. In this 
case, the creditor would not be able to determine whether the price 
at which the seller acquired the property was lower than the price 
the consumer is obligated to pay under the consumer's acquisition 
agreement, pursuant to Sec.  1026.XX(b)(3)(i)(B). Before extending a 
higher-risk mortgage loan, the creditor must either: perform 
additional diligence to obtain information showing the seller's 
acquisition price and determine whether two written appraisals would 
be required based on that information; or obtain two written 
appraisals in compliance with Sec.  1026.XX(b)(3)(vi)(B). See also 
comment XX(b)(3)(vi)(B)-2.
    ii. Assume a creditor reviews the results of a title search 
indicating that the last recorded

[[Page 54775]]

purchase was more than 180 days before the consumer's agreement to 
acquire the property. Assume also that the creditor subsequently 
receives a written appraisal indicating that the seller acquired the 
property fewer than 180 days before the consumer's agreement to 
acquire the property. In this case, the creditor would not be able 
to determine whether seller acquired the property within 180 days of 
the date of the consumer's agreement to acquire the property from 
the seller, pursuant to Sec.  1026.XX(b)(3)(i)(A). Before extending 
a higher-risk mortgage loan, the creditor must either: perform 
additional diligence to obtain information confirming the seller's 
acquisition date and determine whether two written appraisals would 
be required based on that information; or obtain two written 
appraisals in compliance with Sec.  1026.XX(b)(3)(vi)(B). See also 
comment XX(b)(3)(vi)(B)-2.
    2. Lack of information and conflicting information--requirements 
for the additional appraisal. In general, the additional appraisal 
required under Sec.  1026.XX(b)(3)(i) should include an analysis of 
the factors listed in Sec.  1026.XX(b)(3)(iv)(A) through (C). 
However, if, following reasonable diligence, a creditor cannot 
determine whether the criteria in paragraphs (b)(3)(i)(A) and 
(b)(3)(i)(B) of Sec.  1026.XX are met due to a lack of information 
or conflicting information, the required additional appraisal must 
include the analyses required under Sec.  1026.XX(b)(3)(iv)(A) 
through (C) only to the extent that the information necessary to 
perform the analysis is known. For example:
    i. Assume that a creditor is able, following reasonable 
diligence, to determine that the date on which the seller acquired 
the property occurred 180 or fewer days prior to the date of the 
consumer's agreement to acquire the property. However, the creditor 
is unable, following reasonable diligence, to determine the price at 
which the seller acquired the property. In this case, the creditor 
is required to obtain an additional written appraisal that includes 
an analysis under paragraphs (b)(3)(iv)(B) and (b)(3)(iv)(C) of 
Sec.  1026.XX of the changes in market conditions and any 
improvements made to the property between the date the seller 
acquired the property and the date of the consumer's agreement to 
acquire the property. However, the creditor is not required to 
obtain an additional written appraisal that includes analysis under 
Sec.  1026.XX(b)(3)(iv)(A) of the difference between the price at 
which the seller acquired the property and the price that the 
consumer is obligated to pay to acquire the property.
    XX(c) Required disclosure.
    XX(c)(1) In general.
    1. Multiple applicants. When two or more consumers apply for a 
loan subject to this section, the creditor is required to give the 
disclosure to only one of the consumers.
    XX(d) Copy of appraisals.
    XX(d)(1) In general.
    1. Multiple applicants. When two or more consumers apply for a 
loan subject to this section, the creditor is required to give the 
copy of each required appraisal to only one of the consumers.
    XX(d)(4) No charge for copy of appraisal.
    1. Fees and mark-ups. The creditor is prohibited from charging 
the consumer for any copy of an appraisal required to be provided 
under Sec.  1026.XX(d)(1), including by imposing a fee specifically 
for a required copy of an appraisal or by marking up the interest 
rate or any other fees payable by the consumer in connection with 
the higher-risk mortgage loan.

Federal Housing Finance Agency

Authority and Issuance

    For the reasons stated in the Supplementary Information, and under 
the authority of 15 U.S.C. 1639h and 12 U.S.C. 4511(b), 4526, and 4617, 
the Federal Housing Finance Agency proposes to add Part 1222 to 
subchapter B of chapter XII of title 12 of the Code of Federal 
Regulations as follows:

Chapter XII--Federal Housing Finance Agency

Subchapter B--Entity Regulations

PART 1222--APPRAISALS

Subpart A--Requirements for Higher-Risk Mortgages

    Authority:  12 U.S.C. 4511(b), 4526, and 4617; 15 U.S.C. 1639h 
(TILA).


Sec.  1222.1  Purpose and scope.

    This subpart cross-references the requirement that creditors 
extending credit in the form of higher-risk mortgage loans comply with 
Section 129H of the Truth-in-Lending Act (TILA), 15 U.S.C. 1639h, and 
its implementing regulations in Regulation Z, 12 CFR 1026.XX. Neither 
the Banks nor the Enterprises is subject to Section 129H of TILA or 12 
CFR 1026.XX. Originators of higher-risk mortgage loans, including Bank 
members and institutions that sell mortgage loans to the Enterprises, 
are subject to those provisions. A failure of those institutions to 
comply with Section 129H of TILA and 12 CFR 1026.XX may limit their 
ability to sell such loans to the Banks or Enterprises or to pledge 
such loans to the Banks as collateral, to the extent provided in the 
parties' agreements.


Sec.  1222.2  Reservation of authority.

    Nothing in this subpart A shall be read to limit the authority of 
the Director of the Federal Housing Finance Agency to take supervisory 
or enforcement action, including action to address unsafe and unsound 
practices or conditions, or violations of law. In addition, nothing in 
this subpart A shall be read to limit the authority of the Director to 
impose requirements for any purchase of higher-risk mortgage loans by 
an Enterprise or a Federal Home Loan Bank, or acceptance of higher-risk 
mortgage loans as collateral to secure advances by a Federal Home Loan 
Bank.

Subparts B to Z--[Reserved]

    By order of the Board of Governors of the Federal Reserve 
System.
    August 14, 2012.
Margaret McCloskey Shanks,
Associate Secretary of the Board.
    Dated: August 13, 2012.
Richard Cordray,
Director, Bureau of Consumer Financial Protection.

    This rule is being proposed by the FDIC jointly with the other 
agencies as mandated by section 129H of the Truth in Lending Act as 
added by section 1471 of the Dodd-Frank Wall Street Reform and 
Consumer Protection Act.

    By order of the Board of Directors.
    Dated at Washington, DC, this 13th day of August, 2012.
Robert E. Feldman,
Executive Secretary. Federal Deposit Insurance Corporation.
    Dated August 14, 2012.
Edward J. DeMarco,
Acting Director, Federal Housing Finance Agency.

    By the National Credit Union Administration Board.
    Dated: August 14, 2012.
Jon J. Canerday
Acting Secretary of the Board
    Dated: August 13, 2012.
Thomas J. Curry,
Comptroller of the Currency.
[FR Doc. 2012-20432 Filed 8-28-12; 4:15 pm]
BILLING CODE 4810-AM-P; 4810-33-P; 6210-01-P; 6714-01-P; 7535-01-P