Federal Register, Volume 78 Issue 30 (Wednesday, February 13, 2013)

[Federal Register Volume 78, Number 30 (Wednesday, February 13, 2013)]
[Rules and Regulations]
[Pages 10368-10447]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-01809]

[[Page 10367]]

Vol. 78

Wednesday,

No. 30

February 13, 2013

Part III

Department of the Treasury

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

Office of the Comptroller of the Currency

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

12 CFR Parts 34 and 164

Federal Reserve System

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

12 CFR Part 226

National Credit Union Administration

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

12 CFR Part 722

Bureau of Consumer Financial Protection

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

12 CFR Part 1026

Federal Housing Finance Agency

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

12 CFR Part 1222

Appraisals for Higher-Priced Mortgage Loans; Final Rule

Federal Register / Vol. 78, No. 30 / Wednesday, February 13, 2013 /
Rules and Regulations

[[Page 10368]]

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

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

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-Priced Mortgage Loans

AGENCY: Board of Governors of the Federal Reserve System (Board);
Bureau of Consumer Financial Protection (Bureau); Federal Deposit
Insurance Corporation (FDIC); Federal Housing Finance Agency (FHFA);
National Credit Union Administration (NCUA); and Office of the
Comptroller of the Currency, Treasury (OCC).

ACTION: Final rule; official staff commentary.

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

SUMMARY: The Board, Bureau, FDIC, FHFA, NCUA, and OCC (collectively,
the Agencies) are issuing a final rule to amend Regulation Z, which
implements the Truth in Lending Act (TILA), and the official
interpretation to the regulation. The revisions to Regulation Z
implement a new provision requiring appraisals for ``higher-risk
mortgages'' that was added to TILA by the Dodd-Frank Wall Street Reform
and Consumer Protection Act (the Dodd-Frank Act or Act). For mortgages
with an annual percentage rate that exceeds the average prime offer
rate by a specified percentage, the final rule requires creditors to
obtain an appraisal or appraisals meeting certain specified standards,
provide applicants with a notification regarding the use of the
appraisals, and give applicants a copy of the written appraisals used.

DATES: This final rule is effective on January 18, 2014.

FOR FURTHER INFORMATION CONTACT: Board: Lorna Neill or Mandie Aubrey,
Counsels, Division of Consumer and Community Affairs, at (202) 452-
3667, or Carmen Holly, Supervisory Financial Analyst, Division of
Banking Supervision and Regulation, at (202) 973-6122, Board of
Governors of the Federal Reserve System, Washington, DC 20551.
Bureau: Owen Bonheimer, Counsel, or William W. Matchneer, Senior
Counsel, Division of Research, Markets, and Regulations, Bureau of
Consumer Financial Protection, 1700 G Street, 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, Sandra S. Barker, Senior Policy Analyst, Division of
Consumer Protection, at (202) 898-3615, Mark Mellon, Counsel, Legal
Division, at (202) 898-3884, or Kimberly Stock, 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, Ming-Yuen Meyer-Fong, Assistant General Counsel, Office of
General Counsel, (202) 649-3078, or Sharron P.A. Levine, Associate
General Counsel, Office of General Counsel, (202) 649-3496, Federal
Housing Finance Agency, 400 Seventh Street SW., Washington, DC, 20024.
NCUA: John Brolin and Pamela Yu, Staff Attorneys, or Frank
Kressman, Associate General Counsel, Office of General Counsel, at
(703) 518-6540, or Vincent Vieten, Program Officer, Office of
Examination and Insurance, at (703) 518-6360, or 1775 Duke Street,
Alexandria, Virginia, 22314.
OCC: Robert L. Parson, Appraisal Policy Specialist, (202) 649-6423,
G. Kevin Lawton, Appraiser (Real Estate Specialist), (202) 649-7152,
Carolyn B. Engelhardt, Bank Examiner (Risk Specialist--Credit), (202)
649-6404, Charlotte M. Bahin, Senior Counsel or Mitchell Plave, Special
Counsel, Legislative & Regulatory Activities Division, (202) 649-5490,
Krista LaBelle, Special Counsel, Community and Consumer Law Division,
(202) 649-6350, or 250 E Street SW., Washington DC 20219.

SUPPLEMENTARY INFORMATION:

I. Background

In general, the Truth in Lending Act (TILA), 15 U.S.C. 1601 et
seq., seeks to promote the informed use of consumer credit by requiring
disclosures about its costs and terms. TILA requires additional
disclosures for loans secured by consumers' homes and permits consumers
to rescind certain transactions that involve their principal dwelling.
For most types of creditors, TILA directs the Bureau to prescribe
regulations to carry out the purposes of the law and specifically
authorizes the Bureau to issue regulations that contain such
classifications, differentiations, or other provisions, or that provide
for such adjustments and exceptions for any class of transactions, that
in the Bureau's judgment are necessary or proper to effectuate the
purposes of TILA, or prevent circumvention or evasion of TILA.\1\ 15
U.S.C. 1604(a). For most types of creditors and most provisions of the
statute, TILA is implemented by the Bureau's Regulation Z. See 12 CFR
part 1026. Official Interpretations provide guidance to creditors in
applying the rules to specific transactions and interpret the
requirements of the regulation. See 12 CFR part 1026, Supp. I. However,
as explained in the section-by-section analysis of this SUPPLEMENTARY
INFORMATION, the new appraisal section of TILA addressed in this final
rule (TILA section 129H, 15 U.S.C. 1639h) is implemented not only for
all affected creditors by the Bureau's Regulation Z, but also, for
creditors overseen by the OCC and the Board, respectively, by OCC
regulations and the Board's Regulation Z. See 12 CFR parts 34 and 164
(OCC regulations) and part 226 (the Board's Regulation Z). The
Bureau's, the OCC's and the Board's versions of the appraisal rules and
corresponding official interpretations are substantively identical. The
FDIC, NCUA, and FHFA are adopting the

[[Page 10369]]

Bureau's version of the regulations under this final rule.
---------------------------------------------------------------------------

\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).
---------------------------------------------------------------------------

The Dodd-Frank Act \2\ was signed into law on July 21, 2010.
Section 1471 of the Dodd-Frank Act's Title XIV, Subtitle F (Appraisal
Activities), added a new TILA section 129H, 15 U.S.C. 1639h, which
establishes appraisal requirements that apply to ``higher-risk
mortgages.'' Specifically, new TILA section 129H prohibits a creditor
from extending credit in the form of a higher-risk mortgage loan to any
consumer without first:
---------------------------------------------------------------------------

\2\ Public Law 111-203, 124 Stat. 1376 (Dodd-Frank Act).
---------------------------------------------------------------------------

Obtaining a written appraisal performed by a certified or
licensed appraiser who conducts a physical property visit of the
interior of the property.
Obtaining an additional appraisal from a different
certified or licensed appraiser if the higher-risk mortgage finances
the purchase or acquisition of a property from a seller at a higher
price than the seller paid, within 180 days of the seller's purchase or
acquisition. The additional appraisal must include an analysis of the
difference in sale prices, changes in market conditions, and any
improvements made to the property between the date of the previous sale
and the current sale.
A creditor of a ``higher-risk mortgage'' must also:
Provide the applicant, at the time of the initial mortgage
application, with a statement that any appraisal prepared for the
mortgage is for the sole use of the creditor, and that the applicant
may choose to have a separate appraisal conducted at the applicant's
expense.
Provide the applicant with one copy of each appraisal
conducted in accordance with TILA section 129H without charge, at least
three (3) days prior to the transaction closing date.
New TILA section 129H(f) defines a ``higher-risk mortgage'' with
reference to the annual percentage rate (APR) for the transaction. A
higher-risk mortgage is a ``residential mortgage loan'' \3\ 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--
---------------------------------------------------------------------------

\3\ See Dodd-Frank Act, Sec. 1401; TILA section 103(cc)(5), 15
U.S.C. 1602(cc)(5) (defining ``residential mortgage loan'').
---------------------------------------------------------------------------

By 1.5 or more percentage points, for a first lien
residential mortgage loan with an original principal obligation amount
that does not exceed the amount for the maximum limitation on the
original principal obligation of a mortgage in effect for a residence
of the applicable size, as of the date of the interest rate set,
pursuant to the sixth sentence of section 305(a)(2) of the Federal Home
Loan Mortgage Corporation Act (12 U.S.C. 1454);
By 2.5 or more percentage points, for a first lien
residential mortgage loan having an original principal obligation
amount that exceeds the amount for the maximum limitation on the
original principal obligation of a mortgage in effect for a residence
of the applicable size, as of the date of the interest rate set,
pursuant to the sixth sentence of section 305(a)(2) of the Federal Home
Loan Mortgage Corporation Act (12 U.S.C. 1454); or
By 3.5 or more percentage points, for a subordinate lien
residential mortgage loan.
The definition of ``higher-risk mortgage'' expressly excludes
``qualified mortgages,'' as defined in TILA section 129C, and ``reverse
mortgage loans that are qualified mortgages,'' as defined in TILA
section 129C. 15 U.S.C. 1639c.
New TILA section 103(cc)(5) defines the term ``residential mortgage
loan'' as any consumer credit transaction that is secured by a
mortgage, deed of trust, or other equivalent consensual security
interest on a dwelling or on residential real property that includes a
dwelling, other than a consumer credit transaction under an open-end
credit plan. 15 U.S.C. 1602(cc)(5).
New TILA section 129H(b)(4)(A) requires the Agencies jointly to
prescribe regulations to implement the property appraisal requirements
for higher-risk mortgages. 15 U.S.C. 1639h(b)(4)(A). The Dodd-Frank Act
requires that final regulations to implement these provisions be issued
within 18 months of the transfer of functions to the Bureau pursuant to
section 1062 of the Act, or January 21, 2013.\4\ These regulations are
to take effect 12 months after issuance.\5\
---------------------------------------------------------------------------

\4\ See Dodd-Frank Act, section 1400(c)(1).
\5\ See id.
---------------------------------------------------------------------------

The Agencies published proposed regulations on September 5, 2012,
that would implement these higher-risk mortgage appraisal provisions.
77 FR 54722 (Sept. 5, 2012). The comment period closed on October 15,
2012. The Agencies received more than 200 comment letters regarding the
proposal from banks, credit unions, other creditors, appraisers,
appraisal management companies, industry trade associations, consumer
groups, and others.

II. Summary of the Final Rule

Loans Covered

To implement the statutory definition of ``higher-risk mortgage,''
the final rule uses the term ``higher-priced mortgage loan'' (HPML), a
term already in use under the Bureau's Regulation Z with a meaning
substantially similar to the meaning of ``higher-risk mortgage'' in the
Dodd-Frank Act. In response to commenters, the Agencies are using the
term HPML to refer generally to the loans that could be subject to this
final rule because they are closed-end credit and meet the statutory
rate triggers, but the Agencies are separately exempting several types
of HPML transactions from the rule. The term ``higher-risk mortgage''
encompasses a closed-end consumer credit transaction secured by a
principal dwelling with an APR exceeding certain statutory thresholds.
These rate thresholds are substantially similar to rate triggers that
have been in use under Regulation Z for HPMLs.\6\ Specifically,
consistent with TILA section 129H, a loan is a ``higher-priced mortgage
loan'' under the final rule if the APR exceeds the APOR by 1.5 percent
for first-lien conventional or conforming loans, 2.5 percent for first-
lien jumbo loans, and 3.5 percent for subordinate-lien loans.\7\
---------------------------------------------------------------------------

\6\ Added to Regulation Z by the Board pursuant to the Home
Ownership and Equity Protection Act of 1994 (HOEPA), the HPML rules
address unfair or deceptive practices in connection with subprime
mortgages. See 73 FR 44522, July 30, 2008; 12 CFR 1026.35.
\7\ The existing HPML rules apply the 2.5 percent over APOR
trigger for jumbo loans only with respect to a requirement to
establish escrow accounts. See 12 CFR 1026.35(b)(3)(v).
---------------------------------------------------------------------------

Consistent with the statute, the final rule exempts ``qualified
mortgages'' from the requirements of the rule. Qualified mortgages are
defined in Sec. 1026.43(e) of the Bureau's final rule implementing the
Dodd-Frank Act's ability-to-repay requirements in TILA section 129C
(2013 ATR Final Rule).\8\ 15 U.S.C. 1639c.
---------------------------------------------------------------------------

\8\ The Bureau released the 2013 ATR Final Rule on January 10,
2013, under Docket No. CFPB-2011-0008, CFPB-2012-0022, RIN 3170-
AA17, at http://consumerfinance.gov/Regulations.
---------------------------------------------------------------------------

In addition, the final rule excludes the following classes of loans
from coverage of the higher-risk mortgage appraisal rule:
(1) Transactions secured by a new manufactured home;
(2) transactions secured by a mobile home, boat, or trailer;
(3) transactions to finance the initial construction of a dwelling;
(4) loans with maturities of 12 months or less, if the purpose of
the loan is a ``bridge'' loan connected with the acquisition of a
dwelling intended to become the consumer's principal dwelling; and
(5) reverse mortgage loans.
For reasons discussed more fully in the section-by-section analysis
of

[[Page 10370]]

Sec. 1026.35(a)(1), below, the proposal included a request for
comments on an alternative method of determining coverage based on the
``transaction coverage rate'' or TCR, rather than the APR. Unlike the
APR, the TCR would exclude all prepaid finance charges not retained by
the creditor, a mortgage broker, or an affiliate of either.\9\ This
change was proposed to address a possible expansion of the definition
of ``finance charge'' used to calculate the APR, proposed by the Bureau
in its rulemaking to integrate mortgage disclosures (2012 TILA-RESPA
Proposal \10\). Accordingly, the proposal defined ``higher-risk
mortgage loan'' (termed ``higher-priced mortgage loan'' in this final
rule) in the alternative as calculated by either the TCR or APR, with
comment sought on both approaches.
---------------------------------------------------------------------------

\9\ See 75 FR 58539, 58660-62 (Sept. 24, 2010); 76 FR 11598,
11609, 11620, 11626 (March 2, 2011).
\10\ See 77 FR 51116 (Aug. 23, 2012).
---------------------------------------------------------------------------

As explained more fully in the section-by-section analysis of Sec.
1026.35(a)(1), below, the final rule requires creditors to determine
whether a loan is an HPML by comparing the APR to the APOR. The
Agencies are not at this time adopting the proposed alternative of
replacing the APR with the TCR and comparing the TCR to the APOR. The
Agencies will consider the merits of any modifications to this approach
and public comments on this matter if and when the Bureau adopts the
more inclusive definition of finance charge proposed in the 2012 TILA-
RESPA Proposal.
Finally, based on public comments, the Agencies intend to publish a
supplemental proposal to request comment on possible exemptions for
``streamlined'' refinance programs and small dollar loans, as well as
to seek comment on whether application of the HPML appraisal rule to
loans secured by certain other property types, such as existing
manufactured homes, is appropriate.

Requirements That Apply to All Appraisals Performed for Non-Exempt
HPMLs

Consistent with the statute, the final rule allows a creditor to
originate an HPML that is not otherwise exempt from the appraisal rules
only if the following conditions are met:
The creditor obtains a written appraisal;
The appraisal is performed by a certified or licensed
appraiser; and
The appraiser conducts a physical property visit of the
interior of the property.
Also consistent with the statute, the following requirements also
apply with respect to HPMLs subject to the final rule:
At application, the consumer must be provided with a
statement regarding the purpose of the appraisal, that the creditor
will provide the applicant a copy of any written appraisal, and that
the applicant may choose to have a separate appraisal conducted for the
applicant's own use at his or her own expense; and
The consumer must be provided with a free copy of any
written appraisals obtained for the transaction at least three (3)
business days before consummation.

Requirement To Obtain an Additional Appraisal in Certain HPML
Transactions

In addition, the final rule implements the Act's requirement that
the creditor of a ``higher-risk mortgage'' obtain an additional written
appraisal, at no cost to the borrower, when the ``higher-risk
mortgage'' will finance the purchase of the consumer's principal
dwelling and there has been an increase in the purchase price from a
prior sale that took place within 180 days of the current sale. TILA
section 129H(b)(2)(A), 15 U.S.C. 1639(b)(2)(A). In the final rule,
using their exemption authority, the Agencies are setting thresholds
for the increase that will trigger an additional appraisal. An
additional appraisal will be required for an HPML (that is not
otherwise exempt) if either:
The seller is reselling the property within 90 days of
acquiring it and the resale price exceeds the seller's acquisition
price by more than 10 percent; or
The seller is reselling the property within 91 to 180 days
of acquiring it and the resale price exceeds the seller's acquisition
price by more than 20 percent.
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.

III. Legal Authority

As noted above, TILA section 129H(b)(4)(A), added by the Dodd-Frank
Act, requires the Agencies jointly to 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 jointly to
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, unless otherwise noted, the SUPPLEMENTARY
INFORMATION refers to the section numbers of the rules that will be
published in the Bureau's Regulation Z at 12 CFR 1026.35(a) and
(c).\11\ As explained further in the section-by-section analysis of
Sec. 1026.35(c)(7), the rules are being published separately by the
OCC, the Board, and the Bureau. No substantive difference among the
three sets of rules is intended. The NCUA and FHFA adopt the rules as
published in the Bureau's Regulation Z at 12 CFR 1026.35(a) and (c), by
cross-referencing these rules in 12 CFR 722.3 and 12 CFR Part 1222,
respectively. The FDIC adopts the rules as published in the Bureau's
Regulation Z at 12 CFR 1026.35(a) and (c), but does not cross-reference
the Bureau's Regulation Z.
---------------------------------------------------------------------------

\11\ The final rule was issued by the Bureau on January 18,
2013, in accordance with 12 CFR 1074.1.
---------------------------------------------------------------------------

Section 1026.35 Prohibited Acts or Practices in Connection With Higher-
Priced Mortgage Loans

The final rule is incorporated into Regulation Z's existing section
on prohibited acts or practices in connection with HPMLs, Sec.
1026.35. As revised, Sec. 1026.35 will consist of four subsections--
(a) Definitions; (b) Escrows for higher-priced mortgage loans; (c)
Appraisals for higher-priced mortgage loans; and (d) Evasion; open-end
credit. As explained in more detail in the Bureau's final rule on
escrow requirements for HPMLs (2013 Escrows Final Rule) \12\
(finalizing the Board's proposal to implement the Act's escrow account
requirements under TILA section 129D, 15 U.S.C. 1639d (2011 Escrows
Proposal) \13\), the subsections on repayment ability (existing Sec.
1026.35(b)(1)) and prepayment penalties (existing Sec. 1026.35(b)(2))
will be deleted because the Dodd-Frank Act addressed these matters in
other ways. Accordingly, repayment ability and prepayment penalties are
now

[[Page 10371]]

addressed in the Bureau's final ability-to-repay rule (2013 ATR Final
Rule) and high-cost mortgage rule (2013 HOEPA Final Rule).\14\ See
Sec. Sec. 1026.32(d)(6) and 1026.43(c), (d), (f), and (g).
---------------------------------------------------------------------------

\12\ The Bureau released the 2013 Escrows Final Rule on January
10, 2013, under Docket No. CFPB-2013-0001, RIN 3170-AA16, at http://consumerfinance.gov/Regulations.
\13\ 76 FR 11598, 11612 (March 2, 2011).
\14\ The Bureau released the 2013 HOEPA Final Rule on January
10, 2013, under Docket No. CFPB-2012-0029, RIN 3170-AA12, at http://consumerfinance.gov/Regulations.
---------------------------------------------------------------------------

35(a) Definitions

35(a)(1) Higher-priced mortgage loan

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).
Consistent with TILA sections 129H(f) and 103(cc)(5), the proposal
provided 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 1.5 percentage points for first-lien
conventional mortgages, 2.5 percentage points for first-lien jumbo
mortgages, and 3.5 percentage points for subordinate-lien mortgages.
The Agencies noted in the proposal that the statutory definition of
higher-risk mortgage, though similar to that of the regulatory term
``higher-priced mortgage loan,'' differs from the existing regulatory
definition of higher-priced mortgage loan in some 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 has contained 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 requested 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.
The final rule adopts the proposed definition, but replaces the
term ``higher-risk mortgage loan'' with the term ``higher-priced
mortgage loan'' or HPML. See existing Sec. 1026.35(a)(1). The final
rule also makes certain changes to the existing definition of HPML,
discussed in detail below.

Public Comments on the Proposal

Several credit unions, banks, and an individual commenter believed
that the definition of ``higher-risk mortgage loan'' did not adequately
capture loans that were truly ``high risk.'' Several of these
commenters stated that the definition should account not only for the
cost of the loan, but also for other risk factors, such as debt to
income ratio, loan amounts, and credit scores and other measures of a
consumer's creditworthiness. A bank commenter believed that the
interest rate thresholds in the definition were ambiguous and arbitrary
and asserted that, for example, 1.5 percent was not an exceptionally
high interest margin in comparison with interest margins for credit
cards and other financing. A credit union commenter believed the rule
would apply to consumers who were in fact a low credit risk.
Most commenters on the definition expressly supported using the
existing term HPML rather than the new term ``higher-risk mortgage
loan.'' Commenters including, among others, a mortgage company, bank,
credit union, financial holding company, credit union trade
association, and banking trade association, asserted that the use of
two terms with similar meanings would be confusing to the mortgage
credit industry. Some asserted that consumers would be confused by this
as well. Some of these commenters noted that Regulation Z also already
used the term ``high-cost mortgage'' with different requirements and
believed this third term would further compound consumer and industry
confusion. Of commenters who expressed a preference for the term that
should be used, most recommended using the term HPML because this term
has been used by industry for some time.
Some commenters on this issue also advocated making the rate
triggers and overall definition the same for existing HPMLs and
``higher-risk mortgages'' regardless of the terms used. They argued
that this would reduce compliance burdens and confusion and ease costs
associated with developing and managing systems. One commenter believed
that developing a single standard would also avoid creating unnecessary
delay and additional cost for consumers in the origination process.
A few commenters acknowledged key differences between the statutory
meaning of ``higher-risk mortgage'' and the regulatory term HPML, and
suggested ways of harmonizing the two definitions. For example, these
commenters noted that ``higher-risk mortgages'' do not include
qualified mortgages, whereas HPMLs do. To address this difference, one
commenter suggested, for example, that the appraisal requirements
should apply to HPMLs as currently defined, except for qualified
mortgages. Other commenters suggested that the basic definition of HPML
be understood to refer solely to the rate thresholds and suggested that
the exemption for qualified mortgages from the appraisal rules be
inserted as a separate provision. They did not discuss how to address
additional variances in the types of transactions excluded from HPML
and ``higher-risk mortgage,'' respectively, such as the exclusion from
the meaning of HPML but not the statutory definition of ``higher-risk
mortgage'' for construction-only and bridge loans.
Other commenters also acknowledged that the current definition of
HPML includes only two rate thresholds--one for first-lien mortgages
(APR exceeds APOR by 1.5 percentage points) and the other for
subordinate-lien mortgages (APR exceeds APOR by 3.5 percentage points).
By contrast, the statutory definition of ``higher-risk mortgage'' has
an additional rate tier for first-lien jumbo mortgages (APR exceeds
APOR by 2.5 percentage points). The HPML requirements in Regulation Z
apply a rate threshold of 2.5 percentage points above APOR to jumbo
loans only for purposes of the requirement to escrow. The commenters
who noted this distinction held the view that the ``middle tier''
threshold would not have a practical advantage for lenders or
consumers. Instead, they recommended adopting a final rule with a
single APR trigger of 1.5 percentage points above APOR for all first-
lien loans.

Discussion

In the final rule, the Agencies use the term HPML rather than the
proposed term ``higher-risk mortgage loan'' to refer generally to the
loans covered by the appraisal rules. In a separate

[[Page 10372]]

subsection of the final rule (Sec. 1026.35(c)(2), discussed in the
section-by-section analysis below), the Agencies exempt several types
of transactions from coverage of the HPML appraisal rules.
On January 10, 2013, the Bureau published the 2013 Escrows Final
Rule, its final rule to implement Dodd-Frank Act amendments to TILA
regarding the requirement to escrow for certain consumer mortgages.\15\
See TILA section 129D, 15 U.S.C. 1639d. These rules are to take effect
in May 2013, before the effective date of this final rule (January 18,
2014).
---------------------------------------------------------------------------

\15\ The Bureau released the 2013 Escrows Final Rule on January
10, 2013, under Docket No. CFPB-2013-0001, RIN 3170-AA16, at http://consumerfinance.gov/Regulations.
---------------------------------------------------------------------------

Thus, consistent with TILA sections 129H(f) and 103(cc)(5) and the
proposal, the final rule in Sec. 1026.35(a)(1) follows the Bureau's
2013 Escrows Final Rule in defining an HPML as a closed-end consumer
credit transaction secured by the consumer's principal dwelling with an
annual percentage rate that exceeds the average prime offer rate for a
comparable transaction as of the date the interest rate is set:
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;
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
By 3.5 or more percentage points, for a loan secured by a
subordinate lien.
The Agencies acknowledge that some commenters have concerns about
the rate thresholds; however, these rate thresholds are prescribed by
statute. See TILA section 129H(f)(2), 15 U.S.C. 1639h(f)(2); see also
15 U.S.C. 1602(cc)(5).
The Bureau in the 2013 Escrows Final Rule adopted a definition of
HPML that is consistent for both TILA's escrow requirement and TILA's
appraisal requirements for ``higher-risk mortgages.'' TILA sections
129D and 129H, 15 U.S.C. 1639d and 1639h. This definition incorporates
the APR thresholds for loans covered by these rules as prescribed by
Dodd-Frank Act amendments to TILA and also reflects that both sets of
rules apply only to closed-end mortgage transactions. TILA sections
129D(b)(3) and 129H(f), 15 U.S.C. 1639d(b)(3) and 1639h(f). Overall,
the revised definition of HPML adopted in the 2013 Escrows Final Rule
reflects only minor changes from the current definition of HPML in
existing 12 CFR 1026.35(a). For clarity, the Agencies are re-publishing
the definition published earlier in the 2013 Escrows Final Rule.\16\
The incorporation by reference in Sec. 1026.35(c) of the term HPML in
Sec. 1026.35(a) and the re-publishing of Sec. 1026.35(a) in this
final rule are not intended to subject Sec. 1026.35(a) to the joint
rulemaking authority of the Agencies under TILA section 129H.
---------------------------------------------------------------------------

\16\ In their respective publications of the final rule, the
Board is publishing the definition of HPML at 12 CFR 226.43(a)(3)
and the OCC is including a cross-reference to the definition of HPML
at 12 CFR 34.202(b).
---------------------------------------------------------------------------

Consistent with the proposal, the final 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. 1026.35(a)(1). As also proposed, the
Agencies have elected to incorporate the substantive elements of the
statutory definition of ``residential mortgage loan'' into the
definition of HPML 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 final regulation text differs from the
express statutory language, but with no intended substantive change to
the scope of TILA section 129H.

Annual Percentage Rate (APR) Versus Transaction Coverage Rate (TCR)

The Agencies are not at this time adopting an alternative method of
determining coverage based on the ``transaction coverage rate'' or TCR.
The proposal included a request for comments on a proposed amendment to
the method of calculating the APR that was 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 proposed to adopt a more simple and inclusive
finance charge calculation for closed-end credit secured by real
property or a dwelling.\17\ The more-inclusive finance charge
definition would affect the APR calculation because the finance charge
is integral to the APR calculation. The Bureau therefore also sought
comment on whether replacing APR with an alternative metric might be
warranted to determine whether a loan is a ``high-cost mortgage''
covered by the Bureau's proposal to implement the Dodd-Frank Act
provision related to ``high-cost mortgages'' (2012 HOEPA Proposal),\18\
as well as by the proposal to implement the Dodd-Frank Act's escrow
requirements in TILA section 129D (2011 Escrows Proposal).\19\ The
alternative metric would have implications for the 2013 ATR Final Rule
as well. 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.\20\
---------------------------------------------------------------------------

\17\ See 2012 TILA-RESPA Proposal, 77 FR 51116, 51143-46, 51277-
79, 51291-93, 51310-11 (Aug. 23, 2012).
\18\ See 2012 HOEPA Proposal, 77 FR 49090, 49100-07, 49133-35
(Aug. 15, 2012).
\19\ 15 U.S.C. 1639d; 76 FR 11598 (March 2, 2011).
\20\ See 75 FR 58539, 58660-62 (Sept. 24, 2010); 76 FR 11598,
11609, 11620, 11626 (March 2, 2011).
---------------------------------------------------------------------------

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 sought comment in the higher-risk mortgage proposal on whether
a modification should be considered for this final rule as well and, if
so, what type of modification. Accordingly, the proposal defined
``higher-risk mortgage loan'' (termed HPML in this final rule) in the
alternative as calculated by either the TCR or APR, with comment sought
on both approaches. The Agencies relied on their exemption authority
under section 1471 of the Dodd-Frank Act to propose this alternative
definition of higher-risk mortgage. TILA section 129H(b)(4)(B), 15
U.S.C. 1639h(b)(4)(B).
On September 6, 2012, the Bureau published notice in the Federal
Register that the comment period for public comments on the more
inclusive definition of ``finance charge'' in the 2012 TILA-RESPA
Proposal and the use of the TCR in the 2012 HOEPA Proposal would be
extended to November 6, 2012.\21\ The Bureau explained that it believed
that commenters needed additional time to evaluate the proposed more
inclusive finance charge in light of

[[Page 10373]]

the other proposals affected by the more inclusive finance charge
proposal and the Bureau's request for data on the effects of a more
inclusive finance charge. The Bureau stated that it did not expect to
address any proposed changes to the definition of finance charge or
methods of reconciling an expanded definition of finance charge with
APR coverage tests until it finalizes the disclosures in the 2012 TILA-
RESPA Proposal. A final TILA-RESPA disclosure rule is not expected to
be issued until sometime after January of 2013.
---------------------------------------------------------------------------

\21\ 77 FR 54843 (Sept. 6, 2012); 77 FR 54844 (Sept. 6, 2012).
---------------------------------------------------------------------------

For this reason, this final rule requires creditors to determine
whether a loan is an HPML by comparing the APR to the APOR and is not
at this time finalizing the proposed alternative of replacing the APR
with the TCR and comparing the TCR to the APOR. The Agencies will
consider the merits of any modifications to this approach that might be
necessary and public comments on this matter if and when the Bureau
adopts the more inclusive definition of finance charge proposed in the
2012 TILA-RESPA Proposal.

Existing Definition of HPML Versus New Definition of HPML

The new definition of HPML differs from the definition of HPML in
existing Sec. 1026.35(a)(1) in several respects.
First, the new definition of HPML incorporates an additional rate
threshold for determining coverage for first-lien loans--an APR trigger
of 2.5 percentage points above APOR for first-lien jumbo mortgage
loans. The definition retains the APR triggers of 1.5 percentage points
above APOR for first-lien conforming mortgages and 3.5 percentage
points above APOR for subordinate-lien loans.
By statute, this additional APR threshold of 2.5 percentage points
above APOR applies in determining coverage of both the escrow
requirements in revised Sec. 1026.35(b) and the appraisal requirements
in revised Sec. 1026.35(c). See TILA section 129D(b)(3)(B), 15 U.S.C.
1639d(b)(3)(B) (escrow rules); TILA section 129H(f)(2)(B), 15 U.S.C.
1639h(f)(2)(B) (appraisal rules). The APR trigger for first-lien jumbo
loans has applied to the requirement to establish escrow accounts for
HPMLs under Regulation Z since April 1, 2011. See existing Sec.
1026.35(b)(3)(i) and (v); 76 FR 11319 (March 2, 2011).
Under the existing HPML rules in Sec. 1026.35, the APR threshold
of 2.5 percentage points above APOR applies only to the requirement to
escrow HPMLs in Sec. 1026.35(b)(3). See Sec. 1026.35(b)(3)(v). Due to
amendments to TILA mandated by the Dodd-Frank Act, however, existing
HPML rules on repayment ability (Sec. 1026.35(b)(1)) and prepayment
penalties (Sec. 1026.35(b)(2)) will be eliminated from the HPML rules
in Sec. 1026.35. New rules on repayment ability and prepayment
penalties are incorporated into the Bureau's 2013 ATR Final Rule and
final rules on ``high-cost'' mortgages. See Sec. 1026.32(b)(6) and
(d)(6), Sec. 1026.43(b)(10), (c), (e).
Thus, as revised, Sec. 1026.35 will have only two sets of rules
for HPMLs--the escrow requirements in revised Sec. 1026.35(b) and the
appraisal requirements in new Sec. 1026.35(c). The APR test of 2.5
percentage points above APOR applies, as noted, to both sets of rules,
so is now folded into the general definition of HPML in Sec.
1026.35(a)(1). Accordingly, the definition of ``jumbo'' loans in
preexisting Sec. 1026.35(b)(3)(v) is being removed.
A second change is that the revised HPML definition adds the
qualification that an HPML is a ``closed-end'' consumer credit
transaction. This change is not substantive; instead, it merely
replaces text previously in Sec. 1026.35(a)(3), that excludes from the
definition of HPML ``a home-equity line of credit subject to section
1026.5b.'' Other exemptions from the current definition of HPML listed
in existing Sec. 1026.35(a)(3) are moved into the specific provisions
setting forth exemptions for certain types of HPMLs from coverage of
the escrow rules and appraisal rules, respectively. See section-by-
section analysis of Sec. 1026.35(c)(2). Thus, the final rule
eliminates Sec. 1026.35(a)(3), but with no substantive change
intended.
Third, with no substantive change intended, the language used to
describe the HPML rate triggers has been revised from preexisting Sec.
1026.35(a)(1) to conform to the language used in the proposed ``higher-
risk mortgage'' appraisal rule, which in turn conforms more closely to
the statutory language used to describe the rate triggers for ``higher-
risk mortgages'' and similar statutory rate triggers for application of
the escrow requirements. See TILA section 129D(B)(3), 15 U.S.C.
1639d(b)(3) (escrow rules); TILA section 129H(f)(2), 15 U.S.C.
1639h(f)(2) (appraisal rules).
Finally, the Official Staff Interpretations are reorganized with no
substantive change intended. Specifically, comments 35(a)(2)-1 and -3,
clarifying the terms ``comparable transaction'' and ``rate set,''
respectively, are moved to comments 35(a)(1)-1 and 35(a)(1)-2. This
modification reflects that the terms ``comparable transaction'' and
``rate set'' occur in the definition of ``higher-priced mortgage loan''
in Sec. 1026.35(a)(1).

Comparable Transaction

As comment 35(a)(1)-1 indicates, 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. The Bureau publishes on the internet, currently at http://www.ffiec.gov/ratespread/newcalc.aspx, in table form, APORs for a wide
variety of mortgage transaction types based on available information.
For example, the Bureau 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 estimated APRs derived by the
Bureau 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 credit
characteristics. Currently, the Bureau calculates APORs 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 APORs 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 Bureau publishes on the internet the methodology it
uses to arrive at these estimates.

Rate Set

Comment 35(a)(1)-2 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 final rule,
for purposes of Sec. 1026.35(a)(1), the creditor should use the last
date the interest rate for the mortgage is set before consummation.

Average Prime Offer Rate

The Agencies are not separately publishing the definition of the
term ``average prime offer rate'' in Sec. 1026.35(a)(2). The meaning
of this term is determined by the Bureau and is published and explained
in the Bureau's 2013 Escrows Final Rule. Consistent with the proposal,
in the Board's publication of this final rule, the term APOR is defined
to have the same

[[Page 10374]]

meaning as in Sec. 1026.35(a)(2). See 12 CFR 226.43(a)(3)(Board). The
OCC's publication of this final rule cross-references the definition of
HPML, which incorporates the term APOR as defined in Sec.
1026.35(a)(2). See 12 CFR 34.202(b). The OCC's and the Board's versions
of Official Staff Interpretations to the final rule cross-reference
comments to Sec. 1026.35(a)(2) that explain the meaning of average
prime offer rate as described below. See 12 CFR 34.202, comment 1
(OCC); 12 CFR 226.43, comment 2. 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 Bureau 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. The Freddie Mac Primary
Mortgage Market Survey[supreg] is an example of such a survey, and is
the survey currently used to calculate APORs.

Principal Dwelling

As in the proposal, the final versions of the OCC's and the Board's
publication of the definition of ``higher-priced mortgage loan'' rules
cross-reference the Bureau's Regulation Z and Official Staff
Interpretations for the meanings of ``principal dwelling,'' ``average
prime offer rate,'' ``comparable transaction,'' and ``rate set.'' See
12 CFR 34.202, comments 1 (OCC); 12 CFR 226.43(a)(3), comments 1, 2, 3,
and 4 (Board). The Regulation Z comments to which the OCC's and Board's
rules cross-reference regarding the meaning of ``average prime offer
rate,'' ``comparable transaction,'' and ``rate set'' are described
above. See 12 CFR 34.202, comment1 (OCC); 12 CFR 226.43(a)(3), comments
2, 3, and 4 (Board). A proposed comment cross-referencing the Bureau's
Regulation Z for the meaning of the term ``principal dwelling'' is not
adopted in the Bureau's version of the final rule because the meaning
of ``principal dwelling'' in new Sec. 1026.35(a)(1) is understood to
be consistent within the Bureau's Regulation Z. The OCC's version of
this final rule also does not include the proposed comment specifically
cross-referencing the meaning of ``principal dwelling'' in the Bureau's
Regulation Z because the OCC is adopting the Bureau's definition of
HPML, which the Bureau's definition of ``principal dwelling.'' See 12
CFR 34.202(b); see also 12 CFR 34.202, comment 1. The proposed comment
is, however, adopted in the Board's publication of the rule. See 12 CFR
226.43(a)(3), comment 1. Consistent with the proposal, in the final
rule, the term ``principal dwelling'' has the same meaning as in Sec.
1026.2(a)(24) and is further explained in existing comment 2(a)(24)-3.
Consistent with comment 2(a)(24)-3, 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
comment clarifies that the new dwelling is considered the principal
dwelling.

Threshold for ``Jumbo'' Loans

Comment 35(a)(1)-3 explains that Sec. 1026.35(a)(1)(ii) provides a
separate threshold for determining whether a transaction is a higher-
priced mortgage loan subject to Sec. 1026.35 when the principal
balance exceeds the limit in effect as of the date the transaction's
rate is set for the maximum principal obligation eligible for purchase
by Freddie Mac (a ``jumbo'' loan). The comment further explains that
FHFA establishes and adjusts the maximum principal obligation pursuant
to rules under 12 U.S.C. 1454(a)(2) and other provisions of Federal
law. The comment clarifies that adjustments to the maximum principal
obligation made by FHFA apply in determining whether a mortgage loan is
a ``jumbo'' loan to which the separate coverage threshold in Sec.
1026.35(a)(1)(ii) applies.
The Board's publication of the definition of ``higher-priced
mortgage loan'' rule in this final rule cross-references this comment
in the Bureau's Official Staff Interpretations. See 12 CFR
226.43(a)(3), comment 3 (Board). The OCC's version of the final rule
adopts this comment in 12 CFR 34.202, comment 1.

35(c) Appraisals for Higher-Priced Mortgage Loans

New Sec. 1026.35(c) implements the substantive appraisal
requirements for ``higher-risk mortgages'' in TILA section 129H. 15
U.S.C. 1639h. The OCC's and the Board's versions of these rules are
substantively identical to the rules in Sec. 1026.35(c). See 12 CFR
34.201 et seq. (OCC) and 12 CFR 226.43 (Board); see also section-by-
section analysis of Sec. 1026.35(c)(7).

35(c)(1) Definitions

As discussed above, revised Sec. 1026.35(a) contains the
definitions of HPML and APOR, which are used in both the HPML escrow
rules in Sec. 1026.35(b) and the HPML appraisal rules in new Sec.
1026.35(c). Definitions specific to the substantive appraisal
requirements of Sec. 1026.35(c) are segregated in new Sec.
1026.35(c)(1) and described below, along with applicable public
comments.

35(c)(1)(i) 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,
the Agencies proposed to 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.
The proposed definition of ``certified or licensed appraiser''
generally mirrors the statutory language in TILA section 129H(b)(3)
regarding State licensing and certification. However, the Agencies
proposed to use 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. The proposal defined 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

[[Page 10375]]

regulations.\22\ See section-by-section analysis of Sec.
1026.35(c)(1)(iv), below.
---------------------------------------------------------------------------

\22\ 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).
---------------------------------------------------------------------------

As discussed below, the Agencies are adopting the proposed
definition of ``certified or licensed appraiser'' without change.
Uniform Standards of Professional Appraisal Practice (USPAP).
Consistent with the statutory definition of ``certified or licensed
appraiser,'' the proposal incorporated into the proposed definition the
requirement that, to be a ``certified or licensed appraiser'' under the
appraisal rules, the appraiser has to perform the appraisal in
conformity with the ``Uniform Standards of Professional Appraisal
Practice.'' A comment was proposed to clarify 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 and adopt the definition and comment as proposed. See Sec.
1026.35(c)(1)(i) and comment 35(c)(1)(i)-1.
In addition, TILA section 129H(b)(3) requires 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 Agencies proposed to
incorporate this concept in the definition of ``certified or licensed
appraiser'' and to include a comment clarifying that the ``date of the
appraisal'' is the date on which the appraiser signs the appraiser's
certification. Again, the Agencies adopt the definition and comment as
proposed. See Sec. 1026.35(c)(1)(i) and comment 35(c)(1)(i)-1. Thus,
the relevant edition of USPAP is the one in effect at the time the
appraiser signs the appraiser's certification.
Appraiser's certification. The proposal also included a comment to
clarify 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.\23\ The final rule
adopts this clarification without change. See comment 35(c)(1)(i)-2.
---------------------------------------------------------------------------

\23\ See Appraisal Standards Bd., Appraisal Fdn., Standards Rule
2-3, USPAP (2012-2013 ed.) at U-29, available at http://www.uspap.org.
---------------------------------------------------------------------------

FIRREA title XI and implementing regulations. As 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). Section 1110 of FIRREA directs
each Federal financial institutions regulatory agency \24\ 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 rules 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).
---------------------------------------------------------------------------

\24\ The Federal financial institutions regulatory agencies are
the Board, the FDIC, the OCC, and the NCUA.
---------------------------------------------------------------------------

The Dodd-Frank Act added a third requirement--that real estate
appraisals be subject to appropriate review for compliance with USPAP--
for which the Federal financial institutions regulatory 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 financial institutions regulatory 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.\25\ 12 U.S.C. 3339, 3350(4).
---------------------------------------------------------------------------

\25\ See OCC: 12 CFR Part 34, Subpart C; Board: 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' proposal provided 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. While the Federal financial institutions regulatory
agencies' requirements in FIRREA also apply to an institution's
ordering and review of an appraisal, the Agencies proposed 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. Accordingly, a proposed comment clarified
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,'' and that paragraph (3) of FIRREA, which relates to the
review of appraisals, is not relevant. The Agencies are adopting these
proposals as Sec. 1026.35(c)(1)(i) and comment 35(c)(1)(i)-3.
The Agencies also noted that FIRREA title XI applies by its terms
to ``federally related transactions'' involving a narrower category of
loans and institutions than the group of loans and lenders that fall
within TILA's definition of ``creditor.'' \26\ For example, the FIRREA
title XI regulations do not apply to transactions of $250,000 or
less.\27\ They also do not apply to non-depository institutions.\28\
However, the Agencies believe that Congress, by including the higher-
risk mortgage appraisal rules in TILA, which applies to all creditors,
demonstrated its intention that all creditors that extend higher-risk
mortgage loans, such as independent mortgage companies, should obtain
appraisals from appraisers who conform to the standards in FIRREA
related to the development and reporting of the appraisal. The Agencies
also believe that, by placing this rule in TILA, Congress did not
intend to limit its application to loans over $250,000. The Agencies
adopt this broader interpretation in the final rule.
---------------------------------------------------------------------------

\26\ TILA section 103(g), 15 U.S.C. 1602(g) (implemented by
Sec. 1026.2(a)(17)). See also 12 U.S.C. 3350(4) and OCC: 12 CFR
34.42(f); Board: 12 CFR 225.62(f); FDIC: 12 CFR 323.2(f); and NCUA:
12 CFR 722.2(e) (defining ``federally related transaction'').
\27\ See OCC: 12 CFR 34.43(a)(1); Board: 12 CFR 225.63(a)(1);
FDIC: 12 CFR 323.3(a)(1); and NCUA: 12 CFR 722.3(a)(1).
\28\ See 12 U.S.C. 3339, 3350(4) (defining ``federally related
transaction,'' (6) (defining ``federal financial institutions
regulatory agencies'') and (7) (defining ``financial institution'').
---------------------------------------------------------------------------

In the proposed rule, the Agencies did not identify specific FIRREA
regulations that relate to the appraiser's development and reporting of
the appraisal. The Agencies requested

[[Page 10376]]

comment on whether the final rule should address any particular FIRREA
requirements applicable to appraisers that related to the development
and reporting of the appraisal. Consistent with the proposal, the final
rule does not identify specific FIRREA regulations that relate to the
appraiser's development and reporting of the appraisal.

Public Comments on the Proposal

Appraiser trade associations, a housing advocate, and a credit
union commenter agreed that the rule should apply to all qualifying
mortgage loans, and not only the subset of the higher-risk mortgage
loans already covered by FIRREA, including those loans with a
transaction value of $250,000 or less. The appraiser trade associations
and the housing advocate commenters believed that all higher-risk
mortgages must be included in the rule to ensure that consumers receive
the protections offered by appraisals. The housing advocate commenter
also believed that including all higher-risk mortgages would reduce
risk to all parties involved in the financing and servicing of
mortgages and would ensure equal access to credit. This commenter
specifically requested that the Agencies at least require an interior
appraisal by licensed appraisers for all residential mortgages above
$50,000, regardless of whether they are originated or insured by the
private sector, Fannie Mae, Freddie Mac, or the Federal Housing
Administration (FHA).
A banking trade association and a credit union commenter, however,
believed that Congress intended the FIRREA requirements to apply only
to a subset of higher-risk mortgages that are already covered by
FIRREA. The banking trade association commenter believed the Agencies
should not require the rule to apply to loans held in portfolio or
loans with a value of $250,000 or less, because a bank holding a loan
in portfolio has strong incentive to ensure that the property sale is
legitimate and the property is properly valued. The commenter also
believed the statute intended to apply the rules only to the subset of
higher-risk mortgages with a value of over $250,000, as is provided in
the Federal financial institutions regulatory agencies' regulations
implementing FIRREA. The banking trade association and a bank commenter
noted that many community banks, particularly in rural areas, limit
costs to consumers by not requiring appraisals on mortgages held in
portfolio of $250,000 or less as permitted under FIRREA title XI or by
performing cheaper, in-house evaluations of property.
On whether the final rule should identify specific FIRREA
regulations that relate to the development and reporting of the
appraisal, the Agencies received one comment letter from appraiser
trade associations. These commenters requested that the Agencies
specify that creditors must use certified rather than licensed
appraisers. The comment is discussed in more detail in the discussion
of the use of ``certified'' versus ``licensed'' appraisers, below.
Discussion
As discussed in the proposal, the Agencies believe that, by
referencing FIRREA requirements in the context of defining ``certified
or licensed appraiser,'' the statute intended to limit FIRREA's
requirements to those that apply to the appraiser's development and
reporting of performance of the appraisal, rather than the FIRREA
requirements that apply to a creditor's ordering and review of the
appraisal. TILA section 129H(b)(3), 15 U.S.C. 1639h(b)(3). The Agencies
also did not propose to interpret ``certified or licensed appraiser''
to include requirements 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. Comment
35(c)(1)(i)-3 is consistent with the proposal in this regard.
Accordingly, as proposed, the final rule includes a comment clarifying
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 the
proposal. See comment 35(c)(1)(i)-3.
At the same time and in light of public comments, the Agencies
reviewed the relevant statutory provisions and confirmed their
conclusion that applying the FIRREA requirements related to an
appraiser's performance of an appraisal broadly--to transactions
originated by creditors and transaction types not necessarily subject
to FIRREA (such as loans of $250,000 or less)--is wholly consistent
with the consumer protection purpose of title XIV of the Dodd-Frank
Act, as well as specific language of the appraisal provisions. For
example, the Agencies believe that if Congress intended to limit
application of the FIRREA requirements to mortgage loans covered by
FIRREA, such as loans of over $250,000 made by Federally-regulated
depositories, Congress would have expressly done so. Instead, Congress
placed the appraisal requirements, including the definition of
``certified and licensed appraiser'' referencing FIRREA, in TILA, which
applies to loans made by all types of creditors. Moreover, limiting
coverage of the Dodd-Frank Act higher-risk mortgage appraisal rules to
loans of over $250,000 would eliminate protections for most higher-risk
mortgage consumers.\29\ From a practical standpoint, the Agencies
believe that the most reasonable interpretation of the statute is that
all mortgage loans meeting the definition of ``higher-risk mortgage''
are subject to a uniform set of rules, regardless of the type of
creditor. This creates a level playing field and ensures the same
protections for all consumers of ``higher-risk mortgages.'' For these
reasons, consistent with the proposal, the final rule applies the
FIRREA requirements to appraisals for all HPMLs that are not exempt
from the regulation. See Sec. 1026.35(c)(2).
---------------------------------------------------------------------------

\29\ According to HMDA data, mean loan size for purchase-money
HPMLs in 2011 was $141,600 (median $109,000) and for refinance HPMLs
in 2011, mean loans size was $141,600 (median $104,000). In 2010,
mean loan size for purchase-money HPMLs was $140,400 (median
$100,000) and for refinance HPMLs, mean loan size was $138,600
(median $95,000). See Robert B. Avery, Neil Bhutta, Kenneth B.
Brevoort, and Glenn Canner, ``The Mortgage Market in 2011:
Highlights from the Data Reported under the Home Mortgage Disclosure
Act,'' FR Bulletin, Vol. 98, no. 6 (Dec. 2012) http://www.federalreserve.gov/pubs/bulletin/2012/PDF/2011_HMDA.pdf.
---------------------------------------------------------------------------

``Certified'' versus ``licensed'' appraiser. Neither TILA section
129H nor the proposed rule defined the individual terms ``certified
appraiser'' and ``licensed appraiser,'' or specified when a certified
appraiser or a licensed appraiser must be used. Instead, the proposed
rule required that creditors obtain an appraisal performed by ``a
certified or licensed appraiser.'' 15 U.S.C. 1639h(b)(1), (b)(2). The
Agencies noted in the proposal that certified appraisers generally
differ from licensed appraisers based on the examination, education,
and experience requirements necessary to obtain each credential. The
proposal also stated that existing State and Federal law and
regulations require the use of a certified appraiser rather than a
licensed appraiser for certain types of transactions. The Agencies
requested comment on whether the final rule should address the issue of
when a creditor must use a certified appraiser rather than a licensed
appraiser.
Consistent with the proposal, the final rule does not separately
define ``certified'' appraiser or ``licensed'' appraiser, or specify
when a creditor

[[Page 10377]]

should use a ``certified'' rather than a ``licensed'' appraiser.

Public Comments on the Proposal

Several national and State credit union trade associations believed
that the Agencies should not specify when a creditor must use a
certified appraiser rather than a licensed appraiser and requested that
the Agencies provide creditors with flexibility to make that
determination. Some of these commenters noted that State requirements
for certified or licensed appraisers may vary significantly; some
states may not issue licenses for appraisers, and some may issue
different certified appraiser credentials based on the type of
property. A financial holding company commenter, on the other hand,
requested that the Agencies clarify circumstances under which a lender
must use a certified or a licensed appraiser to facilitate compliance.
On the other hand, appraiser trade association commenters believed
that creditors should be required to use only certified appraisers,
because the certification is more rigorous than licensure. These
commenters stated that the FHA requires newly-eligible appraisers to be
certified, and noted that many states have phased out, or are in the
process of phasing out, the licensing of appraisers rather than
certification. The commenters further stated that when collateral
property is complex, the Agencies should require a certified appraiser
who is also credentialed by a recognized professional appraisal
organization. Similarly, a realtor trade association commenter believed
that using certified appraisers was preferable. The commenter believed
that the rule should define appraisals for higher-risk mortgages as
``complex,'' thus requiring that only certified appraisers may perform
the appraisals.

Discussion

As noted above, several commenters confirmed the Agencies' concerns
that State requirements for certified or licensed appraisers may vary
significantly and are evolving. Overall, the Agencies believe that
imposing specific requirements in this rule about when a certified or
licensed appraiser is required goes beyond the scope of the statutory
``higher-risk mortgage'' appraisal provisions in TILA section 129h. 15
U.S.C. 1639h. The Agencies do not believe that this rule is an
appropriate vehicle for guidance on standards for use of a State
certified or licensed appraiser that may change over time and vary by
jurisdiction. Although the FIRREA appraisal regulations specifically
require a ``certified'' appraiser for certain types of mortgage
transactions, the Agencies do not believe that these FIRREA rules are
incorporated into the higher-risk mortgage appraisal rules applicable
to all creditors. See section-by-section analysis of Sec.
1026.35(c)(1)(i) (defining ``certified or licensed appraiser'' to
incorporate FIRREA requirements related to the development and
reporting of the appraisal, not appraiser selection or review). Thus,
the final rule need not clarify these rules for entities not subject to
the FIRREA appraisal regulations; entities subject to the FIRREA
appraisal regulations are familiar with them.
Appraiser competency. In the proposed rule, the Agencies also noted
that, 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 proposed
rule did not specify competency standards, but the Agencies requested
comment on whether the rule should address appraiser competency. In
keeping with the proposal, the final rule does not specify competency
standards for appraisers.

Public Comments on the Proposal

A realtor trade association commenter suggested that the rule
incorporate guidance from the Interagency Appraisal and Evaluation
Guidelines \30\ regarding creditors' criteria for selecting,
evaluating, and monitoring the performance of appraisers. However, a
banking trade association, a financial holding company, appraiser trade
association, and several national and State credit union trade
association commenters stated that the Agencies should not require
creditors to apply specific competency standards for appraisers.
Several commenters asserted that competency standards would result in
increased regulatory burden and cost, and a banking trade association
expressed concern that requiring creditors to implement subjective
competency standards could raise conflict of interest issues with
respect to appraiser independence.
---------------------------------------------------------------------------

\30\ 75 FR 77450, 77465-68 (Dec. 10, 2010).
---------------------------------------------------------------------------

Appraiser trade association commenters suggested that instead of
setting forth competency standards, the Agencies should require a
creditor to ensure that the engagement letter properly lays out the
required scope of work, that the appraiser is independent, and that the
appraiser possesses the appropriate experience to perform the
assignment including, when necessary, geographic competency. The
financial holding company commenter suggested that the rule should
reference FIRREA and require creditors to ensure that appraisers are in
good standing. The banking trade association commenter believed that
the Agencies should include a reference to USPAP to create a uniform
competency standard. One State credit union association believed that
the Agencies should permit creditors to rely on appraisers'
representations regarding licensing and certification.

Discussion

The Agencies believe that the many aspects of appraiser competency
are beyond the scope of TILA's ``higher-risk mortgage'' provisions
defining ``certified or licensed appraiser,'' which do not mention
competency. Appraiser competency is addressed in a number of
regulations and guidelines for Federally-regulated depositories, which
are expected to know and follow rules and guidance under FIRREA
regarding appraiser competency. \31\
---------------------------------------------------------------------------

\31\ See, e.g., id. at 77465-68 (Dec. 10, 2010). Appraiser
competency is critical to the quality and accuracy of residential
mortgage appraisals. As a commenter noted, the federal banking
agencies provide guidance in the Interagency Appraisal and
Evaluation Guidelines regarding creditors' criteria for selecting,
evaluating, and monitoring the performance of appraisers. See id.
---------------------------------------------------------------------------

35(c)(1)(ii) Manufactured Home

As discussed in in the section-by-section analysis of Sec.
1026.35(c)(2)(ii), below, the final rule exempts a transaction secured
by a new manufactured home from the appraisal requirements of Sec.
1026.35(c). Accordingly, Sec. 1026.35(c)(1)(ii) adds a definition of
manufactured home, clarifying that, for the purposes of this section,
the term manufactured home has the same meaning as in HUD regulation 24
CFR 3280.2.

35(c)(1)(iii) National Registry

As discussed in Sec. 1026.35(c)(3)(ii)(B) below, to qualify for
the safe harbor provided in the final rule, 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 the FFIEC is
required to maintain a registry of State certified and licensed
appraisers eligible to perform appraisals in connection with federally
related

[[Page 10378]]

transactions. 12 U.S.C. 3338. For purposes of qualifying for the safe
harbor, the final rule requires that a creditor must verify that the
appraiser holds a valid appraisal license or certification through the
registry maintained by the Appraisal Subcommittee. Thus, as proposed,
Sec. 1026.35(c)(1)(iii) in the final rule provides that the term
``National Registry'' means the database of information about State
certified and licensed appraisers maintained by the Appraisal
Subcommittee of the FFIEC.

35(c)(1)(iv) 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, 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, as proposed, Sec. 1026.35(c)(1)(iv) in the final rule
defines 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.

35(c)(2) Exemptions

The Agencies proposed to exclude from the definition of ``higher-
risk mortgage loan,'' and thus from coverage of TILA's ``higher-risk
mortgage'' appraisal rules entirely, the following types of loans: (1)
Qualified mortgage loans as defined in Sec. 1026.43(e); (2) reverse-
mortgage transactions subject to Sec. 1026.33(a); and (3) loans
secured solely by a residential structure. These exclusions were
proposed consistent with the express language of TILA section 129H(f)
and pursuant to the Agencies' exemption authority in TILA section
129H(b)(4)(B), which authorizes the Agencies to exempt from coverage of
the appraisal rules a class of loans 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) and (f).
The Agencies requested comment on these proposed exemptions. In
addition, the Agencies requested comment on whether the final rule
should exempt the following types of loans:
Loans to finance new construction of a dwelling;
Temporary or ``bridge'' loans, typically used to purchase
a new dwelling where the consumer plans to sell the consumer's current
dwelling; and
Loans secured by properties in ``rural'' areas. For this
last exemption, the Agencies requested comment on how to define
``rural''; specifically, whether to define it as the Board did in its
proposal to implement Dodd-Frank Act ability-to-repay requirements
under TILA section 129C. See 15 U.S.C. 1639c; 76 FR 27390 (May 11,
2011) (2011 ATR Proposal) (and also in the 2011 Escrows Proposal),
discussed in more detail below.
Finally, the Agencies requested comment on whether commenters
believed that any other types of loans should be exempt from the final
rule.
The final rule adopts two of the proposed exemptions: qualified
mortgages and reverse mortgages. See Sec. 1026.35(c)(2)(i) and (vi).
The final rule also adopts exemptions for loans secured by new
manufactured homes and by mobile homes, boats, or trailers, which
replace the proposed exemption for loans secured solely by a
residential structure. See Sec. 1026.35(c)(2)(ii) (new manufactured
homes) and (iii) (mobile homes, boats, or trailers). In addition, the
final rule exempts the two types of loans on which the Agencies
specifically requested comment: new construction loans and bridge
loans. See Sec. 1026.35(c)(2)(iv) (construction loans) and (v) (bridge
loans).
In addition, based on public comments, the Agencies intend to
publish a supplemental proposal to request comment on possible
exemptions for ``streamlined'' refinance programs and small dollar
loans, as well as to seek comment on whether application of the HPML
appraisal rule to loans secured by certain other property types, such
as existing manufactured homes, is appropriate.
Exemptions from the HPML appraisal rules of Sec. 1026.35(c) are
set out in new Sec. 1026.35(c)(2). The structure of the final rule
differs from that of the proposed rule. The proposed rule excluded
certain loan types from the definition of ``higher-risk mortgage loan''
and thereby excluded these loan types from coverage of all of the
``higher-risk mortgage'' appraisal rules. By contrast, the final rule
defines a general term--HPML--and incorporates exemptions from the
appraisal rules in a separate subsection, Sec. 1026.35(c)(2). As
discussed, the general term HPML applies also to loans covered by the
revised escrow rules in Sec. 1026.35(b), with exemptions specific to
those rules enumerated separately in Sec. 1026.35(b)(2).
Thus, exemptions that are the same in both the escrow rules in
Sec. 1026.35(b) and the appraisal rules in Sec. 1026.35(c) are stated
separately in the ``exemptions'' sections for each set of rules. See
Sec. 1026.35(b)(2) and (c)(2). The following exemptions are generally
the same for both the HPML escrow rules and the HPML appraisal rules:
new construction loans, bridge loans, and reverse mortgages. The intent
of this structure is to make clear that the Agencies jointly have
authority to exempt transactions from the appraisal rules, whereas only
the Bureau has authority to exempt transactions from the escrow rules.
These exemptions and related public comments are discussed in
detail below.

35(c)(2)(i)

Qualified Mortgages
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, the Agencies proposed to provide a
single exclusion for a qualified mortgage as that term would be defined
in the Bureau's final rule implementing TILA section 129C. 15 U.S.C.
1639c.
Before authority regarding TILA section 129C transferred 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 of Regulation Z. 12 CFR 226.43(e). See
76 FR 27390, 27484-85 (May 11, 2011). During the proposal period for
the ``higher-risk mortgage'' rule, the Bureau had not yet issued final
rules implementing TILA section 129C's definition of ``qualified
mortgage.'' Since that time, the Bureau has issued rules defining
``qualified mortgage.'' See 2013 ATR Final Rule, Sec. 1026.43(e).
Consistent with the proposed definition of ``qualified mortgage,'' the
Bureau's

[[Page 10379]]

final rule defines ``qualified mortgage'' as generally including loans
characterized by the absence of certain features considered risky, such
as negative amortization and balloon payments.
The Agencies adopt the exemption for ``qualified mortgages'' as
proposed, with a cross-reference to the Bureau's final rules defining
this class of loans in 12 CFR 1026.43(e).

Public Comments on the Proposal

All commenters--including national and State credit union trade
associations, as well as national and State banking trade
associations--supported this exemption. Some banking trade associations
believed the exemption was appropriate because qualified mortgages, by
definition, are safe and sound transactions. Other banking and credit
union trade associations expressed concern that they could not comment
specifically on the exemption, because the term was not yet defined by
the Bureau.

Discussion

The final rule incorporates the exemption for ``qualified
mortgages'' as proposed because the exemption is prescribed by statute
and widely supported by commenters. The Agencies note that some
commenters requested that the final rule also exempt ``qualified
residential mortgages,'' which the Dodd-Frank Act exempts from the risk
retention rules prescribed by the Act. See Dodd-Frank Act section 941,
section 15G of the Securities Exchange Act of 1934, 15 U.S.C. 780-
11(c)(1)(C)(iii). A qualified residential mortgage, however, is by
statute to be defined by regulation as ``no broader than'' the
definition of qualified mortgage prescribed by the Bureau in its 2013
ATR Final Rule. See id. at sec. 780-11(e)(4)(C). Therefore, the
exemption for qualified mortgages will capture all qualified
residential mortgages and a separate exemption is not necessary.

35(c)(2)(ii)

Transactions Secured by a New Manufactured Home
The Agencies proposed to exclude from coverage of the higher-risk
mortgage appraisal rules any loan secured solely by a residential
structure, such as a manufactured home.\32\ The Agencies believed that
requiring appraisals performed by certified or licensed appraisers was
not appropriate, because such transactions typically more closely
resemble titled vehicle loans. At the same time, based on outreach, the
Agencies believed that for loans for residential structures, such as
manufactured homes that are secured by both the home and the land to
which the home is attached, appraisals performed by certified or
licensed appraisers are feasible. Such transactions were therefore
covered by the proposed rule. The Agencies believed the exemption for a
loan secured solely by a residential structure was appropriate pursuant
to the exemption authority under TILA section 129H(b)(4)(B). 15 U.S.C.
1026.35(b)(4)(B).
---------------------------------------------------------------------------

\32\ The Agencies proposed 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
was intended to exclude 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 were
proposed to be 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.
---------------------------------------------------------------------------

The Agencies requested comment on whether the proposed exclusion
was 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. The Agencies also
requested comment on whether 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, in lieu
of an appraisal performed by a certified or licensed appraiser.

Public Comments on the Proposal

Commenters, including national and State credit union trade
associations, a manufactured housing industry consultant, manufactured
housing trade associations, a realtor trade association, a lender
specializing in manufactured housing financing, and national and State
banking trade associations, submitted comments regarding the exemption
for loans secured ``solely by a residential structure,'' but limited
their comments to the exemption as applied to manufactured homes. The
commenters supported exempting loans secured solely by manufactured
homes. Banking trade association commenters believed that the statute
was intended to apply only to loans secured at least in part by real
property. A manufactured housing industry consultant, a manufactured
housing lender, and manufactured housing trade association commenters
concurred that traditional appraisals were not appropriate for these
transactions for a variety of reasons, including: (1) A lack of
qualified and trained appraisers to appraise such transactions,
especially in rural areas; (2) a lack of comparable sales and limited
sales volume; (3) the high expense of appraisals relative to the cost
of the transaction; and (4) inaccurate valuations resulting from
traditional appraisals. The manufactured housing industry consultant
suggested that an exemption was necessary in part because these loans
were unlikely to qualify for the qualified mortgage exemption due to
their small size, which would in turn increase the likelihood that they
would exceed the points and fees thresholds defining qualified
mortgages. See Sec. 1026.43(e)(3).
Some of the commenters believed the Agencies should expand the
exemption to include financing for both real estate and manufactured
homes, known as ``land home'' financing. Manufactured housing trade
association commenters argued that traditional appraisals are not
appropriate for these transactions for many of the same reasons cited
for excluding loans secured solely by a residential structure. One of
these manufactured housing trade associations also expressed the view
that appraisals are not appropriate because the cost of the home itself
is readily known to consumers through other means. In addition, the
commenter stated that in rural areas, the cost of the land is small
compared to the overall value of the transaction.\33\ This commenter
recommended that if the Agencies did not exclude all land home
transactions, the Agencies in the alternative should at least exclude
those land home transactions that are under $125,000 or that are in a
rural area.
---------------------------------------------------------------------------

\33\ Note, however, that another manufactured housing trade
association commenter stated that the majority of manufactured homes
are not considered an improvement or enhancement of the real
property on which they are sited.
---------------------------------------------------------------------------

One commenter also questioned the feasibility of appraisals for
such transactions. A lender specializing in manufactured housing
financing stated that, in land home transactions, the land on which
manufactured homes will be located is often not identified until well
after the time appraisals are typically ordered. Moreover, the
commenter stated that manufactured homes are typically not available
for an interior visit until after closing, regardless of whether the
transaction is secured solely by the home itself or by land and home
together. As an alternative, the commenter suggested different
regulatory language for the exclusion, which would expand the exemption
to

[[Page 10380]]

land home transactions and would incorporate an existing definition of
``manufactured home'' to clearly eliminate site-built manufactured
homes from the exemption.

Discussion

Public commenters generally confirmed Agencies' concerns regarding
the application of the appraisal rules to loans secured by certain
manufactured homes. Accordingly, the Agencies are excluding certain
manufactured homes from coverage under the final rule. However, in the
final rule, the Agencies are modifying the exemption. The proposed rule
would have exempted loans ``secured solely by a residential
structure,'' which was intended to exempt manufactured homes and other
types of dwellings when the loan was not secured at least in part by
land. The language in the final rule is tailored to exempt transactions
secured by specific types of dwellings. Accordingly, the final rule
exempts transactions secured by a new manufactured home, regardless of
whether the structure is attached to land or considered real property,
and also exempts transactions secured by a mobile home, boat, or
trailer.
The Agencies believe that the manufactured home exemption should be
based on whether the manufactured home securing the transaction is a
new home, regardless of whether land also secures the transaction. Upon
further consideration, the Agencies believe that TILA section 129H is
intended to apply to certain transactions without regard to whether a
transaction is secured by land.\34\ Thus, the approach in the final
rule is focused on the feasibility and utility of requiring certified
or licensed appraisers to perform appraisals for particular
manufactured home transactions.
---------------------------------------------------------------------------

\34\ The Agencies note that the definition of ``higher-risk
mortgage loan'' in TILA section 129H incorporates the definition of
``residential mortgage loan.'' TILA section 129H(f). A residential
mortgage loan is defined, in part, to include loans involving
certain types of dwellings that are non-real estate residences. TILA
section 103(cc)(5). For example, cooperatives are specifically
described as dwellings under TILA section 103(w). Moreover, although
TILA section 129H requires appraisals that conform to FIRREA title
XI, the Agencies do not believe that TILA section 129H is limited to
transactions subject to FIRREA title XI or other Federal
regulations. Thus, the Agencies believe the statute intended to
apply the appraisal requirements to some loans that are not secured
by land.
---------------------------------------------------------------------------

The Agencies believe that an exemption for new manufactured homes
regardless of whether the loan for such a home is also secured by land
more precisely excludes from the rule those transactions that should
not be subject to the new appraisal requirements. Based on further
outreach, the Agencies understand that for loans secured by both new
manufactured homes and land, a valuation is often performed by
combining the manufactured home invoice price with the value of the
land, rather than by a traditional appraisal that is based on the
collective value of the structure and the land on which it is sited.
The Agencies believe that requiring traditional appraisals with
interior inspections for transactions secured by a new manufactured
home would add very little value to the consumer beyond existing
valuation methods. Moreover, because it may be difficult or impossible
to retain qualified appraisers to perform such appraisals, the rule
could result in some creditors declining to extend loans for
manufactured homes. Exempting new manufactured homes from the rule is,
therefore, in the public interest. The Agencies believe that such an
exemption also promotes the safety and soundness of creditors, because
creditors will be able to continue relying on standardized valuations
that are more conducive to pricing new manufactured homes than are
appraisals performed by a certified or licensed appraiser.
Accordingly, in Sec. 1026.35(c)(2)(ii), the Agencies are exempting
from the appraisal requirements of Sec. 1026.35(c) a transaction
secured by a new manufactured home. Comment 35(c)(2)(ii)-1 in the final
rule clarifies that a transaction secured by a new manufactured home,
regardless of whether the transaction is also secured by the land on
which it is sited, is not a ``higher-priced mortgage loan'' subject to
the appraisal requirements of Sec. 1026.35(c).

35(c)(2)(iii)

Transaction Secured by Mobile Home, Boat, or Trailer
Section 1026.35(c)(2)(iii) of the final rule also specifically
exempts transactions secured by a mobile home, boat, or trailer. This
is consistent with the proposal, which would have exempted these
transactions because they are secured ``solely by a residential
structure.'' The Agencies note that this exemption applies even if the
transaction is also secured by land. Comment 35(c)(2)(iii)-1 clarifies
that, for purposes of the exemption in Sec. 1026.35(c)(2)(iii), a
mobile home does not include a manufactured home, as defined in Sec.
1026.35(c)(1)(ii).
The Agencies believe the exemption is in the public interest,
because requiring an appraisal with an interior property visit for
these transactions would offer limited value due to existing pricing
tools, such as new product invoices and publicly-available pricing
guides. The Agencies further believe, for purposes of safety and
soundness, that creditors would be better served by using other
valuation methods geared specifically for mobile homes, boats, and
trailers.

35(c)(2)(iv)

Construction Loans
In the proposal, the Agencies asked for comment on whether to
exempt from the higher-risk mortgage appraisal rules transactions that
finance the construction of a new home. The Agencies recognized that
for loans that finance the construction of a new home, an interior
visit of the property securing the loan is generally not feasible
because the homes are proposed to be built or are in the process of
being built. At the same time, the Agencies recognized that
construction loans that meet the pricing thresholds for higher-risk
mortgage loans could pose many of the same risks to consumers as other
types of loans meeting those thresholds. The Agencies therefore
requested comment on whether to exclude construction loans from the
definition of higher-risk mortgage loan. The Agencies also sought
comment on whether, if an exemption for initial construction loans were
not adopted in the final rule, creditors needed any additional
compliance guidance for applying TILA's ``higher-risk mortgage''
appraisal rules to construction loans. Alternatively, the Agencies
requested 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.
The final rule adopts an exemption from all of the HPML appraisal
requirements for a ``transaction that finances the initial construction
of a dwelling.'' This exemption mirrors an existing exemption from the
current HPML rules. See existing Sec. 1026.35(a)(3), also retained in
the 2013 Escrows Final Rule, Sec. 1026.35(b)(2)(i)(B).

Public Comments on the Proposal

Appraiser trade association commenters believed that new
construction loans should not be exempted because consumers needed the
protection of the appraisal rules. However, all other commenters--
including national and State credit union trade associations, national
and State banking trade associations, banks,

[[Page 10381]]

a mortgage company, a financial holding company, a home builder trade
association, and a loan origination software company--supported the
proposed exemption.
Commenters that supported an exemption for new construction loans
had varying views on the risks associated with these loans, all
supporting the commenters' request for an exemption for such loans. A
loan origination software company and a bank commenter asserted that
new construction loan interest rates and fees are often high because
the loans, which are short-term, have inherently greater risk. Thus,
the appraisal rules would be over-inclusive because they would apply
even when extended to prime borrowers. Similarly, a banking association
commenter argued that new construction loans are not those that
Congress intended to target in the appraisal rules, which the commenter
viewed as loans priced higher due to the relative credit risk of the
borrower. The home builder trade association, however, supported an
exemption because the commenter believed that new construction loans
are not as risky as the loans targeted by Congress in the ``higher-risk
mortgage'' appraisal rules because these loans require close
coordination between a bank, home builder, and consumer.
The financial holding company, mortgage company, banking
association, and loan origination software company commenters supported
an exemption for new construction loans because they are temporary. One
of these commenters noted that most mortgage-related regulations, such
as those in Regulation X and Z, make accommodations for temporary
loans. Others noted that the property securing the new construction
loan ultimately will be subject to an appraisal under TILA's ``higher-
risk mortgage'' appraisal rules if the permanent financing replacing
the new construction loan is a ``higher-risk mortgage.''
Several commenters supporting an exemption cited concerns about the
feasibility and utility of performing interior inspection appraisals
during the construction phase. A bank commenter stated that an
exemption was needed because a home under construction is not available
for a physical inspection. Similarly, credit union association and
banking association commenters stated that an interior visit would not
be feasible during the construction phase. Moreover, the commenter
believed an appraisal was unlikely to yield sufficient information
about the condition of the property to justify the expense to the
consumer. A banking association commenter further asserted that the
usual value of a new construction loan is the value ``at completion,''
so an appraisal performed during construction would not assess the
value of a completed home.
A State banking association commenter asserted that failing to
exempt new construction loans from the final rule would result in
operational difficulties and that an interior inspection appraisal
would be of little value to consumers in these circumstances. A bank
commenter requested guidance on how to comply with the rules for these
loans, if the Agencies did not exempt them from the rule.

Discussion

In Sec. 1026.35(c)(2)(iv), the Agencies are using their exemption
authority to exempt from the final rule a ``transaction to finance the
initial construction of a dwelling.'' Unlike the exemption for
``bridge'' loans that the Agencies are also adopting (see section-by-
section analysis of Sec. 1026.35(c)(2)(v), below), the exemption for
new construction loans is not limited to loans of twelve months or
less. This is because the Agencies recognize that new construction
might take longer than twelve months and that therefore new
construction loans might be for terms of longer than twelve months.
This aspect of the exemption adopted in the final rule also reflects
the existing exemption for new construction loans from the current HPML
rules. See Sec. 1026.35(a)(3).
The Agencies' decision to exempt these types of transactions is
consistent with wide support for this exemption received from
commenters, which largely confirmed the Agencies' concerns about the
drawbacks of subjecting these transactions to the new HPML appraisal
requirements, particularly the requirement for an interior inspection,
USPAP-compliant appraisal. The Agencies also believe that this
exemption is important to ensure consistency across mortgage rules, and
thus to facilitate compliance. In addition to noting the existing
exemption for new construction loans from the current HPML
requirements, the Agencies also note the exemption for these loans from
the new Dodd-Frank Act ability-to-repay and ``high-cost'' mortgage
rules issued by the Bureau. See 2013 ATR Final Rule, Sec.
1026.43(a)(3)(ii), and 2013 HOEPA Final Rule, Sec.
1026.32(a)(2)(ii).\35\
---------------------------------------------------------------------------

\35\ Moreover, the existing ``high-cost'' mortgage rules contain
a longstanding exemption for construction loans from the limitation
on balloon payments. See existing Sec. 1026.32(d)(1)(i).
---------------------------------------------------------------------------

Due to their temporary nature and for other reasons, these loans
tend to have higher rates and thus more of them would be subject to the
HPML appraisal rules without an exemption. Applying the HPML appraisal
rules to these products might subject them to rules with which
creditors might not in fact be able to comply. The Agencies therefore
believe that this exemption will help ensure that a useful credit
vehicle for consumers remains available to build and revitalize
communities. The Agencies also recognize that new construction loans
can be an important product for many creditors, enabling them to
strengthen and diversify their lending portfolios. The Agencies are
also not aware of, and commenters did not offer, evidence of widespread
valuation abuses in loans to finance new construction. Thus, the
Agencies find that the exemption is both in the public interest and
promotes the safety and soundness of creditors. See TILA section
129H(b)(4)(B), 15 U.S.C. 1639h(b)(4)(B).
The Agencies also wished to clarify in the final rule the treatment
of ``construction to permanent'' loans, consisting of a single loan
that transforms into permanent financing at the end of the construction
phase. For this reason, the commentary of the final rule includes
guidance on the application of various rules in Regulation Z to these
loans that parallels guidance provided in commentary for the new
``high-cost'' mortgage rules. See 2013 HOEPA Final Rule, comment
32(a)(2)(ii)-1. Specifically, comment 35(c)(2)(iv)-1 clarifies that the
exclusion for loans to finance the initial construction of a dwelling
applies to a construction-only loan as well as to the construction
phase of a construction-to-permanent loan. The comment further
clarifies that the HPML appraisal rules in Sec. 1026.35(c) do apply if
the permanent financing qualifies as an HPML under Sec. 1026.35(a)(1)
and is not otherwise exempt from the rules under Sec. 1026.35(c)(2).
The comment also provides guidance on the application of Regulation
Z's general closed-end mortgage loan disclosure requirements to
construction-to-permanent loans. To this end, the comment states that,
when a construction loan may be permanently financed by the same
creditor, the general disclosure requirements for closed-end credit
(Sec. 1026.17) provide that the creditor may give either one combined
disclosure for both the construction financing and the permanent
financing, or a separate set of disclosures for each of the two phases

[[Page 10382]]

as though they were two separate transactions. See Sec.
1026.17(c)(6)(ii) and comment 17(c)(6)-2. The comment explains that
Sec. 1026.17(c)(6)(ii) addresses only how a creditor may elect to
disclose a construction-to-permanent transaction, and that which
disclosure option a creditor elects under Sec. 1026.17(c)(6)(ii) does
not affect whether the permanent phase of the transaction is subject to
Sec. 1026.35(c). The comment further explains that, when the creditor
discloses the two phases as separate transactions, the annual
percentage rate for the permanent phase must be compared to the average
prime offer rate for a transaction that is comparable to the permanent
financing to determine coverage under Sec. 1026.35(c). The comment
also explains that, when the creditor discloses the two phases as a
single transaction, a single annual percentage rate, reflecting the
appropriate charges from both phases, must be calculated for the
transaction in accordance with Sec. 1026.35 and appendix D to part
1026. The comment also clarifies that the APR must be compared to the
APOR for a transaction that is comparable to the permanent financing to
determine coverage under Sec. 1026.35(c). If the transaction is
determined to be an HPML that is not otherwise exempt under Sec.
1026.35(c)(2), only the permanent phase is subject to the HPML
appraisal requirements of Sec. 1026.35(c).

35(c)(2)(v)

Bridge Loans
In the proposal, the Agencies also requested comment on whether the
appraisal rules of TILA section 129H should apply to temporary or
``bridge'' loans with a term of 12 months or less. 15 U.S.C. 1639h. If
such an exemption were not adopted, the Agencies sought comment on
whether any additional compliance guidance would be needed for applying
the new appraisal rules to bridge loans. The Agencies stated concerns
about the burden to both creditors and consumers of imposing the rule's
requirements on such loans and questioned whether such requirements
would be useful for many consumers.
As explained in the proposal, 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 down payment) 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.
In Sec. 1026.35(c)(2)(v), the final rule adopts an exemption from
the new HPML appraisal rules for a ``loan with a maturity of 12 months
or less, if the purpose of the loan is a `bridge' loan connected with
the acquisition of a dwelling intended to become the consumer's
principal dwelling.''

Public Comments on the Proposal

Almost all commenters--including national and State banking
associations, national and State credit union associations, a mortgage
company, a financial holding company, a loan origination software
company, a home builder trade association, and a bank--supported an
exemption for bridge loans for many of the same reasons that commenters
supported exempting construction loans. Several commenters emphasized
that these loans are temporary, and some further pointed out that
imposing appraisal requirements was unnecessary because bridge loans
are ultimately converted to permanent financing that will be subject to
the appraisal rules. Other commenters argued that the protections of
the appraisal rules were not needed because bridge loans' higher rates
are generally unrelated to a consumer's creditworthiness; they argued
that TILA's new ``higher-risk mortgage'' appraisal rules were intended
for loans made to more vulnerable, less creditworthy consumers without
other credit options.
Some commenters asserted that failing to exempt these loans would
result in operational difficulties and would be of little value to
consumers. In this regard, one commenter discussed the difficulties of
comparing an APR to a ``comparable'' APOR for these loans. One credit
union association commenter believed that without an exemption,
consumers' access to bridge loans would be reduced. Some commenters
requested that the Agencies exempt all types of temporary loans.
Appraiser trade association commenters believed that the Agencies
should not allow an exemption unless there was a compelling policy
reason to do so.

Discussion

The Agencies are adopting an exemption for ``bridge'' loans of 12
months or less that are connected with the acquisition of a dwelling
intended to become the consumer's principal dwelling for several
reasons. First, the Agencies believe that with this exemption, the
consumer would still be afforded the protection of the appraisal rules.
This is because bridge loans used in connection with the acquisition of
a new home are typically secured by the consumer's existing home to
facilitate the purchase of a new home. Thus, the consumer would be
afforded the protections of the appraisal rules on the permanent
financing secured by the new home. This would include the protections
of Sec. 1026.35(c)(4)(i) regarding properties that are potentially
fraudulent flips.
Second, commenters generally confirmed the Agencies' concerns
expressed in the proposal 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 in the
proposal, the Agencies recognize that rates on short-term bridge loans
are often higher than on long-term home mortgages, so these loans may
be more likely to meet the ``higher-risk mortgage loan'' triggers. As
also noted in the proposal and echoed by commenters, ``higher-risk
mortgages'' 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. The Agencies do
not believe 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.
Further, the Agencies recognize that the exemption can help
facilitate compliance by generally ensuring consistency across
residential mortgage rules. Such consistency can reduce compliance-
related burdens and risks, thereby promoting the safety and soundness
of creditors. The Agencies also believe that consistency across the
rules can reduce operational risk and support a creditor's ability to
offer these loans, which can enable creditors to strengthen and
diversify their lending portfolios.
In particular, the Agencies note the current exemption for
``temporary or `bridge' loans of twelve months or less from the
existing HPML rules (retained in the 2013 Escrows Final Rule, Sec.
1026.35(b)(2)(i)(C)), but also a similar exemption from TILA's new
ability-to-repay requirements. See existing

[[Page 10383]]

Sec. 1026.35(a)(3). See TILA section 129C(a)(8), 15 U.S.C.
1639c(a)(8); 2013 ATR Final Rule, Sec. 1026.43(a)(3)(ii).\36\ In
addition, longstanding HOEPA rules have included an exception from the
balloon payment prohibition for ``loans with maturities of less than
one year, if the purpose of the loan is a `bridge' loan connected with
the acquisition or construction of a dwelling intended to become the
consumer's principal dwelling.'' Sec. 1026.32(d)(1)(ii). The final
HOEPA rules adopted by the Bureau contain the same exception with minor
changes for conformity across mortgage rules. See 2013 HOEPA Final
Rule, Sec. 1026.32(d)(1)(ii)(B) (revising the exception to cover
bridge loans of 12 months or less, rather than less than one year).
---------------------------------------------------------------------------

\36\ The exemption for ``temporary or `bridge' loans of twelve
months or less'' in TILA's ability-to-repay rules codifies an
exemption from the current ``high-cost'' and HPML repayment ability
requirements. See existing Sec. Sec. 1026.34(a)(4)(v),
1026.35(a)(3) and (b)(1).
---------------------------------------------------------------------------

Like the HOEPA exception from the balloon payment prohibition, the
final HPML appraisal rule does not exempt all loans with terms of 12
months or less. Only bridge loans of 12 months or less that are made in
connection with the acquisition of a consumer's principal dwelling are
exempted. (Construction loans are separately exempted under Sec.
1026.35(c)(2)(iv), discussed in the corresponding section-by-section
analysis above.) The Agencies believe that the HPML appraisal rule
might be appropriately applied to other types of temporary financing,
particularly temporary financing that does not result in the consumer
ultimately obtaining permanent financing covered by the appraisal rule.
Finally, as with new construction loans, the Agencies are not aware
of, and commenters did not offer, evidence of widespread valuation
abuses in bridge loans of twelve months or less used in connection with
the acquisition of a consumer's principal dwelling. For all these
reasons, the Agencies find that the exemption is both in the public
interest and promotes the safety and soundness of creditors. See TILA
section 129H(b)(4)(B), 15 U.S.C. 1639h(b)(4)(B).

35(c)(2)(vi)

Reverse Mortgage Transactions
The Agencies proposed to exempt reverse mortgage transactions
subject to Sec. 1026.33(a) from the definition of ``higher-risk
mortgage loan.'' The Agencies proposed this exemption in part because
the proprietary (private) reverse mortgage market is effectively
nonexistent, thus the vast majority of reverse mortgage transactions
made in the United States today are insured by FHA as part of the U.S.
Department of Housing and Urban Development's (HUD) Home Equity
Conversion Mortgage (HECM) Program.\37\ The Agencies stated that TILA's
new ``higher-risk mortgage'' appraisal rules are arguably unnecessary
because HECM creditors must adhere to specific standards designed to
protect both the creditor and the consumer, including robust appraisal
rules.\38\ In addition, a methodology for determining APORs for reverse
mortgage transactions does not currently exist, so creditors would be
unable to determine whether the APR of a given reverse mortgage
transaction exceeded the rate thresholds defining a ``higher-risk
mortgage loan'' (HPML in the final rule).
---------------------------------------------------------------------------

\37\ See Bureau, Reverse Mortgages: Report to Congress 14, 70-99
(June 28, 2012), available at http://www.consumerfinance.gov/reports/reverse-mortgages-report (Bureau Reverse Mortgage Report).
\38\ See HUD Handbook 4235.1, ch. 3.
---------------------------------------------------------------------------

At the same time, the Agencies expressed concern that providing a
permanent exemption for all reverse mortgage transactions, both private
and HECM products, could deny key protections to consumers who rely on
reverse mortgages. However, the Agencies proposed the exemption on at
least a temporary basis, asserting that avoiding any potential
disruption of this segment of the mortgage market in the near term
would be in the public interest and promote the safety and soundness of
creditors.
The Agencies requested comment on the appropriateness of this
exemption. The Agencies also sought 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, noting, for
example, information published by HUD on HECMs, including the contract
rate.\39\
---------------------------------------------------------------------------

\39\ See http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/rmra/oe/rpts/hecm/hecmmenu (``Home Equity Conversion
Mortgage Characteristics'').
---------------------------------------------------------------------------

As discussed further below, in Sec. 1026.35(c)(2)(vi) of the final
rule, the Agencies are adopting the proposed exemption for a ``reverse-
mortgage transaction subject to Sec. 1026.33(a).''

Public Comments on the Proposal

National and State credit union trade associations, as well as a
State banking trade association, supported the proposed exemption.
However, appraiser trade association commenters generally believed that
excluding appraisal protections would harm consumers, particularly
senior citizens, and is contrary to public policy. Appraiser trade
association, realtor trade association, and reverse mortgage lending
trade association commenters suggested that any exemption should be
limited to reverse mortgages under the FHA HECM program and not
extended to proprietary products, because HECM consumers are afforded a
comprehensive and mandatory set of appraisal protections. The reverse
mortgage lending trade association also suggested circumstances under
which reverse mortgages should be deemed qualified mortgages and, thus,
qualify for an exemption on that basis. See section-by-section analysis
of Sec. 1026.35(c)(2)(i).
No commenters offered suggestions on an appropriate approach for
developing an APOR for reverse mortgages. Appraiser trade associations,
who only supported an exemption for HECMs, believed that the rules
should apply to reverse mortgages even though indices do not currently
exist. A reverse mortgage lending trade association believed that
benchmark indices for reverse mortgages could be developed, but,
supporting the proposed exemption, questioned whether one should be.

Discussion

The Agencies are adopting the proposed exemption for a ``reverse-
mortgage transaction subject to Sec. 1026.33'' for the same basic
reasons discussed in the proposal, which were affirmed by most
commenters. The Agencies share concerns expressed by some commenters
about the risks to consumers of reverse mortgages generally, and of
proprietary reverse mortgage loans in particular. Proprietary reverse
mortgage loans are not insured by FHA or any other government entity,
so payments are not guaranteed by the U.S. government to either
consumers or creditors. By contrast, HECMs are insured by FHA and
subject to a number of rules and restrictions designed to reduce risk
to both consumers and creditors, including appraisal rules. See TILA
section 129H(b)(4)(B), 15 U.S.C. 1639h(b)(4)(B).
As noted in the proposal, however, there is little to no market for
proprietary reverse mortgages, and prospects for the reemergence of
this market in the near-term are remote.\40\ HECMs comprise virtually
the entire reverse mortgage market and are subject

[[Page 10384]]

to FHA's extensive HECM rules, which include appraisal
requirements.\41\ In addition, the Agencies believe that unwarranted
creditor liability and operational risk could arise if the rule were
applied to loans that a creditor cannot definitively determine are in
fact subject to the rule, as is the case here, where no rate benchmark
exists for measuring whether a reverse mortgage loan is an HPML. Thus,
without an exemption for reverse mortgages, creditors would be
susceptible to risks that could negatively affect their safety and
soundness.
---------------------------------------------------------------------------

\40\ Bureau Reverse Mortgage Report at 137-38.
\41\ See HUD Handbook 4235.1, ch. 3.
---------------------------------------------------------------------------

In reevaluating the proposed exemption, the Agencies also focused
more attention on the fact that TILA's ``higher-risk mortgage''
appraisal rules apply only to closed-end products. Many (and
historically most) reverse mortgages are open-end products. The
Agencies are concerned about creating anomalies in the market and
compliance confusion among creditors by applying one set of rules to
closed-end reverse mortgages and another to open-end reverse mortgages.
The Agencies note that compliance confusion among creditors can create
burden and operational risk that can have a negative impact on the
safety and soundness of the creditors. The Agencies are concerned that
this bifurcation of the rule's application could also hinder creditors
from offering a range of reverse mortgage product choices that support
the creditors' loan portfolios while also benefitting consumers. In
short, questions remain for the Agencies about whether this rule is the
appropriate vehicle for addressing appraisal issues in the reverse
mortgage market.
The Agencies remain concerned about the potential for abuse related
to appraisals even with HECMs, which are subject to appraisal rules.
Indeed, evidence exists that problems of property value inflation and
fraudulent flipping occur even in the HECM market.\42\ The Agencies
plan to continue monitoring the reverse mortgage market closely and
address appraisal issues as needed, including through consultations
with the Bureau regarding any initiatives to revisit previously-issued
reverse mortgage proposals (76 FR 58539, 53638-58659 (Sept. 24, 2012)).
---------------------------------------------------------------------------

\42\ Bureau Reverse Mortgage Report at 154, 157.
---------------------------------------------------------------------------

For all these reasons, the Agencies have concluded that an
exemption for all reverse mortgages at this time from this rule is in
the public interest and promotes the safety and soundness of
creditors.\43\
---------------------------------------------------------------------------

\43\ By statute, the term ``higher-risk mortgage'' excludes any
``qualified mortgage'' and any ``reverse mortgage loan that is a
qualified mortgage.'' 15 U.S.C. 1639h(f). The Bureau was authorized
by the Dodd-Frank Act to define the term ``qualified mortgage'' and
has done so in its 2013 ATR Final Rule. However, the 2013 ATR Final
Rule does not define the types of reverse mortgage loans that should
be considered ``qualified mortgages'' because, by statute, TILA's
ability-to-repay rules do not apply to reverse mortgages. See TILA
section 129C(a)(8), 15 U.S.C. 1639c(a)(8). Thus the Agencies are not
able to implement the precise statutory exemption for ``reverse
mortgage loans that are qualified mortgages.'' Instead, the
exemption for reverse mortgages is based on the Agencies' express
authority to exempt from TILA's ``higher-risk mortgage'' appraisal
rules ``a class of loans,'' if 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).
---------------------------------------------------------------------------

35(c)(3) Appraisals Required for Higher-Priced Mortgage Loans

35(c)(3)(i) In General
Consistent with TILA section 129H(a) and (b)(1), the proposal
provided 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(a) and (b)(1). In new Sec.
1026.35(c)(3)(i), the final rule adopts this proposal without change.
35(c)(3)(ii) Safe Harbor
In the proposed rule, the Agencies proposed a safe harbor that
would establish affirmative steps creditors can follow to ensure that
they satisfy statutory obligations under TILA section 129H(a) and
(b)(1). 15 U.S.C. 1639h(a) and (b)(1). This was done to address
compliance uncertainties, which are discussed in more detail below.
The Agencies are adopting the final rule substantially as proposed.
Specifically, under new Sec. 1026.35(c)(3)(ii), a creditor would be
deemed to have obtained a written appraisal that meets the general
appraisal requirements now adopted in Sec. 1026.35(c)(3)(i) if the
creditor:
Orders the appraiser to 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. 1026.35(c)(3)(ii)(A));
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 as of the date the appraisal is signed (Sec.
1026.35(c)(3)(ii)(B));
Confirms that the elements set forth in appendix N to part
1026 are addressed in the written appraisal (Sec.
1026.35(c)(3)(ii)(C)); and
Has no actual knowledge to the contrary of facts or
certifications contained in the written appraisal (Sec.
1026.35(c)(3)(ii)(D)).
The Agencies are also adopting proposed comments to the safe
harbor. In particular, comment 35(c)(3)(ii)-1 clarifies that a creditor
that satisfies the safe harbor conditions in Sec.
1026.35(c)(3)(ii)(A)-(D) will be deemed to have complied with the
general appraisal requirements of Sec. 1026.35(c)(3)(i). This comment
further clarifies that a creditor that does not satisfy the safe harbor
conditions in Sec. 1026.35(c)(3)(ii)(A)-(D) does not necessarily
violate the appraisal requirements of Sec. 1026.35(c)(3)(i).
Consistent with the proposal, appendix N to part 1026 provides
that, to qualify for the safe harbor, 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
included 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.
As discussed in the proposal, other than the certification for
compliance with FIRREA title XI, the items in appendix N were derived
from the Uniform Residential Appraisal Report (URAR) form used as a
matter of practice in the residential mortgage industry. The final rule
incorporates without change a proposed comment clarifying 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 10385]]

See Sec. 1026.35(c)(3)(ii)(C)-1. However, as also provided in the
proposal, the final rule provides that the safe harbor does not apply
if the creditor has actual knowledge to the contrary of facts or
certifications contained in the written appraisal. See Sec.
1026.35(c)(3)(ii)(D).

Public Comments on the Proposal

The Agencies collectively received 17 comments from 13 trade
groups, three financial institutions, and one bank holding company that
addressed the proposed safe harbor. Of these, 14 commenters
unequivocally supported the safe harbor. Several commenters requested
clarification of certain issues. Two commenters recommended that the
Agencies clarify that a lender has not necessarily violated the
appraisal requirements when an appraisal does not meet the safe
harbor's requirements. Another commenter recommended the final rule
provide that a creditor may outsource the safe harbor requirements to a
third party and that the creditor would be permitted to rely upon the
third party's certification. The commenter also requested confirmation
that creditors could use automated processes for checking whether the
safe harbor's criteria were met.
The same commenter stated that the safe harbor did not indicate
whether the creditor could rely on the face of the written appraisal
report and the appraiser's certification. One commenter stated that the
safe harbor was not clear regarding the scope and type of information
that was required for some of the criteria. One commenter requested
that the Agencies eliminate the certification for compliance with
FIRREA.
Two commenters questioned implementation of the safe harbor and the
creditor's responsibility under the safe harbor standard. These
commenters recommended that the Agencies should use the same appraisal
review standards that exist in FIRREA and the Interagency Appraisal and
Evaluation Guidelines. One of the commenters questioned whether a
creditor was being tasked under the safe harbor with adequate
responsibility for review of an appraisal. This commenter noted that
the proposal appeared to lower the bar for creditors in connection with
appraisal review responsibilities. The commenter strongly opposed
allowing creditors to perform appraisal review functions without
necessarily using licensed or certified appraisers and recommended
requiring lenders to use certified or licensed appraisers to perform
any substantive appraisal review functions.

Discussion

As noted, the safe harbor is being adopted to address compliance
uncertainties for creditors raised by the general appraisal
requirements. Specifically, 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). The statute
goes on to define a ``certified or licensed'' appraiser in some detail.
TILA section 129H(b)(3), 15 U.S.C. 1639h(b)(3). The statute, however,
is silent on how creditors should determine whether the written
appraisals they have obtained comply with these statutory requirements.
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.
---------------------------------------------------------------------------

\44\ The Agencies proposed 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.
---------------------------------------------------------------------------

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 financial
institutions regulatory agencies.\46\ See 12 U.S.C. 3339, 3350.
---------------------------------------------------------------------------

\46\ As discussed above in the section-by-section analysis of
the definition of ``certified or licensed appraiser'' (Sec.
1026.35(c)(1)(i)), under FIRREA title XI, the Federal financial
institutions regulatory 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 for federally related
transactions, including loans secured by real estate, exceeding
certain dollar thresholds. 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 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. The statute is silent, however, as to the extent of
creditors' obligations under the statute to evaluate appraisers'
compliance.
The Agencies remain concerned that, practically speaking, a
creditor might not be able to determine with certainty whether an
appraiser complied with USPAP for a residential appraisal. 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,

[[Page 10386]]

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. TILA
section 130, 15 U.S.C. 1640. If TILA section 129H is construed to
require creditors to assume liability under TILA for the appraiser's
compliance with these obligations, the Agencies also remain 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 did not believe that the statute should be
construed to intend this result.
As discussed in the proposal, the Agencies continue to be of the
opinion 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 noted in the proposed rule, however, that a certification of
USPAP compliance, one of the required safe harbor elements, is already
an element of the URAR form used as a matter of practice in the
industry.)
Regarding the first element of the safe harbor, that the creditor
``order'' that the appraiser perform the appraisal in conformity with
USPAP and FIRREA, the Agencies generally understand that creditors
seeking the safe harbor would include this assignment requirement in
the engagement letter with the appraiser. See Sec.
1026.35(c)(3)(ii)(A). Regarding specific comments received on the
proposal, the Agencies note that the proposed staff commentary, now
adopted, specifically addresses some of the issues the commenters
raised. In particular, comment 35(c)(3)(ii)-1, discussed above, states
that a creditor who does not satisfy the safe harbor conditions in
Sec. 1026.35(c)(3)(ii) does not necessarily violate the general
appraisal requirements of Sec. 1026.35(c)(3)(i). In addition, the
Agencies note that another proposed element of the commentary, adopted
as comment 35(c)(3)(ii)(C)-1, states 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 to this subpart are included in
the written appraisal.
Some commenters sought clarification on whether the creditor could
rely on the face of the appraisal report, and what scope and type of
information is required for the appendix N criteria. As the Agencies
discussed in the proposal, compliance with the appendix N safe harbor
review requires the creditor to check certain elements of the written
appraisal and the appraiser's certification on its face for
completeness and internal consistency. The final rule, consistent with
the proposed rule, does not require the creditor to make an independent
judgment about or perform an independent analysis of the conclusions
and factual statements in the written appraisal. As discussed above,
the Agencies believe that imposing such obligations on the creditor
could effectively require it to re-appraise the property. The Agencies
also are retaining the requirement for the safe harbor that the
appraiser certify, in the appraisal report, the appraiser's compliance
with both USPAP and applicable FIRREA title XI regulations, although
one commenter requested eliminating the certification of compliance
with FIRREA.\47\ This certification reflects that TILA requires
creditors to obtain appraisals for ``higher-risk mortgages'' that are
performed by the appraiser in conformity with the requirements of USPAP
and applicable FIRREA title XI regulations. See TILA section
129H(b)(3)(B), 15 U.S.C. 1639h(b)(3)(B).
---------------------------------------------------------------------------

\47\ The Agencies are aware that the URAR, currently used widely
in the industry, includes a pro forma appraiser certification for
USPAP compliance, but not for compliance with FIRREA Title XI
appraisal regulations. Nonetheless, the URAR form accommodates
``free text'' additions by the appraiser, through which appraisers
can add an appropriate FIRREA Title XI certification.
---------------------------------------------------------------------------

In response to comments about using third parties for the review of
appendix N elements, the Agencies realize that some creditors may want
to outsource the appraisal review function to confirm that the elements
in appendix N are addressed in the written appraisal. Nonetheless, the
Agencies emphasize that while a creditor may outsource this function to
a third party as the creditor's agent, the creditor remains responsible
for its agent's compliance with these requirements, just as if the
creditor had performed the function itself, and the creditor cannot
simply rely on the agent's certification. The same principle applies
regarding a public comment seeking clarification about the use of
automated review processes for the safe harbor; use of automated
processes can be appropriate, but the creditor remains responsible for
their effectiveness.\48\
---------------------------------------------------------------------------

\48\ The Agencies also note that the Interagency Appraisal and
Evaluation Guidelines provide comprehensive guidance on creditors'
use of third parties for appraisal functions for institutions
subject to the appraisal regulations under FIRREA title XI. See
Interagency Appraisal and Evaluation Guidelines, 75 FR 77450, 77463-
77464 (Dec. 10, 2010).
---------------------------------------------------------------------------

As stated in the proposed rule, the Agencies are of the opinion
that the safe harbor requirements would provide reasonable protections
to consumers and compliance guidance to creditors. For the reasons
previously provided and in light of commenters' general support, the
Agencies have adopted the safe harbor provision as proposed.

35(c)(4) Additional Appraisal for Certain Higher-Risk Mortgage Loans

35(c)(4)(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). In the proposal, the Agencies interpreted this
requirement to obtain a ``second appraisal'' to mean that the creditor
must obtain an appraisal in addition to the one required under the
general ``higher-risk mortgage'' appraisal rules in TILA section
129H(a) and (b)(1). See 15 U.S.C. 1639h(a) and (b)(1), implemented at
new Sec. 1026.35(b)(1)(i), discussed above. 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.
The Agencies proposed to implement the basic statutory requirement
without material change. Thus, in ``higher-risk mortgage loan''
transactions under the proposal, creditors would have to apply
additional scrutiny to properties being resold for a higher price
within a 180-day period.
Using the exemption authority under TILA section 129H(b)(4)(B), the
final rule adopts the proposal, but with substantive changes. 15 U.S.C.
1639h(b)(4)(B). Specifically, under new Sec. 1026.35(c)(4)(i), a
creditor may not extend an HPML that is not otherwise

[[Page 10387]]

exempt from the appraisal requirements (see section-by-section analysis
of Sec. 1026.35(c)(2), above, and Sec. 1026.35(c)(4)(vi), below)
without obtaining, prior to consummation, two written appraisals, if:
The seller is reselling the property within 90 days of
acquiring it and the resale price exceeds the seller's acquisition
price by more than 10 percent; or
The seller is reselling the property within 91 to 180 days
of acquiring it and the resale price exceeds the seller's acquisition
price by more than 20 percent.
The Agencies are adopting a proposed comment to clarify that 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 to obtain two written
appraisals under Sec. 1026.35(c)(4)(i). As discussed in more detail
below, the Agencies are also adopting several other proposed comments
to this rule without substantive change. See comments 35(c)(4)(i)-2
through -6.

Public Comments on the Proposal

The Agencies received over 50 comments concerning the proposal to
implement the ``second'' appraisal requirement under TILA section
129H(b)(2) from trade associations, banks, credit unions, mortgage
lending corporations, non-profit organizations, government-sponsored
enterprises (GSEs), and individuals. The commenters offered responses
to some of the questions the Agencies posed in the proposal and made
suggestions for exemptions from the additional appraisal requirement.
Exemptions and related public comments are discussed in the section-by-
section analysis of Sec. 1026.35(c)(4)(vi), below.
In the proposal, the Agencies requested comment on thirteen
separate questions concerning the general requirement to obtain an
additional appraisal and appropriate exemptions from this requirement.
Public comments on proposals related to more specific rules for the
additional appraisal are discussed in the section-by-section analysis
of Sec. 1026.35(c)(ii)-(v), below. On the general requirements adopted
in Sec. 1026.35(c)(4)(i), the Agencies received substantive comments
on the following two questions.
Use of the term ``additional appraisal'' rather than ``second
appraisal.'' The Agencies used the term ``additional appraisal'' rather
than ``second appraisal'' throughout the proposed rule and commentary
because the term ``second'' may imply that the additional appraisal
must be later in time than the first appraisal. In the proposal, the
Agencies asked whether commenters agreed with the proposal's use of the
term ``additional appraisal'' instead of the statutory term ``second
appraisal.'' The Agencies received six comments on this question. The
commenters agreed that the use of the term ``additional'' appraisal is
appropriate.
Three commenters requested clarification on how to distinguish
between appraisals of different valuations in a lending decision,
noting that the proposal did 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.
Reliance on appraisal for seller's purchase of the property. The
Agencies also requested comment on a proposed comment clarifying 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 the
requirement for two appraisals under TILA section 129H(b)(2). 15 U.S.C.
1639h(b)(2). The Agencies received one comment on this question, which
supported the Agencies' approach to this issue.

Discussion

Consistent with the statute and the proposal, new Sec.
1026.35(c)(4)(i) requires a creditor to apply additional scrutiny to
the value of properties securing HPMLs when they are 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 Sec.
1026.35(c)(4)(i), is to discourage fraudulent property ``flipping,'' 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 properties at inflated values can
be financially disadvantaged if, for example, they incur mortgage debt
that exceeds the value of their dwelling at the time of the
acquisition. 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. Section 1026.35(c)(4)(i) requires an additional
appraisal analyzing the property's resale price to ensure that the
increased sales price is appropriate.
---------------------------------------------------------------------------

\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.
---------------------------------------------------------------------------

In the proposal, the Agencies noted that this approach is generally
consistent with rules 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; 77 FR
71099, Nov. 29, 2012 (FHA Anti-Flipping Rules, or FHA Rules). In
general, under the FHA Anti-Flipping Rules, properties that have been
resold within 90 days are ineligible as security for FHA-insured
mortgage financing. See 24 CFR Sec. 237a(b)(2). Properties that have
been resold 91 to 180 days from the seller's acquisition date are
generally ineligible as security for FHA-insured mortgage financing if
the sales price exceeds the seller's price by 100 percent. To obtain
FHA insurance in this case, HUD requires additional documentation that
must include an additional appraisal. See 24 CFR 237a(b)(3).
However, under temporary rules in effect until December 31, 2013,
that waive the existing HUD anti-flipping regulations during the first
90-day period described above, FHA insurance may be obtained for a
mortgage secured by a property resold within 90 days if certain
conditions are met.\50\ Among these conditions is a requirement for
additional documentation if the sales price exceeds the seller's
acquisition cost by more than 20 percent, including ``a second
appraisal and/or supporting documentation'' verifying that the seller
completed legitimate renovation, repair and rehabilitation work on the
property to justify the price increase.\51\
---------------------------------------------------------------------------

\50\ 77 FR 71099, 71100 (Nov. 29, 2012). The waiver rules were
first issued in May 2010 and waived the existing regulations through
December 31, 2011. 75 FR 38633 (May 21, 2010). The waiver was
subsequently extended through December 31, 2012. 76 FR 81363 (Dec.
28, 2011).
\51\ 77 FR 71099, 71100-71101 (Nov. 29, 2012).
---------------------------------------------------------------------------

Use of the term ``additional appraisal'' rather than ``second
appraisal.'' The Agencies are adopting use of the term ``additional
appraisal'' rather than ``second appraisal'' throughout the final rule
and commentary, as proposed. The Agencies are concerned that the term
``second'' may imply that the additional appraisal must be later in
time than the first appraisal, when in some cases creditors might wish
to order both appraisals

[[Page 10388]]

simultaneously. In addition, creditors might not be able to identify
easily which of the two appraisals 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). 15 U.S.C.
1639h(b)(2)(B) (implemented at Sec. 1026.35(c)(4)(v), discussed in the
section-by-section analysis of that provision, below). Public
commenters supported use of the term ``additional appraisal,'' and the
Agencies do not believe that this term changes the substantive
requirements of the statute.
Regarding concerns expressed by commenters about which appraisal to
use for the credit decision when the two appraisals show different
values, the Agencies acknowledge that the introduction of a second
appraisal will sometimes place creditors in the position of exercising
judgment as to which appraisal reflects the more robust analysis and
opinion of property value. The Agencies recognize that creditors
ordering two appraisals from different certified or licensed appraisers
may likely receive appraisals providing different opinions. The
Agencies decline to provide additional guidance on this matter in the
final rule, however, because other rules and regulatory guidance
address the issue and are more appropriate vehicles for this purpose.
TILA section 129H does not require that the creditor use any particular
appraisal, and the Agencies believe that a creditor should retain the
discretion to select the most reliable valuation, consistent with
applicable safety and soundness obligations and prudential regulatory
guidance. 15 U.S.C. 1639h.
In particular, the Agencies noted in the proposal that TILA's
valuation independence rules permit a creditor to obtain multiple
valuations for the consumer's principal dwelling to select the most
reliable valuation.\52\ 12 CFR 1026.42(c)(3)(iv). The Interagency
Appraisal and Evaluation Guidelines also acknowledge that an
institution may find it necessary to obtain another appraisal or
evaluation of a property. In that case, the Guidelines affirm that the
creditor is ``expected to adhere to a policy of selecting the most
credible appraisal or evaluation, rather than the appraisal or
valuation that states the highest [or lowest] value.'' \53\
---------------------------------------------------------------------------

\52\ 75 FR 66554, 66561 (Oct. 28, 2010) (emphasis added).
\53\ 75 FR 77450, 77458 (Dec. 10, 2010). The Guidelines refer
creditors to the section of the Guidelines on ``Reviewing Appraisals
and Evaluations'' for information on determining and documenting the
credibility of an appraisal or evaluation. See id. at 77458, 77461-
77463.
---------------------------------------------------------------------------

Reliance on appraisal for seller's purchase of the property. In
comment 35(c)(4)(i)-1, the Agencies are adopting without change a
proposed comment clarifying 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 the ``additional'' appraisal requirement. 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. As noted, the one
commenter who weighed in on this issue supported the Agencies'
approach.
Section 1026.35(c)(4)(i) is consistent with the proposal in
requiring the creditor to obtain the additional appraisal before
consummating the HPML. TILA section 129H(b)(2) does not specifically
require that the additional appraisal be obtained prior to consummation
of the ``higher-risk mortgage,'' but the Agencies believe that this
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).
Section 1026.35(c)(4)(i) is consistent with the proposal in several
other respects as well. First, the statute requires an additional
appraisal ``if the purpose of a higher-risk mortgage loan is to finance
the purchase or acquisition of the mortgaged property,'' among other
conditions. TILA section 129H(b)(2)(A), 15 U.S.C. 1639h(b)(2)(A)
(emphasis added). Accordingly, Sec. 1026.35(c)(4)(i) requires an
additional appraisal only when the purpose of the HPML is to finance
the acquisition of the consumer's principal dwelling--the requirement
does not apply to refinance loans.
In addition, the final rule replaces the statutory term ``mortgaged
property'' with the term ``principal dwelling.'' 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,'' most notably in the existing definition of
HPML. See existing Sec. 1026.35(a)(1) and the section-by-section
analysis of revised Sec. 1026.35(a)(1). 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. See Sec. 1026.2(a)(24)
and comment 2(a)(24)-3. See also 12 CFR 34.202, comment 1 (OCC) and 12
CFR 226.43(a)(3), comment 1 (Board) (cross-referencing Regulation Z,
which contains the Bureau's definition of ``principal dwelling,'' and
accompanying Official Staff Interpretations of Regulation Z for
purposes of this rule). When referring to the date on which the seller
acquired the ``property'' in Sec. 1026.35(c)(4)(i)(A) and (B),
however, the Agencies use the more general 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.

Criteria for Whether an Additional Appraisal Is Required--Acquisition
Dates

As noted, the final rule requires a creditor to obtain two
appraisals in two sets of circumstances: first, the seller is reselling
the property within 90 days of acquiring it and the resale price
exceeds the seller's acquisition price by more than 10 percent (new
Sec. 1026.35(c)(4)(i)(A)); and second, the seller is reselling the
property within 91 to 180 days of acquiring it and the resale price
exceeds the seller's acquisition price by more than 20 percent (new
Sec. 1026.35(c)(4)(i)(B)). To determine whether either set of
circumstances exists and which price threshold applies, a creditor must
determine the date on which the seller acquired the property and the
date on which the consumer became obligated to acquire the property
from the seller. These aspects of the final rule are discussed below.
Public Comments on the Proposal
The Agencies asked for public comment on several questions
regarding the first of these conditions, Sec. 1026.35(c)(4)(i)(A).
Treatment of non-purchase acquisitions and use of the term
``acquisition.'' The proposal generally used the term ``acquisition''
instead of the longer statutory phrase ``purchase or acquisition'' to
refer to the events in which the seller purchased or acquired the
dwelling at issue. The Agencies proposed to use the sole term
``acquisition'' because this term, as clarified in a proposed comment
adopted as comment 35(c)(4)-1, includes acquisition of legal title to
the property, including by purchase. In the proposal, the Agencies
interpreted ``acquisition'' broadly in order to encompass the broad
statutory phrase ``purchase or acquisition.'' Thus, as proposed, the

[[Page 10389]]

additional appraisal rule would apply to a consumer's purchase of a
property previously acquired by the seller through a non-purchase
acquisition, such as inheritance, divorce, or gift.
In the proposal, the Agencies asked for comment on whether an
additional appraisal should be required for consumer acquisitions where
the property had been conveyed to the seller in a non-purchase
transaction and where, arguably in the consumer's purchase, that seller
may not have the same motive to earn a quick, unreasonable profit on a
short-term investment. The Agencies also requested comment on how a
creditor should calculate the seller's ``acquisition price'' in non-
purchase scenarios. The Agencies offered the example of a case where
the seller acquired the property by inheritance. In such a case, the
seller's acquisition price could be considered ``zero,'' which could
make a subsequent sale offered at any price within 180 days subject to
the additional appraisal requirement.
The Agencies also invited comment on whether the term
``acquisition'' might 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. For
example, if the consumer acquired the property by means other than a
purchase, he or she likely would not seek a mortgage loan to
``finance'' the acquisition.
Two commenters, national trade associations for appraisers, stated
that they had no objections to excluding non-purchase transactions by
either the seller or consumer from the additional appraisal
requirement. A third commenter, a bank, affirmatively supported an
exemption for non-purchase acquisitions, suggesting that such
transactions are less likely to involve fraudulent flipping schemes.
The Agencies also asked for comment on whether the term
``acquisition'' is the appropriate term to use in connection with both
the seller and mortgage consumer. In addition, the Agencies asked
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. As noted in the proposal, the Agencies do not expect that
fraudulent property flipping schemes would likely occur in this
context. The Agencies also noted 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 comments 2(a)(24)-5(i) and -5(ii); see also section-by-
section analysis of Sec. 1026.35(a)(1) (defining HPML and discussing
the distinctions between the term ``residential mortgage transaction''
in Regulation Z and ``residential mortgage loan'' in the Dodd-Frank
Act).
The Agencies received three comments as well on the appropriateness
of using term ``acquisition'' rather than another term such as
``purchase.'' Two commenters endorsed use of this term, without
elaboration. A third commenter, a mortgage lending corporation,
objected to the term ``acquisition'' and proposed the phrase ``purchase
acquisition'' instead. The commenter suggested that consumers who
acquire property through inheritance, divorce or other non-purchase
means frequently want to sell the property quickly; therefore,
application of the additional appraisal requirement is not appropriate
and will needlessly delay such transactions.
The Agencies received three comments as well on the question of
whether the additional appraisal should apply to partial interests in a
transaction. One commenter, a regional trade association for credit
unions, supported an exemption to cover a situation in which a consumer
holds a partial interest in property and is acquiring the remainder of
the interest from the seller. In support of its position, the commenter
cited the commentary to Regulation Z mentioned in the proposal
(comments 2(a)(24)-5(i) and -5(ii)), which clarifies that a
``residential mortgage transaction'' does not include transactions
involving the consumer's principal dwelling when the consumer has a
partial interest in the dwelling, such as when one joint owner
purchases the other's joint interest. The other two commenters,
national trade associations for appraisers, opposed exemptions for
partial interest transactions, given what the commenters described as
the inherent riskiness of higher-priced loans.
Discussion
Use of the term ``acquisition.'' Consistent with the proposal, the
Agencies have decided to adopt the proposal to use the term
``acquisition'' in place of the statutory phrase ``purchase or
acquisition'' to refer to acquisitions by both the seller and the
consumer. The Agencies are also adopting a proposed comment clarifying
that, throughout Sec. 1026.35(c)(4), the terms ``acquisition'' and
``acquire'' refer to the acquisition of legal title to the property
pursuant to applicable State law, including by purchase. See comment
35(c)(4)-1. However, the Agencies are adopting a separate exemption
from the additional appraisal requirement for HPMLs that finance the
purchase of a property ``[f]rom a person who acquired title to the
property by inheritance or pursuant to a court order of dissolution of
marriage, civil union, or domestic partnership, or of partition of
joint or marital assets to which the seller was a party.'' This
exemption and other exemptions from the additional appraisal
requirement are discussed in more detail in the section-by-section
analysis of Sec. 1026.35(c)(4)(vii), below.
``Acquisition'' by the seller. The final rule generally applies to
transactions in which the seller had acquired the property without
purchasing it, other than through divorce or inheritance. For example,
the Agencies are concerned that fraudulent flipping can easily be
accomplished when one party purchases a property and quickly deeds the
property to another party (for example, as a gift), who then sells the
property to an HPML consumer at an inflated price. If the final rule
applied only to instances in which the seller had purchased the
property, the consumer's transaction would not trigger the added
protections of the requirement to obtain two appraisals. By retaining
the broader terms ``acquisition'' and ``acquire,'' rather than a
narrower term such as ``purchase,'' the final rule ensures that two
appraisals will be required to confirm the property's true value. See
section-by-section analysis of Sec. 1026.35(c)(4)(vi)(B) (explaining
that, when a price paid by the seller for the property cannot be
determined, two appraisals are required before an HPML can be
extended). The different treatment by the rule for transactions
involving seller acquisitions through inheritance or divorce are
explained more fully in the section-by-section analysis of Sec.
1026.35(c)(4)(vii), below.
``Acquisition'' by the consumer. The Agencies believe that the
terms ``acquisition'' or ``acquire'' to describe the consumer's
acquisition of the property as well is desirable for consistency
throughout the rule. The Agencies do not anticipate that the rule would
apply where the consumer acquires the property without purchasing it.
As a practical matter, if the consumer acquired the property by means
other than a purchase, the rule would not come into play because he or
she likely would not seek a mortgage to

[[Page 10390]]

``finance'' the acquisition. Moreover, if the consumer paid a nominal
or no amount to acquire the property, the additional appraisal
requirement would not likely be triggered--in this case, the consumer's
price would rarely if ever exceed the seller's acquisition price, which
is a condition for triggering the requirement for two appraisals. See
Sec. 1026.35(c)(4)(i)(B). In terms of whether and how the rule
applies, however, the outcome of these scenarios would not change based
on use of the term ``acquisition'' as opposed to a more precise term
such as ``purchase.''
Seller. As proposed, the final rule uses the term ``seller''
throughout Sec. 1026.35(c)(4) to refer to the party conveying the
property to the consumer. The Agencies use this term to conform to the
reference to ``sale price'' in TILA section 129H(b)(2)(A). 15 U.S.C.
1639h(b)(2)(A). Also, as discussed above, the Agencies do not foresee
instances in which the rule would apply if the consumer acquired the
property other than by a purchase transaction.
Agreement. The final rule follows the proposal in referring to the
consumer's ``agreement'' to acquire the property throughout Sec.
1026.35(c)(4). 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. 15 U.S.C. 1639h(b)(2)(A). The
commenters did not raise any objections to the use of this term as
proposed.
Acquisition timeframe. As described above, TILA section
129H(b)(2)(A) requires creditors to obtain an additional appraisal for
``higher-risk mortgages'' that will finance the consumer's purchase or
acquisition if the following two circumstances are present: (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 current sale price of the
property is higher than the price the seller paid for the property. 15
U.S.C. 1639h(b)(2)(A).
For a creditor to determine whether the first condition is met, the
creditor has to compare two dates: the date of the consumer's
acquisition and the date of the seller's acquisition. However, the
statute does not provide specific guidance regarding the dates that a
creditor must use to perform this comparison. TILA section
129H(b)(2)(A), 15 U.S.C. 1639h(b)(2)(A). To implement this provision,
the Agencies proposed 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. A proposed comment provided 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.
The Agencies did not receive public comment on these aspects of the
proposal and adopt them without change in Sec. 1026.35(c)(4)(i)(A) and
(B), and comment 35(c)(4)(i)(A)-2.
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, Sec. 1026.35(c)(4)(i)(A) and (B) refer to the date on
which the seller ``acquired'' the property. Comment 35(c)(4)(i)-3,
adopted from a proposed comment without change, 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 comprise
acquisition of legal title to the property, including by purchase.
To assist creditors in identifying the date on which the seller
acquired title to the property, comment 35(c)(4)(i)-3 is intended to
clarify 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 provided in Sec.
1026.35(c)(4)(vi)(A) and explained in comments 35(c)(4)(vi)(A)-1
through -3, 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. 1026.35(c)(4)(vi)(A).
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'' consumer purchases or acquires the
mortgaged property, but does not provide detail on how to define the
consumer's acquisition. TILA section 129H(b)(2)(A), 15 U.S.C.
1639h(b)(2)(A). The Agencies proposed to interpret this provision to
refer to ``the date of the consumer's agreement to acquire the
property.'' A proposed comment explained that, in determining this
date, the creditor should use a copy of the agreement provided by the
consumer to the creditor, and use the date on which the consumer and
the seller signed the agreement. If the consumer and seller signed on
different dates, the creditor should use the date on which the last
party signed the agreement.
This comment is incorporated into the final rule without change as
comment 35(c)(4)(i)-4. As explained in the proposal, 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 HPML, 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. 1026.35(c), 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 and the seller delivers the deed to the consumer in
exchange for the proceeds from the mortgage loan. 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 date certain by which the loan would be consummated and
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. 1026.35(c)(4)(i).
Comment 35(c)(4)(i)-4 also clarifies that the date on which 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

[[Page 10391]]

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 signatures and the date on
the agreement, avoids operational and other potential issues because
the Agencies expect that this date would be apparent on its face from
the signature dates on the acquisition agreement.

Criteria for Whether an Additional Appraisal Is Required--Acquisition
Prices

TILA section 129H(b)(2)(A) requires creditors to obtain an
additional appraisal if the seller had 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 had
acquired the property. Accordingly, the Agencies proposed to implement
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 the 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 had
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.\54\
---------------------------------------------------------------------------

\54\ The Agencies proposed a trigger for the additional
appraisal requirement, adopted and revised in new Sec.
1026.35(c)(4)(i)(B), as follows: ``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.'' 77 FR 54722, 54772 (Sept. 5,
2012).
---------------------------------------------------------------------------

As noted above, the Agencies are adopting the general approach
proposed of setting a particular price increase threshold that triggers
the additional appraisal requirement, and are specifying the price
increase thresholds as follows: A creditor is required to obtain two
appraisals in two sets of circumstances--first, when the seller is
reselling the property within 90 days of acquiring it at a price that
exceeds the seller's acquisition price by more than 10 percent (new
Sec. 1026.35(c)(4)(i)(A)); and second, when the seller is reselling
the property within 91 to 180 days of acquiring it at a price that
exceeds the seller's acquisition price by more than 20 percent (new
Sec. 1026.35(c)(4)(i)(B)). This aspect of the final rule and related
comments are discussed in greater detail 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). The proposal also
referred to the ``price'' at which the seller acquired the property; a
proposed comment clarified that the seller's acquisition price refers
to the amount paid by the seller to acquire the property. The proposed
comment also explained that the price at which the seller acquired the
property does not include the cost of financing the property. This
comment was intended to clarify that the creditor should consider only
the price of the property, not the total cost of financing the
property.
The Agencies are adopting these aspects of the proposal without
substantive change in Sec. 1026.35(c)(4)(i)(A) and (B), and comment
35(c)(4)(i)-5.

Public Comments on the Proposal

The Agencies asked for comment on whether additional clarification
was needed regarding how a creditor should identify the price at which
the seller acquired the property. In particular, the Agencies also
requested 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 asked for public input on
whether guidance may be needed for determining the sales price of a
property for purposes of determining whether an additional appraisal is
required. The Agencies also asked for comment on any operational
challenges that might arise for creditors in determining purchase
prices for homes purchased as part of a bulk sale transaction, as well
as for 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.
An appraiser trade association stated that an appraiser's expertise
is important in valuing properties that are part of a bulk sale. No
other commenters commented on this question. In view of the value that
appraisers can add in valuing properties as part of a bulk sale, and in
the absence of requests or suggestions for additional guidance, the
Agencies are adopting the rule as proposed with no additional
provisions or clarifications regarding the purchase price of properties
purchased in bulk sales.
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). The proposal referred 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.'' The
final rule adopts this language in Sec. 1026.35(c)(4)(i)(A) and (B).
The final rule also adopts a proposed comment clarifying 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.
See comment 35(c)(4)(i)-6. In keeping with the proposal, comment
35(c)(4)(i)-6 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 comment refers to comment 35(c)(4)(i)-4 (providing
guidance on the ``date of the consumer's agreement to acquire the
property,'' as discussed above). The intention of this cross-reference
is to indicate that the document on which the creditor may rely to
determine the consumer's acquisition price will be the same document on
which a creditor may rely to determine the date of the consumer's
agreement to acquire the property. Also tracking the proposal, comment
35(c)(4)(i)-6 further 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 apparent from the
consumer's acquisition agreement.

[[Page 10392]]

Public Comments on the Proposal
The Agencies requested 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. The Agencies did not receive comments on this issue, and is
adopting the proposal's use of the phrase ``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.''

35(c)(4)(i)(A) and (B)

TILA section 129H(b)(2)(A) provides that an additional appraisal is
required when the price at which the seller had purchased or acquired
the property was ``lower'' than the current sale price and the resale
occurs within 180 days of the seller's acquisition. 15 U.S.C.
1639h(b)(2)(A). TILA does not define the term ``lower.'' Thus, as
written, the statute would require an additional appraisal for any
price increase above the seller's acquisition price, if the resale
occurred within 180 days of the seller's acquisition. As discussed in
more detail below, 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 any increase in
price. Accordingly, the Agencies proposed an exemption to the
additional appraisal requirement for some threshold increase in the
price. As described above, the proposal contained a placeholder for the
amount by which the resale price would have to have exceeded the price
at which the seller had acquired the property.
In Sec. 1026.35(c)(4)(i)(A) and (B), the Agencies are adopting a
tiered approach to the proposed exemption for certain price increases.
Specifically:
Section 1026.35(c)(4)(i)(A) exempts from the additional
appraisal requirement HPMLs that finance the consumer's purchase of a
property within 90 days of the seller's acquisition of the property at
a price that does not exceed 10 percent of the seller's acquisition
purchase price.
Section 1026.35(c)(4)(i)(B), exempts from the additional
appraisal requirement HPMLs that finance the consumer's purchase of a
property within 91 to 180 days of the seller's acquisition of the
property at a price that does not exceed 20 percent of the seller's
acquisition price.
Public Comments on the Proposal
The Agencies solicited comment on potential exemptions for mortgage
transactions that have a sale price that exceeds the seller's purchase
price by a relatively small amount or by a certain percentage. The
Agencies requested comment on whether a fixed dollar amount, a fixed
percentage, or some alternate approach should be used to determine an
exempt price increase, and what specific price threshold would be
appropriate.
The Agencies received a large number of comments on these
questions. The commenters generally endorsed the proposed exemption,
based either on a dollar amount, or a percentage of the seller's
acquisition price. Four commenters (a bank holding company, two
national trade associations for mortgage lending companies and consumer
and small-business lenders, and a large mortgage lending company)
suggested that a 10 percent price increase exception would be
appropriate. One of these commenters argued that 10 percent is a
customary standard in the industry because it represents typical
realtor and other closing costs.
A national trade association for community banks suggested a
minimum of 15 percent. Two commenters, a regional trade association for
credit unions and a community bank, argued that the exception should be
at least 25 percent. One large national bank suggested a threshold of 5
percent. Another commenter, a credit union, suggested that an exemption
be for the greater of three percent or a $10,000 increase in the price.
A GSE suggested that the Agencies exempt from the second appraisal
requirement sales that are subject to an ``anti-flipping'' clause. When
an investor purchases a property in short sales from the GSEs, for
example, certain clauses in the sales contract prohibit the investor
from reselling that property for the first 30 days after the short sale
purchase. The investor is then prohibited from reselling the property
without justification and permission from the GSE for the next 31 to 90
days for a price that exceeds the seller's price by more than 20
percent.\55\ Identical resale restrictions apply to investors
purchasing property through a short sale under the Home Affordable
Foreclosure Alternatives (HAFA) program.\56\ Some commenters suggested
that the Agencies incorporate FHA's regime as the standard for the
higher-risk mortgage rule.
---------------------------------------------------------------------------

\55\ See Fannie Mae Single Family Servicing Guide Announcement
SVC 2012-19, page 13; and Freddie Mac Single Family Seller Servicer
Guide, Chapter B65.40(i).
\56\ See U.S. Dept. of Treasury, Supplemental Directive 12-07
(Nov. 1, 2012).
---------------------------------------------------------------------------

Discussion
As noted, the Agencies are adopting a tiered approach to the
proposed exemption from the additional appraisal requirement of TILA
section Sec. 1026.35(c)(4)(i) for HPMLs that finance the resale of
properties that do not exceed certain price increases from the prior
sale. Specifically, Sec. 1026.35(c)(4)(i)(A) exempts from the
additional appraisal requirement HPMLs that finance the consumer's
purchase of a property within 90 days of the seller's acquisition of
the property where the resale price does not exceed 10 percent of the
seller's acquisition price. Section 1026.35(c)(4)(i)(B), exempts from
the additional appraisal requirement HPMLs that finance the consumer's
purchase of a property within 91 to 180 days of the seller's
acquisition of the property where the resale price does not exceed 20
percent of the seller's acquisition price. In developing this approach,
the Agencies reviewed public comments as well as other government
standards and rules designed to curb harmful flipping in residential
mortgage transactions. These included short sale reselling restrictions
imposed by Fannie Mae, Freddie Mac and the U.S. Treasury
Department,\57\ as well as HUD's Anti-Flipping Rules--both HUD's
existing regulations (24 CFR 203.37a(b)) and HUD rules currently in
effect that temporarily ``waive'' existing regulations and replace them
with other standards.\58\
---------------------------------------------------------------------------

\57\ See Fannie Mae Single Family Servicing Guide Announcement
SVC 2012-19, page 13; and Freddie Mac Single Family Seller Servicer
Guide, Chapter B65.40(i); U.S. Dept. of Treasury, Supplemental
Directive 12-07 (Nov. 1, 2012).
\58\ See, e.g., 77 FR 71099 (Nov. 29, 2012).
---------------------------------------------------------------------------

The Agencies believe that short sale reselling restrictions of the
GSEs and Treasury are instructive. Like these rules, the final rule
incorporates a bifurcated approach to addressing fraudulent flipping,
based on the number of days between the seller's purchase and the
consumer's purchase.\59\ The Agencies are not adopting an exemption for
HPMLs financing sales subject to an anti-flipping clause, however. The
Agencies

[[Page 10393]]

are concerned that such an exemption would not be sufficiently
protective of the HPML consumers the statute was intended to protect.
If such an exemption covered only loans subject to GSE and Treasury
anti-flipping clauses, HPML consumers purchasing homes from investors
who acquired them from GSEs or Treasury would not receive the
protection of the additional appraisal requirement. Meanwhile, HPML
consumers purchasing homes from investors who acquired them from other
creditors or investors would receive the protection of the additional
appraisal requirement. It is unclear why HPML consumers in the latter
case should receive these protections and consumers in the former case
should not. In addition, the purpose of the additional appraisal
requirement in the final rule is to ensure a second opinion on the
value of a purchased home; the purpose of anti-flipping clauses
generally is to restrict the transaction entirely. Thus, these clauses
may be instructive, but should not necessarily determine who receives
the protection of this rule.
---------------------------------------------------------------------------

\59\ As noted earlier, the GSE and Treasury short sale rules ban
resales outright for 30 days after the short sale and also ban them
if the sales price increases by more than 20 percent for resales in
the next 31 to 90 days. See Fannie Mae Single Family Servicing Guide
Announcement SVC 2012-19, page 13; and Freddie Mac Single Family
Seller Servicer Guide, Chapter B65.40(i); U.S. Dept. of Treasury,
Supplemental Directive 12-07 (Nov. 1, 2012).
---------------------------------------------------------------------------

If an exemption for HPMLs financing sales subject to an anti-
flipping clause covered loans subject to anti-flipping clauses more
generally, the Agencies would be concerned about more HPML consumers
not receiving the protections of the statute. Moreover, if creditors
were concerned that the additional appraisal requirement might impede
disposal of their distressed properties, they could devise ``anti-
flipping'' clauses that would impose only minimal restrictions on the
resale of those properties, simply to take advantage of the exemption.
The Agencies recognize the importance to creditors and investors of
being able to sell distressed properties in a timely manner to decrease
losses. The Agencies further understand that restrictions on the resale
of distressed properties purchased from creditors and investors can
affect how quickly creditors and investors can dispose of these
properties, and that creditors and investors design resale restrictions
accordingly. However, the appraisal requirement under this final rule
is not a restriction on resale by the seller; it is a requirement for
additional documentation regarding the value of homes purchased by a
certain subset of consumers who finance the transaction with an HPML.
The Agencies view the FHA Anti-Flipping Rules as also instructive
for the final rule. In the preamble to its original Anti-Flipping Final
Rule and waiver notices after it, HUD states that ``fraudulent property
flipping involves the rapid re-sale, often within days, of a recently
acquired property.'' \60\ HUD also states in its original final rule
that ``resales executed within 90 days imply pre-arranged transactions
that often prove to be among the most egregious examples of predatory
lending.'' \61\ Thus, under existing HUD regulations, FHA insurance is
not available for loans that finance the purchase of a property within
90 days of the previous sale. See 24 CFR 203.37a(b)(2). HUD's rule is
based on the conclusion that 90 days is a reasonable waiting period to
ensure that legitimate rehabilitation and repairs of a property have
occurred.\62\
---------------------------------------------------------------------------

\60\ See, e.g., 68 FR 23370 (May 1, 2003); 77 FR 71099 (Nov. 29,
2012).
\61\ 68 FR 23370, 23372 (May 1, 2003).
\62\ See id.
---------------------------------------------------------------------------

HUD has also stated that a 180-day ban on eligibility for FHA
insurance would have provided a disincentive to legitimate contractors
who improve houses--thus increasing the stock of affordable
housing.\63\ Therefore, for transactions involving resales in the 91-
180 day period, HUD will insure resales at any price, but requires
additional documentation, which must include a second appraisal, if the
price increase exceeds the seller's acquisition price by 100 percent.
See 24 CFR 203.37a(b)(3).
---------------------------------------------------------------------------

\63\ See id.
---------------------------------------------------------------------------

The Agencies believe that HUD's basic approach--the use of more
restrictive conditions for 90 days, followed by somewhat lesser
restrictions for the next 90 days--has merit as an approach to
combatting the kind of flipping with which Congress seemed
concerned.\64\ The Agencies recognize that, since issuing the
regulation in 24 CFR 203.37a(b)(3), HUD has issued rules that
temporarily replace its existing regulations, with the goal of
encouraging investors to rehabilitate homes and thus help ``stabilize
real estate prices as well as neighborhoods and communities where
foreclosure activity has been high.'' \65\ Under these temporary rules,
FHA insurance is now available for loans that finance property resales
within 90 days of the previous sale, as long as certain conditions are
met. One condition is that ``a second appraisal and/or supporting
documentation'' is required if the sales price exceeds the seller's
acquisition price by more than 20 percent.\66\ However, the Agencies
recognize that these rules are designed to address a temporary market
condition; the Agencies believe that the HPML appraisal rules must be
designed to address property flipping beyond a temporary market
condition.
---------------------------------------------------------------------------

\64\ 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. See also 71 FR
33138, 33141-33142 (June 7, 2006); HUD, Mortgagee Letter 2006-14
(June 8, 2006) (``FHA's policy prohibiting property flipping
eliminates the most egregious examples of predatory flips of
properties within the FHA mortgage insurance programs.'').
\65\ 77 FR 71099 (Nov. 29, 2012).
\66\ See id. at 71100. A property inspection is also required.
See id. at 71100-71101. For loans financing resales within 90 days
where the sales price does not exceed the seller's acquisition price
by more than 20 percent, FHA insurance is conditioned on the
transactions being ``arms-length, with no identity of interest
between the buyer and seller or other parties participating in the
sales transaction.'' Id. at 71100. HUD provides several examples of
ways that lenders can ensure that there is no inappropriate
collusion or agreement between parties. Id.
---------------------------------------------------------------------------

At the same time, the Agencies believe that the approach adopted
with respect to the additional appraisal requirement resembles the FHA
waiver rules in some important ways that mitigate concerns about
chilling investment. Like the FHA waiver rules, the final rule does not
prohibit HPML financing of resales within 90 days (by contrast, the
existing FHA regulations ban FHA insurance on resales within 90 days).
Rather, the final rule imposes an additional condition on the
transaction--namely, that the creditor must obtain a second appraisal
for the creditor's use in considering the loan application and, more
specifically, the collateral value of the dwelling that will secure the
mortgage. The Agencies believe that this protection is consistent with
congressional intent to provide additional protections for borrowers of
loans considered by Congress to pose higher risks to those borrowers.
Consistent with the views expressed by some commenters, however, the
Agencies have determined that consumer protection is not served by
requiring a second appraisal in circumstances where the increase
generally is not indicative of a seller attempting to profit on a flip.
The Agencies believe it is reasonable to expect a seller, faced with
circumstances dictating resale of a dwelling that the seller very
recently acquired, to seek to recoup the seller's transaction costs on
the purchase and resale, in addition to the seller's acquisition price.
These costs may include fees from the seller's acquisition, such as
mortgage application fees, origination points, escrow and attorney's
fees, transfer taxes and recording fees, title search charges and title
insurance premiums, as well as fees incurred in the resale, such as
real estate commissions, seller-

[[Page 10394]]

paid points, and other sales concessions on the resale. These costs
will vary to some extent by State and by transaction. However, the
Agencies believe that providing an allowance of 10 percent over the
seller's acquisition price reasonably accommodates these transaction
costs and strikes an appropriate balance with respect to ease of
administration for purposes of the rule.
Regarding HPMLs that occur within 91 to 180 days, the final rule
provides that an additional appraisal is required only if the property
price increased by more than 20 percent of the seller's acquisition
price. See Sec. 1026.35(c)(4)(i)(B). In this way, the final rule
provides a modest additional 10 percent allowance for legitimate
repairs, and builds in a 90-day period in the interest of ensuring
enough time to allow such repairs to be made. At the same time, the
approach preserves added consumer protections in the first 90 days,
when predatory flipping is most likely to occur. The Agencies recognize
that this element of the final rule differs from the FHA Anti-Flipping
Rules, which require additional documentation for a resale from 91 to
180 days only if the price increases by 100 percent of the seller's
acquisition price. However, FHA insurance applies to HPMLs and non-
HPMLs alike, and the Agencies believe that Congress intended special
protections to apply to HPML consumers.
The Agencies believe that requiring an additional appraisal for
HPMLs financing the purchase of a home being resold within a 180-day
period, regardless of the amount of the price increase, could restrict
home sales to HPML consumers, because investors might be less likely to
sell properties to them. The additional appraisal rules could
potentially affect the safety and soundness of creditors holding
properties as a result of foreclosure or deed-in-lieu of foreclosure.
This might arise if potential application of the two-appraisal
requirement makes the properties less desirable for investors to
purchase from financial institutions and rehabilitate for resale, out
of investor concerns about the potential scope of the HPML requirement
as applied to the pool of likely purchasers for their investment
properties. This could create additional losses for creditors holding
these properties. The Agencies do not believe that these potential
negative impacts would be outweighed by consumer protections afforded
by the additional appraisal requirement. The Agencies believe that the
approach adopted by the final rule strikes the appropriate balance
between allowing legitimate resales without undue restrictions and
providing HPML consumers with additional protections from fraudulent
flipping. For these reasons, the Agencies have concluded that the
exemptions from the additional appraisal requirement reflected in Sec.
1026.35(c)(4)(i)(A) and (B) are in the public interest and promote the
safety and soundness of creditors.

35(c)(4)(ii) Different Certified or Licensed Appraisers

Under the proposed rule, the two appraisals required under the
proposed paragraph now adopted as Sec. 1026.35(c)(4)(i) could not be
performed by the same certified or licensed appraiser. This proposal
was consistent with TILA section 129H(b)(2)(A), which expressly
requires that the additional appraisal must be performed by a
``different'' certified or licensed appraiser than the appraiser who
performed the other appraisal for the ``higher-risk mortgage''
transaction. 15 U.S.C. 1639h(b)(2)(A).
As discussed in the proposal, during informal outreach conducted by
the Agencies, some participants suggested that the Agencies impose
additional requirements regarding the appraiser performing the second
appraisal 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 value
assigned by the first appraiser.
The Agencies explained that they did not propose any additional
conditions on what it means to obtain an appraisal from a ``different''
certified or licensed appraiser because the Agencies expect that
existing valuation independence requirements would be sufficient to
ensure that the second appraiser performs an independent valuation.
Rules to ensure that appraisers exercise their independent judgment in
conducting appraisals exist under TILA (Sec. 1026.42), as well as
FIRREA title XI.\67\ In addition, the USPAP Ethics Rule requires that
appraisers ``perform assignments with impartiality, objectivity, and
independence, and without accommodation of personal interests,'' and
includes several examples of forbidden conduct related to this
rule.\68\ However, the Agencies requested comment on whether the rule
should include additional conditions on what it means for the
additional appraisal to be performed by a ``different'' appraiser.
Specifically, the Agencies sought comment on whether the final rule
should prohibit creditors from obtaining two appraisals by appraisers
employed by the same appraisal firm, or who received the assignments
from same appraisal management company (AMC).
---------------------------------------------------------------------------

\67\ See OCC: 12 CFR 34.45; Board: 12 CFR 225.65; FDIC: 12 CFR
323.5; NCUA: 12 CFR 722.5.
\68\ Appraisal Standards Board, Appraisal Foundation, Uniform
Standards of Professional Appraisal Practice, 2012-2013 Ed., pp. U-7
through U-9.
---------------------------------------------------------------------------

The final rule follows the proposal and the statute in requiring
that the additional appraisal must be performed by a ``different''
certified or licensed appraiser than the appraiser who performed the
other appraisal for the HPML transaction. See Sec. 1026.35(c)(4)(ii).
In the final rule, the Agencies also adopt a new comment clarifying
what it means to obtain an appraisal from a ``different'' certified or
licensed appraiser, discussed below.

Public Comments on the Proposal

The Agencies received approximately 36 comments relating to
requirements that (1) the additional appraisal be performed by a
``different'' certified or licensed appraiser, discussed immediately
below; (2) the additional appraisal include analysis of the sales price
differences between the prior and current home sale transaction (see
section-by-section analysis of Sec. 1026.35(c)(4)(iv), below); and (3)
the creditor may not charge the consumer for the additional appraisal
(see section-by-section analysis of Sec. 1026.35(c)(4)(v), below).
These comments were submitted by banks and bank holding companies,
credit unions, bank and credit union trade associations, and appraisal,
realtor, and mortgage industry trade associations.
Of the commenters addressing the requests for comment on whether
additional conditions should apply regarding the requirement that a
``different'' appraiser perform the additional appraisal, most urged
that the rule allow a creditor to obtain two appraisals from the same
appraisal firm or AMC, provided that they are performed by separate
appraisers. Commenters favoring this approach suggested that allowing a
creditor to use a single appraisal firm or AMC would reduce costs, ease
compliance burdens, and mitigate concerns regarding the availability of
appraisers, particularly in rural or sparsely populated areas. Several
commenters noted that the use of a single appraisal firm or AMC would
not weaken the different appraiser requirement since each appraisal is
subject to USPAP and appraisal independence requirements. One
commenter, however, stated the rule

[[Page 10395]]

should prohibit a creditor from hiring appraisers from the same
valuation firm and, with respect to AMCs, a creditor should be
prohibited from hiring two appraisers through the same AMC if the AMC
is an affiliate of the creditor.
Discussion
Consistent with the proposal, new Sec. 1026.35(c)(4)(ii) provides
that the two appraisals required under Sec. 1026.35(c)(4)(i) may not
be performed by the same certified or licensed appraiser. The Agencies
are also adopting new comment 35(c)(4)(ii)-1, clarifying that the
requirements that a creditor obtain two separate appraisals (Sec.
1026.35(c)(4)(i)), and that each appraisal be conducted by a
``different'' licensed or certified appraiser (Sec.
1026.35(c)(4)(ii)), indicate that the two appraisals must be conducted
independently of each other. The comment explains that, if the two
certified or licensed appraisers are affiliated, such as by being
employed by the same appraisal firm, then whether they have conducted
the appraisal independently of each other must be determined based on
the facts and circumstances of the particular case known to the
creditor.
As discussed in the proposal, the Agencies believe that the
appraisal independence requirements of TILA (implemented at Sec.
1026.42) help ensure that the two appraisals reflect valuation
judgments that are independent of the creditor's loan origination
interests and not biased by an appraiser's personal or business
interest in the property or the transaction. TILA section 129E, 15
U.S.C. 1639e. In addition, FIRREA title XI includes rules to ensure
that appraisers exercise their independent judgment in conducting
appraisals, such as requirements that federally-regulated depositories
separate appraisers from the lending, investment, and collection
functions of the institution, and that the appraiser have ``no direct
or indirect interest, financial or otherwise, in the property.'' \69\
As noted, USPAP's Ethics Rule, which applies to appraisers, also
requires that appraisers ``perform assignments with impartiality,
objectivity, and independence, and without accommodation of personal
interests,'' and includes several examples of prohibited conduct
related to this rule.\70\ As discussed in the section-by-section
analysis of Sec. 1026.35(c)(1)(a), compliance with USPAP is a
condition of being a ``certified or licensed appraiser'' under TILA's
``higher-risk mortgage'' appraisal rules implemented in this final
rule. TILA section 129H(b)(3), 15 U.S.C. 1639h(b)(3); Sec.
1026.35(c)(1)(a).
---------------------------------------------------------------------------

\69\ See OCC: 12 CFR 34.45; Board: 12 CFR 225.65; FDIC: 12 CFR
323.5; and NCUA: 12 CFR 722.5.
\70\ Appraisal Standards Board, Appraisal Foundation, Uniform
Standards of Professional Appraisal Practice, 2012-2013 Ed., pp. U-7
through U-9.
---------------------------------------------------------------------------

Requirements for valuation independence for consumer credit
transactions secured by the consumer's principal dwelling were adopted
under amendments to TILA in the Dodd-Frank Act in 2010 and have been in
effect since April of 2011. See 12 CFR 1026.42; 75 FR 66554 (Oct. 28,
2010), implementing TILA section 129E, 15 U.S.C. 1639e. The
requirements in TILA, which carry civil liability, 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.
Existing appraisal independence requirements expressly prohibit
appraisers, AMCs, or appraisal firms (all providers of settlement
services) from having an interest in the property or transaction or
from causing 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 appraisal. Material misstatements of the value are
also prohibited for these parties, as is having a direct or indirect
interest in the transaction, which prohibits these parties from being
compensated based on the outcome of the transaction.
The Agencies understand that, in light of these rules, a principal
reason that creditors contract with third-party AMCs and appraisal
firms is to ensure that the appraisal function is independent from the
loan origination function, as required by law. In addition, the
creditor remains responsible for compliance with the appraisal
requirements of Sec. 1026.35(c), and both the creditor and the
creditor's third party agent risk liability for violations of TILA's
appraisal independence requirements.
At the same time, the Agencies have concerns about whether the
unbiased appraiser independence will always be fully realized if, for
example, the two appraisals are performed by appraisers employed by the
same company. The Agencies recognize that in some cases, obtaining two
appraisals from different appraisal firms might not be feasible, and
moreover that appraisers working for the same company are cognizant of
their independence, and indeed might not even interact at all. Thus,
the rule is intended to allow flexibility in ordering the two
appraisals from the same entity. However, as underscored in comment
35(c)(4)(ii)-1, in all cases the two appraisers should function
independently of each other to ensure that in fact two separate and
independent judgments of the property value are reflected in the
required appraisals. If the creditor knows of facts or circumstances
about the performance of the additional appraisal by the same firm
indicating that the additional appraisal was not performed
independently, the creditor should refrain from extending credit,
unless the creditor obtains another appraisal.

35(c)(4)(iii) Relationship to General Appraisal Requirements

The proposed rule required that the additional appraisal meet the
requirements of the first appraisal, including 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.
See new Sec. 1026.35(c)(3)(i). The Agencies expressed in the proposal
the belief that this approach best effectuates the purposes of the
statute. TILA section 129H(b)(1) provides that, ``[s]ubject 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

[[Page 10396]]

identified by the seller or the first appraiser were made.
In Sec. 1026.35(c)(4)(iii), the Agencies are adopting the proposed
requirement that, if the conditions requiring an additional appraisal
are present (see new Sec. 1026.35(c)(4)(i)), the creditor must obtain
an additional appraisal that meets the requirements of the first
appraisal, as provided in Sec. 1026.35(c)(3)(i). In response to some
commenters who expressed confusion about whether the creditor could
rely on the safe harbor under Sec. 1026.35(c)(3)(ii) in satisfying the
general appraisal requirements under Sec. 1026.35(c)(3)(i) for the
additional appraisal, the Agencies are adopting a new comment. New
comment 35(c)(4)(iii)-1 clarifies that when a creditor is required to
obtain an additional appraisal under Sec. 1026(c)(4)(i), the creditor
must comply with the requirements of both Sec. 1026.35(c)(3)(i) and
Sec. 1026.35(c)(4)(ii)-(v) for that appraisal. If the creditor meets
the safe harbor criteria in Sec. 1026.35(c)(3)(ii) for the additional
appraisal, the creditor complies with the requirements of Sec.
1026.35(c)(3)(i) for that appraisal.

35(c)(4)(iv) Required Analysis in the Additional Appraisal

The proposed rule required 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. The proposal specified that the changes in market conditions
and improvements made to the property must be analyzed between the date
of the seller's acquisition of the property and the date of the
consumer's agreement to acquire the property. These proposed
requirements are consistent with the statute, which requires 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.''
TILA section 129H(b)(2)(A), 15 U.S.C. 1639h(b)(2)(A).
A proposed comment clarified that guidance on identifying the date
the seller acquired the property could be found in the proposed comment
now adopted as comment 35(c)(4)(i)(A)-3. This comment further stated
that guidance on identifying the date of the consumer's agreement to
acquire the property could be found in the proposed comment adopted as
comment 35(c)(4)(i)(A)-2. The comment also stated that guidance on
identifying the price at which the seller acquired the property could
be found in the proposed comment adopted as comment 35(c)(4)(i)(B)-1
and that guidance on identifying the price the consumer is obligated to
pay to acquire the property could be found in the proposed comment
adopted as comment 35(c)(4)(i)(B)-2.
The Agencies requested comment on these proposed requirements for
the additional appraisal, including the appropriateness of listing the
requirement to analyze the difference in sales prices separately from
the other two analytical requirements.
In Sec. 1026.35(c)(4)(iii) and comment 35(c)(4)(iii)-1, the final
rule adopts the proposed regulation text and comment with only one non-
substantive change: for clarification about the subject of this
subsection of the rule, the title of the subsection has been changed
from ``Requirements for the additional appraisal'' to ``Required
analysis in the additional appraisal.''
Public Comments on the Proposal
Two commenters addressed this issue. Of these, one commenter fully
supported the proposed requirements for the additional appraisal,
noting they are consistent with USPAP. The other commenter, however,
suggested that the additional appraisal should not be required to
include an analysis of the sale price paid by the seller and the
acquisition price as set forth in the borrower's purchase agreement and
improvements made to the property by the seller. The commenter argued
that value should be based solely on the current market value of the
property at the time of the appraisal and sale, of which the first
appraisal should be determinative.
The Agencies also requested comment on the appropriateness of
using, as prices that the additional appraisal must analyze, the terms
``price at which seller acquired property'' and ``price consumer is
obligated to pay to acquire property, as specified in consumer's
agreement to acquire property from seller.'' Further, the Agencies
asked for comment on the appropriateness of using, as the dates the
additional appraisal must analyze in considering changes in market
conditions and improvements to property, the terms ``date seller
acquired property'' and ``date of consumer's agreement to acquire
property.'' No comments were received on this issue.
Discussion
After consideration of public comments, the Agencies believe that
the proposal is appropriate to adopt without substantive change, as
discussed above. Regarding the comment that the additional appraisal
should not include an analysis of the property price increase between
the seller's price and the consumer's price, but that market value as
reflected in the first appraisal should be determinative, the Agencies
point out that the analysis in the additional appraisal required under
new Sec. 1026.35(c)(4)(iii) is mandated by statute. Moreover, the
Agencies believe that the intent of these requirements is to ensure
that creditor, in considering the value of the collateral in connection
with its lending decision, is presented with information focused
specifically on factors that reasonably increase collateral value in a
relatively short period, such as market changes and property
improvements. These statutory requirements are designed to serve as a
backstop for consumers against fraud in flipped transactions and thus
are implemented largely unchanged in the final rule.

35(c)(4)(v) No Charge for the Additional Appraisal

Under the proposed rule, if a creditor must obtain a second
appraisal, it may charge the consumer for only one of the appraisals.
The Agencies proposed a comment clarifying that this rule means that
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 proposal was designed to implement TILA section
129H(b)(2)(B), which 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).
The Agencies requested comment on this proposed approach, and
whether there might be particular ways that the creditor could identify
the appraisal for which the consumer may not be charged in cases where,
for example, the appraisals are ordered simultaneously.
The proposed rule and clarifying comment are adopted without change
in Sec. 1026.35(c)(4)(v) and comment 35(c)(4)(v)-1.
Public Comments on the Proposal
Most commenters were strongly opposed to requiring the additional
appraisal to be obtained at the creditor's expense. While a number of
commenters acknowledged that the requirement is statutorily mandated
under Dodd-Frank they were nevertheless critical of it, cautioning that
the requirement would ultimately limit the availability of credit to

[[Page 10397]]

consumers. Many commenters indicated that the cost of an additional
appraisal would make the loan too costly or unprofitable, leading
creditors to cease offering higher-risk mortgage loans to riskier
borrowers. Several commenters argued it is unfair for creditors to bear
the cost responsibility of a second appraisal, where the applicant has
no incentive to go forward with the loan and there is no guarantee that
the loan will be consummated. Commenters urged the Agencies to exercise
their exemption authority to permit creditors to charge consumers a
reasonable fee for the additional appraisal. Alternatively, one comment
letter recommended that creditors be prohibited from charging a direct
cost for the additional appraisal but not an indirect cost.
Discussion
As noted, 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). Consistent with the
statute and the proposal, Sec. 1026.35(c)(4)(v) provides that ``[i]f
the creditor must obtain two appraisals under paragraph (c)(4)(i) of
this section, the creditor may charge the consumer for only one of the
appraisals.'' As clarified in comment 35(c)(4)(v)-1, adopted without
change from the proposal, 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 (now HPML).
The proposed comment adopted in the final rule also explains that
the creditor would be prohibited from charging the consumer for the
``performance of one of the two appraisals required under Sec.
1026.35(c)(4)(i).'' This comment is intended to clarify that the
prohibition on charging the consumer under Sec. 1026.35(b)(4)(v)
applies to the cost of providing the consumer with a copy of the
appraisal, not to charges for the cost of performing the appraisal. As
implemented by new Sec. 1026.35(c)(6)(iv), TILA section 129H(c)
prohibits 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 Sec.
1026.35(c)(6)(iv), below. As in the proposal, the final rule does not
use the statutory term ``second'' appraisal, but instead refers to the
``additional'' appraisal 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. 1026.35(c)(4)(iv).
The Agencies also understand that 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.\71\
---------------------------------------------------------------------------

\71\ See, e.g., USPAP Standards Rule 1-5(b) (requiring an
appraiser to ``analyze all sales of the subject property that
occurred within the three years prior to the effective date of the
appraisal''); USPAP Standards Rule 1-4(a) (stating that ``an
appraiser must analyze such comparable sales data as are available
to indicate a value conclusion'') and USPAP Standards Rule 1-4(f)
(stating that ``when analyzing anticipated public or private
improvements * * * an * * * appraiser must analyze the effect on
value, if any, of such anticipated improvements to the extent they
are reflected in market actions.''
---------------------------------------------------------------------------

In addition, the final rule also tracks the proposal in prohibiting
the creditor from charging ``the consumer,'' rather than, as in the
statute, the ``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.
Regarding commenters' requests that creditors be permitted to
charge the consumer for the additional appraisal, the Agencies point
out that they do not jointly have authority to provide for adjustments
and exceptions to TILA under TILA section 105(a), which belongs to the
Bureau alone. 15 U.S.C. 1604(a). The prohibition on charging the
consumer for the additional appraisal is mandated by statute. The
Agencies have implemented this statutory prohibition with certain
clarifications appropriate to carry out the statutory mandate
consistently with their general authority to interpret the statute--
specifically clarifying in commentary that the creditor is 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. See Sec.
1026.35(c)(4)(v) and comment 35(c)(4)(v)-1.
The Agencies recognize that neither the statute's plain language
nor the final rule precludes a creditor from spreading costs of
additional appraisals over a large number of loans and products. The
Agencies believe, however, that Congress clearly intended to ensure
that the consumer offered an HPML, who may have limited credit options,
not be exclusively affected by having to bear this cost in full. The
Agencies further believe that the final rule is consistent with this
statutory purpose.

35(c)(4)(vi) Creditor's Determination of Prior Sale Date and Price

35(c)(4)(vi)(A) Reasonable Diligence
The Agencies proposed to require that the creditor have exercised
reasonable diligence to support any determination that an additional
appraisal under Sec. 1026.35(c)(4)(i) is not required. (For a
discussion of the factors triggering the requirement, see the section-
by-section analysis of Sec. 1026.35(c)(4)(i)(A) and (B), above.)
Absent an exemption (see Sec. 1026.35(c)(2) and (c)(4)(vii)), an
additional appraisal would always be required for an HPML where the
creditor elected not to conduct reasonable diligence, could not find
the relevant sales price and sales date information, or where the
information found led to conflicting conclusions about whether an
additional appraisal were required. See section-by-section analysis of
Sec. 1026.35(c)(4)(vi)(B), below.
To help creditors meet the proposed reasonable diligence standard,
the Agencies proposed that creditors be able to rely on written source
documents that are generally available in the normal course of
business. Accordingly, a proposed comment clarified 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 provided a list of written source documents,
not intended to be exhaustive, 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 \72\); 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

[[Page 10398]]

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.
---------------------------------------------------------------------------

\72\ 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, 77 FR
51116 (Aug. 23, 2012).
---------------------------------------------------------------------------

The proposed comment contained 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
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 explained 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.
An additional proposed comment explained that reliance on oral
statements of interested parties, such as the consumer, seller, or
mortgage broker, do not constitute reasonable diligence. The Agencies
explained in the proposal that they 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.
In new Sec. 1026.35(c)(4)(vi) and Appendix O, the Agencies are
adopting the reasonable diligence standard and proposed comments
discussed above without material change. Certain technical changes to
the regulation text and corresponding comments have been made for
clarity, without substantive change intended. The Agencies are also
adding a new comment providing guidance on written source documents
that show only an estimated or assumed value for the seller's
acquisition price. Specifically, this new comment clarifies that, if a
written source document describes the seller's acquisition price in a
manner that indicates that the price described is an estimated or
assumed amount and not the actual price, the creditor should look at an
alternative document to satisfy the reasonable diligence standard in
determining the price at which the seller acquired the property. See
comment (c)(4)(vi)(A)-1.
The reasons for the final rule and revisions to the proposal are
discussed in more detail below.
Public Comments on the Proposal
The Agencies requested comment on a number of aspects of the
reasonable diligence standard and accompanying comments. Specifically,
comment was requested on whether the list of written source documents
now adopted in comment 35(c)(4)(vi)-1 would provide reliable
information about a property's sales history and could be relied on in
making the additional appraisal determination, provided they indicate
the seller's acquisition date or the seller's acquisition price.
The Agencies also requested comment on whether a creditor should be
permitted to rely on a signed USPAP-compliant written appraisal
prepared for the transaction to determine the seller's acquisition date
and price, and whether a creditor could take any specific measures to
ensure that the appraiser is reporting prior sales accurately. The
Agencies indicated particular interest in commenters' view on whether,
for creditors that are required to select an independent appraiser,
such as creditors subject to the Federal financial institutions
regulatory 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.
Noting that public documents listed might not include the requisite
information and that there might be risks inherent in allowing reliance
on seller-provided documents, the Agencies also asked whether non-
public information sources are likely to be more easily available or
more accurate than public ones.
Finally, the Agencies requested comment on the proposed
clarification that reliance on oral statements alone would not be
sufficient to satisfy the reasonable diligence standard, specifically
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.
General comments on the list of source documents. Four commenters
responded to general questions about whether the list of source
documents was appropriate. Several of these commenters affirmed the
Agencies' understanding that some jurisdictions have a lengthy delay
between the time a purchase and sale transaction is closed and the
recording of the deed. In those cases, these commenters averred, that
delay would preclude using the deed as a source document since it would
not be available to the creditor for its due diligence.
One commenter suggested that the seller be required to provide the
source documents rather than the creditor having to obtain them from
the public records, although recognizing the possibility that the
seller may intentionally alter the documents to his needs. Appraiser
trade associations concurred with the proposal's ``flexible approach''
to due diligence sources in allowing use of seller-provided documents.
This commenter believed that this approach would mitigate the
possibility that a lack of access to or availability of source
documents would result in a ``chilling effect'' on mortgage lending.
Another commenter noted that the borrower's creditor would have
difficulty obtaining copies of documents from the seller. This
commenter recommended that the rule provide that, where none of the
source documents provides the required information, the creditor may
provide a certified or attested document signed by the parties as
sufficient evidence of ``reasonable diligence.''
Use of the first appraisal in the transaction. All three comments
relating to the question of whether the final rule should allow
creditors to use and rely on the entire contents of USPAP-compliant
appraisals prepared by certified and licensed appraisers supported
allowing this. Nevertheless, commenters noted that oversight of
appraisal services by users and regulators would be necessary, as would
vigorous enforcement if appraisers violate the requirements. One
commenter recommended that creditors use data from multiple listing
services captured by the appraisal to obtain prior sales price
information. That commenter also requested clarification in the rule
that where multiple listing documents have different sales price data,
that the creditor is deemed to have complied with the rule if it
chooses to use any one.
Additional comments from appraiser trade associations agreed with
allowing creditors to rely on appraisal information relating to
sellers' acquisition dates but only so far as that information is
available to the appraiser in the normal course of business, which is
all that is required of an appraiser under USPAP. These commenters
urged the Agencies to be careful not to impose requirements on
appraisers relating to information, data, and analysis that are not
required of appraisers in a typical USPAP-compliant report.

[[Page 10399]]

Use of seller-provided and other non-public documents. Several
commenters recognized that sometimes creditors have no other reliable
sources than seller-provided or other non-public documents. Appraiser
association commenters proposed that the Agencies consider a ``good-
faith'' exception that would allow creditors to rely on non-traditional
sources of information when more reliable ones are not available. These
commenters reasoned that this exception would balance the underlying
public policy of supporting ``higher-risk mortgage loans'' (now HPMLs)
when no other loan product is available or feasible, against the risk
that creditors will rely on bad information.
Reliability of oral statements. No commenters opposed the proposed
comment, adopted as comment 35(c)(4)(vi)-2, clarifying that reliance on
oral statements alone would not satisfy the reasonable diligence
standard. Appraiser trade associations generally shared the Agencies'
concern about the potential risk of relying on information presented by
interested parties.
Discussion
As noted, the Agencies are adopting the proposed reasonable
diligence standard and associated comments without material change. The
Agencies believe that this standard is important to facilitate
compliance because it may be difficult in some cases for a creditor to
know with absolute certainty that the criteria triggering the
additional appraisal requirement have been met. See Sec.
1026.35(c)(4)(i)(A) and (B). Similarly, a creditor may have difficulty
knowing whether it relied on the ``best information'' available in
making the 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.
Regarding the proposed list of source documents on which creditors
may appropriately rely, now adopted in Appendix O, 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. As did commenters, the Agencies recognize that
permitting the use of these documents presents the risk that the
creditor would be presented with altered copies. Balanced against this
risk, however, 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.\73\ 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). The proposed footnote
explaining the term ``title commitment report'' (Item 9), described
above, is moved in the final rule to new comment 1 of Appendix O.
---------------------------------------------------------------------------

\73\ During informal outreach conducted by the Agencies for the
proposal, 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.
These concerned were affirmed by public comments on the proposal.
---------------------------------------------------------------------------

As noted, new comment 35(c)(4)(vi)(A)-1 clarifies that, if a
written source document describes the seller's acquisition price in a
manner that indicates that the price described is an estimated or
assumed amount and not the actual price, the creditor should look at an
alternative document to satisfy the reasonable diligence standard in
determining the price at which the seller acquired the property.
Regarding a commenter's recommendation that a creditor be permitted
to provide a certified or attested document signed by the parties as
sufficient evidence of ``reasonable diligence,'' the Agencies believe
that this allowance could easily be abused and would not constitute
sufficient diligence. Instead, as discussed in the section-by-section
analysis of Sec. 1026.35(c)(4)(vi)(B) below, the Agencies believe that
the consumer protection purposes of the statute are better served by
simply requiring two appraisals where reliable written documentation of
the sales price and date are unavailable. Similarly, regarding
questions about multiple listing documents that have different sales
price data, the Agencies believe that in cases of conflicting listing
price information, the consumer protection purposes of the statute are
best served if the creditor obtains better information from other
sources through the exercise of reasonable diligence and, failing that,
obtains a second appraisal. See section-by-section analysis of Sec.
1026.35(c)(4)(vi)(B), below.
On the recommendation that the Agencies consider a ``good-faith''
exception that would allow creditors to rely on non-traditional sources
of information, the Agencies believe that the ``reasonable diligence''
standard alone is more appropriate and addresses the commenters'
concerns. Under this standard, a broad array of widely used public and
non-public documents, set forth in the non-exhaustive list under
comment 35(c)(4)(vi)-1, could be relied on by creditors. In short, the
Agencies expect that, with the parameters established in this comment,
the rule will appropriately balance the need to assure access to HPML
credit against the risk that creditors will rely on bad information.
Regarding reliance on another USPAP-compliant appraisal to satisfy
the reasonable diligence standard, the Agencies are revising the
proposed list to clarify that a creditor would not be permitted to rely
on an appraisal other than the one prepared for the creditor for the
subject HPML. Specifically, the Agencies are revising Item 8, which, in
the proposal read as follows: ``A written appraisal signed by an
appraiser who certifies that the appraisal has been performed in
conformity with USPAP that shows any prior transactions for the subject
property.'' In the final rule, this comment has been revised to read as
follows: ``A written appraisal performed in compliance with Sec.
1026.35(c)(3)(i) for the same transaction that shows any prior
transactions for the subject property.'' The Agencies are concerned
that, as proposed, this item in the written source document list could
lead creditors to believe that appraisals performed for the seller's
acquisition or other appraisals that might otherwise be considered
``stale'' could be relied on. As revised, the list item allows reliance
specifically on an appraisal performed in compliance with the HPML
appraisal requirements for the same HPML transaction. That means that
the appraisal would have to have been performed by a state-certified or
-licensed appraiser in conformity with USPAP and FIRREA.
On a related issue, the Agencies emphasize that allowing the
creditor to rely on the first appraisal for prior sales information
does not require more of appraisers than does USPAP. Again, the first
appraisal must be performed in compliance with USPAP and FIRREA. 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

[[Page 10400]]

course of business.'' \74\ If the appraiser did not include that
information because it was not available to the appraiser under the
USPAP standard, the creditor must turn to another document under the
reasonable diligence standard.
---------------------------------------------------------------------------

\74\ Appraisal Standards Bd., Appraisal Fdn., Standards Rule 1-
5, USPAP (2012-2013 ed.).
---------------------------------------------------------------------------

Overall, due to the many requirements to which the first appraisal
is subject, including independence requirements under TILA (implemented
by Sec. 1026.42), and in the absence of public comments to the
contrary, the Agencies expect that, in cases where the appraiser has
provided a price, a creditor generally could rely on the first
appraisal prepared for the HPML transaction to satisfy the reasonable
diligence standard under Sec. 1026.35(c)(4)(vi)(A). The exception
would be circumstances under which other information obtained by the
creditor makes reliance on the price unreasonable. See also section-by-
section analysis of Sec. 1026.35(c)(4)(ii), above.
Comment 35(c)(4)(vi)(A)-2 clarifies that reliance on oral
statements of interested parties, such as the consumer, seller, or
mortgage broker, does not constitute reasonable diligence under Sec.
1026.35(c)(4)(vi)(A). This comment is adopted from the proposal without
change.
Requirement for two appraisals when sale information is unavailable
or conflicting. Under the proposal, a creditor that cannot determine
the seller's acquisition date, or a creditor that can determine that
the date is within 180 days but cannot determine the price, would have
to obtain an additional appraisal before originating a ``higher-risk
mortgage loan'' (now HPML). The proposal included a comment with two
examples of how this rule would apply: one in which a creditor is
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.
Comment 35(c)(4)(vi)(A)-3, discussed further below, gives two
examples of how the rule applies. This comment was moved from its
placement in the proposal with no substantive change to the
requirements of the reasonable diligence standard intended.
Public Comments on the Proposal
The Agencies requested 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 requested 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.
The Agencies did not receive comments directly responsive to these
questions.
Discussion
In general, the Agencies believe that, based on recent data
provided by FHFA discussed in the proposal, most property resales would
not trigger the proposal's conditions requiring an additional
appraisal.\75\ 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 estimated 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 Sec. 1026.35(c)(4)(i)(A) and (c)(4)(i)(B) have been met.
---------------------------------------------------------------------------

\75\ Based on county recorder information from select counties
licensed to FHFA by DataQuick Information Systems.
---------------------------------------------------------------------------

Comment 35(c)(4)(vi)(A)-3 provides two examples of how the rule
would apply: one in which a creditor is 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, comment 35(c)(4)(vi)(A)-3.i
assumes that a creditor orders and reviews the results of a title
search showing the seller's acquisition date occurred between 91 and
180 days ago, but the seller's acquisition price was not included. In
this case, the creditor would not be able to determine whether the
price the consumer is obligated to pay under the consumer's acquisition
agreement exceeded the seller's acquisition price by more than 20
percent. Before extending an HPML subject to the appraisal requirements
of Sec. 1026.35(c), 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.
1026.35(c)(4) would be required based on that information; or (2)
obtain two written appraisals in compliance with Sec. 1026.35(c)(4).
This comment also contains a cross-reference to comment
35(c)(4)(vi)(B)-1, which explains the modified requirements for the
analysis that must be included in the additional appraisal. See Sec.
1026.35(c)(4)(iv); see also section-by-section analysis of Sec.
1026.35(c)(4)(vi)(B).
In the second example, comment 35(c)(4)(vi)(A)-3.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 comment also assumes 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, unless one of these
sources is clearly wrong on its face, 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. 1026.35(c)(4)(i)(A). Before extending an HPML
subject to the appraisal requirements of Sec. 1026.35(c), 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. 1026.35(c)(4) would be required based on that information; or (2)
obtain two written appraisals in compliance with Sec. 1026.35(c)(4).
This comment also contains a cross-reference to comment
35(c)(4)(vi)(B)-1, which explains the modified requirements for the
analysis that must be included in the additional appraisal. See Sec.
1026.35(c)(4)(iv); see also section-by-section analysis of Sec.
1026.35(c)(4)(vi)(B).
As under the proposal, in the final rule, when information about a
property is not available from written source

[[Page 10401]]

documents, creditors extending HPMLs will routinely incur increased
costs associated with obtaining the additional appraisal. One risk of
this rule is that, because TILA section 129H(b)(2)(B) prohibits
creditors from charging their customers for the additional appraisal,
creditors will simply refrain from engaging in any HPML where sales
history data cannot be obtained. 15 U.S.C. 1639h(b)(2)(B). See also
Sec. 1026.35(c)(4)(v) (requiring that the creditor cannot charge the
consumer for the additional appraisal).
As expressed in the proposal, however, the Agencies believe 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 inadequately address the problem of fraudulent property
flipping to borrowers of HPMLs in ``non-disclosure'' jurisdictions,
where prior sales data is routinely unavailable through public sources.
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.

35(c)(4)(vi)(B) Inability To Determine Prior Sale Date or Price--
Modified Requirements for Additional Appraisal

Section 35(c)(4)(vi)(B) provides that if, after exercising
reasonable diligence, a creditor cannot determine whether the
conditions in Sec. 1026.35(c)(4)(i)(A) and (B) are present and
therefore must obtain two written appraisals under Sec. 1026.35(c)(4),
the additional appraisal must include an analysis of the factors in
Sec. 1026.35(c)(4)(iv) (difference in sales price, changes in market
conditions, and property improvements) only to the extent that the
information necessary for the appraiser to perform the analysis can be
determined.
For the reasons discussed above, the Agencies believe that an HPML
creditor should be required to obtain an additional appraisal if the
creditor cannot determine the seller's acquisition date, or if it can
determine the date is within 180 days but cannot determine the price,
based on written source documents. However, in keeping with the
proposal, Sec. 1026.35(c)(4)(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 TILA
section 129H(b)(2)(A), implemented in the final rule as Sec.
1026.35(c)(4)(iv)(A)-(C). 15 U.S.C. 1639h(b)(2)(A).
Public Comments on the Proposal
The Agencies requested 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 requested 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 also requested comment generally 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.
The Agencies did not receive comments directly responsive to these
questions.
Discussion
Under the proposal, now adopted in Sec. 1026.35(c)(4)(vi)(B), the
additional appraisal must include an analysis of the elements that
would be required in proposed Sec. 1026.35(c)(4)(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
Sec. 1026.35(c)(4)(iv), TILA section 129H(b)(2)(A) requires that the
additional appraisal analyze the difference in sales prices, changes in
market conditions, and improvements to the property between the date of
the previous sale and the current sale. 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.
Consistent with the proposal, comment 35(c)(4)(vi)(B)-1 confirms
that, in general, the additional appraisal required under Sec.
1026.35(c)(4)(i) should include an analysis of the factors listed in
Sec. 1026.35(c)(4)(iv)(A)-(C). However, the comment also confirms that
if, following reasonable diligence, a creditor cannot determine whether
the conditions in Sec. 1026.35(c)(4)(i) are present due to a lack of
information or conflicting information, the required additional
appraisal must include the analyses required under Sec.
1026.35(c)(4)(iv)(A)-(C) only to the extent that the information
necessary to perform the analysis is known. As an example, comment
35(c)(4)(vi)(B)-1 assumes that a creditor is able, following reasonable
diligence, to determine that the date on which the seller acquired the
property occurred between 91 and 180 days prior to the date of the
consumer's agreement to acquire the property, but cannot determine the
sale price. In this case, the creditor is required to obtain an
additional written appraisal that includes an analysis under Sec.
1026.35(c)(4)(iv)(B) and (c)(4)(iv)(C) 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. 1026.35(c)(4)(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.
The Agencies note that the proposed rule does not provide
commentary with guidance on the modified requirements for the
additional analysis in a situation in which 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. As
noted, the Agencies requested but did not receive public comments on
this aspect of the proposal. The Agencies are unaware of situations in
which the seller's acquisition price, but not the acquisition date,
would be known. In the absence of public comment on the issue, the
Agencies are not adopting additional guidance on this theoretical
situation.
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. If a creditor could not
determine when or for how much the prior sale occurred, 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.
15 U.S.C. 1639h(b)(2)(A).
The Agencies' approach to situations in which the creditor cannot
obtain the necessary information, either due to a lack of information
or conflicting

[[Page 10402]]

information, can be summed up as follows:
An additional appraisal is required.
However, to account for missing or conflicting
information, only a modified version of the full additional analysis
required under TILA section 129H(b)(2)(A), as implemented by Sec.
1026.35(c)(4)(iv) is required. 15 U.S.C. 1639h(b)(2)(A).
Alternative approaches not chosen by the Agencies include
prohibiting creditors from extending the HPML altogether under these
circumstances. As stated in the proposal, however, the Agencies believe
that a flat prohibition would unduly limit the availability of higher-
risk mortgage loans to consumers.

35(c)(4)(vii) Exemptions From the Additional Appraisal Requirement

TILA section 129H(b)(4)(B) permits the Agencies to exempt jointly 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). The Agencies did not expressly propose any exemptions
from the additional appraisal requirement, but invited comment on
whether exempting any classes of higher-risk mortgage loans from the
additional appraisal requirement (beyond the exemptions in Sec.
1026.35(c)(2)) would be in the public interest and promote the safety
and soundness of creditors. The Agencies offered a number of examples
of potential exemptions, such as loans made in rural areas, and
transactions that are currently exempt 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.\76\ See, e.g.,
24 CFR 203.37a(c). Regarding a possible exemption for higher-risk
mortgage loans (now HPMLs) made in ``rural'' areas from the additional
appraisal requirement, the Agencies requested comment on whether the
rule should use the same definition of ``rural'' that was provided in
the 2011 ATR Proposal.\77\ This same definition of ``rural'' was also
proposed by the Board regarding Dodd-Frank Act escrow requirements
(2011 Escrows Proposal).\78\ This definition is reviewed in more detail
in the section-by-section analysis of Sec. 1026.35(c)(4)(vii)(H),
below.
---------------------------------------------------------------------------

\76\ The FHA exceptions to the restrictions on FHA insurance are
as follows:
(1) Sales by HUD of Real Estate-Owned (REO) properties under 24
CFR part 291 and of single family assets in revitalization areas
pursuant to section 204 of the National Housing Act (12 U.S.C.
1710);
(2) Sales by another agency of the United States Government of
REO single family properties pursuant to programs operated by these
agencies;
(3) Sales of properties by nonprofit organizations approved to
purchase HUD REO single family properties at a discount with resale
restrictions;
(4) Sales of properties that were acquired by the sellers by
inheritance;
(5) Sales of properties purchased by an employer or relocation
agency in connection with the relocation of an employee;
(6) Sales of properties by state- and federally-chartered
financial institutions and government-sponsored enterprises (GSEs);
(7) Sales of properties by local and state government agencies;
and
(8) Only upon announcement by HUD through issuance of a notice,
sales of properties located in areas designated by the President as
federal disaster areas. The notice will specify how long the
exception will be in effect.
24 CFR 203.37a(c).
\77\ 76 FR 27390, 28471 (May 11, 2011) (2011 ATR Proposal).
\78\ 76 FR 11598, 11612 (March 2, 2011) (2011 Escrows Proposal).
---------------------------------------------------------------------------

In the final rule, the Agencies are adopting exemptions from the
additional appraisal requirement under Sec. 1026.35(c)(4)(i) for
extensions of credit that finance the consumer's acquisition of a
property:
(1) From a local, State or Federal government agency (Sec.
1026.35(c)(4)(vii)(A));
(2) From a person that acquired the property through foreclosure,
deed-in-lieu of foreclosure or other similar judicial or non-judicial
procedures as a result of exercising the person's rights as a holder of
a defaulted mortgage loan (Sec. 1026.35(c)(4)(vii)(B));
(3) From a non-profit entity as part of a local, State or Federal
government program under which the non-profit entity is permitted to
acquire single-family properties for resale from a seller who acquired
title to the property through the process of foreclosure, deed-in-lieu
of foreclosure, or other similar judicial or non-judicial procedure
(Sec. 1026.35(c)(4)(vii)(C));
(4) From a person who acquired title to the property by inheritance
or pursuant to a court order of dissolution of marriage, civil union,
or domestic partnership, or of partition of joint or marital assets to
which the seller was a party (Sec. 1026.35(c)(4)(vii)(D));
(5) From an employer or relocation agency in connection with the
relocation of an employee (Sec. 1026.35(c)(4)(vii)(E));
(6) From a servicemember, as defined in 50 U.S.C. Appx. 511(1), who
received deployment or permanent change of station orders after the
servicemember acquired the property (Sec. 1026.35(c)(4)(vii)(G));
(7) Located in an area designated by the President as a federal
disaster area, if and for as long as the Federal financial institutions
regulatory agencies, as defined in 12 U.S.C. 3350(6), waive the
requirements 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 that area (Sec.
1026.35(c)(4)(vii)(F)); and
(8) Located in a ``rural'' county, as defined in the Bureau's 2013
Escrows Final Rule, Sec. 1026.35(b)(2)(iv)(A) (which is the same
definition used in the 2013 ATR Final Rule, Sec. 1026.43(f)(2)(vi) and
comment 43(f)(2)(vi-1) (Sec. 1026.35(c)(4)(vii)(H)).
Public Comments on the Proposal
The Agencies received over fifty comments concerning the questions
asked by the Agencies about appropriate exemptions from the additional
appraisal requirement. Several commenters opposed requiring two
appraisals under any circumstances. However, the Agencies note that the
additional appraisal requirement is mandated by statute. TILA section
129H(b)(2), 15 U.S.C. 1639h(b)(2). Commenters in general strongly
supported an exemption for loans made in rural areas. The commenters
stated that there are limited numbers of licensed and certified
appraisers in rural areas, which would make the additional appraisal
requirement (requiring appraisals by two independent appraisers)
particularly burdensome in these areas. In addition, commenters argued
that lenders in rural areas may be forced to hire appraisers from far
outside the geographic area, which would increase the time and cost
associated with the transaction. Several commenters also stated that
rural areas have not historically been sources of fraudulent real
estate flipping activity. A number of commenters noted that property
prices in rural areas tend to be lower, so the cost of the second
appraisal is higher as a percentage of the overall transaction. Two
commenters, national trade associations for appraisers, opposed the
exemption for rural loans, suggesting that it is not difficult to find
two appraisers to value rural properties.
As for how to define ``rural,'' one commenter, a national trade
association for community banks, suggested that the agencies use a
definition of ``rural'' that is consistent with the definition used in
rules addressing the use of escrow accounts. See 2011 Escrows Proposal,
discussed below, revised and adopted in

[[Page 10403]]

the 2013 Escrows Final Rule.\79\ Another commenter, a financial holding
company, suggested that the final rule exempt lenders located in areas
where the State appraiser licensing or certification roster shows five
or fewer unaffiliated appraisers within a reasonable distance, such as
50 miles or less. A large bank further recommended that the final rule
exempt loans secured by properties in low-density appraiser markets,
such as states with fewer than 500 appraisers or counties with fewer
than five appraisers.
---------------------------------------------------------------------------

\79\ See also 2011 ATR Proposal at 28471, revised and adopted in
the 2013 ATR Final Rule, Sec. 1026.43(f)(2)(vi) and comment
43(f)(2)(vi-1).
---------------------------------------------------------------------------

A large number of commenters also supported an exemption for
transactions that are currently exempted from the restrictions on FHA
insurance applicable to property resales in the FHA Anti-Flipping Rule.
The commenters argued that these categories of transactions do not
present the same risk to consumers and therefore do not require the
additional anti-flipping consumer protections.
Two commenters, national trade associations for appraisers,
objected to adding any exemptions to the additional appraisal
requirement, and suggested that there should be a strong presumption
that an additional appraisal is necessary to protect consumers and to
promote the safety and soundness of financial institutions.
A number of commenters suggested other exemptions or endorsed
exemptions from the entire rule already in the proposal. These are as
follows.
Three commenters (a national trade association for the
banking industry, a State trade association for the banking industry,
and a bank holding company) suggested an exemption from the second
appraisal requirement in cases when the initial appraisal is performed
by an appraiser who was selected from the creditor's list of qualified
appraisers. The commenters stated that eliminating the seller's ability
to influence the selection of the appraiser in this fashion would be
sufficient to protect the borrower from the risk of an artificially-
inflated appraisal, thereby addressing the fraudulent ``flipping''
concern the statute seeks to address.
Two commenters (a nonprofit organization and State credit
union association) suggested an exemption for active duty military
personnel who receive permanent change of duty station orders.
A number of commenters (including national trade
associations for the mortgage finance and retail banking industry)
suggested exemptions for certain non-purchase transactions, such as
gifts, transfers in connection with trusts, transfers that do not
generate capital gains, and intra-family transfers for estate planning
purposes, on grounds that these transactions are not ``profit
seeking.'' Several commenters suggested that transfers in connection
with a divorce decree be included in this category as an exemption.
Many commenters (including two national trade associations
for the mortgage finance and retail banking industry, a national trade
association for the banking industry, a national trade association for
community banks, a national trade association for credit unions, four
regional associations for credit unions, a large national bank, a
financial holding company, and a community bank) endorsed exemptions
for construction and bridge loans, on grounds that these are temporary
loans and that consumers are not exposed to risk at the level
comparable to other residential loans that Congress targeted in the
statute. These commenters also argued that the additional appraisal
requirement would be impractical for construction loans, given the
inability to conduct interior inspections.
Two commenters (a community bank and a credit union)
suggested an exemption for non-purchase acquisitions and transfers
where the consumer previously held a partial interest in the property
and cited to Regulation Z (commentary on the definition of residential
mortgage transaction) as support.
Discussion
In response to widespread support for adopting exemptions
consistent with exemptions from the restrictions on FHA financing in
the FHA Anti-Flipping Rule, the Agencies are adopting several
exemptions from the additional appraisal requirement generally
consistent with exemptions in the FHA Anti-Flipping Rule under 24 CFR
203.37a(c). These are extensions of credit that finance the consumer's
acquisition of a property:
From a local, State or Federal government agency (Sec.
1026.35(c)(4)(vii)(A); see also 24 CFR 203.37a(c)(1), (2) and (7)).
From an entity that acquired the property through
foreclosure, deed-in-lieu of foreclosure or other similar judicial or
non-judicial procedures as a result of exercising the person's rights
as a holder of a defaulted mortgage loan (Sec. 1026.35(c)(4)(vii)(B);
see also 24 CFR 203.37a(c)(6)).
From a non-profit entity as part of a local, State or
Federal government program under which the non-profit entity is
permitted to acquire single-family properties for resale from a seller
who acquired the property through foreclosure, deed-in-lieu of
foreclosure, or other similar judicial or non-judicial procedure (Sec.
1026.35(c)(4)(vii)(C); see also 24 CFR 203.37a(c)(3)).
From a seller who acquired the property pursuant to a
court order of dissolution of marriage, civil union or domestic
partnership, or of partition of joint or marital assets to which the
seller was a party (Sec. 1026.35(c)(4)(vii)(D); see also 24 CFR
203.37a(c)(4)).
From an employer or relocation agency in connection with
the relocation of an employee (Sec. 1026.35(c)(4)(vii)(E); see also 24
CFR 203.37a(c)(4)).
Located in an area designated by the President as a
federal disaster area, if and for as long as the Federal financial
institutions regulatory agencies, as defined in 12 U.S.C. 3350(6),
waive the requirements 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 that area (Sec.
1026.35(c)(4)(vii)(F); see also 12 CFR 203.37a(c)(4)).
In addition, the Agencies are adopting an exemption for extensions
of credit to finance the consumer's purchase of property being sold by
a servicemember, as defined in 50 U.S.C. Appx. 511(1), if the
servicemember receives deployment or permanent change of station orders
after the servicemember purchased the property (Sec.
1026.35(c)(4)(vii)(G)).
Finally, the Agencies are adopting an exemption for HPMLs in rural
areas (Sec. 1026.35(c)(4)(vii)(H)). The exemption would apply to HPMLs
secured by properties in counties considered ``rural'' under
definitions promulgated by the Bureau in the 2013 ATR Final Rule and
2013 Escrows Final Rule--specifically, properties located within the
following Urban Influence Codes (UICs), established by the United
States Department of Agriculture's Economic Research Services (USDA-
ERS): 4, 6, 7, 8, 9, 10, 11, or 12. These UICs generally correspond
with areas outside of metropolitan statistical areas (MSAs) and
Micropolitan Statistical Areas, defined by the Office of Management and
Budget (OMB). For reasons discussed in more detail in the section-by-
section analysis of Sec. 1026.35(c)(4)(vii)(H) and the Dodd-Frank Act
Section 1022(b)(2) analysis in the SUPPLEMENTARY INFORMATION below,
rural properties located in micropolitan statistical areas that are not
adjacent to an MSA (UIC 8) are also included in the exemption.

[[Page 10404]]

Each of these exemptions is discussed in turn below.

35(c)(4)(vii)(A)

Acquisitions of Property From Local, State or Federal Government
Agencies
In Sec. 1026.35(c)(4)(vii)(A), the Agencies are adopting an
exemption for HPMLs financing consumer acquisitions of property being
sold by a local, State or Federal government agency. This exemption
generally corresponds with exemptions in the FHA Anti-Flipping Rule for
loans financing the purchase of an ``REO'' (real estate owned) property
being sold by HUD or another U.S. government agency (see 12 CFR
203.37a(c)(1) and (2)) and a broad exemption for sales of properties by
local and State government agencies (see 12 CFR 203.37a(c)(7)). The
Agencies do not believe that purchases of properties being sold by
local, State or Federal government agencies present the fraudulent
flipping risks that the special ``higher-risk mortgage'' appraisal
rules in TILA section 129H were intended to address. 15 U.S.C. 1639h.
Typically, these types of sales are in connection with government
programs involving the sale of property obtained through foreclosure or
by deed-in-lieu of foreclosure, which can promote affordable housing
and neighborhood revitalization. Government agency sales may also be
related to foreclosures due to tax liability or related reasons.
Without an exemption, most consumer acquisitions involving these types
of sales would be subject to the additional appraisal requirement
because the government agency typically would have ``acquired'' the
property (for example, in a foreclosure or by deed-in-lieu of
foreclosure) for the outstanding balance of the government's lien (plus
costs), which is generally less than the value of the property; thus,
the price paid to the government agency by the consumer would typically
be substantially higher than the government agency's acquisition
``price.'' In addition, these sales might occur relatively soon after
the government agency acquired the property, particularly if the
acquisition resulted from a foreclosure or tax sale.
The Agencies believe that requiring an HPML creditor to obtain two
appraisals to finance transactions involving the purchase of property
from government agencies could interfere with beneficial government
programs. The Agencies further do not believe that this interference is
warranted for these transactions, which do not involve a profit-
motivated seller and thus do not present the kinds of flipping concerns
that the statute is intended to address. The Agencies believe that an
exemption for HPMLs financing the sale of property by a local, State,
or Federal government agency is in the public interest because it
allows beneficial government programs to go forward as intended. By
reducing costs for creditors that might offer HPMLs to finance these
transactions, the exemption helps creditors to strengthen and diversify
their lending portfolios, thereby promoting the safety and soundness of
creditors as well.

35(c)(4)(vii)(B)

Acquisitions of Property Obtained Through Foreclosure and Related Means
In Sec. 1026.35(c)(4)(vii)(B), the Agencies are adopting an
exemption for HPMLs financing the purchase of a property from a person
that had acquired the property through foreclosure, deed-in-lieu of
foreclosure, or other similar judicial or non-judicial procedures as a
result of exercising the person's rights as a holder of a defaulted
mortgage loan. This exemption generally corresponds with an exemption
from the FHA Anti-Flipping Rule for loans financing the purchase of
properties sold by State- and Federally-chartered financial
institutions and GSEs (see 12 CFR 203.37a(c)(6)). The Agencies
recognize that this exemption might overlap with the exemption in Sec.
1026.35(c)(4)(vii)(A) for sales by government agencies, which might
sell properties that the agencies acquire in connection with
liquidating a mortgage. However, the Agencies believe that a separate
exemption for sales by government agencies is advisable because
government agencies might have other reasons for acquiring a property
that they then determined was advisable to sell, such as property
acquired through exercise of the government's eminent domain powers.
The exemption covers HPMLs that finance the acquisition of a home
from a ``person'' who has acquired title of the property through
foreclosure and related means. ``Person'' is defined in Regulation Z to
mean ``a natural person or an organization, including a corporation,
partnership, proprietorship, association, cooperative, estate, trust,
or government unit.'' Sec. 1026.2(a)(22). Thus, consistent with the
FHA Anti-Flipping Rule exemptions, the exemption in Sec.
1026.35(c)(4)(vii)(B) covers purchases of properties being sold by
State- and Federally-chartered financial institutions, as well as by
GSEs such as Fannie Mae, Freddie Mac, and the Federal Home Loan Banks.
In addition, the exemption covers HPML loans financing property
acquisitions from non-bank mortgage companies, servicers that
administer loans held in the portfolios of financial institutions or in
pools of mortgages that underlie private and government or GSE asset-
backed securitizations, and, less commonly, private individuals. The
Agencies believe that a more inclusive exemption for foreclosures
better reflects the way that mortgage loans are held and serviced in
today's market.
Several commenters pointed out that the sale of REO properties to
consumers and potential investors contributes significantly to
revitalizing neighborhoods and stabilizing communities. They expressed
concerns that the additional appraisal requirement might unduly
interfere with these sales, which could have a number of negative
effects. First, holders of the mortgages might be forced to hold
properties after foreclosure longer than is financially optimal,
increasing losses; some public commenters indicated that waiting six
months so that the additional appraisal requirement would not apply
would be far too long. Second, holders who want or need to clear these
properties off of their books might be forced to accept lower prices
offered by investors, which would also increase losses. When the holder
in this situation is a creditor such as a bank or other financial
institution, increased losses can have a negative effect on its safety
and soundness. Third, incentives for investors to buy and rehabilitate
properties could be reduced, which could be counterproductive to
community development and the revitalization of the housing market.
Finally, more consumers might have to forego opportunities for
homeownership.
For all of these reasons, the Agencies believe that the exemption
in Sec. 1026.35(c)(4)(vii)(B) is in the public interest and promotes
the safety and soundness of creditors.

35(c)(4)(vii)(C)

Acquisitions of Property From Certain Non-Profit Entities
In Sec. 1026.35(c)(4)(vii)(C), the Agencies are adopting an
exemption for HPMLs financing the purchase of a property from a non-
profit entity as part of a local, State, or Federal government program
under which the non-profit entity is permitted to acquire single-family
properties for resale from a seller who acquired the property through
foreclosure or similar means. Comment 35(c)(4)(vii)(C)-1 clarifies
that, for purposes of 1026.35(c)(4)(vii)(C), a

[[Page 10405]]

``non-profit entity'' refers to a person with a tax exemption ruling or
determination letter from the Internal Revenue Service under section
501(c)(3) of the Internal Revenue Code of 1986 (12 U.S.C.
501(c)(3)).\80\ This exemption generally builds on an exemption from
the FHA Anti-Flipping Rule for loans financing the purchase of
properties from nonprofit organizations approved to purchase HUD REO
single-family properties at a discount with resale restrictions (see 12
CFR 203.37a(c)(3)).
---------------------------------------------------------------------------

\80\ ``Person'' is defined in Regulation Z as ``a natural person
or an organization, including a corporation, partnership,
proprietorship, association, cooperative, estate, trust, or
government unit.'' Sec. 1026.2(a)(22).
---------------------------------------------------------------------------

Consistent with the FHA Anti-Flipping Rule exemptions, the
exemption in Sec. 1026.35(c)(4)(vii)(C) would cover nonprofit
organizations approved to purchase HUD REO single-family properties. In
addition, the exemption would cover purchases of these types of
properties from nonprofit organizations as part of other local, State
or Federal government programs under which the non-profit entity is
permitted to acquire title to REO single family properties for resale.
For reasons similar to those discussed under the exemption for loan
holders selling a property acquired through liquidating a mortgage
(Sec. 1026.35(c)(4)(vii)(B)), the Agencies believe that the exemption
for HPMLs financing the acquisitions described in Sec.
1026.35(c)(4)(vii)(C) is in the public interest and promotes the safety
and soundness of creditors. The exemption is intended in part to help
holders such as banks and other financial institutions sell properties
held as a result of foreclosure or deed-in-lieu of foreclosure, thereby
removing them from their books. This can minimize losses, which
improves institutions' safety and soundness. The exemption is also
intended to facilitate neighborhood revitalization for the benefit of
communities and individual consumers. Government programs involving
purchases and sales of REO property by non-profits can foster positive
community investment and help investors dispense with loss-generating
properties efficiently and in a manner that maximizes public benefit.
The Agencies do not believe that these types of sales to consumers by
non-profits involve serious risks of fraudulent flipping, and thus do
not believe that TILA's additional appraisal requirement was intended
to apply to these transactions. For these reasons, the Agencies believe
that the exemption in Sec. 1026.35(c)(4)(vii)(C) is in the public
interest and promotes the safety and soundness of creditors.

35(c)(4)(vii)(D)

Acquisitions From Persons Acquiring the Property Through Inheritance or
Dissolution of Marriage, Civil Union, or Domestic Partnership
In Sec. 1026.35(c)(4)(vii)(D), the Agencies are adopting an
exemption for HPMLs financing the purchase of a property that was
acquired by the seller by inheritance or pursuant to a court order of
dissolution of marriage, civil union, or domestic partnership, or of
partition of joint or marital assets to which the seller was a party.
The exemption would include HPMLs financing the acquisition by a joint
owner of the property of a residual interest in that property, if the
joint owner acquired that interest by inheritance or dissolution of a
marriage, civil union, or domestic partnership. This exemption
generally corresponds with an exemption from the FHA Anti-Flipping Rule
for purchases of properties that had been acquired by the seller by
inheritance (see 12 CFR 203.37a(c)(4)). As discussed in the section-by-
section analysis of Sec. 1026.35(c)(4)(i), above, an exemption for
HPMLs that finance the purchase of a property acquired by the seller
through a non-purchase transaction was widely supported by commenters.
In response to comments, the Agencies have decided to expand the
FHA Anti-Flipping Rule exemption for loans financing the purchase of a
property from a seller who had acquired it by inheritance, to include
properties acquired as the result of a dissolution of a marriage, civil
union, or domestic partnership. The Agencies are not aware that sales
of properties so acquired have been the source of fraudulent flipping
activity and note that no commenters suggested that this type of
flipping occurs. In addition, the Agencies do not believe that Congress
intended to cover purchases of property acquired by sellers in this
manner with the ``higher-risk mortgage'' additional appraisal
requirement. The Agencies believe that consumer protection from
fraudulent flipping is aided by the requirement that the acquisition of
property through dissolution of a marriage or civil union must be part
of a court order, which can be easily confirmed and helps ensure that
the original transfer was for legitimate purposes and not merely to
defraud a subsequent purchaser.
As for the exemption for HPMLs financing the purchase of a property
acquired by the seller as an inheritance, the Agencies similarly do not
see the risk of fraudulent flipping that Congress intended to address
occurring in these transactions. Finally, in both the case of
inheritance and that of divorce or dissolution, the seller has acquired
the property (or full ownership of the property) under adverse
circumstances; the Agencies see no reason as a public policy matter to
impose further burden on the seller attempting to sell property
obtained in this manner. With respect to promoting the safety and
soundness of creditors, the Agencies note that a seller attempting to
sell property obtained via inheritance or dissolution of marriage may
not be in a position to satisfy the mortgage obligation associated with
the property. As a result, creditors could be subject to losses, which
can negatively affect the safety and soundness of the creditors.
For these reasons, the Agencies believe that the exemptions in
Sec. 1026.35(c)(4)(vii)(D) are in the public interest and promote the
safety and soundness of creditors.

35(c)(4)(vii)(E)

Acquisitions of Property From Employers or Relocation Agencies
In Sec. 1026.35(c)(4)(vii)(E), the Agencies are adopting an
exemption for HPMLs financing the purchase of a property from an
employer or relocation agency that had acquired the property in
connection with the relocation of an employee. This exemption mirrors
an identical exemption from the FHA Anti-Flipping Rule. See 12 CFR
203.37a(c)(5)). As with other exemptions adopted in the final rule that
correspond with similar FHA Anti-Flipping Rule exemptions, the Agencies
concur with FHA's longstanding conclusion that these types of
transactions do not present significant fraudulent flipping risks.
Rather, the circumstances of the transaction provide evidence that the
impetus for the resales stems from bona fide reasons other than the
seller's efforts to profit from a flip.
The Agencies believe that these transactions benefit both employees
and employers by helping to ensure that employees can relocate as
needed for business reasons in an efficient manner. The Agencies also
believe that the exemption can benefit HPML consumers and creditors by
reducing costs otherwise associated with purchasing and extending
credit to finance the purchase of these properties. In addition, due to
reduced burden involved with the sale of the home, the Agencies believe
the exemption will promote the purchase of homes by employers. This, in
turn, promotes the safety and soundness of the employees'

[[Page 10406]]

creditors by ensuring that the employees' mortgage obligations will be
met.
For these reasons, the Agencies believe that the exemption in Sec.
1026.35(c)(4)(vii)(E) is in the public interest and promotes the safety
and soundness of creditors.

35(c)(4)(vii)(F)

Acquisitions of Property From Servicemembers With Deployment or
Permanent Change of Station Orders
In Sec. 1026.35(c)(4)(vii)(F), the Agencies are adopting an
exemption from the additional appraisal requirement for HPMLs financing
the purchase of a property being sold by a servicemember, as defined in
50 U.S.C. Appx. 511(1), who received a deployment or permanent change
of station order after acquiring the property. This exemption is not in
the FHA Anti-Flipping Rule. The exemption was suggested by some
commenters in response to a request for recommendations for other
appropriate exemptions, however. The Agencies believe that many of the
reasons for the exemptions in the final rule based on the FHA Anti-
Flipping Rule support a servicemember exemption as well. For example,
as with the exemption for HPMLs financing the sale of a property by an
employer or relocation agency in connection with the relocation of an
employee, the exemption for HPMLs financing the sale of a property by a
servicemember with permanent relocation orders facilitates the
efficient transfer of servicemembers.
Without this exemption, servicemembers might have more limited
options for eligible buyers. For reasons discussed earlier, some
creditors might be reticent about lending to an HPML consumer in a
transaction that would trigger the additional appraisal requirement.
This could result in servicemembers being forced to retain mortgages
that are difficult for them to afford when they must also support
themselves and their families in a new living arrangement elsewhere. In
turn, the positions of creditors and investors on those existing
mortgages could be compromised by servicemembers not being able to meet
their mortgage obligations.
The Agencies do not believe that this exemption would be used
frequently. Regardless, the Agencies believe that an exemption for
HPMLs financing the purchase of the property in that instance is in the
public interest and promotes the safety and soundness of creditors.

35(c)(4)(vii)(G)

Acquisitions of a Property in a Federal Disaster Area
In Sec. 1026.35(c)(4)(vii)(G), the Agencies are adopting an
exemption for HPMLs financing the purchase of a property located in an
area designated by the President as a federal disaster area, if and for
as long as the Federal financial institutions regulatory agencies, as
defined in 12 U.S.C. 3350(6), waive the requirements 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 that area. This exemption generally corresponds to an exemption in
the FHA Anti-Flipping Rule for loans financing the purchase of
properties located in areas designated by the President as federal
disaster areas, if HUD has announced that these transactions will not
be subject to the restrictions. See 12 CFR 203.37a(c)(8).
The Agencies believe that this exemption appropriately facilitates
the repair and restoration of disaster areas to the benefit of
individual consumers, communities, and credit markets. The Agencies
also recognize that disasters might result in some consumers being
unable to meet their mortgage obligations. As a result, creditors could
be subject to losses, which could negatively affect the safety and
soundness of the creditors. The Agencies believe that this exemption
would help creditors extend HPMLs that finance the purchase of
properties in disaster areas without undue burden, thus enabling the
creditors to improve their lending positions more effectively.
As noted, the Agencies specified that the exemption would take
effect only if and for as long as the Federal financial institutions
regulatory agencies also waive application of the FIRREA title XI
appraisal rules for properties in the disaster area. The Agencies
believe that this provision helps protect consumers from fraudulent
flipping by giving the Federal financial institutions regulatory
agencies, all of which are parties to this final rule, authority to
monitor the area and determine when appraisal requirements should be
reinstated.
For these reasons, the Agencies have concluded that the exemption
in Sec. 1026.35(c)(4)(vii)(G) for the purchase of properties in
disaster areas is in the public interest and promotes the safety and
soundness of creditors.

35(c)(4)(vii)(H)

Acquisitions of Properties in Rural Counties
In Sec. 1026.35(c)(4)(vii)(H), the Agencies are adopting an
exemption from the additional appraisal requirement for HPMLs that
finance the purchase of a property in a ``rural'' county, as defined in
Sec. 1026.35(b)(iv)(A), which is a county assigned one of the
following Urban Influence Codes (UICs), established by the United
States Department of Agriculture's Economic Research Services (USDA-
ERS): 4, 6, 7, 8, 9, 10, 11, or 12. These UICs correspond to areas
outside of MSAs as well as most micropolitan statistical areas; the
definition would also include properties located in micropolitan
statistical areas that are not adjacent to an MSA. This rural county
exemption is not an exemption in the FHA Anti-Flipping Rule. However,
the Agencies received requests to consider an exemption for loans in
rural areas during informal outreach for the proposal, as well as from
public commenters.
In the proposal, the Agencies did not propose an exemption for
loans secured by properties in ``rural'' areas from all of the Dodd-
Frank Act ``higher-risk mortgage'' appraisal rules, but requested
comment on an exemption for these loans from the additional appraisal
requirement. As discussed earlier, commenters widely supported an
exemption for loans secured by properties in rural areas, citing
several reasons: a lack of appraisers; the disproportionate cost of an
extra appraisal, based on commenters' view that property values tend to
be lower in rural areas than in non-rural areas; the assertion that
many lenders in rural areas hold the loans in portfolio and therefore
are more mindful of ensuring that properties securing their loans are
valued properly; the assertion that lenders in rural areas tend to need
to price loans higher for legitimate reasons, so a disproportionate
amount of their loans (compared to those of larger lenders) will be
subject to the appraisal rules and thus these lenders will bear an
unfair burden that they are less equipped than larger lenders to bear;
and the assertion that property flipping is rare in rural areas.
The analysis in the proposal of the impact of the proposed rule in
rural areas corroborated commenters' concern that a larger share of
loans in rural areas tend to be HPMLs than in non-rural areas.\81\
Although many small and rural

[[Page 10407]]

lenders are excluded from HMDA reporting, tabulations of rural loans by
HMDA reporters may be informative about patterns of rural HPML usage.
As conveyed in the proposal, 10 percent of rural first-lien purchase-
money loans were HPMLs in 2010 compared to 3 percent of non-rural
first-lien purchase loans.\82\ Based on this information, the Bureau
concluded that rural borrowers may be more likely to incur the cost of
an additional appraisal requirement than non-rural consumers.
---------------------------------------------------------------------------

\81\ In the proposal, ``rural'' was defined as a loan made
outside of a micropolitan or metropolitan statistical area. See 77
FR 54722, 54752 n. 108 (Sept. 5, 2012).
\82\ 77 FR 54722, 54752 (Sept. 5, 2012). Similar percentages for
rural and non-rural first-lien purchase HPML lending are reflected
in 2011 HMDA data. See Robert B. Avery, Neil Bhutta, Kenneth B.
Brevoort, and Glenn Canner, ``The Mortgage Market in 2011:
Highlights from the Data Reported under the Home Mortgage Disclosure
Act,'' FR Bulletin, Vol. 98, no. 6 (Dec. 2012) http://www.federalreserve.gov/pubs/bulletin/2012/PDF/2011_HMDA.pdf.
---------------------------------------------------------------------------

Regarding appraiser availability, analysis conducted for the
proposal indicated that more than two appraisers are located in all but
22 counties nationwide (13 of which are in Alaska).\83\ An appraiser
was considered ``located'' in a county if the appraiser's home or
business address listed on the Appraisal Subcommittee's National
Appraiser Registry was in that county. Public commenters pointed out,
however, that while many rural areas might have more than two
appraisers, these few appraisers are often busy and not readily
available. One reason may be that many rural counties cover large
areas, perhaps making it more difficult to arrange timely appraisals in
such areas. As noted, a financial holding company suggested that the
final rule exempt lenders located in areas where the State appraiser
licensing or certification roster shows five or fewer unaffiliated
appraisers within a reasonable distance, such as 50 miles or less. A
large bank further recommended that the final rule exempt loans secured
by properties in low-density appraiser markets, such as states with
fewer than 500 appraisers or counties with fewer than five appraisers.
The final rule does not adopt an exemption based on the number of
appraisers within a particular geographic area or radius of the
property securing the HPML. The Agencies believe that a simpler
approach is consistent with the objectives of the statute, facilitates
compliance, and reduces burden on creditors.
---------------------------------------------------------------------------

\83\ See 77 FR 54722, 54752-54753 (Sept. 5, 2012).
---------------------------------------------------------------------------

Other than the commenters who suggested a ``radius'' or low-density
approach for the rural exemption, only one other commenter offered
suggestions on how to define rural. This commenter recommended that the
Agencies adopt a definition of ``rural'' that is consistent with the
definition used in rules addressing the use of escrow accounts. See
2013 Escrows Final Rule, Sec. 1026.35(b)(2)(iv); see also 2013 ATR
Final Rule, Sec. 1026.43(f)(2)(vi) and comment 43(f)(2)(vi-1). The
Agencies specifically requested comment on whether the definition of
``rural'' used in any exemption adopted should be the same as the
definition in the 2011 ATR Proposal and 2011 Escrows Proposal. These
exemptions are described below.
2011 Escrows Proposal. Since 2010, Regulation Z, implementing TILA,
has required creditors to establish escrow accounts for taxes and
insurance on HPMLs. See 12 CFR 1026.35(b)(3). The Dodd-Frank Act
subsequently amended TILA to codify and augment the escrow requirements
in Regulation Z. See Dodd-Frank Act Sec. Sec. 1461 and 1462, adding 15
U.S.C. 1639d. The Board issued the 2011 Escrows Proposal to implement a
number of these provisions.
Among other amendments, one new section of TILA authorizes the
Board (now, the Bureau) to create an exemption from the requirement to
establish escrow accounts for transactions originated by creditors
meeting certain criteria, including that the creditor ``operates
predominantly in rural or underserved areas.'' 15 U.S.C. 1639d(c).
Accordingly, the 2011 Escrows Proposal proposed to create an
exemption for any loan extended by a creditor that makes most of its
first-lien HPMLs in counties designated by the Board as ``rural or
underserved,'' has annual originations of 100 or fewer first-lien
mortgage loans, and does not escrow for any mortgage transaction it
services.
Definition of ``Rural''
In the 2011 Escrows Proposal, the Board proposed to define ``area''
as ``county'' and to provide that a county would be designated as
``rural'' during a calendar year if:

* * * it is not in a metropolitan statistical area or a micropolitan
statistical area, as those terms are defined by the U.S. Office of
Management and Budget, and either (1) it is not adjacent to any
metropolitan or micropolitan area; or (2) it is adjacent to a
metropolitan area with fewer than one million residents or adjacent
to a micropolitan area, and it contains no town with 2,500 or more
residents.

See 76 FR 11598, 11610-13 (March 2, 2011); proposed 12 CFR
1026.45(b)(2)(iv)(A).
Further, the Board proposed to clarify in Official Staff Commentary
to this provision that, on an annual basis, the Board would
``determine[] whether each county is `rural' by reference to the
currently applicable Urban Influence Codes (UICs), established by the
United States Department of Agriculture's Economic Research Service
(USDA-ERS). Specifically the Board classifies a county as ``rural'' if
the USDA-ERS categorizes the county under UIC 7, 10, 11, or 12.'' See
proposed comment 45(b)(2)(iv)-1.
The Board explained its proposed definition of ``rural'' in the
SUPPLEMENTARY INFORMATION to the proposal as follows:

The Board is proposing to limit the definition of ``rural''
areas to those areas most likely to have only limited sources of
mortgage credit. The test for ``rural'' in proposed Sec.
226.45(b)(2)(iv)(A), described above, is based on the ``urban
influence codes'' numbered 7, 10, 11, and 12, maintained by the
Economic Research Service (ERS) of the United States Department of
Agriculture. The ERS devised the urban influence codes to reflect
such factors as counties' relative population sizes, degrees of
``urbanization,'' access to larger communities, and commuting
patterns. The four codes captured in the proposed ``rural''
definition represent the most remote rural areas, where ready access
to the resources of larger, more urban communities and mobility are
most limited. Proposed comment 45(b)(2)(iv)-1 would state that the
Board classifies a county as ``rural'' if it is categorized under
ERS urban influence code 7, 10, 11, or 12.

Id. at 11612.
2011 ATR Proposal. The Dodd-Frank Act also amended TILA to impose
new requirements that creditors consider a consumer's ability to repay
a mortgage loan secured by the consumer's principal dwelling. See Dodd-
Frank Act section 1411, adding 15 U.S.C. 1639c. As part of these
amendments, the Dodd-Frank Act created a new class of loans called
``qualified mortgages'' and provided that creditors making qualified
mortgages would be presumed to have met the new ability to repay
requirements. See id. section 1412. Under the Act, balloon mortgages
can be considered qualified mortgages if they meet certain criteria,
including that the creditor ``operates predominantly in rural or
underserved areas.'' Id.
In May 2011, the Board issued the 2011 ATR Proposal to implement
these provisions.
In the ATR Proposal, the Board's proposed definition of ``rural''
and accompanying explanation in the Official Staff Commentary and
SUPPLEMENTARY INFORMATION are identical to the definition and

[[Page 10408]]

explanation quoted above in the 2011 Escrows Proposal. See 76 FR 27390,
27469-72 (May 11, 2011); proposed Sec. 1026.43(f)(2)(i) and comment
43(f)(2)-1.
As discussed in more detail in the 2013 ATR Final Rule and 2013
Escrows Final Rule, most commenters on the proposals for those
rulemakings objected to this definition of ``rural'' as too narrow (it
covers approximately 2 percent of the U.S. population). The narrow
scope of the definition of ``rural'' was viewed as especially onerous
because the scope was narrowed even further by a number of additional
conditions on the exemption imposed by the statute.\84\ As explained
more fully in the 2013 ATR Final Rule and 2013 Escrows Final Rule, the
Bureau is finalizing a more broad definition of ``rural,''
acknowledging that the exemption will nonetheless be narrowed by the
additional conditions.
---------------------------------------------------------------------------

\84\ For the exemption from the escrow requirement, the statute
states that the Board (now, the Bureau) may exempt a creditor that:
``(1) Operates predominantly in rural or underserved areas; (2)
together with all affiliates, has total annual mortgage loan
originations that do not exceed a limit set by the [Bureau]; (3)
retains its mortgage loan originations in portfolio; and (4) meets
any asset size threshold and any other criteria the [Bureau] may
establish . * * *'' TILA section 129D(c), 15 U.S.C. 1639d(c); see
also TILA section 129C(b)(2)(E), 15 U.S.C. 1639c(b)(2)(E) (granting
the Bureau authority to deem balloon loans ``qualified mortgages''
under certain circumstances, including that the loan is extended by
a creditor described meeting the same conditions set forth for the
exemption from the escrow requirement).
---------------------------------------------------------------------------

The Bureau is defining ``rural'' as UICs 4, 6, 7, 8, 9, 10, 11, or
12. These codes comprise all areas outside of MSAs and outside of all
micropolitan statistical areas except micropolitan statistical areas
that are not adjacent to MSAs. According to current U.S. Census data,
approximately 10 percent of the U.S. population lives in these areas.
Exemption for HPMLs secured by properties in rural counties from
the additional appraisal requirement. The Agencies believe that the
definition of ``rural'' county used by the Bureau is appropriate for
the exemption from the requirement to obtain an additional appraisal
under Sec. 1026.35(c)(4)(i) for loans in rural areas. In addition, the
Agencies view consistency across mortgage rules in defining rural
county as desirable for compliance and enforcement. Thus, the exemption
in Sec. 1026.35(c)(4)(vii)(H) cross-references the definition of rural
county in the HPML escrow provisions of revised Sec. 1026.35(b) (see
2013 Escrows Final Rule, Sec. 1026.35(b)(2)(iv)). (The same definition
of rural county is adopted by the Bureau in the 2013 ATR Final rule,
Sec. 1026.43(f)(2)(vi) and comment 43(f)(2)(vi-1).) The Agencies have
considered several factors in determining how to define the scope of
the exemption.
First, the Agencies believe that creditors must be readily able to
determine whether a particular transaction qualifies for the exemption.
This will be possible because the Bureau will annually publish on its
Web site a table of the counties in which properties would qualify for
this exemption. Comment 35(c)(4)(vii)(H)-1 cross-references comment
35(b)(2)(iv)-1, which clarifies that the Bureau will publish on its Web
site the applicable table of counties for each calendar year by the end
of that calendar year. The comment further clarifies that a property
securing an HPML subject to Sec. 1026.35(c) is in a rural county under
Sec. 1026(c)(4)(vii)(H) if the county in which the property is located
is on the table of rural counties most recently published by the
Bureau. The comment provides the following example: for a transaction
occurring in 2015, assume that the Bureau most recently published a
table of rural counties at the end of 2014. The property securing the
transaction would be located in a rural county for purposes of Sec.
1026(c)(4)(vii)(H) if the county is on the table of rural counties
published by the Bureau at the end of 2014. The Agencies anticipate
that loan officers and others will be able to look on the Bureau Web
site to identify whether the county in which the subject property is
located is on the list.
Second, the Agencies endeavored to create an exemption tailored to
address key concerns raised by commenters requesting a rural exemption,
based on data findings by the Agencies. The principal concerns that the
Agencies identified among commenters were that: first, adequate numbers
of appraisers might not be available in rural areas for creditors to
comply with the additional appraisal requirement and; second, the cost
of obtaining the additional appraisal might deter some creditors from
making HPMLs in these areas, many of which might already be
underserved, reducing credit access for rural consumers. As noted in
the proposed rule and discussed below, the potential reduction in
credit access might be disproportionally greater in rural areas than in
non-rural areas because the proportion of HPMLs is higher in rural as
opposed to non-rural areas.
For the reasons explained below, the Agencies believe that the
exemption for loans in rural areas as defined in the final rule is
appropriately tailored to address these and related concerns. By better
ensuring credit access and lowering costs among creditors extending
HPMLs in rural areas, including small community banks, the exemption is
expected to benefit the public and promote the safety and soundness of
creditors. See TILA section 129H(b)(4)(B), 15 U.S.C. 1639h(b)(4)(B).
Appraiser availability. As noted, commenters indicated that in some
rural areas it can be difficult to find appraisers who are both
competent to appraise a particular rural property and also readily
available. The cost-benefit analysis conducted by the Bureau for the
proposal focused in part on estimating appraiser availability in
particular areas and identified counties in which fewer than two
appraisers with requisite credentials indicated having a business or
home address.\85\ However, commenters noted and the Agencies confirmed
based on additional outreach for this final rule that not all
appraisers whose home or business address is in a particular geographic
area are competent to appraise properties in that area. Thus, to inform
the final rule, the Bureau expanded its research from that conducted
for the proposal.
---------------------------------------------------------------------------

\85\ See 77 FR 54722, 54752-54753 (Sept. 5, 2012).
---------------------------------------------------------------------------

For the final rule, the Bureau computed how many appraisers showed
that they had a home or business address within a 50-mile radius of the
center of each census tract in which an HPML loan was reported in the
2011 HMDA data.\86\ The 50-mile radius test was intended to be a proxy
for the potential service area for an appraiser in a more rural area
and would cover properties located in roughly an hour's drive of an
appraiser's home or office location.
---------------------------------------------------------------------------

\86\ The appraisers accounted for in the Bureau's analysis of
the National Appraiser Registry were listed on the Registry as
``active,'' ``AQB Compliant'' and either licensed or certified. The
Registry is available at https://www.asc.gov/National-Registry/NationalRegistry.aspx. ``AQB Compliant'' means that the appraiser
met the Real Property Appraisal Qualification Criteria as
promulgated by the Appraisal Qualifications Board on education,
experience, and examination. See Appraisal Subcommittee of the
Federal Financial Institutions Examination Council, https://www.asc.gov/Frequently-Asked-Questions/FrequentlyAskedQuestions.aspx#AQB%20Compliant%20meaning.
---------------------------------------------------------------------------

On this basis, the Bureau found that, of 262,989 HMDA-reported
HPMLs in 2011, 603 had fewer than five appraisers within a 50-mile
radius of the center of the tract in which the securing property was
located; 484 of these loans were in areas covered by the final rule's
rural exclusion. Based on FHFA data, the Bureau estimates that 5
percent of these HPMLs were potentially covered by the statute's
additional appraisal

[[Page 10409]]

requirement because they were purchase-money HPMLs secured by
properties sold within a 180-day window.\87\ A lower proportion would
have been flips with a price increase. See TILA section 129H(b)(2)(A),
15 U.S.C. 1639h(b)(2)(A). But taking solely the number of flips without
regard to price increase or other exemptions (see Sec. 1026.35(c)(2)
and (c)(4)(vii)), an estimated 30 HPML transactions that were flips had
fewer than five appraisers within a 50-mile radius of the center of the
census tract in which they were located (5 percent of 603 HPMLs).
Twenty-four of these would have been covered by the rural exemption as
defined in the final rule (5 percent of 484 HPMLs).
---------------------------------------------------------------------------

\87\ Based on county recorder information from select counties
licensed to FHFA by DataQuick Information Systems.
---------------------------------------------------------------------------

On this basis, the Agencies have concluded that the exemption is
reasonably tailored to exclude from coverage of the additional
appraisal requirement the loans for which appraiser availability might
be an issue.
Credit access. Commenters also raised concerns about credit access,
emphasizing that a larger proportion of loans in rural areas are HPMLs
than in non-rural areas. Commenters suggested that the additional
appraisal requirement could deter some creditors from extending HPML
credit. See Sec. 1026.35(c)(4)(v) and corresponding section-by-section
analysis.
The additional appraisal requirement entails several compliance
steps. After identifying that a loan is an HPML under Sec. 1026.35(a),
a creditor will need to assess whether the HPML is exempt from the
appraisal requirements entirely under Sec. 1026.35(c)(2). If the loan
is not exempt as a qualified mortgage or other type of transaction
exempt under Sec. 1026.35(c)(2), the creditor will need to determine
whether the HPML is one of the transactions that is exempt from the
additional appraisal requirement under Sec. 1026.35(c)(4)(vii). If the
HPML is not exempt from the additional appraisal requirement, the
creditor will need to determine whether the requirement to obtain an
additional appraisal is triggered based on the date and, if necessary,
price of the seller's acquisition of the property securing the HPML.
See Sec. 1026.35(c)(4)(i)(A) and (B). (Alternatively, the creditor
could assume that the requirement applies and order two appraisals
without taking each of these steps.) If the requirement is triggered,
the creditor must obtain an additional appraisal performed by a
certified or licensed appraiser, the cost of which cannot be charged to
the consumer. See id. and Sec. 1026.35(c)(4)(v).
If these compliance obligations would deter some creditors from
extending HPMLs, the impact on credit access might be greater in rural
areas as defined in the final rule than in non-rural areas, because a
significantly larger proportion of residential mortgage loans made in
rural areas are HPMLs than in non-rural areas. Again, based on 2011
HMDA data, 12 percent of rural first-lien, purchase-money loans were
HPMLs compared to four percent of non-rural first-lien, purchase-money
loan.\88\ That is, recent data indicates that HPMLs occur three times
as often in the rural setting.
---------------------------------------------------------------------------

\88\ Robert B. Avery, Neil Bhutta, Kenneth B. Brevoort, and
Glenn Canner, ``The Mortgage Market in 2011: Highlights from the
Data Reported under the Home Mortgage Disclosure Act,'' FR Bulletin,
Vol. 98, no. 6 (Dec. 2012) http://www.federalreserve.gov/pubs/bulletin/2012/PDF/2011_HMDA.pdf.
---------------------------------------------------------------------------

Thus, an important consideration for the Agencies in determining
the scope of the exemption was the comparative number of creditors
extending HPMLs in various geographic areas. To this end, the Agencies
considered, based on HMDA data, the number of creditors reported to
have extended HPML credit in the geographic units defined by the 12
UICs. (For more details, see the Section 1022(b)(2) cost-benefit
analysis in the SUPPLEMENTARY INFORMATION below.) The Agencies believe
that in the areas with a greater number of lenders reporting that they
extended HPMLs, the additional appraisal requirement will have a lower
impact on credit access.
HMDA data for 2011 show that a sharp drop-off in the number of
creditors reporting to extend HPML credit occurs in micropolitan
statistical areas not adjacent to MSAs (UIC 8), compared to MSAs and
micropolitan statistical areas that are adjacent to MSAs.\89\
Specifically, 10 creditors reported that they extended HPMLs in a
median county classified as UIC 8 in 2011; by contrast, in the median
counties of the UICs with the next highest populations (UICs 2, 3, 5),
the number of creditors reporting that they extended HPMLs was 24, 18,
and 16, respectively. The drop-off in numbers of HPML creditors
continues for UICs representing non-MSAs and non-micropolitan
statistical areas.\90\
---------------------------------------------------------------------------

\89\ More detail about the population densities represented by
the 12 UICs is provided in the Section 1022(b)(2) analysis in Part V
of the SUPPLEMENTARY INFORMATION.
\90\ Ten creditors reported extending HPML credit in 2011 in
UICs 6 and 4; six in UIC 11; seven in UIC 9; six in UIC 7; four in
UIC 10; and three in UIC 12.
---------------------------------------------------------------------------

The Agencies also looked at the estimated number of flips in areas
encompassed by the rural exemption of the final rule to determine
whether the consumer protections lost might outweigh the benefits of
the exemption. As explained in greater detail in the Section 1022(b)(2)
analysis, the Bureau estimates that, based on HMDA data, 122,806
purchase-money HPMLs were made in 2011; 21,370 of those were in the
areas covered by the rural exclusion. As noted, the Bureau estimates
that the proportion of purchase-money HPMLs involving properties sold
within 180 days is 5 percent.\91\ Thus, of HPMLs in rural counties as
defined in the final rule, an estimated 5 percent would have been
flips. This number does not account for any other exemptions from the
HPML appraisal rules that might apply to these HPMLs under Sec.
1026.35(c)(2) or (c)(4)(vii). It also does not account for the price
increase thresholds defining a transaction covered under the additional
appraisal requirement in this final rule. See Sec. 1026.35(c)(4)(i)(A)
and (B) and corresponding section-by-section analysis.
---------------------------------------------------------------------------

\91\ Based on county recorder information from select counties
licensed to FHFA by DataQuick Information Systems.
---------------------------------------------------------------------------

The Agencies believe that the exemption for HPMLs secured by rural
properties appropriately balances credit access and consumer
protection. As the data above suggests, the estimated number of HPML
consumers that would not receive the protections of an additional
appraisal due to this exemption is very small. Moreover, the Agencies
note that affected HPML consumers would still receive the consumer
protections afforded by the general requirement for an interior-
inspection appraisal performed by a certified or licensed appraiser.
See Sec. 1026.35(c)(3)(i).
In sum, the Agencies believe that the exemption in Sec.
1026.35(c)(4)(vii)(G) will help ensure that creditors in rural areas
are able to extend HPML credit without undue burden, which will in turn
mitigate any detrimental impacts on access to credit in rural areas
that might result absent the exemption. The Agencies further believe
that the exemption is appropriately tailored to ensure that needed
consumer protections regarding appraisals are in place in areas where
they are needed. For all of the reasons explained above, the Agencies
have concluded that the exemption in Sec. 1026.35(c)(4)(vii)(H) is in
the public interest and promotes the safety and soundness of creditors.

[[Page 10410]]

35(c)(5) Required Disclosure

35(c)(5)(i) In General
Title XIV of the Dodd-Frank Act added two new appraisal-related
notification requirements for consumers. First, TILA section 129H(d)
states that, at the time of the initial mortgage application for a
higher-risk mortgage loan, the applicant shall 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). The Agencies interpret TILA section
129H(d) to provide the elements that a disclosure imposed by regulation
should address. 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); see also 77 FR 50390 (Aug.
21, 2012) (2012 ECOA Appraisals Proposal) and the Bureau's final ECOA
appraisals rule (2013 ECOA Appraisals Final Rule).\92\ Read together,
the revisions to TILA and ECOA 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.
---------------------------------------------------------------------------

\92\ The Bureau released the 2013 ECOA Appraisals Final Rule on
January 18, 2013, under Docket No. CFPB-2012-0032, RIN 3170-AA26, at
http://consumerfinance.gov/Regulations.
---------------------------------------------------------------------------

The Agencies proposed text for the notice required by TILA section
129H that was intended to incorporate the statutory elements, using
language honed through consumer testing designed to minimize confusion
both with respect to the language on its face, as well as when read in
conjunction with appraisal notices required under the ECOA. Under the
proposal, the TILA section 129H notice stated: ``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.''
As explained more fully below, in Sec. 1026.35(c)(5), the Agencies
are adopting the proposed disclosure provision with one change--in
effect, including the word ``promptly'' in the disclosure is optional.
Public Comments on the Proposal
The Agencies received approximately 20 comments pertaining to the
proposal on the text, timing, and form of the HRM appraisal notice. The
comments came from banks and bank holding companies, credit unions,
bank and credit union trade associations, an appraisal industry trade
association, GSEs, consumer advocates, and an industry service
provider. Regarding the text of the disclosure, the Agencies requested
comment on the proposed language and whether additional changes should
be made to the language to further enhance consumer comprehension.
Combining ECOA/TILA notices. A bank and service provider commented
that the proposed text was clear and easy to understand. A major bank,
a credit union trade association, and GSEs supported the proposal to
streamline and integrate the ECOA appraisal notice and the TILA
appraisal notice into a single notice. The credit union trade
association noted this harmonization would increase the likelihood
consumers would read and understand the notice. No commenters objected
to the integration of the ECOA and TILA notices.
Use of ``promptly'' for the timing of disclosure of appraisals.
Several commenters--a bank and two bank trade associations at the State
level--expressed concern that the term ``promptly'' in the proposed
notice was not defined, and that the failure to define the term could
lead to consumer confusion as well as disputes. One commenter suggested
that the term ``promptly'' be defined as within three days before
closing, which the commenter indicated would be consistent with
Regulation B.
Use of the term ``appraisal,'' without reference to ``valuations.''
A major bank suggested that the term ``valuations'' should be added to
the text of the notice, because disclosure of valuations also is
required by ECOA (and the 2012 ECOA Appraisals Proposal, finalized in
the 2013 ECOA Appraisals Final Rule). Because consumers may be
unfamiliar with the term ``valuation,'' the bank also suggested that
the notice include a list of documents that constitute a ``valuation,''
and several other statements regarding how valuations may be conducted
and used by the lender. A GSE also suggested that the term
``valuations'' appear in the notice, so that when copies of valuations
are provided under ECOA consumers would not mistake them for
appraisals.
Statement that the appraisal will be provided even if the loan does
not close. A bank trade association at the State level commented on the
part of the notice stating that the appraisal would be provided ``even
if your loan does not close.'' The commenter suggested that consumers
need to be informed that the creditor is not ``compelled to order an
appraisal if it is determined that the loan will not be consummated
prior to appraisal order process.'' This commenter suggested adding the
qualifier, ``if an appraisal was obtained.''
Ability of creditor to levy certain charges. One bank commenter
expressed concern that the proposed notice did not condition the right
of the borrower to receive a copy of the appraisal upon the borrower's
payment for the appraisal. A credit union trade association suggested
that the notice clarify that the borrower may be charged for any
``additional copies'' of the appraisal that are requested by the
borrower.
Potential for consumer expectations regarding creditor use of the
applicant-ordered appraisal. Several commenters--national and State
banking trade associations, a major credit union trade association, and
an appraisal industry trade association--expressed concern over the
text informing the applicant of the applicant's right to order his or
her own appraisal for his or her own use. These commenters noted that
the proposed notice did not clearly state what use, if any, a creditor
could make of a borrower-ordered appraisal.
Three commenters suggested that the notice clarify that
the borrower-ordered appraisal would not be used by the creditor. One
of these commenters stated that Federal guidelines prohibited use of
the borrower-ordered appraisal as the appraisal for the transaction.
The bank trade associations argued that the creditor is prohibited by
law from ``considering'' the borrower-ordered appraisal (pointing, for
example, to the Appraisal and Evaluation Interagency Guidelines \93\).
Similarly, a national credit union trade association suggested that the
notice clarify that a borrower-ordered appraisal ``will not be taken
into consideration.''
---------------------------------------------------------------------------

\93\ The Interagency Guidelines state: ``An institution's use of
a borrower-ordered or borrower-provided appraisal violates the
[FIRREA title XI] appraisal regulations. However, a borrower can
inform an institution that a current appraisal exists, and the
institution may request it directly from the other financial
services institution.'' 75 FR 77450, 77458 (Dec. 10, 2010).
---------------------------------------------------------------------------

By contrast, another State bank trade association
suggested a less categorical clarification, that the lender

[[Page 10411]]

``has no obligation to use or review any borrower-ordered appraisal.''
Discussion
Section 1026.35(c)(5) of the final rule provides that, unless an
exemption from the HPML appraisal rules applies under Sec.
1026.35(c)(2) (discussed in the corresponding section-by-section
analysis above), a creditor shall disclose the following statement, in
writing, to a consumer who applies for an HPML: ``We may order an
appraisal to determine the property's value and charge you for this
appraisal. We will 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.'' Section 1026.35(c)(5) further provides that
compliance with the disclosure requirement in Regulation B, 12 CFR
Sec. 1002.14(a)(2) satisfies the requirements of this paragraph. Under
Sec. 1026.35(c)(5)(ii) in the final rule, this disclosure shall be
delivered or placed in the mail no later than the third business day
after the creditor receives the consumer's application for a higher-
priced mortgage loan subject to Sec. 1026.35(c). In the case of a loan
that is not a higher-priced mortgage loan subject to Sec. 1026.35(c)
at the time of application, but becomes a higher-priced mortgage loan
subject to Sec. 1026.35(c) after application, the disclosure shall be
delivered or placed in the mail not later than the third business day
after the creditor determines that the loan is a higher-priced mortgage
loan subject to Sec. 1026.35(c).
Combining ECOA/TILA notices. As noted, there was strong industry
support for harmonizing the ECOA/TILA notice language. Consumer testing
also supported this harmonization, as discussed in the proposal. The
Agencies therefore retain the proposed approach of harmonizing the TILA
appraisal notice with language for the ECOA notice.
Use of ``promptly'' for the timing of disclosure of appraisals. The
Agencies have decided to give creditors the option of providing the
HPML appraisal disclosure with or without the word ``promptly.''
Specifically, the final rule clarifies that a creditor may comply with
the HPML appraisal disclosure requirement--which does not incorporate
``promptly''--by providing the disclosure required under ECOA's
Regulation B, which does. Indeed, this is the only difference between
the two notices. The model language for the Bureau's final rule
implementing ECOA's appraisal disclosure requirement in Regulation B
incorporates ``promptly'' to conform to statutory language in ECOA. See
ECOA section 701(e)(1), 15 U.S.C. 1691(e)(1); see also 2013 ECOA
Appraisals Final Rule, 12 CFR part 1002, Appendix C (model form C-9).
Specifically, ECOA requires that a creditor of a first-lien dwelling-
secured mortgage provide the applicant with a copy of each written
appraisal and other valuation ``promptly, and in no case later than
three days prior to closing of the loan, whether the creditor grants or
denies the applicant's request for credit or the application is
incomplete or withdrawn.'' ECOA section 701(e)(1), 15 U.S.C.
1691(e)(1). TILA's ``higher-risk mortgage'' appraisal requirements in
section 129H(c) do not use the word ``promptly'' in describing the
timing requirement for creditors to provide a copy of the appraisal.
Instead, the timing requirement is defined only as ``at least 3 days
prior to the transaction closing date.'' 15 U.S.C. 1639h(c).
In the final rule, the Agencies are not requiring HPML creditors to
include ``promptly'' in the HPML appraisal notice under Sec.
1026.35(c)(5)(i) because ``promptly'' is not the legal standard for
providing a copy of the appraisal in TILA section 129H(c). 15 U.S.C.
1639h(c).
At the same time, the Agencies recognize that all first-lien
dwelling-secured mortgages, including first-lien HPMLs, are subject to
the ECOA disclosure and appraisal copy requirements. Therefore, under
the final rule, first-lien HPML creditors who wish to provide a single
notice to comply with both TILA and ECOA can do so by using the ECOA
notice with the word ``promptly'' into the disclosure. Subordinate-lien
HPMLs are subject only to TILA's rules on appraisal copies, not ECOA's,
so the timing requirement of ``promptly'' does not apply to creditors
of subordinate-lien HPMLs. Therefore, under the final rule,
subordinate-lien HPML creditors have the option of providing a
disclosure without the word ``promptly;'' however, the final rule also
makes it clear that any creditor, whether of a first- or subordinate-
lien HPML, complies with the HPML appraisal disclosure requirement by
complying with the disclosure requirement under ECOA's Regulation B. As
noted, the model language for the ECOA/Regulation B disclosure includes
the word ``promptly.''
Use of term ``appraisal,'' without reference to ``valuations.'' For
several reasons, the Agencies have decided to retain the term
``appraisal'' in the disclosure notice and not refer to ``valuations.''
First, the duty to disclose valuations in addition to appraisals arises
under ECOA, not TILA. The Bureau sought comment on the issue in its
proposed ECOA appraisal rule and is not requiring the use of the term
``valuation'' in its final version of that rule. See 77 FR 50390, 50396
(Aug. 21, 2012); 2013 ECOA Appraisals Final Rule Sec. 1002.14(a)(1)
and appendix C, Form C-9. The Agencies do not believe that the issue is
appropriately addressed in a rule implementing the TILA requirement
expressly relating only to ``appraisals.''
The Agencies also note that, as discussed more fully in the
Bureau's 2013 ECOA Appraisals Final Rule, consumer comprehension would
not necessarily be enhanced by use of the term ``valuation.'' In
consumer testing by the Bureau, for example, a settlement statement
whose ``appraisal'' section did not refer to valuations generally was
viewed as less confusing than one that did refer to valuations.
Including the term ``valuations'' in the HPML appraisal notice also
might confuse subordinate-lien borrowers and creditors, because neither
TILA nor ECOA requires disclosure of valuations for subordinate-lien
loans.
Statement that the appraisal will be provided even if the loan does
not close. The Agencies are retaining the proposed language that the
consumer will receive a copy of the appraisal ``even if your loan does
not close.'' This reflects the statutory requirement of providing a
copy of each appraisal ``conducted,'' a requirement the Agencies
interpret as applying whether or not the loan ultimately is
consummated. TILA section 129H(c) and (d), 15 U.S.C. 1639h(c) and (d).
The Agencies decline to add a qualifier suggested in public
comments explaining that the creditor might not order an appraisal if
the creditor determines that the applicant will not qualify for a loan
before the appraisal is ordered. The Agencies do not believe that this
clarification, while true, is necessary for the disclosure. The
proposed notice, now adopted, states that the creditor ``may'' order an
appraisal. This language indicates that the creditor is not always
required to order an appraisal. Further, the proposed text, now
adopted, states that the creditor will provide a copy of ``any
appraisal.'' This additional language also underscores the possibility
that in some situations (such as if the loan will not close), an
appraisal might not be ordered.
Ability of creditor to levy certain charges. The Agencies decline
to add language to the disclosure indicating that the consumer's right
to receive a

[[Page 10412]]

copy of the appraisal is conditioned on payment for the appraisal. TILA
does not condition the consumer's right to receive a copy of each
appraisal in an HPML transaction on payment for the appraisal. See TILA
section 129H(c), 15 U.S.C. 1639h(c). Moreover, a statement to this
effect would directly contradict the statutory prohibition against
charging for any second appraisal required by the HPML appraisal rule.
See TILA section 129H(b)(2)(B), 15 U.S.C. 1639h(b)(2)(B), implemented
in Sec. 1026.35(c)(4)(v), discussed above. Such a statement would also
further complicate the disclosure, potentially increasing consumer
confusion. Regarding whether a creditor may condition the consumer's
right to receive a copy of an appraisal for a first-lien HPML
transaction that is also subject to ECOA, the Agencies believe that the
issue is more properly addressed in the 2013 ECOA Appraisals Final
Rule.\94\
---------------------------------------------------------------------------

\94\ Regulation B currently does not require a creditor to
provide an appraisal before the borrower pays for it. 12 CFR
1002.14(a)(2)(ii). The Bureau's 2012 ECOA Appraisals Proposal would
have eliminated this aspect of Regulation B, however. See 77 FR
50390, 50403 (Aug. 21, 2012). The Bureau adopted this change in the
2013 ECOA Appraisals Final Rule. See new Sec. 1002.14(a)(1).
---------------------------------------------------------------------------

The Agencies also decline to revise the appraisal notice to state
that the creditor may charge the consumer for additional copies. The
proposed notice, as adopted, refers to the obligation to provide ``a
copy,'' singular. Consumer testing did not suggest consumers were
likely to believe that they had a right to multiple free copies, and it
is unclear that borrowers frequently or even regularly request multiple
copies of the appraisals. The Agencies believe that consumer
understanding is best enhanced by keeping the disclosure as simple as
possible, in part by excluding nonessential information.
Potential for consumer expectations regarding creditor use of a
borrower-ordered appraisal. The proposed disclosure stated: ``You can
pay for an additional appraisal for your own use at your own cost.'' As
noted, several commenters expressed concerns that this statement might
create misunderstandings about whether the creditor has an obligation
to consider an appraisal ordered by a consumer. Some commenters
suggested additional language to address the issue.
The Agencies are not adopting additional language for the
disclosure on this issue. Consumer testing on iterations of the
disclosure language did not indicate that the proposed notice would
mislead borrowers into believing that creditors are required to
consider borrower-ordered appraisals. The language concerning use of a
borrower-ordered appraisal evolved during the consumer testing, to
reduce confusion. One version of language the Bureau tested contained
no suggestion as to the use of borrower-ordered appraisals: ``You can
choose to pay for your own appraisal of the property.'' \95\ Consumers
participating in the testing had difficulty understanding the purpose
of this language; moreover, industry testing participants noted a
concern that consumers might take it to mean that the consumer could
order the consumer's own appraisal to be used by the creditor in lieu
of the creditor-ordered appraisal.\96\ The Bureau subsequently modified
the language to add the ``for your own use'' language,\97\ and this is
the language the Agencies proposed. The Agencies believe that the
phrase, ``for your own use,'' is succinct and enhances consumer
understanding that an appraisal ordered by the consumer is not a
substitute for the appraisal ordered by the creditor.
---------------------------------------------------------------------------

\95\ Kleimann Communication Group, Inc., Know Before You Owe:
Evolution of the Integrated TILA-RESPA Disclosures (July 9, 2012),
at 254-56 (Round 9, Version 1).
\96\ Id.
\97\ This language was included in the disclosure testing in
Round 10.
---------------------------------------------------------------------------

In addition, the Agencies do not wish to include language in a
disclosure that might inadvertently discourage consumers from
questioning the appraisal report ordered by the creditor and providing
the creditor with any supporting information that may be relevant to
the question of the property's value.
The Agencies also recognize that creditors are subject to existing
Federal regulatory and supervisory regulations and requirements that
provide additional guidance to creditors about appropriate and
inappropriate use of borrower-ordered appraisals. To affirm these
existing requirements, the final rule states in comment 35(c)(5)(i)-2
that nothing in the text of the consumer notice required by Sec.
1026.35(c)(5) should be construed to affect, modify, limit, or
supersede the operation of any legal, regulatory, or other requirements
or standards relating to independence in the conduct of appraisers or
the prohibitions against use of borrower-ordered appraisals by
creditors.
Finally, comment 35(c)(5)(i)-1 reflects without change a proposed
comment clarifying 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
consistent with the statutory language requiring the creditor to
provide a disclosure to ``the applicant.'' This interpretation is also
consistent 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. This aspect of existing
Regulation B is retained in the Bureau's 2013 ECOA Appraisals Final
Rule, in Sec. 1002.14(a)(1) and comment 14(a)-1.

35(c)(5)(ii) Timing of Disclosure

TILA section 129H(d) requires that the appraisal notice be provided
at the time of the application. 15 U.S.C. 1639h(d). Consistent with
this requirement, and recognizing that the ``higher-risk'' status of
the proposed loan would not necessarily be determined at the precise
moment of the application, the Agencies proposed to require that the
TILA section 129H notice ``be mailed or delivered not later than the
third business day after the creditor receives the consumer's
application.'' The proposed requirement also stated that, if the notice
is not provided to the consumer in person, the consumer is presumed to
have received the notice three days after its mailing or delivery.
The final rule adopts this provision with two changes. First, the
final rule omits the proposed language providing that ``[i]f the
disclosure is not provided to the consumer in person, the consumer is
presumed to have received the disclosure three business days after they
are mailed or delivered.'' While commenters did not address the issue,
the Agencies have concluded that the date of consumer receipt in this
context is not relevant. By contrast, as discussed in the section-by-
section analysis for Sec. 1026.35(c)(6), below, the Agencies emphasize
in the final rule the relevance of the date that a consumer receives
the copy of the appraisal. Second, the final rule provides that, in the
case of an application for a loan that is not an HPML at the time of
application, but whose rate is set at an HPML level after application,
the disclosure must be delivered or placed in the mail not later than
the third business day after the creditor determines that the loan is
an HPML.
Public Comments on the Proposal
In the proposal, the Agencies asked for 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.

[[Page 10413]]

The Agencies further asked whether, in cases such as in-person or
telephone applications, the notice should be provided at the time the
application is received, or as part of the application. The Agencies
also requested comment on whether a creditor who has a reasonable
belief that the transaction will not be a ``higher-risk mortgage loan''
(now, HPML) at the time of application, but later determines that the
applicant only qualifies for an HPML, should be allowed an opportunity
to give the notice at some later time in the application process.
Timing issues for the HPML appraisal notice. The majority of
commenters--banks, major industry trade associations, and a software
and document service provider--supported a timing requirement that
would allow them to integrate the HPML appraisal notice into the TILA-
RESPA Loan Estimate (as proposed in the 2012 TILA-RESPA Proposal \98\),
using the same disclosure timing requirement as proposed for that
disclosure--within three business days after the application. This
timing requirement is consistent with the Agencies' proposal for the
HPML disclosure. These commenters offered three reasons why an earlier
deadline would be inappropriate:
---------------------------------------------------------------------------

\98\ 77 FR 51116 (Aug. 23, 2012).
---------------------------------------------------------------------------

The trade associations and the service provider noted that
the lender cannot charge an appraisal fee before the TILA Good Faith
Estimate (GFE) is disclosed and the consumer elects to proceed. See
Sec. 1026.19(a)(1)(ii) As a result, there is no value to an appraisal
notice that precedes the TILA GFE.
One of the banks asserted that it would be difficult for a
creditor to comply with a deadline for the notice that is any earlier
than the TILA GFE disclosure deadline, because the rate and therefore
``higher-risk mortgage'' status of a loan is not typically known
earlier. Similarly, the service provider also added that it would be
unrealistic to expect the creditor to determine the status while the
applicant is submitting the application.
The service provider also noted that consumers prefer
integrated disclosures.
Two community banks and a State bank trade association submitted
substantially identical comments opposing the three-business-day
deadline, however. These commenters argued that complying with the
notice requirement in the first few days after the application will
slow the loan approval process and increase loan costs. These
commenters called instead for a 10 business day deadline.
No commenters responded to the question in the proposed rule of
whether the notice should be provided at the time the application is
received, or as part of the application.
Potential need for a mechanism to provide the notice later. Two
banks, a credit union trade association at the State level, and a
service provider supported including a method in the rule for a
creditor to comply with the disclosure requirement if the loan is
determined to be an HPML after the time of application. For example, if
the rate were not locked, HPML status could arise later in the
application process when the rate is set. One large bank noted,
however, that if the language in the notice under this rule is the same
as in the ECOA notice, then there would be no need to allow this type
of cure right for loans that are subject to ECOA (i.e., first-lien
dwelling-secured HPMLs).
Discussion
Again, under Sec. 1026.35(c)(5)(ii) of the final rule, the
disclosure required under Sec. 1026.35(c)(5)(i) shall be delivered or
placed in the mail no later than the third business day after the
creditor receives the consumer's application for a higher-priced
mortgage loan subject to Sec. 1026.35(c). In the case of a loan that
is not a higher-priced mortgage loan subject to Sec. 1026.35(c) at the
time of application, but becomes a higher-priced mortgage loan subject
to Sec. 1026.35(c) after application, the disclosure must be delivered
or placed in the mail not later than the third business day after the
creditor determines that the loan is a higher-priced mortgage loan
subject to Sec. 1026.35(c).
Timing issues for the HPML appraisal notice. In Sec.
1026.35(c)(5)(ii), the final rule adopts the proposed timing
requirement of three business days after application. Congress did not
define the statutory phrase ``at the time of the application'' when
describing when the HRM appraisal notice must be provided. The Agencies
believe that the three-business-day timeframe in the proposed rule is a
reasonable and appropriate interpretation of the statute. As noted,
commenters generally supported a timeframe that would allow for
including the notice in the proposed combined TILA-RESPA Loan Estimate,
which would be provided within three business days after the
application. No commenter suggested that the Agencies should mandate
either an earlier or separate notice. Industry commenters correctly
pointed out that the appraisal charge cannot be levied prior to the
TILA GFE (and, as proposed, the TILA-RESPA Loan Estimate) being
provided in any event. As a result, it appears unlikely that creditors
would order appraisals before this time, so consumers would not appear
to have a significant need to receive the appraisal notice either
earlier or separately from the GFE or Loan Estimate. Adding new
separate notices could increase the volume of information consumers
receive, and potentially decrease consumer understanding.
The Agencies decline to adopt a timing requirement of more than
three business days after application, as some commenters suggested.
The statute requires that the disclosure be provided ``at
application,'' and a three-business-day timing requirement implementing
this would be consistent with the application-related disclosure
requirements of other residential mortgage rules, most notably the
current GFE and proposed TILA-RESPA Loan Estimate discussed above. See,
e.g., Sec. 1026.19(a)(1)(i); 77 FR 51116 (Aug. 23, 2012).
Potential need for a mechanism to provide the notice later. As one
commenter noted, clarification may be needed on how a creditor could
comply with the notice requirement when the loan becomes an HPML more
than three days after application due to the higher-priced rate being
set at a later date. As one commenter noted, this clarification would
not be necessary for first-lien loans. ECOA, as implemented in
Regulation B of the Bureau's 2013 ECOA Appraisals Final Rule, requires
notice within three business days after application for all first-lien
dwelling-secured loans, regardless of whether they are HPMLs. ECOA
section 701(e)(5), 15 U.S.C. 1691(e)(5); 2013 ECOA Appraisals Final
Rule Sec. 1002.14(a)(1). Further, the HPML appraisal notice is
integrated with the ECOA appraisal notice. See 2013 ECOA Appraisals
Final Rule, Sec. 1002.14(b) and appendix C, Form C-9. As the final
rule makes clear, by complying with the ECOA notice requirement, the
creditor would automatically comply with the HPML appraisal notice
requirement, even if the creditor had not yet determined that the loan
would be an HPML. Again, Sec. 1026.35(c)(5)(i) provides that
``[c]ompliance with the disclosure requirement in Regulation B Sec.
1002.14(a)(2) satisfies the requirements of [the HPML appraisal
disclosure requirement of Sec. 1026.35(c)(5)(i)].''
By contrast, the ECOA appraisal notice requirement does not apply
to subordinate-lien loans. Thus, for subordinate-lien mortgage
creditors, a rate increase that occurs more than three business days
after application (i.e.,

[[Page 10414]]

after the required HPML appraisal rule disclosure should have been
given) could trigger the HPML notice requirement. Accordingly, the
Agencies are adopting additional regulation text providing that a
creditor may issue the HPML appraisal notice within three business days
of determining the rate.

35(c)(6) Copy of Appraisals

35(c)(6)(i) In General
Consistent with TILA section 129H(c), the proposal required that a
creditor must provide a copy of any written appraisal performed in
connection with a higher-risk mortgage loan (now HPML) to the
applicant. 15 U.S.C. 1639h(c). A proposed comment clarified 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.
The Agencies received no comments on these aspects of the proposal
and, in Sec. 1026.35(c)(6)(i) and comment 35(c)(6)(i)-1, adopt them
without change.
35(c)(6)(ii) Timing
TILA section 129H(c) requires that the appraisal copy must be
provided to the consumer at least three days prior to the transaction
closing date. 15 U.S.C. 1639h(c). The proposal required creditors to
provide copies of written appraisals no later than ``three business
days'' prior to consummation of the higher-risk mortgage loan (now
HPML). The Agencies did not receive public comment on this aspect of
the proposal, but are making certain changes to the proposal, explained
below. Specifically, the Agencies have revised the proposed timing
requirement to include a timing rule for loans that are not
consummated. Thus, under new Sec. 1026.35(c)(6)(ii), creditors must
provide a copy of an appraisal required under Sec. 1026.35(c)(6)(i):
No later than three business days prior to consummation of
the higher-priced mortgage loan; or
In the case of a loan that is not consummated, no later
than 30 days after the creditor determines that the loan will not be
consummated.
For consistency with the other provisions of Regulation Z, the
proposal also used 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. The Agencies did not receive comment on this aspect of
the proposal, and adopt the proposed term ``consummation'' in Sec.
1026.35(c)(6)(ii).
As noted, TILA's requirement for when a creditor must give a copy
of the appraisal to the consumer is ``at least 3 days prior to the
transaction closing date.'' TILA section 129H(c), 15 U.S.C. 1639h(c).
Thus, the timing requirement is clear for consummated loans.
The Agencies interpret the statute, however, to require that a copy
of the appraisal also be given to HPML applicants when their loans do
not close because they are denied or withdrawn, or for any other
reason. In reaching this interpretation, the Agencies note that TILA
section 129H specifies that the appraisal copy shall be provided ``to
the applicant,'' without suggesting that only applicants whose loans
are closed are entitled to a copy. In addition, the requirement refers
to appraisals that are ``conducted,'' a term whose meaning is
independent of whether the loan closes. In the case of applicants'
loans that do not close, the Agencies are adopting a requirement that
the appraisal be provided ``no later than 30 days after the creditor
determines that the loan will not be consummated.'' Sec.
1026.35(c)(6)(ii)(A). The Agencies believe that this timing requirement
is a reasonable interpretation of the statute, which is silent on the
matter. The timing requirement is clear, which the Agencies believe
will reduce compliance burden and risks for creditors, and generally
consistent with longstanding timing requirements for providing copies
of appraisals under existing Regulation B, 12 CFR 1002.14(a)(2)(ii).
The approach is also reflected in the Bureau's 2013 ECOA Appraisals
Final Rule in Sec. 1002.14(a)(1).
In addition, as stated in the proposal, the Agencies believe that
requiring that the appraisal be provided three ``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 2013 ECOA Appraisals Final Rule,
which implements the appraisal requirements of new ECOA section
701(e)(1). See 15 U.S.C. 1691(e)(1). The Agencies did not receive
comment on this aspect of the proposal, and adopt the proposed language
``no later than three business days prior to consummation'' in Sec.
1026.35(c)(6)(ii).
To ensure that the consumer actually receives the appraisal in
advance of consummation so that the consumer can use it to inform the
consumer's credit decision, comment 35(c)(6)(ii)-1 explains that, for
purposes of the requirement to provide a copy of the appraisal three
days before consummation, ``provide'' means ``deliver.'' This comment
further explains that delivery occurs three business days after mailing
or delivering the copies to the last-known address of the applicant, or
when evidence indicates actual receipt by the applicant (which, in the
case of electronic receipt must be based upon consent that complies
with the Electronic Signatures in Global and National Commerce Act (E-
Sign Act) (15 U.S.C. 7001 et seq.)), whichever is earlier. Comment
35(c)(6)(ii)-2 clarifies that, for appraisals prepared by the
creditor's internal appraisal staff, the date of ``receipt'' is the
date on which the appraisal is completed.
Finally, comment 35(c)(6)(ii)-3 clarifies that the ECOA provision
allowing a consumer to waive the requirement that the appraisal copy be
provided three business days before consummation, does not apply to
higher-priced mortgage loans subject to Sec. 1026.35(c). ECOA section
701(e)(2), 15 U.S.C. 1691(e)(2), implemented in the 2013 ECOA
Appraisals Final Rule, Regulation B Sec. 1002.14(a)(1). The comment
further clarifies that a consumer of a higher-priced mortgage loan
subject to Sec. 1026.35(c) may not waive the timing requirement to
receive a copy of the appraisal under Sec. 1026.35(c)(6)(i).
35(c)(6)(iii) 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 E-Sign Act. In the proposal, the
Agencies stated their belief 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
this form. Accordingly, the proposal provided that any copy of a
written appraisal 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.
Public Comments on the Proposal
Two commenters--a bank holding company and a credit union--
requested that the final rule not impose the E-Sign Act requirement of
consumer consent to receiving HPML appraisals electronically. The first
commenter

[[Page 10415]]

indicated that challenges with the E-Sign Act compliance may result in
issuing a duplicate copy in paper form. The second commenter indicated
that these challenges may lead institutions to refuse to provide
appraisal copies electronically (to the detriment of those consumers
who prefer to receive them this way). A third commenter--a credit union
trade association--supported the option of electronic delivery, but did
not challenge the proposed E-Sign consent requirement.
Discussion
The E-Sign Act generally requires that, before written consumer
disclosures are made electronically, the consumer receive certain
prescribed notices and consent to the electronic disclosures in a
manner that reasonably demonstrates the ability to access the
information that will be disclosed electronically. The E-Sign Act
generally applies to statutes that require consumer disclosures ``in
writing.'' 15 U.S.C. 7001(c)(1). It is unclear from the comments
whether this E-Sign consent requirement would place a significant
burden on creditors. The Agencies continue to believe that the proposed
clarification that the E-Sign Act applies to providing copies of the
appraisal is appropriate and notes that it is consistent with the
Bureau's approach in the 2013 ECOA Appraisals Final Rule. Thus, in
Sec. 1026.35(c)(6)(iii), this clarification is adopted as proposed.

35(c)(6)(iv) No Charge for Copy of Appraisal

TILA section 129H(c) provides that a creditor shall provide one
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). In the proposal, the Agencies interpreted this
provision to prohibit creditors from charging consumers for providing a
copy of written appraisals required for higher-risk mortgage loans.
Accordingly, the proposal provided that a creditor must not charge the
consumer for a copy of a written appraisal required to be provided to
the consumer pursuant to new Sec. 1026.35(c)(6)(i).
A proposed comment clarified that the creditor is prohibited from
charging the consumer for any copy of a required appraisal, 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.
The Agencies received no comments on this aspect of the proposal
and adopt the proposed regulation text and comment without change in
Sec. 1026.35(c)(6)(iv) and comment 35(c)(6)(iv)-1.

35(c)(7) Relation to Other Rules

Section 1026.35(c)(7) clarifies that the final rule was adopted
jointly by the Agencies. This provision states that the Board is
codifying the HPML appraisal rules at 12 CFR 226.43 et seq.; the Bureau
is codifying the HPML appraisal rules at 12 CFR 1026.35(a) and (c); and
the OCC is codifying the HPML appraisal rules at 12 CFR Part 34 and 12
CFR Part 164. Section 1026.35(c)(7) further clarifies that there is no
substantive difference among the three sets of rules.
The NCUA and FHFA are adopting the rules as published in the
Bureau's Regulation Z at 12 CFR 1026.35(a) and (c), by cross-
referencing these rules in 12 CFR 722.3 and 12 CFR Part 1222,
respectively. The FDIC is adopting the Bureau's Regulation Z at 12 CFR
1026.35(a) and (c) without a cross-reference.
As noted above at the beginning of the section-by-section analysis,
Sec. 1026.35(a) is re-published in the final rule for ease of
reference, and the joint rulemaking authority extends to Sec.
1026.35(c).

V. Bureau's Section 1022(b)(2) Analysis of the Dodd-Frank Act

Overview

In developing the final rule, the Bureau has considered potential
benefits, costs, and impacts to consumers and covered persons.\99\ The
Bureau is issuing this final rule jointly with the Federal financial
institutions regulatory agencies and FHFA, and has consulted with these
agencies, HUD, and the FTC, including regarding consistency with any
prudential, market, or systemic objectives administered by such
agencies. The Bureau also has considered the comments filed by
industry, consumer groups, and others as described in the section-by-
section analysis. Data received from commenters relating to potential
benefits and costs, such as the cost of an appraisal, is discussed
below.
---------------------------------------------------------------------------

\99\ 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 final rule implements section 1471 of the
Dodd-Frank Act, which establishes appraisal requirements for certain
HPMLs. Consistent with the statute, the final rule allows a creditor to
originate a covered HPML transaction only if the following conditions
are met:
The creditor obtains a written appraisal;
The appraisal is performed by a certified or licensed
appraiser; and
The appraiser conducts a physical property visit of the
interior of the property.
In addition, as required by the Act, the final rule requires a
creditor in a covered HPML transaction to obtain an additional written
appraisal, at no cost to the borrower, if the transaction has each of
the following characteristics (subject to certain exemptions, as
discussed below):
The HPML will finance the acquisition of the consumer's
principal dwelling;
The seller acquired the property 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 price that
exceeds the price at which the seller acquired the home by more than 10
percent (if the seller acquisition was within 90 days of the consumer's
purchase agreement) or by more than 20 percent (if the seller
acquisition was within the past 91 to 180 days of the consumer's
purchase agreement).
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 price at which
the seller acquired the property and the price at which the consumer
would acquire 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 final rule also requires that within three days of the
application, the creditor provide the applicant with a brief disclosure
statement that the creditor may charge the applicant for an appraisal,
that the creditor will provide the applicant a copy of any appraisal,
and that the applicant may choose to have a separate appraisal
conducted at the expense of the applicant. Finally, the final rule
requires that the creditor provide the consumer with a free copy of any
written appraisals obtained for the transaction at least three (3)
business days before consummation, or within 30 days of determining the
transaction will not be consummated.
In many respects, the final rule codifies mortgage lenders' current
practices. In outreach calls to industry,

[[Page 10416]]

all respondents reported requiring the use of full-interior appraisals
in 95 percent or more of first-lien transactions \100\ and providing
copies of appraisals to borrowers as a matter of course if such a loan
is originated.\101\ The convention of using full-interior appraisals on
first liens has been developing to improve underwriting quality, and
the implementation of this rule would assure that the practice would
continue even under different market conditions.
---------------------------------------------------------------------------

\100\ Respondents include a large bank, a trade group of smaller
depository institutions, a credit union, and an independent mortgage
bank.
\101\ Respondents include a large bank, a trade group of smaller
depository institutions, and an independent mortgage bank.
---------------------------------------------------------------------------

The Bureau notes that many of the provisions in the final rule
implement self-effectuating amendments to TILA. The costs and benefits
of these provisions arise largely or in some cases entirely from the
statute and not from the rule that implements them. This rule provides
benefits compared to allowing these TILA amendments to take effect
without implementing regulations, however, by clarifying parts of the
statute that are ambiguous. Greater clarity on these issues covered by
the rule 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.\102\
---------------------------------------------------------------------------

\102\ While it is possible that some clarifications would put
greater burdens on creditors as compared to what the statute would
ultimately be found to mandate, the Bureau believes that the rule's
clarifying provisions generally mitigate burden.
---------------------------------------------------------------------------

Section 1022 permits the Bureau to consider the benefits, costs,
and impacts of the final 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 the major provisions of the final 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).\103\
---------------------------------------------------------------------------

\103\ 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 final rule.\104\ 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 rule.
---------------------------------------------------------------------------

\104\ The estimates in this analysis are based upon data and
statistical analyses performed by the Bureau. To estimate counts and
properties of mortgages for entities that do not report under the
Home Mortgage Disclosure Act (HMDA), the Bureau has matched HMDA
data to Call Report data and National Mortgage Licensing System
(NMLS) and has statistically projected estimated loan counts for
those depository institutions that do not report these data either
under HMDA or on the NCUA call report. The Bureau has projected
originations of higher-priced mortgage loans for depositories that
do not report HMDA in a similar fashion. These projections use
Poisson regressions that estimate loan volumes as a function of an
institution's total assets, employment, mortgage holdings, and
geographic presence. Neither HMDA nor the Call Report data have loan
level estimates of debt-to-income (DTI) ratios that, in some cases,
determine whether a loan is a qualified mortgage. To estimate these
figures, the Bureau has matched the HMDA data to data on the
historic-loan-performance (HLP) dataset provided by the FHFA. This
allows estimation of coefficients in a probit model to predict DTI
using loan amount, income, and other variables. This model is then
used to estimate DTI for loans in HMDA.
---------------------------------------------------------------------------

The primary source of data used in this analysis is data collected
under the Home Mortgage Disclosure Act (HMDA).\105\ Because the latest
wave of complete data available is for loans made in calendar year
2011, the empirical analysis generally uses the 2011 market as the
baseline. Data from the 4th quarter 2011 bank and thrift Call
Reports,\106\ the 4th quarter 2011 credit union call reports from the
NCUA, and de-identified data from the National Mortgage Licensing
System (NMLS) Mortgage Call Reports (MCR) \107\ for the 4th quarter of
2011 also were 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 with the
data from HMDA including HPML 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.
---------------------------------------------------------------------------

\105\ 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 FHA and 75-85
percent of other first-lien home loans, in both cases including
first liens on manufactured homes (which in some cases are subject
to the final rule). HUD, Office of Policy Development and Research
(2011), ``A Look at the FHA's Evolving Market Shares by Race and
Ethnicity,'' U.S. Housing Market Conditions (May), pp. 6-12.
Depository institutions (including credit unions) with assets less
than $40 million (in 2011), for example, and those with branches
exclusively in non-metropolitan areas and those that make no home
purchase loan or loan refinancing a home purchase loan secured by a
first lien on a dwelling, are not required to report under HMDA.
Reporting requirements for non-depository institutions depend on
several factors, including whether the company made fewer than 100
home purchase loans or refinancings of home purchase 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 2011: Highlights from the Data Reported under the
Home Mortgage Disclosure Act, 98 Fed. Res. Bull., December 2012,
n.6. In addition, HMDA data used in this analysis does not include
transactions secured by properties located in U.S. territories, or
refinance transactions where the existing loan is already a
refinance or a subordinate lien. Although the TILA HRM rule would
apply to otherwise covered HPMLs in these categories, the Bureau
does not believe there are a high number of transactions in these
categories. To the extent this gap understates costs, that effect
will be at least partially offset by the overstatement resulting
from including other data on transactions that are not subject to
the rule.
\106\ 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/.
\107\ The NMLS 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, and the number
and dollar amount of loans brokered. The Bureau noted in its Summer
2012 mortgage proposals that it sought to obtain additional data to
supplement its consideration of the rulemakings, including
additional data from the NMLS and the NMLS Mortgage Call Report,
loan file extracts from various lenders, and data from the pilot
phases of the National Mortgage Database. Each of these data sources
was not necessarily relevant to each of the rulemakings. The Bureau
used the additional data from NMLS and NMLS Mortgage Call Report
data to better corroborate its estimate the contours of the non-
depository segment of the mortgage market. The Bureau has received
loan file extracts from three lenders, but at this point, the data
from one lender is not usable and the data from the other two is not
sufficiently standardized nor representative to inform consideration
of the final rule. Additionally, the Bureau has thus far not yet
received data from the National Mortgage Database pilot phases. The
Bureau also requested that commenters submit relevant data. All
probative data submitted by commenters are discussed in this final
rule.
---------------------------------------------------------------------------

Other portions of the analysis rely on property-level data
regarding parcels and their related financing from DataQuick \108\ and
on data on the location of certified appraisers from the Appraisal
Subcommittee Registry.\109\

[[Page 10417]]

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.
---------------------------------------------------------------------------

\108\ DataQuick is a database of property characteristics on
more than 120 million properties and 250 million property
transactions.
\109\ The National Registry is a database containing selected
information about State certified and licensed real estate
appraisers and is publicly available at https://www.asc.gov/National-Registry/NationalRegistry.aspx.
---------------------------------------------------------------------------

Potential Benefits of the Rule for Covered Persons and Consumers

In a mortgage transaction, the appraisal helps the creditor avoid
lending based on an inflated valuation of the property, and similarly
helps consumers avoid borrowing based upon an inflated valuation.
Assuming that full-interior appraisals conducted by a certified or
licensed appraiser are more accurate than other valuation methods, the
rule would improve the quality of home valuations for those
transactions where such an appraisal would not be performed currently.
While the appraisal is used by the creditor, the improved valuation
also can prevent inflated valuations that would lead consumers to
borrowing that would not be supported by their true home value, as well
as deflated valuations (such as those that do not value an interior
which is of different than average quality) that can lead consumers to
be eligible for a narrower class of loan products that are priced less
advantageously. 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. By tightening
valuation standards for a class of transactions that are already priced
as higher-risk transactions, the rule may reduce both the risk of
default for creditors, as well as more accurately value the collateral
available to the creditor in the event of default. Furthermore, by
requiring the use of full interior appraisals in transactions involving
covered HPMLs, the statute prevents creditors from attempting to
compete on price by using less costly and possibly less accurate
valuation methods in underwriting. 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.
Benefits to consumers. The final rule ensures that covered HPML
transactions will have a written interior appraisal, and in some cases
a second written interior appraisal, and that consumers will receive an
appraisal notice and a copy of these appraisals. These requirements
will mostly benefit consumers whose transactions would not already have
written interior appraisals a copy of which they receive. The benefits
enjoyed by these consumers are described below.
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,
as well as on list prices, to make price determinations. These methods
may not lead a consumer to an accurate valuation of a property they
intend to purchase. For example, there is evidence that real estate
agents sell their own homes for significantly more than other similar
homes, which suggests that consumers may not be able to accurately
price the homes that they are selling.\110\ Other research, this time
in a laboratory setting, provides evidence that individuals are
sensitive to anchor values when estimating home prices.\111\ 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 who are applying for a HPML to 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.\112\
---------------------------------------------------------------------------

\110\ 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.
\111\ 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.
\112\ For example, in Quan and Quigley's theoretical model where
buyers and sellers 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.
---------------------------------------------------------------------------

While the consumer can order an appraisal voluntarily at any time,
an especially valuable time for the consumer to receive a copy of an
appraisal is before closing an HPML--whether it is for a home purchase,
a refinance, or a home improvement. Undoubtedly, some consumers are
aware of the benefits of an appraisal, and could have decided for
themselves whether they want to pay for it if one was not required or
otherwise prepared and provided under standard industry practice.
However, other consumers may be unaware of the benefits of an appraisal
in terms of improving accuracy of a home valuation, and to these
consumers the rule is especially valuable in an HPML transaction that
would not otherwise include an appraisal. Moreover, even the consumers
who are aware of the benefits would not be able to use the self-ordered
appraisal for any transactions with creditors, since those require
creditor-ordered valuations.
The Bureau believes that ensuring HPML borrowers receive appraisals
ensures that they will have more accurate information about the value
of their dwelling, and therefore about their net worth and whether they
have any equity in their dwelling. For transactions that would already
include the appraisal, the rule ensures that in similar transactions
consumers will continue to have an appraisal; for other transactions,
the rule will result in the appraisal. In either case, more accurate
information leads to better decisions and can lead to more investment
in the property in some cases by removing the uncertainty over the
value of the dwelling. The appraisal may also help to inform the
consumer of whether they may be overpaying for the property with a new
home purchase, about to invest more into a property that might be
valued at less than they think with a home improvement loan, or about
to pay the refinance cost on a property that they should sell instead.
The latter two points are especially valuable for consumers who are in
negative equity, or ``underwater'' situations (where the loan amount
exceeds the value of the dwelling). A consumer who finds out that she
is not underwater, when she thought that she might have been, has an
incentive to continue investing in the property and make sure that she
does not lose it in foreclosure or otherwise default. Conversely, a
consumer who finds out that he is underwater, when he thought that he
might not have been, might have second thoughts about any investments,
and will potentially want to pursue loss mitigation options or, if they
do not succeed and the consumer is facing financial difficulties or
default, agree on a short-sale or on a deed-in-lieu of foreclosure with
the creditor.
Aside from the aforementioned decisions, depending on the
alternative valuation, an appraisal can help the consumer to lower
their property tax, to forgo private mortgage insurance (PMI), and to
choose the correct property value for insurance purposes. A lower loan-
to-value (LTV) ratio might also result in a lower interest rate on the
loan, all else equal, as discussed further below. Again, the final rule
ensures these benefits are available to consumers in

[[Page 10418]]

transactions that do not currently have appraisals or provide copies to
applicants.
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 and
consequently, at a higher loan amount, which would be more costly to
the consumer who, in the case of an HPML borrower, also may have fewer
resources to repay the loan. This is particularly true when considering
that transactions subject to the rule will be those HPMLs that are not
qualified mortgages, and which therefore may involve higher points,
greater fees, or a higher debt-to-income ratio, among other
differences. In addition to the direct costs of paying more than the
true value for a property, buying an overvalued 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 also would help ensure an accurate estimate of
the value of the property. This would be particularly true in
transactions involving fraudulent flipping using an inadequate or
improperly performed first appraisal.\113\ Ensuring a more accurate
valuation of a flipped property might be especially valuable to a
consumer when borrowing an HPML (due to its higher price). In the case
of subordinate-lien transactions, the full-interior appraisal
requirement may prevent borrowers on HPMLs from extracting too much
equity if their property is overvalued by other valuation methods.
Accordingly, the appraisals required by the final rule could reduce the
chance consumers would be in a negative equity or near negative equity
situation, which can limit refinancing and selling opportunities.
---------------------------------------------------------------------------

\113\ Congress has noted a concern, for example, that parties to
a flipping transaction ``can often find an appraiser to inflate the
home's value.'' H.Rep. 111-94 (May 4, 2009) at 59.
---------------------------------------------------------------------------

At the same time, if a borrower is prepared to take out an HPML
based upon the creditor's use of a valuation other than an interior
appraisal, that valuation may be less likely to take into account
unique characteristics of the subject property, such as its setting in
the immediate neighborhood, its views, the quality of the exterior or
the residential structure, or its interior condition. For borrowers
where direct assessments of those characteristics would have improved
the valuation, the price of the loan may be based upon an LTV ratio
that is overstated, and the loan may be overpriced to the extent that
higher LTVs correlate with higher-priced loans.
The final rule also may support greater consumer choice in HPML
transactions, to the extent new creditors treat the appraisals required
as portable. For example, the FHA has taken steps to ensure appraisal
portability in the situation of an ``applicant who has gotten to the
appraisal stage of the home loan process, but'' the applicant decides
he or she is ``dissatisfied with [the] lender and decide[s] to find a
new one.'' \114\ The final rule ensures that if consumers would not
otherwise have an appraisal in HPML transactions for which they have
applied, then they will have an appraisal that may be able to be used
in alternative transactions that the consumer may pursue.
---------------------------------------------------------------------------

\114\ See FHA FAQ ``Are FHA Home Loan Appraisals Portable?''
available at http://www.fha.com/fha_article.cfm?id=350, citing FHA
Mortgagee Letter 09-29 (Sept. 18, 2009) (stating that FHA programs
allow for appraisal portability).
---------------------------------------------------------------------------

Codifying HPML valuation standards across the industry likely would
simplify the shopping process for consumers who receive HPML offers.
First, for consumers in HPML transactions that would not have otherwise
included an appraisal, the appraisals required by the rule may help to
improve consumers' 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 will include support for its findings of
the lower value, 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 HPMLs 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
valuation methods or know that different creditors will use different
methods, and therefore may benefit from the standardization the rule
can be expected to promote.
The final rule also will ensure that borrowers in covered HPML
transactions involving subordinate liens receive a notice informing
them about the appraisal process, of their ability to order their own
appraisal, and that they will receive copies of any appraisals at least
three business days prior to the consummation. Under ECOA section
701(e) and its implementing rules, applicants in transactions secured
by a first lien on a dwelling will receive this notice and a copy of an
appraisal; under this provision in the statute and the Bureau's 2013
ECOA Appraisals Final Rule, which takes effect on January 18, 2014,
these requirements do not apply to subordinate lien transactions,
however. The final rule fills this gap for borrowers on covered HPMLs,
ensuring they are better informed prior to entering into subordinate
lien loans, such as for home improvement purposes and other common
purposes.

Potential Costs of the Rule for Covered Persons

The costs of the 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 rule.
These can be separated into costs that are associated with the
origination of a single HPML and the costs of reviewing and
implementing the regulation.
Costs per HPML. The costs of the rule for covered persons that
derive from requirements to obtain 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 HPMLs that are purchase-money loans, first-lien
refinance loans, or closed-end subordinate lien loans are computed from
the loan-level HMDA data. Accepted statistical methods are used to
project loan counts for non-HMDA reporting depository
institutions.\115\ Estimates of the number of loan officers are
calculated from similar projections of applications per institution.
---------------------------------------------------------------------------

\115\ 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 IMBs uses a slightly different
approach.\116\ 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. To obtain a count of
full-time equivalent employees, this number is imputed for HMDA-
reporting IMBs based on the number of

[[Page 10419]]

applications (assuming 1.38 days per loan application).\117\
---------------------------------------------------------------------------

\116\ ``Independent Mortgage Bank'' refers to non-depository
mortgage lenders.
\117\ 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 292,000 HPMLs in 2011. Of these, the Bureau estimates
that 146,000 were purchase-money mortgages, 116,000 were first-lien
refinancings, and 30,000 were closed-end subordinate lien mortgages
that were not part of a purchase transaction.\118\ Due to the
exemptions from the rule, only a subset of HPMLs will be covered by the
rule. Qualified mortgages, for example, are exempt from the final rule,
as are reverse mortgages, loans for initial construction, temporary
bridge loans, and new manufactured housing sales.\119\ Conservatively,
the Bureau is preparing this estimate based upon a loan count without
subtracting construction loans, temporary bridge loans, loans for new
manufactured housing, or reverse mortgages. While these loans are
exempt from the final rule, the data sources do not separately break
them out and nationally-representative data on the number of loans that
fall into these specific categories and also meet the HPML definition
is not available.\120\ Subtracting only those HPMLs that would be
qualified mortgages under Regulation Z, Sec. 1026.43(e) \121\ results
in a loan count of approximately 26,000 HPMLs that are not qualified
mortgages, 12,000 of which were purchase-money mortgages, 12,000 of
which were first-lien refinancings, and 2,000 of which were closed-end
subordinate lien mortgages that were not part of a purchase
transaction. These are the number of loans originated annually that the
Bureau conservatively estimates currently would be subject to the final
rule.
---------------------------------------------------------------------------

\118\ Purchase-money mortgages include subordinate-lien HPMLs
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 HPML; to the extent that any of these subordinate-lien
purchase-money HPMLs were part of a transaction where the first lien
mortgage was a HPML the costs imposed by the rule would be double-
counted. First-lien refinancings include loans classified as first-
lien ``home improvement'' loans in HMDA.
\119\ Very conservatively, the PRA burden estimates for Agencies
other than the Bureau do not estimate and exclude the number of
HPMLs that are qualified mortgages. By contrast, based upon data
available to it, the Bureau does so in this section 1022 analysis
and its Regulatory Flexibility Act certification.
\120\ Similarly, no subtractions are made for boats, trailers,
or mobile homes, which also are exempt from the final rule. The
Bureau also notes that HMDA data includes same-creditor refinances
with lower rates and new payment schedules, within the meaning of 12
CFR 1026.20(a)(2). For purposes of this analysis, the Bureau assumes
the final rule applies to those transactions, which the HMDA data
also does not segregate. This assumption also accounts for the fact
that these transactions would not be qualified mortgages, under
Regulation Z comment 43(a)-1 adopted in the 2013 ATR Final Rule.
\121\ The final rule exempts all loans that would meet one or
more of the definitions of qualified mortgage in Sec. 1026.43(e).
See also 2013 ATR Final Rule, available at http://consumerfinance.gov. These loans are therefore excluded from the
HPML count.
---------------------------------------------------------------------------

The Bureau estimates that the probability that full-interior
appraisals are conducted as part of current practice is 95 percent for
purchase-money transactions, 90 percent for refinance transactions, and
5 percent for subordinate lien mortgage transactions.\122\ The Bureau
therefore estimates that the proposal would lead to full-interior
appraisals for approximately 3,800 HPML originations annually that
would not otherwise have a full-interior appraisal.\123\ A portion of
these HPMLs also would be subject to the requirement that lenders
obtain a second full-interior appraisal in situations where the home
that would secure the higher-risk mortgage is being resold at or within
180 days at a higher price that exceeds the seller's acquisition price
by 10 percent (if the seller acquired the property within 90 days) or
20 percent (if the seller acquired the property within 91 to 180 days).
Based on FHFA estimates from DataQuick noted in the proposal, the
Bureau estimates that the proportion of sales that are resales within
180 days is 5 percent. A significant number of HPMLs financing resales
would not be subject to the second appraisal requirement, however, due
to the price increase thresholds discussed above and to various
exemptions from the second appraisal requirement. For purposes of
estimating the number of HPMLs that are subject to the second appraisal
requirement, however, the Bureau conservatively only excludes the
estimated number of loans subject to the exemption for rural
loans.\124\ The rural exemption excludes 20.6 percent of the relevant
market by transaction volume, according to the 2011 HMDA data. The
Bureau therefore estimates that this provision of the rule would apply
to approximately 500 HPMLs annually.\125\ Accordingly, the Bureau
estimates that the number of HPMLs subject to only one new interior
appraisal under the rule would be 3,800, and the number of HPMLs
subject to a second interior appraisal under the rule would be 500,
resulting in a combined addition of 4,300 interior appraisals to HPML
transactions each year. This combined addition is the estimated total
effect of the rule on the number of appraisals each year.\126\
---------------------------------------------------------------------------

\122\ As other Agencies noted in the proposed rule, federal
regulations do not require interior appraisals in some cases, such
as for transactions below $250,000. To the extent creditors in those
transactions elect not to order interior appraisals, those
transactions would fall within the 5 percent of purchase-money
transactions, 10 percent of refinance transactions, and 95 percent
of subordinate lien transactions in which the Bureau assumes no
interior appraisal is currently performed.
\123\ (5%*12,249) + (10%*11,950) + (95%*2,091) = 3,794.
\124\ The Bureau has not been able to locate nationally-
representative data on the number of HPMLs that are flips that fall
within other categories of transactions that are exempt from the
second appraisal requirement.
\125\ (12,249*5%*(100% - 20.6%)) = 486.
\126\ The Bureau believes that under the 2013 ATR Final Rule
creditors generally will be able to determine at the outset of the
application process whether the loan will be a qualified mortgage.
Some creditors may, for their own risk management and at their
option, over-comply during the application process to mitigate any
risk that due to an error the loan as closed or handled post-closing
ultimately would not be a qualified mortgage. For example, under the
temporary qualified mortgage provision related to GSEs, a creditor
may determine early in the application process that a proposed HPML
would be a qualified mortgage because it meets the criteria for
purchase or guarantee by a GSE consistent with comment
43(e)(4)(iii)-4 in the Bureau's 2013 ATR Final Rule, but later find
that the loan is rejected by the GSE as ineligible for reasons
unrelated to the HPML rule. For the loan to be a qualified mortgage,
it is not necessary that the loan ultimately be purchased or
guaranteed by the GSE. But if the original eligibility determination
were invalid, then this could create a risk that the loan would not
meet the definition of a qualified mortgage. Such a loan potentially
still could meet the definition of qualified mortgage on other bases
than being eligible for purchase or guarantee by a GSE. But if not,
then under this final rule, origination of such a loan would have
been a violation if the creditor did not comply with the
requirements for HPML appraisals and no other exemption applied.
While these situations may be infrequent, some creditors may seek to
over-comply in order to mitigate the risk they may pose. The Bureau
does not believe over-compliance, to control for the risk of an
erroneous determination by the creditor that the loan was a
qualified mortgage, would lead to creditors ordering a significant
number of new appraisals above those estimated here.
---------------------------------------------------------------------------

The following discussion considers estimated compliance costs in
the order in which they arise in the mortgage origination process.
First, the rule requires that the creditor furnish the applicant with
the disclosure required by Sec. 1026.35(c)(5)(i).\127\ The cost of
this disclosure--at most, delivery of a single piece of paper with a
standardized disclosure that could be delivered with

[[Page 10420]]

other documents or disclosures--would be very low.\128\
---------------------------------------------------------------------------

\127\ 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 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.''
\128\ The Bureau notes that creditors in first lien transactions
making a disclosure required by Bureau rules implementing ECOA
section 701(e) also would automatically satisfy the disclosure
requirement under this rule; the final rule. In addition, the
disclosure is included in the proposed Loan Estimate as part of the
2012 TILA-RESPA Proposal (see 2012 TILA-RESPA Proposal, (published
July 9, 2012), available at http://files.consumerfinance.gov/f/201207_cfpb_proposed-rule_integrated-mortgage-disclosures.pdf.);
if that proposal were adopted, the cost of providing the disclosure
would be part of the overall costs of implementing that disclosure.
---------------------------------------------------------------------------

Second, the rule requires the creditor to verify whether a loan is
a HPML. However, the Bureau believes this activity does 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 under existing Regulation Z \129\ or to determine
if a loan is subject to the protections of the Home Ownership and
Equity Protection Act of 1994 (HOEPA).\130\
---------------------------------------------------------------------------

\129\ 12 CFR 1026.35.
\130\ 15 U.S.C. 1639.
---------------------------------------------------------------------------

The third step is an optional one. If a creditor decides to seek to
be eligible for the safe harbor provided for in Sec.
1026.35(c)(3)(ii), the creditor likely would take certain steps in the
process of ordering and reviewing a full-interior appraisal as
prescribed by the rule. The review process is described in the Appendix
N of the rule, and the Bureau assumes it will be performed by a loan
officer and to take 15 minutes on average (including the very brief
time needed to send a copy to the applicant, as discussed below).\131\
Assuming an average total hourly labor cost of loan officers of $48.29,
the cost of review per additional appraisal is $12.07.\132\ With an
estimated total number of annual additional appraisals--pursuant to
both the first and second appraisal requirements--of 4,300, the total
cost of reviewing those appraisals is $58,000 (rounded to the nearest
thousand).\133\
---------------------------------------------------------------------------

\131\ One community bank commenter stated that this estimate was
too low, but did not explain the amount of time it believed would be
required to review the appraisal under the rule. In any event, the
15 minute assumption is on average. Some appraisals would be assumed
to take more time, and others less. To the extent an appraisal is
deficient, and is sent for revision and then further review by the
creditor upon revision, this is not assumed to be a cost imposed by
the rule and rather is part of a standard underwriting process.
\132\ (.25* $48.29) = $12.07. The hourly wage rate is based on
the higher of the loan officer wages at depository institutions of
$31.69 and at non-depository institution of $32.16. Wages comprised
66.6 percent of compensation for employees in credit intermediation
and related fields in Q4 2011, according to the Bureau of Labor
Statistics Series ID CMU2025220000000D,CMU2025220000000P, available
at http://www.bls.gov/ncs/ect/#tables. All the hourly wage rates
below are computed similarly from the same source.
\133\ ($12.07*4,280) = $58,000 (rounded to the nearest
thousand).
---------------------------------------------------------------------------

In purchase transactions financed by a covered HPML, creditors also
will need to determine whether a second appraisal would be required
based upon prior sales or acquisitions involving the property that
would secure the loan. This would require labor costs to determine,
through reasonable diligence, whether the seller acquired the property
in the past 180 days, and if so, at a price that is sufficiently lower
than the contract sale price for the current transaction to trigger the
second appraisal requirement. The rule provides that reasonable
diligence can be performed through reliance on written source
documents, which may include, among others, the 10 types of documents
listed in new Appendix O to Part 1026. The Bureau believes creditors
typically already obtain many of the common source documents for other
purposes during the application process for a purchase-money HPML. The
Bureau estimates that reasonable diligence would take, on average, 15
minutes of staff time. Because an estimated 95 percent of covered HPML
transactions are not flips at all, in many cases this may be determined
from the available documentation more quickly than 15 minutes, simply
by determining that the seller's acquisition occurred more than 180
days before the borrower's purchase agreement. Of the 5 percent that
are flips, creditors may take more time to analyze price differences
versus the thresholds in the rule. Thus the 15 minute estimation is an
average. The dollar cost per covered HPML loan is therefore
$12.07.\134\ With total annual non-QM HPMLs that are purchase
transactions of 12,000, the total cost per year is estimated to be
$148,000 (rounded to the nearest thousand).\135\
---------------------------------------------------------------------------

\134\ (.25*$45.80) = $11.45.
\135\ ($12.07*12,249) = $148,000 (rounded to the nearest
thousand).
---------------------------------------------------------------------------

The Bureau believes 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 Sec.
1026.35(c)(4)(i) (requiring an additional appraisal for properties that
are the subject of certain 180-day resales).\136\ Based on a
nationally-representative dataset of the cost of appraisals, which as a
standard matter include interior inspections per the URAR form
discussed in the section-by-section analysis in this final rule, the
Bureau believes that the average cost of each full-interior appraisal
is $350.\137\ As noted above, the Bureau estimates that 486 second
full-interior appraisals would be required each year under the rule,
for a total cost to creditors of $170,000 (rounded to the nearest
thousand).\138\
---------------------------------------------------------------------------

\136\ The final rule, in Sec. 1026.35(c)(4)(v), prohibits the
creditor from charging the consumer for the cost of the additional
appraisal. For purposes of estimating the cost the rule imposes on
creditors, the Bureau assumes that the creditors will not pass
through any of the cost of the second appraisal to the consumers.
\137\ Based upon the industry dataset used in the proposal, the
Bureau calculates the median for the United States overall is $350,
the average is $351, and standard deviation is $92. The $350
estimated cost also falls within the range of $225 to $750 cited by
industry comments, most of which referred to costs between $300 and
$600. While the proposal had assumed a $600 cost, that cost was at
the highest state median (Alaska) in the industry dataset. Upon
further review, the Bureau believes that $350 is a more accurate
estimate of the average cost and that using a $600 cost would, while
being conservative, also overestimate the cost. In any event, the
estimated costs do not change significantly using a $600 estimate,
as noted in the Bureau's Regulatory Flexibility Analysis below.
\138\ (350*486) = $170,000 (rounded to the nearest thousand).
---------------------------------------------------------------------------

Finally, the rule also requires that free copies of appraisals be
provided to borrowers at least three business days before the loan is
consummated (or within 30 days of determining the loan will not be
consummated). In outreach prior to the proposal stage, market
participants, including a large bank, representatives from a national
community banking trade association, and a large independent mortgage
bank \139\ told the Bureau that, in cases where loans are consummated,
copies of appraisals that are ordered are provided to consumers 100
percent of the time. Indeed, GSEs also generally require that, as a
condition of eligibility for their purchase of a loan, copies of
appraisals be provided to consumers promptly upon completion but no
later than three days before consummation.\140\ The Bureau therefore
believes that for covered HPML first lien transactions, the requirement
to provide copies in the rule imposes no additional costs; any cost due
to providing copies for the small proportion of first lien transactions
that do not currently obtain and provide copies of appraisals is
estimated not to be significant. The only other costs of providing
copies of the appraisals would be for the 2,000 new appraisals in
subordinate lien transactions that the Bureau estimates would be caused
by the rule on an

[[Page 10421]]

annual basis. As noted in the PRA section of the final rule, the time
to send the copy can be assumed to be part of the 15 minutes of time
needed on average to review the appraisal. Given the number of extra
copies that would need to be provided, and the provision in the final
rule that allows these copies to be provided electronically based upon
consent under the E-Sign Act, the Bureau believes that this cost is not
significant.
---------------------------------------------------------------------------

\139\ Interviews conducted on May 15, 2012 and May 24, 2012.
\140\ Fannie Mae Selling Guide, ``Appraiser Independence
Requirements'' (Oct. 15, 2010) (Part III), available at https://www.fanniemae.com/content/fact_sheet/air.pdf; Freddie Mac, Single
Family Seller/Servicer Guide, Vol. 1, Exhibit 35, Appraiser
Independence Requirements (October 15, 2010) (same).
---------------------------------------------------------------------------

As noted above, the Bureau assumes that costs of many of the new
first appraisals would be borne directly by the consumers. This
increase in costs charged to HPML borrowers could deter some consumers
from agreeing to HPMLs. In these cases, however, creditors could agree
to fold the appraisal cost into the cost of the loan. To the extent
consumers would still be deterred from borrowing, creditors also could
waive the cost of the appraisal and absorb it, or otherwise reduce
origination fees.
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 loan officers to become familiar with the provisions
of the rule.\141\
---------------------------------------------------------------------------

\141\ As stated in the proposal, the Bureau estimates that on
average one lawyer and a variable number of compliance officers at
each institution will review the regulation for 1.5 hours each
person. Compliance officer review is assumed to vary by size and
type of the institution, 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: $116.08 for attorneys and $52.04 for compliance
officers. Actual review time will vary by institution. At some
institutions that do not originate non-QM HPMLs, review time may be
lower as lawyers and compliance officers may review secondary trade
press or other free sources of information. By contrast, for those
institutions that originate non-QM HPMLs, the review time may be
greater as it may include activities to prepare for implementation,
such as training. As also stated in the proposal, the Bureau
estimates that on average an additional 0.5 hours of training time
will be added to regular training programs for each loan officer.
Here again, training time will vary depending on whether the officer
is involved in origination of non-QM HPMLs. One community bank
commenter stated that the estimate in the proposal of 30 minutes for
training time was too low, but did not explain the amount of time it
believed would be required for training. Training time per officer
may be lower than average for many loan officers to the extent they
do not or are not likely to originate non-QM HPMLs, and closer to or
potentially more than average in some cases for those who do or may
originate such loans (because those officers would need to be
trained on how to comply with the rule, rather than simply alerted
to its existence). Finally, the Bureau also believes that as part of
routine software updates, creditors may make adjustments to software
systems to ensure compliance with this rule; the Bureau does not
believe these adjustments would impose significant additional costs
beyond the existing routine upgrade processes.
---------------------------------------------------------------------------

Potential Costs of the Rule to Consumers

The direct pecuniary costs to consumers that would be imposed by
the rule can be calculated as the incremental cost of having a full
interior appraisal instead of using another valuation method for the
relatively small subset of covered HPML transactions (a few thousand
annually as discussed above) where an appraisal is not currently
performed. As described above, the Bureau believes that consumers would
pay directly for all new first appraisals--but not the new second
appraisals that would be required because of a recent resale of the
property--for a total of 3,794 new first appraisals per year. Assuming
the consumer pays $350 for an appraisal that would not otherwise have
been conducted, versus $5 for an alternative valuation, gives a total
direct costs to consumers of 3,794 * ($350-$5) = $1,308,930 (rounded to
the nearest thousand).

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

Incremental costs in covered HPML transactions that would not
otherwise have a full-interior appraisal could reduce consumers' access
to non-QM HPMLs. However, the impact on access to credit is probably
negligible. Any costs that derive from the additional underwriting
requirements incurred under the rule are likely to be very small. What
matters, for both first and subordinate lien loans, are the incremental
costs from the difference between the full-interior appraisal and
alternative valuation method costs. These only arise in the fraction of
HPMLs where use of the interior appraisal is not already accepted
practice. For first liens, full interior inspection appraisals are
common industry practice: passing the cost of appraisals on to
consumers is current industry practice, and consumers appear to accept
the appraisal fee. The interior appraisal requirement therefore is
unlikely to cause a significant adverse effect on consumers' access to
this kind of credit. Furthermore, these costs may also be rolled into
the loan, up to LTV ratio limits, so buyers are unlikely to face short-
term liquidity constraints that prevent purchasing the home. The impact
of the rule on the volume of non-QM HPMLs originated may be relatively
greater for subordinate liens because in these transactions the rule
would impose an interior appraisal practice that is not as widespread
currently, and also because the cost of a full interior appraisal is a
larger proportion of the loan amount (because subordinate lien loans
are typically lower in amount than first lien loans). However, the
number of subordinate lien HPMLs that will be covered by the rule will
be small to begin with, excluding qualified mortgages; any changes in
non-QM HPML subordinate lien transaction 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.

Significant Alternatives Considered

In determining what level of review by creditors should be required
for full interior appraisals related to HPMLs, two alternatives were
considered in developing the proposed rule. One alternative considered
was to require a full technical review of the appraisal that would
comply with USPAP Standard 3 (USPAP3). Such a requirement, however,
would add substantially to the cost of each appraisal, as a USPAP3-
compliant review can cost nearly as much as a full interior appraisal.
Another alternative was to require creditors to have USPAP3-compliant
reviews conducted on a sample of the appraisals carried out on
properties related to an HPML. Reviewing a sample of appraisals,
however, would be most useful for creditors making a large number of
HPMLs and employing the same appraisers for a large number of those
loans. Given the small number of HPMLs made each year, the value of
sampling appraisals for full USPAP3 review is likely to be small.
In addition to the exemptions that were adopted in the final rule,
based upon its review of comments discussed in the section-by-section
analysis above, the Agencies also considered possible exemptions from
the final rule for ``streamlined'' refinance programs (such as programs
designed by certain government agencies and government-sponsored
enterprises that do not require appraisals), and loans of lower dollar
amounts, and clarification on application of the rule to loans secured
by certain property types. As discussed in the section-by-section
analysis, however, the Agencies did not adopt these exemptions or
clarifications in the final rule and instead intend to publish a
supplemental proposal to request additional comment on these issues.

[[Page 10422]]

Finally, the Agencies considered alternatives to the scope of the
second appraisal requirement for HPMLs on properties being resold
within 180 days. With respect to what price increase would trigger this
requirement, in addition to the approach adopted in the final rule, the
Agencies also considered whether the trigger should be any amount
greater than zero, an increase of 10 percent regardless of the number
of days between 0 and 180 days since the acquisition, or an increase of
20 percent regardless of the number of days between 0 and 180 days
since the acquisition. For the reasons outlined in the section-by-
section analysis above, the Agencies determined that setting staggered
price increase thresholds--more than 10 percent for properties acquired
within 90 days and more than 20 percent for properties acquired within
91 and 180 days--was more appropriate. In addition, the Agencies
considered providing no exemption from the second appraisal requirement
for loans on properties located in rural areas (as proposed), or
providing an exemption for loans on properties in rural areas defined
using combinations of urban influence codes (UICs). For the reasons
outlined in the section-by-section analysis above, the Agencies
determined that an exemption was appropriate for HPMLs secured by
properties located in certain UICs, as discussed in the section-by-
section analysis of Sec. 1026.35(c)(4)(vii)(H) above.

Impact of the Rule on Depository Institutions and Credit Unions With
$10 Billion or Less in Total Assets, as Described in Section 1026 \142\
---------------------------------------------------------------------------

\142\ 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
151,000 HPML loans in 2011. Assuming the mix of purchase money,
refinancings, and subordinate lien mortgages, and the proportion of
loans exempt as qualified mortgages, was the same at these institutions
as for the industry as a whole, the Bureau estimates that the rule will
require these institutions to have 1,966 full interior appraisals
conducted for transactions that would otherwise not have a full-
interior appraisal, and 252 new second full-interior appraisal (as is
be required by Sec. 1026.35(c)(4)), for a total of 2,218 appraisals.
As noted above, these estimates are derived without subtracting some of
the loans that are exempt from the overall rule. These estimates
therefore are conservative, given that these exemptions collectively
apply to a significant number of loans. The Bureau believes that the
impact on each creditor under $10 billion is substantially the same as
for the broader group of creditors described above. In particular,
based upon analysis of the same data sources described above, the
Bureau has determined the under $10 billion creditors have the same
cost per loan and similar one-time and ongoing burdens, with the
specific differences described above.

Impact of the Final Rule on Consumers in Rural Areas

The Bureau does not anticipate that the final rule will have a
unique impact on consumers in rural areas. The Bureau does not believe
that requiring one interior USPAP-compliant appraisal for a covered
HPML on a rural property will have a significantly greater impact than
the same requirement for a covered HPML on a non-rural property.\143\
Further, the final rule exempts these rural transactions from the
requirement to obtain a second appraisal on the property. Therefore,
the cost of creditor compliance with the second appraisal requirement
(including due diligence) will not be present for these transactions.
For these reasons, explained in more detail below, the Bureau does not
anticipate the final rule will have a unique or disproportionate impact
on consumers in rural areas.
---------------------------------------------------------------------------

\143\ Despite receiving some comments requesting an exemption
from the entire rule for rural HPMLs, the Agencies have not received
nationally-representative data indicating that the cost of first
appraisals for HPMLs would be disproportionately difficult to incur
in rural transactions.
---------------------------------------------------------------------------

As in the section 1022 analysis in the proposal, the Bureau
continues to conclude that there would be no unique impact on rural
consumers of the requirement to obtain the first appraisal. For first
lien transactions, conditional on taking out a mortgage, rural
consumers may take out first lien HPMLs at a higher rate than non-rural
consumers. Such a difference between rural and non-rural rates of first
lien HPMLs does not have a unique impact on rural consumers, however,
because the rule does not alter existing industry practice with respect
to appraisals for most first lien transactions. For subordinate lien
transactions, conditional on taking out a mortgage, in 2010 the
proportion of subordinate liens that were HPMLs were roughly the same
for consumers in rural areas as in non-rural areas, as illustrated in
Table 2 of the proposal. In addition, HMDA data for 2011 indicates the
proportion of subordinate liens in rural areas that were HPMLs (6.77
percent) was lower than the proportion for non-rural areas (8.53
percent). Thus, even though the rule may have a greater impact on
subordinate lien HPML transactions because appraisals are less common
currently for these transactions, rural consumers' subordinate liens
appear no more likely to be HPMLs than non-rural consumers, based upon
the recent HMDA data. As a result, there is no unique or
disproportionate impact on rural consumers in subordinate lien
transactions either.
With respect to the second appraisal requirement for certain
transactions involving flips, the Bureau believes that flips occur at
the same rate in rural areas as in non-rural areas. The second
appraisal requirement will not have any impact on consumers engaging in
transactions on properties in rural areas, however, because they are
exempt from the second appraisal requirement.\144\ As discussed in the
preamble to the final rule, based upon comments received and further
analysis, the Agencies have determined that there is a sufficient basis
for concern over availability of appraisers in rural areas to conduct a
second appraisal on rural HPML transactions, and consequently some
concern over credit availability if the second appraisal requirement
were applied to these transactions. The Agencies therefore have
exempted these transactions from the second appraisal requirement. This
determination in the final rule is based upon a broader consideration
of appraiser availability, as well as other factors discussed in the
section-by-section analysis above, than the Bureau considered in its
section 1022 analysis in the proposal stage. In its section 1022
analysis in the proposal, the Bureau concluded that sufficient
appraisers likely would be available for a property if there were two
active certified and licensed appraisers on the National Appraiser
Registry in the same or adjacent county. After reviewing a number of
industry comments

[[Page 10423]]

summarized in the section-by-section analysis above, however, the
Agencies concluded that this approach was too narrow. The existence of
an appraiser on the registry did not necessarily guarantee that the
appraiser was available, or if they were, that they would be competent
or charging a reasonable fee for the transaction. As discussed in more
detail in the section-by-section analysis above, when the Agencies
considered more broadly whether five appraisers were available within
50 miles, the potential for appraiser availability issues grew more
apparent. This broader approach was viewed as necessary, to account for
the fact that one or more of the active appraisers in the registry
results for a given property may not be available or appropriate for
the transaction.
---------------------------------------------------------------------------

\144\ If rural consumers had been subject to the additional
appraisal requirement for transactions in rural areas, then this
requirement may also have had a disproportionate impact on consumers
in rural areas because significantly more rural first lien mortgage
transactions were HPMLs according to 2010 HMDA data described in
Table 2 of the proposal.
---------------------------------------------------------------------------

VI. Regulatory Flexibility Act

Board

The Board prepared an initial regulatory flexibility analysis as
required by the Regulatory Flexibility Act (RFA) (5 U.S.C. 601 et seq.)
(RFA) in connection with the proposed rule. The regulatory flexibility
analysis otherwise required under section 604 of the RFA is not
required if an agency certifies, along with a statement providing the
factual basis for such certification, that the rule will not have a
significant economic impact on a substantial number of small entities.
5 U.S.C. 604, 605(b). The final rule covers 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.\145\ 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 final rule. Based on its analysis and for the reasons
stated below, the Board believes that this final rule will not have a
significant economic impact on a substantial number of small
entities.\146\
---------------------------------------------------------------------------

\145\ 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.
\146\ The Board notes that for purposes of its analysis, the
Board considered all creditors to which the final rule applies. The
Board's Regulation Z at 12 CFR 226.43 applies to a subset of these
creditors. See Sec. 226.43(g).
---------------------------------------------------------------------------

A. Reasons for the Final 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 in new TILA section 129H 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'' 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 no later than January 21, 2013.
The Agencies are issuing the final rule to fulfill their statutory duty
to implement the appraisal provisions added in new TILA section 129H.

B. Statement of Objectives and Legal Basis

The SUPPLEMENTARY INFORMATION above contains this information. As
discussed above, the legal basis for the final rule is new TILA section
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. Summary of Issues Raised by Commenters

In the proposed rule to implement the appraisal provisions in new
TILA section 129H, the Board sought information and comment on any
costs, compliance requirements, or changes in operating procedures
arising from the application of the rule to small institutions. The
Board received comments from various industry representatives,
including banks, credit unions, and the trade associations that
represent them. As discussed in the SUPPLEMENTARY INFORMATION above,
the commenters asserted that compliance with the proposed rule would
have a disproportionate impact on small entities and cited concerns
about the utility and expense of requiring these entities to comply
with all or some of the rule's requirements. These comments, however,
did not contain specific information about costs that will be incurred
or changes in operating procedures that will be required for
compliance.
In general, the commenters discussed the impact of statutory
requirements rather than any impact that the proposed rules themselves
would generate. Moreover, the Agencies have reduced the compliance
burden in the final rule by adding exemptions from both the written
appraisal and the additional written appraisal requirements. Thus, the
Board continues to believe that the final rule will not have a
significant impact on a substantial number of small entities.

D. Description of Small Entities to Which the Rules Apply

The final rule applies to creditors that make HPMLs subject to 12
CFR 1026.35(c).\147\ To estimate the number of small entities that will
be subject to the requirements of the rule, the Board is relying
primarily on data provided by the Bureau.\148\ According to the data

[[Page 10424]]

provided by the Bureau, approximately 3,466 commercial banks, 373
savings institutions, 3,240 credit unions, and 2,294 non-depository
institutions are considered small entities and extend mortgages, and
therefore are potentially subject to the final rule.
---------------------------------------------------------------------------

\147\ As discussed in the SUPPLEMENTARY INFORMATION above, the
Agencies in the final rule are referring to ``higher-risk
mortgages'' as HPMLs subject to 12 CFR 1026.35(c) in order to use
terminology consistent with that already used in Regulation Z.
\148\ See the Bureau's Regulatory Flexibility Analysis.
---------------------------------------------------------------------------

Data currently available to the Board are not sufficient to
estimate how many small entities that extend mortgages will be subject
to 12 CFR 1026.35(c), given the range of exemptions from the rules,
including the exemption for qualified mortgages. Further, the number of
these small entities that will make HPMLs subject to 12 CFR 1026.35(c)
in the future is unknown.

E. Projected Reporting, Recordkeeping and Other Compliance Requirements

The compliance requirements of the final rule are described in
detail in the SUPPLEMENTARY INFORMATION above.
The final rule generally applies to creditors that make HPMLs
subject to 12 CFR 1026.35(c), which are generally mortgages with an APR
that exceeds the APOR by a specified percentage, subject to certain
exceptions. The final rule generally requires creditors to obtain an
appraisal or appraisals meeting certain specified standards, provide
applicants with a notification regarding the use of the appraisals, and
give applicants a copy of the written appraisals used.
A creditor is required to determine whether it extends HPMLs
subject to 12 CFR 1026.35(c); if so, the creditor must analyze the
regulations. The creditor must establish procedures for identifying
mortgages subject to the new appraisal requirements. A creditor making
a HPML subject to 12 CFR 1026.35(c) must 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 must:
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
Have no actual knowledge to the contrary of facts or
certifications contained in the written appraisal.
A creditor must also determine whether it is financing the purchase
or acquisition of a mortgaged property by a consumer from a seller (1)
within 90 days of the seller's acquisition of the property for a resale
price that exceeds the seller's acquisition price by more than 10
percent; or (2) 91 to 180 days of the seller's acquisition of the
property for a resale price that exceeds the seller's acquisition price
by more than 20 percent. If so, the creditor must obtain an additional
appraisal of the property and confirm that the additional appraisal
meets the requirements of the first appraisal. The creditor also must
ensure that the additional appraisal includes 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 HPMLs subject to 12 CFR 1026.35(c) also must
design, generate, and provide a new notice to applicants. Specifically,
within three business days of application, a creditor must provide a
disclosure that informs consumers of the purpose of the appraisal, that
the creditor will provide the consumer with a copy of any appraisal,
and that the consumer may choose to have a separate appraisal conducted
at the expense of the consumer. In addition, creditors making HPMLs
subject to 12 CFR 1026.35(c) must provide the consumer with a copy of
each appraisal conducted at least three business days prior to closing
and develop systems for that purpose.
The Board believes that certain factors will mitigate the economic
impact of the final rule. First, the Board believes that only a small
number of loans will be affected by the final rule. For example,
according to HMDA data, less than four percent of first-lien home
purchase mortgage loans in 2010 or 2011 would potentially be subject to
the appraisal requirements of 12 CFR 1026.35(c).\149\ Moreover, most
home purchase loans do not involve properties that were previously
purchased within 180 days and therefore would not require an additional
written appraisal. 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.
---------------------------------------------------------------------------

\149\ This estimate does not account for exemptions provided in
the final rule.
---------------------------------------------------------------------------

Because of the small number of transactions affected, the Board
believes that the final rule is unlikely to have a significant economic
impact on a substantial number of small entities.

F. 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 final rule. The
final rule will work in conjunction with the existing requirements of
FIRREA title XI and its implementing regulations.

G. Discussion of Significant Alternatives

As described in the SUPPLEMENTARY INFORMATION, above, the Board has
sought to minimize the economic impact on small entities in several
ways. First, the final rule provides exemptions from both the written
appraisal and the additional written appraisal requirements, and
provides creditors with a safe harbor for determining that an appraiser
has met certain specified requirements. The final rule also replaces
the term ``higher-risk mortgage loan'' with ``higher-priced mortgage
loan'' in order to use terminology consistent with that already used in
Regulation Z. Moreover, the final rule seeks to reduce burden by
providing that the disclosure required at application may be fulfilled
by compliance with the disclosure requirement in Regulation B, 12 CFR
1002.14(a)(2). Lastly, the final 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 that
needed information is known. 15 U.S.C. 1639h(b)(2).
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.\150\ The Bureau

[[Page 10425]]

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.\151\ A FRFA is not required because this rule will not have a
significant economic impact on a substantial number of small entities.
---------------------------------------------------------------------------

\150\ For purposes of assessing the impacts of the final 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).
\151\ 5 U.S.C. 609.
---------------------------------------------------------------------------

A. Summary of Final Rule

The empirical approach to calculating the impact that the
regulation has on small entities subject to the final rule follows the
methodology, and uses the same data, as the above analysis conducted
under Section 1022 of the Dodd-Frank Act. The impact analysis focuses
on the economic impact of the final rule, relative to a pre-statute
baseline, for small depository institutions (DIs) and non-depository
independent mortgage banks (IMBs), also described in this impact
analysis as non-DIs. The Small Business Administration classifies DIs
(commercial banks, savings institutions, credit unions, and other
depository institutions) as small if they have no more than $175
million in assets, and classifies other real estate credit firms
(including non-DIs) as small if they have no more than $7 million in
annual revenues.\152\
---------------------------------------------------------------------------

\152\ 13 CFR Ch. 1.
---------------------------------------------------------------------------

The final rule implements section 1471 of the Dodd-Frank Act, which
establishes appraisal requirements for HPMLs that are not otherwise
exempt under the final rule. Under the exemptions in the final rule,
the final rule does not apply qualified mortgages as defined in the
Bureau's 2013 ATR Final Rule, transactions secured by a new
manufactured home, transactions secured by a mobile home, boat, or
trailer, transactions to finance the initial construction of a
dwelling, temporary bridge loans with a term of 12 months or less, or
reverse mortgages.
Consistent with the statute, the final rule allows a creditor to
make a covered HPML only if the following conditions are met:
The creditor obtains a written appraisal;
The appraisal is performed by a certified or licensed
appraiser; and
The appraiser conducts a physical property visit of the
interior of the property.
In addition, as required by the Act, the final rule requires a
creditor originating a covered HPML to obtain an additional written
appraisal, at no cost to the borrower, if certain conditions are met,
unless a transaction falls into one of the exemptions from this
requirement in the rule (exemptions are described in Sec.
1026.35(c)(4)(vii). The following conditions trigger this requirement:
The HPML 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 price that is
more than 10 percent higher than the price at which the seller acquired
the property (if the seller acquired the property within 90 days of the
consumer's purchase agreement) or more than 20 percent higher than the
price at which the seller acquired the property (if the seller acquired
the property within 91 to 180 days of the consumer's purchase
agreements).
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 price at which
the seller previously acquired the property, and the price at which the
consumer agreed to acquire 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 seller's previous
acquisition and the consumer's agreement to acquire the property.

Finally, the rule requires creditors in covered HPML transactions
to provide a standardized notice to consumers regarding the appraisal
process within three days of the application, as well as a free copy of
any written appraisal obtained for the transaction no later than three
business days prior to consummation of the transaction (or within 30
days of determining the transaction will not be consummated).

B. Number and Classes of Affected Entities

Of the roughly 17,462 depository institutions (including credit
unions) and IMBs, 12,568 are below the relevant small entity
thresholds. Of the small institutions, 9,094 are estimated to have
originated mortgaged loans in 2011. While loan counts exist for credit
unions and HMDA-reporting DIs and IMBs, they must be projected for non-
HMDA reporters. For IMBs, an accepted statistical method (``nearest
neighbor matching'') is used to estimate the number of these
institutions that have no more than $7 million in revenues from the
MCR.

Table 1--Counts of Creditors by Type
----------------------------------------------------------------------------------------------------------------
Entities that Small entities
originate any that originate
Category NAICS code Total entities Small entities mortgage loans any mortgage
\b\ loans
----------------------------------------------------------------------------------------------------------------
Commercial Banking.............. 522110 6,505 3,601 \a\ 6,307 \a\ 3,466
Savings Institutions............ 522120 930 377 \a\ 922 \a\ 373
Credit Unions \c\............... 522130 7,240 6,296 \a\ 4,178 \a\ 3,240
Real Estate Credit d e.......... 522292 2,787 2,294 2,787 \a\ 2,294
-------------------------------------------------------------------------------
Total....................... .............. 17,462 12,568 14,194 9,373
----------------------------------------------------------------------------------------------------------------
Source: 2011 HMDA, Dec 31, 2011 Bank and Thrift Call Reports, Dec 31, 2011 NCUA Call Reports, Dec 31, 2011 NMLSR
Mortgage Call Reports.
\a\ For HMDA reporters, loan counts from HMDA 2011. For institutions that are not HMDA reporters, loan counts
projected based on Call Report data fields and counts for HMDA reporters.
\b\ Entities are characterized as originating loans if they make one or more loans.

[[Page 10426]]

\c\ Does not include cooperatives operating in Puerto Rico. The Bureau has limited data about these
institutions, which are subject to Regulation Z, or their mortgage activity.
\d\ NMLSR Mortgage Call Report (``MCR'') for 2011. All MCR reporters that originate at least one loan or that
have positive loan amounts are considered to be engaged in real estate credit (instead of purely mortgage
brokers). For institutions with missing revenue values, the probability that institution was a small entity is
estimated based on the count and amount of originations and the count and amount of brokered loans.
\e\ Data do not distinguish nonprofit from for-profit organizations, but Real Estate Credit presumptively
includes nonprofit organizations.

C. Analysis

Although most DIs and non-DIs are affected by the final rule, the
final 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. For
DIs, revenue is obtained from the appropriate call report. For non-DIs,
the frequency of HPMLs is not available in the MCR. However, data
available in HMDA shows that the proportion of HPMLs 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
final rule.
The creditors will incur one-time costs of review, as described in
the analysis under section 1022 above, and ongoing costs, proportional
to the volume of HPMLs originated, and also as described in the section
1022 analysis above.
The Bureau estimates that 85 percent of the creditors affected are
going to have one-time costs of less than $300.\153\ Using an
alternative metric, 85 percent of the creditors have a ratio of one-
time costs to their revenue of less than 0.1 percent.\154\
---------------------------------------------------------------------------

\153\ Banks, saving institutions, and credit unions all have
comparatively lower numbers. For the small IMBs, 85 percent are
going to have one-time setup costs of less than $445.
\154\ Even for the small IMBs this ratio is less than 1 percent
for 85 percent of the IMBs. The numbers are much lower for the other
types of creditors.
---------------------------------------------------------------------------

For small DIs, Table 2 reports various statistics for the estimated
annual cost of compliance with the final 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) analysis. The table
shows that 85 percent of the small DIs and credit unions that originate
any HPMLs have costs of significantly less than one percent of the
revenue. This stays the same when the creditors are separated into
types.\155\
---------------------------------------------------------------------------

\155\ The final rule would not have a significant impact on a
substantial number of small DIs, even if the cost of appraisals were
assumed to be significantly higher than the average cost--such as at
$600, as conservatively assumed in the proposal based upon the state
with the highest median--and even if the analysis did not assume any
HPMLs would meet the criteria for exemptions in the final rule. The
switches from $350 to $600 for appraisal cost and from non-QM to all
HPMLs would increase the percentages in the table approximately by a
factor of 20. However, even then the impact remains well within 3
percent for 85 percent of the institutions.

Table 2--Recurring Costs of Rule as a Share of Revenue by Type of
Creditor (85th Percentile).
------------------------------------------------------------------------
Small HPML 85th
originators Percentile
------------------------------------------------------------------------
All Institutions........................ 4461 <0.01%
Banks................................... 3006 <0.01%
Thrifts................................. 310 <0.01%
Credit Unions........................... 1145 <0.01%
------------------------------------------------------------------------
Assumptions: Costs per-transaction and per-loan officer are as described
in the section 1022(b)(2) analysis. These include but are not limited
to the following: Full-interior appraisals--whether first or second--
cost $350, alternative valuations cost $5. In the absence of the rule,
the probability of a full-interior appraisal for a transaction is 95
percent for purchase-money transactions, 90 percent for refinance
transactions, and 5 percent for subordinate-lien mortgages. The
proportion of resales within 180 days is 5 percent, without regard to
difference in price. 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. The Bureau also
includes 15 minutes of loan officer time per loan to estimate whether
the transaction is a flip.

The Bureau also has analyzed the data for IMBs separately. Most
IMBs are small, and the Bureau does not possess the data on the
revenues of approximately 700 of those. As with the DIs and credit
unions, the effects of the rule are insignificant. Out of the 1,325
small IMBs that originate any HPMLs, and for whom the Bureau possesses
revenue information, 85 percent of the IMBs have costs below 0.30
percent of the revenue, using the same cost assumptions as for the
depository institutions and credit unions.\156\ The exemptions from the
rule and from its second appraisal requirement significantly reduce the
number of HPMLs subject to these requirements, almost tenfold. For the
remaining HPMLs that are covered by the rule, such as non-QM HPMLs,
because many of the costs imposed by the final rule are likely to be
passed on to consumers, this may result in a decrease in demand for
those loans (such as non-QM HPMLs). However, any possible decrease in
non-QM HPML volume is likely to be negligible. For both first-lien and
subordinate-lien HPMLs, the principal increase in cost to consumers is
the difference in costs between the full-interior appraisal and any
alternative valuation method costs; some other costs imposed by the
rule, such as creditor labor costs discussed in the section 1022(b)(2)
analysis above, and the cost of providing required disclosures, also
may be reflected in increases in the fees or rates charged in a class
of loans. These charges are unlikely to exceed $600. For first lien
transactions, full interior inspections are common industry practice so
for the typical first lien transaction this increase in cost 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

[[Page 10427]]

there is unlikely to be an adverse effect on demand.
---------------------------------------------------------------------------

\156\ The final rule would not have a significant impact on a
substantial number of small IMBs, even if the cost of appraisals
were assumed to be significantly higher than the average cost--at
$600, as conservatively assumed in the proposal--and even if the
analysis did not assume any HPMLs would meet the criteria for
exemptions in the final rule. The switches from $350 to $600 for
appraisal cost and from non-QM to all HPMLs would increase the
percentages in the table approximately by a factor of 20. However,
even then the impact remains well within 3 percent for 85 percent of
the institutions.
---------------------------------------------------------------------------

A more likely impact--albeit significantly reduced by the scope of
exemptions adopted in the final rule--would be on the volume of non-QM
HPMLs secured by subordinate liens because, in practice, these are the
transactions on which final rule imposes a change from the status quo,
and also because the cost of a full interior appraisal is a larger
proportion of the loan amount to the extent subordinate lien loan
amounts generally are lower than first lien loan amounts. However,
changes in the volume of subordinate lien non-QM HPMLs 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. In addition,
many creditors originating subordinate lien non-QM HPMLs can offer
alternative products that are not subject to the rule, such as
qualified mortgages or home equity lines of credit (HELOCs). 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 rule will not have a significant economic
impact on a substantial number of small entities.
FDIC
The RFA generally requires that, in connection with a final
rulemaking, an agency prepare a final regulatory flexibility analysis
that describes the impact of the final rule on small entities.\157\ 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 along with a statement providing the
factual basis for such certification in the Federal Register together
with the rule.
---------------------------------------------------------------------------

\157\ See 5 U.S.C. 601 et seq.
---------------------------------------------------------------------------

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 \158\ (HMDA) dataset to determine how many loans by
FDIC-supervised banks might qualify as HPMLs under section 129H of
TILA, as added by section 1471 of the Dodd-Frank Act.\159\ This
analysis reflected that only 70 FDIC-supervised banks originated at
least 100 HPMLs, with only four banks originating more than 500 HPMLs.
Further, the FDIC-supervised banks that met the definition of a small
entity originated on average less than eight HPML loans each in 2010.
---------------------------------------------------------------------------

\158\ The FDIC based its analysis on the HMDA data, as it
provided a proxy for the characteristics of HPMLs. While the FDIC
recognizes that fewer higher-priced 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.
\159\ The FDIC notes that the exact number of small entities
likely to be affected by the final rule is unknown because the FDIC
lacks reliable sources for certain information.
---------------------------------------------------------------------------

The three requirements \160\ in the final rule that could impact
small FDIC-supervised institutions most significantly are:
---------------------------------------------------------------------------

\160\ The requirements to provide consumers with a statement
disclosing the purpose of the appraisal and to furnish consumers a
copy of the appraisal without charge at least three days prior to
closing should not create a significant new burden, as most FDIC-
supervised institutions routinely provide required disclosures and
copies of the appraisal to consumers in a timely manner.
---------------------------------------------------------------------------

1. Requiring an appraisal in connection with 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 notes that Part 323 of
the FDIC Rules and Regulations \161\ (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 final rule will supersede
this exemption, resulting in creditors having to obtain an appraisal
for an HPML transaction regardless of the transaction amount. The
requirement to obtain an appraisal rather than an evaluation does not
add much, if any, new burden on FDIC-supervised institutions, as they
are required by Part 323 to obtain some type of valuation of the
mortgaged property. The final rule merely limits the type of
permissible valuation to an appraisal for HPMLs.
---------------------------------------------------------------------------

\161\ 12 CFR Part 323.
---------------------------------------------------------------------------

As for the second potential impact, the final rule's requirement
affects a lender only to the extent that a lender must instruct the
appraiser to conduct a physical visit of the interior of the mortgaged
property. 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. Thus, the physical visit requirement creates a potential
burden for the appraiser, not the lender, and the cost is born by the
applicant.
As for the third potential impact, the final rule's requirement to
conduct a second appraisal for certain transactions should not affect
many FDIC-supervised banks. As previously indicated, FDIC-supervised
banks that meet the definition of a small entity originated an average
of less than eight HPMLs each in 2010. According to estimates provided
by FHFA, about 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 shows that most small FDIC-supervised
banks will have to obtain a second appraisal for a nominal number of
transactions at the bank's expense. The estimated cost of a second
appraisal is between $350 to $600.
In sum, the FDIC believes that the final 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

[[Page 10428]]

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 number of
transactions. Accordingly, pursuant to section 605(b) of the RFA, the
FDIC certifies that the final rule will not have a significant economic
impact on a substantial number of small entities.
FHFA
The final 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 final rule,
an agency prepare and make available for public comment a final
regulatory flexibility analysis that describes the impact of the final
rule on small entities.\162\ 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 \163\ 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.
---------------------------------------------------------------------------

\162\ See 5 U.S.C. 601 et seq.
\163\ 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 HPMLs under section 129H of TILA.\164\ 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 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 HPML. The data reflects that only three FICUs
originated at least 100 HPMLs, with no FICUs originating more than 500
HPMLs, and 88 percent of reporting FICUs originating ten HPMLs or less.
Further, FICUs that met the SBA's definition of a small entity
originated an average four HPML loans each in 2010.\165\
---------------------------------------------------------------------------

\164\ NCUA based its analysis on the HMDA data, as it provided a
proxy for the characteristics of HPMLs. 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.
\165\ 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
HPMLs per real estate loan originated. Using this ratio to
interpolate the likely number of HPML originations, the analysis
suggests that small FICUs originate on average less than two HPML
loans each year.
---------------------------------------------------------------------------

As previously discussed, section 1471 of the Dodd-Frank Act \166\
generally prohibits a creditor from extending credit in the form of a
HPML to any consumer without first:
---------------------------------------------------------------------------

\166\ Codified at section 129H of the Truth-in-Lending Act, 15
U.S.C. 1631 et seq.
---------------------------------------------------------------------------

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 HPML finances the purchase or
acquisition of a property from a seller at a higher price than the
seller paid, within 180 days of the seller's purchase or acquisition.
The additional appraisal must include an analysis of the difference in
sale prices, changes in market conditions, and any improvements made to
the property between the date of the previous sale and the current
sale.
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.
The final rule implements the appraisal requirements of section
1471 of the Dodd-Frank Act. Part 722 of NCUA's regulations \167\
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
practices for such transactions.
---------------------------------------------------------------------------

\167\ 12 CFR part 722.
---------------------------------------------------------------------------

The final rule will supersede this exemption, resulting in FICUs
having to obtain an appraisal for a HPML 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 final rule merely limits the type of
permissible valuations to an appraisal for HPMLs.
The final rule'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
HPMLs, the fact that many creditors already require that an appraiser
conduct an interior inspection of mortgage collateral property in
connection with an appraisal; the fact that requiring an interior
inspection would add a relatively small amount to the cost of an
appraisal; and the various exemptions and exclusions from the
requirements provided in the rule, NCUA believes the final rule will
not have a significant economic impact on small FICUs.
For the reasons provided above, NCUA certifies that the final rule
will

[[Page 10429]]

not have a significant economic impact on a substantial number of small
entities. Accordingly, a regulatory flexibility analysis is not
required.
Executive Order 13132
Executive Order 13132 encourages independent regulatory agencies to
consider the impact of their actions on state and local interests.
NCUA, an independent regulatory agency as defined in 44 U.S.C. 3502(5),
voluntarily complies with the executive order to adhere to fundamental
federalism principles. This final rule applies to Federally insured
credit unions and will not have a substantial direct effect on the
states, on the relationship between the national government and the
states, or on the distribution of power and responsibilities among the
various levels of government. NCUA has determined that this final rule
does not constitute a policy that has federalism implications for
purposes of the Executive Order.
The Treasury and General Government Appropriations Act, 1999--
Assessment of Federal Regulations and Policies on Families
NCUA has determined this final rule will not affect family well-
being within the meaning of section 654 of the Treasury and General
Government Appropriations Act, 1999, Public Law 105-277, 112 Stat. 2681
(1998).
Small Business Regulatory Enforcement Fairness Act
The Small Business Regulatory Enforcement Fairness Act of 1996
\168\ (SBREFA) provides generally for congressional review of agency
rules. A reporting requirement is triggered in instances where NCUA
issues a final rule as defined by Section 551 of the Administrative
Procedure Act.\169\ NCUA does not believe this final rule is a ``major
rule'' within the meaning of the relevant sections of SBREFA. NCUA has
submitted the rule to the Office of Management and Budget (OMB) for its
determination.
---------------------------------------------------------------------------

\168\ Public Law 104-121, 110 Stat. 857 (1996).
\169\ 5 U.S.C. 551.
---------------------------------------------------------------------------

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 final 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 banks, savings institutions
and other depository credit intermediaries with assets less than or
equal to $175 million \170\ 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 final
rule.
---------------------------------------------------------------------------

\170\ ``A financial institution's asset are determined by
averaging 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-
priced mortgage loans. A ``higher-priced 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-priced 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, section 129H does not permit a creditor to extend
credit in the form of a higher-priced 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 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 1,926 banks (1,262 commercial banks,
65 trust companies, 552 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 banks
originate mortgages and therefore may be impacted by the final 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 $10,000 to an
upper bound of approximately $18,000. Using the upper bound cost
estimate, we believe the final rule will have a significant economic
impact on three small banks, which is not a substantial number.
Therefore, we believe the final rule will not have a significant
economic impact on a substantial number of small entities. The OCC
certifies that the Final Rule would not, if promulgated, have a
significant economic impact on a substantial number of small entities.
OCC Unfunded Mandates Reform Act of 1995 Determination
Section 202 of the Unfunded Mandates Reform Act of 1995 (2 U.S.C.
1532), requires the OCC to prepare a budgetary impact statement before
promulgating a rule that includes a Federal mandate that may result in
the expenditure by state, local, and tribal governments, in the
aggregate, or by the private sector, of $100 million or more in any one
year (adjusted annually for inflation). The OCC has determined that
this final rule will not result in expenditures by state, local, and
tribal governments, or the private sector, of $100 million or more in
any one year. Accordingly, the OCC has not prepared a budgetary impact
statement.

VII. Paperwork Reduction Act

Certain provisions of this final rule contain ``collection of
information'' requirements within the meaning of the Paperwork
Reduction Act (PRA) of 1995 (44 U.S.C. 3501 et seq.). Under the PRA,
the Agencies may not conduct or sponsor, and a person is not required
to

[[Page 10430]]

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 final 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 final rule under the authority delegated
to the Board by OMB.
Title of Information Collection: HPML Appraisals.
Frequency of Response: Event generated.
Affected Public: Businesses or other for-profit and not-for-profit
organizations.\171\
---------------------------------------------------------------------------

\171\ 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.\172\
---------------------------------------------------------------------------

\172\ 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 for 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 final rule are
found in paragraphs (c)(3)(i), (c)(3)(ii), (c)(4), (c)(5), and (c)(6)
of 12 CFR 1026.35. This information is required to protect consumers
and promote the safety and soundness of creditors making HPMLs subject
to 12 CFR 1026.35(c). This information is used by creditors to evaluate
real estate collateral securing HPMLs subject to 12 CFR 1026.35(c) and
by consumers entering these transactions. The collections of
information are mandatory for creditors making HPMLs subject to 12 CFR
1026.35(c). The final rule requires that, within three business days of
application, a creditor provide a disclosure that informs consumers of
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 12 CFR 1026.35(c)(5). If a loan is
a HPML subject to 12 CFR 1026.35(c), then the creditor is 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 (Written Appraisal), and provide a
copy of the Written Appraisal to the consumer. See 12 CFR
1026.35(c)(3)(i) and (c)(6). To qualify for the safe harbor provided
under the final rule, a creditor is required to review the Written
Appraisal as specified in the text of the rule and Appendix N. See 12
CFR 1026.35(c)(3)(ii).
A creditor is required to obtain an additional appraisal
(Additional Written Appraisal) for a HPML that is subject to 12 CFR
1026.35(c) if (1) the seller acquired the property securing the loan 90
or fewer days prior to the date of the consumer's agreement to acquire
the property and the resale price exceeds the seller's acquisition
price by more than 10 percent; or (2) the seller acquired the property
securing the loan 91 to 180 days prior to the date of the consumer's
agreement to acquire the property and the resale price exceeds the
seller's acquisition price by more than 20 percent. See 12 CFR
1026.35(c)(4). The Additional Written Appraisal must meet the
requirements described above and 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 date on which the consumer agreed to acquire the property. See 12
CFR 1026.35(c)(4)(iv). A creditor is also required to provide a copy of
the Additional Written Appraisal to the consumer. 12 CFR 1026.35(c)(6).

Comments on Proposed PRA Estimate

In the proposal, the Agencies proposed a Calculation of Estimated
Burden based on the proposed requirements. The Agencies received one
comment from a bank in response to the PRA estimate in the proposed
rule. The commenter asserted that the Agencies' proposed PRA estimates
to comply with the new requirements were understated, but the commenter
did not provide alternative estimates. The Agencies recognize that the
amount of time required of institutions to comply with the requirements
may vary; however, the Agencies continue to believe that estimates
provided are reasonable averages.
The requirements provided in the final rule are substantially
similar to those provided in the proposed rule. Based upon data
available to the Bureau as described in its section 1022 analysis above
and in the table below, the estimated burdens allocated to the Bureau
are revised from the proposal to reflect an institution count based
upon updated data and reduced to reflect those exemptions in the final
rule for which the Bureau has identified data. Because these data were
unavailable to the other Agencies before finalizing this PRA section,
the other Agencies did not adjust the calculations to account for the
exempted transactions provided in the final rule. Accordingly, the
estimated burden calculations in the table below are overstated.

Calculation of Estimated Burden

For the Initial Appraisal Disclosure, the creditor is required to
provide a short, written disclosure within three days of application.
Because the disclosure is classified as a warning label supplied by the
Federal government, the Agencies are assigning it no burden for
purposes of this PRA analysis.\173\
---------------------------------------------------------------------------

\173\ 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 Written Appraisal requirements
includes the creditor's burden of reviewing the Written Appraisal in
order to satisfy the safe harbor criteria set forth in the rule and
providing a copy of the Written Appraisal to the consumer.
Additionally, as discussed above, an Additional Written Appraisal
containing additional analyses is required in certain circumstances.
The Additional Written Appraisal must meet the standards of the Written
Appraisal. The Additional Written Appraisal is also required to be
prepared by a certified or licensed appraiser different from the
appraiser performing the Written Appraisal, and a copy of the
Additional Written Appraisal must be provided to the consumer. The
creditor must separately review the Additional Written Appraisal in
order to qualify for

[[Page 10431]]

the safe harbor provided in the final rule.
The Agencies estimate that respondents will take, on average, 15
minutes for each HPML that is subject to 12 CFR 1026.35(c) to review
the Written Appraisal and to provide a copy of the Written Appraisal.
The Agencies estimate further that respondents will take, on average,
15 minutes for each HPML that is subject to 12 CFR 1026.35(c) to
investigate and verify the need for an Additional Written Appraisal
and, where necessary, an additional 15 minutes to review the Additional
Written Appraisal and to provide a copy of the Additional Written
Appraisal. For the small fraction of loans requiring an Additional
Written Appraisal, the burden is similar to that of the Written
Appraisal. The following table summarizes these burden estimates.

Estimated PRA Burden

Table 3--Summary of PRA Burden Hours for Information Collections in Final Rule
----------------------------------------------------------------------------------------------------------------
Estimated
Estimated number of Estimated Estimated
number of appraisals per burden hours total annual
respondents respondent per appraisal burden hours
\174\
[a] [b] [c] [d] = (a*b*c)
----------------------------------------------------------------------------------------------------------------
Review and Provide a Copy of Written Appraisal
----------------------------------------------------------------------------------------------------------------
Bureau 175 176 177..............................
Depository Inst. > $10 B in total assets + 132 6.21 0.25 205
Depository Inst. Affiliates....................
Non-Depository Inst. and Credit Unions.......... 2,853 0.38 0.25 \178\136
FDIC............................................ 2,571 8 0.25 5,142
Board \179\..................................... 418 24 0.25 2,508
OCC............................................. 1,399 69 0.25 24,133
NCUA............................................ 2,437 6 0.25 3,656
---------------------------------------------------------------
Total....................................... 9,810 .............. .............. 35,780
----------------------------------------------------------------------------------------------------------------
Investigate and Verify Requirement for Additional Written Appraisal
----------------------------------------------------------------------------------------------------------------
Bureau..........................................
Depository Inst. > $10 B in total assets + 132 20.05 0.25 662
Depository Inst. Affiliates....................
Non-Depository Inst. and Credit Unions.......... 2,853 1.22 0.25 435
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....................................... 9,810 .............. .............. 41,035
----------------------------------------------------------------------------------------------------------------
Review and Provide a Copy of Additional Written Appraisal
----------------------------------------------------------------------------------------------------------------
Bureau..........................................
Depository Inst. > $10 B in total assets + 132 0.64 0.25 21
Depository Inst. Affiliates....................
Non-Depository Inst. and Credit Unions.......... 2,853 0.04 0.25 14
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....................................... 9,810 .............. .............. 2,015
----------------------------------------------------------------------------------------------------------------
Notes:
(1) Respondents include all institutions estimated to originate HPMLs that are subject to 12 CFR 1026.35(c).
(2) There may be an additional ongoing burden of roughly 75 hours for privately-insured credit unions estimated
to originate HPMLs that are subject to 12 CFR 1026.35(c). The Bureau will assume half of the burden for non-
depository institutions and the privately-insured credit unions.

Finally, respondents must also review the instructions and legal
guidance

[[Page 10432]]

associated with the final rule and train loan officers regarding the
requirements of the final rule. The Agencies estimate that these one-
time costs are as follows: Bureau: 36,383 hours; FDIC: 10,284 hours;
Board 3,344 hours; OCC: 19,586 hours; NCUA: 7,311 hours.\180\
---------------------------------------------------------------------------

\174\ The ``Estimated Number of Appraisals Per Respondent''
reflects the estimated number of Written Appraisals and Additional
Written Appraisals that will be performed solely to comply with the
final rule. It does not include the number of appraisals that will
continue to be performed under current industry practice, without
regard to the final rule's requirements.
\175\ The information collection requirements (ICs) in this
final 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).
\176\ The burden estimates allocated to the Bureau are updated
using the data described in the Bureau's section 1022 analysis
above, including significant burden reductions after accounting for
qualified mortgages that are exempt from the final rule, and burden
reductions after accounting for loans in rural areas that are exempt
from the Additional Written Appraisal requirement in the final rule.
\177\ There are 153 depository institutions (and their
depository affiliates) that are subject to the Bureau's
administrative enforcement authority. In addition, there are 146
privately-insured credit unions that are subject to the Bureau's
administrative enforcement authority. For purposes of this PRA
analysis, the Bureau's respondents under Regulation Z are 135
depository institutions that originate either open or closed-end
mortgages; 77 privately-insured credit unions that originate either
open or closed-end mortgages; and an estimated 2,787 non-depository
institutions that are subject to the Bureau's administrative
enforcement authority. Unless otherwise specified, all references to
burden hours and costs for the Bureau respondents for the collection
under Regulation Z are based on a calculation that includes half of
the burden for the estimated 2,787 non-depository institutions and
77 privately-insured credit unions.
\178\ The Bureau assumes half of the burden for the IMBs and the
credit unions supervised by the Bureau. The FTC assumes the burden
for the other half.
\179\ 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 final rule.
\180\ 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.
---------------------------------------------------------------------------

The Agencies have a continuing interest in the public's opinions of
our collections of information. At any time, comments regarding the
burden estimate, or any other aspect of this collection of information,
including suggestions for reducing the burden, may be sent to the OMB
desk officer for the Agencies 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 final rule does not contain any collections of information
applicable to the FHFA, 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.

VIII. Section 302 of the Riegle Community Development and Regulatory
Improvement Act

Section 1400 of the Dodd Frank Act requires this rule to take
effect not later than 12 months after the date of issuance of the final
rule. This rule is issued on January 18, 2013 and will become effective
on January 18, 2014. Section 302 of the Riegle Community Development
and Regulatory Improvement Act of 1994 (``RCDRIA'') requires that,
subject to certain exceptions, regulations issued by the OCC, the Board
and the FDIC that impose additional reporting, disclosure, or other
requirements on insured depository institutions, shall take effect on
the first day of a calendar quarter which begins on or after the date
on which the regulations are published in final form. This effective
date requirement does not apply if the issuing agency finds for good
cause that the regulation should become effective before such time. 12
U.S.C. 4802.
The OCC, the Board and the FDIC find that good cause exists to
establish an effective date for this rule other than the first date of
a calendar quarter, specifically January 18, 2014. This rule
incorporates key definitions from, and is designed to accommodate
combined disclosures with, other new mortgage-related rules being
issued by the Bureau that also have effective dates on and around
January 18, 2014. The consistent application of these rules will permit
depository institutions to implement the systems, policies and
procedures required to comply with this group of regulations in a
coordinated and efficient way. In addition, insured depository
institutions wishing to comply at the beginning of a calendar quarter
prior to the effective date retain the flexibility to do so.

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.

Department of the Treasury

Office of the Comptroller of the Currency

Authority and Issuance

For the reasons set forth in the preamble, the OCC amends 12 CFR
parts 34 and 164, as follows:

PART 34--REAL ESTATE LENDING AND APPRAISALS

0
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.

0
2. Subpart G to part 34 is added to read as follows:
Subpart G-- Appraisals for Higher-Priced Mortgage Loans
Sec.
34.201 Authority, purpose, and scope.
34.202 Definitions applicable to higher-priced mortgage loans.
34.203 Appraisals for higher-priced mortgage loans.
Appendix A to Subpart G--Higher-Priced Mortgage Loan Appraisal Safe
Harbor Review
Appendix B to Subpart G--Illustrative Written Source Documents for
Higher-priced Mortgage Loan Appraisal Rules
Appendix C to Subpart G--OCC Interpretations

Subpart G--Appraisals for Higher-Priced 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 without complying with the requirements of
section 129H of the Truth in Lending Act (15 U.S.C. 1639h) and this
subpart G. The definition of a higher-risk mortgage in section 129H is
consistent with the definition of a higher-priced mortgage loan under
Regulation Z, 12 CFR part 1026. Specifically, 12 CFR 1026.35 defines a
higher-priced mortgage loan as a closed-end consumer credit transaction
secured by the consumer's principal dwelling with an annual percentage
rate that exceeds the average prime offer rate for a comparable

[[Page 10433]]

transaction as of the date the interest rate is set:
(1) 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;
(2) 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; or
(3) By 3.5 or more percentage points, for a loan secured by a
subordinate lien.
(c) Scope. This subpart applies to higher-priced 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.
(d) Official Interpretations. Appendix C to this subpart sets out
OCC Interpretations of the requirements imposed by the OCC pursuant to
this subpart.

Sec. 34.202 Definitions applicable to higher-priced mortgage loans.

(a) Creditor has the same meaning as in 12 CFR 1026.2(a)(17).
(b) Higher-priced mortgage loan has the same meaning as in 12 CFR
1026.35(a)(1).
(c) Reverse mortgage has the same meaning as in 12 CFR 1026.33(a).

Sec. 34.203 Appraisals for higher-priced 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) Manufactured home has the same meaning as in 24 CFR 3280.2.
(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) Exemptions. The requirements in paragraphs (c) through (f) of
this section do not apply to the following types of transactions:
(1) A qualified mortgage as defined in 12 CFR 1026.43(e).
(2) A transaction secured by a new manufactured home.
(3) A transaction secured by a mobile home, boat, or trailer.
(4) A transaction to finance the initial construction of a
dwelling.
(5) A loan with a maturity of 12 months or less, if the purpose of
the loan is a ``bridge'' loan connected with the acquisition of a
dwelling intended to become the consumer's principal dwelling.
(6) A reverse-mortgage transaction subject to 12 CFR 1026.33(a).
(c) Appraisals required--(1) In general. Except as provided in
paragraph (b) of this section, a creditor shall not extend a higher-
priced 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 obtains a written appraisal that meets
the requirements for an appraisal required under paragraph (c)(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 contrary to the facts or
certifications contained in the written appraisal.
(d) Additional appraisal for certain higher-priced mortgage loans--
(1) In general. Except as provided in paragraphs (b) and (d)(7) of this
section, a creditor shall not extend a higher-priced mortgage loan to a
consumer to finance the acquisition of the consumer's principal
dwelling without obtaining, prior to consummation, two written
appraisals, if:
(i) The seller acquired the property 90 or fewer days prior to the
date of the consumer's agreement to acquire the property and the price
in the consumer's agreement to acquire the property exceeds the
seller's acquisition price by more than 10 percent; or
(ii) The seller acquired the property 91 to 180 days prior to the
date of the consumer's agreement to acquire the property and the price
in the consumer's agreement to acquire the property exceeds the
seller's acquisition price by more than 20 percent.
(2) Different certified or licensed appraisers. The two appraisals
required under paragraph (d)(1) of this section may not be performed by
the same certified or licensed appraiser.
(3) Relationship to general appraisal requirements. If two
appraisals must be obtained under paragraph (d)(1) of this section,
each appraisal shall meet the requirements of paragraph (c)(1) of this
section.
(4) Required analysis in the additional appraisal. One of the two
required appraisals must include an analysis of:
(i) 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;
(ii) 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
(iii) 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.
(5) No charge for the additional appraisal. If the creditor must
obtain two appraisals under paragraph (d)(1) of this section, the
creditor may charge the consumer for only one of the appraisals.
(6) Creditor's determination of prior sale date and price--(i)
Reasonable diligence. A creditor must obtain two written appraisals
under paragraph (d)(1) of this section unless the creditor can
demonstrate by exercising reasonable diligence that the

[[Page 10434]]

requirement to obtain two appraisals does not apply. A creditor acts
with reasonable diligence if the creditor bases its determination on
information contained in written source documents, such as the
documents listed in appendix B to this subpart.
(ii) Inability to determine prior sale date or price--modified
requirements for additional appraisal. If, after exercising reasonable
diligence, a creditor cannot determine whether the conditions in
paragraphs (d)(1)(i) and (d)(1)(ii) are present and therefore must
obtain two written appraisals in accordance with paragraphs (d)(1)
through (d)(5) of this section, one of the two appraisals shall include
an analysis of the factors in paragraph (d)(4) of this section only to
the extent that the information necessary for the appraiser to perform
the analysis can be determined.
(7) Exemptions from the additional appraisal requirement. The
additional appraisal required under paragraph (d)(1) of this section
shall not apply to extensions of credit that finance a consumer's
acquisition of property:
(i) From a local, State or Federal government agency;
(ii) From a person who acquired title to the property through
foreclosure, deed-in-lieu of foreclosure, or other similar judicial or
non-judicial procedure as a result of the person's exercise of rights
as the holder of a defaulted mortgage loan;
(iii) From a non-profit entity as part of a local, State, or
Federal government program under which the non-profit entity is
permitted to acquire title to single-family properties for resale from
a seller who acquired title to the property through the process of
foreclosure, deed-in-lieu of foreclosure, or other similar judicial or
non-judicial procedure;
(iv) From a person who acquired title to the property by
inheritance or pursuant to a court order of dissolution of marriage,
civil union, or domestic partnership, or of partition of joint or
marital assets to which the seller was a party;
(v) From an employer or relocation agency in connection with the
relocation of an employee;
(vi) From a servicemember, as defined in 50 U.S.C. App. 511(1), who
received a deployment or permanent change of station order after the
servicemember purchased the property;
(vii) Located in an area designated by the President as a federal
disaster area, if and for as long as the Federal financial institutions
regulatory agencies, as defined in 12 U.S.C. 3350(6), waive the
requirements 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 that area; or
(viii) Located in a rural county, as defined in 12 CFR
1026.35(b)(2)(iv)(A).
(e) Required disclosure--(1) In general. Except as provided in
paragraph (b) of this section, a creditor shall disclose the following
statement, in writing, to a consumer who applies for a higher-priced
mortgage loan: ``We may order an appraisal to determine the property's
value and charge you for this appraisal. We will 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.'' Compliance
with the disclosure requirement in Regulation B, 12 CFR 1002.14(a)(2),
satisfies the requirements of this paragraph.
(2) Timing of disclosure. The disclosure required by paragraph
(e)(1) of this section shall be delivered or placed in the mail no
later than the third business day after the creditor receives the
consumer's application for a higher-priced mortgage loan subject to
this section. In the case of a loan that is not a higher-priced
mortgage loan subject to this section at the time of application, but
becomes a higher-priced mortgage loan subject to this section after
application, the disclosure shall be delivered or placed in the mail
not later than the third business day after the creditor determines
that the loan is a higher-priced mortgage loan subject to this section.
(f) Copy of appraisals--(1) In general. Except as provided in
paragraph (b) of this section, a creditor shall provide to the consumer
a copy of any written appraisal performed in connection with a higher-
priced mortgage loan pursuant to paragraphs (c) and (d) of this
section.
(2) Timing. A creditor shall provide to the consumer a copy of each
written appraisal pursuant to paragraph (f)(1) of this section:
(i) No later than three business days prior to consummation of the
loan; or
(ii) In the case of a loan that is not consummated, no later than
30 days after the creditor determines that the loan will not be
consummated.
(3) Form of copy. Any copy of a written appraisal required by
paragraph (f)(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 consumer for a copy of a written appraisal required to be provided
to the consumer pursuant to paragraph (f)(1) of this section.
(g) Relation to other rules. The rules in this section 34.203 were
adopted jointly by the Board of Governors of the Federal Reserve System
(the 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-priced mortgage loan appraisal rules published separately in 12
CFR 226.43 (for the Board) and 12 CFR 1026.35(a) and (c) (for the
Bureau).

Appendix A to Subpart G -- Higher-Priced Mortgage Loan Appraisal Safe
Harbor Review

To qualify for the safe harbor provided in Sec. 34.203(c)(2), a
creditor must 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--Illustrative Written Source Documents for
Higher-Priced Mortgage Loan Appraisal Rules

A creditor acts with reasonable diligence under Sec.
34.203(d)(6)(i) if the creditor bases its determination on
information contained in written source documents, such as:
1. A copy of the recorded deed from the seller.
2. A copy of a property tax bill.
3. A copy of any owner's title insurance policy obtained by the
seller.
4. A copy of the RESPA settlement statement from the seller's
acquisition (i.e., the HUD-1 or any successor form).
5. A property sales history report or title report from a third-
party reporting service.

[[Page 10435]]

6. Sales price data recorded in multiple listing services.
7. Tax assessment records or transfer tax records obtained from
local governments.
8. A written appraisal performed in compliance with Sec.
34.203(c)(1) for the same transaction.
9. A copy of a title commitment report detailing the seller's
ownership of the property, the date it was acquired, or the price at
which the seller acquired the property.
10. A property abstract.

Appendix C to Subpart G--OCC Interpretations

Section 34.202--Definitions applicable to higher-priced mortgage loans

1. Staff Interpretations. Section 34.202 incorporates
definitions from Regulation Z, 12 CFR part 1026. These OCC
Interpretations of 12 CFR part 34, subpart G, incorporate the
Official Staff Interpretations to the Bureau's Regulation Z
associated with those definitions, at 12 CFR part 1026, Supplement
I.

Section 34.203--Appraisals for higher-priced 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(b) Exemptions.
Paragraph 34.203(b)(2).
1. Secured by new manufactured home. A transaction secured by a
new manufactured home, regardless of whether the transaction is also
secured by the land on which it is sited, is not a ``higher-priced
mortgage loan'' subject to the appraisal requirements of Sec.
34.203.
Paragraph 34.203(b)(3).
1. Secured by a mobile home. For purposes of the exemption in
Sec. 34.203(b)(3), a mobile home does not include a manufactured
home, as defined in Sec. 34.203(a)(2).
Paragraph 34.203(b)(4).
1. Construction-to-permanent loans. Section 34.203 does not
apply to a transaction to finance the initial construction of a
dwelling. This exclusion applies to a construction-only loan as well
as to the construction phase of a construction-to-permanent loan.
Section 34.203 does apply, however, to permanent financing that
replaces a construction loan, whether the permanent financing is
extended by the same or a different creditor, unless the permanent
financing is otherwise exempt from the requirements of Sec. 34.203.
See Sec. 34.203(b). When a construction loan may be permanently
financed by the same creditor, the general disclosure requirements
for closed-end credit pursuant to Regulation Z (12 CFR 1026.17)
provide that the creditor may give either one combined disclosure
for both the construction financing and the permanent financing, or
a separate set of disclosures for each of the two phases as though
they were two separate transactions. See 12 CFR 1026.17(c)(6)(ii)
and the Official Staff Interpretations to the Bureau's Regulation Z,
comment 17(c)(6)-2. Which disclosure option a creditor elects under
Sec. 1026.17(c)(6)(ii) does not affect the determination of whether
the permanent phase of the transaction is subject to Sec. 34.203.
When the creditor discloses the two phases as separate transactions,
the annual percentage rate for the permanent phase must be compared
to the average prime offer rate for a transaction that is comparable
to the permanent financing to determine coverage under Sec. 34.203.
When the creditor discloses the two phases as a single transaction,
a single annual percentage rate, reflecting the appropriate charges
from both phases, must be calculated for the transaction in
accordance with 12 CFR 1026.35(a)(1) (incorporated into 12 CFR part
34, subpart G by Sec. 34.202) and appendix D to 12 CFR part 1026.
The annual percentage rate must be compared to the average prime
offer rate for a transaction that is comparable to the permanent
financing to determine coverage under Sec. 34.203. If the
transaction is determined to be a higher-priced mortgage loan not
otherwise exempt under Sec. 34.203(b), only the permanent phase is
subject to the requirements of Sec. 34.203.
34.203(c) Appraisals required.
34.203(c)(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(c)(2) Safe harbor.
1. Safe harbor. A creditor that satisfies the safe harbor
conditions in Sec. 34.203(c)(2)(i) through (iv) complies with the
appraisal requirements of Sec. 34.203(c)(1). A creditor that does
not satisfy the safe harbor conditions in Sec. 34.203(c)(2)(i)
through (iv) does not necessarily violate the appraisal requirements
of Sec. 34.203(c)(1).
2. Appraiser's certification. For purposes of Sec.
34.203(c)(2), the appraiser's certification refers to the
certification specified in item 9 of appendix A to this subpart. See
also comment 34.203(a)(1)-2.
Paragraph 34.203(c)(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(d) Additional appraisal for certain higher-priced
mortgage loans.
1. Acquisition. For purposes of Sec. 34.203(d), 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(d)(1) In general.
1. Appraisal from a previous transaction. 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 to obtain two written appraisals under
Sec. 34.203(d)(1).
2. 90-day, 180-day calculation. The time periods described in
Sec. 34.203(d)(1)(i) and (ii) are 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. 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 from April 17
would be 181, so an additional appraisal is not required.
3. Date seller acquired the property. For purposes of Sec.
34.203(d)(1)(i) and (ii), 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.
4. 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(d)(1)(i) and (ii), 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(d)(1)(i) and (ii), 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.
5. 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.
6. 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. 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(d)(1)(i) and (ii), a creditor is not obligated to determine
whether and to what

[[Page 10436]]

extent the agreement is legally binding on both parties. See also
comment 34.203(d)(1)-4.
34.203(d)(2) Different certified or licensed appraisers.
1. Independent appraisers. The requirements that a creditor
obtain two separate appraisals under Sec. 34.203(d)(1), and that
each appraisal be conducted by a different licensed or certified
appraiser under Sec. 34.203(d)(2), indicate that the two appraisals
must be conducted independently of each other. If the two certified
or licensed appraisers are affiliated, such as by being employed by
the same appraisal firm, then whether they have conducted the
appraisal independently of each other must be determined based on
the facts and circumstances of the particular case known to the
creditor.
34.203(d)(3) Relationship to general appraisal requirements.
1. Safe harbor. When a creditor is required to obtain an
additional appraisal under Sec. 34.203(d)(1), the creditor must
comply with the requirements of both Sec. 34.203(c)(1) and Sec.
34.203(d)(2) through (5) for that appraisal. The creditor complies
with the requirements of Sec. 34.203(c)(1) for the additional
appraisal if the creditor meets the safe harbor conditions in Sec.
34.203(c)(2) for that appraisal.
34.203(d)(4) Required analysis in the additional appraisal.
1. Determining acquisition dates and prices used in the analysis
of the additional appraisal. For guidance on identifying the date on
which the seller acquired the property, see comment 34.203(d)(1)-3.
For guidance on identifying the date of the consumer's agreement to
acquire the property, see comment 34.203(d)(1)-4. For guidance on
identifying the price at which the seller acquired the property, see
comment 34.203(d)(1)-5. For guidance on identifying the price the
consumer is obligated to pay to acquire the property, see comment
34.203(d)(1)-6.
34.203(d)(5) 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(d)(1), 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-priced mortgage loan.
34.203(d)(6) Creditor's determination of prior sale date and
price.
34.203(d)(6)(i) In general.
1. Estimated sales price. If a written source document describes
the seller's acquisition price in a manner that indicates that the
price described is an estimated or assumed amount and not the actual
price, the creditor should look at an alternative document to
satisfy the reasonable diligence standard in determining the price
at which the seller acquired the property.
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(d)(6)(i).
3. Lack of information and conflicting information--two
appraisals required. If a creditor is unable to demonstrate that the
requirement to obtain two appraisals under Sec. 34.203(d)(1) does
not apply, the creditor must obtain two written appraisals before
extending a higher-priced mortgage loan subject to the requirements
of Sec. 34.203 See also comment 34.203(d)(6)(ii)-1. For example:
i. Assume a creditor orders and reviews the results of a title
search, which shows that a prior sale occurred between 91 and 180
days ago, but not the price paid in that sale. Thus, based on the
title search, the creditor would not be able to determine whether
the price the consumer is obligated to pay under the consumer's
acquisition agreement is more than 20 percent higher than the
seller's acquisition price, pursuant to Sec. 34.203(d)(1)(ii).
Before extending a higher-priced mortgage loan subject to the
appraisal requirements of Sec. 34.203, the creditor must either:
perform additional diligence to ascertain the seller's acquisition
price and, based on this information, determine whether two written
appraisals are required; or obtain two written appraisals in
compliance with Sec. 34.203(d)(6). See also comment
34.203(d)(6)(ii)-1.
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 a written appraisal
indicating that the seller acquired the property between 91 and 180
days before the consumer's agreement to acquire the property. In
this case, unless one of these sources is clearly wrong on its face,
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(d)(1)(ii). Before extending a higher-priced mortgage loan
subject to the appraisal requirements of Sec. 34.203, the creditor
must either: perform additional diligence to ascertain the seller's
acquisition date and, based on this information, determine whether
two written appraisals are required; or obtain two written
appraisals in compliance with Sec. 34.203(d)(6). See also comment
34.203(d)(6)(ii)-1.
34.203(d)(6)(ii) Inability to determine prior sales date or
price--modified requirements for additional appraisal.
1. Required analysis. In general, the additional appraisal
required under Sec. 34.203(d)(1) should include an analysis of the
factors listed in Sec. 34.203(d)(4)(i) through (iii). However, if,
following reasonable diligence, a creditor cannot determine whether
the conditions in Sec. 34.203(d)(1)(i) or (ii) are present due to a
lack of information or conflicting information, the required
additional appraisal must include the analyses required under Sec.
34.203(d)(4)(i) through (iii) only to the extent that the
information necessary to perform the analyses is known. For example,
assume that a creditor is able, following reasonable diligence, to
determine that the date on which the seller acquired the property
occurred between 91 and 180 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 Sec. 34.203(d)(4)(ii) and (iii) 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(d)(4)(i) 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(d)(7) Exemptions from the additional appraisal
requirement.
Paragraph 34.203(d)(7)(iii).
1. Non-profit entity. For purposes of Sec. 34.203(d)(7)(iii), a
``non-profit entity'' is a person with a tax exemption ruling or
determination letter from the Internal Revenue Service under section
501(c)(3) of the Internal Revenue Code of 1986 (12 U.S.C.
501(c)(3)).
Paragraph 34.203(d)(7)(viii).
1. Bureau table of rural counties. The Bureau publishes on its
Web site a table of rural counties under 12 CFR 1026.35(b)(2)(iv)(A)
for each calendar year by the end of that calendar year. See
Official Staff Interpretations to the Bureau's Regulation Z, comment
35(b)(2)(iv)-1. A property securing an HPML subject to Sec. 34.203
is in a rural county under Sec. 34.203(d)(7)(viii) if the county in
which the property is located is on the table of rural counties most
recently published by the Bureau. For example, for a transaction
occurring in 2015, assume that the Bureau most recently published a
table of rural counties at the end of 2014. The property securing
the transaction would be located in a rural county for purposes of
Sec. 34.203(d)(7)(viii) if the county is on the table of rural
counties published by the Bureau at the end of 2014.
34.203(e) Required disclosure.
34.203(e)(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.
2. Appraisal independence requirements not affected. Nothing in
the text of the consumer notice required by Sec. 34.203(e)(1)
should be construed to affect, modify, limit, or supersede the
operation of any legal, regulatory, or other requirements or
standards relating to independence in the conduct of appraisals or
restrictions on the use of borrower-ordered appraisals by creditors.
34.203(f) Copy of appraisals.
34.203(f)(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.
34.203(f)(2) Timing.
1. ``Provide.'' For purposes of the requirement to provide a
copy of the appraisal within a specified time under

[[Page 10437]]

Sec. 34.203(f)(2), ``provide'' means ``deliver.'' Delivery occurs
three business days after mailing or delivering the copies to the
last-known address of the applicant, or when evidence indicates
actual receipt by the applicant (which, in the case of electronic
receipt, must be based upon consent that complies with the E-Sign
Act), whichever is earlier.
2. ``Receipt'' of the appraisal. For appraisals prepared by the
creditor's internal appraisal staff, the date of ``receipt'' is the
date on which the appraisal is completed.
3. No waiver. Regulation B, 12 CFR 1002.14(a)(1), allowing the
consumer to waive the requirement that the appraisal copy be
provided three business days before consummation, does not apply to
higher-priced mortgage loans subject to Sec. 34.203. A consumer of
a higher-priced mortgage loan subject to Sec. 34.302 may not waive
the timing requirement to receive a copy of the appraisal under
Sec. 34.203(f)(1).
34.203(f)(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(f)(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-priced mortgage loan.

Appendix B--Illustrative Written Source Documents for Higher-Priced
Mortgage Loan Appraisal Rules

1. Title commitment report. 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.

PART 164--APPRAISALS

0
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]

0
4. Sections 164.1 through 164.8 are designated as Subpart A to part
164.

Subpart A--Appraisals

0
5. The heading of subpart A is added to read as set forth above.

0
6. Subpart B to part 164 is added to read as follows:

Subpart B--Appraisals for Higher-Priced Mortgage Loans

Sec.
164.20 Authority, purpose and scope.
164.21 Application of appraisal requirements for higher-priced
mortgage loans to Federal savings associations and their operating
subsidiaries.

Sec. 164.20 Authority, purpose and scope.

(a) Authority. This subpart is issued by the Office of the
Comptroller of the Currency under 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 Federal savings
association or its operating subsidiary, may not extend credit in the
form of a higher-priced mortgage loan without complying with the
requirements of section 129H of the Truth in Lending Act (15 U.S.C.
1639h) and these implementing regulations.
(c) Scope. This subpart applies to higher priced mortgage loan
transactions entered into by Federal savings associations and operating
subsidiaries of savings associations.

Sec. 164.21 Application of appraisal requirements for higher-priced
mortgage loans to Federal savings associations and their operating
subsidiaries.

Federal savings associations and their operating subsidiaries may
not extend credit in the form of a higher-priced 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 amends Regulation Z, 12 CFR part 226, as follows:

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

0
7. 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.

0
8. New Sec. 226.43 is added to read as follows:

Sec. 226.43 Appraisals for higher-priced mortgage loans.

[[Page 10438]]

(2) A transaction secured by a new manufactured home.
(3) A transaction secured by a mobile home, boat, or trailer.
(4) A transaction to finance the initial construction of a
dwelling.
(5) A loan with maturity of 12 months or less, if the purpose of
the loan is a ``bridge'' loan connected with the acquisition of a
dwelling intended to become the consumer's principal dwelling.
(6) A reverse-mortgage transaction subject to 12 CFR 1026.33(a).
(c) Appraisals required--(1) In general. Except as provided in
paragraph (b) of this section, a creditor shall not extend a higher-
priced 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 obtains a written appraisal that meets
the requirements for an appraisal required under paragraph (c)(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 contrary to the facts or
certifications contained in the written appraisal.
(d) Additional appraisal for certain higher-priced mortgage loans--
(1) In general. Except as provided in paragraphs (b) and (d)(7) of this
section, a creditor shall not extend a higher-priced mortgage loan to a
consumer to finance the acquisition of the consumer's principal
dwelling without obtaining, prior to consummation, two written
appraisals, if:
(i) The seller acquired the property 90 or fewer days prior to the
date of the consumer's agreement to acquire the property and the price
in the consumer's agreement to acquire the property exceeds the
seller's acquisition price by more than 10 percent; or
(ii) The seller acquired the property 91 to 180 days prior to the
date of the consumer's agreement to acquire the property and the price
in the consumer's agreement to acquire the property exceeds the
seller's acquisition price by more than 20 percent.
(2) Different certified or licensed appraisers. The two appraisals
required under paragraph (d)(1) of this section may not be performed by
the same certified or licensed appraiser.
(3) Relationship to general appraisal requirements. If two
appraisals must be obtained under paragraph (d)(1) of this section,
each appraisal shall meet the requirements of paragraph (c)(1) of this
section.
(4) Required analysis in the additional appraisal. One of the two
required appraisals must include an analysis of:
(i) 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;
(ii) 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
(iii) 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.
(5) No charge for the additional appraisal. If the creditor must
obtain two appraisals under paragraph (d)(1) of this section, the
creditor may charge the consumer for only one of the appraisals.
(6) Creditor's determination of prior sale date and price--(i)
Reasonable diligence. A creditor must obtain two written appraisals
under paragraph (d)(1) of this section unless the creditor can
demonstrate by exercising reasonable diligence that the requirement to
obtain two appraisals does not apply. A creditor acts with reasonable
diligence if the creditor bases its determination on information
contained in written source documents, such as the documents listed in
Appendix O to this part.
(ii) Inability to determine prior sale date or price--modified
requirements for additional appraisal. If, after exercising reasonable
diligence, a creditor cannot determine whether the conditions in
paragraphs (d)(1)(i) and (d)(1)(ii) are present and therefore must
obtain two written appraisals in accordance with paragraphs (d)(1)
through (5) of this section, one of the two appraisals shall include an
analysis of the factors in paragraph (d)(4) of this section only to the
extent that the information necessary for the appraiser to perform the
analysis can be determined.
(7) Exemptions from the additional appraisal requirement. The
additional appraisal required under paragraph (d)(1) of this section
shall not apply to extensions of credit that finance a consumer's
acquisition of property:
(i) From a local, State or Federal government agency;
(ii) From a person who acquired title to the property through
foreclosure, deed-in-lieu of foreclosure, or other similar judicial or
non-judicial procedure as a result of the person's exercise of rights
as the holder of a defaulted mortgage loan;
(iii) From a non-profit entity as part of a local, State, or
Federal government program under which the non-profit entity is
permitted to acquire title to single-family properties for resale from
a seller who acquired title to the property through the process of
foreclosure, deed-in-lieu of foreclosure, or other similar judicial or
non-judicial procedure;
(iv) From a person who acquired title to the property by
inheritance or pursuant to a court order of dissolution of marriage,
civil union, or domestic partnership, or of partition of joint or
marital assets to which the seller was a party;
(v) From an employer or relocation agency in connection with the
relocation of an employee;
(vi) From a servicemember, as defined in 50 U.S.C. App. 511(1), who
received a deployment or permanent change of station order after the
servicemember purchased the property;
(vii) Located in an area designated by the President as a federal
disaster area, if and for as long as the Federal financial institutions
regulatory agencies, as defined in 12 U.S.C. 3350(6), waive the
requirements 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 that area; or
(viii) Located in a rural county, as defined in 12 CFR
1026.35(b)(2)(iv)(A).
(e) Required disclosure--(1) In general. Except as provided in
paragraph (b) of this section, a creditor shall disclose the following
statement, in writing, to a consumer who applies for a higher-priced
mortgage loan: ``We may order an appraisal to determine the property's
value and charge you for this appraisal. We will give you a copy of any
appraisal, even if your loan does not close. You can pay for an
additional

[[Page 10439]]

appraisal for your own use at your own cost.'' Compliance with the
disclosure requirement in Regulation B, 12 CFR 1002.14(a)(2), satisfies
the requirements of this paragraph.
(2) Timing of disclosure. The disclosure required by paragraph
(e)(1) of this section shall be delivered or placed in the mail no
later than the third business day after the creditor receives the
consumer's application for a higher-priced mortgage loan subject to
this section. In the case of a loan that is not a higher-priced
mortgage loan subject to this section at the time of application, but
becomes a higher-priced mortgage loan subject to this section after
application, the disclosure shall be delivered or placed in the mail
not later than the third business day after the creditor determines
that the loan is a higher-priced mortgage loan subject to this section.
(f) Copy of appraisals--(1) In general. Except as provided in
paragraph (b) of this section, a creditor shall provide to the consumer
a copy of any written appraisal performed in connection with a higher-
priced mortgage loan pursuant to paragraphs (c) and (d) of this
section.
(2) Timing. A creditor shall provide to the consumer a copy of each
written appraisal pursuant to paragraph (f)(1) of this section:
(i) No later than three business days prior to consummation of the
loan; or
(ii) In the case of a loan that is not consummated, no later than
30 days after the creditor determines that the loan will not be
consummated.
(3) Form of copy. Any copy of a written appraisal required by
paragraph (f)(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 consumer for a copy of a written appraisal required to be provided
to the consumer pursuant to paragraph (f)(1) of this section.
(g) Relation to other rules. The rules in this section were adopted
jointly by the 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-priced
mortgage loan appraisal rules published separately in 12 CFR part 34,
subpart G and 12 CFR part 164, subpart B (for the OCC) and 12 CFR
1026.35(a) and (c) (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 loan association), and
insured branches and agencies of foreign banks. Compliance with the
Board's rules satisfies the requirements of 15 U.S.C. 1639h.

0
9. Appendix N to Part 226 is added to read as follows:

Appendix N to Part 226--Higher-Priced Mortgage Loan Appraisal Safe
Harbor Review

To qualify for the safe harbor provided in Sec. 226.43(c)(2), a
creditor must 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.

0
10. Appendix O to Part 226 is added to read as follows:

Appendix O to Part 226--Illustrative Written Source Documents for
Higher-Priced Mortgage Loan Appraisal Rules

A creditor acts with reasonable diligence under Sec.
226.43(d)(6)(i) if the creditor bases its determination on
information contained in written source documents, such as:
1. A copy of the recorded deed from the seller.
2. A copy of a property tax bill.
3. A copy of any owner's title insurance policy obtained by the
seller.
4. A copy of the RESPA settlement statement from the seller's
acquisition (i.e., the HUD-1 or any successor form).
5. A property sales history report or title report from a third-
party reporting service.
6. Sales price data recorded in multiple listing services.
7. Tax assessment records or transfer tax records obtained from
local governments.
8. A written appraisal performed in compliance with Sec.
226.43(c)(1) for the same transaction.
9. A copy of a title commitment report detailing the seller's
ownership of the property, the date it was acquired, or the price at
which the seller acquired the property.
10. A property abstract.

0
11. In Supplement I to part 226:
0
a. New Section 226.43--Appraisals for Higher-Priced Mortgage Loans is
added.
0
b. New Appendix O--Illustrative Written Source Documents for Higher-
Priced Mortgage Loan Appraisal Rules is added.
The additions 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)(3) Higher-priced mortgage loan.
1. Principal dwelling. The term ``principal dwelling'' has the
same meaning under Sec. 226.43(a)(3) 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, comments 35(a)(2)-1 and -3.
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)(1)-1 and 35(a)(2)-2.
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)(1)-2.

[[Page 10440]]

5. Threshold for ``jumbo'' loans. For guidance on determining
whether a transaction's principal balance exceeds the limit in
effect as of the date the transaction's rate is set for the maximum
principal obligation eligible for purchase by Freddie Mac, see the
Official Staff Interpretations to the Bureau's Regulation Z, comment
35(a)(1)-3.
43(b) Exemptions.
Paragraph 43(b)(2).
1. Secured by new manufactured home. A transaction secured by a
new manufactured home, regardless of whether the transaction is also
secured by the land on which it is sited, is not a ``higher-priced
mortgage loan'' subject to the appraisal requirements of Sec.
226.43.
Paragraph 43(b)(3).
1. Secured by a mobile home. For purposes of the exemption in
Sec. 226.43(b)(3), a mobile home does not include a manufactured
home, as defined in Sec. 226.43(a)(3).
Paragraph 43(b)(4)
1. Construction-to-permanent loans. Section 226.43 does not
apply to a transaction to finance the initial construction of a
dwelling. This exclusion applies to a construction-only loan as well
as to the construction phase of a construction-to-permanent loan.
Section 226.43 does apply, however, to permanent financing that
replaces a construction loan, whether the permanent financing is
extended by the same or a different creditor, unless the permanent
financing is otherwise exempt from the requirements of Sec. 226.43.
See Sec. 226.43(b). When a construction loan may be permanently
financed by the same creditor, the general disclosure requirements
for closed-end credit pursuant to Regulation Z (12 CFR 1026.17)
provide that the creditor may give either one combined disclosure
for both the construction financing and the permanent financing, or
a separate set of disclosures for each of the two phases as though
they were two separate transactions. See 12 CFR 1026.17(c)(6)(ii)
and the Official Staff Interpretations to the Bureau's Regulation Z,
comment 17(c)(6)-2. Which disclosure option a creditor elects under
Sec. 1026.17(c)(6)(ii) does not affect the determination of whether
the permanent phase of the transaction is subject to Sec. 226.43.
When the creditor discloses the two phases as separate transactions,
the annual percentage rate for the permanent phase must be compared
to the average prime offer rate for a transaction that is comparable
to the permanent financing to determine coverage under Sec. 226.43.
When the creditor discloses the two phases as a single transaction,
a single annual percentage rate, reflecting the appropriate charges
from both phases, must be calculated for the transaction in
accordance with Sec. 226.43(a)(3) and appendix D to 12 CFR part
1026. The annual percentage rate must be compared to the average
prime offer rate for a transaction that is comparable to the
permanent financing to determine coverage under Sec. 226.43. If the
transaction is determined to be a higher-priced mortgage loan not
otherwise exempt under Sec. 226.43(b), only the permanent phase is
subject to the requirements of Sec. 226.43.
43(c) Appraisals required.
43(c)(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(c)(2) Safe harbor.
1. Safe harbor. A creditor that satisfies the safe harbor
conditions in Sec. 226.43(c)(2)(i) through (iv) complies with the
appraisal requirements of Sec. 226.43(c)(1). A creditor that does
not satisfy the safe harbor conditions in Sec. 226.43(c)(2)(i)
through (iv) does not necessarily violate the appraisal requirements
of Sec. 226.43(c)(1).
2. Appraiser's certification. For purposes of Sec.
226.43(c)(2), the appraiser's certification refers to the
certification specified in item 9 of appendix N. See also comment
43(a)(1)-2.
Paragraph 43(c)(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(d) Additional appraisal for certain higher-priced mortgage
loans.
1. Acquisition. For purposes of Sec. 226.43(d), the terms
``acquisition'' and ``acquire'' refer to the acquisition of legal
title to the property pursuant to applicable State law, including by
purchase.
43(d)(1) In general.
1. Appraisal from a previous transaction. 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 to obtain two written appraisals under
Sec. 226.43(d)(1).
2. 90-day, 180-day calculation. The time periods described in
Sec. 226.43(d)(1)(i) and (ii) are 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. 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 from April 17
would be 181, so an additional appraisal is not required.
3. Date seller acquired the property. For purposes of Sec.
226.43(d)(1)(i) and (ii), 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.
4. 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(d)(1)(i) and (ii), 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(d)(1)(i) and (ii), 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.
5. 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.
6. 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. 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(d)(1)(i) and (ii), a creditor is not obligated to determine
whether and to what extent the agreement is legally binding on both
parties. See also comment 43(d)(1)-4.
43(d)(2) Different certified or licensed appraisers.
1. Independent appraisers. The requirements that a creditor
obtain two separate appraisals under Sec. 226.43(d)(1), and that
each appraisal be conducted by a different licensed or certified
appraiser under Sec. 226.43(d)(2), indicate that the two appraisals
must be conducted independently of each other. If the two certified
or licensed appraisers are affiliated, such as by being employed by
the same appraisal firm, then whether they have conducted the
appraisal independently of each other must be determined based on
the facts and circumstances of the particular case known to the
creditor.
43(d)(3) Relationship to general appraisal requirements.
1. Safe harbor. When a creditor is required to obtain an
additional appraisal under Sec. 226(d)(1), the creditor must comply
with the requirements of both Sec. 226.43(c)(1) and Sec.
226.43(d)(2) through (5) for that appraisal. The creditor complies
with the requirements of Sec. 226.43(c)(1) for the additional
appraisal if the creditor meets the safe harbor conditions in Sec.
226.43(c)(2) for that appraisal.
43(d)(4) Required analysis in the additional appraisal.
1. Determining acquisition dates and prices used in the analysis
of the additional appraisal. For guidance on identifying the date on
which the seller acquired the property, see comment 43(d)(1)-3. For
guidance on identifying the date of the consumer's agreement to
acquire the property, see comment 43(d)(1)-4. For guidance on
identifying the price at which the seller acquired the property, see
comment 43(d)(1)-5. For guidance on identifying the price the
consumer is obligated to pay to acquire the property, see comment
43(d)(1)-6.
43(d)(5) 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(d)(1), including by

[[Page 10441]]

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-priced mortgage loan.
43(d)(6) Creditor's determination of prior sale date and price.
43(d)(6)(i) In general.
1. Estimated sales price. If a written source document describes
the seller's acquisition price in a manner that indicates that the
price described is an estimated or assumed amount and not the actual
price, the creditor should look at an alternative document to
satisfy the reasonable diligence standard in determining the price
at which the seller acquired the property.
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(d)(6)(i).
3. Lack of information and conflicting information--two
appraisals required. If a creditor is unable to demonstrate that the
requirement to obtain two appraisals under Sec. 226.43(d)(1) does
not apply, the creditor must obtain two written appraisals before
extending a higher-priced mortgage loan subject to the requirements
of Sec. 226.43. See also comment 43(d)(6)(ii)-1. For example:
i. Assume a creditor orders and reviews the results of a title
search, which shows that a prior sale occurred between 91 and 180
days ago, but not the price paid in that sale. Thus, based on the
title search, the creditor would not be able to determine whether
the price the consumer is obligated to pay under the consumer's
acquisition agreement is more than 20 percent higher than the
seller's acquisition price, pursuant to Sec. 226.43(d)(1)(ii).
Before extending a higher-priced mortgage loan subject to the
appraisal requirements of Sec. 226.43, the creditor must either:
perform additional diligence to ascertain the seller's acquisition
price and, based on this information, determine whether two written
appraisals are required; or obtain two written appraisals in
compliance with Sec. 226.43(d). See also comment 43(d)(6)(ii)-1.
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 a written appraisal
indicating that the seller acquired the property between 91 and 180
days before the consumer's agreement to acquire the property. In
this case, unless one of these sources is clearly wrong on its face,
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.
226.43(d)(1)(ii). Before extending a higher-priced mortgage loan
subject to the appraisal requirements of Sec. 226.43, the creditor
must either: (1) Perform additional diligence to ascertain the
seller's acquisition date and, based on this information, determine
whether two written appraisals are required; or (2) obtain two
written appraisals in compliance with Sec. 226.43(d). See also
comment 43(d)(6)(ii)-1.
43(d)(6)(ii) Inability to determine prior sales date or price--
modified requirements for additional appraisal.
1. Required analysis. In general, the additional appraisal
required under Sec. 226.43(d)(1) should include an analysis of the
factors listed in Sec. 226.43(d)(4)(i) through (iii). However, if,
following reasonable diligence, a creditor cannot determine whether
the conditions in Sec. 226.43(d)(1)(i) or (ii) are present due to a
lack of information or conflicting information, the required
additional appraisal must include the analyses required under Sec.
226.43(d)(4)(i) through (iii) only to the extent that the
information necessary to perform the analyses is known. For example,
assume that a creditor is able, following reasonable diligence, to
determine that the date on which the seller acquired the property
occurred between 91 and 180 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 Sec. 226.43(d)(4)(ii) and (iii) 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(d)(4)(i) 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(d)(7) Exemptions from the additional appraisal requirement.
Paragraph 43(d)(7)(iii).
1. Non-profit entity. For purposes of Sec. 226.43(d)(7)(iii), a
``non-profit entity'' is a person with a tax exemption ruling or
determination letter from the Internal Revenue Service under section
501(c)(3) of the Internal Revenue Code of 1986 (12 U.S.C.
501(c)(3)).
Paragraph 43(d)(7)(viii).
1. Bureau table of rural counties. The Bureau publishes on its
Web site a table of rural counties under Sec. 226.43(d)(7)(viii)
for each calendar year by the end of the calendar year. See Official
Staff Interpretations to the Bureau's Regulation Z, comment
35(b)(2)(iv)-1. A property securing an HPML subject to Sec. 226.43
is in a rural county under Sec. 226.43(d)(7)(viii) if the county in
which the property is located is on the table of rural counties most
recently published by the Bureau. For example, for a transaction
occurring in 2015, assume that the Bureau most recently published a
table of rural counties at the end of 2014. The property securing
the transaction would be located in a rural county for purposes of
Sec. 226.43(d)(7)(viii) if the county is on the table of rural
counties published by the Bureau at the end of 2014.
43(e) Required disclosure.
43(e)(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.
2. Appraisal independence requirements not affected. Nothing in
the text of the consumer notice required by Sec. 226.43(e)(1)
should be construed to affect, modify, limit, or supersede the
operation of any legal, regulatory, or other requirements or
standards relating to independence in the conduct of appraisers or
restrictions on the use of borrower-ordered appraisals by creditors.
43(f) Copy of appraisals.
43(f)(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(f)(2) Timing.
1. ``Provide.'' For purposes of the requirement to provide a
copy of the appraisal within a specified time under Sec.
226.43(f)(2), ``provide'' means ``deliver.'' Delivery occurs three
business days after mailing or delivering the copies to the last-
known address of the applicant, or when evidence indicates actual
receipt by the applicant (which, in the case of electronic receipt,
must be based upon consent that complies with the E-Sign Act),
whichever is earlier.
2. ``Receipt'' of the appraisal. For appraisals prepared by the
creditor's internal appraisal staff, the date of ``receipt'' is the
date on which the appraisal is completed.
3. No waiver. Regulation B, 12 CFR 1002.14(a)(1), allowing the
consumer to waive the requirement that the appraisal copy be
provided three business days before consummation, does not apply to
higher-priced mortgage loans subject to Sec. 226.43. A consumer of
a higher-priced mortgage loan subject to Sec. 226.43 may not waive
the timing requirement to receive a copy of the appraisal under
Sec. 226.43(f)(1).
43(f)(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(f)(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-priced mortgage loan.
* * * * *

Appendix O--Illustrative Written Source Documents for Higher-Priced
Mortgage Loan Appraisal Rules

[[Page 10442]]

to by different terms, such as a title commitment, title binder,
title opinion, or title report.

National Credit Union Administration

Authority and Issuance

For the reasons discussed above, NCUA amends 12 CFR part 722 as
follows:

PART 722--APPRAISALS

0
12. 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.

0
13. 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-priced mortgage loans. A credit union may not extend
credit to a consumer in the form of a ``higher-priced mortgage loan''
as defined in 12 CFR 1026.35(a)(1), without meeting the requirements of
section 129H of the Truth in Lending Act, 15 U.S.C. 1639h, and its
implementing regulations in Regulation Z, 12 CFR 1026.35(c).

Bureau of Consumer Financial Protection

Authority and Issuance

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

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

0
14. The authority citation for part 1026 continues to read as follows:

Authority: 12 U.S.C. 2601; 2603-2605, 2607, 2609, 2617, 5511,
5512, 5532, 5581; 15 U.S.C. 1601 et seq.

Subpart C--Closed-End Credit

0
15. Section 1026.35 is amended by republishing paragraphs (a)
introductory text and (a)(1), and adding paragraph (c) as follows:
* * * * *

Sec. 1026.35 Prohibited acts or practices in connection with higher-
priced mortgage loans.

(a) Definitions. For purposes of this section:
(1) ``Higher-priced mortgage loan'' means a closed-end consumer
credit transaction secured by the consumer's principal dwelling with an
annual percentage rate that exceeds the average prime offer rate for a
comparable transaction as of the date the interest rate is set:
(i) 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;
(ii) 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; or
(iii) By 3.5 or more percentage points, for a loan secured by a
subordinate lien.
* * * * *
(c) Appraisals for higher-priced mortgage loans--(1) Definitions.
For purposes of this section:
(i) 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.
(ii) Manufactured home has the same meaning as in 24 CFR 3280.2.
(iii) 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.
(iv) 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.
(2) Exemptions. The requirements in paragraphs (c)(3) through (6)
of this section do not apply to the following types of transactions:
(i) A qualified mortgage as defined in 12 CFR 1026.43(e).
(ii) A transaction secured by a new manufactured home.
(iii) A transaction secured by a mobile home, boat, or trailer.
(iv) A transaction to finance the initial construction of a
dwelling.
(v) A loan with maturity of 12 months or less, if the purpose of
the loan is a ``bridge'' loan connected with the acquisition of a
dwelling intended to become the consumer's principal dwelling.
(vi) A reverse-mortgage transaction subject to 12 CFR 1026.33(a).
(3) Appraisals required--(i) In general. Except as provided in
paragraph (c)(2) of this section, a creditor shall not extend a higher-
priced 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.
(ii) Safe harbor. A creditor obtains a written appraisal that meets
the requirements for an appraisal required under paragraph (c)(3)(i) of
this section if the creditor:
(A) 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;
(B) 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;
(C) Confirms that the elements set forth in appendix N to this part
are addressed in the written appraisal; and
(D) Has no actual knowledge contrary to the facts or certifications
contained in the written appraisal.
(4) Additional appraisal for certain higher-priced mortgage loans--
(i) In general. Except as provided in paragraphs (c)(2) and (c)(4)(vii)
of this section, a creditor shall not extend a higher-priced 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 90 or fewer days prior to the
date of the consumer's agreement to acquire the property and the price
in the consumer's agreement to acquire the property exceeds the
seller's acquisition price by more than 10 percent; or
(B) The seller acquired the property 91 to 180 days prior to the
date of the consumer's agreement to acquire the property and the price
in the consumer's agreement to acquire the

[[Page 10443]]

property exceeds the seller's acquisition price by more than 20
percent.
(ii) Different certified or licensed appraisers. The two appraisals
required under paragraph (c)(4)(i) of this section may not be performed
by the same certified or licensed appraiser.
(iii) Relationship to general appraisal requirements. If two
appraisals must be obtained under paragraph (c)(4)(i) of this section,
each appraisal shall meet the requirements of paragraph (c)(3)(i) of
this section.
(iv) Required analysis in the additional appraisal. One of the two
required appraisals 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 (c)(4)(i) of this section, the
creditor may charge the consumer for only one of the appraisals.
(vi) Creditor's determination of prior sale date and price--(A)
Reasonable diligence. A creditor must obtain two written appraisals
under paragraph (c)(4)(i) of this section unless the creditor can
demonstrate by exercising reasonable diligence that the requirement to
obtain two appraisals does not apply. A creditor acts with reasonable
diligence if the creditor bases its determination on information
contained in written source documents, such as the documents listed in
Appendix O to this part.
(B) Inability to determine prior sale date or price--modified
requirements for additional appraisal. If, after exercising reasonable
diligence, a creditor cannot determine whether the conditions in
paragraphs (c)(4)(i)(A) and (c)(4)(i)(B) are present and therefore must
obtain two written appraisals in accordance with paragraphs (c)(4)(i)
through (v) of this section, one of the two appraisals shall include an
analysis of the factors in paragraph (c)(4)(iv) of this section only to
the extent that the information necessary for the appraiser to perform
the analysis can be determined.
(vii) Exemptions from the additional appraisal requirement. The
additional appraisal required under paragraph (c)(4)(i) of this section
shall not apply to extensions of credit that finance a consumer's
acquisition of property:
(A) From a local, State or Federal government agency;
(B) From a person who acquired title to the property through
foreclosure, deed-in-lieu of foreclosure, or other similar judicial or
non-judicial procedure as a result of the person's exercise of rights
as the holder of a defaulted mortgage loan;
(C) From a non-profit entity as part of a local, State, or Federal
government program under which the non-profit entity is permitted to
acquire title to single-family properties for resale from a seller who
acquired title to the property through the process of foreclosure,
deed-in-lieu of foreclosure, or other similar judicial or non-judicial
procedure;
(D) From a person who acquired title to the property by inheritance
or pursuant to a court order of dissolution of marriage, civil union,
or domestic partnership, or of partition of joint or marital assets to
which the seller was a party;
(E) From an employer or relocation agency in connection with the
relocation of an employee;
(F) From a servicemember, as defined in 50 U.S.C. App. 511(1), who
received a deployment or permanent change of station order after the
servicemember purchased the property;
(G) Located in an area designated by the President as a federal
disaster area, if and for as long as the Federal financial institutions
regulatory agencies, as defined in 12 U.S.C. 3350(6), waive the
requirements 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 that area; or
(H) Located in a rural county, as defined in 12 CFR
1026.35(b)(2)(iv)(A).
(5) Required disclosure--(i) In general. Except as provided in
paragraph (c)(2) of this section, a creditor shall disclose the
following statement, in writing, to a consumer who applies for a
higher-priced mortgage loan: ``We may order an appraisal to determine
the property's value and charge you for this appraisal. We will 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.''
Compliance with the disclosure requirement in Regulation B, 12 CFR
1002.14(a)(2), satisfies the requirements of this paragraph.
(ii) Timing of disclosure. The disclosure required by paragraph
(c)(5)(i) of this section shall be delivered or placed in the mail no
later than the third business day after the creditor receives the
consumer's application for a higher-priced mortgage loan subject to
paragraph (c) of this section. In the case of a loan that is not a
higher-priced mortgage loan subject to paragraph (c) of this section at
the time of application, but becomes a higher-priced mortgage loan
subject to paragraph (c) of this section after application, the
disclosure shall be delivered or placed in the mail not later than the
third business day after the creditor determines that the loan is a
higher-priced mortgage loan subject to paragraph (c) of this section.
(6) Copy of appraisals--(i) In general. Except as provided in
paragraph (c)(2) of this section, a creditor shall provide to the
consumer a copy of any written appraisal performed in connection with a
higher-priced mortgage loan pursuant to paragraphs (c)(3) and (c)(4) of
this section.
(ii) Timing. A creditor shall provide to the consumer a copy of
each written appraisal pursuant to paragraph (c)(6)(i) of this section:
(A) No later than three business days prior to consummation of the
loan; or
(B) In the case of a loan that is not consummated, no later than 30
days after the creditor determines that the loan will not be
consummated.
(iii) Form of copy. Any copy of a written appraisal required by
paragraph (c)(6)(i) 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.).
(iv) No charge for copy of appraisal. A creditor shall not charge
the consumer for a copy of a written appraisal required to be provided
to the consumer pursuant to paragraph (c)(6)(i) of this section.
(7) Relation to other rules. The rules in this paragraph (c) were
adopted 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-priced mortgage loan
appraisal rules published separately in 12 CFR 226.43 (for the Board)
and in 12 CFR part 34, subpart

[[Page 10444]]

G and 12 CFR part 164, subpart B (for the OCC).
* * * * *

0
16. Appendix N to Part 1026 is added to read as follows:

Appendix N to Part 1026--Higher-Priced Mortgage Loan Appraisal Safe
Harbor Review

To qualify for the safe harbor provided in Sec.
1026.35(c)(3)(ii), a creditor must 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.

0
17. Appendix O to Part 1026 is added to read as follows:

Appendix O to Part 1026--Illustrative Written Source Documents for
Higher-Priced Mortgage Loan Appraisal Rules

A creditor acts with reasonable diligence under Sec.
1026.35(c)(4)(vi)(A) if the creditor bases its determination on
information contained in written source documents, such as:
1. A copy of the recorded deed from the seller.
2. A copy of a property tax bill.
3. A copy of any owner's title insurance policy obtained by the
seller.
4. A copy of the RESPA settlement statement from the seller's
acquisition (i.e., the HUD-1 or any successor form).
5. A property sales history report or title report from a third-
party reporting service.
6. Sales price data recorded in multiple listing services.
7. Tax assessment records or transfer tax records obtained from
local governments.
8. A written appraisal performed in compliance with Sec.
1026.35(c)(3)(i) for the same transaction.
9. A copy of a title commitment report detailing the seller's
ownership of the property, the date it was acquired, or the price at
which the seller acquired the property.
10. A property abstract.

0
18. In Supplement I to part 1026,
0
A. Under Section 1026.35--Prohibited Acts or Practices in Connection
with Higher-Priced Mortgage Loans, as amended January 22, 2013 (78 FR
4754):
0
i. Under 35(a) Definitions, the heading of Paragraph 35(a)(1) and
paragraphs 1, 2, and 3 are republished.
0
ii. New 35(c) Appraisals is added.
0
B. New Appendix O--Illustrative Written Source Documents for Higher-
Priced Mortgage Loan Appraisal Rules is added.
The revisions, additions, and removals read as follows:

Supplement I to Part 1026--Official Interpretations

* * * * *

Section 1026.35--Requirements for Higher-Priced Mortgage Loans

35(a) Definitions

Paragraph 35(a)(1)

1. Comparable transaction. A higher-priced mortgage loan is a
consumer credit transaction secured by the consumer's principal
dwelling with an annual percentage rate that exceeds the average
prime offer rate for a comparable transaction as of the date the
interest rate is set by the specified margin. The table of average
prime offer rates published by the Bureau indicates how to identify
the comparable transaction.
2. Rate set. A transaction's annual percentage rate is compared
to the average prime offer rate as of the date the transaction's
interest rate is set (or ``locked'') before consummation. Sometimes
a creditor sets the interest rate initially and then re-sets it at a
different level before consummation. The creditor should use the
last date the interest rate is set before consummation.
3. Threshold for ``jumbo'' loans. Section 1026.35(a)(1)(ii)
provides a separate threshold for determining whether a transaction
is a higher-priced mortgage loan subject to Sec. 1026.35 when the
principal balance exceeds the limit in effect as of the date the
transaction's rate is set for the maximum principal obligation
eligible for purchase by Freddie Mac (a ``jumbo'' loan). The Federal
Housing Finance Agency (FHFA) establishes and adjusts the maximum
principal obligation pursuant to rules under 12 U.S.C. 1454(a)(2)
and other provisions of Federal law. Adjustments to the maximum
principal obligation made by FHFA apply in determining whether a
mortgage loan is a ``jumbo'' loan to which the separate coverage
threshold in Sec. 1026.35(a)(1)(ii) applies.
* * * * *

35(c)--Appraisals

35(c)(1) Definitions

35(c)(1)(i) 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. 1026.35(c)(1)(i), the relevant USPAP standards are those found
in the edition of USPAP and that are 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. 1026.35(c)(1)(i).

35(c)(2) Exemptions

Paragraph 35(c)(2)(ii)

1. Secured by new manufactured home. A transaction secured by a
new manufactured home, regardless of whether the transaction is also
secured by the land on which it is sited, is not a ``higher-priced
mortgage loan'' subject to the appraisal requirements of Sec.
1026.35(c).

Paragraph 35(c)(2)(iii)

1. Secured by a mobile home. For purposes of the exemption in
Sec. 1026.35(c)(2)(iii), a mobile home does not include a
manufactured home, as defined in Sec. 1026.35(c)(1)(ii).

Paragraph 35(c)(2)(iv)

1. Construction-to-permanent loans. Section 1026.35(c) does not
apply to a transaction to finance the initial construction of a
dwelling. This exclusion applies to a construction-only loan as well
as to the construction phase of a construction-to-permanent loan.
Section 1026.35(c) does apply, however, to permanent financing that
replaces a construction loan, whether the permanent financing is
extended by the same or a different creditor, unless the permanent
financing is otherwise exempt from the requirements of Sec.
1026.35(c). See Sec. 1026.35(c)(2). When a construction loan may be
permanently financed by the same creditor, the general disclosure
requirements for closed-end credit (Sec. 1026.17) provide that the
creditor may give either one combined disclosure for both the
construction financing and the permanent financing, or a separate
set of disclosures for each of the two phases as though they were
two separate transactions. See Sec. 1026.17(c)(6)(ii) and comment
17(c)(6)-2. Section 1026.17(c)(6)(ii) addresses only how a creditor
may elect to disclose a construction-to-permanent transaction. Which
disclosure option a creditor elects under Sec. 1026.17(c)(6)(ii)
does not affect the determination of whether the permanent phase of
the transaction is subject to Sec. 1026.35(c). When the creditor
discloses the two phases as separate transactions, the annual
percentage rate for the permanent phase must be compared to the
average prime offer rate for a transaction that is comparable

[[Page 10445]]

to the permanent financing to determine coverage under Sec.
1026.35(c). When the creditor discloses the two phases as a single
transaction, a single annual percentage rate, reflecting the
appropriate charges from both phases, must be calculated for the
transaction in accordance with Sec. 1026.35 and appendix D to part
1026. The annual percentage rate must be compared to the average
prime offer rate for a transaction that is comparable to the
permanent financing to determine coverage under Sec. 1026.35(c). If
the transaction is determined to be a higher-priced mortgage loan
not otherwise exempt under Sec. 1026.35(c)(2), only the permanent
phase is subject to the requirements of Sec. 1026.35(c).

35(c)(3) Appraisals Required

35(c)(3)(i) 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.
35(c)(3)(ii) Safe Harbor.
1. Safe harbor. A creditor that satisfies the safe harbor
conditions in Sec. 1026.35(c)(3)(ii)(A) through (D) complies with
the appraisal requirements of Sec. 1026.35(c)(3)(i). A creditor
that does not satisfy the safe harbor conditions in Sec.
1026.35(c)(3)(ii)(A) through (D) does not necessarily violate the
appraisal requirements of Sec. 1026.35(c)(3)(i).
2. Appraiser's certification. For purposes of Sec.
1026.35(c)(3)(ii), the appraiser's certification refers to the
certification specified in item 9 of appendix N. See also comment
35(c)(1)(i)-2.

Paragraph 35(c)(3)(ii)(C)

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.

35(c)(4) Additional Appraisal for Certain Higher-Priced Mortgage Loans

1. Acquisition. For purposes of Sec. 1026.35(c)(4), the terms
``acquisition'' and ``acquire'' refer to the acquisition of legal
title to the property pursuant to applicable State law, including by
purchase.

35(c)(4)(i) In General

1. Appraisal from a previous transaction. 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 to obtain two written appraisals under
Sec. 1026.35(c)(4)(i).
2. 90-day, 180-day calculation. The time periods described in
Sec. 1026.35(c)(4)(i)(A) and (B) are 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. 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 from April 17
would be 181, so an additional appraisal is not required.
3. Date seller acquired the property. For purposes of Sec.
1026.35(c)(4)(i)(A) and (B), 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.
4. Date of the consumer's agreement to acquire the property. For
the date of the consumer's agreement to acquire the property under
Sec. 1026.35(c)(4)(i)(A) and (B), 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. 1026.35(c)(4)(i)(A) and (B), 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.
5. 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.
6. 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. 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.
1026.35(c)(4)(i)(A) and (B), a creditor is not obligated to
determine whether and to what extent the agreement is legally
binding on both parties. See also comment 35(c)(4)(i)-4.

35(c)(4)(ii) Different Certified or Licensed Appraisers

1. Independent appraisers. The requirements that a creditor
obtain two separate appraisals under Sec. 1026.35(c)(4)(i), and
that each appraisal be conducted by a different licensed or
certified appraiser under Sec. 1026.35(c)(4)(ii), indicate that the
two appraisals must be conducted independently of each other. If the
two certified or licensed appraisers are affiliated, such as by
being employed by the same appraisal firm, then whether they have
conducted the appraisal independently of each other must be
determined based on the facts and circumstances of the particular
case known to the creditor.

35(c)(4)(iii) Relationship to General Appraisal Requirements

1. Safe harbor. When a creditor is required to obtain an
additional appraisal under Sec. 1026(c)(4)(i), the creditor must
comply with the requirements of both Sec. 1026.35(c)(3)(i) and
Sec. 1026.35(c)(4)(ii) through (v) for that appraisal. The creditor
complies with the requirements of Sec. 1026.35(c)(3)(i) for the
additional appraisal if the creditor meets the safe harbor
conditions in Sec. 1026.35(c)(3)(ii) for that appraisal.

35(c)(4)(iv) Required Analysis in the Additional Appraisal

1. Determining acquisition dates and prices used in the analysis
of the additional appraisal. For guidance on identifying the date on
which the seller acquired the property, see comment 35(c)(4)(i)-3.
For guidance on identifying the date of the consumer's agreement to
acquire the property, see comment 35(c)(4)(i)-4. For guidance on
identifying the price at which the seller acquired the property, see
comment 35(c)(4)(i)-5. For guidance on identifying the price the
consumer is obligated to pay to acquire the property, see comment
35(c)(4)(i)-6.

35(c)(4)(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. 1026.35(c)(4)(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-priced mortgage loan.

35(c)(4)(vi) Creditor's Determination of Prior Sale Date and Price

35(c)(4)(vi)(A) In General

1. Estimated sales price. If a written source document describes
the seller's acquisition price in a manner that indicates that the
price described is an estimated or assumed amount and not the actual
price, the creditor should look at an alternative document to
satisfy the reasonable diligence standard in determining the price
at which the seller acquired the property.
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. 1026.35(c)(4)(vi)(A).
3. Lack of information and conflicting information--two
appraisals required. If a creditor is unable to demonstrate that the
requirement to obtain two appraisals under Sec. 1026.35(c)(4)(i)
does not apply, the creditor must obtain two written appraisals
before extending a higher-priced mortgage loan subject to the
requirements of Sec. 1026.35(c). See also comment 35(c)(4)(vi)(B)-
1. For example:
i. Assume a creditor orders and reviews the results of a title
search, which shows that a prior sale occurred between 91 and 180
days ago, but not the price paid in that sale. Thus, based on the
title search, the creditor would not be able to determine whether
the price the consumer is obligated to pay under the consumer's
acquisition agreement is more than 20 percent higher than the
seller's acquisition price, pursuant to Sec. 1026.35(c)(4)(i)(B).
Before extending a higher-priced mortgage loan subject to the
appraisal requirements of Sec. 1026.35(c), the creditor must
either: (1) Perform additional diligence to ascertain the seller's
acquisition price and, based on this information,

[[Page 10446]]

determine whether two written appraisals are required; or (2) obtain
two written appraisals in compliance with Sec. 1026.35(c)(4). See
also comment 35(c)(4)(vi)(B)-1.
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 a written appraisal
indicating that the seller acquired the property between 91 and 180
days before the consumer's agreement to acquire the property. In
this case, unless one of these sources is clearly wrong on its face,
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.
1026.35(c)(4)(i)(B). Before extending a higher-priced mortgage loan
subject to the appraisal requirements of Sec. 1026.35(c), the
creditor must either: perform additional diligence to ascertain the
seller's acquisition date and, based on this information, determine
whether two written appraisals are required; or obtain two written
appraisals in compliance with Sec. 1026.35(c)(4). See also comment
35(c)(4)(vi)(B)-1.

35(c)(4)(vi)(B) Inability To Determine Prior Sales Date or Price--
Modified Requirements for Additional Appraisal

1. Required analysis. In general, the additional appraisal
required under Sec. 1026.35(c)(4)(i) should include an analysis of
the factors listed in Sec. 1026.35(c)(4)(iv)(A) through (C).
However, if, following reasonable diligence, a creditor cannot
determine whether the conditions in Sec. 1026.35(c)(4)(i)(A) or (B)
are present due to a lack of information or conflicting information,
the required additional appraisal must include the analyses required
under Sec. 1026.35(c)(4)(iv)(A) through (C) only to the extent that
the information necessary to perform the analyses is known. For
example, assume that a creditor is able, following reasonable
diligence, to determine that the date on which the seller acquired
the property occurred between 91 and 180 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 Sec. 1026.35(c)(4)(iv)(B) and
(c)(4)(iv)(C) 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. 1026.35(c)(4)(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.

35(c)(4)(vii) Exemptions From the Additional Appraisal Requirement

Paragraph 35(c)(4)(vii)(C)

1. Non-profit entity. For purposes of Sec.
1026.35(c)(4)(vii)(C), a ``non-profit entity'' is a person with a
tax exemption ruling or determination letter from the Internal
Revenue Service under section 501(c)(3) of the Internal Revenue Code
of 1986 (26 U.S.C. 501(c)(3)).

Paragraph 35(c)(4)(vii)(H)

1. Bureau table of rural counties. The Bureau publishes on its
Web site a table of rural counties under Sec. 1026.35(c)(4)(vii)(H)
for each calendar year by the end of that calendar year. See comment
35(b)(2)(iv)-1. A property securing an HPML subject to Sec.
1026.35(c) is in a rural county under Sec. 1026.35(c)(4)(vii)(H) if
the county in which the property is located is on the table of rural
counties most recently published by the Bureau. For example, for a
transaction occurring in 2015, assume that the Bureau most recently
published a table of rural counties at the end of 2014. The property
securing the transaction would be located in a rural county for
purposes of Sec. 1026.35(c)(4)(vii)(H) if the county is on the
table of rural counties published by the Bureau at the end of 2014.

35(c)(5) Required Disclosure

35(c)(5)(i) 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.
2. Appraisal independence requirements not affected. Nothing in
the text of the consumer notice required by Sec. 1026.35(c)(5)(i)
should be construed to affect, modify, limit, or supersede the
operation of any legal, regulatory, or other requirements or
standards relating to independence in the conduct of appraisers or
restrictions on the use of borrower-ordered appraisals by creditors.

35(c)(6) Copy of Appraisals

35(c)(6)(i) 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.

35(c)(6)(ii) Timing

1. ``Provide.'' For purposes of the requirement to provide a
copy of the appraisal within a specified time under Sec.
1026.35(c)(6)(ii), ``provide'' means ``deliver.'' Delivery occurs
three business days after mailing or delivering the copies to the
last-known address of the applicant, or when evidence indicates
actual receipt by the applicant (which, in the case of electronic
receipt, must be based upon consent that complies with the E-Sign
Act), whichever is earlier.
2. ``Receipt'' of the appraisal. For appraisals prepared by the
creditor's internal appraisal staff, the date of ``receipt'' is the
date on which the appraisal is completed.
3. No waiver. Regulation B, 12 CFR 1002.14(a)(1), allowing the
consumer to waive the requirement that the appraisal copy be
provided three business days before consummation, does not apply to
higher-priced mortgage loans subject to Sec. 1026.35(c). A consumer
of a higher-priced mortgage loan subject to Sec. 1026.35(c) may not
waive the timing requirement to receive a copy of the appraisal
under Sec. 1026.35(c)(6)(i).

35(c)(6)(iv) 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. 1026.35(c)(6)(i), 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-priced mortgage loan.
* * * * *

Appendix O--Illustrative Written Source Documents for Higher-Priced
Mortgage Loan Appraisal Rules

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 adds Part 1222 to subchapter B of
chapter XII of title 12 of the Code of the Federal Regulations as
follows:

PART 1222--APPRAISALS

Subpart A--Requirements for Higher-Priced Mortgage Loans
Sec.
1222.1 Purpose and scope.
1222.2 Reservation of authority.

Subparts B to Z--[Reserved]

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

Subpart A--Requirements for Higher-Priced Mortgage Loans

Sec. 1222.1 Purpose and scope.

This subpart cross-references the requirement that creditors
extending

[[Page 10447]]

credit in the form of higher-priced 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 1026.35. Neither the
Banks nor the Enterprises are subject to Section 129H of TILA or 12 CFR
1026.35. Originators of higher-priced 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 1026.35 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-priced mortgage loans by
an Enterprise or a Federal Home Loan Bank, or acceptance of higher-
priced mortgage loans as collateral to secure advances by a Federal
Home Loan Bank.

Subparts B to Z--[Reserved]

Dated: January 18, 2013.
Thomas J. Curry,
Comptroller of the Currency.
By order of the Board of Governors of the Federal Reserve
System, January 16, 2013.
Robert deV. Frierson,
Secretary of the Board.
By the National Credit Union Administration Board on January 11,
2013.
Mary Rupp,
Secretary of the Board.
Dated: January 18, 2013.
Richard Cordray,
Director, Bureau of Consumer Financial Protection.

This rule is being adopted 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.

Dated at Washington, DC, this 15th day of January, 2013.

By order of the Board of Directors.

Federal Deposit Insurance Corporation.

Robert E. Feldman,
Executive Secretary.
Dated: January 18, 2013.
Edward J. DeMarco,
Acting Director, Federal Housing Finance Agency.
[FR Doc. 2013-01809 Filed 2-12-13; 8:45 am]
BILLING CODE 4810-33-4810-AM- 6210-01- 6714-01-7535-01-P