[Federal Register Volume 78, Number 248 (Thursday, December 26, 2013)]
[Rules and Regulations]
[Pages 78520-78588]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-30108]
[[Page 78519]]
Vol. 78
Thursday,
No. 248
December 26, 2013
Part II
Department of the Treasury
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Office of the Comptroller of the Currency
Board of Governors of the Federal Reserve System
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Bureau of Consumer Financial Protection
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12 CFR Parts 34, 226, and 1026
Appraisals for Higher-Priced Mortgage Loans; Final Rule
Federal Register / Vol. 78 , No. 248 / Thursday, December 26, 2013 /
Rules and Regulations
[[Page 78520]]
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DEPARTMENT OF THE TREASURY
Office of the Comptroller of the Currency
12 CFR Part 34
[Docket No. OCC-2013-0009]
RIN 1557-AD70
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
12 CFR Part 226
[Docket No. R-1443]
RIN 7100-AD90
BUREAU OF CONSUMER FINANCIAL PROTECTION
12 CFR Part 1026
[Docket No. CFPB-2013-0020]
RIN 3170-AA11
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: Supplemental final rule; official staff commentary.
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SUMMARY: The Board, Bureau, FDIC, FHFA, NCUA, and OCC (collectively,
the Agencies) are amending Regulation Z, which implements the Truth in
Lending Act (TILA), and the official interpretation to the regulation.
This final rule supplements a final rule issued by the Agencies on
January 18, 2013, which goes into effect on January 18, 2014. The
January 2013 Final Rule implements a provision added to TILA by the
Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-
Frank Act or Act) requiring appraisals for ``higher-risk mortgages.''
For certain mortgages with an annual percentage rate that exceeds the
average prime offer rate by a specified percentage, the January 2013
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. On July 10, 2013, the Agencies
proposed amendments to the January 2013 Final Rule implementing these
requirements. Specifically, the Agencies proposed exemptions from the
rules for transactions secured by existing manufactured homes and not
land; certain streamlined refinancings; and transactions of $25,000 or
less.
DATES: This final rule is effective on January 18, 2014. Alternative
provisions regarding manufactured home loans in amendatory instructions
3b and 5f (12 CFR 34.203(b)(8) and 12 CFR part 34, appendix C,
34.203(b)(8) entry OCC), 12 CFR 226.43(b)(8) Board, and 12 CFR
1026.35(c)(2)(viii) CFPB, are effective July 18, 2015.
FOR FURTHER INFORMATION CONTACT: OCC: Robert L. Parson, Appraisal
Policy Specialist, at (202) 649-6423, G. Kevin Lawton, Appraiser (Real
Estate Specialist), at (202) 649-7152, Charlotte M. Bahin, Senior
Counsel or Mitchell Plave, Special Counsel, Legislative & Regulatory
Activities Division, at (202) 649-5490, Krista LaBelle, Special
Counsel, Community and Consumer Law Division, at (202) 649-6350, or 400
Seventh Street SW., Washington, DC 20219.
Board: Lorna Neill or Mandie Aubrey, Counsels, Division of Consumer
and Community Affairs, at (202) 452-3667, Carmen Holly, Supervisory
Financial Analyst, Division of Banking Supervision and Regulation, at
(202) 973-6122, or Kara Handzlik, Counsel, Legal Division, at (202)
452-3852, Board of Governors of the Federal Reserve System, Washington,
DC 20551.
FDIC: Beverlea S. Gardner, Senior Examination Specialist, Risk
Management Section, at (202) 898-3640, Sandra S. Barker, Senior Policy
Analyst, Division of Consumer Protection, at (202) 898-3615, Mark
Mellon, Counsel, Legal Division, at (202) 898-3884, Kimberly Stock,
Counsel, Legal Division, at (202) 898-3815, or Benjamin Gibbs, Senior
Regional Attorney, at (678) 916-2458, Federal Deposit Insurance
Corporation, 550 17th St, NW., Washington, DC 20429.
NCUA: John Brolin, Staff Attorney, 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.
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.
FHFA: Robert Witt, Senior Policy Analyst, at 202-649-3128, or Ming-
Yuen Meyer-Fong, Assistant General Counsel, Office of General Counsel,
(202) 649-3078, Federal Housing Finance Agency, 400 Seventh Street SW.,
Washington, DC 20024.
SUPPLEMENTARY INFORMATION:
I. Summary of the Final Rule
As discussed in detail under part II of this SUPPLEMENTARY
INFORMATION, section 1471 of the Dodd-Frank Act created new TILA
section 129H, which establishes special appraisal requirements for
``higher-risk mortgages.'' 15 U.S.C. 1639h. The Agencies adopted a
final rule on January 18, 2013 (January 2013 Final Rule; 78 FR 10368
(Feb. 13, 2013)) to implement these requirements (adopting the term
``higher-priced mortgage loans'' (HPMLs) instead of ``higher-risk
mortgages''). The Agencies believe that several additional exemptions
from the new appraisal rules are appropriate. Specifically, the
Agencies are adopting exemptions for certain types of refinancings and
transactions of $25,000 or less (indexed for inflation). The Agencies
are also adopting a temporary exemption of 18 months (until July 18,
2015) for all loans secured in whole or in part by a manufactured home.
Starting on July 18, 2015, transactions secured by a new manufactured
home and land will be exempt from the requirement that the appraisal
include a physical inspection of the interior of the property;
transactions secured by an existing (used) manufactured home and land
will not be exempt from the rules; and transactions secured solely by a
manufactured home and not land will be exempt from the rules if the
creditor gives the consumer one of three types of information about the
home's value, discussed in more detail below.
The Agencies are not adopting the proposed definition of ``business
day'' that would have differed from the definition used in the January
2013 Final Rule. A revision to the exemption for ``qualified
mortgages'' is adopted that is similar to the proposed revision, as
well as a few proposed non-substantive technical corrections.
A. Exemption for Extensions of Credit of $25,000 or Less
The Agencies are adopting without change the proposed exemption
from the HPML appraisal rules for extensions of credit of $25,000 or
less, indexed every year for inflation.
B. Exemption for Certain Refinancings
The Agencies also are adopting an exemption from the HPML appraisal
rules for certain types of refinancings with characteristics common to
refinance products often referred to as
[[Page 78521]]
streamlined refinances. Consistent with the proposal, the final rule
exempts a refinancing where the holder of the credit risk of the
existing obligation remains the same on the refinancing. The final rule
includes revised terminology and additional examples in Official Staff
Commentary to clarify the meaning of this requirement. In addition, the
periodic payments under the refinance loan must not result in negative
amortization, cover only interest on the loan, or result in a balloon
payment. Finally, the proceeds from the refinance loan may only be used
to pay off the existing obligation and to pay closing or settlement
charges.
C. Exemption for Transactions Secured in Whole or in Part by a
Manufactured Home
All loans secured in whole or in part by a manufactured home will
be exempt from the HPML appraisal rules for 18 months, until July 18,
2015. For loan applications received on or July 18, 2015, the following
changes will apply:
Transactions secured by a new manufactured home and land will be
exempt from the requirement that the appraisal include a physical
inspection of the interior of the property, but will be subject to all
other HPML appraisal requirements.
Transactions secured by an existing (used) manufactured home and
land will not be exempt from the rules.
Transactions secured solely by a manufactured home and not land
will be exempt from the rules if the creditor gives the consumer one of
three types of information about the home's value:
The manufacturer's invoice of the unit cost (for a
transaction secured by a new manufactured home).
An independent cost service unit cost.
A valuation conducted by an individual who has no
financial interest in the property or credit transaction, and has
training in valuing manufactured homes.\1\ An example would be an
appraisal conducted according to procedures approved by the U.S.
Department of Housing and Urban Development (HUD) for existing (used)
home-only transactions.
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\1\ As discussed further in the section-by-section analysis, the
Agencies are adopting the definition of ``valuation'' at 12 CFR
1026.42(b)(3): `` `Valuation' means an estimate of the value of the
consumer's principal dwelling in written or electronic form, other
than one produced solely by an automated model or system.''
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D. Effective Date
The temporary exemption for manufactured home loans and the
exemptions for certain refinancings and loans of $25,000 or less will
be effective on January 18, 2014, the same date on which the January
2013 Final Rule will become effective. The Agencies find under 5 U.S.C.
553(d)(1) that these provisions may be made effective less than 30 days
after publication in the Federal Register because these provisions
``grant[] or recognize[] an exemption or relieve[] a restriction.'' 5
U.S.C. 553(d)(1). The modified exemptions for loans secured by
manufactured homes will be effective on July 18, 2015.
II. Background
In general, TILA seeks to promote the informed use of consumer
credit by requiring disclosures about its costs and terms, as well as
other information. 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.\2\ 15 U.S.C. 1604(a).
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\2\ 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. 15 U.S.C. 5519; 15 U.S.C. 1604(i).
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For most types of creditors and most provisions of TILA, 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
January 2013 Final Rule, the new appraisal section of TILA addressed in
the January 2013 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 by OCC regulations and the Board's Regulation Z
(for creditors overseen by the OCC and the Board, respectively). See 12
CFR parts 34 and 164 (OCC regulations) and part 226 (the Board's
Regulation Z); see also Sec. 1026.35(c)(7) and 78 FR 10368, 10415
(Feb. 13, 2013). The Bureau's, the OCC's, and the Board's versions of
the January 2013 Final Rule and corresponding official interpretations
are substantively identical. The FDIC, NCUA, and FHFA adopted the
Bureau's version of the regulations under the January 2013 Final
Rule.\3\
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\3\ See NCUA: 12 CFR 722.3; FHFA: 12 CFR part 1222. The FDIC
adopted the Bureau's version of the regulations, but did not adopt a
cross-reference to the Bureau's regulations in FDIC regulations. See
78 FR 10368, 10370 (Feb. 13, 2013).
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The Dodd-Frank Act \4\ was signed into law on July 21, 2010.
Section 1471 of the Dodd-Frank Act's Title XIV, Subtitle F (Appraisal
Activities), added 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:
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\4\ Public Law 111-203, 124 Stat. 1376 (Dodd-Frank Act).
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Obtaining a written appraisal performed by a certified or
licensed appraiser who conducts an appraisal that includes a physical
inspection of the interior of the property and is performed in
compliance with the Uniform Standards of Professional Appraisal
Practice (USPAP) and title XI of the Financial Institutions Reform,
Recovery, and Enforcement Act of 1989 (FIRREA), and the regulations
prescribed thereunder.
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 that extends 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 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'' \5\ secured
[[Page 78522]]
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--
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\5\ See Dodd-Frank Act section 1401; TILA section 103(cc)(5), 15
U.S.C. 1602(cc)(5) (defining ``residential mortgage loan''). 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).
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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 ``jumbo'' loans (i.e., 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 ``jumbo'' loan (i.e., 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.
III. Summary of the Rulemaking Process
The Agencies issued proposed regulations for public comment on
August 15, 2012, that would have implemented the Dodd-Frank Act higher-
risk mortgage appraisal provisions (2012 Proposed Rule). 77 FR 54722
(Sept. 5, 2012). This rule was open for public comment for 60 days
(until October 15, 2012). After consideration of public comments, the
Agencies issued the January 2013 Final Rule on January 18, 2013. The
Final Rule was published in the Federal Register on February 13, 2013,
and is effective on January 18, 2014. See 78 FR 10368 (Feb. 13, 2013).
The preamble to the January 2013 Final Rule stated that the
Agencies would consider exemptions for three additional types of
transactions that commenters requested the Agencies consider: (1)
smaller dollar loans; (2) streamlined refinance loans; and (3) loans
secured by ``existing'' (used) manufactured homes. On July 10, 2013,
the Agencies issued proposed amendments to the January 2013 Final Rule
the 2013 Supplemental Proposed Rule to exempt these transactions from
the HPML appraisal requirements. (2013 Supplemental Proposed Rule; 78
FR 48548 (Aug. 8, 2013)). The 2013 Supplemental Proposed Rule sought
comment on whether any of these exemptions should be conditioned on the
creditor meeting an alternative standard to estimate the value of the
property securing the transaction and providing that information to the
consumer. Comment also was sought on the appropriate scope of, and
possible conditions on, the exemption in the January 2013 Final Rule
for loans secured by new manufactured homes. The 2013 Supplemental
Proposed Rule was open for public comment for 60 days (until Sept. 9,
2013).
To inform the Agencies in drafting the January 2013 Final Rule as
well as the 2012 Proposed Rule, the Agencies conducted a series of
public outreach meetings in January and February of 2012.\6\ Agency
staff conducted additional public outreach in the first half of 2013 to
inform the Agencies in drafting the 2013 Supplemental Proposed Rule. In
addition to reviewing public comments on the 2013 Supplemental Proposed
Rule, Agency staff conducted limited public outreach in September and
October to inform the Agencies in drafting this final rule.\7\
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\6\ Information about these meetings is available at http://www.federalreserve.gov/newsevents/rr-commpublic/industry_meetings_20120210.pdf.
\7\ Information about these meetings is available at http://www.federalreserve.gov/newsevents/rr-commpublic/industry-meetings-20131001.pdf.
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A. January 2013 Final Rule
1. Loans Covered
To implement the statutory definition of ``higher-risk mortgage,''
the January 2013 Final Rule used the term ``higher-priced mortgage
loan'' or 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 used the term HPML to refer generally to the loans that could
be subject to the January 2013 Final Rule because they are closed-end
credit and meet the statutory rate triggers, but the Agencies
separately exempted several types of HPML transactions from the
rule.\8\ The term ``higher-risk mortgage'' generally 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.\9\ Specifically, consistent with TILA
section 129H, a loan is an HPML under the January 2013 Final Rule if
the APR exceeds the APOR by 1.5 percentage points for first lien
conventional or conforming loans, 2.5 percentage points for first lien
jumbo loans, and 3.5 percentage points for subordinate lien loans.\10\
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\8\ As noted further below, 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).
\9\ 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.
\10\ 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).
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Consistent with TILA, the January 2013 Final Rule included an
exemption for ``qualified mortgages,'' as 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).\11\
15 U.S.C. 1639c. For revisions to this exemption, see Sec.
1026.35(c)(2)(i) and accompanying section-by-section analysis below.
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\11\ 78 FR 6408 (Jan. 30, 2013).
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In addition, the January 2013 Final Rule excludes from its coverage
the following classes of loans:
(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.
2. Requirements That Apply to All Appraisals Performed for Non-Exempt
HPMLs
Consistent with TILA, the January 2013 Final Rule allows a creditor
to originate an HPML that is not exempt from the January 2013 Final
Rule only if the following conditions are met:
[[Page 78523]]
The creditor obtains a written appraisal;
The appraisal is performed by a certified or licensed
appraiser; and
The appraiser conducts a physical visit of the interior of
the property.
Also consistent with TILA, the following requirements also apply
with respect to HPMLs subject to the January 2013 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 business
days before consummation.
3. Requirement To Obtain an Additional Appraisal in Certain HPML
Transactions
In addition, the January 2013 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 loan
will finance the purchase of the consumer's principal dwelling and
there has been an increase in the purchase price from a prior
acquisition that took place within 180 days of the current purchase.
TILA section 129H(b)(2)(A), 15 U.S.C. 1639h(b)(2)(A). In the January
2013 Final Rule, using their exemption authority, the Agencies set
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.
Finally, in the January 2013 Final Rule the Agencies expressed
their intention to publish a supplemental proposal to request comment
on possible exemptions for streamlined refinance programs and smaller
dollar loans, as well as loans secured by certain other property types,
such as existing manufactured homes. See 78 FR 10368, 10370 (Feb. 13,
2013). Accordingly, the Agencies published the 2013 Supplemental
Proposed Rule.
B. 2013 Supplemental Proposed Rule
Based on comments received on the 2012 Proposed Rule and additional
research and outreach, the Agencies believed that several additional
exemptions from the new appraisal rules might be appropriate.
Specifically, in the 2013 Supplemental Proposed Rule, the Agencies
proposed exemptions for transactions secured by an existing
manufactured home and not land, certain types of refinancings, and
transactions of $25,000 or less (indexed for inflation). The Agencies
solicited comment on these proposed exemptions, as well as on the scope
and possible conditions on the exemption in the January 2013 Final Rule
for loans secured by a new manufactured home (with or without land). In
addition, the Agencies proposed a different definition of ``business
day'' than the definition used in the Final Rule, as well as a few non-
substantive technical corrections.
1. Proposed Exemption for Transactions Secured Solely by an Existing
Manufactured Home and Not Land
The Agencies proposed to exempt transactions secured solely by an
existing (used) manufactured home and not land from the HPML appraisal
requirements. The Agencies sought comment on whether an alternative
valuation type should be required.
The Agencies proposed to retain coverage of loans secured by
existing manufactured homes and land. The Agencies also proposed to
retain the exemption for transactions secured by new manufactured
homes, but sought further comment on the scope of this exemption and
whether certain conditions on the exemption might be appropriate.
2. Proposed Exemption for Certain Refinancings
In addition, the Agencies proposed to exempt from the HPML
appraisal rules certain types of refinancings with characteristics
common to refinance programs that offer ``streamlined'' refinances.
Specifically, the Agencies proposed to exempt an extension of credit
that is a refinancing where the owner or guarantor of the refinance
loan is the current owner or guarantor of the existing obligation. The
periodic payments under the refinance loan could not have resulted in
negative amortization, covered only interest on the loan, or resulted
in a balloon payment. Further, the proceeds from the refinance loan
could have been used only to pay off the outstanding principal balance
on the existing obligation and to pay closing or settlement charges.
3. Proposed Exemption for Extensions of Credit of $25,000 or Less
Finally, the Agencies proposed an exemption from the HPML appraisal
rules for extensions of credit of $25,000 or less, indexed every year
for inflation.
4. Effective Date
The Agencies' Proposal
The Agencies intended that exemptions adopted as a result of the
2013 Supplemental Proposed Rule would be effective on January 18, 2014,
the same date on which the January 2013 Final Rule will become
effective. The Agencies requested comment on a number of conditions
that might be appropriate to require creditors to meet to qualify for
the proposed exemptions. The Agencies stated that, if the Agencies
adopted any conditions on an exemption, the Agencies would consider
establishing a later effective date for those conditions to allow
creditors sufficient time to adjust their compliance systems, if
necessary. The Agencies requested comment on the need for a later
effective date for any condition on a proposed exemption.
Public Comments
Most public commenters did not directly address whether the
implementation date for any conditions on proposed exemptions should be
extended beyond January 18, 2014. Four State credit union trade
associations, a national credit union trade association, two State
banking trade associations, a small mortgage lender, and a community
banking trade association supported delaying the implementation date
for all of the HPML appraisal requirements. Two credit union trade
associations recommended that, if conditions were placed on exemptions
in the final rule, the Agencies should delay the implementation date to
allow creditors sufficient time to adjust their systems to comply with
the conditions. One commenter stated that the uncertainty regarding
potential amendments to the January 2013 Final Rule made it difficult
to prepare for compliance by the January 18, 2014 implementation date.
Some commenters
[[Page 78524]]
stated that the difficulty of complying with the rules by January 2014
was compounded by the multiple mortgage rules recently issued by the
Bureau that are also due to become effective in January 2014, and one
pointed out further that several of these rules were amended after
being finalized in January 2013. The small mortgage lender noted that
creating and implementing compliance programs is resource intensive,
and that it is more difficult for small businesses to implement such
programs than for large lenders. These commenters suggested that the
Agencies delay the implementation date by varying amounts of time, from
six to 18 months.
As discussed in the section-by-section analysis of Sec.
1026.35(c)(2)(ii), several commenters focused on the implementation
date of HPML appraisal rules for loans secured by manufactured homes.
Manufactured housing industry commenters--two lenders and a State trade
association--believed that the Agencies should delay issuing final
rules on valuations for covered manufactured home loans until further
study on manufactured housing valuations. The manufactured housing
lenders noted that requiring appraisals in manufactured housing lending
would be a significant change for the manufactured housing industry,
requiring time to negotiate contracts with appraisal management
companies and to develop new disclosures that contain the appraised
value, among other changes. The State manufactured housing industry
trade association commenter recommended that the Agencies issue a more
concrete proposal regarding manufactured housing valuations and that
the effective date be at least two years after the publication of final
rules.
As also discussed further in the section-by-section analysis of
Sec. 1026.35(c)(2)(ii), a national association of owners of
manufactured homes, a consumer advocate group, two affordable housing
organizations and a policy and research organization believed that
appraisal rules applicable to transactions secured by manufactured
homes (both new and existing) and land should be effective ``quickly''
to facilitate the development of appropriate appraisal methods for
these transactions by increasing the demand for appraisals. They
suggested that rules eliminating any exemptions in the January 2013
Final Rule (i.e., the exemptions for loans secured by new manufactured
homes, with or without land) should go into effect six months after the
general effective date of January 2014, if possible, and in any event
no later than January 2016. These commenters also recommended that
loans secured solely by a manufactured home and not land be subject to
a temporary exemption until no later than January 2016. In the
intervening time, the commenters suggested that the Agencies convene a
working group of stakeholders to develop standards for appraising
manufactured homes.
Final Rule
The Agencies are adopting an effective date of January 18, 2014 for
most provisions of this supplemental final rule, to correspond with the
effective date of January 18, 2014 for the January 2013 Final Rule,
which is prescribed by statute. Specifically, the Dodd-Frank Act
requires that regulations required under Title XIV of the Dodd-Frank
Act, which include the HPML appraisal provisions, ``be prescribed in
final form before the end of the 18-month period beginning on the
designated transfer date,'' which was July 21, 2011.\12\ Accordingly,
the Agencies issued the January 2013 Final Rule within 18 months of the
designated transfer date, on January 18, 2013.\13\ The Dodd-Frank Act
also requires that regulations required under Title XIV ``take effect
not later than 12 months after the date of issuance of the regulations
in final form.'' \14\ Twelve months after the date of issuance of the
HPML appraisal rules is January 18, 2014. Thus, the January 2013 Final
Rule, as amended by this supplemental final rule, must go into effect
on January 18, 2014, and will apply to applications received by the
creditor on or after that date.
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\12\ Designated Transfer Date, 75 FR 57252 (Sept. 20, 2010).
\13\ Sections 1400(c) and 1471 of the Dodd-Frank Act, in title
XIV.
\14\ Section 1400(c) of the Dodd-Frank Act, in title XIV.
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The Agencies have authority to exempt certain classes of loans from
the HPML appraisal rules if the exemption is determined to be ``in the
public interest'' and to ``promote[] the safety and soundness of
creditors.'' TILA section 129H(b)(4)(B); 15 U.S.C. 1639h(b)(4)(B). As
discussed further in the section-by-section analysis of Sec.
1026.35(c)(2)(ii), the Agencies believe that a temporary exemption of
18 months for transactions secured by a manufactured home meets these
two exemption criteria. The temporary exemptions for loans secured by a
manufactured home will go into effect on January 18, 2014, the
effective date of the 2013 January Final Rule. Modified exemptions for
certain types of manufactured home transactions will be effective on
July 18, 2015, and applicable to applications received by the creditor
on or after that date.
IV. Legal Authority
TILA section 129H(b)(4)(A), added by the Dodd-Frank Act, authorizes
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).
V. Section-by-Section Analysis
For ease of reference, unless otherwise noted, the SUPPLEMENTARY
INFORMATION refers to the section numbers that will be published in the
Bureau's Regulation Z at 12 CFR 1026.35(c). As explained in the January
2013 Final Rule, separate versions of the regulations and accompanying
commentary were issued as part of the January 2013 Final Rule by the
OCC, the Board, and the Bureau, respectively. 78 FR 10367, 10415 (Feb.
13, 2013). No substantive difference among the three sets of rules was
intended. The NCUA and FHFA adopted 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 adopted the rules as published in the Bureau's
Regulation Z at 12 CFR 1026.35(a) and (c), but did not cross-reference
the Bureau's Regulation Z.
Accordingly, in this Federal Register notice, the revisions to the
January 2013 Final Rule adopted by the Agencies in this supplemental
final rule are separately published in the HPML appraisal regulations
of the OCC, the Board, and the Bureau. No substantive difference among
the three sets of revised rules is intended.
Section 1026.2 Definitions and Rules of Construction
2(a) Definitions
2(a)(6) Business Day
The Agencies' Proposal
The term ``business day'' is used with respect to two requirements
in the January 2013 Final Rule. First, the January 2013 Final Rule
requires the creditor to provide the consumer with a disclosure that
``shall be delivered or placed in the mail not later than the third
business day after the creditor receives the consumer's application for
[[Page 78525]]
a higher-priced mortgage loan'' subject to Sec. 1026.35(c). Sec.
1026.35(c)(5)(i) and (ii). Second, the January 2013 Final Rule requires
the creditor to provide to the consumer a copy of each written
appraisal obtained under the January 2013 Final Rule ``[n]o later than
three business days prior to consummation of the loan.'' Sec.
1026.35(6)(i) and (ii).
The Agencies proposed to define ``business day'' for these
requirements to mean ``all calendar days except Sundays and the legal
public holidays specified in 5 U.S.C. 6103(a), such as New Year's Day,
the Birthday of Martin Luther King, Jr., Washington's Birthday,
Memorial Day, Independence Day, Labor Day, Columbus Day, Veterans Day,
Thanksgiving Day, and Christmas Day.'' Sec. 1026.2(a)(6). The Agencies
proposed this definition for consistency with disclosure timing
requirements under both the existing Regulation Z mortgage disclosure
timing requirements and the Bureau's proposed rules for combined
mortgage disclosures under TILA and the Real Estate Settlement
Procedures Act (RESPA), 12 U.S.C. 2601 et seq. (2012 TILA-RESPA
Proposed Rule). See Sec. 1026.19(a)(1)(ii) and (a)(2); see also 77 FR
51116 (Aug. 23, 2012) (e.g., proposed Sec. 1026.19(e)(1)(iii) (early
mortgage disclosures) and (f)(1)(ii) (final mortgage disclosures).
Under existing Regulation Z, early disclosures must be delivered or
placed in the mail not later than the seventh business day before
consummation of the transaction; if the disclosures need to be
corrected, the consumer must receive corrected disclosures no later
than three business days before consummation (the consumer is deemed to
have received the corrected disclosures three business days after they
are mailed or delivered). See Sec. 1026.19(a)(2)(i)-(ii). For these
purposes, ``business day'' is defined as quoted previously. One reason
that the Agencies proposed to align the definition of ``business day''
under the January 2013 Final Rule with the definition of ``business
day'' for these disclosures was to avoid the creditor having to provide
the copy of the appraisal under the HPML rules and corrected Regulation
Z disclosures at different times (because different definitions of
``business day'' would apply).
The proposed definition of ``business day'' also was intended to
align with the definition of ``business day'' for the timing
requirements of mortgage disclosures under the 2012 TILA-RESPA
Proposal. See proposed Sec. 1026.2(a)(6). The 2012 TILA-RESPA Proposal
would have required the creditor to deliver the early mortgage
disclosures ``not later than the third business day after the creditor
receives the consumer's application.'' Proposed Sec.
1026.19(e)(1)(iii). The 2012 TILA-RESPA Proposal would have required
the final mortgage disclosures to have been provided ``not later than
three business days before consummation.'' Proposed Sec.
1026.19(f)(1)(ii). For these purposes, ``business day'' would have been
defined as the Agencies proposed to define ``business day'' in the 2013
Supplemental Proposed Rule.
The Agencies stated in the 2013 Supplemental Proposed Rule that, if
the Bureau adopted this aspect of the 2012 TILA-RESPA Proposal, then
adopting the proposed definition of ``business day'' for the final HPML
appraisals rule would ensure that the HPML appraisal notice and the
early mortgage disclosures have to be provided at the same time (no
later than three ``business days'' after the creditor receives the
consumer's application). The Agencies further stated that this would
also ensure that the copy of the HPML appraisal and the final mortgage
disclosures would have to be provided at the same time (no later than
three ``business days'' before consummation). The proposal to align
these timing requirements was intended to facilitate compliance and
reduce consumer confusion by reducing the number of disclosures that
consumers might receive at different times.
Public Comments
The Agencies received fourteen comments on the proposed revision to
the definition of ``business day,'' with most commenters supporting the
revised definition. A community banking trade association, an
individual, two State banking trade associations, a mortgage banking
trade association, four State credit union trade associations, one
national credit union trade association, and a financial holding
company believed that revising the definition for consistency with
other disclosure timing requirements--particularly those of the
combined mortgage disclosures under the 2012 TILA-RESPA Proposed Rule--
would reduce regulatory burden and facilitate compliance. The State
banking trade associations and the financial holding company believed
that making these disclosure requirements consistent with the timing
for other mortgage disclosures could also result in better awareness
and understanding of disclosures by consumers and reduce consumer
confusion. One of the State banking trade associations also believed
that the proposed definition provided more certainty for creditors than
the definition of business day in the January 2013 Final Rule, which
refers to days on which a creditor's offices are open to the public for
carrying on substantially all of its business functions. See Sec.
1026.2(a)(6).
A State credit union trade association, a national credit union
trade association, and a community bank commenter, however, opposed the
proposed revised definition of business day, instead favoring the
definition in the January 2013 Final Rule. The national credit union
trade association and community bank commenter stated that many credit
unions and community banks are not open for most or any of their
business functions on Saturdays. They argued that including Saturday as
a business day would increase their regulatory burden.
Final Rule
As noted, the term ``business day'' is used with respect to two
requirements in the January 2013 Final Rule. See Sec. Sec.
1026.35(c)(5)(ii) and (c)(6)(ii). The amendments to the January 2013
Final Rule adopted in this rule add a third use of the term ``business
day.'' As discussed more fully in the section-by-section analysis of
Sec. 1026.35(c)(2)(ii)(C), transactions secured solely by a
manufactured home and not land that are consummated on or after July
18, 2015, will be exempt from the HPML appraisal rules if the creditor
obtains and gives to the consumer a copy of one of three types of
valuation information ``no later than three business days prior to
consummation of the transaction.'' Sec. 1026.35(c)(2)(ii)(C).
For two reasons, the Agencies are not adopting the proposed
definition of ``business day'' and instead are retaining the definition
of ``business day'' adopted in the January 2013 Final Rule: ``a day on
which the creditor's offices are open to the public for carrying on
substantially all of its business functions.'' Sec. 1026.2(a)(6).
First, the Agencies' goal is to provide consistency with the timing
requirements of other mortgage disclosures. Most public commenters who
supported the Agencies' proposed amendment to the definition of
``business day'' used in the January 2013 Final Rule did so on the
basis of favoring consistency with the timing requirements of other
mortgage disclosures, particularly the combined TILA-RESPA early and
final mortgage disclosures.
The proposed definition, however, would result in inconsistency
because the Bureau did not adopt the definition of ``business day''
that includes Saturdays and excludes enumerated
[[Page 78526]]
Federal holidays for the early mortgage disclosures and final mortgage
disclosures proposed in the 2012 TILA-RESPA Proposed Rule. Instead, the
definition of ``business day'' referring to days on which the
creditor's offices are open to the public will be used for the timing
requirement for those disclosures.\15\ For the reasons discussed in the
2013 Supplemental Proposed Rule, the Agencies believe that the timing
requirement for creditors to give consumers the disclosure required
after application should be aligned with the TILA-RESPA early
disclosures and that the timing requirement for creditors to give
consumers copies of appraisals and other valuation information should
generally be aligned with the timing requirement for the TILA-RESPA
mortgage disclosures.
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\15\ See Bureau's 2013 TILA-RESPA Final Rule (issued Nov. 20,
2013) at p. 147 et seq., available at http://files.consumerfinance.gov/f/201311_cfpb_final-rule-preamble_integrated-mortgage-disclosures.pdf.
---------------------------------------------------------------------------
Second, the Agencies heard from commenters that many credit unions
and community banks are not open for most or any of their business
functions on Saturdays. As adopted, the final rule will address these
concerns.
Section 1026.35 Requirements for Higher-Priced Mortgage Loans
35(c) Appraisals for Higher-Priced Mortgage Loans
35(c)(1) Definitions
The Agencies are adopting three new definitions for purposes of the
HPML appraisal rules in Sec. 1026.35(c)--``credit risk,''
``manufacturer's invoice,'' and ``new manufactured home''--and re-
numbering definitions adopted in the January 2013 Final Rule
accordingly.
35(c)(1)(ii)
Section 1026.35(c)(1)(ii) defines ``credit risk'' for purposes of
Sec. 1026.35(c) to mean the financial risk that a loan will default.
The Agencies are adopting a definition of ``credit risk'' to provide
greater clarity regarding certain aspects of the exemption for certain
refinance transactions, discussed in more detail in the section-by-
section analysis of Sec. 1026.35(c)(2)(vii). Under Sec.
1026.35(c)(2)(vii), a covered HPML refinance is eligible for an
exemption if one of several criteria are met, including that either (1)
the credit risk of the refinance loan is retained by the person that
held the credit risk on the existing obligation or (2) the refinance
loan is owned, insured or guaranteed by the same Federal government
agency that owned, insured or guaranteed the existing obligation. See
Sec. 1026.35(c)(2)(vii)(A) and comment 35(c)(2)(vii)(A)-1.
35(c)(1)(iv)
Section 1026.35(c)(1)(iv) defines ``manufacturer's invoice'' to
mean a document issued by a manufacturer and provided with a
manufactured home to a retail dealer that separately details the
wholesale (base) prices at the factory for specific models or series of
manufactured homes and itemized options (large appliances, built-in
items and equipment), plus actual itemized charges for freight from the
factory to the dealer's lot or the home site (including any rental of
wheels and axles) and for any sales taxes to be paid by the dealer. The
invoice may recite such prices and charges on an itemized basis or by
stating an aggregate price or charge, as appropriate, for each
category.
This definition is adopted from the definition of ``manufacturer's
invoice'' in HUD regulations regarding Title I loans insured by the
Federal Housing Administration (FHA) that are secured by a new
manufactured home and not land, at 24 CFR 201.2. The Agencies believe
that defining the term ``manufacturer's invoice'' to mirror the
definition in HUD regulations is appropriate for consistency; the
January 2013 Final Rule defines the term ``manufactured home'' by
referencing HUD regulations. See Sec. 1026.35(c)(1)(iii). The only
aspect of the HUD definition of ``manufacturer's invoice'' not adopted
in the final rule is a provision requiring manufacturer's
certification. The Agencies do not have data regarding how often
manufacturer's invoices outside of the Title I program include the
manufacturer's certification prescribed in HUD regulations at 24 CFR
201.2 that apply to the Title I program. Thus, the Agencies are
concerned that requiring this certification at this time might create
unanticipated compliance challenges.
The final rule defines ``manufacturer's invoice'' to ensure that
creditors understand Sec. 1026.35(c)(2)(viii)(B)(1), which goes into
effect on July 18, 2015. Under Sec. 1026.35(c)(2)(viii)(B)(1), a
covered HPML secured by a new manufactured home and not land is exempt
from the HPML appraisal requirements of Sec. 1026.35(c) if the
creditor provides the consumer with a copy of a manufacturer's invoice
for the manufactured home securing the transaction. Further details
regarding this provision and other valuation-related documents that a
creditor could give the consumer to qualify for the exemption are
discussed in the corresponding section-by-section analysis.
35(c)(1)(vi)
Section 35(c)(1)(vi) defines ``new manufactured home'' to mean a
manufactured home that has not been previously occupied. The Agencies
believe that adopting a definition of ``new manufactured home'' will
help prevent confusion among creditors of manufactured home
transactions. The final rule differentiates between loans secured by
new and existing (used) manufactured homes in the application of
certain requirements, so a clear definition is intended to facilitate
compliance. See Sec. 1026.35(c)(2)(viii).
35(c)(2) Exemptions
The Agencies are adopting new Official Staff Commentary to Sec.
1026.35(c)(2). Specifically, comment 35(c)(2)-1 clarifies that Sec.
1026.35(c)(2) provides exemptions solely from the HPML appraisal
requirements in Regulation Z (Sec. 1026.35(c)(3) through (6)). The
comment states that institutions subject to the requirements of title
XI of FIRREA and its implementing regulations that make a loan
qualifying for an exemption under section 1026.35(c)(2) must still
comply with the appraisal and evaluation requirements under FIRREA and
its implementing regulations.
The Agencies are adopting this comment to ensure that creditors
subject to FIRREA are aware that, for any HPML they originate that
qualifies for an exemption from the HPML appraisal requirements in
Sec. 1026.35(c), they would still be required to obtain an appraisal
or evaluation in conformity with FIRREA title XI requirements.\16\
These requirements are implemented in Federal banking agency
regulations and further explained in the Interagency Appraisal and
Evaluation Guidance.\17\ Comment 35(c)(2)-1 also underscores that the
HPML appraisal requirements were not intended to override existing
Federal appraisal rules applicable to institutions regulated by Federal
financial institutions regulatory agencies.
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\16\ At least one commenter requested that the Agencies clarify
that FIRREA requirements would not apply to loans exempt from the
HPML appraisal rules. The opposite is true.
\17\ See OCC: 12 CFR parts 34, Subpart C, and 164; Board: 12 CFR
part 208, subpart E, and part 225, subpart G; FDIC: 12 CFR part 323;
NCUA: 12 CFR part 722. See also 75 FR 77450 (Dec. 10, 2010).
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35(c)(2)(i)
The Agencies' Proposal
Qualified mortgages ``as defined in [TILA] section 129C'' are
exempt from
[[Page 78527]]
the special appraisal rules for ``higher-risk mortgages.'' 15 U.S.C.
1639c; TILA section 129H(f)(1), 15 U.S.C. 1639h(f)(1). The Agencies
implemented this exemption in the January 2013 Final Rule by cross-
referencing Sec. 1026.43(e), the definition of ``qualified mortgage''
issued by the Bureau in its 2013 ATR Final Rule. See Sec.
1026.35(c)(2)(i). The Bureau's rules define ``qualified mortgage''
pursuant to the authority granted to the Bureau to implement the Dodd-
Frank Act ability-to-repay requirements. See, e.g., TILA section
129C(a)(1), (b)(3)(A), and (b)(3)(B)(i), 15 U.S.C. 1639c(a)(1),
(b)(3)(A), and (b)(3)(B)(i).
To align the regulation with the statute, the Agencies proposed to
revise the appraisal rules' exemption for qualified mortgages to
include all qualified mortgages ``as defined pursuant to TILA section
129C.'' 15 U.S.C. 1639c. In addition to authority granted to the
Bureau, TILA section 129C grants authority to HUD, the U.S. Department
of Veterans Affairs (VA), the U.S. Department of Agriculture (USDA),
and the Rural Housing Service (RHS), which is a part of USDA, to define
the types of loans ``insure[d], guarantee[d], or administer[ed]'' by
those agencies, respectively, that are qualified mortgages. TILA
section 129H(b)(3)(B)(ii), 15 U.S.C. 1639h(b)(3)(B)(ii). The Agencies
recognized that HUD, VA, USDA, and RHS may issue rules defining
qualified mortgages pursuant to their TILA section 129C authority.
Therefore, the Agencies proposed to expand the definition of qualified
mortgages that are exempt from the HPML appraisal rules to cover
qualified mortgages as defined by HUD, VA, USDA, and RHS. 15 U.S.C.
1639c.
Public Comments
Commenters on the revision to the qualified mortgage exemption
were: a State credit union trade association, a national appraiser
trade association, a State banking trade association, a mortgage
banking trade association, a manufactured housing lender, a national
association of owners of manufactured homes, a consumer advocate group,
two affordable housing organizations, and a policy and research
organization. All of these commenters supported the proposed revision.
The State banking trade association and State credit union trade
association emphasized that the definition of qualified mortgage in the
final rule should include all types of qualified mortgages, including
balloon payment qualified mortgages. The mortgage banking trade
association favored expanding the definition of ``qualified mortgage''
to include qualified mortgages as defined by HUD, VA, USDA, and RHS
based on a belief that qualified mortgages as defined by these agencies
will be subject to stringent product requirements and other consumer
safeguards. The manufactured housing lender also favored such an
expansion based on a belief that these agencies' loan programs provide
credit options for underserved consumers in lower income groups.
The Final Rule
In Sec. 1026.35(c)(2)(i), the Agencies are adopting an exemption
similar to the proposed exemption for qualified mortgages. In the final
rule, the exemption for qualified mortgages applies to either:
A loan that is a ``covered transaction'' under the
Bureau's ability-to-repay rules--namely, a loan subject to the ability-
to-repay rules of the Bureau in Sec. 1026.43 (see Sec. 1026.43(b)(1)
(defining ``covered transaction''))--and that is also a qualified
mortgage under the Bureau's ability-to-repay requirements in Sec.
1026.43 or, for loans insured, guaranteed, or administered under
programs of HUD, VA, USDA, or RHS, a qualified mortgage under the
applicable rules of those agencies (but only once such rules are in
effect; otherwise, the Bureau's definition of a qualified mortgage
applies to those loans); or
A loan that is not a ``covered transaction'' under the
Bureau's ability-to-repay rules, but meets the qualified mortgage
criteria established in the rules of the Bureau or, for loans insured,
guaranteed, or administered under programs of HUD, VA, USDA, or RHS,
meets the qualified mortgage criteria under the applicable rules of
those agencies (but only once such rules are in effect; otherwise, the
Bureau's criteria for a qualified mortgage applies to those loans).
The expanded exemption adopted by the Agencies includes qualified
mortgages defined by the Bureau in any of its regulations, such as
loans described in Sec. 1026.43(e) as well as Sec. 1026.43(f). Thus,
qualified mortgages exempt from the HPML appraisal rules include loans
subject to the Bureau's ability-to-repay rules that:
Meet the general criteria for a qualified mortgage under
Sec. 1026.43(e)(2).
Meet the special criteria for a qualified mortgage under
Sec. 1026.43(e)(4).\18\
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\18\ These include loans that are eligible, based solely on
criteria related to the consumer's ability to pay, to be purchased
or guaranteed by Fannie Mae or Freddie Mac and loans eligible to be
insured or guaranteed by HUD, VA, USDA, or RHS. To be qualified
mortgages, these loans also must meet the following general criteria
for a qualified mortgage: (1) provide for regular periodic payments
(Sec. 1026.43(e)(2)(i)); (2) have a term of no more than 30 years
(Sec. 1026.43(e)(2)(ii)); and (3) not exceed thresholds for total
points and fees set out in Sec. 1026.43(e)(3) (Sec.
1026.43(e)(2)(iii)). See Sec. 1026.43(e)(4)(i)(A). The qualified
mortgage status of loans eligible for purchase by Fannie Mae or
Freddie Mac expires starting on January 11, 2021. The qualified
mortgage status of loans eligible to be insured or guaranteed by
HUD, VA, USDA, or RHS expires on the effective date of a rule issued
by each of these respective agencies defining ``qualified mortgage''
for their own programs. On Sept. 30, 2013, HUD published proposed
rules defining ``qualified mortgage'' based on its authority under
TILA section 129C(b)(3)(B)(ii)(I). 15 U.S.C. 1639c(b)(3)(B)(ii)(I);
78 FR 59890 (Sept. 30, 2013).
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Meet the criteria for small creditor portfolio loans in
Sec. 1026.43(e)(5).
Meet the criteria for temporary balloon-payment qualified
mortgages in Sec. 1026.43(e)(6).
Meet the criteria for balloon-payment qualified mortgages
under Sec. 1026.43(f).
The Agencies believe that the statutory provision exempting
``qualified mortgage[s], as defined in section 129C'' evidences
Congress's intent to exempt all loans with the characteristics of a
qualified mortgage from the HPML appraisal rules. TILA section
129H(f)(1); 15 U.S.C. 1639h(f)(1). As discussed above, TILA section
129C encompasses qualified mortgages defined by the Bureau pursuant to
its authority to do so, as well as qualified mortgages defined by HUD,
VA, USDA and RHS for loans in their respective programs. See TILA
section 129C(a)(1), (b)(3)(A), and (b)(3)(B)(i), 15 U.S.C. 1639c(a)(1),
(b)(3)(A), and (b)(3)(B)(i) (authority of the Bureau) and TILA section
129C(b)(3)(B)(ii), 15 U.S.C. 1639c(b)(3)(B)(ii) (authority of HUD, VA,
USDA, and RHS).
Additionally, the amended qualified mortgage exemption language is
intended to ensure that loans that meet the qualified mortgage criteria
of the Bureau, HUD, VA, USDA, or RHS, as applicable, but are exempt
from the Bureau's ability-to-repay rules in Sec. 1026.43, are afforded
an exemption from the HPML appraisal rules as well. In the Bureau's
ability-to-repay rules, ``qualified mortgage'' is a designation only
for ``covered transactions,'' which are loans subject to the ability-
to-repay requirements of TILA section 129C(a), implemented in Sec.
1026.43(c).\19\ 15
[[Page 78528]]
U.S.C. 1639c. The Bureau excluded certain transactions from the scope
of the rules, including loans originated as part of certain programs,
such as a program administered by a Housing Finance Agency, or loans
originated by certain entities, such as a Community Development
Financial Institution (CDFI). See Sec. 1026.43(a)(3). Under the
Bureau's ability-to-repay rules, these loans are not considered to be
``covered transactions'' and are therefore not eligible to be qualified
mortgages under the Bureau's ability-to-repay rules. This is the case
even if the loans meet the criteria for a qualified mortgage in the
Bureau's rules.
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\19\ In the 2013 ATR Final Rule, ``covered transaction'' is
defined to mean ``a consumer credit transaction that is secured by a
dwelling, as defined in Sec. 1026.2(a)(19), including any real
property attached to a dwelling, other than a transaction exempt
from coverage under [Sec. 1026.43(a)]'' (emphasis added).
``Qualified mortgage'' is defined as ``a covered transaction'' that
meets certain criteria. Sec. 1026.43(e)(2).
---------------------------------------------------------------------------
Under the proposed exemption--for ``qualified mortgages as defined
pursuant to 15 U.S.C. 1639c''--loans exempted from the Bureau's
ability-to-repay requirements would not be eligible for the qualified
mortgage exemption from the HPML appraisal rules because, technically,
they are not ``defined'' as qualified mortgages under Bureau rules.
Such excluded loans would include:
Loans made as part of a program administered by a State
housing finance agency (HFA); \20\
---------------------------------------------------------------------------
\20\ See Sec. 1026.43(a)(3)(iv).
---------------------------------------------------------------------------
Loans made by a creditor designated as a CDFI, a creditor
designated as a Downpayment Assistance through Secondary Financing
Provider, a creditor designated as a Community Housing Development
Organization, and a creditor that is a 501(c)(3) organization and meets
certain other criteria; \21\ and
---------------------------------------------------------------------------
\21\ See Sec. 1026.43(a)(3)(v)(A)-(D).
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Loans made pursuant to a program authorized by sections
101 and 109 of the Emergency Economic Stabilization Act of 2008.\22\
---------------------------------------------------------------------------
\22\ See Sec. 1026.43(a)(3)(vi).
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As discussed above, the Agencies believe that, by exempting
qualified mortgages in the statute, Congress intended to exempt from
the requirements those loans that have the characteristics of a
qualified mortgage. The Agencies believe that if the HPML appraisal
rules exempted only ``qualified mortgages as defined pursuant to 15
U.S.C. 1639c,'' the rules would apply to transactions that Congress did
not intend to subject to the appraisal requirements. By contrast, the
final rule, which exempts ``a loan that satisfies the criteria of a
qualified mortgage,'' ensures that all transactions intended to be
exempt from the HPML appraisal requirements are excluded from coverage.
In addition, this exemption ensures that transactions with the
terms and features of a qualified mortgage are not treated differently
when made by or through programs of entities that fall outside the
scope of the Bureau's ability-to-repay rules in Sec. 1026.43 than when
made by other creditors. Thus, the final rule avoids the anomalous
result that an HPML made through the program of an HFA, for example,
would be subject to the HPML appraisal rules, whereas an HPML with the
exact same terms and features made by a private creditor would not.
Accordingly, comment 35(c)(2)(i)-1 explains that, under Sec.
1026.35(c)(2)(i), a loan is exempt from the appraisal requirements of
Sec. 1026.35(c) if either:
The loan is--(1) subject to the Bureau's ability-to-repay
requirements in Sec. 1026.43 as a ``covered transaction'' (defined in
Sec. 1026.43(b)(1)) and (2) a qualified mortgage pursuant to the
Bureau's rules or, for loans insured, guaranteed, or administered by
HUD, VA, USDA, or RHS, a qualified mortgage pursuant to the applicable
rules prescribed by those agencies (but only once such rules are in
effect; otherwise, the Bureau's definition of a qualified mortgage
applies to those loans); or
The loan is--(1) not subject to the Bureau's ability-to-
repay requirements in Sec. 1026.43 as a ``covered transaction,'' but
(2) meets the criteria for a qualified mortgage in the Bureau's rules
or, for loans insured, guaranteed, or administered by HUD, VA, USDA, or
RHS, meets the criteria for a qualified mortgage in the applicable
rules prescribed by those agencies (but only once such rules are in
effect; otherwise, the Bureau's criteria for a qualified mortgage
applies to those loans).
Comment 35(c)(2)(i)-1 further explains that loans enumerated in
Sec. 1026.43(a) are not ``covered transactions'' under the Bureau's
ability-to-repay requirements in Sec. 1026.43, and thus cannot be
qualified mortgages (entitled to a rebuttable presumption or safe
harbor of compliance with the ability-to-repay requirements of Sec.
1026.43, see, e.g., Sec. 1026.43(e)(1)). These include an extension of
credit made pursuant to a program administered by an HFA, as defined
under 24 CFR 266.5, or pursuant to a program authorized by sections 101
and 109 of the Emergency Economic Stabilization Act of 2008. See Sec.
1026.43(a)(3)(iv) and (vi). They also include extensions of credit made
by a creditor identified in Sec. 1026.43(a)(3)(v). The comment
clarifies that, nonetheless, these loans are not subject to the
appraisal requirements of Sec. 1026.35(c) if they meet the Bureau's
qualified mortgage criteria in Sec. 1026.43(e)(2), (4), (5), or (6) or
Sec. 1026.43(f) (including limits on when loans must be consummated)
or, for loans that are insured, guaranteed, or administered by HUD, VA,
USDA, or RHS, in applicable rules prescribed by those agencies (but
only once such rules are in effect; otherwise, the Bureau's criteria
for a qualified mortgage apply to those loans).
The comment includes the following example: Assume that HUD has
prescribed rules to define loans insured under its programs that are
qualified mortgages and those rules are in effect. Assume further that
a creditor designated as a Community Development Financial Institution,
as defined under 12 CFR 1805.104(h), originates a loan insured by the
Federal Housing Administration, which is a part of HUD. The loan is not
a ``covered transaction'' and thus is not a qualified mortgage. See
Sec. 1026.43(a)(3)(v)(A) and (b)(1). Nonetheless, the transaction is
eligible for an exemption from the appraisal requirements of Sec.
1026.35(c) if it meets the qualified mortgage criteria in HUD's rules.
Finally, the comment clarifies that nothing in Sec.
1026.35(c)(2)(i) alters the definition of a qualified mortgage under
regulations of the Bureau, HUD, VA, USDA, or RHS.
35(c)(2)(ii)
The Agencies' Proposal
In the 2013 Supplemental Proposed Rule, the Agencies proposed an
exemption from the HPML appraisal rules for extensions of credit of
$25,000 or less. This threshold amount was based on the Agencies'
consideration of an appropriate threshold in light of comments to the
2012 Proposed Rule, as well as data reported under the Home Mortgage
Disclosure Act (HMDA), 15 U.S.C. 2801 et seq. The Agencies also
proposed to adjust the threshold for inflation every year, based on the
percentage increase of the Consumer Price Index for Urban Wage Earners
and Clerical Workers (CPI-W). Proposed comments 35(c)(2)(ii)-1, -2, and
-3 provided additional guidance on the proposed exemption.
The Agencies expressed the belief that the expense to the consumer
of an appraisal with an interior inspection could be significant and
unduly burdensome to consumers of HPMLs of $25,000 or less that are not
qualified mortgages. Thus, an appraisal requirement could hamper
consumers' use of smaller home equity loans. The Agencies also stated
their concern that a requirement for an appraisal with an interior
inspection may pose a
[[Page 78529]]
burdensome cost for consumers who seek to purchase lower-dollar homes
using HPMLs that are not qualified mortgages; these tend to be low- to
moderate-income (LMI) consumers who are less able to afford extra costs
than higher-income consumers.
The Agencies stated the view that the exemption can facilitate
creditors' ability to meet consumers' smaller dollar credit needs, and
that this could in turn promote the soundness of an institution's
operations by supporting profitability and an institution's ability to
spread risk over a variety of products. The Agencies noted that public
comments on the 2012 Proposed Rule suggested that the reduction in
costs and burdens associated with this exemption might benefit smaller
institutions in particular.
To inform the proposal, the Agencies also relied on data on
mortgage lending in 2009, 2010, and 2011 reported under HMDA. The
Agencies noted that, for example, an appraisal including an interior
inspection for a subordinate lien home improvement loan might be
burdensome on a consumer, without sufficient offsetting consumer
protection or safety and soundness benefits. Therefore, the Agencies
examined the mean and median loan sizes for subordinate lien home
improvement loans in 2009, 2010, and 2011. Based in part on this HMDA
data, the Agencies believed $25,000 was an appropriate threshold. See
78 Fed. Reg. 48547, 48564 (August 8, 2013).
At the same time, in light of the views expressed by consumer
advocates, the Bureau had concerns that, as a result of borrowing so-
called ``smaller'' dollar home purchase or home equity loans, some
consumers may be at risk of high loan-to-value (LTV) ratios, including
LTVs that lead to going ``underwater''--owing more than their home is
worth. The Bureau believed that receiving a written valuation might be
helpful in informing a consumer's decision about whether to obtain the
loan by making the consumer better aware of how the value of the home
compares to the amount that the consumer might borrow. As a result, the
Agencies requested comment in the 2013 Supplemental Proposed Rule
regarding whether certain conditions should be placed on the proposed
smaller dollar loan exemption.
Public Comments
Public Comments on the 2012 Proposed Rule
In the 2012 Proposed Rule, the Agencies requested comment on
exemptions from the final rule that would be appropriate. In response,
several commenters recommended an exemption for smaller dollar loans.
These commenters generally believed that appraisals with interior
inspections for these loans would significantly raise total costs as a
proportion of the loan and thus potentially be detrimental to
consumers. The commenters were concerned that requiring an appraisal
for smaller dollar HPMLs would result in excessive costs to consumers
without sufficient offsetting benefits. Some asserted that applying the
HPML appraisal rules to smaller dollar loans might disproportionately
burden smaller institutions and potentially reduce access to credit for
their consumers.
Comments to the 2012 Proposed Rule varied widely regarding the
appropriate threshold for a smaller dollar loan exemption. Suggested
thresholds ranged from $10,000 or less up to $125,000 for certain
transactions. The Agencies did not finalize a smaller dollar loan
exemption in the January 2013 Final Rule, instead choosing to propose a
smaller dollar loan exemption in the subsequent 2013 Supplemental
Proposed Rule.
The Agencies did not receive comments on the 2012 Proposed Rule
from consumers or consumer advocates. However, in informal outreach
conducted by the Agencies after the January 2013 Final Rule was issued,
a consumer advocacy group expressed the view that LMI consumers
obtaining or refinancing loans secured by lower-value homes may have a
particular need for the protections of the HPML appraisal rules. They
also expressed the view that requiring quality appraisals for smaller
dollar loans, and requiring that they be provided to the consumer, can
help prevent the kinds of appraisal fraud that can lead to consumers
borrowing more money than is supported by the equity in their home or
taking out loans that are otherwise not appropriate for them.
Public Comments on the 2013 Supplemental Proposed Rule
In the 2013 Supplemental Proposed Rule, the Agencies sought comment
on a proposed exemption for loans of $25,000 or less, and whether a
threshold higher or lower than $25,000 was appropriate. The Agencies
encouraged commenters to include data to support their views.
Twenty-nine commenters addressed the threshold for the smaller
dollar loan exemption: nine State credit union trade associations,
three credit unions, one national credit union trade association, two
community banks, one community banking trade association, one financial
holding company, two State banking trade associations, one mortgage
banking trade association, one consumer advocate group, three
affordable housing organizations, one policy and research organization,
one national association of owners of manufactured homes, one State
manufactured housing association, one small mortgage lender, and one
individual.
No commenters on this proposed exemption opposed including an
exemption from the HPML appraisal requirements for smaller dollar
loans. Eight commenters believed that the Agencies should either retain
or reduce the $25,000 threshold. A national association of owners of
manufactured homes, two affordable housing organizations, a consumer
advocate group, and a policy and research organization generally
recommended that, if the Agencies adopted the exemption, the exemption
threshold should be no more than $25,000. They believed that a large
percentage of the transactions affected were likely to be manufactured
home transactions, although they urged the Agencies to apply the
exemption equally to manufactured homes and site-built homes. A State
banking trade association also supported an exemption for extensions of
credit of $25,000 or less, citing increased costs and burdens
associated with obtaining appraisals with interior inspections. An
individual commenter urged the Agencies to reduce the threshold to
$10,000, believing a $25,000 threshold could lead to significant
monetary risk for consumers, particularly LMI consumers.
All of the other commenters urged the Agencies to raise the
threshold for the exemption. Eight State credit union trade
associations, three credit unions, one national credit union trade
association, one State manufactured housing association, and one small
mortgage lender suggested that the threshold be raised to $50,000.
Generally, these commenters supported the increase because they
believed that the cost of an appraisal for transactions of lower
amounts did not correspond to a meaningful benefit. They also supported
regulatory relief to creditors. A credit union stated that a threshold
under $50,000 may result in less lending to LMI consumers because
lenders would not be willing to make the loans. A State credit union
association stated that lenders may not make loans if the threshold is
below $50,000 because the cost of originating and processing loans
under that amount already exceeds origination fees,
[[Page 78530]]
without a requirement for an appraisal with an interior inspection.
Another credit union noted that it obtains evaluations, rather than
appraisals, for transactions below $50,000.\23\
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\23\ Regulations applicable to national credit unions generally
require a credit union to obtain an ``evaluation'' rather than an
appraisal for transactions with a value of $250,000 or less. See 12
CFR 722.3(a)(1) and (d).
---------------------------------------------------------------------------
Several commenters suggested other thresholds. A State credit union
trade association commenter suggested that the threshold should be
raised to $100,000 or, at a minimum, to $75,000. The commenter stated
that requiring costly appraisals on smaller dollar HPMLs
disproportionately hurts LMI consumers and consumers in rural areas,
where appraisals can be costly and the wait time for appraisals,
according to a member survey, is generally one-and-a-half to three
months, but can be up to six months. A community banking trade
association believed that, for loans below $100,000, the cost of an
appraisal is high relative to the cost of the loan, but the credit risk
to the bank is low. One community bank suggested a threshold of
$35,000, noting that the average size of loans secured by a
manufactured home (and not land) that are made by the bank is under
$35,000. Another community bank believed that $40,000 was an
appropriate threshold and expressed concerns about the cost of
appraisals, especially in rural areas.
A few commenters suggested thresholds that are the same as those in
other mortgage rules, asserting that this alignment would reduce
regulatory burden. A mortgage banking trade association stated that the
threshold should be $100,000 because the Bureau's ability-to-repay rule
permits creditors to apply higher points and fees for loans below
$100,000.\24\ Two of the commenters suggesting a $50,000 threshold
asserted that doing so would make the exemption consistent with a
threshold in the Bureau's Regulation Z rules under the Home Ownership
and Equity Protection Act of 1994 (HOEPA) for different interest rate
triggers.\25\
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\24\ See Sec. 1026.43(e)(3).
\25\ See Sec. 1026.32(a)(1)(i)(B), effective January 10, 2014.
See also 78 FR 6856 (Jan. 31, 2013) (2013 HOEPA Final Rule).
---------------------------------------------------------------------------
The suggestions of some commenters focused on excluding subordinate
lien transactions from the rule. A State credit union association
believed $50,000 was an appropriate threshold because it would exclude
from coverage of the HPML appraisal rules many subordinate lien
transactions. This commenter believed that appraisals for subordinate
lien loans taken concurrently with first lien loans were unnecessary
because often an appraisal will have been performed for the first lien
transaction. The commenter also believed that most home improvement
loans are more than $25,000, so the proposed threshold could hinder the
use of smaller home equity loans. The commenter asserted that the
expense of the appraisal with an interior inspection could considerably
raise the total costs of financing the home improvement loan.
In addition, a State banking association and a financial holding
company recommended exempting home equity loans from the rule. The
financial holding company noted that, in the calculation to determine
HPML status, the spread between APR and APOR is smaller for first lien
loans than for subordinate lien loans (1.5 percentage points above APOR
and 3.5 percentage points above APOR, respectively), and objected to an
appraisal requirement for first lien home equity loans in particular.
This commenter recommended that the Agencies raise the APR-APOR spread
to 3.5 percentage points for all home equity loans. The State banking
association argued that first lien home equity loans present very
little credit risk.
The Agencies also sought comment on whether the threshold for the
smaller dollar loan exemption should be adjusted periodically for
inflation and whether the adjustments should be annually or some other
period. A small mortgage lender and a State banking trade association
expressed support for the annual adjustment. The small mortgage lender
noted that this approach was consistent with other provisions in
Regulation Z.\26\
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\26\ See Sec. 1026.3(b) (exempting from Regulation Z loans over
the applicable threshold dollar amount, adjusted annually); Sec.
1026.32(a)(1)(ii) (setting the points and fees trigger for high-cost
mortgages, adjusted annually).
---------------------------------------------------------------------------
Conditioning an exemption. In addition, the Agencies requested
comment on whether conditions should be imposed on the smaller dollar
loan exemption. The Agencies specifically asked whether the smaller
dollar loan exemption should be conditioned on the creditor providing
the consumer with an alternative estimate of the collateral value. A
national association of owners of manufactured homes, two affordable
housing associations, a consumer advocate group, and a policy and
research organization believed that, if the Agencies adopted the
exemption, consumers should be given at least the manufacturer's
invoice for new manufactured home transactions, even if they fall under
the threshold. These commenters believed that providing the invoice
would be low cost, and yet would provide an important check on
overvaluation. Another affordable housing organization believed that
creditors in manufactured home transactions of $25,000 or less should
be required to obtain replacement cost estimates performed by a
trained, independent appraiser from a nationally-published cost
service. See also section-by-section analysis of Sec.
1026.35(c)(2)(viii).
A community bank commenter asserted that consumers should receive a
copy of the valuation used by the creditor as a condition to the
exemption. A small mortgage lender suggested that a government-provided
tax assessment would be an appropriate valuation to provide to
consumers. This commenter argued that because municipalities already
use tax assessments to determine property value for tax and insurance
purposes, the assessments have been proven to be sufficiently reliable.
The commenter contended that requiring more costly valuation methods as
a condition of the exemption might prompt creditors to determine that
the exemption is unduly burdensome and stop making these smaller dollar
loans.
An affordable housing organization suggested that, as a condition
to the exemption (as well as other exemptions), creditors should be
required to provide any valuation used to determine the security for
the loan and suggested that creditors should be given flexibility to
choose the appropriate valuation for the transaction. At the same time,
the commenter recommended that a creditor should be required to obtain
replacement cost estimates from a trained, independent appraiser and to
provide these estimates to a consumer.
The Agencies did not receive comments on a number of additional
comment requests, including requests for information about the risks
that smaller dollar loans could lead to high LTV loans; specific data
on the costs and burdens associated with the exemption, especially for
smaller institutions; and data on the extent to which creditors
anticipate originating HPMLs of $25,000 or less that are not qualified
mortgages.
The Final Rule
The Agencies are adopting the exemption for HPMLs for extensions of
credit of $25,000 or less as proposed and renumbering it Sec.
1026.35(c)(2)(ii). The Agencies are also adopting the proposal to
adjust the threshold annually, based on the percentage increase of the
CPI-W. Official Staff
[[Page 78531]]
Commentary for Sec. 1026.35(c)(2)(ii) is also adopted as proposed.
Comment 35(c)(2)(ii)-1 explains that, for purposes of Sec.
1026.35(c)(2)(ii), the threshold amount in effect during a particular
one-year period is the amount stated in this comment for that period.
Specifically, comment 35(c)(2)(ii)-1.i. provides that from January 18,
2014, through December 31, 2014, the threshold amount is $25,000.
Comment 35(c)(2)(ii)-1 further provides that the threshold amount is
adjusted effective January 1 of every year by the percentage increase
in the CPI-W that was in effect on the preceding June 1. The comment
also states that, every year, the comment will be amended to provide
the threshold amount for the upcoming one-year period after the annual
percentage change in the CPI-W that was in effect on June 1 becomes
available. In addition, the comment states that any increase in the
threshold amount will be rounded to the nearest $100 increment. The
comment provides the following example: if the percentage increase in
the CPI-W would result in a $950 increase in the threshold amount, the
threshold amount will be increased by $1,000. However, if the
percentage increase in the CPI-W would result in a $949 increase in the
threshold amount, the threshold amount will be increased by $900.
Comment 35(c)(2)(ii)-2 clarifies that a transaction is exempt under
Sec. 1026.35(c)(2)(ii) if the creditor makes an extension of credit at
consummation that is equal to or below the threshold amount in effect
at the time of consummation.
Finally, comment 35(c)(2)(ii)-3 explains that a transaction does
not meet the condition for an exemption under Sec. 1026.35(c)(2)(ii)
merely because it is used to satisfy and replace an existing exempt
loan, unless the amount of the new extension of credit is equal to or
less than the applicable threshold amount. The comment provides the
following example: assume a closed-end loan that qualified for a Sec.
1026.35(c)(2)(ii) exemption at consummation in year one is refinanced
in year ten and that the new loan amount is greater than the threshold
amount in effect in year ten. The comment states that, in these
circumstances, the creditor must comply with all of the applicable
requirements of Sec. 1026.35(c) with respect to the year ten
transaction if the original loan is satisfied and replaced by the new
loan, unless another exemption from the requirements of Sec.
1026.35(c) applies. See Sec. 1026.35(c)(2) and Sec.
1026.35(c)(4)(vii).
For the reasons discussed in the 2013 Supplemental Proposed Rule as
described in ``The Agencies' Proposal,'' the Agencies believe that the
exemption finalized in Sec. 1026.35(c)(2)(ii) is in the public
interest and promotes the safety and soundness of creditors. As
discussed in the 2013 Supplemental Proposed Rule, the Agencies believe
that the burden and expense of imposing the HPML appraisal requirements
on HPMLs of $25,000 or less that are not qualified mortgages outweigh
potential consumer protection benefits in many cases. As discussed
above, no commenters objected to an exemption, and many commenters
generally agreed with the Agencies' assessment of the costs versus the
benefits of appraisals for these loans. Commenters also noted that the
cost of the appraisals would be even higher in rural areas, due to the
scarcity of appraisers and the potential for added time to locate and
engage an appraiser.
As noted, the Agencies received a number of comments on the 2013
Supplemental Proposed Rule suggesting that the Agencies should raise
the amount of the threshold. These commenters cited the cost of the
appraisals and at least one commenter provided some information about
the percentage of HPMLs made by the lender that are smaller dollar, but
overall very little data was offered to support the various threshold
suggestions. For example, despite the Agencies' requests for data, no
commenters provided data indicating that a significant number of the
smaller dollar loans they originate would not be qualified mortgages
and thus would be subject to the HPML appraisal requirements absent an
exemption.
To inform the threshold determination, the Agencies again examined
HMDA data. According to 2012 HMDA data, increasing the proposed
threshold could substantially increase the proportion of HPMLs that
would be exempted from the rule. For example, a $25,000 exemption would
exempt 55 percent of conventional subordinate lien home improvement
HPMLs from coverage and 37 percent of conventional subordinate lien
home purchase HPMLs. In comparison, a $50,000 exemption would exempt 87
percent of conventional subordinate lien home improvement HPMLs and 70
percent of percent of conventional subordinate lien home purchase
HPMLs.\27\ The Agencies believe that increasing the threshold from
$25,000 to, for example, $50,000, would exempt too large a proportion
of HPMLs, such that the exemption would violate the intent of the
statute to subject both first and subordinate lien loans to the
appraisal requirements. The Agencies believe that a threshold of
$25,000 appropriately exempts from the rule those smaller dollar loans
that would benefit from the exemption, such as smaller dollar home
improvement loans. Moreover, the Agencies believe creditors are
generally better able to absorb losses that might be associated with a
loan of $25,000 or less than loans of higher amounts.
---------------------------------------------------------------------------
\27\ See Federal Financial Institutions Examination Council
(FFIEC), HMDA, http://www.ffiec.gov/Hmda/default.htm.
---------------------------------------------------------------------------
As discussed under ``Public Comments,'' some commenters suggested
exempting loans based on lien status or whether the loan is a home
equity loan. For example, a State credit union association advocated
for a threshold that would exclude most subordinate lien loan from the
rules. A State banking association and a financial holding company
recommended exempting home equity loans from the rule, particularly
first lien home equity loans. The financial holding company noted that,
in the calculation to determine HPML status, the spread between APR and
APOR is smaller for first lien loans than for subordinate lien loans
(1.5 percent above APOR and 3.5 percent above APOR, respectively). This
commenter recommended that the Agencies raise the APR-APOR spread
triggering HPML status to 3.5 percentage points for all home equity
loans, whether first lien or subordinate lien.
The Agencies believe that an exemption based on a monetary
threshold rather than an exemption based on a loan's lien status or
loan purpose (home equity versus home purchase, for example) is
necessary to protect consumers and more consistent with the statute.
The statute clearly indicates that HPMLs secured by a consumer's
principal dwelling should be covered, whether home purchase or home
equity, and whether first lien or subordinate lien. See TILA section
129H(f), 15 U.S.C. 1639h(f). In addition, the differing APR-APOR
spreads for first lien and subordinate lien loans were set by statute.
See id. Both first lien and subordinate lien home equity loans reduce
equity in a consumer's home and can put consumers at financial risk;
the Agencies believe that limiting this risk to consumers for both
types of loans is appropriate. The Agencies also believe that
consistency of the rule across these loan types will facilitate
compliance.
Regarding comments that the threshold should match those in other
[[Page 78532]]
mortgage rulemakings, the Agencies decline to do so because the other
mortgage rules are not comparable to the appraisal requirements. The
$50,000 threshold in the 2013 HOEPA Final Rule referred to by two
commenters relates to which APR-APOR spread applies in determining
whether a loan is ``high-cost.'' \28\ Specifically, the $50,000
threshold is relevant only if the loan is secured by a first lien on a
dwelling that is personal property. This threshold was intended to
capture a very specific type of loan for an exemption from an entirely
different set of rules. The Agencies therefore question the basis for
applying the same threshold in establishing an exemption from the HPML
appraisal rules.
---------------------------------------------------------------------------
\28\ See Sec. 1026.32(a)(1)(i)(B) as amended by 78 FR 6962
(Jan. 31, 2013).
---------------------------------------------------------------------------
For similar reasons, the Agencies believe that setting the
threshold at $100,000 to align with the $100,000 tier for permitting
higher points and fees for qualified mortgages, as one commenter
suggested, is not appropriate. See Sec. 1026.43(e)(3). The smaller
dollar loan thresholds in that rule were crafted in the context of
ensuring a consumer's ability to repay a mortgage, not for purposes of
determining whether an appraisal should be performed for a particular
transaction. Moreover, the $100,000 threshold is only the highest loan
amount of five tiers of loan amounts for which higher points and fees
are permitted at varying levels.
For the reasons discussed above, therefore, the Agencies are
maintaining the proposed $25,000 threshold in the final rule. The
Agencies also are adopting the proposal to adjust the threshold for
inflation every year, based on the percentage increase of CPI-W. As
noted, commenters supported an annual adjustment for inflation. Also,
as discussed in the 2013 Supplemental Proposed Rule, inflation
adjustments for other thresholds in Regulation Z are also annual, so
the adjustment will provide for consistency across mortgage rules.
Conditions on the exemption. The Agencies are finalizing the
smaller dollar loan exemption with no conditions. Some commenters
suggested providing alternative valuations to consumers as a condition
to the smaller dollar loan exemption, including providing the consumer
with an estimate of the value of the collateral property that the
creditor relied on in making the credit decision. However, the Agencies
believe that for HPMLs of $25,000 or less that are not qualified
mortgages, the added burden or cost of a condition could deter lenders
from making these loans, which could harm consumers. In addition, the
Agencies believe that an unconditional exemption for transactions of
$25,000 or less will be simpler and easier for creditors to apply, thus
facilitating compliance and enhancing the utility of the exemption.
One reason that the Agencies are not raising the exemption above
$25,000 is the Agencies' concern that conditioning the exemption might
then be necessary to ensure that the exemption both promotes the safety
and soundness of creditors and is in the public interest. In the
Agencies' view, arguments that neither an appraisal nor an alternative
valuation need be obtained or provided to the consumer become
increasingly less persuasive for transactions over $25,000, as larger
amounts tie up greater amounts of home equity and losses become less
easily absorbed by creditors. The Agencies deem it best not to add
complexity by conditioning the exemption and believe that no conditions
are needed at the level of $25,000 or less.
35(c)(2)(iv)
The Agencies are adopting a new comment to clarify the exemption in
Sec. 1026.35(c)(2)(iv) for ``a transaction to finance the initial
construction of a dwelling.'' Specifically, new comment 35(c)(2)(iv)-2
clarifies that the exemption for construction loans in Sec.
1026.35(c)(2)(iv) applies to temporary financing of the construction of
a dwelling that will be replaced by permanent financing once
construction is complete. The exemption does not apply, for example, to
loans to finance the purchase of manufactured homes that have not been
or are in the process of being built, when the financing obtained by
the consumer at that time is permanent. The comment cross-references
Sec. 1026.35(c)(2)(viii), which sets out the HPML appraisal rules
applicable to transactions secured by manufactured homes.
The Agencies are adding this comment in response to public comments
on the 2013 Supplemental Proposed Rule suggesting that manufactured
home loans where the unit has not been constructed are similar to
temporary construction loans exempt under Sec. 1026.35(c)(2)(iv) and
should be exempt on the same basis. The Agencies understand that
manufactured home loans in this situation generally are permanent
financing, and therefore the same rationale for exempting temporary
construction loans, expressed in the January 2013 Final Rule, would not
apply to those loans.
35(c)(2)(vii)
The Agencies' Proposal
The Agencies proposed to exempt from the HPML appraisal rules
certain types of refinancings with characteristics common to refinance
programs offering ``streamlined'' refinances. Specifically, the
Agencies proposed to exempt an extension of credit that is a
refinancing where the ``owner or guarantor'' of the refinance loan was
the ``owner or guarantor'' of the existing obligation. In addition, the
regular periodic payments under the refinance loan could not have
resulted in negative amortization, covered only interest on the loan,
or resulted in a balloon payment. Finally, the proceeds from the
refinance loan would have to have been used solely to pay off the
outstanding principal balance on the existing obligation and to pay
closing or settlement charges.
As discussed in the 2013 Supplemental Proposed Rule, the Agencies
believe that this exemption would be in the public interest and promote
the safety and soundness of creditors.
Background
In an environment of historically low interest rates, the Federal
government has supported streamlined refinance programs as a way to
promote the ongoing recovery of the consumer mortgage market. Notably,
the Home Affordable Refinance Program (HARP) was introduced by the U.S.
Treasury Department in 2009 to provide refinance relief options to
consumers following the steep decline in housing prices as a result of
the financial crisis. The HARP program was expanded in 2011 and is
currently set to expire in at the end of 2015.
Federal government agencies--HUD, VA, and USDA--as well as
government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac,
have developed streamlined refinance programs to address consumer,
creditor and investor risks.\29\ These programs enable many consumers
to refinance the balance of those mortgages through an abbreviated
application and underwriting process.\30\
[[Page 78533]]
Under these programs, consumers with little or no equity in their
homes,\31\ as well as consumers with significant equity in their
homes,\32\ can restructure their mortgage debt, often at lower interest
rates or payment amounts than under their existing loans.\33\
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\29\ Under existing GSE streamlined refinance programs, Freddie
Mac and Fannie Mae purchase and guarantee streamlined refinance
loans for consumers under HARP (whose existing loans have LTVs over
80 percent) as well as for consumers whose existing loans have LTVs
at or below 80 percent.
\30\ See Fannie Mae Single Family Selling Guide, chapter B5-5,
section B5-5.2 (Refi Plus[supreg] and DU Refi Plus[supreg] loans);
Freddie Mac Single Family Seller/Servicer Guide, chapters A24, B24,
and C24 (Relief Refinance[supreg] Loans); HUD Handbook 4155.1,
chapters 3.C and 6.C (Streamline Refinances) and Title I Appendix
11-3 (manufactured home streamline refinances); USDA Rural
Development Admin. Notice 4615 (Rural Refinance Pilot); and VA
Lenders Handbook, chapter 6 (Interest Rate Reduction Refinance
Loans, or IRRRLs). Creditworthiness evaluations generally are not
required for Refi Plus, Relief Refinance, HUD Streamline Refinance,
or IRRRL loans unless borrower monthly payments would increase by 20
percent or more. See HUD Handbook 4155.1, chapter 6.C.2.d; Fannie
Mae Single Family Selling Guide, chapter B5-5, section B5-5.2 (Refi
Plus and DU Refi Plus loans); Freddie Mac Single Family Seller/
Servicer Guide, chapters A24, B24, and C24; VA Lenders Handbook,
chapter 6.1.c.
\31\ For example, HARP supports refinancing through the GSEs for
borrowers whose LTV exceeds 80 percent and whose existing loans were
consummated on or before May 31, 2009. See http://www.makinghomeaffordable.gov/programs/lower-rates/Pages/harp.aspx.
\32\ See, e.g., Freddie Mac 2011 Annual Report at Table 52,
reporting that the majority of Freddie Mac funding for Relief
Refinances in 2011 was for borrowers with LTVs at or below 80
percent. This report is available at http://www.freddiemac.com/investors/er/pdf/10k_030912.pdf.
\33\ Over two million streamlined refinance transactions
occurred under FHA and GSE programs in 2012 (including both HPML and
non-HPML refinances). According to public data recently reported by
FHFA, 1,803,980 streamlined refinance loans occurred under Fannie
Mae or Freddie Mac streamlined refinance programs. See FHFA
Refinance Report for February 2013, available at http://www.fhfa.gov/webfiles/25164/Feb13RefiReportFinal.pdf. The Agencies
estimate, based upon data received from FHA during outreach to
prepare this proposal, that the FHA insured 378,000 loans under its
``Streamline'' program in 2012.
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Valuation requirements of ``streamlined'' refinance programs. The
streamlined underwriting for certain refinancings often does not
include an appraisal that conforms with USPAP or a physical inspection
of the property. One reason for this is that, in currently available
streamlined refinance programs, the value of the property securing the
existing and refinance obligations does not determine borrower
eligibility for the refinance.
Generally, the principal concern under streamlined refinance
programs is not whether the creditor or investor could in the near term
recoup the mortgage amount by foreclosing upon and selling the securing
property. The immediate goals for these loans are to secure payment
relief for the borrower and thereby avoid default and foreclosure; to
allow the borrower to take advantage of lower interest rates; or to
restructure their mortgage obligation to build equity more quickly--all
of which reduce risk for creditors and investors and benefit consumers.
The credit risk holder of the existing obligation might obtain a
valuation other than an appraisal for the refinance to estimate LTV for
determining the appropriate securitization pool for the loan. LTV as
determined by this valuation can also affect the terms offered to the
consumer. Sometimes an appraisal is required when the property is not
standardized, or the credit risk holder of the existing obligation and
the refinance loan does not have what it deems to be sufficient
information about the property.
Fannie Mae and Freddie Mac. Fannie Mae and Freddie Mac each have
streamlined refinance programs: Fannie Mae DU (``Desktop Underwriter'')
Refi PlusTM and Refi PlusTM and Freddie Mac
Relief Refinance[supreg]-Same Servicer/Open Access. Under these
programs, Fannie Mae must hold both the old and new loan, as must
Freddie Mac under its program. An appraisal is not required when the
GSEs are confident in an estimate of value (usually based on their
respective proprietary automated valuation models (AVMs)), which is
then provided to lenders originating loans under these programs.\34\
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\34\ For GSE streamlined refinance transactions purchased in
2012 at LTVs of above 80 percent, AVM estimates were obtained for
approximately 81 percent and appraisals (either interior inspection
or exterior-only) were obtained for approximately 19 percent. For
GSE streamlined refinance transactions purchased in 2012 at LTVs of
80 percent or below, AVM estimates were obtained for approximately
87 and appraisals (either interior inspection or exterior-only) were
obtained for approximately 13 percent.
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HUD/FHA. The HUD ``Streamline'' Refinance program administered by
the FHA permits but generally does not require a creditor to obtain an
appraisal.\35\ The Agencies understand that almost all FHA streamlined
refinances are done without requiring an appraisal.\36\ The FHA program
does not require an alternative valuation type for transactions that do
not have appraisals.
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\35\ See, e.g., HUD Handbook 4155.1, chapter 6.C.1.
\36\ According to data from FHA, in calendar year 2012, only 1.1
percent of FHA streamline refinances required an appraisal.
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VA and USDA. VA and USDA programs do not require appraisals. The VA
and USDA streamlined refinance programs also do not require an
alternative valuation type for transactions for which an appraisal is
not required.
Private ``streamlined'' refinance programs. The Agencies also
understand that some private creditors offer streamlined refinance
programs for their borrowers that meet certain eligibility
requirements. In the 2013 Supplemental Proposed Rule, the Agencies
sought comment and relevant data on how often private creditors obtain
alternative valuation estimates in these transactions (i.e.,
streamlined refinances outside of the government agency and GSE
programs discussed previously) when no appraisal is conducted.\37\ The
Agencies did not receive comment on this issue.
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\37\ In general, FIRREA regulations governing appraisal
requirements permit the use of an ``evaluation'' (or in the case of
NCUA, a ``written estimate of market value'') rather than an
appraisal in same-creditor refinances that involve no new monies
except to pay reasonable closing costs and, in the case of the NCUA,
no obvious and material change in market conditions or physical
adequacy of the collateral. See OCC: 12 CFR 34.43 and 164.3; Board:
12 CFR 225.63; FDIC: 12 CFR 323.3; NCUA: 12 CFR 722.3. See also OCC,
Board, FDIC, NCUA, Interagency Appraisal and Evaluation Guidelines,
App. A-5, 75 FR 77450, 77466-67 (Dec. 10, 2010).
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Public Comments
Public Comments on the 2012 Proposed Rule
A number of commenters on the 2012 Proposed Rule recommended that
the Agencies exempt streamlined refinancings. Some of these commenters
expressed a view that the Dodd-Frank Act's ``higher-risk mortgage''
appraisal rules were not appropriate for refinancings designed to move
a borrower into a more stable mortgage product with affordable
payments. Commenters pointed out, among other things, that these types
of refinancings can be important credit risk management tools in the
primary and secondary markets, and can reduce foreclosures, stabilize
communities, and stimulate the economy. GSE commenters indicated that
in many cases loans originated under Federal government streamlined
refinance programs do not require appraisals and asserted that doing so
would interfere with these programs.
Consumer advocates did not comment on the 2012 Proposed Rule, but
in subsequent informal outreach with the Agencies for the 2013
Supplemental Proposed Rule, they expressed concerns about not requiring
appraisals in HPML streamlined refinance programs. They expressed the
view that a quality appraisal that also is required to be made
available to the consumer can be a tool to prevent fraud in refinance
transactions. They also pointed out instances in which an appraisal on
a refinance transaction revealed appraisal fraud on the original
purchase transaction. In the 2013 Supplemental Proposed Rule, the
Agencies invited further comment on these and any related concerns, and
appropriate means of addressing these concerns as part of this
rulemaking. The Agencies did not
[[Page 78534]]
receive additional comments on this issue as part of the 2013
Supplemental Proposed Rule, the relevant public comments on which are
summarized below.
Public Comments on the 2013 Supplemental Proposed Rule
Commenters were generally supportive of exempting streamlined
refinances from the HPML appraisal requirements. These included
comments from a credit union, a State credit union trade association, a
national mortgage banking trade association, and a national real estate
trade association. The commenters stated that the exemption would
encourage and enable many consumers to refinance the balance of their
mortgages through an abbreviated underwriting process that will save
them time and money and help them restructure their debt and lower
their interest rate or mortgage payment. The State credit union
association commenter stated that an appraisal is not necessary for
these types of transactions as the value of the home is not the factor
driving the restructuring transaction. The national real estate trade
association asserted that the cost of the appraisal would increase the
costs to the consumer, especially in rural areas where there are fewer
appraisers, with no offsetting benefit to the consumer.
Three national appraiser organizations opposed the proposed
exemption for streamlined refinances and urged the Agencies not to
adopt it in the final rule. Two of these commenters asserted that a key
component of a consumers' decision to refinance their loan is the
market value of their home. A third national appraiser organization
believed that the proposed exemption was unnecessary and inconsistent
with what this commenter viewed as the Dodd-Frank Act's emphasis on
risk management, particularly for HPMLs.
The Agencies solicited comment on the circumstances in which an
originator's assumption of ``put back'' risk on a refinance loan raises
safety and soundness concerns, even where the owner or guarantor on the
refinance loan remains the same. Two national appraiser organizations
and a State HFA offered comments related to this question. The
appraisal organizations commented that where a loan involves new risk
to either government agencies or the taxpayers, an appraisal should be
required. Generally, where new risk results from a transaction, an
appraisal with an interior inspection should be required. These
commenters added that, if the risk is already known or exists (i.e., is
not new risk), an exterior inspection appraisal might be sufficient.
The State HFA commented that the scope of the same ``owner or
guarantor'' requirement should be expanded to include Federally-insured
or -guaranteed streamlined refinancing transactions. The group
suggested that the proposed language focused on the secondary market
for mortgage loans rather than the Federal entities bearing the risk at
the loan level. The Agencies understand that this State HFA has
programs in which a Federally-insured or -guaranteed loan (such as by
FHA or VA) might be refinanced and placed in a mortgage revenue bond
guaranteed by the HFA. The State HFA expressed concerns that under this
arrangement, the loan might not meet the same ``owner or guarantor''
criteria of the proposed refinance exemption because the HFA would be a
new guarantor at the secondary market level. However, the State HFA
pointed out that the refinance loan continues to be insured by FHA or
guaranteed by VA at the loan level.
A State credit union organization believed that exempting
refinances in which the ``owner or guarantor'' of the refinanced loan
also is the ``owner or guarantor'' of the existing loan would reduce
time and transaction costs. A State banking trade association commented
in the context of balloon mortgages that streamlined refinances with
the same ``owner and guarantor'' typically have lower costs than a
refinance with another creditor. The national trade association that
represents creditors believed that the language of the proposal
requiring that the ``owner or guarantor'' be the same would exclude
loans that are originated by the servicer or subservicer on the
original obligation, and requested clarification to allow those
entities to originate streamlined refinances and still be eligible for
the exemption.
As noted under ``Background,'' the Agencies also sought information
on the valuation practices of private creditors for refinanced loans
where the private owner or guarantor remains the same and the loans are
not sold to a GSE or insured or guaranteed by a Federal government
agency. Two national organizations representing appraisers commented
that when refinanced loans are not sold to the GSEs or insured or
guaranteed by a government agency, creditors are likely to order
appraisals with interior inspections because of the increased risk to
the creditor.
Five commenters--three State credit union associations and two
State banking trade associations--supported the proposed exemption for
streamlined refinances but requested that the Agencies remove the
proposed prohibition on balloon payments. These commenters believed
that balloon mortgages can be an affordable option and serve an
important role in helping consumers retain their homes. For similar
reasons, one of the State credit union associations also supported
eliminating the proposed prohibition on interest-only payments. A State
banking trade association urged the Agencies to consider including
Balloon Payment Qualified Mortgages \38\ in the proposed expanded
definition for qualified mortgages, arguing that these types of
mortgages undergo rigorous underwriting procedures similar to those
required under the general qualified mortgage provisions.\39\
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\38\ See Sec. 1026.43(e)(6) and (f).
\39\ Sec. 1026.43(e)(2).
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In addition to the restrictions on exempt refinancings that the
Agencies proposed, one State bank commenter recommended that the
proceeds from the refinance be used to pay both principal and accrued
interest since the majority of refinance loans today include the
accrued interest of the refinanced loan into the new loan amount. This
commenter stated that including accrued interest would not adversely
affect the consumer and could be beneficial if the consumer does not
have the cash to pay the amount.
An affordable housing organization commenter stated that any
streamlined refinance resulting in higher payments, higher interest
rates or longer loan terms for the consumer should not be exempt. This
commenter also believed that previously refinanced loans should not be
exempt to prevent an accumulation of high fees from eroding the
consumer's equity.
A State credit union association commenter opposed limiting the
amount of points and fees that may be financed on an exempt refinance
transaction. This commenter pointed out that a points and fees test
applies to ``high-cost'' mortgages in Regulation Z \40\ and asserted
that it is not necessary to include point and fee caps as part of HPML
appraisal rules. This commenter also argued that to do so would create
more regulatory confusion for consumers and financial institutions.
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\40\ See Sec. 1026.32(a), implementing TILA section 103(aa), 15
U.S.C. 1602(aa), as amended by section 1431 of the Dodd-Frank Act
(revising the points and fees triggers for determining whether a
loan is a ``high-cost mortgage.'' See also Sec. 1026.43(e)(3),
implementing TILA section 129C(b)(2)(A)(vii), 15 U.S.C.
1639c(b)(2)(A)(vii) (limiting points and fees that may be charged on
a ``qualified mortgage'').
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Two commenters--a national mortgage banking association and an
[[Page 78535]]
affordable housing organization--suggested that one of the criteria for
an exempt refinance transaction should be a consumer benefit. The
national mortgage banking association commenter recommended that the
Agencies adopt the benefits test used by the GSEs for HARP loans, which
requires that the new loans put borrowers in a better position by
reducing their payments or moving them from a risky loan structure.\41\
Similarly, the affordable housing organization commenter stated that
only streamlined refinance transactions clearly lowering the consumer's
risk should be exempt. On the other hand, a State credit union
association commenter opposed introducing additional limits on the
exemption, such as requiring that the borrower have made timely
payments for a specified period or that the consumer ``benefit'' from
the transaction in some way defined in the regulations.
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\41\ See Fannie Mae Selling Guide, B5-5.2-02, DU Refi Plus and
Refi Plus Underwriting Considerations (9/24/2013).
---------------------------------------------------------------------------
The Agencies also requested comments on whether the exemption for
refinance loans should be conditioned on the creditor obtaining an
alternative valuation and providing a copy to the consumer three
business days prior to closing. The Agencies further asked whether
obtaining and providing an alternative valuation would better position
the consumer to consider alternatives, and whether consumers seeking to
refinance their existing first lien loan typically need or want to
consider alternatives to refinancing. Lastly, the Agencies generally
requested comment and data on whether a condition on the exemption is
necessary.
Four commenters--a State credit union association, a national
community bank trade association, a national mortgage banking
association, and a financial holding company--affirmatively opposed
requiring creditors to obtain an alternative valuation to qualify their
refinance loans for the refinance exemption from the HPML appraisal
rules. Commenters stated that doing so would hinder the refinancing
process and increase the time and expense of these transactions
unnecessarily. These commenters did not believe that a significant
benefit exists in giving an alternative valuation when consumers are
not increasing the amount of their debt or changing the collateral.
Comments from a State bank and a State credit union association
suggested that if an alternative valuation were required, creditors
should be able to rely on an existing appraisal to the extent permitted
by existing Federal appraisal regulations and the interagency appraisal
guidelines,\42\ which allow for using an existing appraisal prepared
for another financial institution. A credit union commenter and a State
credit union association commenter suggested that if an alternative is
required, a ``drive-by'' appraisal or comparable market analysis to
ensure that the home still stands and is in reasonable condition is
prudent when modifying or restructuring debt to reduce foreclosures and
further delinquencies.
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\42\ See OCC: 12 CFR 34.45(b)(2) and 12 CFR 164.5(b)(2); Board:
12 CFR 225.65(b)(2); FDIC: 12 CFR 323.5(b)(2); NCUA: 12 CFR
722.5(b)(2).
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Three national appraiser organizations and an affordable housing
organization recommended that, at minimum, an alternative valuation to
an appraisal with an interior inspection should be required so that
consumers are better informed. The appraiser group commenters
recommended that creditors obtain replacement cost estimates or other
less costly services provided by appraisers, such as desktop
appraisals. One appraiser group generally asserted that the consumer
should be made aware of what type of valuation service was performed
and by whom.
No commenters provided data relevant to whether requiring an
alternative valuation as a condition of the proposed refinance
exemption would be necessary or beneficial.
In the 2013 Supplemental Proposed Rule, the Agencies recognized
that estimates of value may not always be required by Federal law or
investors. For example, some creditors are not subject to the appraisal
and evaluation requirements that apply to Federally regulated financial
institutions \43\ under FIRREA and, therefore would not be required to
obtain a FIRREA-compliant valuation on a ``no cash out'' refinance.
Thus, the Agencies requested comment on the extent to which either
appraisals or other valuation tools such as AVMs or broker price
opinions (BPOs) are used in connection with streamlined refinances--by
non-depositories not covered by FIRREA in particular. Only one
commenter, a national appraiser organization, responded to this
question, stating that BPOs are not used in refinance transactions and,
in fact, are illegal in many states. Moreover, this commenter pointed
out that GSEs and other government agencies prohibit using BPOs in
refinancing, and use their own AVMs to waive appraisal requirements
when appropriate.
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\43\ See 12 U.S.C 3350(7) (defining ``financial institution''
for purposes of FIRREA and implementing regulations).
---------------------------------------------------------------------------
The Final Rule
The Agencies are adopting the exemption for certain refinancings
proposed in the 2013 Supplemental Proposed Rule with modifications to
some of the criteria for an exempt refinance transaction, described in
the section-by-section analysis below. Consistent with the 2013
Supplemental Proposed Rule, the Agencies decline to adopt an exemption
for all refinance loans, as a few commenters on the 2012 Proposed Rule
suggested. The appraisal rules in TILA Section 129H apply to
``residential mortgage loans'' that are higher-priced and secured by
the consumer's principal dwelling. TILA section 129H(f), 15 U.S.C.
1639h(f). The term ``residential mortgage loan'' includes refinance
loans.\44\ Accordingly, the Agencies believe that an exemption for all
HPML refinances would be overbroad. For example, in refinance
transactions involving additional cash out to the consumer, consumer
equity in the home can decrease significantly, increasing risks, so the
Agencies do not believe an exemption from this rule would be
appropriate.
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\44\ ``The term `residential mortgage loan' means 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 . . ..''
TILA section 103(cc)(5), 15 U.S.C. 1602(cc)(5).
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As stated in the 2013 Supplemental Proposed Rule, the Agencies
believe that a narrower exemption for certain types of HPML refinance
loans, generally consistent with the program criteria for streamlined
refinances under GSE and Federal government agency programs, is in the
public interest and will promote the safety and soundness of creditors.
The Agencies recognize that, by reducing the risk of foreclosures and
helping borrowers better afford their mortgages, streamlined
refinancing programs can contribute to stabilizing communities and the
economy, both now and in the future. Streamlined HPML refinance
transactions can help borrowers who are at risk of default in the near
future, as well as those who might not default in the near term but
could benefit by refinancing into a lower rate mortgage for
considerable cost savings over time. The Agencies also recognize that
streamlined refinancing programs assist credit risk holders to manage
their risks. Originating HPML refinances that are beneficial to
consumers can be important to creditors to ensure the
[[Page 78536]]
continuing performance of loans on their books and to strengthen
customer relations. For investors in these loans, the streamlined
refinances can reduce financial risks associated with potential
defaults and foreclosures.
As a general matter, the purpose of the exemption for certain
refinance transactions is to facilitate transactions that can be
beneficial to borrowers even though they are HPMLs. When the consumer
is not obtaining additional funds to increase the amount of the debt
(other than the costs related to the refinancing), and the entity that
will hold the credit risk of the refinance loan is already the credit
risk holder on the existing loan, the benefit from obtaining a new
appraisal may be insufficient to warrant the additional cost. The
Agencies believe that an exemption from the HPML appraisal rules for
certain HPML refinances can ensure that the time and cost generated by
new appraisal requirements are not introduced into certain HPML
transactions--namely, those that are not qualified mortgages but are
part of programs designed to help consumers avoid defaults and improve
their financial positions, as well as help creditors and investors
avoid losses and mitigate credit risk.
Definition of ``Refinancing''
Consistent with the proposal, Sec. 1026.35(c)(2)(vii) in the final
rule defines a ``refinancing'' to mean ``refinancing'' in Sec.
1026.20(a). Also consistent with the proposal, the definition of
``refinancing'' under Sec. 1026.35(c)(2)(vii) does not require that
the creditor remain the same for both the refinancing and the existing
obligation.\45\ As noted in the 2013 Supplemental Proposed Rule, this
is a departure from the definition of ``refinancing'' under Sec.
1026.20(a); commentary to that provision clarifies that a
``refinancing'' under Sec. 1026.20(a) includes ``only refinancings
undertaken by the original creditor or a holder or servicer of the
original obligation.'' See comment 20(a)-5. By contrast, the exemption
in Sec. 1026.35(c)(2)(vii) allows a different creditor to extend the
refinance loan, as long as the credit risk holder remains the same on
both the existing loan and the refinance.
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\45\ ``Creditor'' is defined under Regulation Z to mean, in
pertinent part, ``[a] person who regularly extended consumer credit
that is subject to a finance charge * * *, and to whom the
obligation is initially payable, either on the face of the note or
by contract * * *.'' Sec. 1026.2(a)(17).
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As stated in new comment 35(c)(2)-1, discussed previously, the
Agencies emphasize that any creditor subject to regulation by a Federal
financial regulatory agency remains subject to FIRREA regulations
regarding appraisals and evaluations and the accompanying Interagency
Appraisal and Evaluation Guidelines.\46\ As such, these institutions
will have to obtain an appraisal or ``evaluation'' under FIRREA rules
for any refinance loan, regardless of whether it qualifies for an
exemption from the HPML appraisal rules.
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\46\ See OCC: 12 CFR parts 34, Subpart C, and 164; Board: 12 CFR
part 208, subpart E, and part 225, subpart G; FDIC: 12 CFR part 323;
NCUA: 12 CFR part 722. See also 75 FR 77450 (Dec. 10, 2010).
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Finally, in Sec. 1026.35(c)(2)(vii), the Agencies are clarifying
that the refinance loans eligible for the exemption are limited to
loans ``secured by a first lien,'' which is consistent with the
Agencies' intention in the 2013 Supplemental Proposed Rule.
35(c)(2)(vii)(A)
The exemption from the HPML appraisal rules requires that the
refinance transaction satisfy several criteria. These are described in
the section-by-section analysis of Sec. 1026.35(c)(2)(vii)(A), (B),
and (C).
One criterion that a refinance loan must meet is that either: (1)
The credit risk of the refinance loan is retained by the person that
held the credit risk of the existing obligation and the credit risk is
not subject, at consummation, to a commitment to be transferred to
another person; or (2) the refinance loan is insured or guaranteed by
the same Federal government agency that insured or guaranteed the
existing obligation.
35(c)(2)(vii)(A)(1)--same credit risk holder. Substantively
consistent with the 2013 Supplemental Proposed Rule, Sec.
1026.35(c)(2)(vii)(A)(1) allows the exemption for certain refinancings
to apply if the credit risk holder is the current credit risk holder of
the existing obligation (assuming the criteria in Sec.
1026.35(c)(2)(vii)(B) and (C) are also met). The Agencies are adopting
this requirement as a condition of obtaining the refinance loan
exemption from the HPML appraisal rules because the Agencies believe
that this restriction is important to ensuring that the exemption
promotes the safety and soundness of financial institutions. An
exemption for streamlined refinances from the HPML appraisal rules can
help creditors more readily refinance loans to mitigate risk by placing
consumer in loans with better terms. Decreased default risk for all
parties is also in the public interest.
For clarity, as discussed previously, the final regulation defines
``credit risk'' to mean the financial risk that a loan will default.
See Sec. 1026.35(c)(1)(ii) and corresponding section-by-section
analysis. The final rule also differs from the proposal in that it does
not use the terms ``guarantor'' or ``owner,'' but instead refers to the
holder of the credit risk.
Based on public comments, the Agencies are concerned that the terms
``guarantor'' and ``owner'' may have multiple meanings in the mortgage
markets and be confusing. For example, the Agencies are concerned that
the agreements associated with loans securitized in a private-label
mortgage-backed security (MBS) may include parties identified as
``guarantor'' and ``owner,'' but such parties do not bear the ``credit
risk'' as defined in this final rule. See Sec. 1026.35(c)(1)(ii).
In GSE securitizations, a GSE bears all of the credit risk because
it either ``owns'' a loan and holds the loan in portfolio, or
``guarantees'' the loan by placing the loan in an MBS and guaranteeing
payments of principal and any interest to investors. Some of these
loans might have private mortgage insurance, but the GSE is the
beneficiary.
By contrast, in private-label securitizations, the credit risk is
spread among multiple parties; for example, the originating credit
might retain some residual risk (and will be required to for
``Qualified Residential Mortgages'' \47\), the other MBS investors bear
certain risks depending on the ``tranche'' or risk tier of the
investor, and private mortgage insurers or bond insurers also may
guarantee some losses. Typically, when a loan in an MBS is refinanced,
the loan will not remain in the same MBS.\48\ The Agencies believe that
where entities take on material new credit risk with a refinance,
safety and soundness and the public interest are not served by
exempting that refinance from the HPML appraisal rules.
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\47\ See 78 FR 57920 (Sept. 20, 2013).
\48\ Certain disincentives for refinancing a loan out of a
private-label refinance may exist, including contractual
restrictions on refinancing the loan.
---------------------------------------------------------------------------
At the same time, the Agencies recognize that the private-label
securitization market could involve MBS structures that include an
entity that provides a guarantee similar to that guarantee provided by
Fannie Mae and Freddie Mac today. Therefore, the criterion in Sec.
1026.35(c)(2)(vii)(A)(1) is intended to address not only GSE
securitizations, but also any equivalent private-label structures that
meet the requirements of the exemption. The Agencies believe that
private creditor refinance transactions may have similar benefits to
consumers, creditors, and credit markets as those under GSE and
[[Page 78537]]
government agency programs. In particular, the Agencies believe that
the central feature of public streamlined refinance programs--the
credit risk holder on the existing obligation remains the credit risk
holder on the refinance loan--must be in place in any private
streamlined refinances that would be entitled to an exemption from the
HPML appraisal requirements.
Accordingly, the Agencies are not adopting proposed comment
35(c)(2)(vii)(A)-1, which was intended to help clarify the meaning of
the terms ``owner'' and ``guarantor.'' Instead, the Agencies are
adopting a revised version of this comment, re-numbered comment
35(c)(2)(vii)(A)(1)-1, that focuses on what it means to hold the credit
risk on a loan for purposes of the exemption. Specifically, comment
35(c)(2)(vii)(A)(1)-1 states that the requirement that the holder of
the credit risk on the existing obligation and the refinance loan be
the same applies to situations in which an entity bears the financial
responsibility for the default of a loan by either holding the loan in
its portfolio or guaranteeing payments of principal and any interest to
investors in a mortgage-backed security in which the loan is pooled.
See Sec. 1026.35(c)(1)(ii) (defining ``credit risk''). The comment
states that, for example, a credit risk holder could be a bank that
bears the credit risk on the existing obligation by holding the loan in
the bank's portfolio. Another example of a credit risk holder would be
a government-sponsored enterprise that bears the risk of default on a
loan by guaranteeing the payment of principal and any interest on a
loan to investors in a mortgage-backed security. Finally, the comment
clarifies that the holder of credit risk under Sec.
1026.35(c)(2)(vii)(A)(1) does not mean individual investors in an MBS
or providers of private mortgage insurance.
Consistent with the proposal (see proposed comment
35(c)(2)(vii)(A)-1), the Agencies do not intend that individual
investors in an MBS be considered credit risk holders under this
exemption criterion. The risks held by investors in these arrangements
are too disparate for these investors to be considered credit risk
holders under the final rule.
The Agencies also do not intend private mortgage insurers--either
at the loan level or MBS level (as bond insurers, for example)--to be
credit risk holders under the final rule because the types of losses
they guarantee may vary for each loan by contract, as may their
valuation standards for collateral underlying loans they insure. These
factors are subject to private contractual arrangements that are not
publicly available. Even if the refinance loan were insured by the same
private mortgage insurance provider that insured the existing
obligation, the types of losses guaranteed by this provider on the
refinance loan might be different from those guaranteed on the existing
loan and a new party to the refinance transaction could be taking on
significant new credit risk.
In new comment 35(c)(2)(vii)(A)(1)-2, the final rule provides two
illustrations of refinance situations in which the credit risk holder
would be considered the same for both the existing obligation and the
refinance loan. These examples are not intended to be exhaustive. In
the first illustration, the existing obligation is held in the
portfolio of a bank, thus the bank holds the credit risk. The bank
arranges to refinance the loan and also will hold the refinance loan in
its portfolio. If the refinance transaction otherwise meets the
requirements for an exemption under Sec. 1026.35(c)(2)(vii), the
transaction will qualify for the exemption because the credit risk
holder is the same for the existing obligation and the refinance loan.
In this case, the exemption would apply regardless of whether the bank
arranged to refinance the loan directly or indirectly, such as through
the servicer or subservicer on the existing obligation. See comment
35(c)(2)(vii)(A)(1)-2.i.
In the second illustration, the existing obligation is held in the
portfolio of a GSE, thus the GSE holds the credit risk. The GSE
approves a refinance of the existing obligation by the servicer of the
loan and immediately purchases the refinance loan. The GSE pools the
refinance loan in a mortgage-backed security guaranteed by the GSE;
thus, the GSE continues to hold the credit risk on the refinance loan.
If the refinance transaction otherwise meets the requirements for an
exemption under Sec. 1026.35(c)(2)(vii), the transaction will qualify
for the exemption because the credit risk holder is the same for the
existing obligation and the refinance loan. In this case, the exemption
would apply regardless of whether the existing obligation were
refinanced by the servicer or subservicer on the existing obligation
(acting as a ``creditor'' under Sec. 1026.2(a)(17)) or by a different
creditor. See comment 35(c)(2)(vii)(A)(1)-2.ii.
As noted, one commenter requested clarification about whether a
servicer or subservicer could originate a refinance that would be
eligible for the exemption. This commenter expressed concerns that the
requirement that the ``owner or guarantor'' remain the same would
prohibit this for exempt refinances. Comment 35(c)(2)(vii)(A)(1)-2.ii
is intended to clarify that servicers or subservicers may originate
refinances that are exempt if the credit risk holder on the original
obligation remains the credit risk holder on the refinance loan.
In new comment 35(c)(2)(vii)(A)(1)-3, the final rule notes that a
creditor may at times make a mortgage loan that will be transferred or
sold to a purchaser pursuant to an agreement that has been entered into
at or before the time the transaction is consummated. Such an agreement
is sometimes known as a ``forward commitment.'' The comment clarifies
that a refinance loan with a forward commitment does not satisfy the
requirement of Sec. 1026.35(c)(2)(vii)(A)(1) if the loan will be
acquired by another person pursuant to a forward commitment, such that
the credit risk on the refinance loan will transfer to a person who did
not hold the credit risk on the existing obligation. This comment is
intended to ensure that creditors cannot evade the HPML appraisal
requirement by refinancing a loan on which they hold the credit risk
but then bear the credit risk on the refinance loan for only a short
interim period before transferring the loan to a new longer-term credit
risk holder.
Overall, the Agencies believe that the benefits of an appraisal
with an interior inspection are less clear where the credit risk holder
remains the same for both transactions. The credit risk holder of the
existing obligation is more likely to be familiar with the property
securing the transaction or relevant market conditions than a new
credit risk holder. This knowledge could have resulted from the credit
risk holder having evaluated property valuation documents when taking
on the original credit risk, as well as ongoing portfolio monitoring.
By contrast, when the credit risk holder of the refinance loan is not
also the credit risk holder of the existing loan, the refinance loan
involves new risk to the new credit risk holder of the refinance loan;
here, safety and soundness would be better served by an appraisal in
conformity with USPAP and in compliance with FIRREA that includes an
interior inspection.\49\
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\49\ Legislative history of the Dodd-Frank Act also suggests
that Congress believed that certain underwriting requirements were
not necessary in refinances where the holder of the credit risk
remains the same: ``However, certain refinance loans, such as VA-
guaranteed mortgages refinanced under the VA Interest Rate Reduction
Loan Program or the FHA streamlined refinance program, which are
rate-term refinance loans and are not cash-out refinances, may be
made without fully re-underwriting the borrower . . . . It is the
conferees' intent that the [Board] and the [Bureau] use their
rulemaking authority . . . to extend the same benefit for
conventional streamlined refinance programs where the party making
the refinance loan already owns the credit risk. This will enable
current homeowners to take advantage of current loan interest rates
to refinance their mortgages.'' Statement of Sen. Dodd, 156 Cong.
Rec. S5928 (July 15, 2010).
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[[Page 78538]]
As stated in the 2013 Supplemental Proposed Rule, the Agencies
generally believe that requiring that the credit risk holder remain the
same makes it unnecessary to require that the ``creditor'' (as defined
under Sec. 1026.2(a)(17)) also be the same for both the existing
obligation and the refinance loan. Under Regulation Z's definition of
``creditor,'' the creditor will not necessarily be the credit risk
holder for both the existing and the refinance loans. By allowing the
creditor to be different (as long as the underlying credit risk holder
on the loan remains the same), the final rule provides consumers with
greater ability to obtain a more beneficial loan without having to
obtain an appraisal.
35(c)(2)(vii)(A)(2)--government agency programs. Section
1026.35(c)(2)(vii)(A)(2) provides that a refinance loan meeting the
other criteria for the exemption (Sec. 1026.35(c)(2)(vii)(B) and (C))
could also qualify for the exemption if the Federal government agency
that insured or guaranteed the existing obligation also insures or
guarantees the refinance loan.
Typically these government agency loans would be qualified
mortgages under the Bureau's 2013 ATR Final Rule; \50\ they also
potentially could be qualified mortgages under the qualified mortgage
regulations of each of these agencies, once issued.\51\ As qualified
mortgages, they would be exempt from the HPML appraisal rules under the
exemption for qualified mortgages in Sec. 1026.35(c)(2)(i).
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\50\ See Sec. 1026.43(e)(4)(iii)(A); see also TILA section
129C(b)(3)(ii), 15 U.S.C. 1639c(b)(3)(ii).
\51\ See 78 FR 59890 (Sept. 30, 2013).
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The Agencies are adopting a separate provision for Federal
government agency loans for several reasons. First, Sec.
1026.35(c)(2)(vii)(A)(2) is intended to ensure that the HPML appraisal
rules will not disrupt government refinance programs, which the
Agencies do not believe was Congress's intent. This provision is meant
to clarify the 2013 Supplemental Proposed Rule, which was intended to
exempt refinances consistent with existing Federal government agency
streamlined refinance programs.
Second, as noted, Federal government agency loans have valuation
requirements that the affected Federal agency has deemed sufficiently
protective of its interests. The Agencies do not believe that Congress
intended that the HPML appraisal rules should override the established
requirements and standards of Federal government agencies for their
mortgage programs. Moreover, the requirements of Federal mortgage
programs, including the valuation requirements, are transparent and
established by publicly accountable entities. In this regard,
refinances retaining FHA insurance, for instance, are distinguishable
from loans with the same loan-level private mortgage insurer, whose
valuation and other standards are determined by private contracts. See
also comment 35(c)(2)(vii)(A)(1)-1 and accompanying section-by-section
analysis.
Third, the terms ``insured'' and ``guaranteed'' are commonly used
to describe the loan-level protections afforded by HUD, VA, and USDA
(including RHS) against losses due to default; however, the Agencies
are concerned that these terms might not be readily understood to be a
part of the same credit risk holder provision under Sec.
1026.35(c)(2)(vii)(A)(1). As noted, one commenter indicated, for
example, that confusion might exist about whether a loan with FHA
insurance or a VA guaranty that was refinanced into a loan also insured
or guaranteed by FHA or VA could qualify for the exemption if the
secondary market participants differed on the two loans. The Agencies
therefore wish to be clear that these loans would still qualify for the
exemption because the loan-level credit risk holder remains the same.
Finally, these loans might not always be ``qualified mortgages''
under the Bureau's ATR rules because they might not meet all of the
criteria required for that status.\52\ The Agencies do not believe that
layering the HPML appraisal requirements onto Federal government agency
loans provides sufficient benefits to warrant the drawbacks of
burdening consumers and creditors in these transactions. A Federal
government agency has already determined what the appropriate valuation
requirements should be and, as previously discussed, these mortgage
programs are intended to provide needed relief to borrowers and to
mitigate credit risk for creditors. The Agencies thus believe that the
safety and soundness of creditors and the public interest is served by
allowing these transactions to go forward under valuation rules
established by the Federal agency insuring or guaranteeing the loan.
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\52\ To be ``qualified mortgages,'' loans eligible to be insured
or guaranteed by HUD, VA, USDA or RHS must not result in negative
amortization or provide for interest-only or balloon payments; have
a loan term exceeding 30 years; or points and fees above to three
percent of the loan amount (with a higher cap for loans under
$100,000). Sec. 1026.43(e)(4)(i)(A) (cross-referencing Sec.
1026.43(e)(2)(i) through (iii).
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Relationship to the 2013 ATR Final Rule. The Agencies recognize
that in the near term, most Federal government program and GSE
streamlined refinance loans will be exempt from the HPML appraisal
rules as ``qualified mortgages'' under Sec. 1026.35(c)(2)(i). Under
the Bureau's 2013 ATR Final Rule, loans eligible to be purchased,
guaranteed, or insured by Fannie Mae, Freddie Mac, HUD, VA, USDA, or
RHS (based solely on criteria related to the consumer's ability to
repay) are subject to the general ability-to-repay rules (found in
Sec. 1026.43(c)). See Sec. 1026.43(e)(4)(ii). However, if they meet
certain criteria,\53\ they are considered ``qualified mortgages''
entitled to either a rebuttable or conclusive presumption of compliance
with the general ability-to-repay rules, depending on the loan's
interest rate.\54\ See Sec. 1026.43(e)(1), (e)(4).\55\ As qualified
mortgages, they are exempt from the HPML appraisal rules. See Sec.
1026.35(c)(2)(i).
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\53\ See Sec. 1026.43(e)(4)(i)(A) (cross-referencing Sec.
1026.43(e)(2)(i) through (iii), which require that the loan not
result in negative amortization or provide for interest-only or
balloon payments; limit the loan term at 30 years; and cap points
and fees to three percent of the loan amount (with a higher cap for
loans under $100,000).
\54\ Creditors making qualified mortgages that are ``higher-
priced'' are entitled to a rebuttal presumption of compliance with
the general ability-to-repay rules, while creditors making qualified
mortgages that are not ``higher-priced'' are entitled to a safe
harbor of compliance. A ``higher-priced covered transaction'' under
the Bureau's 2013 ATR Rule is a transaction covered by the general
ability-to-repay rules ``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
first lien covered transaction, other than a qualified mortgage
under paragraph (e)(5), (e)(6), or (f) of Sec. 1026.43; by 3.5 or
more percentage points for a first lien covered transaction that is
a qualified mortgage under paragraph (e)(5), (e)(6), or (f) of Sec.
1026.43; or by 3.5 or more percentage points for a subordinate lien
covered transaction. Sec. 1026.43(b)(4).
\55\ They also can be ``qualified mortgages'' if, for instance,
they meet all of the criteria under the general definition of
``qualified mortgage.'' See Sec. 1026.43(e)(2).
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First, the 2013 ATR Final Rule limits the qualified mortgage status
of loans purchased or guaranteed by Fannie Mae and Freddie Mac under
the special rules of Sec. 1026.43(e)(4). These loans will not be
eligible to be qualified mortgages if consummated after January 10,
2021, unless they meet the criteria of another type of qualified
mortgage. See Sec. 1026.43(c)(4)(iii)(B). Second, again, GSE-eligible
loans and loans eligible to be insured or guaranteed under a HUD,
[[Page 78539]]
VA, USDA, or RHA program \56\ are ``qualified mortgages'' only if they
meet certain criteria--they must not result in negative amortization or
provide for interest-only or balloon payments; have a loan term
exceeding 30 years; or points and fees above to three percent of the
loan amount (with a higher cap for loans under $100,000).\57\
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\56\ For loans eligible to be insured or guaranteed under a HUD,
VA, USDA, or RHA program, the qualified mortgage status conferred
under Sec. 1026.43(e)(4)(i) will be replaced for each type of loan
when those agencies respectively issue rules defining a qualified
mortgage based on each agency's own programs. See Sec.
1026.43(e)(4)(iii)(A); see also TILA section 129C(b)(3)(ii), 15
U.S.C. 1639c(b)(3)(ii). See also, e.g., 78 FR 59890 (Sept. 30,
2013).
\57\ See Sec. 1026.43(e)(4)(i)(A) (cross-referencing Sec.
1026.43(e)(2)(i) through (iii).
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The Agencies believe that the refinance exemption under the HPML
appraisal rule should nonetheless cover Federal government agency and
GSE streamlined refinance loans. The exemption is appropriate here in
part because the GSEs and Federal government agencies have valuation
requirements to protect their interests that are transparent and
publicly available. In this regard, an important distinction between
the qualified mortgage provisions addressing GSE and Federal government
agency loans and the HPML refinance exemption criteria in Sec.
1026.35(c)(2)(vii)(A)(1) and (2) is that qualified mortgage status may
be conferred on loans ``eligible'' to be purchased by a GSE or insured
or guaranteed by a Federal government agency; by contrast, the HPML
refinance exemption from the HPML appraisal rules requires that these
loans actually are purchased by Fannie Mae or Freddie Mac or continue
to be insured or guaranteed by a Federal government agency. In this
way, compliance with valuation requirements established by these
entities is assured as part of the justification for the exemption.
35(c)(2)(vii)(B)
Prohibition on certain risky features. Consistent with the 2013
Supplemental Proposed Rule, Sec. 1026.35(c)(2)(vii)(B) requires that a
refinancing eligible for the refinance exemption from the HPML
appraisal rules not allow for negative amortization (``cause the
principal balance to increase''), interest-only payments (``allow the
consumer to defer repayment of principal''), or a balloon payment, as
defined in Sec. 1026.18(s)(5)(i).\58\
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\58\ Section 1026.18(s)(5)(i) defines ``balloon payment'' as ``a
payment that is more than two times a regular periodic payment.''
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The Agencies also are adopting without change proposed comment
35(c)(2)(vii)(B)-1 which states that, under Sec.
1026.35(c)(2)(vii)(B), a refinancing must provide for regular periodic
payments that do not: result in an increase of the principal balance
(negative amortization), allow the consumer to defer repayment of
principal (see comment 43(e)(2)(i)-2), or result in a balloon payment.
The comment thus clarifies that the terms of the legal obligation must
require the consumer to make payments of principal and interest on a
monthly or other periodic basis that will repay the loan amount over
the loan term. The comment further states that, except for payments
resulting from any interest rate changes after consummation in an
adjustable-rate or step-rate mortgage, the periodic payments must be
substantially equal. The comment cross-references comment 43(c)(5)(i)-4
of the Bureau's 2013 ATR Final Rule for an explanation of the term
``substantially equal.'' \59\ The comment also clarifies that a single-
payment transaction is not a refinancing meeting the requirements of
Sec. 1026.35(c)(2)(vii) because it does not require ``regular periodic
payments.''
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\59\ Comment 43(c)(5)(i)-4 states as follows: ``In determining
whether monthly, fully amortizing payments are substantially equal,
creditors should disregard minor variations due to payment-schedule
irregularities and odd periods, such as a long or short first or
last payment period. That is, monthly payments of principal and
interest that repay the loan amount over the loan term need not be
equal, but the monthly payments should be substantially the same
without significant variation in the monthly combined payments of
both principal and interest. For example, where no two monthly
payments vary from each other by more than 1 percent (excluding odd
periods, such as a long or short first or last payment period), such
monthly payments would be considered substantially equal for
purposes of this section. In general, creditors should determine
whether the monthly, fully amortizing payments are substantially
equal based on guidance provided in Sec. 1026.17(c)(3) (discussing
minor variations), and Sec. 1026.17(c)(4)(i) through (iii)
(discussing payment-schedule irregularities and measuring odd
periods due to a long or short first period) and associated
commentary.''
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Where these features are present in an HPML that is not a qualified
mortgage, the Agencies believe that the information provided by a real
property appraisal in conformity with USPAP that includes an interior
property inspection is important for the safety and soundness of
creditors and the protection of consumers. Additional equity may be
needed to support a loan with negative amortization, for example, and
the risk of default might be higher for loans with interest-only and
balloon payment features.
The Agencies recognize that consumers who need immediate relief
from payments that they cannot afford might benefit in the near term by
refinancing into a loan that allows interest-only payments for a period
of time. However, the Agencies believe that a reliable valuation of the
collateral is important when the consumer will not be building any
equity for a period of time. In that situation, the consumer and credit
risk holder may be more vulnerable should the property decline in value
than they would be if the consumer were paying some principal as
well.\60\
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\60\ The Agencies acknowledge that these increased risks may be
lower where the interest-only period is relatively short (such as
one or two years), because the payments in the early years of a
mortgage are heavily weighted toward interest; thus the consumer
would be paying down little principal even in making fully
amortizing payments.
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The Agencies also recognize that, in most cases, balloon payment
mortgages are originated with the expectation that a consumer will be
able to refinance the loan when the balloon payment comes due. These
loans are made for a number of reasons, such as to control interest
rate risk for the creditor or as a wealth management tool, usually for
higher-asset consumers. Regardless of why a balloon mortgage is made,
however, there is always risk that a consumer will not be able to make
the balloon payment or refinance, with potentially significant
consequences for the consumer and the credit risk holder if something
unexpected happens and the consumer cannot do so.
The Agencies note that the GSE and government streamlined refinance
programs described above do not allow these features, in part because
helping a consumer pay off debt more quickly is one of the goals of
these programs.\61\ In addition, the prohibition on risky features for
this exemption is consistent with provisions in the Dodd-Frank Act
reflecting congressional concerns about these loan terms. For example,
in Dodd-Frank Act provisions regarding exemptions from certain ability-
to-repay requirements for refinancings under HUD, VA, USDA, and RHS
programs, Congress similarly required that the refinance loan be fully
amortizing and prohibited balloon payments.\62\ The
[[Page 78540]]
final rule also is consistent with a provision in the Bureau's 2013 ATR
Final Rule that exempts the refinancing of a ``non-standard mortgage''
into a ``standard mortgage'' from the requirement that the creditor
make a good faith determination of the consumer's ability to repay the
loan. See Sec. 1026.43(d). To be eligible for this exemption from the
ability-to-repay rules, the refinance loan must, among other criteria,
not allow for negative amortization, interest-only payments, or a
balloon payment. See Sec. 1026.43(d)(1)(ii). The Agencies believe that
these statutory provisions and program restrictions reflect a judgment
on the part of Congress, government agencies, and the GSEs that
refinances with negative amortization, interest-only payment features,
or balloon payments may increase risks to consumers and creditors.
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\61\ See, e.g., Fannie Mae, ``Home Affordable Refinance (DU Refi
Plus and Refi Plus) FAQs'' (June 7, 2013) at 11 (describing options
for meeting the requirement that the refinance provide a borrower
benefit); Freddie Mac, ``Freddie Mac Relief Refinance
Mortgages\SM\--Open Access Eligibility Requirements'' (January 2013)
at 1 (describing options for meeting the requirement that the
refinance provide a borrower benefit).
\62\ See Dodd-Frank Act section 1411(a)(2), TILA section
129C(a)(5)(E) and (F), 15 U.S.C. 1639c(a)(5)(E) and (F). TILA
section 129C(a)(5) authorizes HUD, VA, USDA, and RHS to exempt
``refinancings under a streamlined refinancing'' from the Act's
income verification requirement of the ability-to-repay rules. 15
U.S.C. 1639c(a)(5). See also TILA section 129c(a)(4), 15 U.S.C.
1639c(a)(4).
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The Agencies are concerned that negative amortization, interest-
only payments, and balloon payments are loan features that may increase
a loan's risk to consumers as well as to primary and secondary mortgage
markets.\63\ Thus, in the Agencies' view, permitting these non-
qualified mortgage HPML refinances to proceed without a real property
appraisal in conformity with USPAP and FIRREA that includes an interior
inspection would not be consistent with the Agencies' exemption
authority, which permits exemptions only if they promote the safety and
soundness of creditors and are in the public interest.
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\63\ See also OCC, Board, FDIC, NCUA, ``Interagency Guidance on
Nontraditional Mortgage Product Risks,'' 71 FR 58609 (Oct. 4, 2006).
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As noted, several commenters requested that the prohibition on
balloon payments for exempt refinances be eliminated in the final rule.
One commenter also requested that the prohibition on interest-only
payments be eliminated. For the reasons stated, however, the Agencies
continue to believe that the prohibitions on balloon payments and
interest-only payments are appropriate. In addition, the Agencies note
that some of the public comments in support of eliminating the balloon
payment prohibition suggested uncertainty about whether ``balloon
payment qualified mortgages'' under the Bureau's ability-to-repay rules
would be exempt. See Sec. 1026.43(e)(6) and (f). As set out in the
section-by-section analysis of the exemption for qualified mortgages
under Sec. 1026.35(c)(2)(i), both temporary balloon payment mortgages
under Sec. 1026.43(e)(6) and balloon payment qualified mortgages under
Sec. 1026.43(f) are exempt from the HPML appraisal rules under the
exemption for qualified mortgages. The Agencies believe that this
clarification helps address the concerns of commenters on this issue.
35(c)(2)(vii)(C)
No cash out. Proposed Sec. 1026.35(c)(2)(vii)(C) would have
required that the proceeds from a refinancing eligible for an exemption
from the HPML appraisal rules be used for only two purposes: (1) to pay
off the outstanding principal balance on the existing first lien
mortgage obligation; and (2) to pay closing or settlement charges
required to be disclosed under RESPA. Based on comments, particularly a
comment recommending that the Agencies clarify that proceeds could be
used to pay accrued interest, the Agencies are revising this provision
of the proposal.
Specifically, the Agencies are revising Sec. 1026.35(c)(2)(vii)(C)
to require that the proceeds from the refinance loan be used ``only to
satisfy the existing obligation and to pay amounts attributed solely to
the costs of the refinancing.'' The Agencies have determined that
compliance and understanding are best facilitated by generally modeling
the ``no cash out'' aspect of the exemption on other provisions in
Regulation Z regarding refinancings in the rescission context. Thus,
revised Sec. 1026.35(c)(2)(vii)(C) incorporates concepts and guidance
from Sec. 1026.23(f)(2), which sets out the portion of a refinance
that is rescindable--namely, the portion that exceeds ``the unpaid
principal balance, any earned unpaid finance charge on the existing
debt, and amounts attributed solely to the costs of the refinancing or
consolidation.'' The Official Staff Commentary associated with Sec.
1026.23(f)(2) clarifies, in pertinent part, that ``a new advance does
not include amounts attributed solely to the costs of the refinancing.
These amounts would include section 1026.4(c)(7) charges (such as
attorney's fees and title examination and insurance fees, if bona fide
and reasonable in amount), as well as insurance premiums and other
charges that are not finance charges. (Finance charges on the new
transaction--points, for example--would not be considered in
determining whether there is a new advance of money in a refinancing
since finance charges are not part of the amount financed.)'' Comment
23(f)(2)-4.
Revised comment 35(c)(2)(vii)(C)-1 provides that the ``existing
obligation'' includes the consumer's existing first lien principal
balance, any earned unpaid finance charges such as accrued interest,
and any other lawful charges related to the existing loan. Accrued
interest is any interest that has accumulated since the consumer's last
payment of principal and interest, but that the borrower has not yet
paid and has not been capitalized into the principal balance. Accrued
interest exists when a consumer makes a payment on the existing
obligation on October 1st, for example, but then refinances into a new
loan on October 20th. In this case, interest would have accumulated
between the payment made on October 1st and the date of the refinance.
However, the consumer would not have paid that accrued interest and the
creditor normally would not have capitalized that interest into the
principal balance.
Revised comment 35(c)(2)(vii)(C)-1 further provides that guidance
on the meaning of refinancing costs is available in comment 23(f)-4.
Finally, consistent with proposed comment 35(c)(2)(vii)(C)-1, the
revised comment clarifies that, if the proceeds of a refinancing are
used for other purposes, such as to pay off other liens or to provide
additional cash to the consumer for discretionary spending, the
transaction does not qualify for the exemption for a refinancing under
Sec. 1026.35(c)(2)(vii) from the appraisal requirements in Sec.
1026.35(c).
The Agencies view the limitation on the use of the refinance loan's
proceeds as necessary to ensure that the principal balance of the loan
does not increase, or increases only minimally. This in turn helps
ensure that the consumer is not losing significant additional equity
and that the holder of the credit risk is not taking on significant new
risk, in which case an appraisal with an interior inspection to assess
the change in risk could be beneficial to both parties.
The Agencies also note that limiting the use of proceeds to allow
for no extra cash out for the consumer other than closing costs is
consistent with prevailing streamlined refinance programs.\64\ It is
also consistent with the exemption from the Bureau's ability-to-repay
rules for refinances of ``non-standard mortgages'' into ``standard
mortgages.'' \65\ See Sec. 1026.43(d)(1)(ii)(E). The Agencies believe
that consistency across mortgage rules can help facilitate
[[Page 78541]]
compliance and ease compliance burden.
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\64\ See, e.g., Fannie Mae Single Family Selling Guide, chapter
B5-5, Section B5-5.2; Freddie Mac Single Family Seller/Servicer
Guide, chapters A24, B24 and C24.
\65\ Under the 2013 ATR Final Rule, a refinance loan or
``standard mortgage'' is one for which, among other criteria, the
proceeds from the loan are used solely for the following purposes:
(1) To pay off the outstanding principal balance on the non-standard
mortgage; and (2) to pay closing or settlement charges required to
be disclosed under RESPA. See Sec. 1026.43(d)(1)(ii)(E).
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Other conditions. Consistent with the proposal, the Agencies are
not adopting additional conditions on the types of refinancings
eligible for the exemption from the HPML appraisal rules. In this way,
the Agencies seek to maintain flexibility for creditors and investors
to adapt and change their borrower eligibility requirements and other
requirements for streamlined HPML refinances to address changing market
environments and factors that may be unique to their programs.
Regarding comments supporting a requirement that the refinance
result in a ``benefit'' to the consumer, such as a lower payment, a
lower rate, or shorter term, the Agencies continue to believe that it
is unclear how the existence of a borrower benefit in the new
transaction relates to what type of valuation should be required. The
Agencies are also not adopting a limitation on the points and fees that
may be refinanced. Congress addressed loan cost parameters for the
appraisal rules by defining HPMLs as loans with interest rates above
APOR by a certain percentage. The Agencies are concerned that
introducing a points and fees cap into the rule could create confusion
and compliance difficulties, given the statutory points and fees caps
implemented in other overlapping regulations, such as regulations
regarding qualified mortgages and high-cost mortgages, noted earlier.
Other protections in the final rule ensure that the borrower,
creditor and investor would be taking on no new material credit risk,
which the Agencies believe should be the primary determinant of whether
an appraisal with an interior inspection should be required. The
Agencies also believe that borrower benefits can be difficult to define
because they can be highly transaction-specific. For example, a higher
rate might result in a benefit to a consumer where the higher rate
results from extending the loan term to lower the consumer's payments.
Here, the benefit to the consumer is an improved ability to stay in the
home by making the payments more affordable. Finally, the Agencies are
concerned that a ``benefits'' test could add complexity and burden to
the exemption that might undermine its intended benefits.
The Agencies are also not adopting borrower eligibility
requirements, such as that the borrower must have been on-time with
payments on the existing mortgage for a certain period of time, as at
least one commenter suggested. As discussed in the 2013 Supplemental
Proposed Rule, GSE and Federal government agency streamlined refinance
programs require that borrower eligibility criteria be met, such as
that the consumer have been current on the existing obligation for a
certain period of time.\66\ Commenters did not, however, explain how
borrower eligibility requirements relate to whether an appraisal should
be required. Again, the Agencies believe that the criteria for the
refinance exemption in the final rule comprise those that relate to
whether a more or less rigorous valuation requirement should apply; the
Agencies believe that the main consideration is whether new credit risk
will be taken on by the consumer, creditor, and investor. The criteria
adopted in the final rule are designed to minimize additional risk on
the refinance by curbing material increases in principal and ensuring
that the ultimate credit risk holder remains the same. In addition, the
Agencies believe that streamlined refinance programs can provide
maximum benefit to consumers, creditors, and investors when creditors
and investors retain some flexibility to adapt borrower eligibility and
other requirements to address changing market environments and factors
that may be unique to their programs.
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\66\ See also 2013 ATR Final Rule Sec. 1026.43(d)(2)(iv) and
(v). The exemption from the ability-to-repay rules for refinances of
``non-standard mortgages'' into ``standard mortgages'' under the
2013 ATR Final Rule requires that, among other conditions: (1) the
consumer made no more than one payment more than 30 days late on the
non-standard mortgage in 12-month period before applying for the
standard mortgage; and (2) the consumer made no payments more than
30 days late in the six-month period before applying for the
standard mortgage. See Sec. 1026.43(d)(2)(iv) and (v).
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Finally, one commenter also urged the Agencies not to apply the
exemption to loans that had already been refinanced, to avoid the
consumer accruing excessive origination costs with successive
refinances. The Agencies share concerns about harm to consumers through
serial refinancings. On balance, however, the Agencies believe that
consumers who have already refinanced their loans should have the same
opportunities to take advantage of lower rates as other consumers. The
Agencies believe that the limit on cash out helps mitigate abuses with
serial refinancings by ensuring that consumers cannot continually
refinance to pay off other debts without a full assessment of the
collateral value.
Conditional exemption. In the 2013 Supplemental Proposed Rule, the
Agencies sought comment on whether the exemption for refinance loans
should be conditioned on the creditor obtaining an alternative
valuation (i.e., a valuation other than a real property appraisal in
conformity with USPAP and FIRREA that includes an interior inspection)
and providing a copy to the consumer three days before consummation. In
requesting comment on this issue, the Agencies noted that a refinanced
mortgage loan is a significant financial commitment that involves
material transaction costs.
Because refinances do involve potential risks and costs, the
Agencies requested commenters' views on whether the consumer would
better positioned to consider alternatives to refinancing if they were
given an alternative valuation. The Agencies also sought data that
might be relevant to whether this additional condition would be
necessary.
For reasons discussed below, the Agencies are not adopting a
condition on the refinance exemption that the creditor obtain and give
the consumer an alternative valuation. As noted, several commenters
affirmatively opposed requiring creditors to obtain an alternative
valuation. Commenters stated that doing so would hinder the process and
increase the time and expense of these transactions unnecessarily.
These commenters did not believe that a significant benefit exists in
giving an alternative valuation when consumers are not increasing the
amount of their debt or substituting the collateral.
Other commenters, while not affirmatively supporting or opposing an
alternative valuation condition, suggested that if an alternative
valuation is required, creditors should be able to rely on an existing
appraisal to the extent permitted by existing Federal appraisal
regulations and the interagency appraisal guidelines,\67\ which allow
for using an existing appraisal. Two commenters asked whether a
creditor that is considering an extension of credit secured by a junior
mortgage could use the appraisal obtained by the creditor who extended
credit to the same borrower secured by a first mortgage. FIRREA real
estate appraisal regulations required to be issued by the Federal
financial institution regulatory agencies \68\ allow a regulated
institution \69\ to accept an
[[Page 78542]]
appraisal that was prepared by an appraiser engaged directly by another
financial services institution,\70\ if certain conditions are met.
These include that a regulated institution may accept an appraisal that
was prepared by an appraiser engaged directly by another financial
services institution, if: (1) The appraiser has no direct or indirect
interest, financial or otherwise, in the property or the transaction;
and (2) the regulated institution determines that the appraisal
conforms to the requirements of this subpart and is otherwise
acceptable.\71\
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\67\ See OCC: 12 CFR parts 34, Subpart C, and 164; Board: 12 CFR
part 208, subpart E, and part 225, subpart G; FDIC: 12 CFR part 323;
NCUA: 12 CFR part 722. See also 75 FR 77450 (Dec. 10, 2010).
\68\ FDIC: 12 CFR part 323; FRB: 12 CFR part 208, subpart E and
12 CFR part 255, subpart G; NCUA: 12 CFR part 722; and OCC: 12 CFR
part 34, subpart C, and 12 CFR part 164.
\69\ A regulated institution is an institution regulated by a
Federal financial institution regulatory agency, such as the FDIC,
FRB, NCUA, or the OCC.
\70\ The Interagency Appraisal and Evaluation Guidelines note
that the Agencies' appraisal regulations do not contain a specific
definition of the term ``financial services institution.'' The term
is intended to describe entities that provide services in connection
with real estate lending transactions on an ongoing basis, including
loan brokers.
\71\ See OCC: 12 CFR 34. 45(b)(2) and 12 CFR 164.5(b)(2); Board:
12 CFR 225.65(b)(2); FDIC: 12 CFR 323.5(b)(2); NCUA: 12 CFR
722.5(b)(2).
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Still others suggested that, if an alternative is required, a
``drive-by'' appraisal or comparable market analysis to ensure that the
home still stands and is in reasonable condition would be advisable.
The Agencies believe that conditioning the exemption is not warranted,
so they are not adopting this suggestion.
Several commenters supported conditioning the exemption and
recommended that an alternative valuation to an appraisal with an
interior inspection should be required so that consumers are better
informed about their home value.
The Agencies believe that the condition discussed in the 2013
Supplemental Proposed Rule would not provide sufficient benefit to
warrant the burden or cost it would introduce into the exemption. The
vast majority of refinance transactions involve some type of valuation
that, as of January 2014, creditors will have to provide to consumers.
For example, for any refinance eligible for a Federal government
program or to be sold to a GSE, the creditor would have to comply with
any valuation requirements imposed under those programs. For loans not
made under those programs but purchased or made by a Federally
regulated financial institution, either an ``evaluation'' or an
appraisal generally would be required.\72\
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\72\ See OCC: 12 CFR 34.43 and 164.3; Board: 12 CFR 225.63;
FDIC: 12 CFR 323.3; NCUA: 12 CFR 722.3. See also OCC, Board, FDIC,
NCUA, Interagency Appraisal and Evaluation Guidelines, 75 FR 77450,
77458-61 and App. A, 77465-68 (Dec. 10, 2010). In addition, as noted
(see infra note 42), data on GSE streamlined refinances indicates
that either an AVM or an appraisal (interior visit or exterior-only)
was obtained for all streamlined refinances purchased by the GSEs in
2012.
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The Bureau's rules in Regulation B implementing Dodd-Frank Act
amendments to the Equal Credit Opportunity Act \73\ (ECOA) require all
creditors to provide to credit applicants free copies of appraisals and
other written valuations developed in connection with an application
for a loan to be secured by a first lien on a dwelling.\74\ The copies
must be provided to the applicant promptly upon completion or three
business days before consummation. See id. Regulation B defines
``valuation'' broadly to mean ``any estimate of the value of a dwelling
developed in connection with an application for credit.'' \75\ Sec.
1002.14(b)(3).
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\73\ 15 U.S.C. 1691 et seq.
\74\ See 12 CFR 1002.14(a)(1), effective January 18, 2014; 78 FR
7216 (Jan. 31, 2013) (2013 ECOA Valuations Final Rule).
\75\ ``Valuation'' is separately defined in Regulation Z, Sec.
1026.42(b)(3). That definition does not include AVMs, however, which
was deemed appropriate for purposes of the appraisal independence
rules under Sec. 1026.42. Here, however, the Agencies believe that
an estimate of value provided to the consumer could appropriately
include an AVM.
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As stated in the 2013 Supplemental Proposed Rule, the Agencies
recognize that obtaining estimates of value and providing copies of
written valuations to consumers might not always be required by Federal
law or investors. For example, certain non-depositories and
depositories are not subject to the appraisal and evaluation
requirements that apply to Federally regulated financial institutions
under FIRREA title XI. However, the Agencies did not receive data or
information suggesting that a significant number of refinances would be
subject to no valuation requirements. The Agencies believe that the
volume of refinances that might be exempt from the HPML appraisal rules
and subject to no other valuation requirements of either the government
or investors will be very small and that the benefits of conditioning
the exemption for these refinances will not outweigh complexity and
burden to affected creditors and their consumers seeking streamlined
refinances.
Again, the criteria for an exempt refinance adopted in the final
rule are designed to limit the new risk that would result in a
refinance, including risk resulting from significant additional equity
being taken out of the home. Where no material credit risk is taken on
in a refinance transactions, including risk resulting from a material
reduction in home equity, the Agencies believe that valuation
requirements are appropriately left to be determined by the parties
involved in the transaction and any other applicable laws and
regulations.
In sum, the Agencies believe that the exemption is appropriately
narrow in scope to capture the types of refinancings that Congress has
generally expressed an intent to facilitate. See, e.g., TILA sections
129C(a)(5) and (6), 15 U.S.C. 1639c(a)(5) and (6).\76\ The Agencies
believe that this exemption promotes the safety and soundness of
creditors and is in the public interest.
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\76\ See also Statement of Sen. Dodd, 156 Cong. Rec. S5928 (July
15, 2010).
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35(c)(2)(viii)
In section 35(c)(2)(viii), effective January 18, 2014, the Agencies
are adopting a temporary exemption for all transactions secured in
whole or in part by a manufactured home, until July 18, 2015. This
temporary exemption of 18 months is intended to give creditors
sufficient time to make any changes needed to comply with the HPML
rules that will apply to manufactured home loans as a result of the
final rules that will apply to applications received on or after July
18, 2015. The Agencies understand that creditors may need to make
adjustments to their compliance systems for some of the new rules.
These changes may involve new technical configurations and training, as
well as modified or new contracts with any third-party service
providers that the creditor may enlist to perform valuation services
and related functions. Thus, the Agencies believe that this temporary
exemption promotes the safety and soundness of creditors and is in the
public interest.
Rules Effective July 18, 2015
For applications received on or after July 18, 2015, new rules will
apply to loans secured by manufactured homes, as follows:
(1) The temporary exemption for loans secured by existing
manufactured homes and land will expire; those loans will be subject to
the HPML appraisal rules in Sec. 1026.35(c)(3) through (6).
(2) A modified exemption for loans secured by a new manufactured
home and land will take effect; those loans will be subject to all of
the HPML appraisal requirements except the requirement that the
appraisal include a physical visit of the interior of the property. See
Sec. 1026.35(c)(2)(viii)(A) and accompanying section-by-section
analysis.
(3) An exemption for loans secured by either a new or existing
manufactured home and not land will be subject to a condition that the
creditor obtain and provide to the consumer one of three
[[Page 78543]]
types of value-related information. See Sec. 1026.35(c)(2)(viii)(B)
and accompanying section-by-section analysis.
These new rules are discussed below.
Loans Secured by an Existing Manufactured Home and Land
Under the version of Sec. 1026.35(c)(2)(viii) that goes into
effect on July 18, 2015, loans secured by an existing manufactured home
and land together will be subject to the HMPL appraisal requirements in
Sec. 1026.35(c)(3) through (6), consistent with the January 2013 Final
Rule and the 2013 Supplemental Proposed Rule.
The Agencies' Proposal
In the 2013 Supplemental Proposed Rule, the Agencies did not
propose to exempt from the HPML appraisal rules transactions that are
secured by both an existing manufactured home and land. The Agencies
did not believe that an exemption for these transactions would be in
the public interest and promote the safety and soundness of creditors.
The Agencies noted that Federal government and GSE manufactured home
loan programs generally require conformity with USPAP real property
appraisal standards for transactions secured by both a manufactured
home and land.\77\ The Agencies expressed the view that the Federal
government agency and GSE requirements may reflect that conducting an
appraisal in conformity with USPAP standards are feasible for existing
manufactured homes together with land.
---------------------------------------------------------------------------
\77\ See, e.g., HUD: 24 CFR 203.5(e); HUD Handbook 4150.2,
Valuations for Analysis for Home Mortgage Insurance for Single
Family One- to Four-Unit Dwellings, chapter 8.4 and App. D; USDA: 7
CFR 3550.62(a) and 3550.73; USDA Direct Single Family Housing Loans
and Grants Field Office Handbook (USDA Handbook), chapters 5.16 and,
9.18; VA: VA Lenders Handbook, VA Pamphlet 26-7 (VA Handbook),
chapters 7.11, 11.3, and 11.4; Fannie Mae: Fannie Mae Single Family
2013 Selling Guide B5-2.2-04, Manufactured Housing Appraisal
Requirements (04/01/2009); Freddie Mac: Freddie Mac Single Family
Seller/Servicer Guide, H33: Manufactured Homes/H33.6: Appraisal
requirements (02/10/12).
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The Agencies noted that this view was affirmed by participants in
informal outreach with experience in the area of manufactured home loan
appraisals, who indicated that USPAP-compliant real property appraisals
with an interior inspection are feasible and performed with regularity
in these types of transactions. The Agencies also noted, however, that
some commenters on the 2012 Proposed Rule recommended that the Agencies
exempt these types of ``land/home'' transactions.\78\
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\78\ See 78 FR 10368, 10379-80 (Feb. 13, 2013).
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Public Comments
In the 2013 Supplemental Proposed Rule, the Agencies sought comment
on whether an exemption from the HPML appraisal requirements for
transactions secured by an existing manufactured home and land would be
in the public interest and promote the safety and soundness of
creditors. The Agencies also sought comment on, among other issues,
whether an exemption for these loans should be conditioned on the
creditor providing the consumer with some other type of valuation
information.
The Agencies received 14 comment letters on this issue from two
national appraisal trade associations, a consumer advocate group, three
affordable housing organizations, a policy and research organization, a
national association for owners of manufactured homes, a credit union,
a community bank, a national trade association for community banks, a
State manufactured housing trade association, and two manufactured
housing nonbank lenders. In addition, a national manufactured housing
industry trade association referred to and endorsed the comments of two
manufactured housing lenders.
The credit union, community bank, consumer advocate group,
affordable housing organizations, national association of owners of
manufactured homes, and appraisal trade associations all supported the
proposal to retain the coverage of HPMLs secured by an existing
manufactured home and land, consistent with the January 2013 Final
Rule.
The community bank stated that existing manufactured homes
typically depreciate more than comparable site-built homes and should
receive an interior and exterior inspection. This commenter asserted
that an interior inspection is important for obtaining a proper
valuation and that providing an exemption from the interior inspection
requirement would not be appropriate. This commenter added that
consumers and creditors deserve a safe and accurate transaction.
The appraisal trade associations acknowledged that appraisal
assignments for transactions secured by existing manufactured homes and
land can involve greater complexity than assignments for site-built
homes. These commenters indicated, however, that in recent years they
have undertaken over 150 training sessions to train over 5,500
appraisal industry professionals on performing appraisals for
transactions secured by a manufactured home and land.
The consumer advocate group, two affordable housing organizations,
a policy and research organization, and national association of owners
of manufactured homes indicated that any issues with appraiser
availability were due to a lack of valuation standards in this segment
of the housing market. They maintained that requiring appraisals for
these transactions would ensure demand, thus fostering greater
appraiser capacity.
On the other hand, the community bank trade association, State
manufactured housing trade association, and two manufactured housing
nonbank lenders opposed the proposal to cover loans secured by an
existing manufactured home and land and recommended exemption these
transactions from the HPML appraisal rules.
The community bank trade association stated that appraisals
increase costs to manufactured home borrowers who often have low
incomes. In the view of this commenter, credit risk on portfolio
lending and underwriting standards for secondary market transactions
provide sufficient incentives for creditors to select appropriate
alternative valuation methods, which include a variety of methods other
than an appraisal in conformity with USPAP and FIRREA based upon a
physical inspection of the interior of the property as required by the
HPML appraisal rules. In addition, according to this commenter, some
community banks report that appraisers can be readily engaged for
manufactured housing transactions in general; for others, however,
appraisers are reportedly difficult to find or appraisals are more
costly or take longer than in-house non-appraisal valuations. The State
manufactured housing trade association also referred to difficulties
with obtaining appraisals for these loans. This commenter expressed the
view that creditors should be subject only to an appraisal requirement
when participating in a government or GSE program that imposes such a
requirement.
One of the nonbank lenders stated that these transactions should be
exempt due to a lack of sufficient appraisers and a lack of sufficient
data on comparable sales (``comparables'') of manufactured homes,
particularly in rural areas. This commenter also raised concerns about
costs, noting that appraisals with interior inspections could, in this
lender's experience, raise loan cost by 68 to 81 basis points. In
addition, the lender noted that in the 6 percent of its 2012
manufactured home transactions secured by land and home
[[Page 78544]]
that were subject to a similar HUD appraisal requirement, the
collateral did not appraise at or above the sales price in 30 percent
of transactions. In the view of this lender, these outcomes were due in
significant part to an inappropriate emphasis in the HUD program on the
use of manufactured homes as comparables. The other nonbank lender
stated that an appraisal for transactions secured by an existing
manufactured home and land would be unreliable and a misuse of consumer
funds. This commenter also noted that it already complies with
appraisal disclosure requirements in Regulation B.\79\ Finally, as
noted above, a national trade association for manufactured housing
endorsed the comments of these manufactured home lenders.
---------------------------------------------------------------------------
\79\ See 12 CFR 1002.14.
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The Final Rule
Consistent with the 2013 Supplemental Proposed Rule, the final rule
that goes into effect July 18, 2015, does not exempt loans secured by
an existing manufactured home and land from the HPML appraisal
requirements in Sec. 1026.35(c)(3) through (6).\80\ Covering
transactions secured by an existing home and land is consistent with
the requirements of the GSEs and Federal government agencies for these
types of loans.
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\80\ The requirement for a second appraisal in ``flipped''
transactions is not anticipated to be triggered in most existing
manufactured home transactions, if any. See Sec. 1026.35(c)(4). The
Agencies are not aware, based on research, public comments, and
outreach, that manufactured home properties are improved and re-sold
quickly by investors.
---------------------------------------------------------------------------
In addition, the Agencies received information from manufactured
home lender representatives who indicated that obtaining appraisals in
conformity with USPAP that include interior inspections for loans
secured by an existing manufactured home and land is not uncommon among
manufactured home creditors. Some lender commenters on the 2013
Supplemental Proposed Rule supported applying the HPML appraisal rules
to these transactions as consistent with prudent lending practices.
Moreover, the Agencies obtained comments on the 2013 Supplemental
Proposed Rule from consumer advocates, affordable housing
organizations, and other stakeholders, but had not had the benefit of
comments from these stakeholders on the 2012 Proposed Rule. As
discussed above, consumer and affordable housing advocates strongly
supported applying the HPML appraisal requirements to transactions
secured by an existing manufactured home and land. They argued, among
other things, that consumers would thereby obtain information about the
value of their homes that would account more thoroughly for the value
added to a home by the land on which the existing home is or will be
placed. Similar comments were submitted by a national real estate trade
organization, a policy and research organization, and a national
association of owners of manufactured homes.\81\
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\81\ In commenting on the 2012 Proposed Rule, the national real
estate trade associated similarly expressed the view that exempting
transactions secured by both a manufactured home and land may not be
appropriate. See 78 FR 48548, 48554, n. 16 (Aug. 8, 2013).
---------------------------------------------------------------------------
Appraiser organizations that submitted written comments and
appraisers consulted by the Agencies in informal outreach also strongly
recommended that the HPML appraisal rules be adopted for transactions
secured by existing manufactured homes and land. They indicated that
the appraisal methods for appraising existing manufactured homes and
land are the same as for site-built homes and land. Their comments
suggested that appraisals with interior inspections for these homes are
common and that prudent lending practice and consumer protection are
best served by obtaining appraisals for transactions secured by an
existing manufactured home and land together, including a physical
inspection of the interior of the home.
As noted, one manufactured home lender commenter expressed concerns
about applying the HPML appraisal rules to loans secured by existing
manufactured homes and land when the home has been moved from its
previous site to a dealer's lot. Transactions secured by an existing
home that has been moved to a dealer's lot and land can still be
appraised in conformity with USPAP, which does not require that the
home first be sited before an appraiser performs the appraisal. The
Agencies understand that the home could be inspected on the dealer's
lot, for example, or once the home is re-sited. The Agencies also note
that several commenters asserted that existing manufactured homes are
rarely moved. For these reasons, the Agencies believe that an appraisal
with an interior inspection that values the home and land together is
still warranted for these properties.
Based on these comments and related outreach, the Agencies do not
believe that exempting loans secured by a manufactured home and land
from the HPML appraisal requirements would be in the public interest or
promote the safety and soundness of creditors. The Agencies believe
that covering these loans will help ensure that consumers are aware of
information related to the value of their manufactured home before
consummating an HPML (that is not a qualified mortgage). The Agencies
also believe that covering these loans will facilitate the development
of greater consistency between the rules and practices applicable to
transactions secured by site-built homes and manufactured homes. The
Agencies believe that this consistency of rules and practices will
contribute to integrating manufactured home lending more fully into the
broader mortgage market over time, which could have long-term benefits
for consumers and lenders.
The Agencies believe that most lenders of manufactured home loans
obtain appraisals in conformity with USPAP and FIRREA for loans secured
by existing manufactured homes and land. However, the Agencies
understand that not all manufactured home lenders may do so, or do so
consistently, and are mindful that smaller lenders in particular may
need more time to comply. Therefore, the final rule gives the industry
18 months before compliance with the HPML appraisal requirements is
mandatory for these transactions.
35(c)(2)(viii)(A)
Loans Secured by a New Manufactured Home and Land
Section 1026.35(c)(2)(viii)(A), effective July 18, 2015, provides a
partial exemption from the HPML appraisal requirements of Sec.
1026.35(c)(3) through (c)(6) for transactions secured by both a new
manufactured home and land. Specifically, loans for which the creditor
receives the application on or after July 18, 2015, will be exempt from
the requirement that the appraisal include a physical visit of the
interior of the manufactured home, found in Sec. 1026.35(c)(3)(i). All
other HPML appraisal requirements in Sec. 1026.35(c)(3) through (c)(6)
will apply.
The Agencies' Proposal
In the January 2013 Final Rule, the Agencies adopted an exemption
from the HPML appraisal requirements for loans secured by a ``new
manufactured home.'' See 78 FR 10368, 10379-10380, 10433, 10438, 10444
(Feb. 13, 2013). In the 2013 Supplemental Proposed Rule, the Agencies
stated that, after issuing the January 2013 Final Rule, the Agencies
obtained additional information on valuation methods for
[[Page 78545]]
manufactured homes. Based on this information, the Agencies requested
comment and information concerning whether to require USPAP-compliant
appraisals with interior property inspections conducted by a state-
licensed or -certified appraiser for HPMLs secured by both a new
manufactured home and land. The Agencies also sought comment on whether
some other valuation method should be required as a condition of the
exemption for these transactions from the general HPML appraisal
requirements in Sec. 1026.35(c)(3) through (c)(6).
In particular, the Agencies noted that appraisers and State
appraiser boards consulted in outreach efforts confirmed that real
property appraisals in conformity with USPAP are possible and conducted
with at least some regularity in transactions secured by a new
manufactured home and land. The Agencies expressed their understanding
that these appraisals value the site and the home together based upon
comparable transactions that have been exposed to the open market (as
would be done with a site-built home or any other existing home).\82\
The Agencies further noted that these appraisals could document
additional value based on factors such as the home's location, and in
some cases could identify visible discrepancies between the
manufacturer's specifications and the actual home once it is sited.
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\82\ See, e.g., Texas Appraiser Licensing and Certification
Board, ``Assemblage As Applied to Manufactured Housing,'' available
at http://www.talcb.state.tx.us/pdf/USPAP/AssemblageAsAppliedToMfdHousing.pdf.
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In the 2013 Supplemental Proposed Rule, the Agencies also observed
that USPAP-compliant real property appraisals are regularly conducted
for all transactions under Federal government agency and GSE
manufactured home loan programs.\83\ FHA Title II program standards,
for example, which apply to transactions secured by a manufactured home
and land titled together as real property, require an appraisal in
conformity with USPAP.\84\
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\83\ See, e.g., HUD: 24 CFR 203.5(e); HUD Handbook 4150.2,
Valuations for Analysis for Home Mortgage Insurance for Single
Family One- to Four-Unit Dwellings, chapter 8.4 and App. D; USDA: 7
CFR 3550.62(a) and 3550.73; USDA Direct Single Family Housing Loans
and Grants Field Office Handbook (USDA Handbook), chapters 5.16 and,
9.18; VA: VA Lenders Handbook, VA Pamphlet 26-7 (VA Handbook),
chapters 7.11, 11.3, and 11.4; Fannie Mae: Fannie Mae Single Family
2013 Selling Guide B5-2.2-04, Manufactured Housing Appraisal
Requirements (04/01/2009); Freddie Mac: Freddie Mac Single Family
Seller/Servicer Guide, H33: Manufactured Homes/H33.6: Appraisal
requirements (02/10/12).
\84\ Title II appraisal standards are available in HUD Handbook
4150.2. For supplemental standards for manufactured housing, see HUD
Handbook 4150.2, chapters 8-1 through 8-4. The valuation protocol in
Appendix D of HUD Handbook 4150.2 calls for a certification that the
appraisal is USPAP compliant (p. D-9).
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The Agencies noted further that in informal outreach, a
representative of manufactured home appraisers and a manufactured home
CDFI representative stated that they conduct appraisals for loans
secured by a new manufactured home and land before the home is sited
based on plans and specifications for the new home.\85\ An interior
property inspection occurs once the home is sited (although the CDFI
representative indicated that it did not always use a state-certified
or -licensed appraiser for the final inspection). These outreach
participants suggested that, in their experience, qualified certified-
or -licensed appraisers and appropriate comparables are not unduly
difficult to find to perform these appraisals, even in rural areas.\86\
---------------------------------------------------------------------------
\85\ For a summary of more recent informal outreach conducted by
the Agencies, see http://www.federalreserve.gov/newsevents/rr-commpublic/industry-meetings-20131001.pdf.
\86\ For FHA-insured loans secured by real property--a
manufactured home and lot together--HUD requires creditors to use a
FHA Title II Roster appraiser that can certify to prior experience
appraising manufactured homes as real property. See HUD, Title I
Letter 481 (Aug. 14, 2009) (``HUD TI-481''), Appendices 8-9, C, and
10-5, issued pursuant to authority granted to HUD under section
2(b)(10) of the National Housing Act, 12 U.S.C. 1703(b)(10).
---------------------------------------------------------------------------
The Agencies noted that manufactured home lenders commenting on the
2012 Proposed Rule and during informal outreach raised concerns that
comparables of other manufactured homes can be particularly difficult
to find. The Agencies expressed their understanding that a lack of
appropriate comparables can be a barrier to obtaining a manufactured
home appraisal, especially in certain loan programs that require
appraisals of manufactured homes to use a certain number of
manufactured home comparables and have other restrictions on the
comparables that may be used.\87\
---------------------------------------------------------------------------
\87\ See Robin LeBaron, Fair Mortgage Collaborative, Real Homes,
Real Value: Challenges, Issues and Recommendations Concerning Real
Property Appraisals of Manufactured Homes (Dec. 2012) at 19-28. This
report is available at http://cfed.org/assets/pdfs/Appraising_Manufacture_Housing.pdf.
---------------------------------------------------------------------------
The Agencies noted, however, that USPAP does not require that
manufactured home comparables be used. USPAP allows the appraiser to
use site-built or other types of home construction as comparables with
adjustments where necessary.\88\ The Agencies also stated that a
current version of an Appraisal Institute seminar on manufactured
housing appraisals confirmed that when necessary, USPAP appraisals can
use non-manufactured homes as comparables, making adjustments where
needed.\89\
---------------------------------------------------------------------------
\88\ See HUD Handbook 4150.2, chapter 8.4 (providing the
following instructions on appraisals for manufactured homes insured
under the FHA Title II program: ``If there are no manufactured
housing sales within a reasonable distance from the subject
property, use conventionally built homes. Make the appropriate and
justifiable adjustments for size, site, construction materials,
quality, etc. As a point of reference, sales data for manufactured
homes can usually be found in local transaction records.'').
\89\ See Appraisal Institute, ``Appraising Manufactured
Housing--Seminar Handbook,'' Doc. PS009SH-F (2008) at Part 8, 8-110,
available at http://www.appraisalinstitute.org/education/seminar_descrb/Default.aspx?sem_nbr=OL-671&key_type=OOS.
---------------------------------------------------------------------------
At the same time, the Agencies sought information about the
potential impact on the industry and consumers of requiring real
property appraisals in conformity with USPAP that include interior
inspections in transactions secured by a new manufactured home and land
(where these types of appraisals are not already required). In this
regard, the Agencies noted that several manufactured home lenders
commented on the 2012 Proposed Rule and shared in informal outreach
that they typically do not conduct an appraisal with an interior
inspection of a new manufactured home, but use other methods, such as
relying on the manufacturer's invoice as a baseline for the value of
the new home and conducting a separate appraisal of the land in
conformity with USPAP.\90\ Thus, the Agencies observed that requiring a
USPAP-compliant appraisal with an interior inspection could require
systems changes for some manufactured home lenders. In addition, the
Agencies also noted the possibility that, if the appraisals required
under the 2013 January Final Rule were more expensive than existing
methods, imposing the HPML appraisal requirements would lead to
additional costs that could be passed on in whole or in part to
consumers.
---------------------------------------------------------------------------
\90\ Some consumer and affordable housing advocates and
appraisers in outreach have expressed the view that separately
valuing the component parts of a manufactured home plus land
transaction can result in material inaccuracies.
---------------------------------------------------------------------------
Accordingly, the Agencies requested data on the extent to which an
appraisal in conformity with USPAP with an interior property inspection
would be of comparable cost to, or more or less expensive than, a
separate USPAP-compliant appraisal of a lot added
[[Page 78546]]
together with an invoice price for the home unit. The Agencies also
requested comment on the potential burdens on creditors and consumers
and any potential reduction in access to credit that might result from
imposing requirements for an appraisal in conformity with USPAP that
includes an interior property inspection on all manufactured home
creditors of HPMLs secured by both a new manufactured home and land. In
this regard, the Agencies asked commenters to bear in mind that any of
these transactions that are qualified mortgages are exempt from the
HPML appraisal requirements under the separate exemption for qualified
mortgages. See Sec. 1026.35(c)(2)(i). Finally, the Agencies requested
comment on whether and the extent to which consumers in these
transactions typically receive information about the value of their
land and home and, if so, what information is received.
Public Comments
Eighteen commenters responded to the Agencies' questions about the
exemption for transactions secured by both a new manufactured home and
land. These commenters comprised four national appraiser trade
associations, a State credit union trade association, a credit union, a
national manufactured housing industry trade association, a national
association for owners of manufactured homes, two manufactured housing
lenders, a consumer advocate group, three affordable housing
organizations, a policy and research organization, a State manufactured
housing industry trade association, a real estate trade association,
and a mortgage banking trade association.
Commenters had varying opinions on whether the exemption for
transactions secured by both a new manufactured home and land was
appropriate. Four national appraiser trade associations, a credit
union, a national association for owners of manufactured homes, a
consumer advocate group, three affordable housing organizations, a
policy and research organization, and a real estate trade association
opposed the exemption. Two of the national appraiser trade associations
asserted that the exemption for transactions secured by new
manufactured homes and land did not meet the statutory exemption
criteria of being in the public interest and promoting the safety and
soundness of creditors.\91\ These commenters also believed that the
January 2013 Final Rule and the 2013 Supplemental Proposed Rule lacked
public policy consistency because loans secured by a manufactured home
and land would be treated differently based on whether the home is
existing or new, even though both are real estate-secured transactions.
A real estate trade association and two national appraiser trade
associations noted that the exemption was inconsistent with the
manufactured housing appraisal requirements of HUD, VA, and GSE
manufactured housing loan programs.
---------------------------------------------------------------------------
\91\ See TILA section 129H(b)(4)(B), 15 U.S.C. 1639h(b)(4)(B).
---------------------------------------------------------------------------
A credit union commenter expressed the view that an appraisal with
an interior inspection in conformity with USPAP and FIRREA is the only
method of valuation that properly accounts for all valuation factors,
including the property's location and discrepancies between the
manufacturer's specifications and the home itself. Similarly, two
national appraiser trade associations argued that this type of
appraisal was necessary because the price of a manufactured home may
not necessarily reflect its value, due to factors such as the quality
of installation and construction of the home. Two national appraiser
trade associations, a manufactured housing lender, and a real estate
trade association stated that an appraisal in conformity with USPAP of
a lot combined with an invoice price for the home unit (as opposed to
valuing the home and land as a single item of real property) was an
incorrect form of valuation that would not provide a credible
indication of the value of the home and land combined.
Several commenters emphasized that performing appraisals in
conformity with USPAP and FIRREA for these transactions is feasible. An
affordable housing commenter argued that, for new manufactured homes
that are not yet sited, appraisers can follow standards in USPAP for
appraising site-built homes that are not yet constructed. Under these
existing USPAP standards, an appraisal is based on a site inspection
and the plans and specifications of the home.\92\ When the construction
is complete, an appraiser or qualified inspector can confirm whether
the finished home meets the same specifications.
---------------------------------------------------------------------------
\92\ See Appraisal Standards Bd., Appraisal Fdn., Standards Rule
1-2(e) and Advisory Opinion 17, ``Appraisals of Real Property with
Proposed Improvements,'' at U-17, U-18, and A-37, available at
http://www.uspap.org.
---------------------------------------------------------------------------
According to national appraiser trade associations, appraisals in
conformity with USPAP are regularly performed for transactions secured
by a new manufactured home and land. These commenters stated that
professional appraisers for manufactured homes are widely available,
that appropriate comparables can be readily found, and that USPAP
protocols (including interior inspections) are appropriate for valuing
manufactured housing and land. Two affordable housing organizations, a
consumer advocate group, a policy and research organization, and a
national association of owners of manufactured homes believed that the
same appraisal requirements should apply to transactions secured by a
new manufactured home as apply to transactions secured by site-built
homes. They believed, however, that appraisers should have more
flexibility in manufactured home transactions to use site-built homes
as comparables than some Federal government agency and GSE programs
currently allow.
Two affordable housing organizations, a consumer advocate group, a
policy and research organization, and a national association for owners
of manufactured homes believed that transactions secured by a new
manufactured home should be subject to the rule if the homeowner owns
the land on which the home is sited, even if the home is not subject to
a security interest. Another affordable housing organization
recommended that new manufactured homes should be subject to the rule,
whether affixed to owned land or on land with a long term lease.
In contrast, six commenters--a national mortgage banking
association, a State credit union association, two manufactured housing
lenders, a national manufactured housing trade association, and a State
manufactured housing trade association--supported the exemption for
transactions secured by both a new manufactured home and land. Some of
these commenters asserted that an exemption was necessary because a
physical interior inspection was infeasible. In this regard, the
manufactured housing lender stated that a new manufactured home
typically will not be delivered and installed until after a loan
closes. The commenter noted that, as with construction loans, which are
provided an exemption from the HPML appraisal rules (Sec.
1026.35(c)(2)(iv)), on-site interior inspections of new manufactured
homes that will secure loans are not feasible because they are still
being manufactured, delivered, or installed when appraisals would need
to be ordered. Similarly, a State manufactured housing industry trade
association stated that a manufactured home's production does not begin
before the determination is made to provide credit to a consumer, so a
physical inspection prior to closing would be impossible.\93\
---------------------------------------------------------------------------
\93\ As noted under ``Public Comments,'' however, a
representative of a manufactured home loan lender consulted in
informal outreach by the Agencies indicated that the lender does not
close loans secured by a new manufactured home and land until the
home is sited.
---------------------------------------------------------------------------
[[Page 78547]]
A national manufactured housing industry trade association also
questioned the value of an interior inspection of new manufactured
homes, stating that each manufactured home is built to the
specifications of the retailer and is manufactured in a controlled
manufacturing process in accordance with HUD standards, which ensures
the application of consistent, quality standards.\94\ According to this
commenter, the manufacturer certifies to the retailer the authenticity
and accuracy of the wholesale cost of the home at the point of
manufacture.
---------------------------------------------------------------------------
\94\ See 24 CFR part 3280.
---------------------------------------------------------------------------
Some commenters noted that even though appraisals in conformity
with USPAP are required by some Federal government agencies and GSE
manufactured housing loan programs, they are not performed frequently.
One manufactured housing lender stated that traditional appraisals
typically are performed only for certain FHA loans that represent a
small fraction of overall land/home manufactured housing loans.\95\ A
State manufactured housing industry trade association offered similar
comments. The State manufactured housing industry trade association
commenter also asserted that GSE-like appraisal requirements were not
appropriate for these transactions, because most new manufactured home
loans are held in portfolio and creditors will set valuation standards
appropriate for their own loans.
---------------------------------------------------------------------------
\95\ FHA reported providing insurance under its Title I program
for 655 manufactured home loans in Fiscal Year (FY) 2012, 986 in FY
2011, and 1,776 in FY 2010. See HUD, FHA Annual Management Report,
Fiscal Year 2012 (Nov. 15, 2013) at 17. FHA also reported providing
insurance under its Title II program for 20,479 manufactured home
loans in FY 2012, 21,378 in FY 2011, and 30,751 in FY 2010. See id.
According to 2012 HMDA data, 19,614 FHA-insured manufactured home
loans (under both Titles I and II) were reported out of a total of
123,628 reported manufactured home loans; thus, FHA-insured loans
represented 15.9 percent of HMDA-reported manufactured home loans.
See www.ffiec.gov/hmda.
---------------------------------------------------------------------------
Commenters also challenged the accuracy of appraisals performed in
conformity with USPAP and FIRREA for transactions secured by both a new
manufactured home and land. A manufactured housing lender stated that,
even for FHA-insured land/home loans, traditional appraisals are prone
to yielding appraised values that are lower than the sales price of the
home. A national manufactured housing industry trade association stated
that traditional appraisals produce appraised values lower than the
sales price for more than 20 percent of transactions that are secured
by manufactured homes and land. One manufactured housing lender stated
that for its loans for which appraisals are ordered, appraisals
resulted in appraised values lower than the sales price around 30
percent of the time. Similarly, the State manufactured housing industry
trade association stated that, based on information from its members,
the rate of appraisals with appraised values lower than the sales price
is approximately 30 percent.
Commenters also cited problems with obtaining comparables as
contributing to the difficulty with obtaining accurate appraisals.
Manufactured housing lenders, a national manufactured housing industry
trade association, and a State manufactured housing industry trade
association stated that manufactured home comparables, especially in
rural areas, tend to be unavailable or inadequate. One lender noted
that, in practice, HUD will permit site-built comparables for the Title
II FHA loan insurance program in the absence of appropriate
manufacturer home comparables, but only on a limited basis. A
manufactured housing lender also asserted that relying upon site-built
homes as comparables can lead to inflated values.
A national manufactured housing industry trade association and a
State manufactured housing industry trade association asserted that no
reliable database of previous sales which appraisers can use to develop
an accurate, reliable value for manufactured homes exists. The State
manufactured housing industry trade association believed that actual
sales data must serve as the foundation for any valuation system. The
commenter believed that creating such a database would involve both
time and expense, and that such a database should not be created by
private industry or based upon the voluntary submission of sales price
data. This commenter expressed the view that such a database should be
created by State governments.
Several commenters believed that issues with appraisers are the
cause of manufactured housing appraisals resulting in values lower than
the sales price. A manufactured housing lender believed that
significant appraiser bias exists against manufactured housing, which
results in lower value estimates. Another manufactured housing lender
stated that most state-licensed or -certified appraisers have no
training or experience in appraising manufactured homes.
Commenters also cited concerns about the cost of requiring
appraisals for these transactions. A national manufactured housing
industry trade association and two manufactured housing lenders raised
related concerns that appraisal costs would make these transactions
less affordable for consumers and that an appraisal is expensive
relative to the cost of a manufacture home. The national manufactured
housing industry trade association expressed the view that these costs
could result in reduced manufactured housing lending.
The Agencies specifically requested comment on the potential
burdens on creditors and consumers and any potential reduction in
access to credit that might result from imposing requirement for an
appraisal in conformity with USPAP and FIRREA with an interior property
inspection on all creditors of loans secured by both a new manufactured
home and land. Two national appraiser trade associations believed that
concerns about appraisal costs could be mitigated because professional
appraisers can provide a range of services other than an interior
inspection but still in conformity with USPAP. These commenters argued
that the cost of a professional appraisal is relatively small compared
to the value provided to borrowers and to loan underwriting safety and
soundness. A consumer advocate group, two affordable housing
organizations, a national association of owners of manufactured homes,
and a policy and research organization believed that the costs of an
appraisal with an interior inspection would be no higher than the costs
of appraisals for site-built homes subject to the rule.
No commenters offered data on the cost of the method of using the
manufacturer's invoice for the home and conducting a separate appraisal
of the land. However, a national manufactured housing industry trade
association asserted that this method costs consumers less than the
type of appraisal that the HPML appraisal rules require. Informal
outreach by the Agencies with a manufactured housing lender after the
2013 Supplemental Proposed Rule suggested that the interior inspection
was the element of the HPML appraisal requirements that added the most
cost. Another manufactured housing lender believed that the land-only
appraisal would still be expensive for consumers. A national
association of owners of manufactured homes, a consumer advocate group,
a policy and research organization, and two affordable housing
organizations stated that they did not have cost information in order
to respond to the question posed by the Agencies.
[[Page 78548]]
In addition, the Agencies requested comment on whether consumers
currently receive information about the value of their land and
manufactured home. A consumer advocate group, two affordable housing
organizations, a policy and research organization, and a national
association of owners of manufactured homes asserted that consumers do
not currently receive valuation information. Two manufactured housing
lenders stated that, when appraisals are performed, lenders are
required to provide the ECOA notice informing consumers that a copy of
the appraisal may be obtained from the lender upon request.\96\ One of
the manufactured housing lenders indicated that it routinely issues a
copy of the appraisal to its customers. The other lender stated that,
after receiving the ECOA notice, very few consumers request the
appraisal information.
---------------------------------------------------------------------------
\96\ See ECOA section 701(e), 15 U.S.C. 1691(e). These
provisions were amended by section 1474 of the Dodd-Frank Act,
implemented by the Bureau's 2013 ECOA Valuations Rule, 12 CFR Sec.
1002.14, and effective January 18, 2014.
---------------------------------------------------------------------------
Finally, the Agencies requested comment on alternative methods that
may be appropriate for valuing new manufactured homes and land, which
the Agencies could require as a condition of an exemption from the
general HPML appraisal rules in Sec. 1026.35(c)(3) through (c)(6). A
real estate trade association, two national appraiser trade
associations, a consumer advocate group, a policy and research
organization, two affordable housing organizations, and a national
association of owners of manufactured homes believed that a discussion
of conditioning the exemption was unnecessary because they believed
that there should be no exemption for these transactions.
All other commenters on this issue--a national mortgage banking
association, a State credit union association, two nonbank manufactured
home lenders, a State manufactured housing industry trade association,
and a national manufactured housing industry trade association--opposed
adding conditions to the exemption. The manufactured housing lenders
stated that they were unaware of a reliable, uniform valuation method
by which to provide information to a consumer in new or existing
manufactured housing transactions. The mortgage banking trade
association believed that providing an alternative valuation would
confuse consumers, and a State credit union trade association believed
that a condition would increase the cost for consumers to obtain
credit.
The Final Rule
The Agencies are adopting a modified exemption for transactions
secured by a new manufactured home and land. Under the final rule,
creditors for these transactions will be subject to all of the HPML
appraisal requirements except for the requirement that the appraisal
include a physical visit of the interior of the manufactured home. See
Sec. 1026.35(c)(3)(i). As discussed below, the Agencies believe that
this exemption from the requirement for a physical visit of the
interior of the property is in the public interest and promotes the
safety and soundness of creditors. Comment 35(c)(2)(viii)(A)-1
clarifies that a creditor of a loan secured by a new manufactured home
and land could comply with Sec. 1026.35(c)(3)(i) by obtaining an
appraisal conducted by a state-certified or -licensed appraiser based
on plans and specifications for the new manufactured home and an
inspection of the land on which the property will be sited, as well as
any other information necessary for the appraiser to complete the
appraisal assignment in conformity with USPAP and FIRREA. Compliance
with the HPML appraisal rules for these transactions is not mandatory
until July 18, 2015.
As discussed in the 2013 Supplemental Proposed Rule, the Agencies
conducted additional research and outreach after issuing the January
2013 Final Rule to determine how to treat loans secured by existing
manufactured homes under the HPML appraisal rules. In this process, the
Agencies obtained information about manufactured home lending valuation
practices that prompted the Agencies to review the exemption in the
January 2013 Final Rule for transactions secured by a new manufactured
home, whether or not the transaction is secured by land.
Through research, written comments, and informal outreach, the
Agencies obtained the views of a wider range of stakeholders, including
consumer advocates, affordable housing organizations, a policy and
research organization, and a national association of owners of
manufactured homes (summarized earlier ``Public Comments'').\97\ In
addition, the Agencies consulted with additional manufactured home
lenders, one of which indicated that the lender obtains appraisals in
conformity with USPAP for these transactions.\98\ Based on this
information, the Agencies understand that a pivotal factor in valuing
manufactured homes is whether the transaction is secured by land.
Accordingly, the Agencies are adopting a final rule that applies
different rules to loans secured by a new manufactured home and land
(Sec. 1026.35(c)(2)(viii)(A)) and loans secured by a new manufactured
home without land (Sec. 1026.35(c)(2)(viii)(B)).
---------------------------------------------------------------------------
\97\ The Agencies did not receive comments from these types of
organizations on the 2012 Proposed Rule, which the Agencies believe
may be due to the large volume of mortgage rules that were issued
for public comment at that time. A large real estate trade
association expressed similar views in commenting on both the 2012
Proposed Rule and 2013 Supplemental Proposed Rule.
\98\ For a summary of more recent informal outreach conducted by
the Agencies, see http://www.federalreserve.gov/newsevents/rr-commpublic/industry-meetings-20131001.pdf.
---------------------------------------------------------------------------
The Agencies understand that manufactured home lenders regularly
value a new manufactured home and land by relying on the manufacturer's
(wholesale) invoice for the home unit (marked up by a certain
percentage to account for siting costs, dealer profit, and related
expenses associated with the transactions) and having a separate
appraisal performed on the land. The two values are then added together
to obtain a maximum loan amount, which may not be the amount of credit
ultimately extended. The Agencies understand that transactions secured
by a new manufactured home and land can be consummated before the new
home is sited or, in some cases, even built.
For these reasons, the Agencies recognize that applying the HPML
appraisal rules to transactions secured by a new manufactured home and
land will represent a change in practices for many manufactured home
lenders. In part to mitigate unnecessary burden, the Agencies are
exempting these transactions from the requirements that the appraisal
include a physical inspection of the interior of the new manufactured
home. In addition, the Agencies understand that an interior inspection
of the property is a central obstacle to complying with the HPML
appraisal rules in transactions secured by a new manufactured home and
land, since production of the home might not be completed or started
before the loan is consummated. Further, the Agencies believe that an
interior inspection on a new manufactured home may not be warranted
because the home would not have been subject to wear and tear and
production and installation inspections new manufactured homes occur as
part of a separate regulatory framework administered by HUD.\99\
---------------------------------------------------------------------------
\99\ See 24 CFR parts 3282 and 3286.
---------------------------------------------------------------------------
Under the final rule, as of July 18, 2015, a creditor could, for
example, obtain an appraisal based on the
[[Page 78549]]
appraiser's review of plans and specifications of the new home and an
inspection of the site. See comment 35(c)(2)(viii)(A)-1. Neither USPAP
nor FIRREA requires an interior inspection, but the Agencies believe
that all other aspects of the HPML appraisal rules could and should be
complied with. USPAP and FIRREA also do not require an appraiser to use
particular types of comparables in valuing manufactured homes, so
appraisers will have flexibility in selecting either manufactured home
comparables or site-built comparables as the appraiser deems
appropriate or as the creditor, secondary market participant, or
relevant government agency requires. The Agencies are also aware that
public comments and outreach included varying views on the availability
of appropriate comparables and appraisers with the relevant competency
to conduct USPAP land/home appraisals for transactions secured by a new
manufactured home and land, with some generally asserting that
appropriate comparables and competent appraisers are readily available,
while other expressed concerns that at least in some markets they are
not. However, the Agencies believe that giving creditors 18 months
before compliance becomes mandatory can provide time for creditors and
other stakeholders to determine how to address concerns in these areas.
The Agencies believe that applying the HPML appraisal rules to
transactions secured by new manufactured homes and land is important
for several reasons. First, as with transactions secured by an existing
manufactured home and land, covering transactions secured by a new home
and land is consistent with the requirements of the GSEs and Federal
government agencies for these types of loans. Again, Congress
designated HPML transactions that are not qualified mortgages to be
``higher-risk'' than other transactions; therefore, the Agencies
believe it prudent and in keeping with congressional concern to be
consistent with other Federal standards for these loans.
Second, appraiser representatives and regulators have made it clear
in public comments on this rulemaking and independent publications that
separate assessments of the unit value and land added together do not
constitute an acceptable appraisal.\100\ For loans deemed ``higher-
risk'' by Congress, the Agencies have reservations about a valuation
practice that diverges from practices deemed appropriate and most
likely to result in a valid outcome.
---------------------------------------------------------------------------
\100\ See, e.g., Texas Appraiser Licensing and Certification
Board, ``Assemblage As Applied to Manufactured Housing,'' available
at http://www.talcb.state.tx.us/pdf/USPAP/AssemblageAsAppliedToMfdHousing.pdf.
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Third, all commenters on the 2013 Supplemental Proposed Rule that
did not represent the manufactured home lending industry, as well as a
few manufactured home lenders, opposed a full exemption for loans
secured by a new manufactured home and land. These comments strongly
suggest that the exemption would not be in the public interest, as
required by the statute. Commenters opposing a full exemption generally
held the view that appraisals in conformity with USPAP and FIRREA for
these homes are feasible and that prudent lending practice and consumer
protection are best served by obtaining appraisals for transactions
secured by a new manufactured home and land together. They believed
that appraisals with interior inspections would allow consumers to
obtain better information about the value of their homes than methods
that combine an appraised value of a site and a marked-up invoice price
of a manufactured home. As noted under ``Public Comments,'' some
manufactured home lenders indicated that they already conduct
appraisals in conformity with USPAP for transactions secured by a new
manufactured home and land.
The Agencies decline, however, to adopt suggestions from some of
these commenters that the general appraisal requirements should cover a
broader range of transactions. Regarding the suggestion that the
general appraisal requirements should cover transactions secured by a
manufactured home and a leasehold interest, the Agencies are aware that
State laws may vary regarding rights attendant to leasehold interests
and that different lease terms might have different values; both are
factors that would be beyond the scope of the final rule to provide
guidance. GSE and Federal agency manufactured housing programs require
the securing property to be real estate; whether a manufactured home
and lease-hold meets that standard varies by State law and the Agencies
believe that uniformity across states for the HPML appraisal rules
would best facilitate compliance. At the same time, the Agencies
recognize that lease terms and stability of tenancy can affect value,
and believe that these factors would be appropriate to take into
account as part of valuations for appraising transactions secured by a
home and not land. The final rule permits but does not require
consideration of these factors.\101\ See Sec.
1026.35(c)(2)(viii)(B)(3) and accompanying section-by-section analysis.
---------------------------------------------------------------------------
\101\ A national provider of a manufactured home cost guide
indicated in comments that its guide includes a land-lease community
adjustment guideline that can be used if a manufactured home is
located in a land-lease community.
---------------------------------------------------------------------------
The Agencies are also not following the suggestion that the
appraisal requirement be applied to transactions secured by a home
whenever the borrower owns the land, even if the transaction is not
secured by the land. The Agencies are concerned that accounting for
differing ownership structures of the land would complicate the rule
and could be difficult for creditors and appraisers to assess. The
Agencies also have questions about whether appraisals of the land and
home together, even if the land is not securing the transaction, will
consistently lead to the desired result--market value of the collateral
securing the loan. Some lenders indicated that when a loan goes into
foreclosure, the property may be repossessed and taken back into dealer
inventory; thus, it would seem important for a lender to know the value
of the structure by itself. Again, the Agencies recognize that the
location of the home can have a significant impact on its value, and
believe that the location-related factors would be appropriate to take
into account as part of valuations for transactions secured by a home
and not land. The final rule permits but does not require consideration
of these factors. See Sec. 1026.35(c)(2)(viii)(B)(3) and accompanying
section-by-section analysis.
Fourth, most commenters, including leading manufactured housing
lending industry representatives, expressed support for developing and
even requiring appropriate valuations for manufactured home
transactions. In light of additional stakeholder views received since
issuance of the January 2013 Final Rule and additional research, the
Agencies believe that applying the HPML appraisal rules to transactions
secured by new manufactured homes and land, as well as transactions
secured by existing manufactured homes and land, creates needed
incentives for the continued training of state-certified and -licensed
appraisers in valuing manufactured homes and the development of
appraisal methods tailored to value collateral in manufactured home
lending transactions, including appropriate use of comparables. This
will in turn support improved accuracy and
[[Page 78550]]
reliability of appraisals for these transactions.
Regarding concerns expressed by commenters about a lack of
comparable sales data, the Agencies understand that in many cases
comparable sales data is reported to and available in Multiple Listing
Services (MLS) regarding sales of manufactured homes and land
classified as real property. The Agencies recognize that a more robust
tracking of manufactured home sales information would be beneficial and
may take time, and encourages efforts in this regard. The delayed
effective date is intended to allow more time to move forward in this
process.
Finally, the Agencies believe that treating manufactured home loans
secured by both the home and land in the same way as loans secured by
site-built homes and land will foster the development of greater
consistency between the rules and practices applicable to transactions
secured by site-built homes and manufactured homes. The Agencies
believe that this consistency of rules and practices will contribute to
integrating manufactured home lending more fully into the broader
mortgage market over time, which could have long-term benefits for
consumers and lenders.
For these reasons, on balance, the Agencies have concluded that an
exemption from the HPML appraisal requirement for a physical visit of
the interior of the home as part of the appraisal will promote the
safety and soundness of creditors and be in the public interest.
35(c)(2)(ii)(B)
Loans Secured by a Manufactured Home and Not Land
The Agencies' Proposal
As noted, in the January 2013 Final Rule, the Agencies adopted an
exemption from the HPML appraisal requirements for loans secured by a
``new manufactured home.'' See 78 FR 10368, 10379-10380, 10433, 10438,
10444 (Feb. 13, 2013). The January 2013 Final Rule did not address
loans secured by ``existing'' (used) manufactured homes, which
therefore would be subject to the appraisal requirements unless the
Agencies adopted an exemption.
As discussed in the 2013 Supplemental Proposed Rule, additional
research and outreach on valuation practices for loans secured by an
existing manufactured home and not land indicated that current
valuation practices for these transactions generally do not involve
using a state-certified or -licensed appraiser to perform a real
property appraisal in conformity with USPAP and FIRREA with an interior
property inspection, as required under TILA section 129H and the
January 2013 Final Rule. In addition, lender commenters on the 2012
Proposed Rule had raised concerns about the availability of data on
comparable sales that may be used by appraisers for loans secured by an
existing manufactured home and not land. They indicated that data from
used manufactured home sales not involving land (usually titled as
personal property) are not currently recorded in MLS of most states, so
an appraiser's ability to obtain information on comparable manufactured
homes without land is more limited than in real estate transactions. A
provider of manufactured home valuation services confirmed in outreach
with the Agencies in 2013 that manufactured home sales information is
generally not available through standard real estate data sources.\102\
The Agencies also understood that, in many states, appraisers are not
currently required to be licensed or certified in order to perform
personal property appraisals.
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\102\ The Agencies also are not aware of site-built or similar
comparables for home-only collateral.
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Accordingly, the 2013 Supplemental Proposed Rule would have
exempted transactions secured by existing manufactured homes and not
land in proposed Sec. 1026.35(c)(2)(ii)(B).\103\ The Agencies noted
that an exemption would promote the public interest in affordable
housing by ensuring transactions were not subject to a requirement not
suited to this particular collateral type at this time, and would
promote safety and soundness by allowing creditors to rely on currently
prevalent valuation methods to ensure profitability and diversity to
mitigate risk. The Agencies requested comment on this proposed
exemption.
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\103\ In addition, proposed comment 35(c)(2)(ii)(B)-1 would have
clarified that an HPML secured by a manufactured home and not land
would not be subject to the appraisal requirements of Sec.
1026.35(c), regardless of whether the home is titled as realty by
operation of state law.
---------------------------------------------------------------------------
In addition, however, the Agencies' 2013 Supplemental Proposed Rule
sought comment on any risks that could be created by an unconditional
exemption for transactions secured by a manufactured home, whether new
or existing, and not land. After the January 2013 Final Rule was
issued, consumer advocates and other stakeholders expressed concerns
that some transactions in the lending channel for manufactured home-
only (chattel) transactions (both of new and existing manufactured
homes) can result in consumers owing more than the manufactured home is
worth. For this type of loan, stakeholders such as consumer and
affordable housing advocates asserted that networks of manufacturers,
broker/dealers, and lenders are common, and that these parties can
coordinate sales prices and loan terms to increase manufacturer,
dealer, and lender profits, even where this leads to loan amounts that
exceed the collateral value.
Consumer advocates and others raised concerns that, where the
original loan amount exceeds the collateral value and the consumer is
unaware of this fact, the consumer is often unprepared for difficulties
that can arise when seeking to refinance or sell the home at a later
date. They also noted that chattel manufactured home loan transactions
tend to have much higher rates than conventional mortgage loans. Some
stakeholders suggested that giving the consumer third-party information
about the unit value could be helpful in educating the consumer,
particularly as to the risk that the loan amount might exceed the
collateral value, and might prompt the consumer to ask important
questions about the transaction.
Accordingly, the 2013 Supplemental Proposed Rule posed a number of
questions seeking comment on conditioning the exemptions for
manufactured home-only transactions on providing the consumer with an
estimate of the value of the manufactured home no later than three
business days before consummation. The 2013 Supplemental Proposed Rule
discussed several types of estimates.
First, based on input from lenders and manufactured home valuation
providers, the Agencies understood that in new home-only transactions,
many creditors determine the maximum amount that they will lend by
using the manufacturer's invoice, or wholesale unit price, marked up by
a certain percentage to reflect, for example, dealer profit and siting
costs. As discussed in the 2012 Proposed Rule, informal outreach
participants indicated that this practice--similar to that sometimes
used for automobiles--is longstanding in new manufactured home
transactions.\104\ Lenders asserted that these methods save costs for
consumers and creditors and has been found to be reasonably effective
and accurate for purposes of ensuring a safe and sound loan.
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\104\ See 77 FR 54722, 54732-33 (Sept. 5, 2012).
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Second, outreach to manufactured home lenders indicated that in
transactions secured by an existing manufactured home and not land,
lenders typically obtain replacement
[[Page 78551]]
cost estimates derived from nationally published cost services, taking
into account factors such as the age of the unit (to derive depreciated
values) and regional location of the home.\105\
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\105\ One option identified in the 2013 Supplemental Proposed
Rule (78 FR 48548, 48554 n. 12 (Aug. 8, 2013) was the National
Automobile Dealers Association (NADA) Manufactured Housing Cost
Guide. See NADAguides.com Value Report, available at
www.nadaguides.com/Manufactured-Homes/images/forms/MHOnlineSample.pdf.
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Third, the Agencies understood that additional methods exist for
conducting personal property appraisals of manufactured homes. For
example, HUD has adopted property valuation standards for HUD-insured
loans secured by an existing manufactured home and not land. These
standards call for use of a certified independent fee appraiser to
conduct a valuation of the home using data on comparable manufactured
homes in similar condition and in the same geographic area.\106\
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\106\ See HUD TI-481, Appendices 8-9, C, and 10-5.
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Public Comments
The Agencies received 28 comment letters on transactions secured by
manufactured homes and not land from four national appraisal trade
associations, a provider of a manufactured housing cost guide, a
consumer advocate group, three affordable housing organizations, a
national association of owners of manufactured homes, a policy and
research organization, a credit union, seven State or regional credit
union associations, a national credit union association, a community
bank, a national trade association for community banks, a State banking
trade association, a national mortgage banking trade association, a
national trade association for manufactured housing, a State
manufactured housing trade association, and two manufactured housing
nonbank lenders.
Many of the comments received pertained to transactions secured by
either an existing or new manufactured home, but the comment summary
below is generally divided into two parts, one regarding comments on
loans secured by a new manufactured home (but not land) and one
regarding comments on loans secured by an existing manufactured home
(but not land). First, however, some generally applicable comments are
reviewed below.
General Comments
A consumer advocate group, two affordable housing organizations, a
national association of owners of manufactured homes, and a policy and
research organization indicated that the Agencies should adopt a rule
that would ensure that consumers have information about their home
value before entering into an HPML secured by an existing manufactured
loan without land.
Providers of valuations and their trade associations also generally
supported providing copies of valuation information to consumers in
these transactions. Two appraiser trade associations stated that
consumers have a ``fundamental right'' to understand the market value
of the property collateralizing covered loans. A provider of a
manufactured home cost guide stated that consumers unequivocally would
benefit from knowing the cost estimate value of their home.
Industry support for providing this information to consumers was
more limited. A State credit union association stated that in an HPML
secured by an existing manufactured home and not land, the consumer
should receive a copy of a valuation, which this commenter believed
would be a valuable tool for the consumer. A State manufactured housing
trade association stated that, if a reliable repository of data on
comparable sales were developed, it would support providing the
consumer a copy of a valuation based upon such data.
More broadly, manufactured home lending industry commenters
questioned the need for valuation regulations on new manufactured home
transactions on several grounds. A State manufactured housing trade
association noted that most manufactured housing lenders are portfolio
lenders who have incentives to adopt appropriate underwriting standards
and not to over-finance the loan. This commenter asserted that the
widespread practice of using actual cost information from the
manufacturer's invoice to determine maximum loan amount prevents over-
financing. Finally, the commenter stated that over-financing has not
been substantiated as a problem in manufactured home lending. Thus, the
commenter suggested that the Agencies take more time to study the issue
of manufactured home valuations before proposing a final rule in this
area.
Similarly, a national community banking trade association stated
that a portfolio lender's assumption of credit risk is an incentive to
choose appropriate valuation methods. Further, two State credit union
associations stated that existing valuation methods suffice for
ensuring reasonably safe and sound loans. Another State credit union
association noted that creditors have alternatives to the USPAP
interior-inspection appraisal, such as an exterior inspection or drive-
by, or an analysis of sales of comparable homes.
One manufactured home lender suggested that consumers purchasing
manufactured homes do not need appraisals because manufactured homes
are sold like automobiles, in that they are sold from a retailer's
display center. Therefore, the commenter suggests that instead of
providing consumers with appraisals, consumers should be encouraged to
engage independently in comparative shopping when selecting a home as
well as when shopping for a loan. Another manufactured home lender
stated that consumers do not need information beyond the sales
contract, which breaks down certain costs. This commenter stated that
information about the value of the home is not relevant to these
consumers because they do not buy manufactured homes for investment. A
manufactured home lender also stated that it does not offer loans based
on the collateral value but instead on the consumer's ability to repay.
A national manufactured housing trade association stated that
inspections by HUD-certified inspectors conducted on all new
manufactured homes provide lenders and consumers a strong guarantee of
the quality of a manufactured home.\107\ Moreover, this commenter
asserted that the HUD inspection process, coupled with the verification
that lenders receive from manufactured home retailers and builders on
all new manufactured homes,\108\ dispenses with the need for an
appraisal and interior inspection.
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\107\ See generally, 24 CFR parts 3280, 3282, and 3286.
\108\ This commenter may have been referring to requirements
such as those in HUD manufactured housing regulations that require a
manufacturer to certify to the manufactured home dealer or
distributer that the home conforms to all applicable Federal
construction and safety standards. See 24 CFR 3282.205.
---------------------------------------------------------------------------
Two national appraiser associations generally asserted that the
importance of valuation information to the consumer and lenders far
outweighs the costs and burdens of providing this information. However,
one manufactured home lender suggested that the cost of performing
third-party appraisals would be unnecessary for the consumer,
especially given this commenter's concerns about their reliability in
home-only transactions. In addition, the commenter suggested that these
costs would be a particular hardship on consumers who purchase
manufactured home because they tend to have lower
[[Page 78552]]
incomes and lower credit scores than consumers of site-built homes;
thus, they are purchasing a manufactured home because it is the most
affordable and viable option available to them to own their own home.
Finally, the commenter suggested the burden on manufactured home
creditors of valuation requirements is likely to result in a reduction
in lending. Similarly, a national manufactured housing trade
association commenter suggested that existing valuation methods are
adequate and cost consumers substantially less than traditional
property appraisals.
A manufactured home lender expressed concerns in particular about
requiring creditors to provide a third-party cost service unit value to
the consumer for either new or existing manufactured homes. According
to this commenter, the technology and personnel required to program and
develop a system to compare the home's year, manufacturer, and model
name with the appropriate year, manufacturer, and model name from a
specific price guide would be considerable. Further, this commenter
asserted, this type of requirement would add to all lenders' overhead
costs, which would increase the cost of credit (i.e., be passed on to
the consumer). This lender predicted that such a task would deter other
established creditors, including banks and credit unions, from offering
financing secured by a manufactured home.
Location. A question with equal applicability to transactions
secured by either a new or existing manufactured home was a request for
comment on the impact the location of a new manufactured home can have
on its value and whether cost services are available that account
adequately for differences in location. Commenters who responded
generally agreed that the location of a manufactured home can have a
significant impact on its value. Two national appraiser association
commenters suggested that the location of a manufactured home can have
a significant influence on its value and that they know of no cost
services that adequately account for price differences in locations.
A consumer advocacy group, two affordable housing organizations, a
national manufactured homeowner association, and a policy and research
organization suggested that manufactured homes are very rarely moved
because moving a manufactured home is expensive and likely to damage
the unit. As a result, a location-based value is more relevant to
resale value. These commenters further suggested that attributes of the
home's location that affect the home's value are tangible and visible,
but that there are other attributes of a manufactured home's location
that affect the home's value that are not typically captured in
existing valuation models. Examples of such characteristics provided
were lease terms or State laws that: (1) Stabilize rent; (2) ensure
that the home may remain where it is sited; (3) ensure that the
homeowner is able to sell the home to a new owner without having to
move it; and (4) protect the lender's interest in the home if the
homeowner defaults on the loan.
One manufactured home lender suggested that similar factors, such
as proximity to retail shopping, the quality of the neighborhood public
and private schools, the condition and upkeep of neighboring
properties, and other factors that affect the value of site-built homes
will also affect the value of manufactured homes. However, the
commenter suggested that due to historical biases against manufactured
homes in urban areas and most neighborhoods--expressed through zoning
restrictions, prohibitions, and restrictive covenants--most
manufactured homes are located in rural communities. A manufactured
home lender also indicated that, in fact, it is not uncommon for
manufactured homes may be moved from a sited location back to a
dealer's lot, particularly when they have been foreclosed upon and are
in rural areas.
Further study. Several commenters suggested that more time may be
needed to develop reliable alternatives to a USPAP- and FIRREA-
compliant appraisal based upon a physical inspection of the interior of
the home. Two manufactured housing lenders, while generally opposed to
conditioning the exemption, suggested the Agencies that postpone any
decision on these issues for several months of further evaluation. A
State manufactured housing trade association indicated that it would
only support a condition if a mandatory repository of data on
comparable sales were developed and sufficient time passed for this
repository to populate.\109\ This commenter also expressed concerns
that very few, if any, loans secured by manufactured homes would be
exempt from the HPML appraisal rules as qualified mortgages. See Sec.
1026.35(c)(2)(i). This commenter suggested that the large number of
loans potentially covered by conditions on any exemption for
manufactured home transactions that would involve alternative
valuations warranted further study of these options by the Agencies.
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\109\ This commenter noted, however, that the private sector was
not in a position to develop such a repository due to cost and anti-
trust concerns. Further, if such a repository were developed, this
commenter expected challenges in finding data on comparable sales in
rural areas would remain.
---------------------------------------------------------------------------
Similarly, a consumer advocate group, two affordable housing
groups, a national association of owners of manufactured homes, and a
policy and research organization, while generally supporting
conditions, suggested that the Agencies convene a working group of
stakeholders to review and develop valuation standards. These
commenters observed that this approach would help to integrate the
manufactured housing sector into the larger housing market. In their
view, valuation rules would create demand, which would improve capacity
for providing valuations and also generate more financing options for
manufactured home consumers.
Comments on Loans Secured by a New Manufactured Home (but not Land)
The Agencies solicited comment on whether it would be appropriate
and beneficial to consumers to condition the exemption from the HPML
appraisal requirements on the creditor providing the consumer with
various types of third-party information about the manufactured home's
cost, which third-party estimates should be used for these estimates,
and when creditors should be required to provide the information. The
Agencies received several comments on these questions. Representatives
of appraisal providers, a credit union, a community bank, a consumer
advocacy group, three affordable housing groups, a national association
of owners of manufactured homes, and one policy and research
organization generally suggested that consumers would benefit. On the
other hand, a manufactured home lender, two manufactured housing trade
associations, a State credit union association, a mortgage company, a
national community bank trade association, and a national mortgage
banking trade association generally suggested that consumers would not
benefit and a condition should not be adopted.
Manufacturer's invoice. Regarding the utility of providing the
consumer with a copy of the manufacturer's invoice, a consumer advocacy
group, two affordable housing groups, a national manufactured homeowner
association, and a policy and research organization stated that in the
near term consumers would benefit from receiving the manufacturer's
invoice because this is what manufactured home lenders rely on in
transactions involving new manufactured homes. They asserted that a
consumer who is given the invoice is better able to evaluate the
accuracy of
[[Page 78553]]
the description of the home's features. Given concerns about truth and
accuracy in invoices in capturing all dealer payments, though, these
commenters suggested that these transactions ultimately should be
subject to the HPML appraisal rules on the same basis as site-built
homes. In their view, higher valuation standards would improve
appraiser capacity and, they argued, decrease incentives to steer
consumers to loans with weaker standards.
Regarding the credibility of manufacturer's invoices, the Agencies
received conflicting information. One affordable housing organization
differentiated between a dealer's invoice and a manufacturer's invoice,
indicating that incentives and rebates might be omitted from the
dealer's invoice but not from the manufacturer's invoice so the
manufacturer's invoice would be more reliable for the consumer. A
consumer advocacy group, two affordable housing organizations, a
national association of owners of manufactured homes, and a policy and
research organization, however, commented that the manufacturer's
invoice may not have accurate information about the actual cost paid by
the dealer because it might not reflect incentives, rebates, and in-
kind services agreed upon by the dealer and manufacturer. However, as
noted, they believed that the representation of home features on the
invoice would be useful to consumers.
A national manufactured housing trade association stated that the
manufacturer certifies to the retailer the authenticity and accuracy of
the wholesale cost of the manufactured home at the point of
manufacture. A manufactured housing lender further suggested that the
manufacturer's invoice is the only realistic option upon which to base
a home's value because it takes into account the upgrades and other
features pertinent to the home. This commenter suggested that the
invoice amount also offers a ``conservative'' figure in terms of
valuation and loan-to-value considerations. However, the commenter
noted that a consumer's total sales price will include certain other
third-party charges related to the move and set-up of the manufactured
home, dealer mark-ups and occasionally local government fees required
to be paid by the dealer.
Third-party cost service estimates. Regarding the utility of
providing a third-party unit estimate from an independent cost service,
a credit union commenter stated that a third-party unit estimate would
give consumers a valuable guideline to prevent predatory practices.
Similarly, a community bank commenter stated that this information
could help alleviate the potential for dealer price markups over
manufacturer's suggested retail price. A national provider of a
manufactured home cost service stated in its comment letter that its
cost guide information could ``absolutely'' be useful to consumers, but
cautioned that providing consumers with multiple different indications
of value could make the process more confusing to consumers. The
provider further stated that its cost guide can be used to provide a
``guideline'' that is a ``reasonable approximation'' for a new
manufactured home value using the ``new or like new'' condition for the
current-year model. The cost guide provider indicated that its value
estimates consider the home's manufacturer, model, size, year, and
region. In its cost guide, adjustments are also possible for State
location, the general condition of the home, as well as for value added
by additional features.
An affordable housing organization stated that creditors should be
required to obtain cost estimates from an independent appraiser based
upon nationally-published cost information. This commenter stated that
consumers will be better informed with more information.
On the other hand, several industry and industry trade association
commenters suggested that providing copies of third-party estimates
would be of no benefit to consumers or would cause consumer confusion.
One manufactured home lender asserted that cost guides consider pieces
of property in the abstract and fail to account for the cost of
permits, site preparation, and delivering the home to the purchaser's
site. Moreover, this commenter suggested cost guides are typically used
by lenders only to determine a value for pre-owned manufactured homes.
A State manufactured housing association also noted that the third-
party cost guides are not used in practice for new manufactured home
transactions, a view confirmed by a manufactured home lender during
informal outreach.
Independent valuations. Regarding third-party valuations for new
home-only transactions generally, a number of industry, consumer group,
and other commenters stated that in their view there does not exist
today a reliable national third party database for comparable sales for
new manufactured homes. However, two national appraiser association
commenters stated that they strongly support requiring an independent
third-party valuation by a credentialed third party appraiser with
education, training, and experience, or a valuation through the
National Appraisal System (NAS), which would be consistent with the
requirements of government programs.\110\
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\110\ See HUD TI-481, Appendices 8-9, C, and 10-5. The Agencies
understand that the NAS is an appraisal method involving both the
comparable sales and the cost approach.
---------------------------------------------------------------------------
Information for the consumer. The Agencies also solicited comment
on whether the consumer in an HPML transaction to be secured by a new
manufactured home and not land typically receives unit cost
information, and what cost information from a reliable independent
third-party source might be reasonably available to creditors and
useful to a consumer. Several commenters responded to this and a
related question; all generally suggested that, other than the retail
purchase and sale agreement between the manufactured home purchaser and
the retailer, no third-party information is currently provided to
consumers about the value of their new manufactured home. One
manufactured home lender noted that the retail purchase agreement will
list the retail price of the manufactured home and itemize and include
in the total cost all other costs and charges associated with the
transactions and installation of the home and extras. Another
manufactured home lender added that it is not the industry custom to
disclose the wholesale amount to a consumer. Rather, the commenter
suggested, the Agencies should not require disclosures of cost
information for consumers and deviate from widely accepted practice in
other areas of retail sales, including automobiles or site-built homes.
Most of the commenters who responded on the information
availability issue suggested that there was currently no readily-
accessible, publicly-available information that consumers could use to
determine whether their loan amount exceeds the collateral value in a
new manufactured home chattel transaction. Two national appraiser
associations asserted that, under the statute, consumers have a
fundamental right to know the value of the home that collateralizes
debt they incur. However, a provider of a manufactured home cost guide
suggested that consumers could access manufactured home value
information on its Web site representing the depreciated replacement
cost of a home.
Regarding the best timing for a creditor to provide a unit value
estimate to a consumer, two national appraiser associations suggested
that the
[[Page 78554]]
information should be delivered to the prospective borrower as early in
the loan underwriting process as possible. A consumer advocacy group,
two affordable housing organizations, a national association of owners
of manufactured homes, and a policy and research organization suggested
that a copy of the manufacturer's invoice should be provided to
consumers after the execution of the buyer's order but prior to the
consummation of the transaction. Finally, one community bank suggested
that third-party cost guide information should be provided to the
consumer at least three days prior to consummation because the data is
readily available through the database.
Comments on Loans Secured by an Existing Manufactured Home (but not
Land)
Commenters generally supported an exemption from the HPML appraisal
rules under Sec. 1026.35(c)(3) through (6) for transactions secured by
an existing manufactured home and not land. However, a number of
commenters favored conditioning the exemption on the creditor obtaining
and providing valuation information to the consumer. Several commenters
also stated that any exemption should be temporary. The most common
reasons cited by commenters for supporting the exemption were a lack of
qualified and available appraisers; a lack of data on comparable sales;
and concerns over the cost of appraisals.
Regarding the availability of appraisers, a State manufactured
housing trade association cited a scarcity of state-certified and -
licensed appraisers to support chattel lending in general, which this
commenter stated is particularly pronounced in rural areas where the
homes are predominantly located. This commenter also believed valuation
professionals lacked sufficient experience with USPAP personal property
appraisal standards to comply with them in existing manufactured home-
only transactions. Similarly, a manufactured home lender stated that
most state-certified or -licensed appraisers are not trained or
experienced in manufactured home appraisals and that in many rural
areas, no qualified appraisers are available.\111\
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\111\ This commenter's observations were also endorsed by
another manufactured home lender and a national manufactured housing
trade association.
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In addition, a national community bank trade association indicated
that, while some community banks can readily engage appraisers for
manufactured home transactions, other banks do find it difficult to
identify appraisers. A consumer advocate group, two affordable housing
organizations, a national association of owners of manufactured homes,
and a policy and research organization stated, however, that any
appraiser capacity issues are driven by a lack of valuation standards
for the manufactured housing segment. As a result, allowing the rule to
take effect after a temporary period would lead to demand for
appraisers, creating an incentive for appraisers to obtain the
requisite skills.
A number of commenters expressed concern that the limited
availability of data on comparable sales for transactions secured by an
existing manufactured home and not land posed a significant barrier to
obtaining reliable third-party appraisals for these transactions. A
manufactured home lender stated that sales of existing manufactured
homes on leased land are not reported to MLS and that data on
comparable sales outside of California is generally lacking. The
commenter noted, though, that one private company does aggregate
comparable sales data from different sources around the country, which
is usually used for transactions in land-lease communities. The
national manufactured housing trade association added that state-
certified or -licensed appraisers do not capture data on sales of
existing manufactured homes, whether from retail dealers or
communities. In addition, this commenter suggested that data may be
distorted by foreclosures in rural areas leading to relocation of homes
to dealer inventory. The State manufactured housing trade association
commenter stated that the lack of a reliable nationwide database of
comparable sales should be remedied and indicated that the one
statewide database (in California) only receives data on a voluntary
basis.\112\
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\112\ This commenter suggested that a national mandatory-
reporting database would need to be sponsored by the government, as
cost and possible anti-trust issues make it unlikely the private
sector would create such a database.
---------------------------------------------------------------------------
Further, several industry commenters cited concerns over the cost
of appraisals. A national community bank trade association and a State
credit union association generally believed that that a USPAP-complaint
appraisal with an interior inspection would be costly for low-income
borrowers purchasing existing manufactured homes. Another State credit
union association and a national credit union association supported the
exemption because manufactured home values are generally lower than the
values of other types of home. A state-level bank trade association
also stated that appraisals would be costly for these transactions.
Third-party cost service estimates. A number of commenters also
believed that existing market incentives and valuation methods were
sufficient for this type of transaction. For example, national and
State manufactured housing trade associations noted that lenders
frequently use the value indicated by a national manufactured home cost
guide to determine the maximum amount of credit they would extend for
transactions secured by existing homes and not land. One manufactured
home lender stated that it uses the guide to calculate a
``theoretical'' value, which is imperfect given the lack of reliable
information about the condition of the home. Another nonbank lender
stated that while it uses this guide to determine approximate wholesale
value on trade-ins and as a general guide to the potential sale price
for repossessions, it does not use the guide in transactions to finance
the purchase or refinance of an existing manufactured home and not
land.\113\ A consumer advocate group, two affordable housing
organizations, a national association of owners of manufactured homes,
and a policy and research organization further confirmed the widespread
use of third-party cost service depreciation schedules in this segment
of the market.
---------------------------------------------------------------------------
\113\ This nonbank lender also stated that industry lenders do
not typically obtain a ``valuation'' in manufactured home
transactions.
---------------------------------------------------------------------------
Regarding the accuracy of third-party cost service estimates for
existing manufactured homes, a national provider of a manufactured home
cost guide stated that its values are derived by applying depreciation
factors to the cost estimate of the home, and are designed to represent
``retail worth'' assuming average condition and certain components.
Adjustments can be made for actual condition, inventoried components,
and local site value (for homes located in land-lease
communities).\114\ The commenter stated that the local site value
adjustment is representative of a national average of the contributing
value for land-lease communities with certain attributes. After
accounting for this adjustment, the value can be up to 33 percent
higher or
[[Page 78555]]
11 percent lower than the value of the structure only (on average, the
location adjustment adds 13 percent). While acknowledging that only
appraisers are qualified to analyze a property's sited location, this
commenter claimed that its location adjustment was more cost effective
than an appraisal based upon a physical inspection, without sacrificing
accuracy. When it compared its location-adjusted values with estimates
from a sample of over 1,000 personal property appraisals of
manufactured homes over a wide range of ages, it found that the median
difference between its estimates and the appraised value was less than
five percent.
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\114\ According to the association, the association develops its
guide by collecting data from industry manufacturers to create a
guideline based on actual original costs, current regional market
activity (which are used to make regional adjustments), and
depreciation factors. The association stated that the depreciation
cost approach used by its guide is a component of the cost approach
used by certified or licensed appraisers, and is approved for use
with Fannie Mae Form 1004C, Freddie Mac Form 70B, and the VA.
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Views of other commenters on the accuracy of third-party cost guide
estimate were more mixed. A manufactured home lender stated that cost
guides are used as a guideline by lenders rather than as an estimate of
resale value. Another manufactured home lender stated that the cost
guide does not include transaction costs, including setup fees, which
can lead to unreliable estimates for consumers.
A consumer advocate group, two affordable housing organizations, a
national association of owners of manufactured homes, and a policy and
research organization believed that estimates based upon these cost
guides fail to value correctly important factors related to the
location of the home, such as the security of land tenure, risk of rent
increases, and community attributes, among others. These commenters
also noted that the cost guide assumes the property value has
depreciated and that available adjustments based upon the property
condition are not required; as a result, maintenance, repairs, and
upgrades could be left out of the value and the property could be
under-valued. Further, these commenters expressed concern that
widespread use of a depreciated value could drive rather than reflect
manufactured home values. However, another affordable housing
organization believed that, despite concerns expressed by some about
the utility of a third-party estimate based upon a nationally-published
cost service, consumers will be better informed with this information.
A State manufactured housing trade association expressed concerns
that depreciated values available through a cost service can be
understated. While this commenter noted that adjustments can be made,
the commenter asserted that questions remain as to who should make the
adjustments and whether they will be made in a uniform, valid, and
reliable manner.
One manufactured home lender believed that the use of physical
inspections to provide a basis for making adjustments to depreciated
unit cost estimates was not widespread. This commenter also pointed out
that some transactions are consummated before the existing manufactured
home is placed on the new site making it infeasible for the lender to
arrange for pre-closing inspections of the home at its new site in
these situations.
Independent valuations. Some commenters also indicated that
valuation methods based upon sales comparison approaches are sometimes
used in transactions secured by an existing manufactured home and not
land. A consumer advocate group, two affordable housing organizations,
a national association of owners of manufactured homes, and a policy
and research organization stated that comparable sales typically are
selected based upon characteristics such as type of sale, size, style,
and location of the home.
A State manufactured housing trade association noted that a private
company can provide comparable sales reports for some transactions. A
manufactured home lender indicated that this service also included a
physical inspection, and is used for transactions secured by homes in
land-lease communities in particular when a cost guide estimate does
not match the sales price.
A national manufactured housing trade association stated that, for
FHA Title I program loans, a physical inspection is conducted to adjust
for site additions and the physical condition of the home. A State
manufactured housing association asserted that the NAS is rarely used
because only a small number of originations are currently done under
the Title I FHA program for which NAS appraisals are specifically
approved.\115\ This commenter and a manufactured home lender stated
suggested that the small number of FHA Title I program loans is due in
part to eligibility requirements, including appraisal requirements.
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\115\ FHA reported providing insurance under its Title I program
for 655 manufactured home loans in Fiscal Year (FY) 2012, 986 in FY
2011, and 1,776 in FY 2010. See HUD, FHA Annual Management Report,
Fiscal Year 2012 (Nov. 15, 2013) at 17. FHA also reported providing
insurance under its Title II program for 20,479 manufactured home
loans in FY 2012, 21,378 in FY 2011, and 30,751 in FY 2010. See id.
According to 2012 HMDA data, 19,614 FHA-insured manufactured home
loans were reported out of a total of 123,628 reported manufactured
home loans, for a FHA-insured share of 15.9 percent. See
www.ffiec.gov/hmda.
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The consumer advocate group, two affordable housing organizations,
a national association of owners of manufactured homes, and a policy
and research group stated that the FHA Title I appraisal system is
overly focused on one characteristic of the home (that it is a
manufactured home) and excludes use of other types of comparables that
may be more suitable. A manufactured home lender noted that HUD-
approved valuation methods based upon comparable sales tend to yield
values below the sales price, which this commenter attributed to an
over-emphasis on use of manufactured homes as comparables.\116\ Another
manufactured home lender claimed that this occurrence in HUD-approved
appraisals is evidence that they undervalue manufactured homes. A
manufactured home lender expressed concerns about the cost of NAS
appraisals under the FHA Title I program. This lender stated that, if a
condition is imposed, lenders should have more than one option for the
type of valuation that would satisfy the condition.
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\116\ These commenters did not identify, however, what other
types of comparables, apart from manufactured homes that are not
sited on land owned by the consumers, could be used as comparables
in these transactions.
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A national association for community banking also referred to all
of the above types of valuations as options for valuating these
transactions, in addition to an evaluation by a bank employee. This
commenter stated that some bank employees conduct interior or exterior
inspections.
An affordable housing organization believed that creditors should
be required to obtain a replacement cost estimate from a trained,
independent appraiser using a nationally-published cost service. Two
national appraiser trade associations stated that, in light of the
importance of the location to the value of the home, the Agencies
should require an independent third-party valuation by a credentialed
appraiser with education, training, and experience,\117\ or a valuation
that complies with the appraisal system specified under the FHA Title I
program for insuring loans secured by existing manufactured homes and
not land. A community bank stated that interior and exterior
inspections should be conducted, due to higher depreciation
[[Page 78556]]
of manufactured homes compared to site-built homes.
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\117\ This commenter suggested the individual would not
necessarily have to be a state-certified or -licensed real estate
appraiser. Nonetheless, a national manufactured home cost service
provider also noted that the number of individuals certified to use
the FHA Title I personal property appraisal system is down, from
over 1,000 in previous decades to less than 100 today. HUD also
allows creditors to rely on real estate appraisers from its Title II
roster to complete these appraisals. See HUD TI-481, Appendices 8-9,
C, and 10-5.
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The Final Rule
Under Sec. 1026.35(c)(2)(viii)(B), which goes into effect on July
18, 2015, the Agencies are adopting a conditional exemption for
transactions secured by existing manufactured homes and not land. The
Agencies believe that exempting transactions secured by existing
manufactured homes and not land is in the public interest and promotes
the safety and soundness of creditors, provided that such exemption is
conditioned on the consumer receiving certain information as provided
in detail below. The Agencies also are adopting a condition on the
exemption for transactions secured by new manufactured homes and not
land adopted in the January 2013 Final Rule. Under the condition, for
applications received by the creditor on or after July 18, 2015, an
HPML that is not a qualified mortgage and is secured by either a new or
existing manufactured home without land will be exempt from the general
HPML appraisal rules in Sec. 1026.35(c)(3) through (c)(6) if the
creditor provides the consumer with a copy of any one of three
specified types of information no later than three days prior to
consummation of the transaction. The three types of information that
can satisfy the condition are: (1) The manufacturer's invoice for the
manufactured home, where the date of manufacture is within 18 months of
the creditor's receipt of the consumer's application; (2) a cost
estimate of the value of the manufactured home from an independent cost
service; or (3) a valuation, as defined in Sec. 1026.42(b)(3), of the
manufactured home by a person who has no direct or indirect interest,
financial or otherwise, in the property or transaction for which the
valuation is performed and has training in valuing manufactured homes.
The Agencies also are adopting and re-numbering proposed comment
35(c)(2)(ii)(B)-1, which clarifies that the exemption does not depend
on whether the home is titled as realty by operation of State law. The
heading for the comment is revised to remove the word ``solely,'' to
reflect that this provision applies to transactions that are secured by
a manufactured home and other collateral that is not land, such as a
leasehold interest. The comment is re-numbered as comment
35(c)(2)(viii)(B)-1. See also section-by-section analysis of Sec.
1026.35(c)(2)(viii)(A) (further discussing transactions secured by a
manufactured home and a leasehold interest).
The Agencies are not adopting proposed comment 35(c)(2)(ii)(A)-1,
which would have provided that an HPML secured by a new manufactured
home is not subject to the appraisal requirements of Sec. 1026.35(c),
regardless of whether the transactions is also secured by the land on
which it is sited. The unconditional exemption for transactions secured
by a new manufactured home, with or without land, will go into effect
on January 18, 2014, but will end starting with applications received
by the creditor on or after July 18, 2015. At that time, the exempt
status of transactions secured by new manufactured homes will depend on
whether the transaction also is secured by land. Other comments adopted
in the final rule relate to the information that a creditor can provide
to satisfy the condition and are discussed in the section-by-section
analysis below.
Discussion
The Agencies believe that the exemption in Sec.
1026.35(c)(2)(viii)(B) for loans secured by manufactured homes and not
land promotes the safety and soundness of creditors in part because the
exemption makes it possible for creditors to continue making these
loans, which may be an important part of a given creditor's operations;
the Agencies understand that for chattel transactions, compliance with
all of the general HPML appraisal requirements of Sec. 1026.35(c)(3)
through (6) may be infeasible. The condition on the exemption in Sec.
1026.35(c)(2)(viii)(B) is necessary to ensure that the exemption is
also in the public interest, because the condition will ensure that
consumers receive information pertaining to the value of their
manufactured home. The Agencies further believe that by allowing
creditors a menu of options for compliance, the condition will provide
appropriate flexibility to the creditor to select which materials it
deems most cost-effective. The Agencies also believe that having this
information before consummation of the loan can be useful to the
consumer, and is consistent with the timing of the general HPML
appraisal requirement that the creditor must give the consumer a copy
of the appraisal three days before consummation.\118\ See Sec.
1026.35(c)(6)(ii).
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\118\ Having this information three days before consummation
also will allow borrowers the opportunity to discuss it with a HUD-
certified housing counselor whose participation in the transaction
prior to consummation is mandated for loans under the Bureau's 2013
HOEPA Final Rule, to be codified at 12 CFR 1026.34(a)(5). The role
of the HUD-certified housing counselor specifically includes helping
borrowers ``avoid inflated appraisals.'' See HUD Housing Counseling
Program Handbook 7610.1 (May 2010), Ch. 1-2.
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TILA Section 129H ensures that, before consummation of a ``higher-
risk mortgage,'' creditors obtain a valuation of the home and provide a
copy to the consumer. 15 U.S.C. 1639h. The statute focuses on
transactions with a higher risk profile (i.e., those with higher
interest rates and which are not qualified mortgages). For these
riskier transactions, the statute sets standards that are intended to
reduce the risk of inflated valuations of the ``dwelling,'' and grants
consumers a right to know the appraised value of the ``dwelling''
before entering into these transactions.\119\ A manufactured home is a
``dwelling'' under regulations implementing TILA.\120\ Indeed,
transactions secured by manufactured homes and not land comprise a
substantial proportion of the overall annual housing transactions that
are HPMLs and not qualified mortgages.\121\ The Agencies therefore
believe that Congress intended for TILA Section 129H to provide
protection against inflated valuations and transparency to borrowers in
this housing segment.
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\119\ U.S. House of Reps., Comm. on Fin. Servs., Report on H.R.
1728, Mortgage Reform and Anti-Predatory Lending Act, No. 111-94
(May 4, 2009) (House Report), at p. 56 (noting that when faulty
valuation methods lead to overvaluation, individuals ``may later
encounter difficulty in refinancing or selling a home because the
true value of the property used as collateral is less than the
original mortgage.'').
\120\ 12 CFR 1026.2(19).
\121\ The Bureau's Section 1022 analysis estimates that around
20,000 but potentially more of these transactions occur annually.
Potential for a higher number of affected loans results from
variables that determine whether a loan is a qualified mortgage that
require access to information that is not available for these loans,
such as the debt-to-income ratio.
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Nonetheless, based upon outreach and comments on the 2012 Proposed
Rule and further outreach and comments on the 2013 Supplemental
Proposed Rule, the Agencies believe that the precise form of valuation
specified in the statute--an appraisal by a state-certified or -
licensed appraiser in conformity with USPAP and FIRREA, based upon a
physical inspection of the interior of the home--is infeasible for this
housing segment at this time. A steady supply of state-certified or -
licensed appraisers to service thousands of these transactions annually
starting on January 18, 2014, does not yet exist.
Even if more state-certified or -licensed appraisers were able to
perform appraisals for transactions secured by a manufactured home and
not land in the future, the Agencies recognize that sources of data on
[[Page 78557]]
comparable sales for transactions secured by a manufactured home and
not land may not be as robust as sources of data on sales of
transactions secured by a home and land.\122\ As a result, the Agencies
believe that, absent an exemption, creditors could be unable to comply
with the HPML appraisal requirements in a substantial number of
transactions secured by a manufactured home and not land. Thus, the
Agencies have concluded that an exemption from a requirement to perform
appraisals in conformity with USPAP and FIRREA for these transactions
would promote the safety and soundness of creditors and be in the
public interest by allowing the transactions to occur without requiring
use of a valuation method that is infeasible in a large number of
cases.
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\122\ Whereas appraisals of a land/home transaction are not
always limited to the use of manufactured housing transactions as
comparables, in transactions secured only by the home, the universe
of comparables is generally limited to manufactured homes.
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At the same time, the risk of inflated valuations in these
transactions can contribute to increased default risk,\123\ which runs
counter to both the safety and soundness of creditors and the public
interest. The Agencies are concerned, based on research, outreach, and
comments received, that these transactions can be prone to inflated
valuations and associated risks of under-collateralization, leading to
loans where the consumer has little, no, or even negative equity in the
home.\124\ The Agencies believe that an unconditional exemption for
these transactions at a minimum would not adequately account for the
risks of under-collateralization.
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\123\ See Enterprise Duty to Serve Underserved Markets, Proposed
Rule, 75 FR 32099, 32014 (June 7, 2010) (FHFA finding that
``[i]nterest rates charged for chattel loans are typically higher
than those for real estate-secured loans'' and that
``[d]elinquencies and defaults on chattel loans typically exceed
rates on mortgage loans.'').
\124\ See, e.g., Consumers Union Southwest Regional Office,
``Manufactured Housing Appreciation: Stereotypes and Data'' (Aug.
2003), p. 4 (asserting that depreciation is but one factor leading
to ``underwater'' homes and that ``many industry practices [ ] lead
to very high loan-to-value ratios. Fees, points and overpriced,
unneeded add-ons (such as vacations, cash rebates and single-premium
credit life) raise the loan balance without adding value to the
home. This can contribute to a deficiency balance by removing equity
and placing the loan underwater.''). See also id. at 14 (``One
contributing factor to an initial drop [in the value of a
manufactured home] can be inflated retailer mark-ups embedded in the
price of a home.'').
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The effect of an inflated valuation on consumers and their risk of
default can be even more pronounced in these transactions. Chattel
lending generally carries higher interest rates, which could result in
a significant number of HOEPA loans.\125\ Further, several industry
commenters indicated that manufactured home loans would be less likely
to be qualified mortgages than other types of mortgages because their
points and fees would typically exceed thresholds set by the Bureau's
2013 ATR Final Rule. See Sec. 1026.43(e)(3). At the same time,
consumers borrowing these loans are disproportionately in the LMI
segment.\126\ Higher loan amounts resulting from inflated valuations,
combined with the comparatively high interest rates on these loans, can
generate payments that pose significant burdens on LMI consumers and
can put them at greater risk of default.
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\125\ See, e.g., Bureau's 2013 HOEPA Final Rule, 78 FR 6856,
6876 (Jan. 31, 2013) (noting that Congress set a higher APR
threshold for HOEPA coverage of loans secured by manufactured homes
titled as personal property--8.5 percentage points--and that under
this test, industry commenters estimated that between 32 and 48
percent of recent originations would be covered).
\126\ See, e.g., Howard Baker and Robin LeBaron, Fair Mortgage
Collaborative, Toward a Sustainable and Responsible Expansion of
Affordable Mortgages for Manufactured Homes (March 2013) at 9 (``In
2009, the median household income of households in manufactured
homes was under $30,000--well below the national average of $49,777.
More than one-fifth (22 percent) of manufactured housing residents
have incomes at or below the Federal poverty level.''). This report
is available at http://cfed.org/assets/pdfs/IM_HOME_Loan_Data_Collection_Project_Report.pdf.
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Outreach and comments from the 2012 Proposed Rule and 2013
Supplemental Proposed Rule have not shown that existing industry
practices or standards necessarily would be sufficient to control the
risk of inflated valuations in these transactions, or ensure that
consumers are informed of the home value in these transactions. To
compound the concern, most of these transactions are not subject to
valuation standards imposed by Federal law or regulation or Federal
agency or GSE programs. The FHA Title I Manufactured Housing Loan
Insurance Program is the only program at the Federal level that covers
these transactions; no other Federal agency or GSE has programs for
loans secured by a manufactured home and not land. The FHA Title I
program includes valuation requirements and loan amount caps to
mitigate against the risk of inflated valuations, but currently most
transactions secured by a manufactured home and not land are not
insured by that program. Some of these transactions are originated by
Federally regulated financial institutions subject to FIRREA's
appraisal and evaluation requirements, but the FIRREA regulations and
related Interagency Appraisal and Evaluation Guidelines apply only to
real estate transactions.\127\ Under current State laws, the collateral
in transactions secured by a manufactured home and not land is not
typically classified as real property.
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\127\ 75 CFR 77450, 77456 n.12 (Dec. 10, 2010) (noting that
scope is for Federally-related transactions, which are real-estate
related under 12 U.S.C. 3339 and 12 U.S.C. 3350(4)).
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In addition, all creditors are subject to Regulation Z's interim
final valuation independence rule (Valuation Independence Rule) for
consumer credit secured by chattel, but the valuation service providers
are not, due to a limitation in the current rule.\128\ The Valuation
Independence Rule applies to creditors and ``settlement service''
providers of covered transactions.\129\ Under the rule, ``settlement
service'' is defined under RESPA and implementing regulations
(Regulation X).\130\ Under RESPA and Regulation X, a ``settlement
service'' is limited to services for ``Federally related mortgage
loans,'' which include only loans secured by real property.\131\ Thus,
valuation service providers for transactions secured by personal
property, such as many transactions secured by a manufactured home and
not land, are not covered under Regulation Z's Valuation Independence
Rule.
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\128\ Bureau: 12 CFR 1026.42; Board 12 CFR 226.42.
\129\ Bureau: 12 CFR 1026.42(b)(1) and (2); Board 12 CFR
226.42(b)(1) and (2).
\130\ See id.; see also 12 U.S.C. 2602(3) and 24 CFR 1024.2.
\131\ 12 CFR 1024.2.
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Further, commenters indicated that consumers in transactions
secured by manufactured homes and not land do not currently receive
information about the value of their homes. Participants in informal
outreach and research conducted by the Agencies similarly indicated
that consumers for these loans are not familiar with independent
information about home values and may be subject to high-pressure sales
tactics that tend to limit consumer's consideration of their choices
and pursuit of independent information.
Finally, while consumers might receive valuations in some of these
transactions under the Bureau's 2013 ECOA Valuations Final Rule,\132\
creditors might not always obtain a valuation subject to disclosure to
the consumer under that rule. For example, in new manufactured home
transactions without land, outreach and comments indicated that
creditors often rely primarily upon the manufacturer's invoice when
determining the maximum loan amount. The manufacturer's invoice is not
subject to
[[Page 78558]]
disclosure under the 2013 ECOA Valuations Final Rule.\133\ In addition,
the maximum loan amount is not necessarily a valuation subject to
disclosure under ECOA, and could well exceed caps defined under HUD
regulations that serve to prevent over-financing, under-
collateralization, and underwater loans.\134\ Accordingly, even if that
amount were disclosed to consumers under the 2013 ECOA Valuations Rule,
it would not necessarily impart meaningful, independent information to
the consumer about the value of the home.
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\132\ See 12 CFR 1002.14.
\133\ See 12 CFR 1002.14, comment 14(b)(3)-3.iv.
\134\ See 24 CFR 201.10(b)(1).
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The Agencies therefore are adopting a condition on the exemption to
ensure that valuation information from an independent source is
obtained and is transparent to the consumer. The condition requires the
creditor to obtain and provide to the consumer, no later than three
days before consummation, certain information related to the value of
the manufactured home securing the covered HPML.\135\
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\135\ ``Consummation'' would have the same meaning as in Sec.
1026.35(c)(6)(ii), requiring that a copy of any appraisal obtained
under Sec. 1026.35(c)(6)(i) be given to the consumer no later than
three business days prior to consummation of the covered HPML--
namely, as defined elsewhere in Regulation Z at 12 CFR 1026.2(a)(13)
and accompanying Official Staff Commentary. Under those provisions,
``consummation'' means ``the time that a consumer becomes
contractually obligated on a credit transaction,'' which is
determined by state law. Sec. 1026.2(a)(13) and comment 2(a)(13)-1.
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The Agencies have identified three types of materials, any one of
which can be provided, as further discussed below.
Providing a copy of a manufacturer's invoice used by a creditor for
a transaction secured by a new manufactured home. Under Sec.
1026.35(c)(2)(ii)(B)(1), a creditor on a loan secured by a new
manufactured home and not land may be exempt from the HPML appraisal
rules if the creditor gives the consumer a copy of the manufacturer's
invoice, which is defined consistent with HUD manufactured home program
regulations. See Sec. 1026.35(c)(1)(iv) and accompanying section-by-
section analysis.
Outreach and comments consistently indicated that in these
transactions, creditors use the invoice as the primary source for
calculating a maximum loan amount. For that reason, several commenters
generally supported providing a copy of the invoice to consumers as a
means of informing them of pertinent valuation information. A national
manufactured housing trade association also asserted that it is
standard practice for manufacturers to certify the authenticity and
accuracy of the wholesale cost of the home at the point of manufacture.
The Agencies are adopting a limitation on the option to provide the
manufacturer's invoice: the invoice may be provided to satisfy the
condition only if the date of manufacture of the home was within 18
months of the creditor's receipt of the consumer's application for
credit. This limitation is generally consistent with FHA Title I
regulations, which incorporate the practice of using manufacturers'
invoices as a reference point for determining safe and sound loan
amounts for insuring transactions secured by new manufactured homes.
Specifically, FHA Title I rules limit the use of this practice to homes
manufactured within 18 months of purchase by the consumer.\136\ The
Agencies believe that this limitation will help prevent the use of
invoices that are too dated to reflect reliably the current value of
the manufactured home.
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\136\ 24 CFR 201.21(b)(2)(i) (defining a ``new manufactured
home'' for which a manufacturer's invoice may be used as ``one that
is purchased by the borrower within 18 months after the date of
manufacture and has not been previously occupied.'' See also HUD TI-
481, Appendix 2.
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Creditors commonly obtain and rely on the manufacturer's invoice
and consumer advocates, affordable housing organizations, and others,
however, have asserted that consumers should have access to information
that creditors use. If creditors have the invoice, providing a consumer
with a copy imposes little burden.
The Agencies note that some commenters were concerned that the
manufacturer's invoice contains sensitive wholesale pricing information
and that the wholesale invoice from the manufacturer will not match the
retail price paid by the consumer. The Agencies recognize that the
retail price will include a markup for various costs. Commenters and
industry participants in outreach indicated that in transactions
secured by new manufactured homes, the maximum loan amount typically is
determined by applying a percentage markup to the manufacturer's
invoice. Outreach indicated that this markup can vary among creditors,
in some cases significantly. The Agencies are not aware of any
regulatory standards governing the extent of this markup other than
limitations in the FHA Title I program, which only covers a small
subset of these loans currently. The FHA Title I limitations do not
permit a markup on the manufacturer's invoice of more than 130 percent
when calculating the maximum insurable loan amount, and HUD has other
detailed standards for determining what other charges can be factored
into the maximum loan amount.\137\ Most manufactured housing
transactions are not subject to these restrictions, leaving the markup
to be determined by the creditor's tolerance for risk, and thus subject
to risk of inflated valuation.
---------------------------------------------------------------------------
\137\ See 24 CFR 201.10((b)(1).
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The Agencies believe that providing the manufacturer's invoice to
consumers will give them an opportunity to have a better understanding
of the factors contributing to the loan amount and its relationship to
the value of the home.\138\ In transactions secured by a home and land
under GSE and Federal agency programs, the appraiser is required to
receive a copy of this invoice and must disclose in the appraisal
report how it was considered.\139\
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\138\ See, e.g., Consumers Union Southwest Regional Office,
``Manufactured Housing Appreciation: Stereotypes and Data'' (Apr.
2003) at 14, available at http://consumersunion.org/pdf/mh/Appreciation.pdf (``One contributing factor to an initial drop can
be inflated retailer mark-ups embedded in the price of a home.
Consumers who pay too much for any home will find it harder to sell
it later for a higher price. Retailer markups can be a quarter of
the base price of the home. Consumers should question what value
they get from this middleman, and take steps to minimize costs that
don't add value to the home. Buying direct from the last owner in a
used transaction may reduce this overhead, as can buying direct from
manufacturers when possible.'').
\139\ Fannie Mae Single-Family Selling Guide, B5-2.2-04 (4/1/
09); Freddie Mac Single-Family Seller/Servicer Guide, H33.6 (2/10/
12). See also 24 CFR 201.10(b)(1) (HUD regulations requiring that
the loan amount be determined with reference to the invoice).
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Under the final rule, creditors also may choose to communicate the
nature or extent of this markup to consumers when providing the
manufacturer's invoice. In this case, the manufacturer's invoice will
provide an opportunity for questions from consumers to assess whether
the markup leads the collateral to be over-valued. As noted above, HUD-
certified counselors, required for HOEPA transactions and available for
others, also can assist consumers in answering any questions. The
Agencies have sought to accommodate remaining concerns over providing
the manufacturer's invoice by providing other compliance options that
could be used in new manufactured home transactions (including that the
loan might qualify for another exemption under Sec.
1026.35(c)(2)).\140\
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\140\ See, e.g., Sec. 1026.35(c)(2)(i); see also 78 FR 59890,
59901 (Sept. 30, 2013) (HUD proposing that manufactured home loans
insured under Title I would be qualified mortgages under HUD
regulations, even if their points and fees exceed the cap under the
Bureau's qualified mortgage definition, Sec. 1026.43(c)(3)).
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Providing a cost estimate from an independent cost service
provider.
[[Page 78559]]
Section 1026.35(c)(2)(ii)(B)(2) gives the creditor the option of
providing a cost estimate from an independent third-party cost service
provider. Comment 35(c)(2)(ii)(B)(2)-1 clarifies that a cost service
provider from which the creditor obtains a manufactured home unit cost
estimate under Sec. 1026.35(c)(2)(ii)(B)(2) is independent if that
party is not affiliated with the creditor in the transaction, such as
by common corporate ownership, and receives no direct or indirect
financial benefits based on whether the transaction is consummated.
As noted above, the Agencies recognize that creditors may choose
not to provide a copy of the manufacturer's invoice for new
manufactured home transactions. In addition, appraisers or valuation
providers may be unavailable for some transactions. Thus, including
this additional option is important to ensure that the consumer can
receive a unit cost estimate of the value of the home from an
independent source. Commenters and outreach indicated that this type of
estimate is the predominant method used for transactions secured by an
existing manufactured home and not land. Based upon comments from a
national cost service provider confirming that its cost guide reports
values for the current model year, the Agencies also believe this type
of cost service also could be used for many new manufactured home
transactions. The Agencies learned from one cost service that an
adjustment for ``new or like new'' is available through its cost guide,
and that this guide is updated multiple times per year.
The information provided by an independent cost service provider
can provide a useful outside check against inflated valuations. At the
same time, the check will not prohibit transactions above the value
reflected in the cost service. Rather, the check will make sure that if
transactions occur above those values, creditors and consumers have the
opportunity to know that fact and evaluate the transaction accordingly.
Interior inspections and adjustments. The Agencies are not
requiring physical inspections of the interior or condition or location
adjustments to the cost service values. In this way, the condition
ensures that the creditor can readily identify the information to be
provided to the consumer (based upon the make and model and year of the
manufactured home unit) from an independent source, without being asked
to interject subjective or discretionary considerations.
Interior inspections by an appraiser for new manufactured homes may
often be of limited value, given the associated expense. For
transactions secured by new manufactured homes, as indicated by
industry commenters, HUD and State inspectors conduct inspections to
ensure the proper construction and installation of the home.\141\ Some
commenters asserted that an interior inspection could confirm the
existence of extras or options that were promised. The Agencies
believe, however, that consumers themselves can confirm that they
received extras or options ordered. Regarding adjustments, the Agencies
understand that cost services may offer adjustments of standard
estimates to reflect that the unit is in ``new or like new'' condition.
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\141\ See generally, 24 CFR parts 3280, 3282, and 3286.
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For existing manufactured homes, information about the condition of
the interior can be an important factor affecting the valuation. Due to
concerns with burden, complexity, and reliability of such adjustments,
though, the Agencies are not mandating that adjustments be made. At the
same time, the rule does not prohibit creditors from making this
adjustment to the unit-cost estimate of an existing manufactured home.
Accordingly, comment 35(c)(2)(viii)(B)(2)-2 clarifies that the
requirement that the cost estimate be from an independent cost service
provider does not prohibit a creditor from providing a cost estimate
that reflects adjustments to factors such as special features,
condition or location. The comment explains, however, that the
requirement that the estimate be obtained from an independent cost
service provider means that any adjustments to the estimate must be
based on adjustment factors available as part of the independent cost
service used, with associated values that are determined by the
independent cost service.
For both new and existing manufactured homes, the location can
enhance or, in some cases, reduce the value of the home. A consumer
advocate group, affordable housing organizations, and others emphasized
that cost service data does not adequately account for the contribution
of location to the value of the home. The manufactured home can be
resold as a trade-in or repossessed, however, in which case its value-
in-place is not what is relevant to the consumer. Further, as noted
above, location adjustments can introduce greater subjectivity into the
information provided. Therefore, the rule does not mandate that a
location adjustment be made. Providing the unit value will enable
consumers to compare the cost estimate from the published cost service
to the line item charge in the sales contract for the base unit.
Finally, some commenters expressed concerns over accuracy or
undervaluation in the unit cost estimates published by third-party cost
services. These commenters did not provide data to support their views,
however. In addition, while some comments noted that the unit cost
estimate is not the same as an estimate of the retail market value, the
Agencies recognize that this type of estimate nonetheless is widely
used by creditors currently as a guideline for the value of an existing
manufactured home. In some cases, it therefore may represent the best
available, most cost-effective estimate of the value of the home.
Further, the Agencies are structuring the exemption condition so that
the creditor has the discretion to choose which of the specified types
of valuation materials it finds most suitable for informing the
consumer of the estimated value of the home. Thus, if a creditor
believes an independent cost service generally undervalues manufactured
homes, the creditor can provide other forms of valuation information as
described below, as well as its own accompanying explanatory
information.
Providing a valuation by a trained manufactured home valuation
provider. Section 1026.35(c)(2)(ii)(B)(3) allows a creditor to provide
an appraisal conducted by a person who has no direct or indirect
interest, financial or otherwise, in the property for which the
valuation is performed and has training or experience in valuing
manufactured homes. ``Valuation'' is defined as in Sec. 1026.42(b)(3)
of the Bureau's Valuation Independence Rule, which defines
``valuation'' to mean ``an estimate of the value of the consumer's
principal dwelling in written or electronic form, other than one
produced solely by an automated model or system.'' \142\
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\142\ See 12 CFR 226.42(b)(3) for the definition of
``valuation'' in the Board's substantially similar version of the
valuation independence rule.
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Comment 35(c)(2)(ii)(B)(3)-1 provides that the manufactured home
valuation provider would have a direct or indirect interest in the
property if, for example, the person had any ownership or reasonably
foreseeable ownership interest in the manufactured home. To illustrate,
the comment states that a person who seeks a loan to purchase the
manufactured home to be valued has a reasonably foreseeable ownership
interest in the property.
[[Page 78560]]
Comment 35(c)(2)(ii)(B)(3)-2 clarifies that the valuation provider
would have a direct or indirect interest in the transaction if, for
example, the manufactured home valuation provider or an affiliate of
that person also served as a loan officer of the creditor or otherwise
arranges the credit transaction, or is the retail dealer of the
manufactured home. The comment further states that a person also has a
prohibited interest in the transaction if the person is compensated or
otherwise receives financial or other benefits based on whether the
transaction is consummated.
Comments 35(c)(2)(ii)(B)(3)-1 and -2 are generally based on
comments 42(d)(1)(i)-1 and -2 of Regulation Z's Valuation Independence
Rule.\143\ As discussed previously, the Valuation Independence Rule
applies to all creditors of transactions secured by a consumer's
principal dwelling, but applies to ``settlement service'' providers
only for transactions secured by real property.\144\ However, the
Agencies believe it prudent to apply the principles of Regulation Z's
Valuation Independence Rule to valuations that may be used in lieu of
complying with the general HPML appraisal requirements for transactions
secured by manufactured homes and not land, which might not be titled
as real property.
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\143\ Bureau: 12 CFR 1026.42; Board: 12 CFR 226.42.
\144\ Bureau: Sec. 1026.42(b)(1) and (2); Board Sec.
226.42(b)(1) and (2).
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Comment 35(c)(2)(viii)(B)(3)-3 clarifies that ``training''
referenced in Sec. 1026.35(c)(2)(viii)(B)(3) includes, for example,
successfully completing a course in valuing manufactured homes offered
by a State or national appraiser association or receiving job training
from an employer in the business of valuing manufactured homes.
Comment 35(c)(2)(viii)(B)(3)-4 provides an example of a
manufactured home valuation that would satisfy the requirements of the
condition in Sec. 1026.35(c)(2)(viii)(B)(3). Specifically, the comment
states that a valuation in compliance with Sec.
1026.35(c)(2)(viii)(B)(3) would include, for example, an appraisal of
the manufactured home in accordance with the appraisal requirements for
a manufactured home classified as personal property under the Title I
Manufactured Home Loan Insurance Program of HUD (administered by FHA),
pursuant to section 2(b)(10) of the National Housing Act, 12 U.S.C.
1703(b)(10).
The Agencies included this comment in recognition that one of the
more well-developed standards for the valuation of manufactured homes
and not land is found in the FHA Title I program.\145\ When an existing
manufactured home is classified as personal property, FHA Title I
requires creditors to, among other things: (1) Use an appraiser
certified to use the NAS or, if the lender is unable to locate an NAS-
certified appraiser, an appraiser from the FHA Title II mortgage
program who certifies having experience appraising manufactured homes;
\146\ (2) obtain an appraisal performed on the home site where possible
and that reflects the retail value of comparable manufactured homes in
similar condition and in the same geographic area; and (3) review the
appraisal to verify, among other things, that the correct cost service
unit value was used and proper condition adjustment was made.\147\
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\145\ See HUD TI-481, Appendix 2-1, D (General Program
Requirements--Eligible Homes).
\146\ When the home is classified as real property, the
appraisal must be completed by a real estate appraiser on the FHA
Title II roster who can certify prior experience appraising
manufactured homes as real property. The Agencies believe it is
useful to incorporate the general standard, in case states adopt
model laws treating manufactured homes as real property even when
they are not affixed to land and the land does not provide security
for a loan. See HUD TI-481, Appendices 8-9, C, and 10-5.
\147\ See HUD TI-481, Appendices 8-9, C, and 10-5.
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As noted in the 2013 Supplemental Proposed Rule, the Agencies are
aware that fewer than 100 individuals are currently certified to use
this system, although many more have been certified in the past and may
have incentives to obtain the certification in the future. This factor
provides further support for the Agencies' decision to allow creditors
multiple options to comply with the condition.
Consumer and affordable housing advocate commenters supported the
long-term goal of applying an appraisal standard to transactions
secured by a manufactured home and not land. At the same time,
manufacturer housing industry commenters generally supported a long-
term effort to further refine and develop valuation methods for
manufactured homes. The Agencies believe that adopting a condition that
furthers these goals is in the public interest. To allow flexibility
for these and other valuation methods to evolve, the Agencies seek to
avoid prescriptive, detailed requirements on the valuation method.
Rather, the Agencies seek generally to define who is eligible to
perform the valuation, and leave the method to that person's judgment
and expertise as appropriate for the scope of work required. As noted
above, two national appraisal trade associations noted that state-
certified or -licensed appraisers are not the only persons who could
value manufactured homes. For example, some commenters identified an
existing product prepared by a company who hires individuals trained in
the valuation of manufactured homes. The company generates a report
that estimates the value of a given manufactured home using local data
on comparable sales.
Accordingly, under this alternative, the creditor must provide the
consumer with a valuation prepared by one or more individuals who do
not have a direct or indirect financial interest in the property or the
transaction, and who have training in the valuation of manufactured
homes. The Agencies are adopting comments to provide further guidance
on how creditors can satisfy these criteria. Finally, it may follow
from the exercise of independent judgment and application of this
training that the individual will conduct a physical inspection of the
interior, or assess the condition or value of the location of the home.
But as noted, at this time, the Agencies are not specifying these steps
as necessary elements of a valuation that satisfies the condition.
Several industry commenters indicated that HUD appraisal
requirements in transactions secured by manufactured homes have led to
higher frequency of appraisals where the value of the home is below the
purchase price. At least one commenter indicated this occurred in Title
I transactions secured by existing manufactured homes. Some commenters
and outreach participants attributed high numbers of appraised values
that are lower than the purchase price to an over-emphasis on the use
of manufactured homes as comparables in FHA and other manufactured home
credit programs. They suggested, for example, that manufactured homes
comparables in the geographic area might be much older than the home
being appraised. The Agencies are concerned, however, that other
factors can contribute to higher rates of appraised values lower than
the purchase price, such as inflated purchase prices and corresponding
loan amounts.
The Agencies believe that, on balance, appraising manufactured
homes in transactions that are not also secured by land can be an
effective way to account for the many factors that contribute to the
value of the home, including home condition, location, re-sale
conditions, and lease terms, among others.
[[Page 78561]]
Other Issues
Delay in issuing rules on manufactured home loans. As discussed
under ``Public Comments,'' commenters on behalf of consumers and
industry generally expressed support in principle for ensuring that
consumers receive valuation information in exempt transactions.
Industry commenters raised a number of concerns over the utility to
consumers of information generated through current valuation practices,
however. Several consumer and affordable housing groups expressed a
similar concern over the quality of current valuation methods (citing,
for example, concerns over the reliability of a cost estimate of the
unit from a third-party source). They nonetheless stated that creditors
should still be required to provide a copy of the collateral valuation
information that is used by the creditor (i.e., manufacturer's invoice
in new manufactured home transactions). These commenters also suggested
that the Agencies engage in further study of manufactured housing
valuation issues before adopting further conditions.
The Agencies note, however, that manufactured housing valuation
practices and issues have been the subject of significant requests for
comment and outreach in two separate proposals, and have generated
detailed comment from representatives of industry, consumer advocates,
and appraisers alike. The Agencies believe that the current public
record sufficiently supports adopting conditions in this final rule.
While the Agencies are allowing additional 18 months for conditions to
be implemented, deferring their adoption pending further study would
not promote safety and soundness and be in the public interest.
Thousands of consumers would be without the protections during any
further study. It also is unclear that further study, beyond the two
years of study already undertaken, would generate material improvements
to the approach taken here.
Steering. Some consumer group and affordable housing commenters
also expressed concern that consumers might be steered into higher-rate
chattel transactions with fewer consumer protections if the final rule
provided an unconditional exemption for transactions secured by a
manufactured home and not land. For example, consumers could be steered
away from an HPML transaction secured by both the home and land to
avoid the HPML appraisal requirements (see Sec. 1026.35(c)(2)(viii),
effective July 18, 2015). Creditors might also structure what otherwise
would be a packaged land/home transactions into two transactions--one
secured solely by the home and one by land. The Agencies believe that
some of these concerns are mitigated by other laws and regulations.
Such practices might be subject to scrutiny under consumer protection
laws at the State and Federal level. For example, regulations may apply
that generally prohibit a loan originator from steering a consumer to a
transaction based on the fact that the originator will receive greater
compensation (which could result from an over-valuation of the home,
leading to a higher loan amount).\148\ The Agencies believe that some
of the concerns about steering may be mitigated by conditioning the
exemption for manufactured home-only transactions on the creditor
having to provide alternative valuation information to the consumer.
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\148\ See, e.g., Sec. 1026.36(e)(1) (prohibiting steering
consumers to earn greater compensation). The Agencies will monitor
application of the rule in this regard.
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Effective date. The Agencies recognize creditors will need time to
make necessary adjustments to their compliance systems to be able to
comply with the condition. For example, creditors will need to adjust
their systems to identify transactions that would need to rely on the
exemption (e.g., HPMLs that are not eligible for exemptions for loans
that satisfy the criteria of a qualified mortgage, transactions in an
amount of $25,000 or less, or other exemption types (see Sec.
1026.35(c)(2)),\149\ to determine which types of valuation materials to
obtain for these transactions, and to develop a mechanism for providing
these to the consumer no later than three days prior to consummation.
Creditors also will need to ensure that they have access to the
valuation materials they choose to use. To ensure adequate time to
implement these and any other necessary steps, and that these
transactions remain available to consumers in the interim period, the
Agencies are delaying implementation of the condition for 18 months
after the effective date of the HPML Appraisals Rules, until July 18,
2015.
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\149\ Transactions secured by a manufactured home would not
typically be eligible for the exemption for initial construction
loans, 12 CFR 1026.35(c)(2)(iv), because that exemption is designed
for temporary initial financing that is replaced with permanent
financing when the construction phase is complete. See comment
35(c)(2)(iv)-1.
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Sunset. Finally, the Agencies are not adopting an expiration date
for the conditional exemption for transactions secured by a
manufactured home and not land. Some commenters suggested that a
``sunset'' date would provide an incentive for the appraiser and
manufactured home lending industries to improve capacity and methods
for conducting appraisals that would comply with USPAP and FIRREA.
However, it is unclear that a sunset date would promote this outcome.
At the same time, a sunset date would create risk for this important
source of affordable housing if capacity and methods are not developed
by that date. The Agencies believe that a better way to promote
improved capacity and methods is to allow the condition to be satisfied
through the use of existing methods. This is therefore another reason
why the Agencies are allowing the third option for satisfying the
condition--appraisals performed by independent and trained individuals.
35(c)(6) Copy of Appraisals
35(c)(6)(ii) Timing
In the January 2013 Final Rule, Sec. 1026.35(c)(6)(ii) requires
that a creditor provide a copy of any appraisal obtained in compliance
with the HPML appraisal rules to the consumer ``no later than three
business days prior to consummation of the loan.'' Comment
35(c)(6)(ii)-2 provides that, for appraisals prepared by the creditor's
internal appraisal staff, the date that a consumer receives a copy of
an appraisal as required under Sec. 1026.35(c)(6) is the date on which
the appraisal is completed. In the 2013 Supplemental Proposed Rule, the
Agencies proposed to delete this comment as unnecessary, because the
relevant timing requirement is based on when the creditor provides the
appraisal, not when the consumer receives it. See Sec.
1026.35(c)(6)(i).
Public Comments
A State credit union association commenter requested that the
Agencies allow flexibility in providing a copy of the appraisal three
days before closing because it is difficult to obtain an appraisal in
time to do so, requiring closing to be rescheduled, which can be
difficult. The commenter requested that consumers be permitted to waive
the requirement if it is in their best interest to do so.
The Final Rule
The Agencies are adopting the proposal to delete comment
35(c)(6)(ii)-2 without change, and re-numbering comment 35(c)(6)(ii)-3
as 35(c)(6)(ii)-2. The Agencies are not adding a waiver option to the
timing requirement for providing a copy of the appraisal to the
[[Page 78562]]
consumer. Re-numbered comment 35(c)(6)(ii)-2 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 HPMLs subject to Sec. 1026.35(c).\150\ The comment
further clarifies that a consumer of an HPML 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).
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\150\ ECOA section 701(e)(2), 15 U.S.C. 1691(e)(2), implemented
in the 2013 ECOA Valuations Final Rule, Regulation B Sec.
1002.14(a)(1), effective January 18, 2014.
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The Agencies believe that allowing the consumer to waive the timing
requirement for providing a copy of the appraisal would be inconsistent
with the statute. ECOA expressly provides that the consumer may waive
the three day timing requirement for the creditor to provide a copy of
the appraisal to the consumer under ECOA.\151\ By contrast, Congress
did not amend TILA to include a parallel waiver provision regarding the
same requirement in the context of appraisals for HPMLs. See TILA
section 129H(c), 15 U.S.C. 1639h(c). The Agencies interpret TILA's lack
of a waiver provision to indicate that Congress did not intend to allow
consumers of loans covered by the HPML appraisal rules to waive the
timing requirement.
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\151\ ECOA section 701(e)(2), 15 U.S.C. 1691(e)(2), implemented
in 12 CFR 1002.14(a)(1), effective January 18, 2014.
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VI. Bureau's Dodd-Frank Act Section 1022(b)(2) Analysis \152\
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\152\ The analysis and views in this Part VI reflect those of
the Bureau only, and not necessarily those of all of the Agencies.
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In developing this supplemental rule, the Bureau has considered
potential benefits, costs, and impacts to consumers and covered
persons.\153\ In addition, the Bureau has consulted, or offered to
consult with HUD and the Federal Trade Commission, including regarding
consistency with any prudential, market, or systemic objectives
administered by those agencies. The Bureau also held discussions with
or solicited feedback from the USDA, RHS, and VA regarding the
potential impacts of this supplemental rule on their loan programs.
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\153\ 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.
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In this supplemental final rule, the Agencies are exempting the
following three additional classes of higher-priced mortgage loans
(HPMLs) from the January 2013 Final Rule: (1) HPMLs whose proceeds are
used exclusively to satisfy (i.e., refinance) an existing first lien
loan and to pay for closing costs, provided that the credit risk holder
is the same on both loans (or that the same government agency insures
or guarantees both loans) and the new loan does not have negative
amortization, interest-only, or balloon features; (2) HPMLs that have a
principal amount of $25,000 or less (indexed to inflation); and (3)
certain HPMLs secured by manufactured homes.
As revised in this final rule, the manufactured home exemption
covers all HPMLs secured by manufactured homes for which an application
is received before July 18, 2015. Thereafter, (1) for transactions
secured by a new manufactured home and land, creditors will only be
exempt only from the requirement that the appraiser conduct a physical
visit of the interior; and (2) for transactions secured by a
manufactured home and not land, the exemption applies only if certain
alternative valuation information is provided to the consumer no later
than three days before consummation.
The Agencies are also broadening the exemption for qualified
mortgages adopted in the January 2013 Final Rule beyond the Bureau's
qualified mortgage definition in 12 CFR 1026.43(e) to include any
transaction that meets the criteria of a qualified mortgage established
by agencies with authority to do so under TILA section 129c--the
Bureau, HUD, VA, USDA, and RHS. See 15 U.S.C. 1693c. As revised, this
exemption will include transactions that are qualified mortgages as
defined under any final rule that the Bureau, HUD, VA, USDA, or RHS has
adopted or will adopt under authority at TILA section 129c. See 15
U.S.C. 1693c. In addition, transactions that meet criteria for a
qualified mortgage established under rules prescribed by the Bureau,
HUD, VA, USDA, or RHS are eligible for the exemption even if they are
not ``covered transactions'' under the Bureau's ability-to-repay rules
(and thus not technically defined as ``qualified mortgages'' under each
of the respective rules).\154\ For further discussion, see the section-
by-section analysis of Sec. 1026.35(c)(2)(i).
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\154\ Only transactions that are actually insured, guaranteed,
or administered under programs of HUD, VA, USDA, or RHS could be
eligible for the exemption under Sec. 1026.35(c)(2)(i) by being
defined as or meeting the criteria of a qualified mortgage under
rules of those agencies; the authority of those agencies to
determine the features of a qualified mortgage does not extend to
loans that they do not insure, guarantee, or administer. See TILA
section 129c(b)(3)(B)(ii), 15 U.S.C. 1639c(b)(3)(B)(ii).
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A. Potential Benefits and Costs to Consumers and Covered Persons
This analysis considers the benefits, costs, and impacts of the key
provisions of the supplemental rule relative to the baseline provided
by existing law, including the January 2013 Final Rule and the Bureau's
previously issued ATR Rules.\155\ The Bureau considered comments
received on issues related to this analysis. These comments are
addressed below and in the section-by-section analyses.
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\155\ The Bureau has discretion in future rulemakings to choose
the most appropriate baseline for that particular rulemaking.
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1. Economic Overview
This rulemaking consists of the adoption of an expanded qualified
mortgage exemption and five separate provisions regarding HPMLs that do
not qualify for the qualified mortgage status (non-QM). The January
2013 Final Rule demarcated which of those non-QM loans are subject to
requirement for an appraisal in conformity with USPAP and FIRREA with
an interior property visit (the full appraisal) and related notice and
additional appraisal requirements for loans used to purchase certain
flipped properties. The overall impact of these five provisions is
limited to specific segments of the mortgage market, with arguably the
largest impact on transactions secured by a used manufactured home and
not land (provision (3) below). The five provisions for non-QM HPMLs
are:
1. Certain refinances, commonly referred to as ``streamlined,'' are
now exempt from the January 2013 Final Rule;
2. Smaller dollar loans (up to $25,000, indexed to inflation) are
now exempt from the January 2013 Final Rule;
3. Used manufactured housing transactions that are not secured by
land (chattel) are now exempt from the January 2013 Final Rule and, for
applications received on or after July 18, 2015, subject to a condition
that the creditor must give the consumer alternative valuation
information; \156\
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\156\ Used manufactured housing transactions that are secured by
land remain covered by the January 2013 Final Rule, starting with
applications received on or after July 18, 2015. All loans secured
in whole or in part by manufactured home are exempt if the
application is received before July 18, 2015.
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4. New manufactured housing transactions that are not secured by
land (chattel) remain exempt from the January 2013 Final Rule; however,
for applications received on or after July 18, 2015, this exemption
will be subject to
[[Page 78563]]
a condition that the creditor must give the consumer alternative
valuation information; and
5. New manufactured housing transactions secured by land (new land/
home) remain exempt until July 18, 2015; for applications received on
or after July 18, 2015, these transactions will be exempted only from
the physical interior visit part of the January 2013 Final Rule.
In adopting each of these provisions, the Agencies considered
mandating that consumers receive information about the value of their
house at the time of the loan. The Bureau discusses the general
benefits and costs of this type of mandatory information provision, and
then applies this discussion to each of the provisions.
Consumers benefit from knowing the value of the home on which they
are planning to take out a loan. Consumers are able to make decisions
that will better fit their situation if they have a more precise
estimate of what their home is worth. For example, a consumer might
decide, given a home's value, that he or she should not take out the
loan or should consider purchasing a different home whose value in
relation to the loan amount is lower; that they should sell instead of
refinancing; that they should postpone a particular home improvement
and not overinvest in a home that might be worth less than they
thought. Affording consumers a better opportunity to get this decision
right is particularly valuable in home loans because these transaction
sizes are significant relative to income; the large size of the
transaction relative to income may be especially significant in non-QM
HPMLs, which are more costly and may pose greater repayment risk than
other mortgage loans.
No valuation method will give the consumer perfect information
about the home's value. Thus, a consumer might receive a valuation that
overestimates the value and leads to a purchase that should not have
been made; similarly, a valuation that underestimates the value might
lead to no purchase when one should have been made. However, the Bureau
believes that imparting unbiased valuation information to the consumer
is better than the consumer receiving no information, and that consumer
benefits increase with more precise information, whether it's moving
from no information to a manufacturer's invoice, an AVM or similar
estimate, a full appraisal, or some other type of valuation prepared by
an independent trained person.
The cost of providing any additional information on the home value
is directly imposed on the creditor--the creditor has to perform what
is necessary to obtain the home valuation information and provide it to
the consumer. However, since this is mostly a marginal cost and most of
the mortgage markets are relatively competitive, this cost is likely to
be almost fully passed through to the consumer.\157\ The fixed costs,
which are unlikely to be passed through to the consumer in a relatively
competitive market, include developing training materials and providing
training. However, the Bureau believes that the marginal training and
training development costs for the provisions of this supplemental
final rule are non-significant. Creditors will have already developed
and provided training in preparation for complying with the various
requirements of the January 2013 Final Rule, which goes into effect on
January 18, 2014; this supplemental final rule is considerably less
complex, establishing exemptions from those requirements.
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\157\ See, for example, E. Glen Weyl and Michael Fabinger,
``Pass-Through as an Economic Tool: Principles of Incidence under
Imperfect Competition,'' Journal of Political Economy, Vol. 121, No.
3 (Feb. 24, 2013).
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In the world of informed consumers exhibiting fully rational
economic behavior, mandatory information provisions might be
unnecessary--consumers would have decided for themselves whether they
need this information enough to pay for it. However, the Bureau
believes that this is not the best assumption, especially for a market
with many product characteristics, intertemporal investment decisions,
and projections into the distant future. Moreover, even under that
assumption, creditors might have some specialized knowledge making them
able to obtain better information than the consumer could access on
their own.\158\
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\158\ For example, consumers generally cannot access the
manufacturer's invoice for a manufactured house.
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A range of possibilities for a home value information requirement
exists in the non-QM HPML mortgage market. This range has, at one end
of the spectrum, no information provision requirement, and a full
appraisal on the other. Generally, the more precise the information is,
the more expensive the method is. In particular, the Bureau believes
that a full appraisal costs $350 on average as discussed in the Section
1022 analysis in the January 2013 Final Rule.\159\ Not providing any
information is, of course, free to the creditor. An intermediate
solution like an automated valuation estimate (an AVM estimate) would
result in a cost of under $20, as estimated in the 2013 Supplemental
Proposed Rule; \160\ however, an AVM estimate is arguably less precise
than a USPAP appraisal, especially in rural areas. Providing a consumer
with a copy of a manufacturer's invoice (one of the few conditions that
a creditor might satisfy for a non-QM HPML to be exempted from a full
appraisal on chattel manufactured housing) is estimated to cost less
than $5. Moreover, the Bureau's January 2013 ECOA Valuations Rule
already requires the creditor to give the consumer a copy of valuations
performed for the transaction; the Bureau estimates that full
appraisals that are performed 95% of the time for purchases, 90% for
refinances, and 5% for other loans generally in the mortgage market
based upon outreach.\161\
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\159\ 78 FR 10368, 10420 (Feb. 13, 2013).
\160\ 78 FR 48548, 48568 n.91 (Aug. 13, 2013).
\161\ 78 FR 10368, 10419 (Feb. 13, 2013).
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2. Data Used
For all the estimates, both above and below, the data sources used
are described in the 2013 Supplemental Proposed Rule (described in the
next paragraph below). Several commenters stated that for the
completeness of analysis, the Bureau should also examine the impact of
the points and fees criterion for a qualified mortgage under the
Bureau's 2013 ATR Final Rule on the number of HPMLs that are non-
QMs.\162\ The Bureau does not possess any data and is not aware of any
existing data to address this point directly. However, the effect of
points and fees is described further below. The Bureau did not receive
comments raising additional issues regarding the data and the
methodology by which projections were originated.
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\162\ See generally 12 CFR 1026.43(e)-(f) (provisions
identifying types of mortgages that are qualified mortgages under
Bureau rules).
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The Bureau has relied on a variety of data sources to analyze the
potential benefits, costs and impacts of the rule.\163\ However, in
some instances, the
[[Page 78564]]
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.
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\163\ 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 HPMLs in a similar fashion for depositories that do
not report HMDA. 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.
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The primary source of data used in this analysis is data collected
under HMDA. The empirical analysis generally uses 2011 data, including
from the 4th quarter 2011 bank and thrift Call Reports \164\ and 4th
quarter 2011 credit union call reports from the NCUA. De-identified
data from the National Mortgage Licensing System (NMLS) Mortgage Call
Reports (MCR) \165\ for the 4th quarter of 2011 also were used to
identify financial institutions and their characteristics.
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\164\ 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/.
\165\ 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 or this supplemental proposal. Additionally, the
Bureau has thus far not yet received data from the National Mortgage
Database pilot phases.
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In addition, in analyzing alternatives for the exemption for
certain refinances, the Bureau did consider data provided by FHFA and
FHA regarding valuation practices under their streamlined refinance
programs (and in particular regarding the frequency with which
appraisals or automated valuations are conducted).
3. Smaller Dollar Loans
Estimate of the Number of Covered Loans
The Bureau estimates the number of transactions potentially
eligible for the smaller dollar exemption as follows: HMDA data for
2011 indicates there were approximately 25,000 HPMLs at or below
$25,000 that were not insured or guaranteed by government agencies or
purchased by the GSEs (so, not qualified mortgages on that basis). Of
these, the Bureau estimates that 4,800 were HPMLs with DTI ratios above
43 percent (so they would not meet the more general definition of a
qualified mortgage at 12 CFR 1026.43(e)(2)). Accordingly, the Bureau
estimates that approximately 4,800 covered loans are originated
annually in an amount up to $25,000.\166\ Of these estimated 4,800
covered loans, the Bureau estimates that the types most affected by
this exemption, in that they would be unlikely to include appraisals if
the exemption applies, would be home improvement loans, subordinate
lien transactions not for home improvement purposes, and transactions
secured by manufactured homes. Absent an exemption, the HPML appraisal
rules could lead to significant changes in valuation methods used for
these types of loans. For example, current practice includes appraisals
for only an estimated five percent of subordinate lien transactions as
explained in the January 2013 Final Rule.\167\
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\166\ As discussed above, the Bureau does not believe that a
significant number of smaller dollar HPMLs would exceed the points
and fees threshold in the 2013 ATR Final Rule. The Bureau requested
data on this issue in the supplemental proposal. None of the
commenters on the smaller dollar exemption provided this data. If a
significant number of smaller dollar HPMLs did exceed that
threshold, then the number of loans eligible for the exemption would
increase.
\167\ See 78 FR 10368, 10419 (Feb. 13, 2013).
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Covered Persons
Creditors originating smaller dollar HPMLs that are non-QMs would
experience some reduced burden as a result of the exemption for HPMLs
of $25,000 or less. As a result of the exemption, these loans will not
be subject to the estimated per-loan costs described in the January
2013 Final Rule.\168\ For these transactions, creditors do not need to
spend time or resources on complying with the requirements in the HPML
appraisal rules: Checking for applicability of the second appraisal
requirement on a flipped property (in a purchase transaction) and
paying for that appraisal when the requirement applies, obtaining and
reviewing the appraisals conducted for conformity to this rule,
providing a copy of the required disclosure, and providing copies of
these appraisals to applicants. Creditors therefore may find it
relatively easier to originate HPMLs that are eligible for this
exemption. As noted above, the overall impact of this exemption on
creditors is likely minimal for most creditors given that in 2011 only
4,800 loans were potentially eligible for the exemption.
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\168\ See Section 1022(b) analysis, 78 FR at 10418-21.
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Consumers
For consumers who seek to borrow smaller dollar loans, such as home
improvement loans and other subordinate lien transactions, and who are
not able to obtain a qualified mortgage, the exemption for smaller
dollar HPMLs (at or less than $25,000) would provide some benefits.
Industry practice prior to implementation of the January 2013 Final
Rule suggests that appraisals are not otherwise frequently done for
home improvement and subordinate lien transactions.\169\ Thus, by not
requiring an appraisal, the cost of which typically would be passed on
to consumers, the exemption could facilitate access to smaller dollar
HPMLs that are not otherwise exempt from the HPML appraisal rules.
Otherwise, requiring an appraisal for these loans could create
incentives that may not benefit consumers. These incentives can be more
significant for smaller dollar loans, given that the cost of the
appraisal relative to the amount of the loan is higher for smaller
dollar loans. For example, some consumers could try to avoid the cost
of an appraisal by either not entering into a smaller dollar HPML
(unless it is otherwise exempt from the rules, such as a QM) or
pursuing an alternative source of credit that is not subject to the
rules, such as an open-end home equity line of credit or using other
forms of credit that are not dwelling-secured such as a credit card.
Finally, as a result of the exemption, consumers are likely to save
around $350 per loan; if the appraisal requirement applied to these
loans, the Bureau would have expected creditors to pass the cost of the
appraisal on to consumers.
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\169\ 78 FR at 10419.
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Regarding costs to consumers, under the exemption, consumers
entering into smaller dollar HPMLs (that are not otherwise exempt)
would lose the benefits of the Final Rule. As discussed in the Bureau's
analysis under Section 1022 in the January 2013 Final Rule, in general,
consumers who are borrowing HPMLs could benefit from an appraisal.
[[Page 78565]]
For smaller dollar HPMLs that are not purchase transactions, the
general benefits elsewhere may be relatively less valuable to the
consumer in some cases, given the lower size of the loan and also the
likelihood that the consumer already would have had an appraisal in the
original purchase transaction.
Nonetheless, having an appraisal could provide a particularly
significant benefit to those consumers who are informed by the
appraisal that they have significantly less equity in their home than
they realize. A smaller dollar mortgage could push these consumers even
further toward or into negative equity, without the consumer realizing
it. This effect is even more pronounced for consumers whose homes have
lower value. All else equal, a $25,000 loan will pose greater risk to a
consumer whose home is worth $20,000, than to a consumer whose house is
worth $200,000. According to a periodic government survey, as of 2011
more than 2.75 million homes were worth less than $20,000, including a
greater proportion of homes whose owners were below the poverty level
or elderly.\170\ In addition, according to a recent study, as of the
end of 2012, 10.4 million properties with a residential mortgage were
in ``negative equity'' and an additional 11.3 million had less than 20
percent equity.\171\ In addition, some recent studies suggest that
subordinate liens can increase the risk of default, as they reduce the
amount of equity in the home.\172\ Moreover, based upon HMDA data, more
than half of subordinate liens originated in 2011 were at or below
$25,000. Therefore, smaller dollar loans of $25,000 or less could still
pose significant risks to consumers who own these lower-value homes or
other homes that are highly leveraged, consuming most or all of any
remaining equity.
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\170\ See 2011 American Housing Survey, ``Value, Purchase Price,
and Source of Down Payment--Owner Occupied Units (NATIONAL),'' C-13-
OO, available at http://factfinder2.census.gov/faces/tableservices/jsf/pages/productview.xhtml?pid=AHS_2011_C13OO&prodType=table. In
addition, in seven metropolitan statistical areas, as of the end
2012 the median home value was less than $100,000. See National
Association of Realtors[supreg] Median Sales Price of Existing
Single-Family Homes for Metropolitan Statistical Areas Q4 2012,
available at http://www.realtor.org/sites/default/files/reports/2013/embargoes/hai-metro-2-11-asdlp/metro-home-prices-q4-2012-single-family-2013-02-11.pdf.
\171\ Core Logic Press Release and Negative Equity Report Q4
2012 (Mar. 19, 2013), available at http://www.corelogic.com.
\172\ See Steven Laufer, ``Equity Extraction and Mortgage
Default,'' Financial and Economics Discussion Series Federal Reserve
Board Division of Research & Statistics and Monetary Affairs (2013-
30), available at http://www.federalreserve.gov/pubs/feds/2013/201330/201330pap.pdf. The study concludes, at 2, that ``through
cash-out refinances, second mortgages and home equity lines of
credit, . . . homeowners [in the sample studied] had extracted much
of the equity created by the rising value of their homes. As a
result, their loan-to-value (LTV) ratios were on average more than
50 percentage points higher than they would have been without this
additional borrowing and the majority had mortgage balances that
exceeded the value of their homes.''). See also Michael LaCour-
Little, California State University-Fullerton, Eric Rosenblatt and
Vincent Yao, Fannie Mae, ``A Close Look at Recent Southern
California Foreclosures,'' (May 23, 2009) at 17 (finding that, based
upon a sample of homes, the existence of a subordinate lien is
correlated more strongly with default than whether the home was
purchased in 2005-06 period), available at http://www.areuea.org/conferences/papers/download.phtml?id=2133.
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4. Transactions Secured by Used Manufactured Homes and Not Land
Estimate of the Number of Covered Loans
To assess the impact of the rule's provisions concerning
manufactured housing, it is necessary to estimate the volume of
transactions potentially affected, by collateral type. The Bureau's
analysis of 2011 HMDA data, matched with the historic loan performance
(HLP) data from the FHFA, indicates that roughly eight percent of all
manufactured home purchases were covered loans: HPMLs that were non-QMs
because the DTI ratio exceeded 43 percent and the loan was not insured,
guaranteed, or purchased by a federal government agency or GSE.\173\
Because HMDA data does not differentiate between transactions with each
of the relevant collateral types, including new versus used, the Bureau
is applying this ratio to each of the transaction types to derive the
estimated number of covered loans below. Manufactured home loans of
$25,000 or less also would be exempt under the smaller dollar exemption
discussed above. However, the estimates of affected manufactured home
transactions discussed in this Section 1022 analysis do not exclude
smaller dollar loans and therefore may be slightly overstated.
Census data also reports an estimated 369,000 move-ins to owner-
occupied manufactured homes in 2011.\174\ Census data reports shipment
of approximately 51,000 new manufactured homes in 2011, with
approximately 17 percent titled as real estate.\175\ Therefore, the
Bureau estimates that approximately 318,000 existing manufactured homes
were purchased in 2011. The Bureau conservatively assumes that all of
these purchases were financed. Further, based upon a review of nearly
two decades of Census data on shipments of new manufactured homes, the
Bureau estimates that approximately one third of the existing
manufactured homes are titled as real property. Therefore, the Bureau,
for the purposes of this 1022 analysis, conservatively estimates that
approximately 105,000 purchases of existing manufactured homes also
involved the acquisition of land which provided security for the
purchase loan,\176\ while approximately 213,000 purchases were secured
only by the existing manufactured home (chattel loans). Applying the
same eight percent factor for other purchases discussed above, of
these, approximately 17,000 were chattel HPMLs that were non-QMs, and
approximately 8,400 were land- and home-secured HPMLs that were non-
QMs.\177\
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\174\ The Census report refers to these homes as ``manufactured/
mobile homes'', but the Census definitions note that all of these
homes are ``HUD Code homes'', which is the fundamental
characteristic of what are currently referred to as manufactured
homes.
\175\ See Cost & Size Comparisons: New Manufactured Homes,
available at http://www.census.gov/construction/mhs/pdf/sitebuiltvsmh.pdf.
\176\ According to data provided by HUD for the fiscal year
2011, approximately 5,900 existing manufactured homes were purchased
together with land under the FHA Title II program.
\177\ As with new homes, this estimate would increase to the
extent that any other manufactured home purchase HPMLs would not be
qualified mortgages solely because they exceed caps on points and
fees in the Bureau's 2013 ATR Rules.
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The Bureau's analysis of 2011 HMDA data, matched with the HLP data
from the FHFA, indicates that, approximately, for every four covered
purchase manufactured housing loans, there is one manufactured housing
refinance or home improvement loan (that is, out of every five
manufactured housing loans, four are purchases). The Bureau believes
that both refinance and home improvement loans in manufactured housing
are exempt due to other exemptions in this rule. Therefore, the Bureau
believes that there are approximately 13,600 covered used chattel
manufactured housing loans.\178\
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\178\ For further analysis of these assumptions, see the
Bureau's RFA analysis at part VII.
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Several commenters noted that the proportion of non-QM loans will
be higher in manufactured housing than what was estimated by the
Bureau, particularly due to points and fees exceeding the qualified
mortgage limit. These commenters did not provide supporting data or
address non-QM proportions by collateral type. Nonetheless, if the
proportion of non-QM loans secured by existing manufactured homes and
not land is indeed higher, then the estimates of costs and benefits of
this final rule might increase somewhat (while remaining constant on a
per-loan basis). Moreover, while the commenters identified the points
and fees cap for qualified mortgages in the Bureau's ATR
[[Page 78566]]
Rules as the main reason for these loans not to qualify for qualified
mortgage status, the Bureau believes that creditors will adjust many
transactions, for example by shifting points and fees into the interest
rate, so that these transactions are QMs.
Moreover, HUD recently issued a proposed rulemaking to effectively
exempt Title I manufactured housing from the qualified mortgage points
and fees requirement. If this provision of HUD's proposal is finalized
substantially as proposed, the Bureau believes that some creditors will
start originating more Title I mortgage loans that will also have the
qualified mortgage status. Furthermore, the Bureau conservatively
assumes that every manufactured home move-in reported in the Census (or
in the American Housing Survey) had a mortgage loan associated with the
move-in. Finally, given the analysis of HMDA data, the Bureau believes
that the two creditors specialized in manufactured home lending that
commented on the supplemental proposal are outliers on several
dimensions relevant to the proportion of covered loans, and thus are
not necessarily representative of the whole manufactured home market
and that their claims regarding non-QM loan volume might overestimate
the proportion of manufactured housing loans that are non-QMs for the
overall market.
Covered Persons
Creditors originating covered transactions secured by existing
manufactured homes but not land will experience some reduced burden as
a result of the exemption. In particular, these loans are not subject
to the estimated per-loan costs for an appraisal in conformity with
USPAP described in the January 2013 Final Rule.\179\ For these
transactions, creditors also would not need to spend time or resources
on complying with the requirements in the HPML appraisal rules:
checking for applicability of the second appraisal requirement on a
flipped property (in a purchase transaction) and paying for that
appraisal when the requirement applies, obtaining and reviewing the
appraisals conducted for conformity to this rule, and providing
disclosures and appraisal report copies to applicants.
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\179\ See Section 1022(b) analysis, 78 FR at 10418-21.
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Appraisals in conformity with USPAP may currently be conducted for
transactions secured by existing manufactured homes but not land much
less frequently than in connection with HPMLs overall. For example, the
Bureau believes that USPAP is a set of standards typically followed by
appraisers who are state-certified or licensed, and that state laws
generally do not require certifications or licenses to appraise
personal property. Therefore, even though USPAP includes standards for
the appraisal of personal property, it is unclear that these standards
are applied when individuals who are not state-licensed or state-
certified value manufactured homes. Indeed, the Bureau believes that
currently, in some transactions, lenders may simply prepare their own
estimates of the value of the home without engaging a licensed or
certified appraiser. Thus, most, of the covered transactions might have
been impossible to make. The impact of the hypothetical case in which
creditors are not able to comply with a provision of this rule that has
not yet taken effect is impossible to estimate with any reasonable
degree of confidence. As a result, for purposes of analyzing the
benefits of the exemption, the Bureau cannot evaluate the burden
reduced as a result of the exemption.
The Bureau believes that whatever method of satisfying conditions
for the exemption the creditors choose, the cost is likely to be
relatively low, and all the manufactured housing creditors would incur
it, likely resulting in the majority of this cost passed on to the
consumers. The Bureau believes that many creditors will opt to use an
independent cost service to qualify for the exemption. The prevalent
option currently on the market is the NADAguides. This guide contains
an estimate of a manufactured home's cost of replacement value based on
the exact make, model, and the year that the manufactured home was
built. Since many creditors use this guide or a competitor's guide
already in these transactions, and that estimate is a valuation under
the ECOA Valuations Rule and would have had to be provided to the
consumer in either case, this additional requirement is not an extra
cost on either the creditors or the consumers.\180\
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\180\ The Agencies received a comment that implementing a
process to ensure compliance with the new provisions regarding
chattel manufactured homes will take at least 1,600 hours of labor
time. The Bureau disagrees. As discussed above, the requirements can
be satisfied not only by obtaining an independent valuation, but
also by copying a manufacturer's invoice for new chattel, or
following a guide, like the one provided by NADA, for new or used
chattel. Following the guide involves looking up the model, make,
and the year that the home was built in, akin to Yellow Pages or,
more appropriately, Kelley's Bluebook. The Bureau believes that most
loan officers should be able to perform that task in, at most,
minutes given either a hardcopy of the guide or an electronic
version. If a creditor chooses to invest additional labor to tailor
its output to consumers to go beyond the limited conditions in this
rule, that is not a cost of this rule.
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Consumers
The exemption likely results in creditors being able to consummate
these transactions while staying in compliance, and thus the benefit of
the exemption to consumers is primarily that they will continue to have
access to these loans.
Consumers will now receive one of the available options including,
and most likely (since it is likely the most cost-effective option for
used homes), a third-party cost estimate. As noted above, most
creditors use an existing cost service to produce an estimate that
already would be provided to the consumer under the ECOA Valuations
Rule. This will provide consumers with some information about the value
of their manufactured home, and will allow them to decide whether they
should indeed purchase this home. If the consumers deem the value too
low, they might decide to look at other models of manufactured homes,
choose a non-manufactured home instead, or decide to exit the housing
market, most likely by renting. The Bureau believes that creditors will
pass through most of their costs onto consumers. The Bureau is unaware
of any estimates of the cost of a third-party cost evaluation for a
used chattel manufactured home, but believes that it is significantly
less than $350 required for a full appraisal for a non-manufactured
home. For example, the cost of using the third-party cost service may
be more akin to the cost of using an automated valuation model, which,
as discussed in this Section 1022 analysis, may be approximately
$20.\181\
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\181\ See also 78 CFR 48548, 48573, n.123 (Aug. 13, 2013) (``The
Bureau has received information in outreach indicating that annual
subscriptions to the NADA Guide may cost between $100 and $200 for
an unlimited number of value reports . . . The average cost per-loan
would therefore depending on the covered person's total level of
lending activity.'').
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5. Transactions Secured by New Manufactured Homes and Not Land
Estimate of the Number of Covered Loans
As noted above, approximately 51,000 new manufactured homes were
shipped according to recent annual Census data. For this analysis, the
Bureau conservatively assumes that all of these homes were used as
principal dwellings for consumers and that all of these purchases were
financed. In addition, the Bureau believes that the proportion of homes
titled as real estate is a reasonable estimate of the number of
[[Page 78567]]
new manufactured home purchase transactions that are secured in part by
land.\182\ The Bureau therefore, for this 1022 analysis, conservatively
estimates that based upon 2011 data approximately 42,400 new
manufactured home sales were financed by chattel loans (which can
include homes located on leased land such as in trailer parks and other
land-lease communities) and 8,600 transactions were secured by new
manufactured homes and land. Applying a factor of approximately eight
percent, the Bureau estimates that, of these, almost 3,400 were chattel
HPMLs that were non-QMs, and almost 700 were land and home-secured
HPMLs that were non-QMs.\183\
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\182\ Only a few states provide for treating manufactured homes
sited on leased land as real property.
\183\ See the discussion in the beginning of this section on
data used and comments received. If the Bureau's estimate is off,
for example by a factor as great as three, the estimate would
increase from 4,100 to slightly more than 12,000 loans per year
(indicating that close to a quarter of the transactions would be
non-QM HPMLs after the rule is implemented and that a significant
proportion of the manufactured home transactions are not reported to
HMDA despite these transactions covered by HMDA).
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Covered Persons
The Bureau believes that the vast majority of creditors receive a
copy of the manufacturer's invoice as a matter of standard business
practice, and thus they could simply provide consumers a copy.
Consistent with the January 2013 ECOA Valuations Rule,\184\ the Bureau
estimates that this will cost creditors around $5 per loan, including
training costs. A few commenters have suggested that releasing invoices
would upset industry's pricing model. The Bureau does not possess any
data and is not aware of any studies to help it evaluate this claim.
Moreover, in some industries, such as the car market, a high volume of
transactions occur and firms profit even though some consumers are able
to discover the invoice value of the product. Moreover, the rule allows
the creditor to choose to avoid disclosing the invoice and thereby
avoid any issues a creditor believes disclosure of the invoice could
entail; in lieu of the invoice, the rule allows covered persons to
provide a valuation from an independent person or based on an
independent cost service, as described above.
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\184\ 78 FR 7216, 7244 (Jan. 31, 2013).
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Consumers
Consumers will benefit from this rule by receiving at least some
kind of valuation information. The Bureau believes that while consumers
getting a mortgage loan on a non-manufactured home would generally
receive a valuation based on the ECOA Valuations Rule, this is not the
case for new manufactured homes since the manufacturer's invoice is
exempt from the ECOA requirements. Thus, this provision arguably has a
particularly large effect per transaction affected: consumers go from
not knowing anything about the value of their home to at least having
some information. This is particularly valuable considering that these
are likely to be LMI consumers who would be particularly vulnerable and
adversely affected by entering into a transaction that might leave them
underwater from the very first day, as discussed in more detail in the
section-by-section analysis. The Agencies further discuss this
provision in the section-by-section analysis.
6. Transactions Secured by New Manufactured Homes and Land
The Bureau believes that there were approximately 700 new land/home
HPML non-QM transactions. One commenter noted that few if any of the
transactions outside of those programs include appraisals currently.
While the Bureau does not have data on this point, even if few
transactions outside of these programs did have appraisals currently,
the number of new appraisals that would result from the modified
exemption still is quite low.
Covered Persons
This rule will result in approximately a $350 dollar cost increase
(the average price of a full appraisal) per transaction, which is
likely to be passed through to the consumer. While the rule exempts
these appraisals from the requirement of the interior inspections,
various commenters suggested that full appraisals (including interior
inspections) of manufactured houses cost more than $350. Thus, it is
possible that the actual cost per appraisal is slightly higher or
slightly lower.\185\
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\185\ Some commenters claimed that requiring appraisals for
manufactured housing, in particular in land/home transactions, is
problematic, in part because they asserted that the appraised value
comes in lower than the sale price in a high proportion of FHA
manufactured home program transactions. Some comments suggested that
the appraisals were not valid in part because they relied upon too
many manufactured homes as comparables or the opposite--they relied
too heavily on site-built homes as comparables with adjustments
which are too subjective. The commenters' views, however, were
presented only in theoretical form and did not include data to
support the contents. In the context of an individual transaction,
if the lender views the appraisal to be inaccurate and can
demonstrate that fact, appraisal review and dispute processes exist,
and lenders can get a second appraisal or opinion as well. On the
other hand, if a portfolio lender accepts an appraisal that
indicates insufficient collateral value and does not proceed with
the transactions, the fact that the creditor voluntarily decided not
to originate the loan based on the appraisal is a benefit to the
creditor, and likely to the consumer as well. In addition, FHA
appraisal requirements indicate that this agency considers these
appraisals sufficiently valid to use, and thus not everyone views
these appraisals as problematic.
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Consumers
Consumers will receive the benefits of the appraisal discussed
elsewhere, and will not be vulnerable to weaker valuation practices
when their transactions are occurring outside of GSE or federal agency
programs. However, consumers will pay any cost of the required
appraisal to the extent that creditors pass it through. The Bureau
believes that many of the consumers using non-QM HPMLs to purchase a
new manufactured home and land currently do not receive any valuation
before buying it, magnifying the potential benefit for consumers.
Finally, the Agencies do not believe that a requirement of a full
appraisal (i.e., with a physical inspection of the interior) on new
manufactured housing secured by land is appropriate given the fact that
many of these houses are not physically on land when the loan is
consummated and other inspections occur under HUD and other safety
standards. Aside from that, these transactions are not systematically
different from construction of site-built homes, and thus should be
treated the same to the extent possible.
Again, the Bureau believes that there were approximately 700 new
land/home HPML non-QM transactions. This will result in approximately a
$350 dollar cost increase (the average price of a full appraisal) that
is likely to be passed through to the consumer. This cost might be
lower because the rule exempts these appraisals from the requirement of
the interior exemptions; however, some commenters suggested that full
manufactured home appraisals (which would typically include an interior
inspection) might sometimes cost more than appraisals of site-built
homes. Thus, it is possible that the actual cost per appraisal is
slightly higher or slightly lower.
7. Streamlined Refinances
Estimate of the Number of Covered Loans
The Bureau anticipates that the refinance provision overwhelmingly
affects private streamline refinances until 2021 because qualified
mortgages are separately exempt from this rule and, under the Bureau's
2013 ATR Final Rule, GSE and federal government agency refinances are
generally deemed
[[Page 78568]]
qualified mortgages until 2021.\186\ In addition, as discussed in the
section-by-section analysis above, only refinances in which the holder
of the credit risk on the existing obligation and the refinancing
remain the same would be eligible, and the loan cannot have interest-
only, negative amortization, or balloon features.
---------------------------------------------------------------------------
\186\ See 12 CFR 1026.43(e)(4).
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The Bureau estimates that at most 12,000 private no cash-out
refinance transactions were originated in 2011. The Bureau believes
that some of these were refinances of existing loans where the credit
risk holder changed and thus would not be eligible for the exemption,
and that a small number of these refinances had interest-only, negative
amortization, or balloon features and also would not be eligible for
the exemption. The Bureau believes that for about 90% of refinance
transactions, the creditor would have provided an appraisal to the
consumer; starting in January 2014, the ECOA Valuations Rule will
require creditors to do so. Thus, this exemption is likely to affect
under 1,000 loans a year (10% of 12,000).
Covered Persons
Any creditors originating covered refinances that meet the criteria
of the exemption can choose to make use of the exemption, which reduces
burden. In particular, these loans will not be subject to the estimated
per-loan costs described in the January 2013 Final Rule.\187\ For these
transactions, the creditor is not required to spend time providing a
notice, obtaining an appraisal, reviewing the appraisals conducted for
conformity to this rule, and providing copies of those appraisals to
applicants.
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\187\ See Section 1022(b) analysis, 78 FR at 10418-21.
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Consumers
Regarding benefits, consumers whose HPML streamlined refinance are
newly exempt will save an average of $350 per loan. In addition,
streamlined refinance transactions may close more quickly without an
appraisal, reducing the time in which a consumer may be in a worse
loan, which can result in further cost savings to the consumer. For
example, if the consumer can close a refinance transaction two weeks
earlier because a full appraisal is not performed, and the refinance
loan has a lower interest rate, that will provide the consumer with an
additional two weeks of payments at the reduced interest rate of the
refinance loan.
As discussed above and in the Bureau's analysis under Section 1022
in the January 2013 Final Rule, in general, consumers who are borrowing
HPMLs that are covered loans benefit from having an appraisal. The cost
to consumers of the proposed exemption therefore is the loss of these
potential benefits for the number of covered loans that would be newly-
exempted by the proposed exemption and which would not have otherwise
included an appraisal. As noted above, the Bureau estimates this would
be very few transactions.
8. Significant Alternatives
The Agencies discussed various conditions on exemptions for smaller
dollar loans and streamline refinances. Placing conditions on these
exemptions--for example, requiring that an automated valuation be
obtained and provided to the consumer--would provide many of the same
benefits to consumer as a full appraisal. However, the Bureau believes
that the benefits of an appraisal would likely be lower for these two
particular types of transactions than for other types of transactions
that will not be exempt from the January 2013 Final Rule.
The cost of these conditions would be directly levied on the
creditors; however, the Bureau believes that it would be almost fully
passed on to consumers. The Bureau did not view the cost of these
alternatives to be significant. The Agencies determined, however, not
to adopt this alternative. A significant factor was that streamline
refinances and smaller dollar loans were viewed as classes of
transactions that were significantly lower risk and therefore not
necessitating alternative valuation conditions in this rule.
The Agencies also discussed a provision mandating the creditors to
provide chattel manufactured home valuations with adjustments for
condition (used chattel) and location (used or new chattel). The
Agencies decided that this provision would introduce additional
implementation burden and subjectivity with respect to the compliance
processes, and that practices with regard to these adjustments had not
sufficiently evolved to codify a uniform set of standards in
regulations. From the perspective of potential benefits of this
provision, creditors can still provide whatever adjustments are
specified in the cost service guide.
The Agencies discussed raising the loan amount requirement for the
smaller dollar exemption to $50,000. However, the Agencies decided that
the range of $25,000 to $50,000 captures too great a proportion of the
remaining non-QM subordinate lien HPMLs. The Bureau also noted that
such an increase would wholly exempt many manufactured home purchases
that deserve the protection provided by the new provisions in this
rule. The Agencies also believe that at these higher loan amounts the
cost of the appraisal provides less of an incentive to switch to
another kind of financing, for example an open-credit loan.
B. Potential Specific Impacts of the Supplemental Final Rule
1. Potential Reduction in Access of Consumers to Consumer Financial
Products or Services
The rule includes only exemptions and provisions that have limited
impact on a small amount of loans. Thus, the Bureau does not believe
that any reduction in access to credit will result. If anything, the
Bureau believes that the exemption for used chattel manufactured
housing will make many loans possible to originate while complying with
the January 2013 Final Rule, thus improving access to credit.
Manufactured housing industry commenters suggested that access to
credit in chattel loans, including new chattel loans, would be reduced
if valuation information must be provided to the consumer. These
comments may be read as potentially suggesting that: (1) Consumers, if
informed of the estimated value of the home by currently available
means, might elect not to proceed with the transaction, or (2)
creditors, if required to provide such information to the consumers,
also might not proceed with the transaction, particularly where the
loan amount exceeds the estimated value of the home.
If these comments are based upon the assumption that valuation
information provided will be inaccurate or misleading, commenters did
not provide data in support of this point with respect to any of the
three valuation information options specified in the condition to the
exemption for chattel manufactured home loans. In this regard, the
Bureau notes that a leading independent cost service provided data in
its comments indicating the accuracy of its method compared to personal
property appraisals. Otherwise, the Bureau does not consider access to
credit to be reduced where consumers voluntarily choose not to continue
with a transaction after receiving valuation information; in this case,
the information has benefited the consumer by enabling the consumer to
make better informed credit choices. Similarly,
[[Page 78569]]
access to credit is not necessarily compromised if the creditor chooses
not to continue with the transaction, particularly if the loan amount
exceeds the estimated value of the home. In purchase transactions, the
Bureau believes that consumers typically have the option of purchasing
other manufactured and non-manufactured homes that would not have the
consumer starting off in their mortgage by effectively being
underwater.
2. Impact of the Rule on Depository Institutions and Credit Unions With
$10 Billion or Less in Total Assets
Small depository banks and credit unions may originate loans of
$25,000 or less more often, relative to their overall origination
business, than other depository institutions (DIs) and credit unions.
Therefore, relative to their overall origination business, these small
depository banks and credit unions may experience relatively more
benefits from the exemption for smaller dollar loans. These benefits
would not be high in absolute dollar terms, however, because the number
of covered transactions across all creditors that would be exempted by
the smaller dollar loan exemption is still relatively low--less than
5,000, as discussed above.
Otherwise, the Bureau does not believe that the impact of the
supplemental rule would be substantially different for the DIs and
credit unions with total assets below $10 billion than for larger DIs
and credit unions. The Bureau has not identified data indicating that
small depository institutions or small credit unions disproportionately
engage in lending secured by manufactured homes. Finally, the Bureau
has not identified data indicating that these institutions engage in
covered streamlined refinances that would be exempted by the exemption
for certain refinances at a greater rate than would other financial
institutions.
3. Impact of the Rule on Consumers in Rural Areas
The Bureau understands that a significantly greater proportion of
homes in rural areas are existing manufactured homes than in non-rural
areas.\188\ Therefore, any impacts of the exemption for transactions
secured by these homes (but not land) would proportionally accrue more
often to rural consumers. With respect to streamlined refinances, the
Bureau does not believe that streamlined refinances are more or less
common in rural areas. Accordingly, the Bureau currently believes that
the exemption for streamlined refinances would generate a similar
benefit for consumers in rural areas as for consumers in non-rural
areas. Finally, setting aside the increased incidence of manufactured
housing loans in rural areas, the Bureau does not believe that the
difference in the number of smaller dollar loans originated for
consumers in rural areas and non-rural areas is significant.
---------------------------------------------------------------------------
\188\ Census data from 2011 indicates that approximately 45
percent of owner-occupied manufactured homes are located outside of
metropolitan statistical areas, compared with 21 percent of owner-
occupied single-family homes. See U.S. Census Bureau, 2011 American
Housing Survey, General Housing Data--Owner-Occupied Units
(National), available at http://factfinder2.census.gov/faces/tableservices/jsf/pages/productview.xhtml?pid=AHS_2011_C01OO&prodType=table. See also Housing Assistance Council Rural
Housing Research Note, ``Improving HMDA: A Need to Better Understand
Rural Mortgage Markets,'' (Oct. 2010), available at http://www.ruralhome.org/storage/documents/notehmdasm.pdf. Industry
comments on the 2012 Interagency Appraisals Proposed Rule noted that
manufactured homes sited on land owned by the buyer are
predominantly located in rural areas; one commenter estimated that
60 percent of manufactured homes are located in rural areas.
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VII. Regulatory Flexibility Act
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 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 $500 million
\189\ and trust companies with total assets of $35.5 million or less)
and publishes its certification and a short, explanatory statement in
the Federal Register along with its final rule.
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\189\ ``A financial institution's assets 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.
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As described previously in this preamble, section 1471 of the Dodd-
Frank Act establishes a new TILA section 129H, which sets forth
appraisal requirements applicable to HPMLs. The statute expressly
excludes from these appraisal requirements coverage of ``qualified
mortgages as defined by section 129C.'' In addition, the Agencies may
jointly exempt a class of loans from the requirements of the statute if
the Agencies determine that the exemption is in the public interest and
promotes the safety and soundness of creditors.
The Agencies issued the January 2013 Final Rule on January 18,
2013, which will be effective on January 18, 2014. Pursuant to the
general exemption authority in the statute, the January 2013 Final Rule
excluded the following consumer credit transactions from the definition
of HPML: Transactions secured by new manufactured homes; transactions
secured by a mobile homes, boats, or trailers; transactions to finance
the initial construction of a dwelling; temporary or ``bridge'' loans
with a term of twelve months or less, such as a loan to purchase a new
dwelling where the consumer plans to sell a current dwelling within
twelve months; and reverse mortgage loans. The Agencies are issuing
this supplemental final rule to include additional exemptions from the
higher risk mortgage loan appraisal requirements of section 129H of
TILA: Certain ``streamlined'' refinancings and extensions of credit of
$25,000 or less, indexed every year for inflation. In addition, this
supplemental final rule amends and adds exemptions for transactions
secured by manufactured homes.
The OCC currently supervises 1,797 banks (1,179 commercial banks,
61 trust companies, 509 federal savings associations, and 48 branches
or agencies of foreign banks). We estimate that less than 1,309 of the
banks supervised by the OCC are currently originating one- to four-
family residential mortgage loans that could be HPMLs. Approximately
1,291 of OCC-supervised banks are small entities based on the Small
Business Administration's (SBA's) definition of small entities for RFA
purposes. Of these, the OCC estimates that 867 banks originate
mortgages and therefore may be impacted by this 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 be zero. The supplemental final rule does not impose
new requirements on banks or include new mandates. The OCC assumes any
costs (e.g., alternative valuations) or requirements that may be
associated with the exemptions in the supplemental final rule will be
less than the cost of compliance for a comparable loan under the final
rule.
Therefore, the OCC believes the supplemental final rule will not
have a significant economic impact on a substantial number of small
entities. The OCC certifies that the supplemental final rule will not
have a significant
[[Page 78570]]
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 supplemental 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.
Board
The RFA (5 U.S.C. 601 et seq.) requires an agency either to provide
a final regulatory flexibility analysis (FRFA) with a final rule or
certify that the final rule will not have a significant economic impact
on a substantial number of small entities. This supplemental final rule
applies to certain banks, other depository institutions, and non-bank
entities that extend HPMLs to consumers.\190\ The SBA establishes size
standards that define which entities are small businesses for purposes
of the RFA.\191\ The size standard to be considered a small business
is: $500 million or less in assets for banks and other depository
institutions; and $35.5 million or less in annual revenues for the
majority of nonbank entities that are likely to be subject to the
regulations. Based on its analysis, and for the reasons stated below,
the Board believes that the supplemental final rule will not have a
significant economic impact on a substantial number of small entities.
Nevertheless, the Board is publishing a FRFA.
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\190\ The Board notes that for purposes of its analysis, the
Board considered all creditors to which the supplemental final rule
applies. The Board's Regulation Z at 12 CFR 226.43 applies to a
subset of these creditors. See 12 CFR 226.43(g).
\191\ U.S. SBA, 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_table_07222013.pdf.
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A. Reasons for the Final Rule
This supplemental final rule relates to the January 2013 Final Rule
issued by the Agencies on January 18, 2013, which goes into effect on
January 18, 2014. See 78 FR 10368 (Feb. 13, 2013). The January 2013
Final Rule implements a provision added to TILA by the Dodd-Frank Act
requiring appraisals for ``higher-risk mortgages.'' For certain
mortgages with an annual percentage rate that exceeds the average prime
offer rate by a specified percentage, the January 2013 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. 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.
The Agencies are now finalizing two additional exemptions to the
2013 Final Rule appraisal requirements and adopting certain provisions
for manufactured homes. As described in the SUPPLEMENTARY INFORMATION,
the supplemental final rule exempts ``streamlined'' refinancings and
transactions of $25,000 or less. The supplemental final rule also
exempts loans secured by manufactured homes from the January 2013 Final
Rule's appraisal requirements for 18 months, until July 18, 2015.
Subsequent to that date:
[cir] A loan secured by a new manufactured home and land must
comply with the January 2013 Final Rule's appraisal requirements except
for the requirement to conduct a physical visit to the interior of the
property;
[cir] A loan secured by an existing (used) manufactured home and
land will be subject to all of the January 2013 Final Rule's appraisal
requirements; and
[cir] A loan secured by manufactured homes (new or used) and not
land will be exempt from the January 2013 Final Rule's appraisal
requirements if the consumer is provided with a specified alternative
cost estimate or valuation.
B. Statement of Objectives and Legal Basis
The Board believes that the additional exemptions and amendments
established by the supplemental final rule are appropriate to carry out
the purposes of the statute, as discussed above in the SUPPLEMENTARY
INFORMATION. The legal basis for the proposed rule is TILA section
129H(b)(4). 15 U.S.C. 1639h(b)(4). TILA section 129H(b)(4)(A), added by
the Dodd-Frank Act, authorizes 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).
C. Description of Small Entities to Which the Regulation Applies
The January 2013 Final Rule applies to creditors that make HPMLs
subject to 12 CFR 1026.35(c). In the Board's regulatory flexibility
analysis for the January 2013 Final Rule, the Board relied primarily on
data provided by the Bureau to estimate the number of small entities
that would be subject to the requirements of the rule.\192\ According
to the data provided by the Bureau in connection with promulgation of
the supplemental final rule, approximately 5,913 commercial banks and
savings institutions, 3,784 credit unions, and 2,672 non-depository
institutions are considered small entities and extend mortgages, and
therefore are potentially subject to the January 2013 Final Rule and
the supplemental final rule.
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\192\ See the Bureau's regulatory flexibility analysis in the
2013 Final Rule (78 FR 10368, 10424 (Feb. 13, 2013)).
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Data currently available to the Board are not sufficient to
estimate how many small entities that extend mortgages will be subject
to 12 CFR 226.43, given the range of exemptions provided in the January
2013 Final Rule and the supplemental final rule, including the
exemption for loans that satisfy the criteria of a qualified mortgage.
Further, the number of these small entities that will make HPMLs
subject to the supplemental final rule's exemptions is unknown.
D. Projected Reporting, Recordkeeping and Other Compliance Requirements
The supplemental final rule does not impose any significant new
recordkeeping, reporting, or compliance requirements on small entities.
The supplemental final rule reduces the number of transactions that are
subject to the requirements of the January 2013 Final Rule. As noted
above, the January 2013 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 exemptions. The supplemental final rule exempts two additional
classes of HPMLs from the January 2013 Final Rule: Certain streamlined
refinance HPMLs whose proceeds are used exclusively to satisfy
[[Page 78571]]
an existing first lien loan and to pay for closing costs, and new HPMLs
that have a principal amount of $25,000 or less (indexed to inflation).
In addition, the supplemental final rule exempts until July 2015 HPMLs
secured by manufactured homes. Accordingly, the supplemental final rule
decreases the burden on creditors by reducing the number of loan
transactions that are subject to the January 2013 Final Rule. For
applications submitted on or after July 18, 2015, burden increases
slightly for transactions secured by new manufactured homes and land
because such transactions will be required to comply with the January
2013 Final Rule's appraisal requirements except for the requirement to
conduct a physical visit to the interior of the property. In addition,
burden also increases with respect to transactions secured by a new
manufactured home and not land. These transactions will be exempt from
the January 2013 Final Rule's appraisal requirements only if the
borrower is provided with a specified alternative cost estimate or
valuation to the borrower.
F. Identification of Duplicative, Overlapping, or Conflicting Federal
Regulations
The Board has not identified any Federal statutes or regulations
that duplicate, overlap, or conflict with the proposed revisions.
G. Discussion of Significant Alternatives
The Board is not aware of any significant alternatives that would
further minimize the economic impact of the supplemental final rule on
small entities. With respect to transactions secured by ``streamlined''
refinances or smaller-dollar HPMLs, the supplemental final rule exempts
these transactions from the January 2013 Final Rule and therefore
reduces economic burden for small entities. With respect to loans
secured by new manufactured homes and land, the Board recognizes that
the supplemental final rule imposes new burden by requiring such
transactions to comply with the January 2013 Final Rule's appraisal
requirements except for the requirement to conduct a physical visit to
the interior of the property. With respect to loans secured by new
manufactured homes and not land, the Board also recognizes that the
supplemental final rule imposes new burden by requiring that such
transactions are exempt from the January 2013 Final Rule only if the
borrower is provided with a specified alternative cost estimate or
valuation. Although maintaining the January 2013 Final Rule exemption
for new manufactured homes would lower the economic impact on small
entities, the Board does not believe doing so is appropriate in
carrying out the purposes of the statute.
FDIC
The RFA generally requires that, in connection with a rulemaking,
an agency prepare and make available for public comment a regulatory
flexibility analysis that describes the impact of the rule on small
entities.\193\ 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 SBA to include banking
organizations with total assets of $500 million or less) and publishes
its certification and a short, explanatory statement in the Federal
Register together with the rule.
---------------------------------------------------------------------------
\193\ See 5 U.S.C. 601 et seq.
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As of June 30, 2013, there were about 3,673 small FDIC-supervised
institutions, which include 3,363 state nonmember banks and 310 state-
chartered savings banks. The FDIC analyzed the 2011 HMDA \194\ dataset
to determine how many loans by all FDIC-supervised institutions might
qualify as HPMLs under section 129H of the TILA as added by section
1471 of the Dodd-Frank Act. This analysis reflects that only 70 FDIC-
supervised institutions originated at least 100 HPMLs, with only four
institutions originating more than 500 HPMLs. Further, the FDIC-
supervised institutions that met the definition of a small entity
originated on average less than 11 HPMLs of $250,000 \195\ or less each
in 2011.
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\194\ 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-price loans were generated in 2011, 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.
\195\ HPML transactions over $250,000 were excluded from this
analysis as 12 CFR Part 323 of the FDIC Rules and Regulations
requires an appraisal for real estate loans over $250,000 unless
another exemption applies.
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The supplemental final rule relates to the January 2013 Final Rule
issued by the Agencies on January 18, 2013, which goes into effect on
January 18, 2014. The January 2013 Final Rule requires that creditors
satisfy the following requirements for each HPML they originate that is
not exempt from the rule:
The creditor must obtain a written appraisal; the
appraisal must be performed by a certified or licensed appraiser; and
the appraiser must conduct a physical property visit of the interior of
the property.
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.
The consumer must be provided with a free copy of any
written appraisals obtained for the transaction at least three business
days before consummation.
The creditor of an HPML must obtain an additional written
appraisal, at no cost to the borrower, when the loan will finance the
purchase of a consumer's principal dwelling and there has been an
increase in the purchase price from a prior acquisition that took place
within 180 days of the current purchase.
The supplemental final rule amends one existing exemption and
establishes additional exemptions to the appraisal requirements in the
January 2013 Final Rule. The supplemental final rule exempts:
``Streamlined'' refinancings. A ``streamlined''
refinancing results if the holder of the successor credit risk also
held the risk of the original credit obligation. The supplemental final
rule does not exempt refinancing transactions involving cash out,
negative amortization, interest only payments or balloon payments.
``Smaller Dollar'' Residential Loans. A ``smaller dollar''
residential loan is an extension of credit of $25,000 or less, with the
amount indexed annually for inflation, secured by the borrower's
principal dwelling.
Manufactured Home Loans. Loans secured by manufactured
homes are exempt from the appraisal requirements for 18 months, until
July 18, 2015. Subsequent to that date:
[cir] A loan secured by a new manufactured home and land must
comply with the appraisal requirements except for the requirement to
conduct a physical visit to the interior of the property;
[cir] A loan secured by an existing (used) manufactured home and
land will be subject to all appraisal requirements; and
[cir] A loan secured by a manufactured home (new or used) and not
land will be exempt from the appraisal requirements if the buyer is
provided with a specified alternative cost estimate or valuation.
[[Page 78572]]
The supplemental final rule amends the exemption for a loan secured
by a new manufactured home in the January 2013 Final Rule by requiring
an appraisal without a physical visit to the interior of the property
for loans secured by a new manufactured home and land after July 18,
2015. This amendment will increase burden as such loans will no longer
be exempt from all of the appraisal requirements. While data is not
available to estimate the number of such transactions, the previously
cited HMDA data reflects that FDIC-supervised institutions that met the
definition of a small entity each engaged in a relatively small number
of HPML transactions in 2011. In addition, the supplemental final rule
exempts additional transactions, including certain ``streamlined''
refinancings, ``smaller dollar'' residential loans, and some
manufactured home loans, from the appraisal requirements of the January
2013 Final Rule, resulting in reduced regulatory burden to FDIC-
supervised institutions that would have otherwise been required to
obtain an appraisal and comply with the requirements for such HPML
transactions.
It is the opinion of the FDIC that the supplemental final rule will
not have a significant economic impact on a substantial number of small
entities that it regulates in light of the following facts: (1) The
supplemental final rule reduces regulatory burden on small institutions
by exempting certain transactions from the appraisal requirements of
the January 2013 Final Rule; and (2) the FDIC previously certified that
the January 2013 Final Rule would not have a significant economic
impact on a substantial number of small entities. Accordingly, the FDIC
certifies that the supplemental final rule would not have a significant
economic impact on a substantial number of small entities. Therefore, a
regulatory flexibility analysis is not required.
NCUA
The RFA generally requires that, in connection with a final rule,
an agency prepare and make available for public comment a FRFA that
describes the impact of the final rule on small entities.\196\ 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 federally insured
credit unions (FICU) having less than 50 million dollars in
assets.\197\
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\196\ See 5 U.S.C. 601 et seq.
\197\ NCUA Interpretative Ruling and Policy Statement (IRPS) 87-
2, 52 FR 35231 (Sept. 18, 1987); as amended by IRPS 03-2, 68 FR
31951 (May 29, 2003); and IRPS 13-1, 78 FR 4032, 4037 (Jan. 18,
2013).
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In 2012, there were approximately 4,600 small FICUs. The NCUA
analyzed the 2012 HMDA \198\ dataset to determine how many loans by all
FICUs might qualify as HPMLs under section 129H of the TILA as added by
section 1471 of the Dodd-Frank Act. This analysis reflects that 918
FICUs originated HPMLs, with only 24 institutions originating more than
100 HPMLs. Further, the FICUs that met the definition of a small entity
originated on average less than 2 HPMLs in 2012.
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\198\ The NCUA based its analysis on the HMDA data, as it
provided a proxy for the characteristics of HPMLs. While the NCUA
recognizes that fewer higher-price loans were generated in 2011, 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 NCUA also recognizes that the HMDA data
provides information relative to mortgage lending in metropolitan
statistical areas, but not in rural areas.
---------------------------------------------------------------------------
The supplemental final rule relates to the January 2013 Final Rule
issued by the Agencies on January 18, 2013, which goes into effect on
January 18, 2014. The January 2013 Final Rule requires that creditors
satisfy the following requirements for each HPML they originate that is
not exempt from the rule:
The creditor must obtain a written appraisal; the
appraisal must be performed by a certified or licensed appraiser; and
the appraiser must conduct a physical property visit of the interior of
the property.
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.
The consumer must be provided with a free copy of any
written appraisals obtained for the transaction at least three business
days before consummation.
The creditor of an HPML must obtain an additional written
appraisal, at no cost to the borrower, when the loan will finance the
purchase of a consumer's principal dwelling and there has been an
increase in the purchase price from a prior acquisition that took place
within 180 days of the current purchase.
The supplemental final rule amends one existing exemption and
establishes additional exemptions to the appraisal requirements in the
January 2013 Final Rule. The supplemental final rule exempts:
``Streamlined'' refinancings. A ``streamlined''
refinancing if the holder of the successor credit risk also held the
risk of the original credit obligation. The supplemental final rule
does not exempt refinancing transactions involving cash out, negative
amortization, interest only payments or balloon payments.
Extensions of credit of $25,000 or less. Extension of
credit of $25,000 or less, with the amount indexed annually for
inflation, secured by the borrower's principal dwelling.
Manufactured Home Loans. Loans secured by a manufactured
home are exempt from the appraisal requirements for 18 months, until
July 18, 2015. Subsequent to that date:
[cir] A loan secured by a new manufactured home and land must
comply with the appraisal requirements except for the requirement to
conduct a physical visit to the interior of the property;
[cir] A loan secured by an existing (used) manufactured home and
land will be subject to all appraisal requirements; and
[cir] A loan secured by a manufactured home (new or used) and not
land will be exempt from the appraisal requirements if the consumer is
provided with a specified alternative cost estimate or valuation.
The supplemental final rule amends the exemption for loans secured
by a new manufactured home in the January 2013 Final Rule by requiring
an appraisal without a physical visit to the interior of the property
for loans secured by a new manufactured home and land after July 18,
2015. This amendment will increase burden as such loans will no longer
be exempt from all of the appraisal requirements. While data is not
available to estimate the number of such transactions, the previously
cited HMDA data reflects that FICUs that met the definition of a small
entity each engaged in a relatively small number of HPML transactions
in 2011. In addition, the supplemental final rule exempts additional
transactions, including certain ``streamlined'' refinancings, ``smaller
dollar'' residential loans, and some manufactured home loans, from the
appraisal requirements of the January 2013 Final Rule, resulting in
reduced regulatory burden to FICUs that would have otherwise been
required to obtain an appraisal and comply with the requirements for
such HPML transactions.
[[Page 78573]]
It is the opinion of the NCUA that the supplemental final rule will
not have a significant economic impact on a substantial number of small
entities that it regulates in light of the following facts: (1) The
supplemental final rule reduces regulatory burden on small institutions
by exempting certain transactions from the appraisal requirements of
the January 2013 Final Rule; and (2) the NCUA previously certified that
the January 2013 Final Rule would not have a significant economic
impact on a substantial number of small entities. Accordingly, the NCUA
certifies that the supplemental final rule will not have a significant
economic impact on a substantial number of small entities. Therefore, 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 supplemental final rule applies to FICUs
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 supplemental 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
\199\ (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.\200\ 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.
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\199\ Public Law 104-121, 110 Stat. 857 (1996).
\200\ 5 U.S.C. 551.
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Bureau
The RFA generally requires an agency to conduct an initial
regulatory flexibility analysis (IRFA) and a FRFA of any rule subject
to notice-and-comment rulemaking requirements.\201\ These analyses must
``describe the impact of the proposed rule on small entities.'' \202\
An IRFA or FRFA is not required if the agency certifies that the rule
will not have a significant economic impact on a substantial number of
small entities.\203\ The Bureau 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.\204\
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\201\ 5 U.S.C. 601 et. seq.
\202\ Id. at 603(a). For purposes of assessing the impacts of
the proposed rule on small entities, ``small entities'' is defined
in the RFA to include small businesses, small not-for-profit
organizations, and small government jurisdictions. Id. at 601(6). A
``small business'' is determined by application of SBA regulations
and reference to the North American Industry Classification System
(NAICS) classifications and size standards. Id. at 601(3). A ``small
organization'' is any ``not-for-profit enterprise which is
independently owned and operated and is not dominant in its field.''
Id. at 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.
Id. at 601(5).
\203\ Id. at 605(b).
\204\ Id. at 609.
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An IRFA was not required for the proposal, and a FRFA is not
required for the supplemental final rule, because it will not have a
significant economic impact on a substantial number of small entities.
The analysis below evaluates the potential economic impact of the
supplemental final rule on small entities as defined by the RFA. The
analysis generally examines the regulatory impact of the provisions of
the supplemental final rule against the baseline of the January 2013
Final Rule the Agencies issued on January 18, 2013.
No comments received were relevant specifically to smaller
entities. The Agencies discuss more general comments in the section-by-
section analyses and the Bureau discusses some of the more specific
comments relating to benefits and costs of these provisions in its
Section 1022(b) analysis.
A. Number and Classes of Affected Entities
The supplemental final rule applies to all creditors that extend
closed-end credit secured by a consumer's principal dwelling. All small
entities that extend these loans are potentially subject to at least
some aspects of the supplemental final rule. This supplemental final
rule may impact small businesses, small nonprofit organizations, and
small government jurisdictions. A ``small business'' is determined by
application of SBA regulations and reference to the North American
Industry Classification System (NAICS) classifications and size
standards.\205\ Under such standards, depository institutions with $500
million or less in assets are considered small; other financial
businesses are considered small if such entities have average annual
receipts (i.e., annual revenues) that do not exceed $35.5 million.
Thus, commercial banks, savings institutions, and credit unions with
$500 million or less in assets are small businesses, while other
creditors extending credit secured by real property or a dwelling are
small businesses if average annual receipts do not exceed $35.5
million.
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\205\ 5 U.S.C. 601(3). The current SBA size standards are
located on the SBA's Web site at http://www.sba.gov/content/table-small-business-size-standards.
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The Bureau can identify through data under the HMDA, Reports of
Condition and Income (Call Reports), and data from the National
Mortgage Licensing System (NMLS) the approximate numbers of small
depository institutions that would be subject to the final rule.
Origination data is available for entities that report in HMDA, NMLS or
the credit union call reports; for other entities, the Bureau has
estimated their origination activities using statistical projection
methods.
The following table provides the Bureau's estimate of the number
and types of entities to which the supplemental final rule would apply:
\206\
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\206\ The Bureau assumes that creditors who originate chattel
manufactured home loans are included in the sources described above,
but to the extent commenters believe this is not the case, the
Bureau seeks data from commenters on this point.
[[Page 78574]]
Table 1--Counts of Creditors by Type
[Estimated number of affected entities and small entities by NAICS code and engagement in closed-end mortgage
transactions]
----------------------------------------------------------------------------------------------------------------
Entities engaged Small entities
Small entity in closed-end engaged in closed-
Category NAICS threshold mortgage end mortgage
transactions \b\ transactions
----------------------------------------------------------------------------------------------------------------
Commercial banks & savings 522110, 522120..... $500,000,000 \a\ 7230 \a\ 5913
institutions. assets.
Credit unions \c\.............. 522130............. $500,000,000 \a\ 4178 \a\ 3784
assets.
Real Estate credit \d e\....... 522310, 522292..... $35,500,000 2787 \a\ 2672
revenues.
---------------------------------------
Total...................... ................... .................. 14,195 12,369
----------------------------------------------------------------------------------------------------------------
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.
\c\ Does not include cooperatives operating in Puerto Rico. The Bureau has limited data about these institutions
or their mortgage activity.
\d\ NMLSR Mortgage Call Report 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 the institution was a small entity is
estimated based on the count and amount of originations and the count and amount of brokered loans.
\a\ Data do not distinguish nonprofit from for-profit organizations, but Real Estate Credit presumptively
includes nonprofit organizations.
B. Impact of Exemptions
The provisions of the supplemental final rule all provide or modify
exemptions from the HPML appraisal requirements. Measured against the
baseline of the burdens imposed by the January 2013 Final Rule the
Agencies issued on January 18, 2013, the Bureau believes that these
provisions impose either no or insignificant additional burdens on
small entities. The Bureau believes that most of these provisions would
reduce the burdens associated with implementation costs, additional
valuation costs, and compliance costs stemming from the HPML appraisal
requirements. The Bureau also notes that creditors voluntarily choose
whether to avail themselves of the exemptions.
As discussed in the Bureau's Section 1022(b) analysis, the five
provisions \207\ for non-QM HPMLs are in this rule are:
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\207\ The Bureau believes that other provisions would have a de
minimis impact on small entities.
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1. Certain refinances, commonly referred to as ``streamlined'' are
now exempt from the January 2013 Final Rule;
2. Smaller dollar loans (under $25,000) are now exempt from the
January 2013 Final Rule;
3. Used manufactured housing transactions that are not secured by
land (chattel) are now exempt from the January 2013 Final Rule and, for
applications received on or after July 18, 2015, subject to some
conditions to provide an alternative valuation; \208\
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\208\ Used manufactured housing transactions that are secured by
land remain covered by the January 2013 Final Rule. However, all
loans are exempt if the application is received before July 18,
2015.
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4. New manufactured housing transactions that are not secured by
land (chattel) remain exempt from the January 2013 Final Rule; however,
for applications received on or after July 18, 2015, these transactions
are now subject to conditions; and
5. New manufactured housing transactions secured by land (new land/
home) for which an application is received on or after July 18, 2015,
now are subject to the January 2013 Final Rule; however, these
transactions remain exempted from the physical interior visit part of
the requirement.
1. Exemption for ``Streamlined'' Refinancing Programs
The supplemental final rule provides an exemption for any
transaction that is a refinancing satisfying certain conditions.
This provision removes the burden to small entities extending any
HPMLs covered by the final rule under ``streamlined'' refinance
programs of providing a consumer notice and obtaining, reviewing, and
disclosing to consumers USPAP- and FIRREA-compliant appraisals.
The regulatory burden reduction might be lower since a creditor
would have to determine whether the refinancing loan is of the type
that meets the exemption requirements. However, the Bureau believes
that little if any additional time would be needed to make these
determinations, as they depend upon basic information relating to the
transaction that is typically already known to the creditor. Small
entities will be able to choose whether to avail themselves of this
exemption.
2. Exemption for Smaller Dollar Loans
The supplemental final rule exempts from the final rule loans equal
to or less than $25,000, adjusted annually for inflation. This
provision removes burden imposed by the final rule on small entities
extending any HPMLs covered by the final rule up to $25,000. In any
event, small entities will be able to choose whether to avail
themselves of this exemption.
3. Exemption Subject to Alternative Valuation for Used Manufactured
Housing Transactions Not Secured by Land (Used Chattel)
The supplemental final rule exempts from the HPML appraisal
requirements a transaction secured by an existing manufactured home and
not land. This provision removes certain burdens imposed by the January
2013 Final Rule on small entities extending HPMLs covered by the
January 2013 Final Rule when they are secured solely by existing
manufactured homes. The burdens removed would be those of providing a
consumer notice, determining the applicability of the second appraisal
requirement in purchase transactions, and obtaining, reviewing, and
disclosing to consumers USPAP- and FIRREA-compliant appraisals. To be
eligible for this burden-reducing exemption, the creditor is required
to obtain an estimate of the value of the home, with the types of
estimates allowed described in detail in the section-by-section
analysis. For example, creditors can use an independent cost service to
qualify for the exemption.
Taking the January 2013 Final Rule as the baseline, as discussed in
the section-by-section and the Bureau's Section
[[Page 78575]]
1022(b) analyses, this exemption might provide significant burden
relief since, the Bureau believes that USPAP is a set of standards
typically followed by appraisers who are state-certified or licensed,
and that state laws generally do not require certifications or licenses
to appraise personal property. Thus, many of these transactions might
not have been made, but for this exemption. Finally, taking advantage
of this exemption is voluntary for creditors, thus it imposes no
additional burden.
4. Narrowed Exemption for Transactions Secured by New Chattel
Manufactured Homes
As discussed in the Bureau's Section 1022(b) analysis and in the
section-by-section analysis, the final rule requires the creditor to
provide the consumer with one of several types of an alternative
valuation of the new manufactured home in transactions that are secured
by a new manufactured home but not land. This condition does not
significantly increase the burden of the rule relative to the January
2013 Final Rule. The Bureau believes that the cost of obtaining an
estimate of the value of the new manufactured home using a third-party
cost source, for example, would be significantly less than the cost of
obtaining a USPAP-complaint appraisal.
As noted in the Bureau's Section 1022(b) analysis, the Bureau
believes that there might be as many as 3,400 such transactions. As
shown in the table above, the Bureau believes that there were 12,369
small creditors in 2011. Thus, over 85 percent of small creditors face
at most one such transaction per year. As noted in the 2013 January
Final Rule, the Bureau believes that a USPAP appraisal costs on average
$350. Even if we suppose that an alternative valuation would cost as
must as a USPAP appraisal, that results in a burden of $350 for that
creditor, an insignificant burden. Note that the Bureau believes that
the cost imposed per transaction is considerably lower, arguably under
$5 for some third-party cost sources. Moreover, HMDA data implies that
over 85 percent of small creditors will not be subject to any
transactions like that. Even if the Bureau misestimated the number of
affected transactions by a factor of 10, the costs imposed on 85
percent of small creditors are still like to be well under $100 per
creditor.\209\
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\209\ All mortgage lenders can participate in the manufactured
housing market segment (which includes chattel transactions and
transactions secured by a manufactured home and land; the handful of
manufactured housing specialty lenders engaged in chattel lending
are still not significant in number by themselves. Further, even if
the chattel exemption conditions were significant to their revenue,
that is not a substantial number for RFA purposes.
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5. Narrowed Exemption for Transactions Secured by New Manufactured
Homes and Land
The Agencies finalized a provision that requires an appraisal for
transactions secured by new manufactured homes and land, while
exempting these appraisals from interior inspection. As noted in the
Bureau's Section 1022(b) analysis, the Bureau believes that
approximately 700 transactions are going to be affected. Thus, over 90
percent of small creditors are not going to be affected by this
provision. Even if the Bureau misestimated the number of transactions
affected by a factor of 10, over 85 percent of small creditors would be
subject to at most one such transaction per year, resulting in a burden
of around $350 per creditor, a negligible fraction of a creditor's
revenue. This impact could be even lower, given that, as noted in the
section-by-section analysis, these transactions already are subject to
a full appraisal requirement when carried out under GSE or federal
agency programs.
C. Conclusion
Each element of this supplemental final rule would reduce economic
burden for small entities or impose a minor burden on a small amount of
creditors (well less than $500 per creditor for 85 percent of small
creditors even if the Bureau misestimated the number of covered
manufactured home transactions by a factor of 10). The exemption for
HPMLs secured by existing manufactured homes and not land would lessen
any economic impact resulting from the HPML appraisal requirements. The
exemption for ``streamlined'' refinance HPMLs also would lessen any
economic impact on small entities extending credit pursuant to those
programs, particularly those relating to the refinancing of existing
loans held on portfolio. The exemption for smaller-dollar HPMLs
similarly would lessen burden on small entities extending credit in the
form of HPMLs up to the threshold amount. The narrowed exemptions for
transactions secured by new manufactured homes, both land and chattel,
would barely affect over 85 percent of creditors (at most one such
transaction per year).
These impacts that would have been generated by the January 2013
Final Rule are reduced to the extent the transactions are not already
exempt from the January 2013 Final Rule as qualified mortgages. While
all of these exemptions may entail additional recordkeeping costs, the
Bureau believes that these costs are minimal and outweighed by the cost
reductions resulting from the proposal. Small entities for which such
cost reductions are outweighed by additional record keeping costs may
choose not to utilize the proposed exemptions.
Certification
Accordingly, the undersigned certifies that the supplemental final
rule will not have a significant economic impact on a substantial
number of small entities.
FHFA
The supplemental 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 RFA.
See 5 U.S.C. 601(6)).
VIII. Paperwork Reduction Act
OCC, Board, FDIC, NCUA, and Bureau
Certain provisions of the January 2013 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.). See 78
FR 10368, 10429 (Feb. 13, 2013). Under the PRA, and notwithstanding any
other provision of law, the Agencies may not conduct or sponsor, and a
person is not required to respond to, an information collection unless
the information collection displays a valid OMB control number. The
information collection requirements contained in this final rule to
amend the January 2013 Final Rule 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 Bureau, FDIC, NCUA, and OCC submitted these
information collection requirements to OMB at the proposed rule stage,
as well. OMB filed comments instructing the agencies to examine public
comment in response to the NPRM and describe in the supporting
statement of its collection any public comments received regarding the
collection, as well as why it did or did not incorporate the
commenter's recommendation. No comments were received concerning the
proposed information collection requirements. The Board reviewed these
final rules
[[Page 78576]]
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.\210\
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\210\ 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.
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Bureau: Insured depository institutions with more than $10 billion
in assets, their depository institution affiliates, and certain non-
depository mortgage institutions.\211\
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\211\ 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 final rule.
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FDIC: Insured state non-member banks, insured state branches of
foreign banks, state savings associations, 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 the January 2013
Final Rule are found in paragraphs (c)(3)(i), (c)(3)(ii), (c)(4),
(c)(5), and (c)(6) of 12 CFR 1026.35.\212\ 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).
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\212\ As explained in the section-by-section analysis, these
requirements are also published in regulations of the OCC (12 CFR
34.203(c)(1), (c)(2), (d), (e) and (f)) and the Board (12 CFR
226.43(c)(1), (c)(2), (d), (e), and (f)). For ease of reference,
this PRA analysis refers to the section numbers of the requirements
as published in the Bureau's Regulation Z at 12 CFR 1026.35(c).
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The January 2013 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 January 2013 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).
The requirements provided in the January 2013 Final Rule were
described in the PRA section of that rule. See 78 FR 10368, 10429
(February 13, 2013). As described in the Bureau's section 1022 analysis
in the January 2013 Final Rule and in Table 3 to that rule, the
estimated burdens allocated to the Bureau reflected an institution
count based upon data that had been updated from the proposed rule
stage and reduced to reflect those exemptions in the January 2013 Final
Rule for which the Bureau had identified data. As discussed in the
January 2013 Final Rule, the other Agencies did not adjust the
calculations to account for the exempted transactions provided in the
January 2013 Final Rule. Accordingly, the estimated burden calculations
in Table 3 in the January 2013 Final Rule were overstated.
Calculation of Estimated Burden
January 2013 Final Rule
As explained in the January 2013 Final Rule, for the Initial
Appraisal Disclosure, the creditor is required to provide a short,
written disclosure within three business days of application. Because
this disclosure is supplied by the federal government for purposes of
disclosure to the public, this is not classified as an information
collection pursuant to 5 CFR 1320(c)(2), and the Agencies have assigned
it no burden for purposes of this PRA analysis.
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 the safe harbor provided in the January 2013 Final
Rule.
The Agencies continue to 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 further continue to estimate 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.
[[Page 78577]]
Final Rule
The Agencies use the estimated burden from the PRA section of the
January 2013 Final Rule as the baseline for analyzing the impact the
three exemptions in the final rule. The estimated number of appraisals
per respondent for the FDIC, Board, OCC, and NCUA respondents has been
updated to account for the exemption for qualified mortgages adopted in
the January 2013 Final Rule, which had not been accounted for in the
table published at that time, as discussed in the PRA section of the
Final Rule. See 78 FR 10368, 10430-31 (February 13, 2013). In addition,
the impact of the final rule has been considered as follows:
First, the Agencies find that, currently, only a very small
minority of refinances involve cash out beyond the levels permitted for
the exemption for certain refinance loans. See Sec.
1026.35(c)(2)(vii). Going forward, the Agencies believe that virtually
all refinance loans will be either qualified mortgages or qualify for
this exemption. The Agencies therefore assume that the exemption for
certain refinances in this supplemental final rule affects all of the
refinance loans analyzed under Section 1022(b)(2) of the January 2013
Final Rule.\213\ In that analysis, the Bureau estimated that a total of
3,800 new Written Appraisals would occur as a result of the January
2013 Final Rule (including home purchase, home equity, and refinance
loans). In the Supplemental Proposal, the Bureau estimated that
refinances would account for approximately 1,200 of these 3,800 new
Written Appraisals that would occur as a result of the January 2013
Final Rule.\214\ Thus, the exemption for certain refinances in this
supplemental final rule would eliminate approximately 32 percent of the
new Written Appraisals that were estimated to occur as a result of the
January 2013 Final Rule.
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\213\ See 78 FR 10368, 10419 (Feb. 13, 2013). As discussed in
the Section 1022(b)(2) analysis in this rule, the Bureau believes
that there were at most private 12,000 no cash-out refinance
transactions in 2011, and that some number of these were refinances
of existing loans where the credit risk holder changed and thus
would not be eligible for the exemption, and that a small number of
these refinances had interest-only, negative amortization, or
balloon features and also would not be eligible for the exemption.
Moreover, the Bureau believes that about 90 percent of refinance
transactions would have an appraisal provided to consumers because
the creditor chose to have an appraisal and provided a copy due to
the ECOA Valuations Rule. Thus, this exemption is likely to affect
under 1,000 loans a year. The Agencies do not possess reliable,
representative data on how many refinances will qualify for this
exemption. However, to the extent refinances previously would not
have been eligible for exemptions to this rule, the Agencies believe
that going forward most such refinances will be restructured as
qualified mortgages or otherwise to satisfy the criteria of this
exemption for certain refinances. The Agencies used the same
assumption for the supplemental proposal and did not receive any
comments indicating otherwise. Accordingly, the Table below reflects
this assumption. If this assumption did not hold and these
refinances were not restructured, the Agencies believe that based on
the 2011 data the final rules will cause at most a minor number of
new appraisals--for approximately 1,200 loans.
\214\ As stated in the Bureau's Section 1022 analysis in the
January 2013 Final Rule 1022, there were 12,000 refinances affected
by the January 2013 Final Rule, and out of those the Bureau
estimated that 10 percent did not have a full appraisal performed in
the absence of the January 2013 Final Rule, resulting in 10
percent*12,000=1,200 of refinances that would be estimated to obtain
an appraisal as a result of the January 2013 Final Rule (and which
would not be obtained as a result of this supplemental final rule).
---------------------------------------------------------------------------
Second, based on the HMDA 2011 data, the Agencies find that 12
percent of all HPMLs are under $25,000. The Agencies believe that this
implies that there will be, proportionately, 12 percent fewer
appraisals based on the exemption for smaller dollar loans.
Third, the Agencies find that many of the transactions secured by
manufactured homes involve either refinances (all of which are
conservatively assumed to be covered by the exemption for certain
refinances), or smaller dollar loans (which cover many types of
manufactured housing transactions).\215\ While covered HPMLs above
smaller dollar levels that are secured by existing manufactured homes
and not land may be newly-exempted, these transactions will need
alternative valuations under the final rule. In addition, such loans
secured by new manufactured homes and not land also will need
alternative valuations. Further, such loans secured by new manufactured
homes and land will need an appraisal. In the January 2013 Final Rule,
the Agencies did not reduce the paperwork burden estimates to account
for the exemption for new manufactured homes adopted at that time. The
Agencies therefore conservatively make no adjustment to the data in the
first panel of Table 3 in the January 2013 Final Rule as a result of
that exemption.\216\
---------------------------------------------------------------------------
\215\ In particular, the Bureau believes that a substantial
proportion of the existing manufactured homes that are sold would be
sold for less than $25,000. According to the Census Bureau 2011
American Housing Survey Table C-13-OO, the average value of existing
manufactured homes is $30,000. See http://factfinder2.census.gov/faces/tableservices/jsf/pages/productview.xhtml?pid=AHS_2011_C13OO&prodType=table. The estimate includes not only the value of
the home, but also appears to include the value of the lot where the
lot is also owned. According to the AHS Survey, the term ``value''
is defined as ``the respondent's estimate of how much the property
(house and lot) would sell for if it were for sale. Any
nonresidential portions of the property, any rental units, and land
cost of mobile homes, are excluded from the value. For vacant units,
value represents the sales price asked for the property at the time
of the interview, and may differ from the price at which the
property is sold. In the publications, medians for value are rounded
to the nearest dollar.'' See http://www.census.gov/housing/ahs/files/Appendix%20A.pdf.
\216\ The Bureau assumes that manufactured housing loans secured
solely by a manufactured home and not land are reflected in the data
provided by the institutions to the datasets that are used by the
Bureau (Call Reports for Banks and Thrifts, Call Reports for Credit
Unions, and NMLS's Mortgage Call Reports), and thus are reflected in
the Bureau's loan projections utilized for the table below.
The Agencies conservatively included all non-QM HPML MH loans
reported in HMDA and projected based on the Call Reports data in its
paperwork burden calculations for the January 2013 Final Rule. The
Agencies did not possess sufficient information at the time to
estimate the proportion of non-QM HPML MH affected by the January
2013 Final Rule. No new data is used in this rule, and the Agencies
still do not possess sufficient information to estimate the
proportion of non-QM HPML MH affected by this Supplemental final
rule. Thus, the Agencies continue to conservatively assume that all
non-QM HPML MH loans reported in HMDA and projected based on the
Call Reports data are subject to the full appraisal requirement,
resulting in no change in the Table of paperwork burden below.
Note that, while the Agencies assume that all non-QM HPML MH
loans are affected, and thus the paperwork burden reported might be
an overestimate, the Agencies are possibly underestimating the
burden to the extent that there exists systematic underreporting or
non-reporting of MH loans to HMDA by creditors who are subject to
reporting. In its Section 1022(b) and RFA analyses, the Bureau
stress-tested this possibility and very conservatively, in terms of
calculating the magnitude of loans affected by provisions of this
Supplemental final rule, assumed that this underreporting is
occurring on a massive scale. For the purposes of the PRA analysis,
the Agencies assume that there is no underreporting. Also, note that
if the Bureau underestimated the proportion of non-QM loans among MH
lending, the paperwork burden is also underestimated. See the
Bureau's Section 1022(b) analysis above for a discussion of data
used and comments received.
---------------------------------------------------------------------------
The numbers above affect only the first panel in Table 3 of the PRA
section of the January 2013 Final Rule. Refinances are not subject to
the requirement to obtain an Additional Written Appraisal under the
January 2013 Final Rule, and it is assumed that none of the smaller
dollar loans or the loans secured by manufactured homes and not land
were used to purchase homes being resold within 180 days with the
requisite price increases to trigger that requirement (and thus the
exemptions for those loans will not reduce any burden associated with
that requirement). Accordingly, only the first panel in Table 3 from
the January 2013 Final Rule is being updated and the estimates in the
second and third panels remain the same. The updated table is
reproduced below. The one-time costs are not affected.
The following table summarizes the resulting burden estimates.
[[Page 78578]]
Estimated PRA Burden
Table 2--Summary of PRA Burden Hours for Information Collections in HPML Appraisals Final Rule Once Exemptions
in the Supplemental Proposal Are Adopted \217\
----------------------------------------------------------------------------------------------------------------
Estimated number
Estimated of appraisals Estimated burden Estimated total
number of per respondent hours per annual burden
respondents \218\ appraisal hours
[a] [b] [c] [d] = (a*b*c)
----------------------------------------------------------------------------------------------------------------
Review and Provide a Copy of Written Appraisal
----------------------------------------------------------------------------------------------------------------
Bureau \219,220,221,222\................
Depository Inst. > $10 B in total
assets+
Depository Inst. Affiliates............. 132 3.73 0.25 123
Non-Depository Inst. and Credit Unions.. 2,853 0.23 0.25 \223\ 82
FDIC.................................... 2,571 0.14 0.25 93
Board \224\............................. 418 0.18 0.25 19
OCC..................................... 1,399 0.16 0.25 55
NCUA.................................... 2,437 0.07 0.25 44
-----------------------------------------------------------------------
Total............................... 9,810 ................ ................ 416
----------------------------------------------------------------------------------------------------------------
Investigate and Verify Requirement for Additional Written Appraisal
----------------------------------------------------------------------------------------------------------------
Bureau
Depository Inst. > $10 B in total
assets+
Depository Inst. Affiliates............. 132 20.05 0.25 662
Non-Depository Inst. and Credit Unions.. 2,853 1.22 0.25 435
FDIC.................................... 2,571 0.78 0.25 502
Board................................... 418 0.97 0.25 102
OCC..................................... 1,399 0.85 0.25 299
NCUA.................................... 2,437 0.38 0.25 232
-----------------------------------------------------------------------
Total............................... 9,810 ................ ................ 2,232
----------------------------------------------------------------------------------------------------------------
Review and Provide a Copy of Additional Written Appraisal
----------------------------------------------------------------------------------------------------------------
Bureau
Depository Inst. > $10 B in total
assets+
Depository Inst. Affiliates............. 132 0.64 0.25 21
Non-Depository Inst. and Credit Unions.. 2,853 0.04 0.25 14
FDIC.................................... 2,571 0.02 0.25 15
Board................................... 418 0.03 0.25 3
OCC..................................... 1,399 0.02 0.25 8
NCUA.................................... 2,437 0.01 0.25 5
-----------------------------------------------------------------------
Total............................... 9,810 ................ ................ 66
----------------------------------------------------------------------------------------------------------------
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). As discussed in the second footnote in this PRA
section, the Bureau will assume half of the burden for non-depository institutions and the privately-insured
credit unions.
---------------------------------------------------------------------------
\217\ Some of the intermediate numbers are rounded, resulting in
``Estimated Total Annual Burden Hours'' not precisely matching up
with columns a, b, and c.
\218\ 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
January 2013 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.
\219\ The information collection requirements (ICs) contained in
the Bureau's Regulation Z are generally approved by OMB under OMB
No. 3170-0015. The Bureau divided certain proposals to amend the
Bureau's Regulation Z into separate Information Collection Requests
in OMB's system (accessible at www.reginfo.gov) to ease the public's
ability to view and understand the individual proposals. The ICs in
the January 2013 Final Rule (and 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. 3170-0026).
In the future, the Bureau plans to reintegrate the ICs in this final
rule back into OMB No. 3170-0015; therefore, OMB No. 3170-0015
should continue to be used when referencing the ICs contained in
this final rule.
\220\ The burden estimates allocated to the Bureau are updated
using the data described in the Bureau's section 1022 analysis in
the January 2013 Final Rule and in the Bureau's section 1022
analysis above, including significant burden reductions after
accounting for qualified mortgages that are exempt from the January
2013 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.
\221\ 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.
\222\ The Bureau calculates its burden by including both HMDA
reporting creditors and the HMDA non-reporting creditors, based on
the 2011 data, and allocating burden as discussed in the second
footnote in this PRA section. The other Agencies only report the
burden for HMDA reporting creditors, based on the 2011 counts.
\223\ The Bureau assumes half of the burden for the non-
depository mortgage institutions and the credit unions supervised by
the Bureau. The FTC assumes the burden for the other half.
\224\ The ICs in the January 2013 Final Rule will be
incorporated with the Board's Reporting, Recordkeeping, and
Disclosure Requirements associated with Regulation Z (Truth in
Lending), 12 CFR part 226 (OMB No. 7100-0199). The burden estimates
provided in this final rule pertain only to the ICs associated with
the Final Rule.
---------------------------------------------------------------------------
[[Page 78579]]
Finally, as explained in the PRA section of the January 2013 Final
Rule, respondents must also review the instructions and legal guidance
associated with the Final Rule and train loan officers regarding the
requirements of the Final Rule. The Agencies continue to 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.\225\
---------------------------------------------------------------------------
\225\ As discussed in the PRA section of the January 2013 Final
Rule, estimated one-time burden continues to be 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.
See 78 FR 10368, 10432 (Feb. 13, 2013).
---------------------------------------------------------------------------
The Agencies have a continuing interest in the public opinion 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 [email protected], with copies
to the Agencies at the addresses listed in the ADDRESSES section of
this SUPPLEMENTARY INFORMATION.
FHFA
The January 2013 Final Rule and this final rule do not contain any
collections of information applicable to the FHFA, requiring review by
OMB under the PRA. Therefore, FHFA has not submitted any materials to
OMB for review.
IX. Section 302 of the Riegle Community Development and Regulatory
Improvement Act
Section 1400 of the Dodd Frank Act requires that the rule issued to
implement Section 1471 take effect not later than 12 months after the
date of issuance of the Final Rule. The January 2013 Final Rule was
issued on January 18, 2013 and will become effective on January 18,
2014. This supplemental final rule is issued on December 10, 2013 and
will be effective on January 18, 2014, except that modifications to the
exemptions for loans secured by manufactured homes will be effective on
July 18, 2015.
Section 302 of the Riegle Community Development and Regulatory
Improvement Act of 1994 (``RCDRIA'') requires that, subject to certain
exceptions, regulations issued by the federal banking agencies that
impose additional reporting, disclosure, or other requirements on
insured depository institutions, 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.
With respect to the provisions that are effective on January 18,
2014, the OCC, Board, and FDIC find that section 302 of the RCDRIA does
not apply because these provisions do not impose additional reporting,
disclosure, or other requirements on insured depository institutions.
With respect to the provisions that are effective July 18, 2015,
the OCC, Board, and FDIC recognize that section 302 of the RCDRIA
applies because these modifications to the exemption for loans secured
by manufactured housing impose some additional disclosure requirements.
The July 18, 2015 effective date will provide depository institutions
engaged in manufactured housing lending the opportunity to develop
appropriate policies and implement systems to ensure compliance with
the new requirements. Although this date is not the first day of a
calendar quarter which begins on or after the date on which the
regulations are published in final form, the OCC, Board, and FDIC note
that 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 226
Advertising, Appraisal, Appraiser, Consumer protection, Credit,
Federal Reserve System, Mortgages, Reporting and recordkeeping
requirements, Truth in lending.
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.
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
part 34 as amended on February 13, 2013 at 78 FR 10368, effective on
January 18, 2014, as follows:
PART 34--REAL ESTATE LENDING AND APPRAISALS
0
1. The authority citation for part 34 continues 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.
Subpart G--Appraisals for Higher-Priced Mortgage Loans
0
2. Section 34.202 is amended by redesignating paragraphs (a) through
(c) as paragraphs (b) through (d), respectively, and adding a new
paragraph (a) to read as follows:
Sec. 34.202 Definitions applicable to higher-priced mortgage loans.
(a) Consummation has the same meaning as in 12 CFR 1026.2(a)(13).
* * * * *
0
3a. Section 34.203 is amended by:
0
a. Redesignating paragraphs (a)(2), (3), and (4) as paragraphs (a)(3),
(5), and (7), respectively, and republishing them;
0
b. Adding new paragraphs (a)(2) and (4) and paragraph (a)(6);
0
c. Revising paragraphs (b) introductory text and (b)(1) and (2); and
0
d. Adding paragraphs (b)(7) and (8).
The additions and revisions read as follows:
Sec. 34.203 Appraisals for higher priced mortgage loans.
(a) Definitions. For purposes of this section:
* * * * *
(2) Credit risk means the financial risk that a consumer will
default on a loan.
[[Page 78580]]
(3) Manufactured home has the same meaning as in 24 CFR 3280.2.
(4) Manufacturer's invoice means a document issued by a
manufacturer and provided with a manufactured home to a retail dealer
that separately details the wholesale (base) prices at the factory for
specific models or series of manufactured homes and itemized options
(large appliances, built-in items and equipment), plus actual itemized
charges for freight from the factory to the dealer's lot or the
homesite (including any rental of wheels and axles) and for any sales
taxes to be paid by the dealer. The invoice may recite such prices and
charges on an itemized basis or by stating an aggregate price or
charge, as appropriate, for each category.
(5) 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.
(6) New manufactured home means a manufactured home that has not
been previously occupied.
(7) 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. Unless otherwise specified, the requirements in
paragraph (c) through (f) of this section do not apply to the following
types of transactions:
(1) A loan that satisfies the criteria of a qualified mortgage as
defined pursuant to 15 U.S.C. 1639c.
(2) An extension of credit for which the amount of credit extended
is equal to or less than the applicable threshold amount, which is
adjusted every year to reflect increases in the Consumer Price Index
for Urban Wage Earners and Clerical Workers, as applicable, and
published in the OCC official interpretations to this paragraph (b)(2).
* * * * *
(7) An extension of credit that is a refinancing secured by a first
lien, with refinancing defined as in 12 CFR 1026.20(a) (except that the
creditor need not be the original creditor or a holder or servicer of
the original obligation), provided that the refinancing meets the
following criteria:
(i) Either--
(A) The credit risk of the refinancing is retained by the person
that held the credit risk of the existing obligation and there is no
commitment, at consummation, to transfer the credit risk to another
person; or
(B) The refinancing is insured or guaranteed by the same Federal
government agency that insured or guaranteed the existing obligation;
(ii) The regular periodic payments under the refinance loan do
not--
(A) Cause the principal balance to increase;
(B) Allow the consumer to defer repayment of principal; or
(C) Result in a balloon payment, as defined in 12 CFR
1026.18(s)(5)(i); and
(iii) The proceeds from the refinancing are used solely to satisfy
the existing obligation and to pay amounts attributed solely to the
costs of the refinancing; and
(8) A transaction secured in whole or in part by a manufactured
home.
0
3b. Effective July 18, 2015, in Sec. 34.203, newly added paragraph
(b)(8) is revised to read as follows:
Sec. 34.203 Appraisals for higher priced mortgage loans.
* * * * *
(b) * * *
(8) A transaction secured by:
(i) A new manufactured home and land, but the exemption shall only
apply to the requirement in paragraph (c)(1) of this section that the
appraiser conduct a physical visit of the interior of the new
manufactured home; or
(ii) A manufactured home and not land, for which the creditor
obtains one of the following and provides a copy to the consumer no
later than three business days prior to consummation of the
transaction--
(A) For a new manufactured home, the manufacturer's invoice for the
manufactured home securing the transaction, provided that the date of
manufacture is no earlier than 18 months prior to the creditor's
receipt of the consumer's application for credit;
(B) A cost estimate of the value of the manufactured home securing
the transaction obtained from an independent cost service provider; or
(C) A valuation, as defined in 12 CFR 1026.42(b)(3), of the
manufactured home performed by a person who has no direct or indirect
interest, financial or otherwise, in the property or transaction for
which the valuation is performed and has training in valuing
manufactured homes.
* * * * *
0
4. In Appendix A to Subpart G, republish the introductory text and
revise paragraph 7 to read as follows:
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:
* * * * *
7. Indicates that a physical property visit of the interior of
the property was performed, as applicable.
* * * * *
Appendix C to Subpart G--OCC Interpretations
0
5. In Appendix C to Subpart G:
0
a. Under the Sec. 34.203(b) entry, add paragraph 1 and add an entry
for Sec. 34.203(b)(1);
0
c. Revise the Sec. 34.203(b)(2) entry;
0
d. Add paragraph 2 to the Sec. 34.203(b)(4) entry;
0
e. Add an entry for Sec. 34.203(b)(7);
0
f. Effective July 18, 2015, add an entry for Sec. 34.203(b)(8); and
0
g. In the Sec. 34.203(f)(2) entry, remove paragraph 2, redesignate
paragraph 3 as paragraph 2, and revise it.
The additions and revisions read as follows:
Section 34.203--Appraisals for Higher-Priced Mortgage Loans
* * * * *
34.203(b) Exemptions
1. Compliance with title XI of the Financial Institutions
Reform, Recovery, and Enforcement Act of 1989 (FIRREA). Section
34.203(b) provides exemptions solely from the requirements of Sec.
34.203(c) through (f). Institutions subject to the requirements of
FIRREA and its implementing regulations that make a loan qualifying
for an exemption under Sec. 34.203(b) must still comply with
appraisal and evaluation requirements under FIRREA and its
implementing regulations.
34.203(b)(1) Exemptions
Paragraph 34.203(b)(1)
1. Qualified mortgage criteria. Under Sec. 34.203(b)(1), a loan
is exempt from the appraisal requirements of Sec. 34.203 if either:
i. The loan is--(1) subject to the ability-to-repay requirements
of the Consumer Financial Protection Bureau (Bureau) in 12 CFR
1026.43 as a ``covered transaction'' (defined in 12 CFR
1026.43(b)(1)) and (2) a qualified mortgage pursuant to the Bureau's
rules or, for loans insured, guaranteed, or administered by the U.S.
Department of Housing and Urban Development (HUD), U.S. Department
of Veterans Affairs (VA), U.S. Department of Agriculture (USDA), or
Rural Housing Service (RHS), a qualified mortgage pursuant to
applicable rules prescribed by those agencies (but only once such
rules are in effect; otherwise, the Bureau's definition of a
qualified mortgage applies to those loans); or
ii. The loan is--(1) not subject to the Bureau's ability-to-
repay requirements in 12 CFR 1026.43 as a ``covered transaction''
(defined in 12 CFR 1026.43(b)(1)), but (2)
[[Page 78581]]
meets the criteria for a qualified mortgage in the Bureau's rules
or, for loans insured, guaranteed, or administered by HUD, VA, USDA,
or RHS, meets the criteria for a qualified mortgage in the
applicable rules prescribed by those agencies (but only once such
rules are in effect; otherwise, the Bureau's criteria for a
qualified mortgage applies to those loans). To explain further,
loans enumerated in 12 CFR 1026.43(a) are not ``covered
transactions'' under the Bureau's ability-to-repay requirements in
12 CFR 1026.43, and thus cannot be qualified mortgages (entitled to
a rebuttable presumption or safe harbor of compliance with the
ability-to-repay requirements of 12 CFR 1026.43, see, e.g., 12 CFR
1026.43(e)(1)). These include an extension of credit made pursuant
to a program administered by a Housing Finance Agency, as defined
under 24 CFR 266.5, or pursuant to a program authorized by sections
101 and 109 of the Emergency Economic Stabilization Act of 2008. See
12 CFR 1026.43(a)(3)(iv) and (vi). They also include extensions of
credit made by a creditor identified in 12 CFR 1026.43(a)(3)(v).
However, these loans are eligible for the exemption in Sec.
34.203(b)(1) if they meet the Bureau's qualified mortgage criteria
in 12 CFR 1026.43(e)(2), (4), (5), or (6) or 12 CFR 1026.43(f)
(including limits on when loans must be consummated) or, for loans
that are insured, guaranteed, or administered by HUD, VA, USDA, or
RHS, in applicable rules prescribed by those agencies (but only once
such rules are in effect; otherwise, the Bureau's criteria for a
qualified mortgage applies to those loans). For example, assume that
HUD has prescribed rules to define loans insured under its programs
that are qualified mortgages and those rules are in effect. Assume
further that a creditor designated as a Community Development
Financial Institution, as defined under 12 CFR 1805.104(h),
originates a loan insured by the Federal Housing Administration,
which is a part of HUD. The loan is not a ``covered transaction''
and thus is not a qualified mortgage. See 12 CFR 1026.43(a)(3)(v)(A)
and (b)(1). Nonetheless, the transaction is eligible for an
exemption from the appraisal requirements of Sec. 34.203(b)(1) if
it meets the qualified mortgage criteria in HUD's rules. Nothing in
Sec. 34.203(b)(1) alters the definition of a qualified mortgage
under regulations of the Bureau, HUD, VA, USDA, or RHS.
Paragraph 34.203(b)(2)
1. Threshold amount. For purposes of Sec. 34.203(b)(2), the
threshold amount in effect during a particular one-year period is
the amount stated below for that period. The threshold amount is
adjusted effective January 1 of every year by the percentage
increase in the Consumer Price Index for Urban Wage Earners and
Clerical Workers (CPI-W) that was in effect on the preceding June 1.
Every year, this comment will be amended to provide the threshold
amount for the upcoming one-year period after the annual percentage
change in the CPI-W that was in effect on June 1 becomes available.
Any increase in the threshold amount will be rounded to the nearest
$100 increment. For example, if the percentage increase in the CPI-W
would result in a $950 increase in the threshold amount, the
threshold amount will be increased by $1,000. However, if the
percentage increase in the CPI-W would result in a $949 increase in
the threshold amount, the threshold amount will be increased by
$900.
i. From January 18, 2014, through December 31, 2014, the
threshold amount is $25,000.
2. Qualifying for exemption--in general. A transaction is exempt
under Sec. 34.203(b)(2) if the creditor makes an extension of
credit at consummation that is equal to or below the threshold
amount in effect at the time of consummation.
3. Qualifying for exemption--subsequent changes. A transaction
does not meet the condition for an exemption under Sec.
34.203(b)(2) merely because it is used to satisfy and replace an
existing exempt loan, unless the amount of the new extension of
credit is equal to or less than the applicable threshold amount. For
example, assume a closed-end loan that qualified for a Sec.
34.203(b)(2) exemption at consummation in year one is refinanced in
year ten and that the new loan amount is greater than the threshold
amount in effect in year ten. In these circumstances, the creditor
must comply with all of the applicable requirements of Sec. 34.203
with respect to the year ten transaction if the original loan is
satisfied and replaced by the new loan, unless another exemption
from the requirements of Sec. 34.203 applies. See Sec. 34.203(b)
and Sec. 34.203(d)(7).
* * * * *
Paragraph 34.203(b)(4)
* * * * *
2. Financing initial construction. The exemption for
construction loans in Sec. 34.203(b)(4) applies to temporary
financing of the construction of a dwelling that will be replaced by
permanent financing once construction is complete. The exemption
does not apply, for example, to loans to finance the purchase of
manufactured homes that have not been or are in the process of being
built when the financing obtained by the consumer at that time is
permanent. See Sec. 34.203(b)(8).
* * * * *
Paragraph 34.203(b)(7)
Paragraph 34.203(b)(7)(i)(A)
1. Same credit risk holder. The requirement that the holder of
the credit risk on the existing obligation and the refinancing be
the same applies to situations in which an entity bears the
financial responsibility for the default of a loan by either holding
the loan in its portfolio or guaranteeing payments of principal and
any interest to investors in a mortgage-backed security in which the
loan is pooled. See Sec. 34.203(a)(2) (defining ``credit risk'').
For example, a credit risk holder could be a bank that bears the
credit risk on the existing obligation by holding the loan in the
bank's portfolio. Another example of a credit risk holder would be a
government-sponsored enterprise that bears the risk of default on a
loan by guaranteeing the payment of principal and any interest on a
loan to investors in a mortgage-backed security. The holder of
credit risk under Sec. 34.203(b)(7)(i)(A) does not mean individual
investors in a mortgage-backed security or providers of private
mortgage insurance.
2. Same credit risk holder--illustrations.
Illustrations of the credit risk holder of the existing
obligation continuing to be the credit risk holder of the
refinancing include, but are not limited to, the following:
i. The existing obligation is held in the portfolio of a bank,
thus the bank holds the credit risk. The bank arranges to refinance
the loan and also will hold the refinancing in its portfolio. If the
refinancing otherwise meets the requirements for an exemption under
Sec. 34.203(b)(7), the transaction will qualify for the exemption
because the credit risk holder is the same for the existing
obligation and the refinance transaction. In this case, the
exemption would apply regardless of whether the bank arranged to
refinance the loan directly or indirectly, such as through the
servicer or subservicer on the existing obligation.
ii. The existing obligation is held in the portfolio of a
government-sponsored enterprise (GSE), thus the GSE holds the credit
risk. The existing obligation is then refinanced by the servicer of
the loan and immediately transferred to the GSE. The GSE pools the
refinancing in a mortgage-backed security guaranteed by the GSE,
thus the GSE holds the credit risk on the refinance loan. If the
refinance transaction otherwise meets the requirements for an
exemption under Sec. 34.203(b)(7), the transaction will qualify for
the exemption because the credit risk holder is the same for the
existing obligation and the refinance transaction. In this case, the
exemption would apply regardless of whether the existing obligation
was refinanced by the servicer or subservicer on the existing
obligation (acting as a ``creditor'' under 12 CFR 1026.2(a)(17)) or
by a different creditor.
3. Forward commitments. A creditor may make a mortgage loan that
will be sold or otherwise transferred pursuant to an agreement that
has been entered into at or before the time the transaction is
consummated. Such an agreement is sometimes known as a ``forward
commitment.'' A refinance loan does not satisfy the requirement of
Sec. 34.203(b)(7)(i)(A) if the loan will be acquired pursuant to a
forward commitment, such that the credit risk on the refinance loan
will transfer to a person who did not hold the credit risk on the
existing obligation.
Paragraph 34.203(b)(7)(ii)
1. Regular periodic payments. Under Sec. 34.203(b)(7)(ii), the
regular periodic payments on the refinance loan must not: Result in
an increase of the principal balance (negative amortization); allow
the consumer to defer repayment of principal (see 12 CFR 1026.43,
and the Official Staff Interpretations to the Bureau's Regulation Z,
comment 43(e)(2)(i)-2); or result in a balloon payment. Thus, the
terms of the legal obligation must require the consumer to make
payments of principal and interest on a monthly or other periodic
basis that will repay the loan amount over the loan term. Except for
payments resulting from any interest rate changes after consummation
in an adjustable-rate or step-rate mortgage, the periodic
[[Page 78582]]
payments must be substantially equal. For an explanation of the term
``substantially equal,'' see 12 CFR 1026.43, the Official Staff
Interpretations to the Bureau's Regulation Z, comment 43(c)(5)(i)-4.
In addition, a single-payment transaction is not a refinancing
meeting the requirements of Sec. 34.203(b)(7) because it does not
require ``regular periodic payments.''
Paragraph 34.203(b)(7)(iii)
1. Permissible use of proceeds. The exemption for a refinancing
under Sec. 34.203(b)(7) is available only if the proceeds from the
refinancing are used exclusively for the existing obligation and
amounts attributed solely to the costs of the refinancing. The
existing obligation includes the unpaid principal balance of the
existing first lien loan, any earned unpaid finance charges, and any
other lawful charges related to the existing loan. For guidance on
the meaning of refinancing costs, see 12 CFR 1026.23, the Official
Staff Interpretations to the Bureau's Regulations Z, comment 23(f)-
4. If the proceeds of a refinancing are used for other purposes,
such as to pay off other liens or to provide additional cash to the
consumer for discretionary spending, the transaction does not
qualify for the exemption for a refinancing under Sec. 34.203(b)(7)
from the appraisal requirements in Sec. 34.203.
For applications received on or after July 18, 2015
Paragraph 34.203(b)(8)
Paragraph 34.203(b)(8)(i)
1. Secured by new manufactured home and land--physical visit of
the interior. A transaction secured by a new manufactured home and
land is subject to the requirements of Sec. 34.203(c) through (f)
except for the requirement in Sec. 34.203(c)(1) that the appraiser
conduct a physical inspection of the interior of the property. Thus,
for example, a creditor of a loan secured by a new manufactured home
and land could comply with Sec. 34.203(c)(1) by obtaining an
appraisal conducted by a state-certified or -licensed appraiser
based on plans and specifications for the new manufactured home and
an inspection of the land on which the property will be sited, as
well as any other information necessary for the appraiser to
complete the appraisal assignment in conformity with the Uniform
Standards of Professional Appraisal Practice and the requirements of
FIRREA and any implementing regulations.
Paragraph 34.203(b)(8)(ii)
1. Secured by a manufactured home and not land. Section
34.203(b)(8)(ii) applies to a higher-priced mortgage loan secured by
a manufactured home and not land, regardless of whether the home is
titled as realty by operation of state law.
Paragraph 34.203(b)(8)(ii)(B)
1. Independent. A cost service provider from which the creditor
obtains a manufactured home unit cost estimate under Sec.
34.203(b)(8)(ii)(B) is ``independent'' if that person is not
affiliated with the creditor in the transaction, such as by common
corporate ownership, and receives no direct or indirect financial
benefits based on whether the transaction is consummated.
2. Adjustments. The requirement that the cost estimate be from
an independent cost service provider does not prohibit a creditor
from providing a cost estimate that reflects adjustments to account
for factors such as special features, condition or location.
However, the requirement that the estimate be obtained from an
independent cost service provider means that any adjustments to the
estimate must be based on adjustment factors available as part of
the independent cost service used, with associated values that are
determined by the independent cost service.
Paragraph 34.203(b)(8)(ii)(C)
1. Interest in the property. A person has a direct or indirect
in the property if, for example, the person has any ownership or
reasonably foreseeable ownership interest in the manufactured home.
To illustrate, a person who seeks a loan to purchase the
manufactured home to be valued has a reasonably foreseeable
ownership interest in the property.
2. Interest in the transaction. A person has a direct or
indirect interest in the transaction if, for example, the person or
an affiliate of that person also serves as a loan officer of the
creditor or otherwise arranges the credit transaction, or is the
retail dealer of the manufactured home. A person also has a
prohibited interest in the transaction if the person is compensated
or otherwise receives financial or other benefits based on whether
the transaction is consummated.
3. Training in valuing manufactured homes. Training in valuing
manufactured homes includes, for example, successfully completing a
course in valuing manufactured homes offered by a state or national
appraiser association or receiving job training from an employer in
the business of valuing manufactured homes.
4. Manufactured home valuation--example. A valuation in
compliance with Sec. 34.203(b)(8)(ii)(C) would include, for
example, an appraisal of the manufactured home in accordance with
the appraisal requirements for a manufactured home classified as
personal property under the Title I Manufactured Home Loan Insurance
Program of the U.S. Department of Housing and Urban Development,
pursuant to section 2(b)(10) of the National Housing Act, 12 U.S.C.
1703(b)(10).
* * * * *
Paragraph 34.203(f)(2) * * *
2. 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. 34.203 may not waive
the timing requirement to receive a copy of the appraisal under
Sec. 34.203(f)(2).
* * * * *
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 further amends Regulation Z, 12 CFR part 226, as amended
at 78 FR 10368 (Feb. 13, 2013), as follows:
PART 226--TRUTH IN LENDING ACT (REGULATION Z)
0
6. The authority citation for part 226 continues 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
7a. Section 226.43 is amended by:
0
a. Revising paragraphs (a)(2) through (6);
0
b. Adding paragraphs (a)(7) through (10);
0
c. Revising paragraphs (b) introductory text, (b)(1) and (2) and
(b)(5);
0
d. Adding paragraphs (b)(7) and (8).
The revisions and additions read as follows:
Sec. 226.43 Appraisals for higher-priced mortgage loans.
(a) * * *
(2) Consummation has the same meaning as in 12 CFR 1026.2(a)(13).
(3) Creditor has the same meaning as in 12 CFR 1026.2(a)(17).
(4) Credit risk means the financial risk that a consumer will
default on a loan.
(5) Higher-priced mortgage loan has the same meaning as in 12 CFR
1026.35(a)(1).
(6) Manufactured home has the same meaning as in 24 CFR 3280.2.
(7) Manufacturer's invoice means a document issued by a
manufacturer and provided with a manufactured home to a retail dealer
that separately details the wholesale (base) prices at the factory for
specific models or series of manufactured homes and itemized options
(large appliances, built-in items and equipment), plus actual itemized
charges for freight from the factory to the dealer's lot or the
homesite (including any rental of wheels and axles) and for any sales
taxes to be paid by the dealer. The invoice may recite such prices and
charges on an itemized basis or by stating an aggregate price or
charge, as appropriate, for each category.
(8) 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.
[[Page 78583]]
(9) New manufactured home means a manufactured home that has not
been previously occupied.
(10) 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. Unless otherwise specified, the requirements in
paragraphs (c) through (f) of this section do not apply to the
following types of transactions:
(1) A loan that satisfies the criteria of a qualified mortgage as
defined pursuant to 15 U.S.C. 1639c;
(2) An extension of credit for which the amount of credit extended
is equal to or less than the applicable threshold amount, which is
adjusted every year to reflect increases in the Consumer Price Index
for Urban Wage Earners and Clerical Workers, as applicable, and
published in the official staff commentary to this paragraph (b)(2);
* * * * *
(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.
* * * * *
(7) An extension of credit that is a refinancing secured by a first
lien, with refinancing defined as in 12 CFR 1026.20(a) (except that the
creditor need not be the original creditor or a holder or servicer of
the original obligation), provided that the refinancing meets the
following criteria:
(i) Either--
(A) The credit risk of the refinancing is retained by the person
that held the credit risk of the existing obligation and there is no
commitment, at consummation, to transfer the credit risk to another
person; or
(B) The refinancing is insured or guaranteed by the same Federal
government agency that insured or guaranteed the existing obligation;
(ii) The regular periodic payments under the refinance loan do
not--
(A) Cause the principal balance to increase;
(B) Allow the consumer to defer repayment of principal; or
(C) Result in a balloon payment, as defined in 12 CFR
1026.18(s)(5)(i); and
(iii) The proceeds from the refinancing are used only to satisfy
the existing obligation and to pay amounts attributed solely to the
costs of the refinancing; and
(8) A transaction secured in whole or in part by a manufactured
home.
* * * * *
0
7b. Effective July 18, 2015, Sec. 226.43(b)(8) is revised to read as
follows:
Sec. 226.43 Appraisals for higher-priced mortgage loans
* * * * *
(b) * * *
(8) A transaction secured by:
(i) A new manufactured home and land, but the exemption shall only
apply to the requirement in paragraph (c)(1) of this section that the
appraiser conduct a physical visit of the interior of the new
manufactured home; or
(ii) A manufactured home and not land, for which the creditor
obtains one of the following and provides a copy to the consumer no
later than three business days prior to consummation of the
transaction--
(A) For a new manufactured home, the manufacturer's invoice for the
manufactured home securing the transaction, provided that the date of
manufacture is no earlier than 18 months prior to the creditor's
receipt of the consumer's application for credit;
(B) A cost estimate of the value of the manufactured home securing
the transaction obtained from an independent cost service provider; or
(C) A valuation, as defined in 12 CFR 1026.42(b)(3), of the
manufactured home performed by a person who has no direct or indirect
interest, financial or otherwise, in the property or transaction for
which the valuation is performed and has training in valuing
manufactured homes.
* * * * *
0
8. In Appendix N to part 226, the introductory text is republished and
paragraph 7 is revised 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:
* * * * *
7. Indicates that a physical property visit of the interior of
the property was performed, as applicable.
* * * * *
0
9. In Supplement I to part 226, under Section 226.43--Appraisals for
Higher-Priced Mortgage Loans:
0
a. Under the entry for 43(b), paragraph 1 is added;
0
b. A 43(b)(1) entry is added.
0
c. The 43(b)(2) entry is revised.
0
d. Under the 43(b)(4) entry, paragraph 2 is added.
0
e. A 43(b)(7) entry is added.
0
f. Effective July 18, 2015, a 43(b)(8) entry is added.
0
g. Under entry 43(f)(2), paragraph 2 is removed and paragraph 3 is
redesignated as paragraph 2 and revised.
The additions and revisions read as follows:
Supplement I to Part 226--Official Interpretations
* * * * *
Section 226.43--Appraisals for Higher-Priced Mortgage Loans
* * * * *
43(b) Exemptions
1. Compliance with title XI of the Financial Institutions
Reform, Recovery, and Enforcement Act of 1989 (FIRREA). Section
226.43(b) provides exemptions solely from the requirements of Sec.
226.43(c) through (f). Institutions subject to the requirements of
FIRREA and its implementing regulations that make a loan qualifying
for an exemption under Sec. 226.43(b) must still comply with
appraisal and evaluation requirements under FIRREA and its
implementing regulations.
Paragraph 43(b)(1)
1. Qualified mortgage criteria. Under Sec. 226.43(b)(1), a loan
is exempt from the appraisal requirements of Sec. 226.43 if either:
i. The loan is--(1) subject to the ability-to-repay requirements
of the Bureau of Consumer Financial Protection (Bureau) in 12 CFR
1026.43 as a ``covered transaction'' (defined in 12 CFR
1026.43(b)(1)) and (2) a qualified mortgage pursuant to the Bureau's
rules or, for loans insured, guaranteed, or administered by the U.S.
Department of Housing and Urban Development (HUD), U.S. Department
of Veterans Affairs (VA), U.S. Department of Agriculture (USDA), or
Rural Housing Service (RHS), a qualified mortgage pursuant to
applicable rules prescribed by those agencies (but only once such
rules are in effect; otherwise, the Bureau's definition of a
qualified mortgage applies to those loans); or
ii. The loan is--(1) not subject to the Bureau's ability-to-
repay requirements in 12 CFR 1026.43 as a ``covered transaction''
(defined in 12 CFR 1026.43(b)(1)), but (2) meets the criteria for a
qualified mortgage in the Bureau's rules or, for loans insured,
guaranteed, or administered by HUD, VA, USDA, or RHS, meets the
criteria for a qualified mortgage in the applicable rules prescribed
by those agencies (but only once such rules are in effect;
otherwise, the Bureau's criteria for a qualified mortgage applies to
those loans). To explain further, loans enumerated in 12 CFR
1026.43(a) are not ``covered transactions'' under the Bureau's
ability-to-repay requirements in 12 CFR 1026.43, and thus cannot be
qualified mortgages (entitled to a rebuttable presumption or safe
harbor of compliance with the ability-to-repay requirements of 12
CFR 1026.43, see, e.g., 12 CFR 1026.43(e)(1)). These include an
extension of credit made pursuant to a program administered by a
Housing Finance Agency, as defined under 24 CFR 266.5, or pursuant
to a program
[[Page 78584]]
authorized by sections 101 and 109 of the Emergency Economic
Stabilization Act of 2008. See 12 CFR 1026.43(a)(3)(iv) and (vi).
They also include extensions of credit made by a creditor identified
in 12 CFR 1026.43(a)(3)(v). However, these loans are eligible for
the exemption in Sec. 226.43(b)(1) if they meet the Bureau's
qualified mortgage criteria in Sec. 1026.43(e)(2), (4), (5), or (6)
or Sec. 1026.43(f) (including limits on when loans must be
consummated) or, for loans that are insured, guaranteed, or
administered by HUD, VA, USDA, or RHS, in applicable rules
prescribed by those agencies (but only once such rules are in
effect; otherwise, the Bureau's criteria for a qualified mortgage
applies to those loans). For example, assume that HUD has prescribed
rules to define loans insured under its programs that are qualified
mortgages and those rules are in effect. Assume further that a
creditor designated as a Community Development Financial
Institution, as defined under 12 CFR 1805.104(h), originates a loan
insured by the Federal Housing Administration, which is a part of
HUD. The loan is not a ``covered transaction'' and thus is not a
qualified mortgage. See 12 CFR 1026.43(a)(3)(v)(A) and (b)(1).
Nonetheless, the transaction is eligible for an exemption from the
appraisal requirements of Sec. 226.43 if it meets the qualified
mortgage criteria in HUD's rules. Nothing in Sec. 226.43(b)(1)
alters the definition of a qualified mortgage under regulations of
the Bureau, HUD, VA, USDA, or RHS.
Paragraph 43(b)(2)
1. Threshold amount. For purposes of Sec. 226.43(b)(2), the
threshold amount in effect during a particular one-year period is
the amount stated below for that period. The threshold amount is
adjusted effective January 1 of every year by the percentage
increase in the Consumer Price Index for Urban Wage Earners and
Clerical Workers (CPI-W) that was in effect on the preceding June 1.
Every year, this comment will be amended to provide the threshold
amount for the upcoming one-year period after the annual percentage
change in the CPI-W that was in effect on June 1 becomes available.
Any increase in the threshold amount will be rounded to the nearest
$100 increment. For example, if the percentage increase in the CPI-W
would result in a $950 increase in the threshold amount, the
threshold amount will be increased by $1,000. However, if the
percentage increase in the CPI-W would result in a $949 increase in
the threshold amount, the threshold amount will be increased by
$900.
i. From January 18, 2014, through December 31, 2014, the
threshold amount is $25,000.
2. Qualifying for exemption--in general. A transaction is exempt
under Sec. 226.43(b)(2) if the creditor makes an extension of
credit at consummation that is equal to or below the threshold
amount in effect at the time of consummation.
3. Qualifying for exemption--subsequent changes. A transaction
does not meet the condition for an exemption under Sec.
226.43(b)(2) merely because it is used to satisfy and replace an
existing exempt loan, unless the amount of the new extension of
credit is equal to or less than the applicable threshold amount. For
example, assume a closed-end loan that qualified for a Sec.
226.43(b)(2) exemption at consummation in year one is refinanced in
year ten and that the new loan amount is greater than the threshold
amount in effect in year ten. In these circumstances, the creditor
must comply with all of the applicable requirements of Sec. 226.43
with respect to the year ten transaction if the original loan is
satisfied and replaced by the new loan, unless another exemption
from the requirements of Sec. 226.43 applies. See Sec. 226.43(b)
and (d)(7).
* * * * *
Paragraph 43(b)(4)
* * * * *
2. Financing initial construction. The exemption for
construction loans in Sec. 226.43(b)(4) applies to temporary
financing of the construction of a dwelling that will be replaced by
permanent financing once construction is complete. The exemption
does not apply, for example, to loans to finance the purchase of
manufactured homes that have not been or are in the process of being
built when the financing obtained by the consumer at that time is
permanent. See Sec. 226.43(b)(8).
Paragraph 43(b)(7)(i)(A)
1. Same credit risk holder. The requirement that the holder of
the credit risk on the existing obligation and the refinancing be
the same applies to situations in which an entity bears the
financial responsibility for the default of a loan by either holding
the loan in its portfolio or guaranteeing payments of principal and
any interest to investors in a mortgage-backed security in which the
loan is pooled. See Sec. 226.43(a)(4) (defining ``credit risk'').
For example, a credit risk holder could be a bank that bears the
credit risk on the existing obligation by holding the loan in the
bank's portfolio. Another example of a credit risk holder would be a
government-sponsored enterprise that bears the risk of default on a
loan by guaranteeing the payment of principal and any interest on a
loan to investors in a mortgage-backed security. The holder of
credit risk under Sec. 226.43(b)(7)(i)(A) does not mean individual
investors in a mortgage-backed security or providers of private
mortgage insurance.
2. Same credit risk holder--illustrations.
Illustrations of the credit risk holder of the existing
obligation continuing to be the credit risk holder of the
refinancing include, but are not limited to, the following:
i. The existing obligation is held in the portfolio of a bank,
thus the bank holds the credit risk. The bank arranges to refinance
the loan and also will hold the refinancing in its portfolio. If the
refinancing otherwise meets the requirements for an exemption under
Sec. 226.43(b)(7), the transaction will qualify for the exemption
because the credit risk holder is the same for the existing
obligation and the refinance transaction. In this case, the
exemption would apply regardless of whether the bank arranged to
refinance the loan directly or indirectly, such as through the
servicer or subservicer on the existing obligation.
ii. The existing obligation is held in the portfolio of a
government-sponsored enterprise (GSE), thus the GSE holds the credit
risk. The existing obligation is then refinanced by the servicer of
the loan and immediately transferred to the GSE. The GSE pools the
refinancing in a mortgage-backed security guaranteed by the GSE,
thus the GSE holds the credit risk on the refinance loan. If the
refinance transaction otherwise meets the requirements for an
exemption under Sec. 226.43(b)(7), the transaction will qualify for
the exemption because the credit risk holder is the same for the
existing obligation and the refinance transaction. In this case, the
exemption would apply regardless of whether the existing obligation
was refinanced by the servicer or subservicer on the existing
obligation (acting as a ``creditor'' under Sec. 1026.2(a)(17)) or
by a different creditor.
3. Forward commitments. A creditor may make a mortgage loan that
will be sold or otherwise transferred pursuant to an agreement that
has been entered into at or before the time the transaction is
consummated. Such an agreement is sometimes known as a ``forward
commitment.'' A refinance loan does not satisfy the requirement of
Sec. 226.43(b)(7)(i)(A) if the loan will be acquired pursuant to a
forward commitment, such that the credit risk on the refinance loan
will transfer to a person who did not hold the credit risk on the
existing obligation.
Paragraph 43(b)(7)
Paragraph 43(b)(7)(ii)
1. Regular periodic payments. Under Sec. 226.43(b)(7)(ii), the
regular periodic payments on the refinance loan must not: result in
an increase of the principal balance (negative amortization); allow
the consumer to defer repayment of principal (see 12 CFR 1026.43 and
the Official Staff Interpretations to the Bureau's Regulation Z,
comment 43(e)(2)(i)-2); or result in a balloon payment. Thus, the
terms of the legal obligation must require the consumer to make
payments of principal and interest on a monthly or other periodic
basis that will repay the loan amount over the loan term. Except for
payments resulting from any interest rate changes after consummation
in an adjustable-rate or step-rate mortgage, the periodic payments
must be substantially equal. For an explanation of the term
``substantially equal,'' see 12 CFR 1026.43 and the Official Staff
Interpretations to the Bureau's Regulation Z, comment 43(c)(5)(i)-4.
In addition, a single-payment transaction is not a refinancing
meeting the requirements of Sec. 226.43(b)(7) because it does not
require ``regular periodic payments.''
Paragraph 43(b)(7)(iii)
1. Permissible use of proceeds. The exemption for a refinancing
under Sec. 226.43(b)(7) is available only if the proceeds from the
refinancing are used exclusively for the existing obligation and
amounts attributed solely to the costs of the refinancing. The
existing obligation includes the unpaid principal balance of the
existing first lien loan, any earned unpaid finance charges, and any
other lawful charges related to the existing loan. For guidance on
the meaning of refinancing costs, see 12 CFR
[[Page 78585]]
1026.23, the Official Staff Interpretations to the Bureau's
Regulations Z, comment 23(f)-4. If the proceeds of a refinancing are
used for other purposes, such as to pay off other liens or to
provide additional cash to the consumer for discretionary spending,
the transaction does not qualify for the exemption for a refinancing
under Sec. 226.43(b)(7) from the appraisal requirements in Sec.
226.43.
For applications received on or after July 18, 2015
Paragraph 43(b)(8)
Paragraph 43(b)(8)(i)
1. Secured by new manufactured home and land--physical visit of
the interior. A transaction secured by a new manufactured home and
land is subject to the requirements of Sec. 226.43(c) through (f)
except for the requirement in Sec. 226.43(c)(1) that the appraiser
conduct a physical inspection of the interior of the property. Thus,
for example, a creditor of a loan secured by a new manufactured home
and land could comply with Sec. 226.43(c)(1) by obtaining an
appraisal conducted by a state-certified or -licensed appraiser
based on plans and specifications for the new manufactured home and
an inspection of the land on which the property will be sited, as
well as any other information necessary for the appraiser to
complete the appraisal assignment in conformity with the Uniform
Standards of Professional Appraisal Practice and the requirements of
FIRREA and any implementing regulations.
Paragraph 43(b)(8)(ii)
1. Secured by a manufactured home and not land. Section
226.43(b)(8)(ii) applies to a higher-priced mortgage loan secured by
a manufactured home and not land, regardless of whether the home is
titled as realty by operation of State law.
Paragraph 43(b)(8)(ii)(B)
1. Independent. A cost service provider from which the creditor
obtains a manufactured home unit cost estimate under Sec.
226.43(b)(8)(ii)(B) is ``independent'' if that person is not
affiliated with the creditor in the transaction, such as by common
corporate ownership, and receives no direct or indirect financial
benefits based on whether the transaction is consummated.
2. Adjustments. The requirement that the cost estimate be from
an independent cost service provider does not prohibit a creditor
from providing a cost estimate that reflects adjustments to account
for factors such as special features, condition or location.
However, the requirement that the estimate be obtained from an
independent cost service provider means that any adjustments to the
estimate must be based on adjustment factors available as part of
the independent cost service used, with associated values that are
determined by the independent cost service.
Paragraph 43(b)(8)(ii)(C)
1. Interest in the property. A person has a direct or indirect
in the property if, for example, the person has any ownership or
reasonably foreseeable ownership interest in the manufactured home.
To illustrate, a person who seeks a loan to purchase the
manufactured home to be valued has a reasonably foreseeable
ownership interest in the property.
2. Interest in the transaction. A person has a direct or
indirect interest in the transaction if, for example, the person or
an affiliate of that person also serves as a loan officer of the
creditor or otherwise arranges the credit transaction, or is the
retail dealer of the manufactured home. A person also has a
prohibited interest in the transaction if the person is compensated
or otherwise receives financial or other benefits based on whether
the transaction is consummated.
3. Training in valuing manufactured homes. Training in valuing
manufactured homes includes, for example, successfully completing a
course in valuing manufactured homes offered by a State or national
appraiser association or receiving job training from an employer in
the business of valuing manufactured homes.
4. Manufactured home valuation--example. A valuation in
compliance with Sec. 226.43(b)(8)(ii)(C) would include, for
example, an appraisal of the manufactured home in accordance with
the appraisal requirements for a manufactured home classified as
personal property under the Title I Manufactured Home Loan Insurance
Program of the U.S. Department of Housing and Urban Development,
pursuant to section 2(b)(10) of the National Housing Act, 12 U.S.C.
1703(b)(10).
* * * * *
43(f)(2) Timing
* * * * *
2. 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)(2).
* * * * *
Bureau of Consumer Financial Protection
Authority and Issuance
For the reasons stated above, the Bureau further amends Regulation
Z, 12 CFR part 1026, as amended February 13, 2013 (78 FR 10368), as
follows:
PART 1026--TRUTH IN LENDING ACT (REGULATION Z)
0
10. 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 E--Special Rules for Certain Home Mortgage Transactions
0
11a. Section 1026.35 is amended by;
0
a. Revising the paragraph (c) subject heading and paragraphs (c)(1)(ii)
through (iv);
0
b. Adding paragraphs (c)(1)(v) through (vii);
0
c. Revising paragraphs (c)(2) introductory text, (c)(2)(i) and (ii),
and (v); and
0
d. Adding paragraphs (c)(2)(vii) and (viii).
The revisions and additions read as follows:
Sec. 1026.35 Requirements for higher-priced mortgage loans.
* * * * *
(c) Appraisals--(1) * * *
(ii) Credit risk means the financial risk that a consumer will
default on a loan.
(iii) Manufactured home has the same meaning as in 24 CFR 3280.2.
(iv) Manufacturer's invoice means a document issued by a
manufacturer and provided with a manufactured home to a retail dealer
that separately details the wholesale (base) prices at the factory for
specific models or series of manufactured homes and itemized options
(large appliances, built-in items and equipment), plus actual itemized
charges for freight from the factory to the dealer's lot or the
homesite (including any rental of wheels and axles) and for any sales
taxes to be paid by the dealer. The invoice may recite such prices and
charges on an itemized basis or by stating an aggregate price or
charge, as appropriate, for each category.
(v) 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.
(vi) New manufactured home means a manufactured home that has not
been previously occupied.
(vii) 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. Unless otherwise specified, the requirements in
paragraph (c)(3) through (6) of this section do not apply to the
following types of transactions:
(i) A loan that satisfies the criteria of a qualified mortgage as
defined pursuant to 15 U.S.C. 1639c;
(ii) An extension of credit for which the amount of credit extended
is equal to or less than the applicable threshold amount, which is
adjusted every year to reflect increases in the Consumer Price
[[Page 78586]]
Index for Urban Wage Earners and Clerical Workers, as applicable, and
published in the official staff commentary to this paragraph
(c)(2)(ii);
* * * * *
(v) 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.
* * * * *
(vii) An extension of credit that is a refinancing secured by a
first lien, with refinancing defined as in Sec. 1026.20(a) (except
that the creditor need not be the original creditor or a holder or
servicer of the original obligation), provided that the refinancing
meets the following criteria:
(A) Either--
(1) The credit risk of the refinancing is retained by the person
that held the credit risk of the existing obligation and there is no
commitment, at consummation, to transfer the credit risk to another
person; or
(2) The refinancing is insured or guaranteed by the same Federal
government agency that insured or guaranteed the existing obligation;
(B) The regular periodic payments under the refinance loan do not--
(1) Cause the principal balance to increase;
(2) Allow the consumer to defer repayment of principal; or
(3) Result in a balloon payment, as defined in Sec.
1026.18(s)(5)(i); and
(C) The proceeds from the refinancing are used solely to satisfy
the existing obligation and amounts attributed solely to the costs of
the refinancing; and
(viii) A transaction secured in whole or in part by a manufactured
home.
0
11b. Effective July 18, 2015, Sec. 1026.35(c)(2)(viii) is revised to
read as follows:
Sec. 1026.35 Requirements for higher-priced mortgage loans.
* * * * *
(c) * * *
(2) * * *
(viii) A transaction secured by:
(A) A new manufactured home and land, but the exemption shall only
apply to the requirement in paragraph (c)(3)(i) of this section that
the appraiser conduct a physical visit of the interior of the new
manufactured home; or
(B) A manufactured home and not land, for which the creditor
obtains one of the following and provides a copy to the consumer no
later than three business days prior to consummation of the
transaction--
(1) For a new manufactured home, the manufacturer's invoice for the
manufactured home securing the transaction, provided that the date of
manufacture is no earlier than 18 months prior to the creditor's
receipt of the consumer's application for credit;
(2) A cost estimate of the value of the manufactured home securing
the transaction obtained from an independent cost service provider; or
(3) A valuation, as defined in Sec. 1026.42(b)(3), of the
manufactured home performed by a person who has no direct or indirect
interest, financial or otherwise, in the property or transaction for
which the valuation is performed and has training in valuing
manufactured homes.
* * * * *
0
12. In Appendix N to part 1026, the introductory text is republished
and paragraph 7 is revised 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:
* * * * *
7. Indicates that a physical property visit of the interior of
the property was performed, as applicable.
* * * * *
0
13. In Supplement I to part 1026, under Section 1026.35--Requirements
for Higher Priced Mortgages Loans:
0
a. The 35(c)(2) entry is amended by adding paragraph 1.
0
b. A 35(c)(2)(i) entry is added.
0
c. The 35(c)(2)(ii) entry is revised.
0
d. The 35(c)(2)(iv) entry is amended by adding paragraph 2.
0
e. A 35(c)(2)(vii)(A)(1) entry is added.
0
f. Entries for 35(c)(2)(vii)(B) and (C) are added.
0
g. Effective July 18, 2015, entries for 35(c)(2)(viii)(A) and (B) are
added.
0
h. Effective July 18, 2015, a 35(c)(2)(viii)(B)(2) entry is added.
0
i. Effective July 18, 2015, a 35(c)(2)(viii)(C)(3) entry is added.
0
j. Under the 35(c)(6)(ii) entry, paragraph 2 is removed and paragraph 3
is redesignated as paragraph 2.
The revisions and additions read as follows:
Supplement I to Part 1026--Official Interpretations
* * * * *
Subpart E--Special Rules for Certain Home Mortgage Transactions
Section 1026.35--Requirements for Higher-Priced Mortgage Loans
* * * * *
Paragraph 35(c)(2) Exemptions
1. Compliance with title XI of the Financial Institutions
Reform, Recovery, and Enforcement Act of 1989 (FIRREA). Section
1026.35(c)(2) provides exemptions solely from the requirements of
section 1026.35(c)(3) through (6). Institutions subject to the
requirements of FIRREA and its implementing regulations that make a
loan qualifying for an exemption under section 1026.35(c)(2) must
still comply with appraisal and evaluation requirements under FIRREA
and its implementing regulations.
Paragraph 35(c)(2)(i)
1. Qualified mortgage criteria. Under Sec. 1026.35(c)(2)(i), a
loan is exempt from the appraisal requirements of Sec. 1026.35(c)
if either:
i. The loan is--(1) subject to the Bureau's ability-to-repay
requirements in Sec. 1026.43 as a ``covered transaction'' (defined
in Sec. 1026.43(b)(1)) and (2) a qualified mortgage pursuant to the
Bureau's rules or, for loans insured, guaranteed, or administered by
the U.S. Department of Housing and Urban Development (HUD), U.S.
Department of Veterans Affairs (VA), U.S. Department of Agriculture
(USDA), or Rural Housing Service (RHS), a qualified mortgage
pursuant to applicable rules prescribed by those agencies (but only
once such rules are in effect; otherwise, the Bureau's definition of
a qualified mortgage applies to those loans); or
ii. The loan is--(1) not subject to the Bureau's ability-to-
repay requirements in Sec. 1026.43 as a ``covered transaction''
(defined in Sec. 1026.43(b)(1)), but (2) meets the criteria for a
qualified mortgage in the Bureau's rules or, for loans insured,
guaranteed, or administered by HUD, VA, USDA, or RHS, meets the
criteria for a qualified mortgage in the applicable rules prescribed
by those agencies (but only once such rules are in effect;
otherwise, the Bureau's criteria for a qualified mortgage applies to
those loans). To explain further, loans enumerated in Sec.
1026.43(a) are not ``covered transactions'' under the Bureau's
ability-to-repay requirements in Sec. 1026.43, and thus cannot be
qualified mortgages (entitled to a rebuttable presumption or safe
harbor of compliance with the ability-to-repay requirements of Sec.
1026.43, see, e.g., Sec. 1026.43(e)(1)). These include an extension
of credit made pursuant to a program administered by a Housing
Finance Agency, as defined under 24 CFR 266.5, or pursuant to a
program authorized by sections 101 and 109 of the Emergency Economic
Stabilization Act of 2008. See Sec. 1026.43(a)(3)(iv) and (vi).
They also include extensions of credit made by a creditor identified
in Sec. 1026.43(a)(3)(v). However, these loans are eligible for the
exemption in Sec. 1026.35(c)(2)(i) if they meet the Bureau's
qualified mortgage criteria in Sec. 1026.43(e)(2), (4), (5), or (6)
or Sec. 1026.43(f) (including limits on when loans must be
consummated) or, for loans that are insured, guaranteed, or
administered by HUD, VA, USDA, or RHS, in applicable rules
prescribed by those agencies (but only once such rules are in
effect; otherwise, the Bureau's criteria for a qualified mortgage
applies to those loans). For example, assume that HUD has prescribed
rules to define loans insured
[[Page 78587]]
under its programs that are qualified mortgages and those rules are
in effect. Assume further that a creditor designated as a Community
Development Financial Institution, as defined under 12 CFR
1805.104(h), originates a loan insured by the Federal Housing
Administration, which is a part of HUD. The loan is not a ``covered
transaction'' and thus is not a qualified mortgage. See Sec.
1026.43(a)(3)(v)(A) and (b)(1). Nonetheless, the transaction is
eligible for an exemption from the appraisal requirements of Sec.
1026.35(c) if it meets the qualified mortgage criteria in HUD's
rules. Nothing in Sec. 1026.35(c)(2)(i) alters the definition of a
qualified mortgage under regulations of the Bureau, HUD, VA, USDA,
or RHS.
* * * * *
Paragraph 35(c)(2)(ii)
1. Threshold amount. For purposes of Sec. 1026.35(c)(2)(ii),
the threshold amount in effect during a particular one-year period
is the amount stated below for that period. The threshold amount is
adjusted effective January 1 of every year by the percentage
increase in the Consumer Price Index for Urban Wage Earners and
Clerical Workers (CPI-W) that was in effect on the preceding June 1.
Every year, this comment will be amended to provide the threshold
amount for the upcoming one-year period after the annual percentage
change in the CPI-W that was in effect on June 1 becomes available.
Any increase in the threshold amount will be rounded to the nearest
$100 increment. For example, if the percentage increase in the CPI-W
would result in a $950 increase in the threshold amount, the
threshold amount will be increased by $1,000. However, if the
percentage increase in the CPI-W would result in a $949 increase in
the threshold amount, the threshold amount will be increased by
$900.
i. From January 18, 2014, through December 31, 2014, the
threshold amount is $25,000.
2. Qualifying for exemption--in general. A transaction is exempt
under Sec. 1026.35(c)(2)(ii) if the creditor makes an extension of
credit at consummation that is equal to or below the threshold
amount in effect at the time of consummation.
3. Qualifying for exemption--subsequent changes. A transaction
does not meet the condition for an exemption under Sec.
1026.35(c)(2)(ii) merely because it is used to satisfy and replace
an existing exempt loan, unless the amount of the new extension of
credit is equal to or less than the applicable threshold amount. For
example, assume a closed-end loan that qualified for a Sec.
1026.35(c)(2)(ii) exemption at consummation in year one is
refinanced in year ten and that the new loan amount is greater than
the threshold amount in effect in year ten. In these circumstances,
the creditor must comply with all of the applicable requirements of
Sec. 1026.35(c) with respect to the year ten transaction if the
original loan is satisfied and replaced by the new loan, unless
another exemption from the requirements of Sec. 1026.35(c) applies.
See Sec. 1026.35(c)(2) and Sec. 1026.35(c)(4)(vii).
* * * * *
Paragraph 35(c)(2)(iv)
* * * * *
2. Financing initial construction. The exemption for
construction loans in Sec. 1026.35(c)(2)(iv) applies to temporary
financing of the construction of a dwelling that will be replaced by
permanent financing once construction is complete. The exemption
does not apply, for example, to loans to finance the purchase of
manufactured homes that have not been or are in the process of being
built when the financing obtained by the consumer at that time is
permanent. See Sec. 1026.35(c)(2)(viii).
Paragraph 35(c)(2)(vii)(A)(1)
1. Same credit risk holder. The requirement that the holder of
the credit risk on the existing obligation and the refinancing be
the same applies to situations in which an entity bears the
financial responsibility for the default of a loan by either holding
the loan in its portfolio or guaranteeing payments of principal and
any interest to investors in a mortgage-backed security in which the
loan is pooled. See Sec. 1026.35(c)(1)(ii) (defining ``credit
risk''). For example, a credit risk holder could be a bank that
bears the credit risk on the existing obligation by holding the loan
in the bank's portfolio. Another example of a credit risk holder
would be a government-sponsored enterprise that bears the risk of
default on a loan by guaranteeing the payment of principal and any
interest on a loan to investors in a mortgage-backed security. The
holder of credit risk under Sec. 1026.35(c)(2)(vii)(A)(1) does not
mean individual investors in a mortgage-backed security or providers
of private mortgage insurance.
2. Same credit risk holder--illustrations.
Illustrations of the credit risk holder of the existing
obligation continuing to be the credit risk holder of the
refinancing include, but are not limited to, the following:
i. The existing obligation is held in the portfolio of a bank,
thus the bank holds the credit risk. The bank arranges to refinance
the loan and also will hold the refinancing in its portfolio. If the
refinancing otherwise meets the requirements for an exemption under
Sec. 1026.35(c)(2)(vii), the transaction will qualify for the
exemption because the credit risk holder is the same for the
existing obligation and the refinance transaction. In this case, the
exemption would apply regardless of whether the bank arranged to
refinance the loan directly or indirectly, such as through the
servicer or subservicer on the existing obligation.
ii. The existing obligation is held in the portfolio of a
government-sponsored enterprise (GSE), thus the GSE holds the credit
risk. The existing obligation is then refinanced by the servicer of
the loan and immediately transferred to the GSE. The GSE pools the
refinancing in a mortgage-backed security guaranteed by the GSE,
thus the GSE holds the credit risk on the refinance loan. If the
refinance transaction otherwise meets the requirements for an
exemption under Sec. 1026.35(c)(2)(vii), the transaction will
qualify for the exemption because the credit risk holder is the same
for the existing obligation and the refinance transaction. In this
case, the exemption would apply regardless of whether the existing
obligation was refinanced by the servicer or subservicer on the
existing obligation (acting as a ``creditor'' under Sec.
1026.2(a)(17)) or by a different creditor.
3. Forward commitments. A creditor may make a mortgage loan that
will be sold or otherwise transferred pursuant to an agreement that
has been entered into at or before the time the transaction is
consummated. Such an agreement is sometimes known as a ``forward
commitment.'' A refinance loan does not satisfy the requirement of
Sec. 1026.35(c)(2)(vii)(A)(1) if the loan will be acquired pursuant
to a forward commitment, such that the credit risk on the refinance
loan will transfer to a person who did not hold the credit risk on
the existing obligation.
Paragraph 35(c)(2)(vii)(B)
1. Regular periodic payments. Under Sec. 1026.35(c)(2)(vii)(B),
the regular periodic payments on the refinance loan must not: result
in an increase of the principal balance (negative amortization);
allow the consumer to defer repayment of principal (see comment
43(e)(2)(i)-2); or result in a balloon payment. Thus, the terms of
the legal obligation must require the consumer to make payments of
principal and interest on a monthly or other periodic basis that
will repay the loan amount over the loan term. Except for payments
resulting from any interest rate changes after consummation in an
adjustable-rate or step-rate mortgage, the periodic payments must be
substantially equal. For an explanation of the term ``substantially
equal,'' see comment 43(c)(5)(i)-4. In addition, a single-payment
transaction is not a refinancing meeting the requirements of Sec.
1026.35(c)(2)(vii) because it does not require ``regular periodic
payments.''
Paragraph 35(c)(2)(vii)(C)
1. Permissible use of proceeds. The exemption for a refinancing
under Sec. 1026.35(c)(2)(vii) is available only if the proceeds
from the refinancing are used exclusively for the existing
obligation and amounts attributed solely to the costs of the
refinancing. The existing obligation includes the unpaid principal
balance of the existing first lien loan, any earned unpaid finance
charges, and any other lawful charges related to the existing loan.
For guidance on the meaning of refinancing costs, see comment 23(f)-
4. If the proceeds of a refinancing are used for other purposes,
such as to pay off other liens or to provide additional cash to the
consumer for discretionary spending, the transaction does not
qualify for the exemption for a refinancing under Sec.
1026.35(c)(2)(vii) from the appraisal requirements in Sec.
1026.35(c).
For applications received on or after July 18, 2015
Paragraph 35(c)(2)(viii)(A)
1. Secured by new manufactured home and land--physical visit of
the interior. A transaction secured by a new manufactured home and
land is subject to the requirements of Sec. 1026.35(c)(3) through
(6) except for the requirement in Sec. 1026.35(c)(3)(i) that the
appraiser conduct a physical inspection of the interior of the
property. Thus, for
[[Page 78588]]
example, a creditor of a loan secured by a new manufactured home and
land could comply with Sec. 1026.35(c)(3)(i) by obtaining an
appraisal conducted by a state-certified or -licensed appraiser
based on plans and specifications for the new manufactured home and
an inspection of the land on which the property will be sited, as
well as any other information necessary for the appraiser to
complete the appraisal assignment in conformity with the Uniform
Standards of Professional Appraisal Practice and the requirements of
FIRREA and any implementing regulations.
Paragraph 35(c)(2)(viii)(B)
1. Secured by a manufactured home and not land. Section
1026.35(c)(2)(viii)(B) applies to a higher-priced mortgage loan
secured by a manufactured home and not land, regardless of whether
the home is titled as realty by operation of state law.
Paragraph 35(c)(2)(viii)(B)(2)
1. Independent. A cost service provider from which the creditor
obtains a manufactured home unit cost estimate under Sec.
1026.35(c)(2)(viii)(B)(2) is ``independent'' if that person is not
affiliated with the creditor in the transaction, such as by common
corporate ownership, and receives no direct or indirect financial
benefits based on whether the transaction is consummated.
2. Adjustments. The requirement that the cost estimate be from
an independent cost service provider does not prohibit a creditor
from providing a cost estimate that reflects adjustments to account
for factors such as special features, condition or location.
However, the requirement that the estimate be obtained from an
independent cost service provider means that any adjustments to the
estimate must be based on adjustment factors available as part of
the independent cost service used, with associated values that are
determined by the independent cost service.
Paragraph 35(c)(2)(viii)(C)(3)
1. Interest in the property. A person has a direct or indirect
in the property if, for example, the person has any ownership or
reasonably foreseeable ownership interest in the manufactured home.
To illustrate, a person who seeks a loan to purchase the
manufactured home to be valued has a reasonably foreseeable
ownership interest in the property.
2. Interest in the transaction. A person has a direct or
indirect interest in the transaction if, for example, the person or
an affiliate of that person also serves as a loan officer of the
creditor or otherwise arranges the credit transaction, or is the
retail dealer of the manufactured home. A person also has a
prohibited interest in the transaction if the person is compensated
or otherwise receives financial or other benefits based on whether
the transaction is consummated.
3. Training in valuing manufactured homes. Training in valuing
manufactured homes includes, for example, successfully completing a
course in valuing manufactured homes offered by a state or national
appraiser association or receiving job training from an employer in
the business of valuing manufactured homes.
4. Manufactured home valuation--example. A valuation in
compliance with Sec. 1026.35(c)(2)(viii)(B)(3) would include, for
example, an appraisal of the manufactured home in accordance with
the appraisal requirements for a manufactured home classified as
personal property under the Title I Manufactured Home Loan Insurance
Program of the U.S. Department of Housing and Urban Development,
pursuant to section 2(b)(10) of the National Housing Act, 12 U.S.C.
1703(b)(10).
* * * * *
Dated: December 10, 2013.
Thomas J. Curry,
Comptroller of the Currency.
By order of the Board of Governors of the Federal Reserve
System, December 11, 2013.
Robert deV. Frierson,
Secretary of the Board.
Dated: December 10, 2013.
Richard Cordray,
Director, Bureau of Consumer Financial Protection.
In consultation with:
By the National Credit Union Administration Board on December
10, 2013.
Gerard Poliquin,
Secretary of the Board.
Dated at Washington, DC, this 10th day of December, 2013.
By order of the Board of Directors.
Federal Deposit Insurance Corporation.
Robert E. Feldman,
Executive Secretary.
Dated: December 9, 2013.
Edward J. DeMarco,
Acting Director, Federal Housing Finance Agency.
[FR Doc. 2013-30108 Filed 12-18-13; 4:15 pm]
BILLING CODE 4810-33-P