Tuesday, February 4, 2014

Why the New Appraisal Disclosure (Reg B) is Tricky?

Effective on 1/18/2014, creditors must comply with new rules under Reg B governing appraisals ("Appraisal Rule") in connection with first lien loans secured by a dwelling with an application date of 1/18/2014 or later.

In a nutshell, a creditor must provide the borrowers a disclosure, within three business days after the receipt of a loan application, advising them of their right to receive a copy of all appraisals and other written valuations developed in connection with the loan.  Appendix C, Form 9 provides the following recommended language for the disclosure:
We may order an appraisal to determine the property's value and charge you for this appraisal. We will promptly give you a copy of any appraisal, even if your loan does not close. 
 You can pay for an additional appraisal for your own use at your own cost.
In addition, the creditor must provide a copy of the appraisal/valuation reports to the borrowers promptly upon completion or three business days before closing.

These requirements seem simple and straightforward enough.  What is so tricky about the new Reg B?

1.  Scope of Application
Unlike other federal regulations, for example, Reg Z (TILA), Reg X (RESPA), Reg V (Fair Credit Reporting Act), or the new fearsome QM Rules, the new Appraisal Rule applies broadly to both consumer credit transaction and business-purpose credit transactions.

Notably, the Official Staff Interpretations provides:
14(a)(1) In general.
1. Coverage. Section 1002.14 covers applications for credit to be secured by a first lien on a dwelling, as that term is defined in § 1002.14(b)(2), whether the credit is for a business purpose (for example, a loan to start a business) or a consumer purpose (for example, a loan to purchase a home). [Emphasis added]
In other words, if the borrowers apply for a first-lien loan secured by a dwelling (i.e., 1-4 family residence, including, mobile home, condo, and coop), the requirements under the new Appraisal Rule will be triggered.  Therefore, even if the loan is for a business purpose, for example, to acquire a non-owner occupied, 1-4 family rental/investment property, the Appraisal Rule applies.  Similarly, it applies to a business purpose loan even if the borrower is a business entity, such as a limited liability company.

In terms of scope and applicability, the Appraisal Rule departs from other federal regulations.  Creditors, who lend to business entities or rental property investors, must comply with the Appraisal Rule by providing the early disclosure. (I do note that the broad application of this disclosure requirement is an existing requirement under Reg B.)  

2. Written Valuations
While the industry is familiar with appraisal reports developed by appraisers, less is known, however, about "written valuations".  In Reg B, "valuations" is defined as follows:
any estimate of the value of a dwelling developed in connection with an application for credit.
According to this definition, valuations should cover (refer to this):
  • An appraisal report (by an appraisal whether or not licensed or certified) including the appraiser's estimate or opinion of the property’s value;
  • A document prepared by the creditor or its agent/contractor that assigns a specific monetary value to the property;
  •  A report approved by a GSE for describing  the estimate of the property’s value developed pursuant to the proprietary methodology or mechanism of the GSE;
  •  A report generated through an automated valuation model (AVM) to estimate the property’s value;
  • A broker price opinion (BPO) prepared by a real estate broker, agent, or sales person to estimate the property’s value.
In some instances, a creditor may compile valuation data, post closing, regarding a property solely for quality control purposes.  Will those valuation data be subject to this rule?  Given the overarching goal of Reg B for preventing discrimination by promoting transparency during the loan origination process, written documentation developed by a creditor after closing for quality control purposes should fall outside the scope of the Appraisal Rule.


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