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Mortgage Lending: 7.6.4.2 FIRREA

The first federal law regulating real estate appraisals was Title XI of the Financial Institutions, Recovery, Reform, and Enforcement Act of 1989 (FIRREA), entitled “Real Estate Appraisal Reform Amendments.”691 Title XI prohibits financial institutions692 and the GSEs (Fannie Mae and Freddie Mac) from purchasing an appraisal from anyone except a state-licensed or certified appraiser.693 (Certified appraisers have additional training.) The Act

Mortgage Lending: 7.6.4.3 Uniform Standards of Appraisal Practice (USPAP)

As explained in § 7.6.4.2, supra, Congress has designated “The Appraisal Foundation” as the official standard-setting body for appraisals in the United States. The Foundation’s Appraisal Standards Board issues those standards in a volume called the Uniform Standards of Professional Appraisal Practice (USPAP). The Board also issues advisory opinions interpreting the standards.

Truth in Lending: 11.7.3.5 Special Statutory Damages for Violation of Dodd-Frank Property Appraisal Requirements

The Dodd-Frank Act added new requirements for appraisals when a creditor extends credit in the form of a “higher-risk mortgage.”862 The statute includes a special statutory damage award for violations:

In addition to any other liability to any person under this title, a creditor found to have willfully failed to obtain an appraisal as required in this section shall be liable to the applicant or borrower for the sum of $2,000.863

Truth in Lending: 9.5.2 Annual Percentage Rate Trigger for Higher-Priced Loan Protections

A first-lien loan secured by the consumer’s principal dwelling meets the APR trigger for HPMLs if its APR exceeds the average prime offer rate for a comparable transaction by 1.5 or more percentage points.488 For “jumbo loans,” loans (those with a principal amount exceeding the maximum loan size authorized for Fannie Mae and Freddie Mac), the rate trigger is 2.5 percentage points.489 The APR on a subordinate-lien loan must exceed the average prime offer rate for a comparable transaction by 3

Truth in Lending: 9.5.4.1 Overview

Regulation Z imposes four restrictions on loans meeting the APR trigger for higher-priced mortgages:

  • • Ability-to-repay restrictions;
  • • Limits on prepayment penalties;
  • • Escrow requirements; and
  • • A prohibition on evading these restrictions by structuring the loan as open-end credit.

Truth in Lending: 9.5.4.6.1 General

TILA, as amended by Dodd-Frank, prohibits creditors from making “higher-risk mortgages” without obtaining a written appraisal that meets certain requirements.529 When the CFPB and other federal banking regulators adopted a regulation implementing this requirement, they decided to use the existing term “higher-priced mortgage loan,” rather than creating a separate definition for “higher-risk mortgages.”530 The appraisal rule requires creditors to use a licensed or certified appraiser who prep

Mortgage Lending: 7.6.4.5 Appraisal Review, Supervision, and Independence

FIRREA has the express purposes of ensuring that:

Federal financial and public policy interests in real estate related transactions will be protected by requiring that real estate appraisals utilized in connection with federally related transactions are performed . . . by individuals whose competency has been demonstrated and whose professional conduct will be subject to effective supervision.716

Mortgage Lending: 7.6.4.6 Reconsideration of Value

When there is a problem with an appraisal that affects the valuation of the property, the one who ordered the appraisal may ask the appraiser to take a second look. This process is called requesting a “reconsideration of value” (ROV). Because the prospective lender is most often the one who orders an appraisal, homeowners or borrowers who disagree with a valuation must direct their request to the lender. Upon receiving a request for a reconsideration of value, the lender will evaluate it and decide whether to forward it to the appraiser.

Mortgage Lending: 7.6.5.1 Background

The rules for when an appraisal is required are an overlapping mix of each lender’s own policies, banking regulations, secondary market requirements, and agency guarantor rules. Nevertheless, despite repeated evidence that valuation problems pose a threat to borrowers and the financial system, the threshold for requiring an appraisal has steadily been weakened from when Title XI of FIRREA was enacted.

Mortgage Lending: 7.6.5.2 Current Standards for When an Appraisal Is Required

The current standards for when an appraisal is required vary widely depending on the value and location of the property, who regulates the lender, and who will purchase, insure, or guarantee the loan. And even then, the lender itself may require an appraisal where no other requirement would.

In 2018, Congress amended FIRREA to add an exemption for certain loans in rural areas.754 Federally regulated lenders are not required to obtain an appraisal under the following conditions:

Mortgage Lending: 7.6.6.1 What to Look For

Inflated values are typically achieved by misrepresenting the condition of the property, by using false comparables, such as sales of other flipped properties, or omitting key information about the sales transactions, such as a sale of the property within the previous year. Appraisers may overstate how many square feet are within a building, attach pictures of a different house, or provide a false or misleading floor plan. Appraisers may also falsely describe the neighborhood as one that is stable or has high home values, when in fact home values are low and falling in the neighborhood.

Mortgage Lending: 7.6.6.2 Getting the Original Appraisal

For loans with application dates after January 18, 2014, the Equal Credit Opportunity Act requires that borrowers be provided with a copy of the appraisal, at no cost.774 Borrowers are entitled to a copy of any appraisal done, even if their application for credit is ultimately withdrawn,775 so it may be worth exploring with a borrower whether there were prior applications for which an appraisal might have been done.

Mortgage Lending: 7.6.6.3 Retrospective and Review Appraisals

A retrospective appraisal is sanctioned by the USPAP and looks at comparable sales at the time the original appraisal was done.778 A retrospective appraisal should be accepted as evidence of the value of the house at the time of the transaction.779 The weak point of a retrospective appraisal is that the home’s condition may have changed.

Mortgage Lending: 7.6.7.2 Fact Versus Opinion

Generally, to state a UDAP, fraud, or negligence claim, one must show that the misrepresentation was factual and not an opinion.813 This usually requires a showing that the appraisal is wrong in the reported facts and not just in the valuation.814 For example, showing that the appraiser added 1000 square feet or more to a house, added extra rooms, or reported that the house had amenities it lacked—all factual matters that would tend to increase the home’s value—can help establish that the ap

Mortgage Lending: 7.6.7.3 Reliance

Reliance is likely to be a necessary component of a fraud or negligent misrepresentation claim,822 though not of other causes of action.823 But it may, nevertheless, help show standing.

Consumer Credit Regulation: 3.1.1 Overview

The “normal” operation of state law is that when a consumer enters into a transaction, the transaction must comply with the law of the state where the transaction took place. But there is nothing normal about the operation of state credit statutes, particularly where a loan is originated by a depository institution, such as a bank, savings association, or credit union.

Consumer Credit Regulation: 3.1.2.3 Banks and Savings Associations

Different rules apply to federally chartered vs. state-chartered banks and savings associations. The United States banking system consists of two parallel tracks for depository institutions—those that operate under federal charters and are federally regulated and those that operate under state charters and are primarily state regulated. Those with state charters can opt for certain forms of federal regulation and preemption of state law by opting for federal insurance of their deposits.18

Consumer Credit Regulation: 3.1.2.4 Credit Unions

Credit unions are depository institutions. Federal credit unions have federal charters and are regulated by the National Credit Union Association (NCUA). State credit unions have state charters and are subject to state banking supervision. If they are federally insured, it is through the National Credit Union Share Insurance Fund, administered by the NCUA. The NCUA has some regulatory control over state-chartered credit unions through their participation in the insurance fund.

Mortgage Lending: 5.11.2 Remedies for Violation of Duty of Good Faith

As the duty of good faith is an implied contract term, most jurisdictions allow a contract claim for violation of this duty.509 Tort liability may require a showing of some special relationship, beyond that of lender and customer, such as special circumstances giving rise to a fiduciary or quasi-fiduciary relationship or other indicia of a heightened duty.510

Consumer Credit Regulation: 3.1.2.5 Industrial Loan Companies

The federal Bank Holding Company Act (BHC Act) has established a general separation of banking and commerce by prohibiting commercial firms, such as companies engaged in industrial, retail, and information technology businesses, from owning FDIC-insured “banks.”28 However, the BHC Act exempts an industrial loan company (ILC) from the definition of “bank,” permitting a commercial firm to own an ILC, provided the ILC satisfies two criteria.29