[Federal Register Volume 78, Number 30 (Wednesday, February 13, 2013)]
[Rules and Regulations]
[Pages 10367-10447]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-01809]



[[Page 10367]]

Vol. 78

Wednesday,

No. 30

February 13, 2013

Part III





Department of the Treasury





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Office of the Comptroller of the Currency





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12 CFR Parts 34 and 164





Federal Reserve System





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12 CFR Part 226





National Credit Union Administration





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12 CFR Part 722





Bureau of Consumer Financial Protection





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12 CFR Part 1026





Federal Housing Finance Agency





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12 CFR Part 1222





Appraisals for Higher-Priced Mortgage Loans; Final Rule

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

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DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

12 CFR Parts 34 and 164

[Docket No. OCC-2012-0013]
RIN 1557-AD62

FEDERAL RESERVE SYSTEM

12 CFR Part 226

[Docket No. R-1443]
RIN 7100-AD90

NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Part 722

RIN 3133-AE04

BUREAU OF CONSUMER FINANCIAL PROTECTION

12 CFR Part 1026

[Docket No. CFPB-2012-0031]
RIN 3170-AA11

FEDERAL HOUSING FINANCE AGENCY

12 CFR Part 1222

RIN 2590-AA58


Appraisals for Higher-Priced Mortgage Loans

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

ACTION: Final rule; official staff commentary.

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

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

FOR FURTHER INFORMATION CONTACT: Board: Lorna Neill or Mandie Aubrey, 
Counsels, Division of Consumer and Community Affairs, at (202) 452-
3667, or Carmen Holly, Supervisory Financial Analyst, Division of 
Banking Supervision and Regulation, at (202) 973-6122, Board of 
Governors of the Federal Reserve System, Washington, DC 20551.
    Bureau: Owen Bonheimer, Counsel, or William W. Matchneer, Senior 
Counsel, Division of Research, Markets, and Regulations, Bureau of 
Consumer Financial Protection, 1700 G Street, NW., Washington, DC 
20552, at (202) 435-7000.
    FDIC: Beverlea S. Gardner, Senior Examination Specialist, Risk 
Management Section, at (202) 898-3640, Sumaya A. Muraywid, Examination 
Specialist, Risk Management Section, at (573) 875-6620, Glenn S. 
Gimble, Senior Policy Analyst, Division of Consumer Protection, at 
(202) 898-6865, Sandra S. Barker, Senior Policy Analyst, Division of 
Consumer Protection, at (202) 898-3615, Mark Mellon, Counsel, Legal 
Division, at (202) 898-3884, or Kimberly Stock, Counsel, Legal 
Division, at (202) 898-3815, or 550 17th St. NW., Washington, DC 20429.
    FHFA: Susan Cooper, Senior Policy Analyst, (202) 649-3121, Lori 
Bowes, Policy Analyst, Office of Housing and Regulatory Policy, (202) 
649-3111, Ming-Yuen Meyer-Fong, Assistant General Counsel, Office of 
General Counsel, (202) 649-3078, or Sharron P.A. Levine, Associate 
General Counsel, Office of General Counsel, (202) 649-3496, Federal 
Housing Finance Agency, 400 Seventh Street SW., Washington, DC, 20024.
    NCUA: John Brolin and Pamela Yu, Staff Attorneys, or Frank 
Kressman, Associate General Counsel, Office of General Counsel, at 
(703) 518-6540, or Vincent Vieten, Program Officer, Office of 
Examination and Insurance, at (703) 518-6360, or 1775 Duke Street, 
Alexandria, Virginia, 22314.
    OCC: Robert L. Parson, Appraisal Policy Specialist, (202) 649-6423, 
G. Kevin Lawton, Appraiser (Real Estate Specialist), (202) 649-7152, 
Carolyn B. Engelhardt, Bank Examiner (Risk Specialist--Credit), (202) 
649-6404, Charlotte M. Bahin, Senior Counsel or Mitchell Plave, Special 
Counsel, Legislative & Regulatory Activities Division, (202) 649-5490, 
Krista LaBelle, Special Counsel, Community and Consumer Law Division, 
(202) 649-6350, or 250 E Street SW., Washington DC 20219.

SUPPLEMENTARY INFORMATION:

I. Background

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

[[Page 10369]]

Bureau's version of the regulations under this final rule.
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    \1\ For motor vehicle dealers as defined in section 1029 of the 
Dodd-Frank Act, TILA directs the Board to prescribe regulations to 
carry out the purposes of TILA and authorizes the Board to issue 
regulations that contain such classifications, differentiations, or 
other provisions, or that provide for such adjustments and 
exceptions for any class of transactions, that in the Board's 
judgment are necessary or proper to effectuate the purposes of TILA, 
or prevent circumvention or evasion of TILA. 15 U.S.C. 5519; 15 
U.S.C. 1604(a).
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    The Dodd-Frank Act \2\ was signed into law on July 21, 2010. 
Section 1471 of the Dodd-Frank Act's Title XIV, Subtitle F (Appraisal 
Activities), added a new TILA section 129H, 15 U.S.C. 1639h, which 
establishes appraisal requirements that apply to ``higher-risk 
mortgages.'' Specifically, new TILA section 129H prohibits a creditor 
from extending credit in the form of a higher-risk mortgage loan to any 
consumer without first:
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    \2\ 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 a physical property visit of the 
interior of the property.
     Obtaining an additional appraisal from a different 
certified or licensed appraiser if the higher-risk mortgage finances 
the purchase or acquisition of a property from a seller at a higher 
price than the seller paid, within 180 days of the seller's purchase or 
acquisition. The additional appraisal must include an analysis of the 
difference in sale prices, changes in market conditions, and any 
improvements made to the property between the date of the previous sale 
and the current sale.
    A creditor of a ``higher-risk mortgage'' must also:
     Provide the applicant, at the time of the initial mortgage 
application, with a statement that any appraisal prepared for the 
mortgage is for the sole use of the creditor, and that the applicant 
may choose to have a separate appraisal conducted at the applicant's 
expense.
     Provide the applicant with one copy of each appraisal 
conducted in accordance with TILA section 129H without charge, at least 
three (3) days prior to the transaction closing date.
    New TILA section 129H(f) defines a ``higher-risk mortgage'' with 
reference to the annual percentage rate (APR) for the transaction. A 
higher-risk mortgage is a ``residential mortgage loan'' \3\ secured by 
a principal dwelling with an APR that exceeds the average prime offer 
rate (APOR) for a comparable transaction as of the date the interest 
rate is set--
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    \3\ See Dodd-Frank Act, Sec.  1401; TILA section 103(cc)(5), 15 
U.S.C. 1602(cc)(5) (defining ``residential mortgage loan'').
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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 the maximum limitation on the 
original principal obligation of a mortgage in effect for a residence 
of the applicable size, as of the date of the interest rate set, 
pursuant to the sixth sentence of section 305(a)(2) of the Federal Home 
Loan Mortgage Corporation Act (12 U.S.C. 1454);
     By 2.5 or more percentage points, for a first lien 
residential mortgage loan having an original principal obligation 
amount that exceeds the amount for the maximum limitation on the 
original principal obligation of a mortgage in effect for a residence 
of the applicable size, as of the date of the interest rate set, 
pursuant to the sixth sentence of section 305(a)(2) of the Federal Home 
Loan Mortgage Corporation Act (12 U.S.C. 1454); or
     By 3.5 or more percentage points, for a subordinate lien 
residential mortgage loan.
    The definition of ``higher-risk mortgage'' expressly excludes 
``qualified mortgages,'' as defined in TILA section 129C, and ``reverse 
mortgage loans that are qualified mortgages,'' as defined in TILA 
section 129C. 15 U.S.C. 1639c.
    New TILA section 103(cc)(5) defines the term ``residential mortgage 
loan'' as any consumer credit transaction that is secured by a 
mortgage, deed of trust, or other equivalent consensual security 
interest on a dwelling or on residential real property that includes a 
dwelling, other than a consumer credit transaction under an open-end 
credit plan. 15 U.S.C. 1602(cc)(5).
    New TILA section 129H(b)(4)(A) requires the Agencies jointly to 
prescribe regulations to implement the property appraisal requirements 
for higher-risk mortgages. 15 U.S.C. 1639h(b)(4)(A). The Dodd-Frank Act 
requires that final regulations to implement these provisions be issued 
within 18 months of the transfer of functions to the Bureau pursuant to 
section 1062 of the Act, or January 21, 2013.\4\ These regulations are 
to take effect 12 months after issuance.\5\
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    \4\ See Dodd-Frank Act, section 1400(c)(1).
    \5\ See id.
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    The Agencies published proposed regulations on September 5, 2012, 
that would implement these higher-risk mortgage appraisal provisions. 
77 FR 54722 (Sept. 5, 2012). The comment period closed on October 15, 
2012. The Agencies received more than 200 comment letters regarding the 
proposal from banks, credit unions, other creditors, appraisers, 
appraisal management companies, industry trade associations, consumer 
groups, and others.

II. Summary of the Final Rule

Loans Covered

    To implement the statutory definition of ``higher-risk mortgage,'' 
the final rule uses the term ``higher-priced mortgage loan'' (HPML), a 
term already in use under the Bureau's Regulation Z with a meaning 
substantially similar to the meaning of ``higher-risk mortgage'' in the 
Dodd-Frank Act. In response to commenters, the Agencies are using the 
term HPML to refer generally to the loans that could be subject to this 
final rule because they are closed-end credit and meet the statutory 
rate triggers, but the Agencies are separately exempting several types 
of HPML transactions from the rule. The term ``higher-risk mortgage'' 
encompasses a closed-end consumer credit transaction secured by a 
principal dwelling with an APR exceeding certain statutory thresholds. 
These rate thresholds are substantially similar to rate triggers that 
have been in use under Regulation Z for HPMLs.\6\ Specifically, 
consistent with TILA section 129H, a loan is a ``higher-priced mortgage 
loan'' under the final rule if the APR exceeds the APOR by 1.5 percent 
for first-lien conventional or conforming loans, 2.5 percent for first-
lien jumbo loans, and 3.5 percent for subordinate-lien loans.\7\
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    \6\ Added to Regulation Z by the Board pursuant to the Home 
Ownership and Equity Protection Act of 1994 (HOEPA), the HPML rules 
address unfair or deceptive practices in connection with subprime 
mortgages. See 73 FR 44522, July 30, 2008; 12 CFR 1026.35.
    \7\ The existing HPML rules apply the 2.5 percent over APOR 
trigger for jumbo loans only with respect to a requirement to 
establish escrow accounts. See 12 CFR 1026.35(b)(3)(v).
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    Consistent with the statute, the final rule exempts ``qualified 
mortgages'' from the requirements of the rule. Qualified mortgages are 
defined in Sec.  1026.43(e) of the Bureau's final rule implementing the 
Dodd-Frank Act's ability-to-repay requirements in TILA section 129C 
(2013 ATR Final Rule).\8\ 15 U.S.C. 1639c.
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    \8\ The Bureau released the 2013 ATR Final Rule on January 10, 
2013, under Docket No. CFPB-2011-0008, CFPB-2012-0022, RIN 3170-
AA17, at http://consumerfinance.gov/Regulations.
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    In addition, the final rule excludes the following classes of loans 
from coverage of the higher-risk mortgage appraisal rule:
    (1) Transactions secured by a new manufactured home;
    (2) transactions secured by a mobile home, boat, or trailer;
    (3) transactions to finance the initial construction of a dwelling;
    (4) loans with maturities of 12 months or less, if the purpose of 
the loan is a ``bridge'' loan connected with the acquisition of a 
dwelling intended to become the consumer's principal dwelling; and
    (5) reverse mortgage loans.
    For reasons discussed more fully in the section-by-section analysis 
of

[[Page 10370]]

Sec.  1026.35(a)(1), below, the proposal included a request for 
comments on an alternative method of determining coverage based on the 
``transaction coverage rate'' or TCR, rather than the APR. Unlike the 
APR, the TCR would exclude all prepaid finance charges not retained by 
the creditor, a mortgage broker, or an affiliate of either.\9\ This 
change was proposed to address a possible expansion of the definition 
of ``finance charge'' used to calculate the APR, proposed by the Bureau 
in its rulemaking to integrate mortgage disclosures (2012 TILA-RESPA 
Proposal \10\). Accordingly, the proposal defined ``higher-risk 
mortgage loan'' (termed ``higher-priced mortgage loan'' in this final 
rule) in the alternative as calculated by either the TCR or APR, with 
comment sought on both approaches.
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    \9\ See 75 FR 58539, 58660-62 (Sept. 24, 2010); 76 FR 11598, 
11609, 11620, 11626 (March 2, 2011).
    \10\ See 77 FR 51116 (Aug. 23, 2012).
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    As explained more fully in the section-by-section analysis of Sec.  
1026.35(a)(1), below, the final rule requires creditors to determine 
whether a loan is an HPML by comparing the APR to the APOR. The 
Agencies are not at this time adopting the proposed alternative of 
replacing the APR with the TCR and comparing the TCR to the APOR. The 
Agencies will consider the merits of any modifications to this approach 
and public comments on this matter if and when the Bureau adopts the 
more inclusive definition of finance charge proposed in the 2012 TILA-
RESPA Proposal.
    Finally, based on public comments, the Agencies intend to publish a 
supplemental proposal to request comment on possible exemptions for 
``streamlined'' refinance programs and small dollar loans, as well as 
to seek comment on whether application of the HPML appraisal rule to 
loans secured by certain other property types, such as existing 
manufactured homes, is appropriate.

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

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

Requirement To Obtain an Additional Appraisal in Certain HPML 
Transactions

    In addition, the final rule implements the Act's requirement that 
the creditor of a ``higher-risk mortgage'' obtain an additional written 
appraisal, at no cost to the borrower, when the ``higher-risk 
mortgage'' will finance the purchase of the consumer's principal 
dwelling and there has been an increase in the purchase price from a 
prior sale that took place within 180 days of the current sale. TILA 
section 129H(b)(2)(A), 15 U.S.C. 1639(b)(2)(A). In the final rule, 
using their exemption authority, the Agencies are setting thresholds 
for the increase that will trigger an additional appraisal. An 
additional appraisal will be required for an HPML (that is not 
otherwise exempt) if either:
     The seller is reselling the property within 90 days of 
acquiring it and the resale price exceeds the seller's acquisition 
price by more than 10 percent; or
     The seller is reselling the property within 91 to 180 days 
of acquiring it and the resale price exceeds the seller's acquisition 
price by more than 20 percent.
    The additional written appraisal, from a different licensed or 
certified appraiser, generally must include the following information: 
an analysis of the difference in sale prices (i.e., the sale price paid 
by the seller and the acquisition price of the property as set forth in 
the consumer's purchase agreement), changes in market conditions, and 
any improvements made to the property between the date of the previous 
sale and the current sale.

III. Legal Authority

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

IV. Section-by-Section Analysis

    For ease of reference, unless otherwise noted, the SUPPLEMENTARY 
INFORMATION refers to the section numbers of the rules that will be 
published in the Bureau's Regulation Z at 12 CFR 1026.35(a) and 
(c).\11\ As explained further in the section-by-section analysis of 
Sec.  1026.35(c)(7), the rules are being published separately by the 
OCC, the Board, and the Bureau. No substantive difference among the 
three sets of rules is intended. The NCUA and FHFA adopt the rules as 
published in the Bureau's Regulation Z at 12 CFR 1026.35(a) and (c), by 
cross-referencing these rules in 12 CFR 722.3 and 12 CFR Part 1222, 
respectively. The FDIC adopts the rules as published in the Bureau's 
Regulation Z at 12 CFR 1026.35(a) and (c), but does not cross-reference 
the Bureau's Regulation Z.
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    \11\ The final rule was issued by the Bureau on January 18, 
2013, in accordance with 12 CFR 1074.1.
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Section 1026.35 Prohibited Acts or Practices in Connection With Higher-
Priced Mortgage Loans

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

[[Page 10371]]

addressed in the Bureau's final ability-to-repay rule (2013 ATR Final 
Rule) and high-cost mortgage rule (2013 HOEPA Final Rule).\14\ See 
Sec. Sec.  1026.32(d)(6) and 1026.43(c), (d), (f), and (g).
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    \12\ The Bureau released the 2013 Escrows Final Rule on January 
10, 2013, under Docket No. CFPB-2013-0001, RIN 3170-AA16, at http://consumerfinance.gov/Regulations.
    \13\ 76 FR 11598, 11612 (March 2, 2011).
    \14\ The Bureau released the 2013 HOEPA Final Rule on January 
10, 2013, under Docket No. CFPB-2012-0029, RIN 3170-AA12, at http://consumerfinance.gov/Regulations.
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35(a) Definitions

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

    TILA section 129H(f) defines a ``higher-risk mortgage'' as a 
residential mortgage loan secured by a principal dwelling with an APR 
that exceeds the APOR for a comparable transaction by a specified 
percentage as of the date the interest rate is set. 15 U.S.C. 1639(f). 
New TILA section 103(cc)(5) defines the term ``residential mortgage 
loan'' as ``any consumer credit transaction that is secured by a 
mortgage, deed of trust, or other equivalent consensual security 
interest on a dwelling or on residential real property that includes a 
dwelling, other than a consumer credit transaction under an open-end 
credit plan.'' 15 U.S.C. 1602(cc)(5).
    Consistent with TILA sections 129H(f) and 103(cc)(5), the proposal 
provided that a ``higher-risk mortgage loan'' is a closed-end consumer 
credit transaction secured by the consumer's principal dwelling with an 
APR that exceeds the APOR for a comparable transaction as of the date 
the interest rate is set by 1.5 percentage points for first-lien 
conventional mortgages, 2.5 percentage points for first-lien jumbo 
mortgages, and 3.5 percentage points for subordinate-lien mortgages.
    The Agencies noted in the proposal that the statutory definition of 
higher-risk mortgage, though similar to that of the regulatory term 
``higher-priced mortgage loan,'' differs from the existing regulatory 
definition of higher-priced mortgage loan in some important respects. 
First, the statutory definition of higher-risk mortgage expressly 
excludes loans that meet the definition of a ``qualified mortgage'' 
under TILA section 129C. In addition, the statutory definition of 
higher-risk mortgage includes an additional 2.5 percentage point 
threshold for first-lien jumbo mortgage loans, while the definition of 
higher-priced mortgage loan has contained this threshold only for 
purposes of applying the requirement to establish escrow accounts for 
higher-priced mortgage loans. Compare TILA section 129H(f)(2), 15 
U.S.C. 1639h(f)(2), with 12 CFR 1026.35(a)(1) and 1026.35(b)(3). The 
Agencies requested comment on whether the concurrent use of the defined 
terms ``higher-risk mortgage loan'' and ``higher-priced mortgage loan'' 
in different portions of Regulation Z may confuse industry or consumers 
and, if so, what alternative approach the Agencies could take to 
implementing the statutory definition of ``higher-risk mortgage loan'' 
consistent with the requirements of TILA section 129H. 15 U.S.C. 1639h.
    The final rule adopts the proposed definition, but replaces the 
term ``higher-risk mortgage loan'' with the term ``higher-priced 
mortgage loan'' or HPML. See existing Sec.  1026.35(a)(1). The final 
rule also makes certain changes to the existing definition of HPML, 
discussed in detail below.

Public Comments on the Proposal

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

Discussion

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

[[Page 10372]]

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

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

    Thus, consistent with TILA sections 129H(f) and 103(cc)(5) and the 
proposal, the final rule in Sec.  1026.35(a)(1) follows the Bureau's 
2013 Escrows Final Rule in defining an HPML as a closed-end consumer 
credit transaction secured by the consumer's principal dwelling with an 
annual percentage rate that exceeds the average prime offer rate for a 
comparable transaction as of the date the interest rate is set:
     By 1.5 or more percentage points, for a loan secured by a 
first lien with a principal obligation at consummation that does not 
exceed the limit in effect as of the date the transaction's interest 
rate is set for the maximum principal obligation eligible for purchase 
by Freddie Mac;
     By 2.5 or more percentage points, for a loan secured by a 
first lien with a principal obligation at consummation that exceeds the 
limit in effect as of the date the transaction's interest rate is set 
for the maximum principal obligation eligible for purchase by Freddie 
Mac; and
     By 3.5 or more percentage points, for a loan secured by a 
subordinate lien.
    The Agencies acknowledge that some commenters have concerns about 
the rate thresholds; however, these rate thresholds are prescribed by 
statute. See TILA section 129H(f)(2), 15 U.S.C. 1639h(f)(2); see also 
15 U.S.C. 1602(cc)(5).
    The Bureau in the 2013 Escrows Final Rule adopted a definition of 
HPML that is consistent for both TILA's escrow requirement and TILA's 
appraisal requirements for ``higher-risk mortgages.'' TILA sections 
129D and 129H, 15 U.S.C. 1639d and 1639h. This definition incorporates 
the APR thresholds for loans covered by these rules as prescribed by 
Dodd-Frank Act amendments to TILA and also reflects that both sets of 
rules apply only to closed-end mortgage transactions. TILA sections 
129D(b)(3) and 129H(f), 15 U.S.C. 1639d(b)(3) and 1639h(f). Overall, 
the revised definition of HPML adopted in the 2013 Escrows Final Rule 
reflects only minor changes from the current definition of HPML in 
existing 12 CFR 1026.35(a). For clarity, the Agencies are re-publishing 
the definition published earlier in the 2013 Escrows Final Rule.\16\ 
The incorporation by reference in Sec.  1026.35(c) of the term HPML in 
Sec.  1026.35(a) and the re-publishing of Sec.  1026.35(a) in this 
final rule are not intended to subject Sec.  1026.35(a) to the joint 
rulemaking authority of the Agencies under TILA section 129H.
---------------------------------------------------------------------------

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

    Consistent with the proposal, the final rule uses the phrase ``a 
closed-end consumer credit transaction secured by the consumer's 
principal dwelling'' in place of the statutory term ``residential 
mortgage loan'' throughout Sec.  1026.35(a)(1). As also proposed, the 
Agencies have elected to incorporate the substantive elements of the 
statutory definition of ``residential mortgage loan'' into the 
definition of HPML rather than using the term itself to avoid 
inadvertent confusion of the term ``residential mortgage loan'' with 
the term ``residential mortgage transaction,'' which is an established 
term used throughout Regulation Z and defined in Sec.  1026.2(a)(24). 
Compare 15 U.S.C. 1602(cc)(5) (defining ``residential mortgage loan'') 
with 12 CFR 1026.2(a)(24) (defining ``residential mortgage 
transaction''). Accordingly, the final regulation text differs from the 
express statutory language, but with no intended substantive change to 
the scope of TILA section 129H.

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

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

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

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

[[Page 10373]]

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

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

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

Existing Definition of HPML Versus New Definition of HPML

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

Comparable Transaction

    As comment 35(a)(1)-1 indicates, the table of APORs published by 
the Bureau will provide guidance to creditors in determining how to use 
the table to identify which APOR is applicable to a particular mortgage 
transaction. The Bureau publishes on the internet, currently at http://www.ffiec.gov/ratespread/newcalc.aspx, in table form, APORs for a wide 
variety of mortgage transaction types based on available information. 
For example, the Bureau publishes a separate APOR for at least two 
types of variable rate transactions and at least two types of non-
variable rate transactions. APORs are estimated APRs derived by the 
Bureau from average interest rates, points, and other loan pricing 
terms currently offered to consumers by a representative sample of 
creditors for mortgage transactions that have low-risk credit 
characteristics. Currently, the Bureau calculates APORs consistent with 
Regulation Z (see 12 CFR 1026.22 and appendix J to part 1026), for each 
transaction type for which pricing terms are available from a survey, 
and estimates APORs for other types of transactions for which direct 
survey data are not available based on the loan pricing terms available 
in the survey and other information. However, data are not available 
for some types of mortgage transactions, including reverse mortgages. 
In addition, the Bureau publishes on the internet the methodology it 
uses to arrive at these estimates.

Rate Set

    Comment 35(a)(1)-2 clarifies that a transaction's APR is compared 
to the APOR as of the date the transaction's interest rate is set (or 
``locked'') before consummation. The comment notes that sometimes a 
creditor sets the interest rate initially and then re-sets it at a 
different level before consummation. Accordingly, under the final rule, 
for purposes of Sec.  1026.35(a)(1), the creditor should use the last 
date the interest rate for the mortgage is set before consummation.

Average Prime Offer Rate

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

[[Page 10374]]

meaning as in Sec.  1026.35(a)(2). See 12 CFR 226.43(a)(3)(Board). The 
OCC's publication of this final rule cross-references the definition of 
HPML, which incorporates the term APOR as defined in Sec.  
1026.35(a)(2). See 12 CFR 34.202(b). The OCC's and the Board's versions 
of Official Staff Interpretations to the final rule cross-reference 
comments to Sec.  1026.35(a)(2) that explain the meaning of average 
prime offer rate as described below. See 12 CFR 34.202, comment 1 
(OCC); 12 CFR 226.43, comment 2. Comment 35(a)(2)-1 clarifies that 
APORs are APRs derived from average interest rates, points, and other 
loan pricing terms currently offered to consumers by a representative 
sample of creditors for mortgage transactions that have low-risk 
pricing characteristics. Other pricing terms include commonly used 
indices, margins, and initial fixed-rate periods for variable-rate 
transactions. Relevant pricing characteristics include a consumer's 
credit history and transaction characteristics such as the loan-to-
value ratio, owner-occupant status, and purpose of the transaction. 
Currently, to obtain APORs, the Bureau uses a survey of creditors that 
both meets the criteria of Sec.  1026.35(a)(2) and provides pricing 
terms for at least two types of variable rate transactions and at least 
two types of non-variable rate transactions. The Freddie Mac Primary 
Mortgage Market Survey[supreg] is an example of such a survey, and is 
the survey currently used to calculate APORs.

Principal Dwelling

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

Threshold for ``Jumbo'' Loans

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

35(c) Appraisals for Higher-Priced Mortgage Loans

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

35(c)(1) Definitions

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

35(c)(1)(i) Certified or Licensed Appraiser

    TILA section 129H(b)(3) defines ``certified or licensed appraiser'' 
as a person who ``(A) is, at a minimum, certified or licensed by the 
State in which the property to be appraised is located; and (B) 
performs each appraisal in conformity with the Uniform Standards of 
Professional Appraisal Practice and title XI of the Financial 
Institutions Reform, Recovery, and Enforcement Act of 1989, and the 
regulations prescribed under such title, as in effect on the date of 
the appraisal.'' 15 U.S.C. 1639h(b)(3). Consistent with the statute, 
the Agencies proposed to define ``certified or licensed appraiser'' as 
a person who is certified or licensed by the State agency in the State 
in which the property that secures the transaction is located, and who 
performs the appraisal in conformity with the Uniform Standards of 
Professional Appraisal Practice (USPAP) and the requirements applicable 
to appraisers in title XI of the Financial Institutions Reform, 
Recovery, and Enforcement Act of 1989, as amended (FIRREA title XI) (12 
U.S.C. 3331 et seq.), and any implementing regulations in effect at the 
time the appraiser signs the appraiser's certification.
    The proposed definition of ``certified or licensed appraiser'' 
generally mirrors the statutory language in TILA section 129H(b)(3) 
regarding State licensing and certification. However, the Agencies 
proposed to use the defined term ``State agency'' to clarify that the 
appraiser must be certified or licensed by a State agency that meets 
the standards of FIRREA title XI. The proposal defined the term ``State 
agency'' to mean a ``State appraiser certifying and licensing agency'' 
recognized in accordance with section 1118(b) of FIRREA title XI (12 
U.S.C. 3347(b)) and any implementing

[[Page 10375]]

regulations.\22\ See section-by-section analysis of Sec.  
1026.35(c)(1)(iv), below.
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    \22\ If the Appraisal Subcommittee of the Federal Financial 
Institutions Examination Council issues certain written findings 
concerning, among other things, a State agency's failure to 
recognize and enforce FIRREA title XI standards, appraiser 
certifications and licenses issued by that State are not recognized 
for purposes of title XI and appraisals performed by appraisers 
certified or licensed by that State are not acceptable for 
federally-related transactions. 12 U.S.C. 3347(b).
---------------------------------------------------------------------------

    As discussed below, the Agencies are adopting the proposed 
definition of ``certified or licensed appraiser'' without change.
    Uniform Standards of Professional Appraisal Practice (USPAP). 
Consistent with the statutory definition of ``certified or licensed 
appraiser,'' the proposal incorporated into the proposed definition the 
requirement that, to be a ``certified or licensed appraiser'' under the 
appraisal rules, the appraiser has to perform the appraisal in 
conformity with the ``Uniform Standards of Professional Appraisal 
Practice.'' A comment was proposed to clarify that USPAP refers to the 
professional appraisal standards established by the Appraisal Standards 
Board of the ``Appraisal Foundation,'' as defined in FIRREA section 
1121(9). 12 U.S.C. 3350(9). The Agencies believe that this terminology 
is appropriate for consistency with the existing definition in FIRREA 
title XI and adopt the definition and comment as proposed. See Sec.  
1026.35(c)(1)(i) and comment 35(c)(1)(i)-1.
    In addition, TILA section 129H(b)(3) requires that the appraisal be 
performed in conformity with USPAP ``as in effect on the date of the 
appraisal.'' 15 U.S.C. 1639h(b)(3). The Agencies proposed to 
incorporate this concept in the definition of ``certified or licensed 
appraiser'' and to include a comment clarifying that the ``date of the 
appraisal'' is the date on which the appraiser signs the appraiser's 
certification. Again, the Agencies adopt the definition and comment as 
proposed. See Sec.  1026.35(c)(1)(i) and comment 35(c)(1)(i)-1. Thus, 
the relevant edition of USPAP is the one in effect at the time the 
appraiser signs the appraiser's certification.
    Appraiser's certification. The proposal also included a comment to 
clarify that the term ``appraiser's certification'' refers to the 
certification that must be signed by the appraiser for each appraisal 
assignment as specified in USPAP Standards Rule 2-3.\23\ The final rule 
adopts this clarification without change. See comment 35(c)(1)(i)-2.
---------------------------------------------------------------------------

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

    FIRREA title XI and implementing regulations. As noted, TILA 
section 129H(b)(3) defines ``certified or licensed appraiser'' as a 
person who is certified or licensed as an appraiser and ``performs each 
appraisal in accordance with [USPAP] and title XI of [FIRREA], and the 
regulations prescribed under such title, as in effect on the date of 
the appraisal.'' 15 U.S.C. 1639h(b)(3). Section 1110 of FIRREA directs 
each Federal financial institutions regulatory agency \24\ to prescribe 
``appropriate standards for the performance of real estate appraisals 
in connection with federally related transactions under the 
jurisdiction of each such agency or instrumentality.'' 12 U.S.C. 3339. 
These rules must require, at a minimum--(1) that real estate appraisals 
be performed in accordance with generally accepted appraisal standards 
as evidenced by the appraisal standards promulgated by the Appraisal 
Standards Board of the Appraisal Foundation; and (2) that such 
appraisals shall be written appraisals. 12 U.S.C. 3339(1) and (2).
---------------------------------------------------------------------------

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

    The Dodd-Frank Act added a third requirement--that real estate 
appraisals be subject to appropriate review for compliance with USPAP--
for which the Federal financial institutions regulatory agencies must 
prescribe implementing regulations. FIRREA section 1110(3), 12 U.S.C. 
3339(3). FIRREA section 1110 also provides that each Federal banking 
agency may require compliance with additional standards if the agency 
determines in writing that additional standards are required to 
properly carry out its statutory responsibilities. 12 U.S.C. 3339. 
Accordingly, the Federal financial institutions regulatory agencies 
have prescribed appraisal regulations implementing FIRREA title XI that 
set forth, among other requirements, minimum standards for the 
performance of real estate appraisals in connection with ``federally 
related transactions,'' which are defined as real estate-related 
financial transactions that a Federal banking agency engages in, 
contracts for, or regulates, and that require the services of an 
appraiser.\25\ 12 U.S.C. 3339, 3350(4).
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    \25\ See OCC: 12 CFR Part 34, Subpart C; Board: 12 CFR part 208, 
subpart E, and 12 CFR part 225, subpart G; FDIC: 12 CFR part 323; 
and NCUA: 12 CFR part 722.
---------------------------------------------------------------------------

    The Agencies' proposal provided that the relevant provisions of 
FIRREA title XI and its implementing regulations are those selected 
portions of FIRREA title XI requirements ``applicable to appraisers,'' 
in effect at the time the appraiser signs the appraiser's 
certification. While the Federal financial institutions regulatory 
agencies' requirements in FIRREA also apply to an institution's 
ordering and review of an appraisal, the Agencies proposed that the 
definition of ``certified or licensed appraiser'' incorporate only 
FIRREA title XI's minimum standards related to the appraiser's 
performance of the appraisal. Accordingly, a proposed comment clarified 
that the relevant standards ``applicable to appraisers'' are found in 
regulations prescribed under FIRREA section 1110 (12 U.S.C. 3339) 
``that relate to an appraiser's development and reporting of the 
appraisal,'' and that paragraph (3) of FIRREA, which relates to the 
review of appraisals, is not relevant. The Agencies are adopting these 
proposals as Sec.  1026.35(c)(1)(i) and comment 35(c)(1)(i)-3.
    The Agencies also noted that FIRREA title XI applies by its terms 
to ``federally related transactions'' involving a narrower category of 
loans and institutions than the group of loans and lenders that fall 
within TILA's definition of ``creditor.'' \26\ For example, the FIRREA 
title XI regulations do not apply to transactions of $250,000 or 
less.\27\ They also do not apply to non-depository institutions.\28\ 
However, the Agencies believe that Congress, by including the higher-
risk mortgage appraisal rules in TILA, which applies to all creditors, 
demonstrated its intention that all creditors that extend higher-risk 
mortgage loans, such as independent mortgage companies, should obtain 
appraisals from appraisers who conform to the standards in FIRREA 
related to the development and reporting of the appraisal. The Agencies 
also believe that, by placing this rule in TILA, Congress did not 
intend to limit its application to loans over $250,000. The Agencies 
adopt this broader interpretation in the final rule.
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    \26\ TILA section 103(g), 15 U.S.C. 1602(g) (implemented by 
Sec.  1026.2(a)(17)). See also 12 U.S.C. 3350(4) and OCC: 12 CFR 
34.42(f); Board: 12 CFR 225.62(f); FDIC: 12 CFR 323.2(f); and NCUA: 
12 CFR 722.2(e) (defining ``federally related transaction'').
    \27\ See OCC: 12 CFR 34.43(a)(1); Board: 12 CFR 225.63(a)(1); 
FDIC: 12 CFR 323.3(a)(1); and NCUA: 12 CFR 722.3(a)(1).
    \28\ See 12 U.S.C. 3339, 3350(4) (defining ``federally related 
transaction,'' (6) (defining ``federal financial institutions 
regulatory agencies'') and (7) (defining ``financial institution'').
---------------------------------------------------------------------------

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

[[Page 10376]]

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

Public Comments on the Proposal

    Appraiser trade associations, a housing advocate, and a credit 
union commenter agreed that the rule should apply to all qualifying 
mortgage loans, and not only the subset of the higher-risk mortgage 
loans already covered by FIRREA, including those loans with a 
transaction value of $250,000 or less. The appraiser trade associations 
and the housing advocate commenters believed that all higher-risk 
mortgages must be included in the rule to ensure that consumers receive 
the protections offered by appraisals. The housing advocate commenter 
also believed that including all higher-risk mortgages would reduce 
risk to all parties involved in the financing and servicing of 
mortgages and would ensure equal access to credit. This commenter 
specifically requested that the Agencies at least require an interior 
appraisal by licensed appraisers for all residential mortgages above 
$50,000, regardless of whether they are originated or insured by the 
private sector, Fannie Mae, Freddie Mac, or the Federal Housing 
Administration (FHA).
    A banking trade association and a credit union commenter, however, 
believed that Congress intended the FIRREA requirements to apply only 
to a subset of higher-risk mortgages that are already covered by 
FIRREA. The banking trade association commenter believed the Agencies 
should not require the rule to apply to loans held in portfolio or 
loans with a value of $250,000 or less, because a bank holding a loan 
in portfolio has strong incentive to ensure that the property sale is 
legitimate and the property is properly valued. The commenter also 
believed the statute intended to apply the rules only to the subset of 
higher-risk mortgages with a value of over $250,000, as is provided in 
the Federal financial institutions regulatory agencies' regulations 
implementing FIRREA. The banking trade association and a bank commenter 
noted that many community banks, particularly in rural areas, limit 
costs to consumers by not requiring appraisals on mortgages held in 
portfolio of $250,000 or less as permitted under FIRREA title XI or by 
performing cheaper, in-house evaluations of property.
    On whether the final rule should identify specific FIRREA 
regulations that relate to the development and reporting of the 
appraisal, the Agencies received one comment letter from appraiser 
trade associations. These commenters requested that the Agencies 
specify that creditors must use certified rather than licensed 
appraisers. The comment is discussed in more detail in the discussion 
of the use of ``certified'' versus ``licensed'' appraisers, below.
Discussion
    As discussed in the proposal, the Agencies believe that, by 
referencing FIRREA requirements in the context of defining ``certified 
or licensed appraiser,'' the statute intended to limit FIRREA's 
requirements to those that apply to the appraiser's development and 
reporting of performance of the appraisal, rather than the FIRREA 
requirements that apply to a creditor's ordering and review of the 
appraisal. TILA section 129H(b)(3), 15 U.S.C. 1639h(b)(3). The Agencies 
also did not propose to interpret ``certified or licensed appraiser'' 
to include requirements related to appraisal review under FIRREA 
section 1110(3) because these requirements relate to an institution's 
responsibilities after receiving the appraisal, rather than to how the 
certified or licensed appraiser performs the appraisal. Comment 
35(c)(1)(i)-3 is consistent with the proposal in this regard. 
Accordingly, as proposed, the final rule includes a comment clarifying 
that the requirements of FIRREA section 1110(3) that relate to the 
``appropriate review'' of appraisals are not relevant for purposes of 
whether an appraiser is a certified or licensed appraiser under the 
proposal. See comment 35(c)(1)(i)-3.
    At the same time and in light of public comments, the Agencies 
reviewed the relevant statutory provisions and confirmed their 
conclusion that applying the FIRREA requirements related to an 
appraiser's performance of an appraisal broadly--to transactions 
originated by creditors and transaction types not necessarily subject 
to FIRREA (such as loans of $250,000 or less)--is wholly consistent 
with the consumer protection purpose of title XIV of the Dodd-Frank 
Act, as well as specific language of the appraisal provisions. For 
example, the Agencies believe that if Congress intended to limit 
application of the FIRREA requirements to mortgage loans covered by 
FIRREA, such as loans of over $250,000 made by Federally-regulated 
depositories, Congress would have expressly done so. Instead, Congress 
placed the appraisal requirements, including the definition of 
``certified and licensed appraiser'' referencing FIRREA, in TILA, which 
applies to loans made by all types of creditors. Moreover, limiting 
coverage of the Dodd-Frank Act higher-risk mortgage appraisal rules to 
loans of over $250,000 would eliminate protections for most higher-risk 
mortgage consumers.\29\ From a practical standpoint, the Agencies 
believe that the most reasonable interpretation of the statute is that 
all mortgage loans meeting the definition of ``higher-risk mortgage'' 
are subject to a uniform set of rules, regardless of the type of 
creditor. This creates a level playing field and ensures the same 
protections for all consumers of ``higher-risk mortgages.'' For these 
reasons, consistent with the proposal, the final rule applies the 
FIRREA requirements to appraisals for all HPMLs that are not exempt 
from the regulation. See Sec.  1026.35(c)(2).
---------------------------------------------------------------------------

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

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

[[Page 10377]]

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

Public Comments on the Proposal

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

Discussion

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

Public Comments on the Proposal

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

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

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

Discussion

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

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

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

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

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

    As discussed in Sec.  1026.35(c)(3)(ii)(B) below, to qualify for 
the safe harbor provided in the final rule, a creditor must verify 
through the ``National Registry'' that the appraiser is a certified or 
licensed appraiser in the State in which the property is located as of 
the date the appraiser signs the appraiser's certification. Under 
FIRREA section 1109, the Appraisal Subcommittee of the FFIEC is 
required to maintain a registry of State certified and licensed 
appraisers eligible to perform appraisals in connection with federally 
related

[[Page 10378]]

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

35(c)(1)(iv) State Agency

    TILA section 129H(b)(3)(A) provides that, among other things, a 
certified or licensed appraiser means a person who is certified or 
licensed by the ``State'' in which the property to be appraised is 
located. 15 U.S.C. 1639h(b)(3)(A). As discussed above, a certified or 
licensed appraiser means a person certified or licensed by the ``State 
agency'' in the State in which the property that secures the 
transaction is located. Under FIRREA section 1118, the Appraisal 
Subcommittee of the FFIEC is responsible for recognizing each State's 
appraiser certifying and licensing agency for the purpose of 
determining whether the agency is in compliance with the appraiser 
certifying and licensing requirements of FIRREA title XI. 12 U.S.C. 
3347. In addition, FIRREA section 1120(a) prohibits a financial 
institution from obtaining an appraisal from a person the financial 
institution knows is not a State certified or licensed appraiser in 
connection with a federally related transaction. 12 U.S.C. 3349(a). 
Accordingly, as proposed, Sec.  1026.35(c)(1)(iv) in the final rule 
defines the term ``State agency'' as a ``State appraiser certifying and 
licensing agency'' recognized in accordance with section 1118(b) of 
FIRREA and any implementing regulations.

35(c)(2) Exemptions

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

35(c)(2)(i)

Qualified Mortgages
    TILA section 129H(f) expressly excludes from the definition of 
higher-risk mortgage any loan that is a qualified mortgage as defined 
in TILA section 129C and a reverse mortgage loan that is a qualified 
mortgage as defined in TILA section 129C. 15 U.S.C. 1639(f). Rather 
than implement one exclusion for qualified mortgages and a separate 
exclusion for any reverse mortgage loans that may be defined by the 
Bureau as qualified mortgages, the Agencies proposed to provide a 
single exclusion for a qualified mortgage as that term would be defined 
in the Bureau's final rule implementing TILA section 129C. 15 U.S.C. 
1639c.
    Before authority regarding TILA section 129C transferred to the 
Bureau under the Dodd-Frank Act, the Board issued the 2011 ATR 
Proposal, which, among other things, would have defined a ``qualified 
mortgage'' in a new subsection of Regulation Z. 12 CFR 226.43(e). See 
76 FR 27390, 27484-85 (May 11, 2011). During the proposal period for 
the ``higher-risk mortgage'' rule, the Bureau had not yet issued final 
rules implementing TILA section 129C's definition of ``qualified 
mortgage.'' Since that time, the Bureau has issued rules defining 
``qualified mortgage.'' See 2013 ATR Final Rule, Sec.  1026.43(e). 
Consistent with the proposed definition of ``qualified mortgage,'' the 
Bureau's

[[Page 10379]]

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

Public Comments on the Proposal

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

Discussion

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

35(c)(2)(ii)

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

    \32\ The Agencies proposed to exclude from the definition of 
``higher-risk mortgage loan'' any loans secured solely by a 
``residential structure,'' as that term is used in Regulation Z's 
definition of ``dwelling.'' See 12 CFR 1026.2(a)(19). The provision 
was intended to exclude loans that are not secured in whole or in 
part by land. Thus, for example, loans secured by manufactured homes 
that are not also secured by the land on which they are sited were 
proposed to be excluded from the definition of higher-risk mortgage 
loan, regardless of whether the manufactured home itself is deemed 
to be personal property or real property under applicable State law.
---------------------------------------------------------------------------

    The Agencies requested comment on whether the proposed exclusion 
was appropriate, and if not, reasonable methods by which creditors 
could comply with the requirements of this proposed rule when providing 
loans secured solely by a residential structure. The Agencies also 
requested comment on whether some alternative standards for valuing 
residential structures securing higher-risk mortgage loans might be 
feasible and appropriate to include as part of the final rule, in lieu 
of an appraisal performed by a certified or licensed appraiser.

Public Comments on the Proposal

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

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

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

[[Page 10380]]

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

Discussion

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

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

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

35(c)(2)(iii)

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

35(c)(2)(iv)

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

Public Comments on the Proposal

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

[[Page 10381]]

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

Discussion

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

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

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

[[Page 10382]]

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

35(c)(2)(v)

Bridge Loans
    In the proposal, the Agencies also requested comment on whether the 
appraisal rules of TILA section 129H should apply to temporary or 
``bridge'' loans with a term of 12 months or less. 15 U.S.C. 1639h. If 
such an exemption were not adopted, the Agencies sought comment on 
whether any additional compliance guidance would be needed for applying 
the new appraisal rules to bridge loans. The Agencies stated concerns 
about the burden to both creditors and consumers of imposing the rule's 
requirements on such loans and questioned whether such requirements 
would be useful for many consumers.
    As explained in the proposal, bridge loans are short-term loans 
typically used when a consumer is buying a new home before selling the 
consumer's existing home. Usually secured by the existing home, a 
bridge loan provides financing for the new home (often in the form of 
the down payment) or mortgage payment assistance until the consumer can 
sell the existing home and secure permanent financing. Bridge loans 
normally carry higher interest rates, points and fees than conventional 
mortgages, regardless of the consumer's creditworthiness.
    In Sec.  1026.35(c)(2)(v), the final rule adopts an exemption from 
the new HPML appraisal rules for a ``loan with a maturity of 12 months 
or less, if the purpose of the loan is a `bridge' loan connected with 
the acquisition of a dwelling intended to become the consumer's 
principal dwelling.''

Public Comments on the Proposal

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

Discussion

    The Agencies are adopting an exemption for ``bridge'' loans of 12 
months or less that are connected with the acquisition of a dwelling 
intended to become the consumer's principal dwelling for several 
reasons. First, the Agencies believe that with this exemption, the 
consumer would still be afforded the protection of the appraisal rules. 
This is because bridge loans used in connection with the acquisition of 
a new home are typically secured by the consumer's existing home to 
facilitate the purchase of a new home. Thus, the consumer would be 
afforded the protections of the appraisal rules on the permanent 
financing secured by the new home. This would include the protections 
of Sec.  1026.35(c)(4)(i) regarding properties that are potentially 
fraudulent flips.
    Second, commenters generally confirmed the Agencies' concerns 
expressed in the proposal about the burden to both creditors and 
consumers of imposing TILA section 129H's heightened appraisal 
requirements on short-term financing of this nature. As noted in the 
proposal, the Agencies recognize that rates on short-term bridge loans 
are often higher than on long-term home mortgages, so these loans may 
be more likely to meet the ``higher-risk mortgage loan'' triggers. As 
also noted in the proposal and echoed by commenters, ``higher-risk 
mortgages'' under TILA section 129H would generally be a credit option 
for less creditworthy consumers, who may be more vulnerable than others 
and in need of enhanced consumer protections, such as TILA section 
129H's special appraisal requirements. However, a bridge loan consumer 
could be subject to rates that would exceed the higher-risk mortgage 
loan thresholds even if the consumer would qualify for a non-higher-
risk mortgage loan when seeking permanent financing. The Agencies do 
not believe that Congress intended TILA section 129H to apply to loans 
simply because they have higher rates, regardless of the consumer's 
creditworthiness or the purpose of the loan.
    Further, the Agencies recognize that the exemption can help 
facilitate compliance by generally ensuring consistency across 
residential mortgage rules. Such consistency can reduce compliance-
related burdens and risks, thereby promoting the safety and soundness 
of creditors. The Agencies also believe that consistency across the 
rules can reduce operational risk and support a creditor's ability to 
offer these loans, which can enable creditors to strengthen and 
diversify their lending portfolios.
    In particular, the Agencies note the current exemption for 
``temporary or `bridge' loans of twelve months or less from the 
existing HPML rules (retained in the 2013 Escrows Final Rule, Sec.  
1026.35(b)(2)(i)(C)), but also a similar exemption from TILA's new 
ability-to-repay requirements. See existing

[[Page 10383]]

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

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

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

35(c)(2)(vi)

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

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

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

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

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

Public Comments on the Proposal

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

Discussion

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

[[Page 10384]]

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

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

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

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

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

    \43\ By statute, the term ``higher-risk mortgage'' excludes any 
``qualified mortgage'' and any ``reverse mortgage loan that is a 
qualified mortgage.'' 15 U.S.C. 1639h(f). The Bureau was authorized 
by the Dodd-Frank Act to define the term ``qualified mortgage'' and 
has done so in its 2013 ATR Final Rule. However, the 2013 ATR Final 
Rule does not define the types of reverse mortgage loans that should 
be considered ``qualified mortgages'' because, by statute, TILA's 
ability-to-repay rules do not apply to reverse mortgages. See TILA 
section 129C(a)(8), 15 U.S.C. 1639c(a)(8). Thus the Agencies are not 
able to implement the precise statutory exemption for ``reverse 
mortgage loans that are qualified mortgages.'' Instead, the 
exemption for reverse mortgages is based on the Agencies' express 
authority to exempt from TILA's ``higher-risk mortgage'' appraisal 
rules ``a class of loans,'' if the exemption ``is in the public 
interest and promotes the safety and soundness of creditors.'' TILA 
section 129H(b)(4)(B), 15 U.S.C. 1639h(b)(4)(B).
---------------------------------------------------------------------------

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

35(c)(3)(i) In General
    Consistent with TILA section 129H(a) and (b)(1), the proposal 
provided that a creditor shall not extend a higher-risk mortgage loan 
to a consumer without obtaining, prior to consummation, a written 
appraisal performed by a certified or licensed appraiser who conducts a 
physical visit of the interior of the property that will secure the 
transaction. 15 U.S.C. 1639h(a) and (b)(1). In new Sec.  
1026.35(c)(3)(i), the final rule adopts this proposal without change.
35(c)(3)(ii) Safe Harbor
    In the proposed rule, the Agencies proposed a safe harbor that 
would establish affirmative steps creditors can follow to ensure that 
they satisfy statutory obligations under TILA section 129H(a) and 
(b)(1). 15 U.S.C. 1639h(a) and (b)(1). This was done to address 
compliance uncertainties, which are discussed in more detail below.
    The Agencies are adopting the final rule substantially as proposed. 
Specifically, under new Sec.  1026.35(c)(3)(ii), a creditor would be 
deemed to have obtained a written appraisal that meets the general 
appraisal requirements now adopted in Sec.  1026.35(c)(3)(i) if the 
creditor:
     Orders the appraiser to perform the appraisal in 
conformity with USPAP and FIRREA title XI, and any implementing 
regulations, in effect at the time the appraiser signs the appraiser's 
certification (Sec.  1026.35(c)(3)(ii)(A));
     Verifies through the National Registry that the appraiser 
who signed the appraiser's certification holds a valid appraisal 
license or certification in the State in which the appraised property 
is located as of the date the appraisal is signed (Sec.  
1026.35(c)(3)(ii)(B));
     Confirms that the elements set forth in appendix N to part 
1026 are addressed in the written appraisal (Sec.  
1026.35(c)(3)(ii)(C)); and
     Has no actual knowledge to the contrary of facts or 
certifications contained in the written appraisal (Sec.  
1026.35(c)(3)(ii)(D)).
    The Agencies are also adopting proposed comments to the safe 
harbor. In particular, comment 35(c)(3)(ii)-1 clarifies that a creditor 
that satisfies the safe harbor conditions in Sec.  
1026.35(c)(3)(ii)(A)-(D) will be deemed to have complied with the 
general appraisal requirements of Sec.  1026.35(c)(3)(i). This comment 
further clarifies that a creditor that does not satisfy the safe harbor 
conditions in Sec.  1026.35(c)(3)(ii)(A)-(D) does not necessarily 
violate the appraisal requirements of Sec.  1026.35(c)(3)(i).
    Consistent with the proposal, appendix N to part 1026 provides 
that, to qualify for the safe harbor, a creditor must check to confirm 
that the written appraisal:
     Identifies the creditor who ordered the appraisal and the 
property and the interest being appraised.
     Indicates whether the contract price was analyzed.
     Addresses conditions in the property's neighborhood.
     Addresses the condition of the property and any 
improvements to the property.
     Indicates which valuation approaches were used, and 
included a reconciliation if more than one valuation approach was used.
     Provides an opinion of the property's market value and an 
effective date for the opinion.
     Indicates that a physical property visit of the interior 
of the property was performed.
     Includes a certification signed by the appraiser that the 
appraisal was prepared in accordance with the requirements of USPAP.
     Includes a certification signed by the appraiser that the 
appraisal was prepared in accordance with the requirements of FIRREA 
title XI, as amended, and any implementing regulations.
    As discussed in the proposal, other than the certification for 
compliance with FIRREA title XI, the items in appendix N were derived 
from the Uniform Residential Appraisal Report (URAR) form used as a 
matter of practice in the residential mortgage industry. The final rule 
incorporates without change a proposed comment clarifying that a 
creditor need not look beyond the face of the written appraisal and the 
appraiser's certification to confirm that the elements in appendix N 
are included in the written appraisal.

[[Page 10385]]

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

Public Comments on the Proposal

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

Discussion

    As noted, the safe harbor is being adopted to address compliance 
uncertainties for creditors raised by the general appraisal 
requirements. Specifically, TILA section 129H(b)(1) requires that 
appraisals mandated by section 129H be performed by ``a certified or 
licensed appraiser'' who conducts a physical property visit of the 
interior of the mortgaged property. 15 U.S.C. 1639h(b)(1). The statute 
goes on to define a ``certified or licensed'' appraiser in some detail. 
TILA section 129H(b)(3), 15 U.S.C. 1639h(b)(3). The statute, however, 
is silent on how creditors should determine whether the written 
appraisals they have obtained comply with these statutory requirements.
    TILA section 129H(b)(3) defines a ``certified or licensed 
appraiser'' as a person who is (1) certified or licensed by the State 
in which the property to be appraised is located, and (2) performs each 
appraisal in conformity with USPAP and the requirements applicable to 
appraisers in FIRREA title XI, and the regulations prescribed under 
such title, as in effect on the date of the appraisal. 15 U.S.C. 
1639h(b)(3). These two elements of the definition of ``certified or 
licensed appraiser'' are discussed in more detail below.
    Certified or licensed in the State in which the property is 
located. State certification and licensing of real estate appraisers 
has become a nationwide practice largely as a result of FIRREA title 
XI. Pursuant to FIRREA title XI, entities engaging in certain 
``federally related transactions'' involving real estate are required 
to obtain written appraisals performed by an appraiser who is certified 
or licensed by the appropriate State. 12 U.S.C. 3339, 3341. As noted, 
to facilitate identification of appraisers meeting this requirement, 
the Appraisal Subcommittee of the FFIEC maintains an on-line National 
Registry of appraisers identifying all federally recognized State 
certifications or licenses held by U.S. appraisers.\44\ 12 U.S.C. 3332, 
3338.
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    \44\ The Agencies proposed to interpret the State certification 
or licensing requirement under TILA section 129H(b)(3) to mean 
certification or licensing by a State agency that is recognized for 
purposes of credentialing appraisers to perform appraisals required 
for federally related transactions pursuant to FIRREA title XI.
---------------------------------------------------------------------------

    Performs appraisals in conformity with USPAP and FIRREA. Again, 
TILA section 129H(b)(3) also defines ``certified or licensed 
appraiser'' as a person who performs each appraisal in accordance with 
USPAP and FIRREA title XI, and the regulations prescribed under such 
title, in effect on the date of the appraisal. 15 U.S.C. 1639h(b)(3). 
USPAP is a set of standards promulgated and interpreted by the 
Appraisal Standards Board of the Appraisal Foundation, providing 
generally accepted and recognized standards of appraisal practice for 
appraisers preparing various types of property valuations.\45\ USPAP 
provides guiding standards, not specific methodologies, and application 
of USPAP in each appraisal engagement involves the application of 
professional expertise and judgment.
---------------------------------------------------------------------------

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

    FIRREA title XI and the regulations prescribed thereunder regulate 
entities engaging in real estate-related financial transactions that 
are engaged in, contracted for, or regulated by the Federal financial 
institutions regulatory agencies.\46\ See 12 U.S.C. 3339, 3350.
---------------------------------------------------------------------------

    \46\ As discussed above in the section-by-section analysis of 
the definition of ``certified or licensed appraiser'' (Sec.  
1026.35(c)(1)(i)), under FIRREA title XI, the Federal financial 
institutions regulatory agencies have issued regulations requiring 
insured depository institutions and their affiliates, bank holding 
companies and their affiliates, and insured credit unions to obtain 
written appraisals prepared by a State certified or licensed 
appraiser in accordance with USPAP for federally related 
transactions, including loans secured by real estate, exceeding 
certain dollar thresholds. See OCC: 12 CFR Part 34, Subpart C; FRB: 
12 CFR part 208, subpart E, and 12 CFR part 225, subpart G; FDIC: 12 
CFR part 323; and NCUA: 12 CFR part 722.
---------------------------------------------------------------------------

    The statute does not specifically address Congress's intent in 
referencing USPAP and FIRREA title XI. Congress could have amended 
FIRREA title XI directly to expand the scope of the statute to subject 
all creditors to its requirements. Instead, Congress inserted language 
into TILA requiring that the appraisers who perform appraisals in 
connection with higher-risk mortgage loans comply with USPAP and FIRREA 
title XI. The statute is silent, however, as to the extent of 
creditors' obligations under the statute to evaluate appraisers' 
compliance.
    The Agencies remain concerned that, practically speaking, a 
creditor might not be able to determine with certainty whether an 
appraiser complied with USPAP for a residential appraisal. An appraisal 
performed in accordance with USPAP represents an expert opinion of 
value. Not only does USPAP require extensive application of 
professional judgment, it also establishes standards for the scope of 
inquiry and analysis to be performed that cannot be verified absent 
substantially re-performing the appraisal. Conclusive verification of 
FIRREA title XI compliance (which itself incorporates USPAP) poses 
similar problems. On an even more basic level,

[[Page 10386]]

it may not be possible for a creditor to determine conclusively whether 
the appraiser actually performed the interior visit required by TILA 
section 129H(a). Moreover, TILA subjects creditors to significant 
liability and risk of litigation, including private actions and class 
actions for actual and statutory damages and attorneys' fees. TILA 
section 130, 15 U.S.C. 1640. If TILA section 129H is construed to 
require creditors to assume liability under TILA for the appraiser's 
compliance with these obligations, the Agencies also remain concerned 
that it would unduly increase the cost and restrict the availability of 
higher-risk mortgage loans. Absent clear language requiring such a 
construction, the Agencies did not believe that the statute should be 
construed to intend this result.
    As discussed in the proposal, the Agencies continue to be of the 
opinion that the safe harbor will be particularly useful to consumers, 
industry, and courts with regard to the statutory requirement that the 
appraisal be obtained from a ``certified or licensed appraiser'' who 
conducts each appraisal in compliance with USPAP and FIRREA title XI. 
While determining whether an appraiser is licensed or certified by a 
particular State is straightforward, USPAP and FIRREA provide a broad 
set of professional standards and requirements. The appraisal process 
involves the application of subjective judgment to a variety of 
information points about individual properties; thus, application of 
these professional standards is often highly context-specific. (The 
Agencies noted in the proposed rule, however, that a certification of 
USPAP compliance, one of the required safe harbor elements, is already 
an element of the URAR form used as a matter of practice in the 
industry.)
    Regarding the first element of the safe harbor, that the creditor 
``order'' that the appraiser perform the appraisal in conformity with 
USPAP and FIRREA, the Agencies generally understand that creditors 
seeking the safe harbor would include this assignment requirement in 
the engagement letter with the appraiser. See Sec.  
1026.35(c)(3)(ii)(A). Regarding specific comments received on the 
proposal, the Agencies note that the proposed staff commentary, now 
adopted, specifically addresses some of the issues the commenters 
raised. In particular, comment 35(c)(3)(ii)-1, discussed above, states 
that a creditor who does not satisfy the safe harbor conditions in 
Sec.  1026.35(c)(3)(ii) does not necessarily violate the general 
appraisal requirements of Sec.  1026.35(c)(3)(i). In addition, the 
Agencies note that another proposed element of the commentary, adopted 
as comment 35(c)(3)(ii)(C)-1, states a creditor need not look beyond 
the face of the written appraisal and the appraiser's certification to 
confirm that the elements in appendix N to this subpart are included in 
the written appraisal.
    Some commenters sought clarification on whether the creditor could 
rely on the face of the appraisal report, and what scope and type of 
information is required for the appendix N criteria. As the Agencies 
discussed in the proposal, compliance with the appendix N safe harbor 
review requires the creditor to check certain elements of the written 
appraisal and the appraiser's certification on its face for 
completeness and internal consistency. The final rule, consistent with 
the proposed rule, does not require the creditor to make an independent 
judgment about or perform an independent analysis of the conclusions 
and factual statements in the written appraisal. As discussed above, 
the Agencies believe that imposing such obligations on the creditor 
could effectively require it to re-appraise the property. The Agencies 
also are retaining the requirement for the safe harbor that the 
appraiser certify, in the appraisal report, the appraiser's compliance 
with both USPAP and applicable FIRREA title XI regulations, although 
one commenter requested eliminating the certification of compliance 
with FIRREA.\47\ This certification reflects that TILA requires 
creditors to obtain appraisals for ``higher-risk mortgages'' that are 
performed by the appraiser in conformity with the requirements of USPAP 
and applicable FIRREA title XI regulations. See TILA section 
129H(b)(3)(B), 15 U.S.C. 1639h(b)(3)(B).
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    \47\ The Agencies are aware that the URAR, currently used widely 
in the industry, includes a pro forma appraiser certification for 
USPAP compliance, but not for compliance with FIRREA Title XI 
appraisal regulations. Nonetheless, the URAR form accommodates 
``free text'' additions by the appraiser, through which appraisers 
can add an appropriate FIRREA Title XI certification.
---------------------------------------------------------------------------

    In response to comments about using third parties for the review of 
appendix N elements, the Agencies realize that some creditors may want 
to outsource the appraisal review function to confirm that the elements 
in appendix N are addressed in the written appraisal. Nonetheless, the 
Agencies emphasize that while a creditor may outsource this function to 
a third party as the creditor's agent, the creditor remains responsible 
for its agent's compliance with these requirements, just as if the 
creditor had performed the function itself, and the creditor cannot 
simply rely on the agent's certification. The same principle applies 
regarding a public comment seeking clarification about the use of 
automated review processes for the safe harbor; use of automated 
processes can be appropriate, but the creditor remains responsible for 
their effectiveness.\48\
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    \48\ The Agencies also note that the Interagency Appraisal and 
Evaluation Guidelines provide comprehensive guidance on creditors' 
use of third parties for appraisal functions for institutions 
subject to the appraisal regulations under FIRREA title XI. See 
Interagency Appraisal and Evaluation Guidelines, 75 FR 77450, 77463-
77464 (Dec. 10, 2010).
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    As stated in the proposed rule, the Agencies are of the opinion 
that the safe harbor requirements would provide reasonable protections 
to consumers and compliance guidance to creditors. For the reasons 
previously provided and in light of commenters' general support, the 
Agencies have adopted the safe harbor provision as proposed.

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

35(c)(4)(i) In General
    Under TILA section 129H(b)(2), a creditor must obtain a ``second 
appraisal'' from a ``different'' certified or licensed appraiser if the 
higher-risk mortgage loan will ``finance the purchase or acquisition of 
the mortgaged property from a seller within 180 days of the purchase or 
acquisition of such property by the seller at a price that was lower 
than the current sale price of the property.'' 15 U.S.C. 
1639h(b)(2)(A). In the proposal, the Agencies interpreted this 
requirement to obtain a ``second appraisal'' to mean that the creditor 
must obtain an appraisal in addition to the one required under the 
general ``higher-risk mortgage'' appraisal rules in TILA section 
129H(a) and (b)(1). See 15 U.S.C. 1639h(a) and (b)(1), implemented at 
new Sec.  1026.35(b)(1)(i), discussed above. Thus, a creditor would be 
required to obtain two appraisals before extending a higher-risk 
mortgage loan to finance a consumer's acquisition of the property.
    The Agencies proposed to implement the basic statutory requirement 
without material change. Thus, in ``higher-risk mortgage loan'' 
transactions under the proposal, creditors would have to apply 
additional scrutiny to properties being resold for a higher price 
within a 180-day period.
    Using the exemption authority under TILA section 129H(b)(4)(B), the 
final rule adopts the proposal, but with substantive changes. 15 U.S.C. 
1639h(b)(4)(B). Specifically, under new Sec.  1026.35(c)(4)(i), a 
creditor may not extend an HPML that is not otherwise

[[Page 10387]]

exempt from the appraisal requirements (see section-by-section analysis 
of Sec.  1026.35(c)(2), above, and Sec.  1026.35(c)(4)(vi), below) 
without obtaining, prior to consummation, two written appraisals, if:
     The seller is reselling the property within 90 days of 
acquiring it and the resale price exceeds the seller's acquisition 
price by more than 10 percent; or
     The seller is reselling the property within 91 to 180 days 
of acquiring it and the resale price exceeds the seller's acquisition 
price by more than 20 percent.
    The Agencies are adopting a proposed comment to clarify that an 
appraisal that was previously obtained in connection with the seller's 
acquisition or the financing of the seller's acquisition of the 
property does not satisfy the requirements to obtain two written 
appraisals under Sec.  1026.35(c)(4)(i). As discussed in more detail 
below, the Agencies are also adopting several other proposed comments 
to this rule without substantive change. See comments 35(c)(4)(i)-2 
through -6.

Public Comments on the Proposal

    The Agencies received over 50 comments concerning the proposal to 
implement the ``second'' appraisal requirement under TILA section 
129H(b)(2) from trade associations, banks, credit unions, mortgage 
lending corporations, non-profit organizations, government-sponsored 
enterprises (GSEs), and individuals. The commenters offered responses 
to some of the questions the Agencies posed in the proposal and made 
suggestions for exemptions from the additional appraisal requirement. 
Exemptions and related public comments are discussed in the section-by-
section analysis of Sec.  1026.35(c)(4)(vi), below.
    In the proposal, the Agencies requested comment on thirteen 
separate questions concerning the general requirement to obtain an 
additional appraisal and appropriate exemptions from this requirement. 
Public comments on proposals related to more specific rules for the 
additional appraisal are discussed in the section-by-section analysis 
of Sec.  1026.35(c)(ii)-(v), below. On the general requirements adopted 
in Sec.  1026.35(c)(4)(i), the Agencies received substantive comments 
on the following two questions.
    Use of the term ``additional appraisal'' rather than ``second 
appraisal.'' The Agencies used the term ``additional appraisal'' rather 
than ``second appraisal'' throughout the proposed rule and commentary 
because the term ``second'' may imply that the additional appraisal 
must be later in time than the first appraisal. In the proposal, the 
Agencies asked whether commenters agreed with the proposal's use of the 
term ``additional appraisal'' instead of the statutory term ``second 
appraisal.'' The Agencies received six comments on this question. The 
commenters agreed that the use of the term ``additional'' appraisal is 
appropriate.
    Three commenters requested clarification on how to distinguish 
between appraisals of different valuations in a lending decision, 
noting that the proposal did not specify which of the two required 
appraisals a creditor must rely on in extending a higher-risk mortgage 
loan if the appraisals provide different opinions of value.
    Reliance on appraisal for seller's purchase of the property. The 
Agencies also requested comment on a proposed comment clarifying that 
an appraisal previously obtained in connection with the seller's 
acquisition or the financing of the seller's acquisition of the 
property cannot be used as one of the two required appraisals under the 
requirement for two appraisals under TILA section 129H(b)(2). 15 U.S.C. 
1639h(b)(2). The Agencies received one comment on this question, which 
supported the Agencies' approach to this issue.

Discussion

    Consistent with the statute and the proposal, new Sec.  
1026.35(c)(4)(i) requires a creditor to apply additional scrutiny to 
the value of properties securing HPMLs when they are being resold for a 
higher price within a 180-day period. The Agencies believe that the 
intent of TILA section 129H(b)(2), as implemented in Sec.  
1026.35(c)(4)(i), is to discourage fraudulent property ``flipping,'' a 
practice in which a seller resells a property at an artificially 
inflated price within a short time period after purchasing it, 
typically after some minor renovations and frequently relying on an 
inflated appraisal to support the increase in value.\49\ 15 U.S.C. 
1639h(b)(2). Consumers who purchase properties at inflated values can 
be financially disadvantaged if, for example, they incur mortgage debt 
that exceeds the value of their dwelling at the time of the 
acquisition. The Agencies recognize that a property may be resold at a 
higher price within a short timeframe for legitimate reasons, such as 
when a seller makes valuable improvements to the property or market 
prices increase. Section 1026.35(c)(4)(i) requires an additional 
appraisal analyzing the property's resale price to ensure that the 
increased sales price is appropriate.
---------------------------------------------------------------------------

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

    In the proposal, the Agencies noted that this approach is generally 
consistent with rules promulgated by HUD to address property flipping 
in single-family mortgage insurance programs of the FHA. See 24 CFR 
203.37a; 68 FR 23370, May 1, 2003; 71 FR 33138, June 7, 2006; 77 FR 
71099, Nov. 29, 2012 (FHA Anti-Flipping Rules, or FHA Rules). In 
general, under the FHA Anti-Flipping Rules, properties that have been 
resold within 90 days are ineligible as security for FHA-insured 
mortgage financing. See 24 CFR Sec.  237a(b)(2). Properties that have 
been resold 91 to 180 days from the seller's acquisition date are 
generally ineligible as security for FHA-insured mortgage financing if 
the sales price exceeds the seller's price by 100 percent. To obtain 
FHA insurance in this case, HUD requires additional documentation that 
must include an additional appraisal. See 24 CFR 237a(b)(3).
    However, under temporary rules in effect until December 31, 2013, 
that waive the existing HUD anti-flipping regulations during the first 
90-day period described above, FHA insurance may be obtained for a 
mortgage secured by a property resold within 90 days if certain 
conditions are met.\50\ Among these conditions is a requirement for 
additional documentation if the sales price exceeds the seller's 
acquisition cost by more than 20 percent, including ``a second 
appraisal and/or supporting documentation'' verifying that the seller 
completed legitimate renovation, repair and rehabilitation work on the 
property to justify the price increase.\51\
---------------------------------------------------------------------------

    \50\ 77 FR 71099, 71100 (Nov. 29, 2012). The waiver rules were 
first issued in May 2010 and waived the existing regulations through 
December 31, 2011. 75 FR 38633 (May 21, 2010). The waiver was 
subsequently extended through December 31, 2012. 76 FR 81363 (Dec. 
28, 2011).
    \51\ 77 FR 71099, 71100-71101 (Nov. 29, 2012).
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    Use of the term ``additional appraisal'' rather than ``second 
appraisal.'' The Agencies are adopting use of the term ``additional 
appraisal'' rather than ``second appraisal'' throughout the final rule 
and commentary, as proposed. The Agencies are concerned that the term 
``second'' may imply that the additional appraisal must be later in 
time than the first appraisal, when in some cases creditors might wish 
to order both appraisals

[[Page 10388]]

simultaneously. In addition, creditors might not be able to identify 
easily which of the two appraisals is the ``second appraisal'' for 
purposes of complying with the prohibition on charging the consumer for 
any ``second appraisal'' under TILA section 129H(b)(2)(B). 15 U.S.C. 
1639h(b)(2)(B) (implemented at Sec.  1026.35(c)(4)(v), discussed in the 
section-by-section analysis of that provision, below). Public 
commenters supported use of the term ``additional appraisal,'' and the 
Agencies do not believe that this term changes the substantive 
requirements of the statute.
    Regarding concerns expressed by commenters about which appraisal to 
use for the credit decision when the two appraisals show different 
values, the Agencies acknowledge that the introduction of a second 
appraisal will sometimes place creditors in the position of exercising 
judgment as to which appraisal reflects the more robust analysis and 
opinion of property value. The Agencies recognize that creditors 
ordering two appraisals from different certified or licensed appraisers 
may likely receive appraisals providing different opinions. The 
Agencies decline to provide additional guidance on this matter in the 
final rule, however, because other rules and regulatory guidance 
address the issue and are more appropriate vehicles for this purpose. 
TILA section 129H does not require that the creditor use any particular 
appraisal, and the Agencies believe that a creditor should retain the 
discretion to select the most reliable valuation, consistent with 
applicable safety and soundness obligations and prudential regulatory 
guidance. 15 U.S.C. 1639h.
    In particular, the Agencies noted in the proposal that TILA's 
valuation independence rules permit a creditor to obtain multiple 
valuations for the consumer's principal dwelling to select the most 
reliable valuation.\52\ 12 CFR 1026.42(c)(3)(iv). The Interagency 
Appraisal and Evaluation Guidelines also acknowledge that an 
institution may find it necessary to obtain another appraisal or 
evaluation of a property. In that case, the Guidelines affirm that the 
creditor is ``expected to adhere to a policy of selecting the most 
credible appraisal or evaluation, rather than the appraisal or 
valuation that states the highest [or lowest] value.'' \53\
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    \52\ 75 FR 66554, 66561 (Oct. 28, 2010) (emphasis added).
    \53\ 75 FR 77450, 77458 (Dec. 10, 2010). The Guidelines refer 
creditors to the section of the Guidelines on ``Reviewing Appraisals 
and Evaluations'' for information on determining and documenting the 
credibility of an appraisal or evaluation. See id. at 77458, 77461-
77463.
---------------------------------------------------------------------------

    Reliance on appraisal for seller's purchase of the property. In 
comment 35(c)(4)(i)-1, the Agencies are adopting without change a 
proposed comment clarifying that an appraisal previously obtained in 
connection with the seller's acquisition or the financing of the 
seller's acquisition of the property cannot be used as one of the two 
required appraisals under the ``additional'' appraisal requirement. The 
Agencies believe that this clarification is consistent with the 
statutory purpose of TILA section 129H of mitigating fraud on the part 
of parties to the transaction. 15 U.S.C. 1639h. As noted, the one 
commenter who weighed in on this issue supported the Agencies' 
approach.
    Section 1026.35(c)(4)(i) is consistent with the proposal in 
requiring the creditor to obtain the additional appraisal before 
consummating the HPML. TILA section 129H(b)(2) does not specifically 
require that the additional appraisal be obtained prior to consummation 
of the ``higher-risk mortgage,'' but the Agencies believe that this 
timing requirement is necessary to effectuate the statute's policy of 
requiring creditors to apply greater scrutiny to potentially flipped 
properties that will secure the transaction. 15 U.S.C. 1639h(b)(2).
    Section 1026.35(c)(4)(i) is consistent with the proposal in several 
other respects as well. First, the statute requires an additional 
appraisal ``if the purpose of a higher-risk mortgage loan is to finance 
the purchase or acquisition of the mortgaged property,'' among other 
conditions. TILA section 129H(b)(2)(A), 15 U.S.C. 1639h(b)(2)(A) 
(emphasis added). Accordingly, Sec.  1026.35(c)(4)(i) requires an 
additional appraisal only when the purpose of the HPML is to finance 
the acquisition of the consumer's principal dwelling--the requirement 
does not apply to refinance loans.
    In addition, the final rule replaces the statutory term ``mortgaged 
property'' with the term ``principal dwelling.'' TILA section 
129H(b)(2)(A), 15 U.S.C. 1639h(b)(2)(A). The Agencies have made this 
change to be consistent with Regulation Z, which elsewhere uses the 
term ``principal dwelling,'' most notably in the existing definition of 
HPML. See existing Sec.  1026.35(a)(1) and the section-by-section 
analysis of revised Sec.  1026.35(a)(1). Although a property that the 
consumer has not yet acquired will not at that time be the consumer's 
actual dwelling, existing commentary to Regulation Z explains that the 
term ``principal dwelling'' refers to properties that will become the 
consumer's principal dwelling within a year. See Sec.  1026.2(a)(24) 
and comment 2(a)(24)-3. See also 12 CFR 34.202, comment 1 (OCC) and 12 
CFR 226.43(a)(3), comment 1 (Board) (cross-referencing Regulation Z, 
which contains the Bureau's definition of ``principal dwelling,'' and 
accompanying Official Staff Interpretations of Regulation Z for 
purposes of this rule). When referring to the date on which the seller 
acquired the ``property'' in Sec.  1026.35(c)(4)(i)(A) and (B), 
however, the Agencies use the more general term ``property'' rather 
than ``principal dwelling,'' because the subject property may not have 
been used as a principal dwelling when the seller acquired and owned 
it. The Agencies intend the term ``principal dwelling'' and 
``property'' to refer to the same property.

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

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

[[Page 10389]]

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

[[Page 10390]]

``finance'' the acquisition. Moreover, if the consumer paid a nominal 
or no amount to acquire the property, the additional appraisal 
requirement would not likely be triggered--in this case, the consumer's 
price would rarely if ever exceed the seller's acquisition price, which 
is a condition for triggering the requirement for two appraisals. See 
Sec.  1026.35(c)(4)(i)(B). In terms of whether and how the rule 
applies, however, the outcome of these scenarios would not change based 
on use of the term ``acquisition'' as opposed to a more precise term 
such as ``purchase.''
    Seller. As proposed, the final rule uses the term ``seller'' 
throughout Sec.  1026.35(c)(4) to refer to the party conveying the 
property to the consumer. The Agencies use this term to conform to the 
reference to ``sale price'' in TILA section 129H(b)(2)(A). 15 U.S.C. 
1639h(b)(2)(A). Also, as discussed above, the Agencies do not foresee 
instances in which the rule would apply if the consumer acquired the 
property other than by a purchase transaction.
    Agreement. The final rule follows the proposal in referring to the 
consumer's ``agreement'' to acquire the property throughout Sec.  
1026.35(c)(4). A ``sale price,'' as referenced in TILA section 
129H(b)(2)(A), is typically contained in a legally binding agreement or 
contract between a buyer and a seller. 15 U.S.C. 1639h(b)(2)(A). The 
commenters did not raise any objections to the use of this term as 
proposed.
    Acquisition timeframe. As described above, TILA section 
129H(b)(2)(A) requires creditors to obtain an additional appraisal for 
``higher-risk mortgages'' that will finance the consumer's purchase or 
acquisition if the following two circumstances are present: (1) The 
consumer is financing the purchase or acquisition of the mortgaged 
property from a seller within 180 days of the seller's purchase or 
acquisition of the property; and (2) the current sale price of the 
property is higher than the price the seller paid for the property. 15 
U.S.C. 1639h(b)(2)(A).
    For a creditor to determine whether the first condition is met, the 
creditor has to compare two dates: the date of the consumer's 
acquisition and the date of the seller's acquisition. However, the 
statute does not provide specific guidance regarding the dates that a 
creditor must use to perform this comparison. TILA section 
129H(b)(2)(A), 15 U.S.C. 1639h(b)(2)(A). To implement this provision, 
the Agencies proposed to require that the creditor compare (1) the date 
on which the consumer entered into the agreement to acquire the 
property from the seller, and (2) the date on which the seller acquired 
the property. A proposed comment provided an illustration in which the 
creditor determines the seller acquired the property on April 17, 2012, 
and the consumer's acquisition agreement is dated October 15, 2012; an 
additional appraisal would not be required because 181 days would have 
elapsed between the two dates.
    The Agencies did not receive public comment on these aspects of the 
proposal and adopt them without change in Sec.  1026.35(c)(4)(i)(A) and 
(B), and comment 35(c)(4)(i)(A)-2.
    Date the seller acquired the property. Regarding the date of the 
seller's acquisition, TILA section 129H(b)(2)(A) refers to the date of 
that person's ``purchase or acquisition'' of the property being 
financed by the higher-risk mortgage loan. 15 U.S.C. 1639h(b)(2)(A). 
Accordingly, Sec.  1026.35(c)(4)(i)(A) and (B) refer to the date on 
which the seller ``acquired'' the property. Comment 35(c)(4)(i)-3, 
adopted from a proposed comment without change, clarifies that this 
refers to the date on which the seller became the legal owner of the 
property under State law, which the Agencies understand to be, in most 
cases, the date on which the seller acquired title. The Agencies have 
interpreted TILA section 129H(b)(2)(A) in this manner because the 
Agencies understand that creditors, in most cases, will not extend 
credit to finance the acquisition of a property from a seller who 
cannot demonstrate clear title. 15 U.S.C. 1639h(b)(2)(A). Also, as 
discussed above, the Agencies have proposed to use the single term 
``acquisition'' because this term is generally understood to comprise 
acquisition of legal title to the property, including by purchase.
    To assist creditors in identifying the date on which the seller 
acquired title to the property, comment 35(c)(4)(i)-3 is intended to 
clarify that the creditor may rely on records that provide information 
as to the date on which the seller became vested as the legal owner of 
the property pursuant to applicable State law. As provided in Sec.  
1026.35(c)(4)(vi)(A) and explained in comments 35(c)(4)(vi)(A)-1 
through -3, the creditor may determine this date through reasonable 
diligence, requiring reliance on a written source document. The 
reasonable diligence standard is discussed further below under the 
section-by-section analysis of Sec.  1026.35(c)(4)(vi)(A).
    Date of the consumer's agreement to acquire the property. Regarding 
the date of the consumer's acquisition, TILA refers to the date on 
which the ``higher-risk mortgage'' consumer purchases or acquires the 
mortgaged property, but does not provide detail on how to define the 
consumer's acquisition. TILA section 129H(b)(2)(A), 15 U.S.C. 
1639h(b)(2)(A). The Agencies proposed to interpret this provision to 
refer to ``the date of the consumer's agreement to acquire the 
property.'' A proposed comment explained that, in determining this 
date, the creditor should use a copy of the agreement provided by the 
consumer to the creditor, and use the date on which the consumer and 
the seller signed the agreement. If the consumer and seller signed on 
different dates, the creditor should use the date on which the last 
party signed the agreement.
    This comment is incorporated into the final rule without change as 
comment 35(c)(4)(i)-4. As explained in the proposal, the Agencies 
believe that use of the date on which the consumer and the seller 
agreed on the purchase transaction best accomplishes the purposes of 
the statute. This approach is substantially similar to existing 
creditor practice under the FHA Anti-Flipping Rule, which uses the date 
of execution of the consumer's sales contract to determine whether the 
restrictions on FHA insurance applicable to property resales are 
triggered. See 24 CFR 203.37a(b)(1). The Agencies have not interpreted 
the date of the consumer's acquisition to refer to the actual date of 
title transfer to the consumer under State law, or the date of 
consummation of the HPML, because it would be difficult if not 
impossible for creditors to determine, at the time that they must order 
an appraisal or appraisals to comply with Sec.  1026.35(c), when title 
transfer or consummation will occur. The actual date of title transfer 
typically depends on whether a creditor consummates financing for the 
consumer's purchase and the seller delivers the deed to the consumer in 
exchange for the proceeds from the mortgage loan. Various factors 
considered in the underwriting decision, including a review of 
appraisals, will affect whether the creditor extends the loan. In 
addition, the Agencies are concerned that even if a creditor could 
identify a date certain by which the loan would be consummated and 
title would be transferred to the consumer, the creditor could 
potentially set a date that exceeds the 180-day time period to 
circumvent the requirements of Sec.  1026.35(c)(4)(i).
    Comment 35(c)(4)(i)-4 also clarifies that the date on which the 
consumer and the seller agreed on the purchase transaction, as 
evidenced by the date the last party signed the agreement, may not 
necessarily be the date on which the consumer became contractually

[[Page 10391]]

obligated under State law to acquire the property. It may be difficult 
for a creditor to determine the date on which the consumer became 
legally obligated under the acquisition agreement as a matter of State 
law. Using the date on which the consumer and the seller agreed on the 
purchase transaction, as evidenced by their signatures and the date on 
the agreement, avoids operational and other potential issues because 
the Agencies expect that this date would be apparent on its face from 
the signature dates on the acquisition agreement.

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

    TILA section 129H(b)(2)(A) requires creditors to obtain an 
additional appraisal if the seller had acquired the property ``at a 
price that was lower than the current sale price of the property'' 
within the past 180 days. 15 U.S.C. 1639h(b)(2)(A). To determine 
whether this statutory condition has been met, a creditor would have to 
compare the current sale price with the price at which the seller had 
acquired the property. Accordingly, the Agencies proposed to implement 
this requirement by requiring the creditor to compare the price paid by 
the seller to acquire the property with the price that the consumer is 
obligated to pay to acquire the property, as specified in the 
consumer's agreement to acquire the property. Thus, if the price paid 
by the seller to acquire the property is lower than the price in the 
consumer's acquisition agreement by a certain amount or percentage to 
be determined by the Agencies in the final rule, and the seller had 
acquired the property 180 or fewer days prior to the date of the 
consumer's acquisition agreement, the creditor would be required to 
obtain an additional appraisal before extending a higher-risk mortgage 
loan to finance the consumer's acquisition of the property.\54\
---------------------------------------------------------------------------

    \54\ The Agencies proposed a trigger for the additional 
appraisal requirement, adopted and revised in new Sec.  
1026.35(c)(4)(i)(B), as follows: ``The price at which the seller 
acquired the property was lower than the price that the consumer is 
obligated to pay to acquire the property, as specified in the 
consumer's agreement to acquire the property from the seller, by an 
amount equal to or greater than XX.'' 77 FR 54722, 54772 (Sept. 5, 
2012).
---------------------------------------------------------------------------

    As noted above, the Agencies are adopting the general approach 
proposed of setting a particular price increase threshold that triggers 
the additional appraisal requirement, and are specifying the price 
increase thresholds as follows: A creditor is required to obtain two 
appraisals in two sets of circumstances--first, when the seller is 
reselling the property within 90 days of acquiring it at a price that 
exceeds the seller's acquisition price by more than 10 percent (new 
Sec.  1026.35(c)(4)(i)(A)); and second, when the seller is reselling 
the property within 91 to 180 days of acquiring it at a price that 
exceeds the seller's acquisition price by more than 20 percent (new 
Sec.  1026.35(c)(4)(i)(B)). This aspect of the final rule and related 
comments are discussed in greater detail below.
    Price at which the seller acquired the property. TILA section 
129H(b)(2)(A) refers to a property that the seller previously purchased 
or acquired ``at a price.'' 15 U.S.C. 1639h(b)(2)(A). The proposal also 
referred to the ``price'' at which the seller acquired the property; a 
proposed comment clarified that the seller's acquisition price refers 
to the amount paid by the seller to acquire the property. The proposed 
comment also explained that the price at which the seller acquired the 
property does not include the cost of financing the property. This 
comment was intended to clarify that the creditor should consider only 
the price of the property, not the total cost of financing the 
property.
    The Agencies are adopting these aspects of the proposal without 
substantive change in Sec.  1026.35(c)(4)(i)(A) and (B), and comment 
35(c)(4)(i)-5.

Public Comments on the Proposal

    The Agencies asked for comment on whether additional clarification 
was needed regarding how a creditor should identify the price at which 
the seller acquired the property. In particular, the Agencies also 
requested comment on how a creditor would calculate the price paid by a 
seller to acquire a property as part of a bulk sale that is later 
resold to a higher-risk mortgage consumer. The Agencies understand 
that, in bulk sales, a sales price might be assigned to individual 
properties for tax or accounting reasons, but asked for public input on 
whether guidance may be needed for determining the sales price of a 
property for purposes of determining whether an additional appraisal is 
required. The Agencies also asked for comment on any operational 
challenges that might arise for creditors in determining purchase 
prices for homes purchased as part of a bulk sale transaction, as well 
as for views on whether any challenges presented could impede 
neighborhood revitalization in any way, and, if so, whether the 
Agencies should consider an exemption from the additional appraisal 
requirement for these types of transactions altogether.
    An appraiser trade association stated that an appraiser's expertise 
is important in valuing properties that are part of a bulk sale. No 
other commenters commented on this question. In view of the value that 
appraisers can add in valuing properties as part of a bulk sale, and in 
the absence of requests or suggestions for additional guidance, the 
Agencies are adopting the rule as proposed with no additional 
provisions or clarifications regarding the purchase price of properties 
purchased in bulk sales.
    Price the consumer is obligated to pay to acquire the property. 
TILA section 129H(b)(2)(A) refers to the ``current sale price of the 
property'' being financed by a higher-risk mortgage loan. 15 U.S.C. 
1639h(b)(2)(A). The proposal referred to ``the price that the consumer 
is obligated to pay to acquire the property, as specified in the 
consumer's agreement to acquire the property from the seller.'' The 
final rule adopts this language in Sec.  1026.35(c)(4)(i)(A) and (B). 
The final rule also adopts a proposed comment clarifying that the price 
the consumer is obligated to pay to acquire the property is the price 
indicated on the consumer's agreement with the seller to acquire the 
property that is signed and dated by both the consumer and the seller. 
See comment 35(c)(4)(i)-6. In keeping with the proposal, comment 
35(c)(4)(i)-6 also explains that the price at which the consumer is 
obligated to pay to acquire the property from the seller does not 
include the cost of financing the property to clarify that a creditor 
should only consider the sale price of the property as reflected in the 
consumer's acquisition agreement.
    In addition, the comment refers to comment 35(c)(4)(i)-4 (providing 
guidance on the ``date of the consumer's agreement to acquire the 
property,'' as discussed above). The intention of this cross-reference 
is to indicate that the document on which the creditor may rely to 
determine the consumer's acquisition price will be the same document on 
which a creditor may rely to determine the date of the consumer's 
agreement to acquire the property. Also tracking the proposal, comment 
35(c)(4)(i)-6 further explains that the creditor is not obligated to 
determine whether and to what extent the agreement is legally binding 
on both parties. The Agencies expect that the price the consumer is 
obligated to pay to acquire the property will be apparent from the 
consumer's acquisition agreement.

[[Page 10392]]

Public Comments on the Proposal
    The Agencies requested comment on whether the price at which the 
consumer is obligated to pay to acquire the property, as reflected in 
the consumer's acquisition agreement, provides sufficient clarity to 
creditors on how to comply while providing consumers adequate 
protection. The Agencies did not receive comments on this issue, and is 
adopting the proposal's use of the phrase ``the price the consumer is 
obligated to pay to acquire the property, as specified in the 
consumer's agreement to acquire the property from the seller.''

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

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

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

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

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

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

[[Page 10393]]

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

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

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

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

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

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

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

    \64\ See U.S. House of Reps., Comm. on Fin. Servs., Report on 
H.R. 1728, Mortgage Reform and Anti-Predatory Lending Act, No. 111-
94, 59 (May 4, 2009) (House Report); Federal Bureau of 
Investigation, 2010 Mortgage Fraud Report Year in Review 18 (August 
2011), available at http://www.fbi.gov/stats-services/publications/mortgage-fraud-2010/mortgage-fraud-report-2010. See also 71 FR 
33138, 33141-33142 (June 7, 2006); HUD, Mortgagee Letter 2006-14 
(June 8, 2006) (``FHA's policy prohibiting property flipping 
eliminates the most egregious examples of predatory flips of 
properties within the FHA mortgage insurance programs.'').
    \65\ 77 FR 71099 (Nov. 29, 2012).
    \66\ See id. at 71100. A property inspection is also required. 
See id. at 71100-71101. For loans financing resales within 90 days 
where the sales price does not exceed the seller's acquisition price 
by more than 20 percent, FHA insurance is conditioned on the 
transactions being ``arms-length, with no identity of interest 
between the buyer and seller or other parties participating in the 
sales transaction.'' Id. at 71100. HUD provides several examples of 
ways that lenders can ensure that there is no inappropriate 
collusion or agreement between parties. Id.
---------------------------------------------------------------------------

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

[[Page 10394]]

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

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

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

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

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

Public Comments on the Proposal

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

[[Page 10395]]

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

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

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

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

    The proposed rule required that the additional appraisal meet the 
requirements of the first appraisal, including the requirements that 
the appraisal be performed by a certified or licensed appraiser who 
conducts a physical visit of the interior of the mortgaged property. 
See new Sec.  1026.35(c)(3)(i). The Agencies expressed in the proposal 
the belief that this approach best effectuates the purposes of the 
statute. TILA section 129H(b)(1) provides that, ``[s]ubject to the 
rules prescribed under paragraph (4), an appraisal of property to be 
secured by a higher-risk mortgage does not meet the requirements of 
this section unless it is performed by a certified or licensed 
appraiser who conducts a physical property visit of the interior of the 
mortgaged property.'' 15 U.S.C. 1639h(b)(1). The ``second appraisal'' 
required under TILA section 129H(b)(2)(A) is ``an appraisal of property 
to be secured by a higher-risk mortgage'' under TILA section 
129H(b)(1). 15 U.S.C. 1639h(b)(1), (b)(2)(A). Therefore, to meet the 
requirements of TILA section 129H, the additional appraisal would be 
required to be ``performed by a certified or licensed appraiser who 
conducts a physical visit of the interior of the property that will 
secure the transaction.'' TILA section 129H(b)(1), 15 U.S.C. 
1639h(b)(1).
    In addition, under TILA section 129H(b)(2)(A), the additional 
appraisal must analyze several elements, including ``any improvements 
made to the property between the date of the previous sale and the 
current sale.'' 15 U.S.C. 1639h(b)(2)(A). The Agencies believe that the 
purposes of the statute would be best implemented by requiring the 
second appraiser to perform a physical interior property visit to 
analyze any improvements made to the property. Without an on-site 
visit, the second appraiser would have difficulty confirming that any 
improvements

[[Page 10396]]

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

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

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

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

    Under the proposed rule, if a creditor must obtain a second 
appraisal, it may charge the consumer for only one of the appraisals. 
The Agencies proposed a comment clarifying that this rule means that 
the creditor would be prohibited from imposing a fee specifically for 
that appraisal or by marking up the interest rate or any other fees 
payable by the consumer in connection with the higher-risk mortgage 
loan. The proposal was designed to implement TILA section 
129H(b)(2)(B), which provides that ``[t]he cost of the second appraisal 
required under subparagraph (A) may not be charged to the applicant.'' 
15 U.S.C. 1639h(b)(2)(B).
    The Agencies requested comment on this proposed approach, and 
whether there might be particular ways that the creditor could identify 
the appraisal for which the consumer may not be charged in cases where, 
for example, the appraisals are ordered simultaneously.
    The proposed rule and clarifying comment are adopted without change 
in Sec.  1026.35(c)(4)(v) and comment 35(c)(4)(v)-1.
Public Comments on the Proposal
    Most commenters were strongly opposed to requiring the additional 
appraisal to be obtained at the creditor's expense. While a number of 
commenters acknowledged that the requirement is statutorily mandated 
under Dodd-Frank they were nevertheless critical of it, cautioning that 
the requirement would ultimately limit the availability of credit to

[[Page 10397]]

consumers. Many commenters indicated that the cost of an additional 
appraisal would make the loan too costly or unprofitable, leading 
creditors to cease offering higher-risk mortgage loans to riskier 
borrowers. Several commenters argued it is unfair for creditors to bear 
the cost responsibility of a second appraisal, where the applicant has 
no incentive to go forward with the loan and there is no guarantee that 
the loan will be consummated. Commenters urged the Agencies to exercise 
their exemption authority to permit creditors to charge consumers a 
reasonable fee for the additional appraisal. Alternatively, one comment 
letter recommended that creditors be prohibited from charging a direct 
cost for the additional appraisal but not an indirect cost.
Discussion
    As noted, TILA section 129H(b)(2)(B) provides that ``[t]he cost of 
the second appraisal required under subparagraph (A) may not be charged 
to the applicant.'' 15 U.S.C. 1639h(b)(2)(B). Consistent with the 
statute and the proposal, Sec.  1026.35(c)(4)(v) provides that ``[i]f 
the creditor must obtain two appraisals under paragraph (c)(4)(i) of 
this section, the creditor may charge the consumer for only one of the 
appraisals.'' As clarified in comment 35(c)(4)(v)-1, adopted without 
change from the proposal, the creditor would be prohibited from 
imposing a fee specifically for that appraisal or by marking up the 
interest rate or any other fees payable by the consumer in connection 
with the higher-risk mortgage loan (now HPML).
    The proposed comment adopted in the final rule also explains that 
the creditor would be prohibited from charging the consumer for the 
``performance of one of the two appraisals required under Sec.  
1026.35(c)(4)(i).'' This comment is intended to clarify that the 
prohibition on charging the consumer under Sec.  1026.35(b)(4)(v) 
applies to the cost of providing the consumer with a copy of the 
appraisal, not to charges for the cost of performing the appraisal. As 
implemented by new Sec.  1026.35(c)(6)(iv), TILA section 129H(c) 
prohibits the creditor from charging the consumer for one copy of each 
appraisal conducted pursuant to the higher-risk mortgage rule. 15 
U.S.C. 1639h(c); see also section-by-section analysis of Sec.  
1026.35(c)(6)(iv), below. As in the proposal, the final rule does not 
use the statutory term ``second'' appraisal, but instead refers to the 
``additional'' appraisal because, in practice, a creditor ordering two 
appraisals at the same time may not know which of the two appraisals 
would be the ``second'' appraisal. The Agencies understand that the 
additional appraisal could be separately identified because it must 
contain an analysis of elements in proposed Sec.  1026.35(c)(4)(iv). 
The Agencies also understand that appraisers may perform such an 
analysis as a matter of routine, and that it may be difficult to 
distinguish the two appraisals on that basis.\71\
---------------------------------------------------------------------------

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

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

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

35(c)(4)(vi)(A) Reasonable Diligence
    The Agencies proposed to require that the creditor have exercised 
reasonable diligence to support any determination that an additional 
appraisal under Sec.  1026.35(c)(4)(i) is not required. (For a 
discussion of the factors triggering the requirement, see the section-
by-section analysis of Sec.  1026.35(c)(4)(i)(A) and (B), above.) 
Absent an exemption (see Sec.  1026.35(c)(2) and (c)(4)(vii)), an 
additional appraisal would always be required for an HPML where the 
creditor elected not to conduct reasonable diligence, could not find 
the relevant sales price and sales date information, or where the 
information found led to conflicting conclusions about whether an 
additional appraisal were required. See section-by-section analysis of 
Sec.  1026.35(c)(4)(vi)(B), below.
    To help creditors meet the proposed reasonable diligence standard, 
the Agencies proposed that creditors be able to rely on written source 
documents that are generally available in the normal course of 
business. Accordingly, a proposed comment clarified that a creditor has 
acted with reasonable diligence to determine when the seller acquired 
the property and whether the price at which the seller acquired the 
property is lower than the price reflected in the consumer's 
acquisition agreement if, for example, the creditor bases its 
determination on information contained in written source documents, as 
discussed below.
    The proposed comment provided a list of written source documents, 
not intended to be exhaustive, that the creditor could use to perform 
reasonable diligence as follows: A copy of the recorded deed from the 
seller; a copy of a property tax bill; a copy of any owner's title 
insurance policy obtained by the seller; a copy of the RESPA settlement 
statement from the seller's acquisition (i.e., the HUD-1 or any 
successor form \72\); a property sales history report or title report 
from a third-party reporting service; sales price data recorded in 
multiple listing services; tax assessment records or transfer tax 
records obtained from local governments; a written appraisal, including 
a signed appraiser's

[[Page 10398]]

certification stating that the appraisal was performed in conformity 
with USPAP, that shows any prior transactions for the subject property; 
a copy of a title commitment report; or a property abstract.
---------------------------------------------------------------------------

    \72\ As explained in a footnote in the proposed comment, the 
Bureau's 2012 TILA-RESPA Proposal contains a proposed successor form 
to the RESPA settlement statement. See Sec.  1026.38 (Closing 
Disclosure Form) of the Bureau's 2012 TILA-RESPA Proposal, 77 FR 
51116 (Aug. 23, 2012).
---------------------------------------------------------------------------

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

[[Page 10399]]

    Use of seller-provided and other non-public documents. Several 
commenters recognized that sometimes creditors have no other reliable 
sources than seller-provided or other non-public documents. Appraiser 
association commenters proposed that the Agencies consider a ``good-
faith'' exception that would allow creditors to rely on non-traditional 
sources of information when more reliable ones are not available. These 
commenters reasoned that this exception would balance the underlying 
public policy of supporting ``higher-risk mortgage loans'' (now HPMLs) 
when no other loan product is available or feasible, against the risk 
that creditors will rely on bad information.
    Reliability of oral statements. No commenters opposed the proposed 
comment, adopted as comment 35(c)(4)(vi)-2, clarifying that reliance on 
oral statements alone would not satisfy the reasonable diligence 
standard. Appraiser trade associations generally shared the Agencies' 
concern about the potential risk of relying on information presented by 
interested parties.
Discussion
    As noted, the Agencies are adopting the proposed reasonable 
diligence standard and associated comments without material change. The 
Agencies believe that this standard is important to facilitate 
compliance because it may be difficult in some cases for a creditor to 
know with absolute certainty that the criteria triggering the 
additional appraisal requirement have been met. See Sec.  
1026.35(c)(4)(i)(A) and (B). Similarly, a creditor may have difficulty 
knowing whether it relied on the ``best information'' available in 
making the determination, which could require that creditors perform an 
exhaustive review of every document that might contain information 
about a property's sales history and unduly limit the availability of 
credit to higher-risk mortgage consumers.
    Regarding the proposed list of source documents on which creditors 
may appropriately rely, now adopted in Appendix O, the Agencies note 
that the first four listed items would be voluntarily provided directly 
or indirectly by the seller, rather than collected from publicly 
available sources. As did commenters, the Agencies recognize that 
permitting the use of these documents presents the risk that the 
creditor would be presented with altered copies. Balanced against this 
risk, however, is the concern that no information sources are publicly 
available in non-disclosure jurisdictions and jurisdictions with 
significant lag times before public land records are updated to reflect 
new transactions.\73\ The Agencies are concerned that, unless the 
creditor can rely on other sources, such as sources provided by the 
seller, the higher-risk mortgage transaction may not proceed at all, or 
could proceed only with an additional appraisal containing a limited 
form of the analysis that would be required by TILA section 
129H(b)(2)(A). 15 U.S.C. 1639h(b)(2)(A). The proposed footnote 
explaining the term ``title commitment report'' (Item 9), described 
above, is moved in the final rule to new comment 1 of Appendix O.
---------------------------------------------------------------------------

    \73\ During informal outreach conducted by the Agencies for the 
proposal, representatives of large, small, and regional lenders 
expressed concern that in some cases, a creditor may be unable to 
determine the seller's date and price due to information gaps in the 
public record. The Agencies also understand that a creditor may not 
be able to determine prior transaction data because of delays in the 
recording of public records. The Agencies also understand that 
certain ``non-disclosure'' jurisdictions do not make the price at 
which a seller acquired a property available in the public records. 
These concerned were affirmed by public comments on the proposal.
---------------------------------------------------------------------------

    As noted, new comment 35(c)(4)(vi)(A)-1 clarifies that, if a 
written source document describes the seller's acquisition price in a 
manner that indicates that the price described is an estimated or 
assumed amount and not the actual price, the creditor should look at an 
alternative document to satisfy the reasonable diligence standard in 
determining the price at which the seller acquired the property.
    Regarding a commenter's recommendation that a creditor be permitted 
to provide a certified or attested document signed by the parties as 
sufficient evidence of ``reasonable diligence,'' the Agencies believe 
that this allowance could easily be abused and would not constitute 
sufficient diligence. Instead, as discussed in the section-by-section 
analysis of Sec.  1026.35(c)(4)(vi)(B) below, the Agencies believe that 
the consumer protection purposes of the statute are better served by 
simply requiring two appraisals where reliable written documentation of 
the sales price and date are unavailable. Similarly, regarding 
questions about multiple listing documents that have different sales 
price data, the Agencies believe that in cases of conflicting listing 
price information, the consumer protection purposes of the statute are 
best served if the creditor obtains better information from other 
sources through the exercise of reasonable diligence and, failing that, 
obtains a second appraisal. See section-by-section analysis of Sec.  
1026.35(c)(4)(vi)(B), below.
    On the recommendation that the Agencies consider a ``good-faith'' 
exception that would allow creditors to rely on non-traditional sources 
of information, the Agencies believe that the ``reasonable diligence'' 
standard alone is more appropriate and addresses the commenters' 
concerns. Under this standard, a broad array of widely used public and 
non-public documents, set forth in the non-exhaustive list under 
comment 35(c)(4)(vi)-1, could be relied on by creditors. In short, the 
Agencies expect that, with the parameters established in this comment, 
the rule will appropriately balance the need to assure access to HPML 
credit against the risk that creditors will rely on bad information.
    Regarding reliance on another USPAP-compliant appraisal to satisfy 
the reasonable diligence standard, the Agencies are revising the 
proposed list to clarify that a creditor would not be permitted to rely 
on an appraisal other than the one prepared for the creditor for the 
subject HPML. Specifically, the Agencies are revising Item 8, which, in 
the proposal read as follows: ``A written appraisal signed by an 
appraiser who certifies that the appraisal has been performed in 
conformity with USPAP that shows any prior transactions for the subject 
property.'' In the final rule, this comment has been revised to read as 
follows: ``A written appraisal performed in compliance with Sec.  
1026.35(c)(3)(i) for the same transaction that shows any prior 
transactions for the subject property.'' The Agencies are concerned 
that, as proposed, this item in the written source document list could 
lead creditors to believe that appraisals performed for the seller's 
acquisition or other appraisals that might otherwise be considered 
``stale'' could be relied on. As revised, the list item allows reliance 
specifically on an appraisal performed in compliance with the HPML 
appraisal requirements for the same HPML transaction. That means that 
the appraisal would have to have been performed by a state-certified or 
-licensed appraiser in conformity with USPAP and FIRREA.
    On a related issue, the Agencies emphasize that allowing the 
creditor to rely on the first appraisal for prior sales information 
does not require more of appraisers than does USPAP. Again, the first 
appraisal must be performed in compliance with USPAP and FIRREA. The 
Agencies understand that USPAP Standards Rule 1-5 requires appraisers 
to ``analyze all sales of the subject property that occurred within the 
three (3) years prior to the effective date of the appraisal'' if that 
information is available to the appraiser ``in the normal

[[Page 10400]]

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

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

    Overall, due to the many requirements to which the first appraisal 
is subject, including independence requirements under TILA (implemented 
by Sec.  1026.42), and in the absence of public comments to the 
contrary, the Agencies expect that, in cases where the appraiser has 
provided a price, a creditor generally could rely on the first 
appraisal prepared for the HPML transaction to satisfy the reasonable 
diligence standard under Sec.  1026.35(c)(4)(vi)(A). The exception 
would be circumstances under which other information obtained by the 
creditor makes reliance on the price unreasonable. See also section-by-
section analysis of Sec.  1026.35(c)(4)(ii), above.
    Comment 35(c)(4)(vi)(A)-2 clarifies that reliance on oral 
statements of interested parties, such as the consumer, seller, or 
mortgage broker, does not constitute reasonable diligence under Sec.  
1026.35(c)(4)(vi)(A). This comment is adopted from the proposal without 
change.
    Requirement for two appraisals when sale information is unavailable 
or conflicting. Under the proposal, a creditor that cannot determine 
the seller's acquisition date, or a creditor that can determine that 
the date is within 180 days but cannot determine the price, would have 
to obtain an additional appraisal before originating a ``higher-risk 
mortgage loan'' (now HPML). The proposal included a comment with two 
examples of how this rule would apply: one in which a creditor is 
unable to obtain information on the seller's acquisition price or date 
and the other in which a creditor obtains conflicting information about 
the seller's acquisition price or date.
    Comment 35(c)(4)(vi)(A)-3, discussed further below, gives two 
examples of how the rule applies. This comment was moved from its 
placement in the proposal with no substantive change to the 
requirements of the reasonable diligence standard intended.
Public Comments on the Proposal
    The Agencies requested comment on whether the enhanced protections 
for consumers afforded by requiring an additional appraisal whenever 
the seller's acquisition date or price cannot be determined merit the 
potential restraint on the availability of higher-risk mortgage loans. 
The Agencies also requested comment on whether concerns about these 
potential restraints on credit availability make it particularly 
important to include the first four source documents listed in the 
proposed commentary, even though they would be seller-provided, and 
whether these concerns warrant further expanding the sources of 
information creditors may rely on to satisfy the reasonable diligence 
standard under the proposed rule.
    The Agencies did not receive comments directly responsive to these 
questions.
Discussion
    In general, the Agencies believe that, based on recent data 
provided by FHFA discussed in the proposal, most property resales would 
not trigger the proposal's conditions requiring an additional 
appraisal.\75\ However, the Agencies understand that, in some cases, a 
creditor performing typical underwriting and documentation procedures 
may be unable to ascertain through information derived from public 
records whether the conditions in the additional appraisal requirement 
have been triggered. For example, a creditor may be unable to determine 
information about the seller's acquisition because of lag times in 
recording public records. The Agencies also understand that some source 
documents often report only estimated amounts of consideration when 
describing the consideration paid by the current titleholder for the 
property. Moreover, as noted, several ``non-disclosure'' jurisdictions 
do not make the price at which a seller acquired a property publicly 
available. In addition, the creditor may obtain conflicting information 
from written source documents. In these cases, a creditor may be unable 
to determine, based on its reasonable diligence, whether the criteria 
in Sec.  1026.35(c)(4)(i)(A) and (c)(4)(i)(B) have been met.
---------------------------------------------------------------------------

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

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

[[Page 10401]]

documents, creditors extending HPMLs will routinely incur increased 
costs associated with obtaining the additional appraisal. One risk of 
this rule is that, because TILA section 129H(b)(2)(B) prohibits 
creditors from charging their customers for the additional appraisal, 
creditors will simply refrain from engaging in any HPML where sales 
history data cannot be obtained. 15 U.S.C. 1639h(b)(2)(B). See also 
Sec.  1026.35(c)(4)(v) (requiring that the creditor cannot charge the 
consumer for the additional appraisal).
    As expressed in the proposal, however, the Agencies believe that 
requiring an additional appraisal where creditors are unable to obtain 
the seller's acquisition price and date is necessary to prevent 
circumvention of the statute. In particular, the Agencies are concerned 
that not requiring an additional appraisal in cases of limited 
information may inadequately address the problem of fraudulent property 
flipping to borrowers of HPMLs in ``non-disclosure'' jurisdictions, 
where prior sales data is routinely unavailable through public sources. 
Similarly, the Agencies are concerned that sellers that acquire and 
sell properties within a short timeframe could take advantage of delays 
in the public recording of property sales to engage in fraudulent 
flipping transactions. The Agencies believe that, where the seller's 
acquisition date in particular is not in the public record due to 
recording delays, it is more reasonable to assume that the seller's 
transaction was sufficiently recent to be covered by the rule than not.

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

    Section 35(c)(4)(vi)(B) provides that if, after exercising 
reasonable diligence, a creditor cannot determine whether the 
conditions in Sec.  1026.35(c)(4)(i)(A) and (B) are present and 
therefore must obtain two written appraisals under Sec.  1026.35(c)(4), 
the additional appraisal must include an analysis of the factors in 
Sec.  1026.35(c)(4)(iv) (difference in sales price, changes in market 
conditions, and property improvements) only to the extent that the 
information necessary for the appraiser to perform the analysis can be 
determined.
    For the reasons discussed above, the Agencies believe that an HPML 
creditor should be required to obtain an additional appraisal if the 
creditor cannot determine the seller's acquisition date, or if it can 
determine the date is within 180 days but cannot determine the price, 
based on written source documents. However, in keeping with the 
proposal, Sec.  1026.35(c)(4)(vi)(B) also provides that the additional 
appraisal in this situation would not have to contain the full analysis 
required for additional appraisals of flipping transactions under TILA 
section 129H(b)(2)(A), implemented in the final rule as Sec.  
1026.35(c)(4)(iv)(A)-(C). 15 U.S.C. 1639h(b)(2)(A).
Public Comments on the Proposal
    The Agencies requested comment on whether an appraiser would be 
unable to analyze the difference in the price the consumer is obligated 
to pay to acquire the property and the price at which the seller 
acquired the property without knowing when the seller acquired the 
property. If such an analysis is not possible without information about 
when the seller acquired the property, the Agencies requested comment 
on whether the rule should assume the seller acquired the property 180 
days prior to the date of the consumer's agreement to acquire the 
property. The Agencies also requested comment generally on the proposed 
approach to situations in which the creditor cannot obtain the 
necessary information and whether the rule should address information 
gaps about the flipping transaction in other ways.
    The Agencies did not receive comments directly responsive to these 
questions.
Discussion
    Under the proposal, now adopted in Sec.  1026.35(c)(4)(vi)(B), the 
additional appraisal must include an analysis of the elements that 
would be required in proposed Sec.  1026.35(c)(4)(iv)(A)-(C) only to 
the extent that the creditor knows the seller's purchase price and 
acquisition date. As discussed in the section-by-section analysis of 
Sec.  1026.35(c)(4)(iv), TILA section 129H(b)(2)(A) requires that the 
additional appraisal analyze the difference in sales prices, changes in 
market conditions, and improvements to the property between the date of 
the previous sale and the current sale. 15 U.S.C. 1639h(b)(2)(A). An 
appraiser could not perform this analysis if efforts to obtain the 
seller's acquisition date and price were not successful.
    Consistent with the proposal, comment 35(c)(4)(vi)(B)-1 confirms 
that, in general, the additional appraisal required under Sec.  
1026.35(c)(4)(i) should include an analysis of the factors listed in 
Sec.  1026.35(c)(4)(iv)(A)-(C). However, the comment also confirms that 
if, following reasonable diligence, a creditor cannot determine whether 
the conditions in Sec.  1026.35(c)(4)(i) are present due to a lack of 
information or conflicting information, the required additional 
appraisal must include the analyses required under Sec.  
1026.35(c)(4)(iv)(A)-(C) only to the extent that the information 
necessary to perform the analysis is known. As an example, comment 
35(c)(4)(vi)(B)-1 assumes that a creditor is able, following reasonable 
diligence, to determine that the date on which the seller acquired the 
property occurred between 91 and 180 days prior to the date of the 
consumer's agreement to acquire the property, but cannot determine the 
sale price. In this case, the creditor is required to obtain an 
additional written appraisal that includes an analysis under Sec.  
1026.35(c)(4)(iv)(B) and (c)(4)(iv)(C) of the changes in market 
conditions and any improvements made to the property between the date 
the seller acquired the property and the date of the consumer's 
agreement to acquire the property. However, the creditor is not 
required to obtain an additional written appraisal that includes 
analysis under Sec.  1026.35(c)(4)(iv)(A) of the difference between the 
price at which the seller acquired the property and the price that the 
consumer is obligated to pay to acquire the property.
    The Agencies note that the proposed rule does not provide 
commentary with guidance on the modified requirements for the 
additional analysis in a situation in which the creditor is unable to 
determine the date the seller acquired the property but is able to 
determine the price at which the seller acquired the property. As 
noted, the Agencies requested but did not receive public comments on 
this aspect of the proposal. The Agencies are unaware of situations in 
which the seller's acquisition price, but not the acquisition date, 
would be known. In the absence of public comment on the issue, the 
Agencies are not adopting additional guidance on this theoretical 
situation.
    The Agencies believe that allowing creditors to comply with a 
modified form of the full analysis where a creditor cannot determine 
information about a property based on its reasonable diligence is a 
reasonable interpretation of the statute. If a creditor could not 
determine when or for how much the prior sale occurred, it would be 
impossible for a creditor to obtain an appraisal that complies with the 
full analysis requirement of TILA section 129H(b)(2)(A) concerning the 
change in price, market conditions, and improvements to the property. 
15 U.S.C. 1639h(b)(2)(A).
    The Agencies' approach to situations in which the creditor cannot 
obtain the necessary information, either due to a lack of information 
or conflicting

[[Page 10402]]

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

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

    TILA section 129H(b)(4)(B) permits the Agencies to exempt jointly a 
class of loans from the additional appraisal requirement if the 
Agencies determine the exemption ``is in the public interest and 
promotes the safety and soundness of creditors.'' 15 U.S.C. 
1639h(b)(4)(B). The Agencies did not expressly propose any exemptions 
from the additional appraisal requirement, but invited comment on 
whether exempting any classes of higher-risk mortgage loans from the 
additional appraisal requirement (beyond the exemptions in Sec.  
1026.35(c)(2)) would be in the public interest and promote the safety 
and soundness of creditors. The Agencies offered a number of examples 
of potential exemptions, such as loans made in rural areas, and 
transactions that are currently exempt from the restrictions on FHA 
insurance applicable to property resales in the FHA Anti-Flipping Rule, 
including, among others, sales by government agencies of certain 
properties, sales of properties acquired by inheritance, and sales by 
State- and federally-chartered financial institutions.\76\ See, e.g., 
24 CFR 203.37a(c). Regarding a possible exemption for higher-risk 
mortgage loans (now HPMLs) made in ``rural'' areas from the additional 
appraisal requirement, the Agencies requested comment on whether the 
rule should use the same definition of ``rural'' that was provided in 
the 2011 ATR Proposal.\77\ This same definition of ``rural'' was also 
proposed by the Board regarding Dodd-Frank Act escrow requirements 
(2011 Escrows Proposal).\78\ This definition is reviewed in more detail 
in the section-by-section analysis of Sec.  1026.35(c)(4)(vii)(H), 
below.
---------------------------------------------------------------------------

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

    In the final rule, the Agencies are adopting exemptions from the 
additional appraisal requirement under Sec.  1026.35(c)(4)(i) for 
extensions of credit that finance the consumer's acquisition of a 
property:
    (1) From a local, State or Federal government agency (Sec.  
1026.35(c)(4)(vii)(A));
    (2) From a person that acquired the property through foreclosure, 
deed-in-lieu of foreclosure or other similar judicial or non-judicial 
procedures as a result of exercising the person's rights as a holder of 
a defaulted mortgage loan (Sec.  1026.35(c)(4)(vii)(B));
    (3) From a non-profit entity as part of a local, State or Federal 
government program under which the non-profit entity is permitted to 
acquire single-family properties for resale from a seller who acquired 
title to the property through the process of foreclosure, deed-in-lieu 
of foreclosure, or other similar judicial or non-judicial procedure 
(Sec.  1026.35(c)(4)(vii)(C));
    (4) From a person who acquired title to the property by inheritance 
or pursuant to a court order of dissolution of marriage, civil union, 
or domestic partnership, or of partition of joint or marital assets to 
which the seller was a party (Sec.  1026.35(c)(4)(vii)(D));
    (5) From an employer or relocation agency in connection with the 
relocation of an employee (Sec.  1026.35(c)(4)(vii)(E));
    (6) From a servicemember, as defined in 50 U.S.C. Appx. 511(1), who 
received deployment or permanent change of station orders after the 
servicemember acquired the property (Sec.  1026.35(c)(4)(vii)(G));
    (7) Located in an area designated by the President as a federal 
disaster area, if and for as long as the Federal financial institutions 
regulatory agencies, as defined in 12 U.S.C. 3350(6), waive the 
requirements in title XI of the Financial Institutions Reform, 
Recovery, and Enforcement Act of 1989, as amended (12 U.S.C. 3331 et 
seq.), and any implementing regulations in that area (Sec.  
1026.35(c)(4)(vii)(F)); and
    (8) Located in a ``rural'' county, as defined in the Bureau's 2013 
Escrows Final Rule, Sec.  1026.35(b)(2)(iv)(A) (which is the same 
definition used in the 2013 ATR Final Rule, Sec.  1026.43(f)(2)(vi) and 
comment 43(f)(2)(vi-1) (Sec.  1026.35(c)(4)(vii)(H)).
Public Comments on the Proposal
    The Agencies received over fifty comments concerning the questions 
asked by the Agencies about appropriate exemptions from the additional 
appraisal requirement. Several commenters opposed requiring two 
appraisals under any circumstances. However, the Agencies note that the 
additional appraisal requirement is mandated by statute. TILA section 
129H(b)(2), 15 U.S.C. 1639h(b)(2). Commenters in general strongly 
supported an exemption for loans made in rural areas. The commenters 
stated that there are limited numbers of licensed and certified 
appraisers in rural areas, which would make the additional appraisal 
requirement (requiring appraisals by two independent appraisers) 
particularly burdensome in these areas. In addition, commenters argued 
that lenders in rural areas may be forced to hire appraisers from far 
outside the geographic area, which would increase the time and cost 
associated with the transaction. Several commenters also stated that 
rural areas have not historically been sources of fraudulent real 
estate flipping activity. A number of commenters noted that property 
prices in rural areas tend to be lower, so the cost of the second 
appraisal is higher as a percentage of the overall transaction. Two 
commenters, national trade associations for appraisers, opposed the 
exemption for rural loans, suggesting that it is not difficult to find 
two appraisers to value rural properties.
    As for how to define ``rural,'' one commenter, a national trade 
association for community banks, suggested that the agencies use a 
definition of ``rural'' that is consistent with the definition used in 
rules addressing the use of escrow accounts. See 2011 Escrows Proposal, 
discussed below, revised and adopted in

[[Page 10403]]

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

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

    A large number of commenters also supported an exemption for 
transactions that are currently exempted from the restrictions on FHA 
insurance applicable to property resales in the FHA Anti-Flipping Rule. 
The commenters argued that these categories of transactions do not 
present the same risk to consumers and therefore do not require the 
additional anti-flipping consumer protections.
    Two commenters, national trade associations for appraisers, 
objected to adding any exemptions to the additional appraisal 
requirement, and suggested that there should be a strong presumption 
that an additional appraisal is necessary to protect consumers and to 
promote the safety and soundness of financial institutions.
    A number of commenters suggested other exemptions or endorsed 
exemptions from the entire rule already in the proposal. These are as 
follows.
     Three commenters (a national trade association for the 
banking industry, a State trade association for the banking industry, 
and a bank holding company) suggested an exemption from the second 
appraisal requirement in cases when the initial appraisal is performed 
by an appraiser who was selected from the creditor's list of qualified 
appraisers. The commenters stated that eliminating the seller's ability 
to influence the selection of the appraiser in this fashion would be 
sufficient to protect the borrower from the risk of an artificially-
inflated appraisal, thereby addressing the fraudulent ``flipping'' 
concern the statute seeks to address.
     Two commenters (a nonprofit organization and State credit 
union association) suggested an exemption for active duty military 
personnel who receive permanent change of duty station orders.
     A number of commenters (including national trade 
associations for the mortgage finance and retail banking industry) 
suggested exemptions for certain non-purchase transactions, such as 
gifts, transfers in connection with trusts, transfers that do not 
generate capital gains, and intra-family transfers for estate planning 
purposes, on grounds that these transactions are not ``profit 
seeking.'' Several commenters suggested that transfers in connection 
with a divorce decree be included in this category as an exemption.
     Many commenters (including two national trade associations 
for the mortgage finance and retail banking industry, a national trade 
association for the banking industry, a national trade association for 
community banks, a national trade association for credit unions, four 
regional associations for credit unions, a large national bank, a 
financial holding company, and a community bank) endorsed exemptions 
for construction and bridge loans, on grounds that these are temporary 
loans and that consumers are not exposed to risk at the level 
comparable to other residential loans that Congress targeted in the 
statute. These commenters also argued that the additional appraisal 
requirement would be impractical for construction loans, given the 
inability to conduct interior inspections.
     Two commenters (a community bank and a credit union) 
suggested an exemption for non-purchase acquisitions and transfers 
where the consumer previously held a partial interest in the property 
and cited to Regulation Z (commentary on the definition of residential 
mortgage transaction) as support.
Discussion
    In response to widespread support for adopting exemptions 
consistent with exemptions from the restrictions on FHA financing in 
the FHA Anti-Flipping Rule, the Agencies are adopting several 
exemptions from the additional appraisal requirement generally 
consistent with exemptions in the FHA Anti-Flipping Rule under 24 CFR 
203.37a(c). These are extensions of credit that finance the consumer's 
acquisition of a property:
     From a local, State or Federal government agency (Sec.  
1026.35(c)(4)(vii)(A); see also 24 CFR 203.37a(c)(1), (2) and (7)).
     From an entity that acquired the property through 
foreclosure, deed-in-lieu of foreclosure or other similar judicial or 
non-judicial procedures as a result of exercising the person's rights 
as a holder of a defaulted mortgage loan (Sec.  1026.35(c)(4)(vii)(B); 
see also 24 CFR 203.37a(c)(6)).
     From a non-profit entity as part of a local, State or 
Federal government program under which the non-profit entity is 
permitted to acquire single-family properties for resale from a seller 
who acquired the property through foreclosure, deed-in-lieu of 
foreclosure, or other similar judicial or non-judicial procedure (Sec.  
1026.35(c)(4)(vii)(C); see also 24 CFR 203.37a(c)(3)).
     From a seller who acquired the property pursuant to a 
court order of dissolution of marriage, civil union or domestic 
partnership, or of partition of joint or marital assets to which the 
seller was a party (Sec.  1026.35(c)(4)(vii)(D); see also 24 CFR 
203.37a(c)(4)).
     From an employer or relocation agency in connection with 
the relocation of an employee (Sec.  1026.35(c)(4)(vii)(E); see also 24 
CFR 203.37a(c)(4)).
     Located in an area designated by the President as a 
federal disaster area, if and for as long as the Federal financial 
institutions regulatory agencies, as defined in 12 U.S.C. 3350(6), 
waive the requirements in title XI of the Financial Institutions 
Reform, Recovery, and Enforcement Act of 1989, as amended (12 U.S.C. 
3331 et seq.), and any implementing regulations in that area (Sec.  
1026.35(c)(4)(vii)(F); see also 12 CFR 203.37a(c)(4)).
    In addition, the Agencies are adopting an exemption for extensions 
of credit to finance the consumer's purchase of property being sold by 
a servicemember, as defined in 50 U.S.C. Appx. 511(1), if the 
servicemember receives deployment or permanent change of station orders 
after the servicemember purchased the property (Sec.  
1026.35(c)(4)(vii)(G)).
    Finally, the Agencies are adopting an exemption for HPMLs in rural 
areas (Sec.  1026.35(c)(4)(vii)(H)). The exemption would apply to HPMLs 
secured by properties in counties considered ``rural'' under 
definitions promulgated by the Bureau in the 2013 ATR Final Rule and 
2013 Escrows Final Rule--specifically, properties located within the 
following Urban Influence Codes (UICs), established by the United 
States Department of Agriculture's Economic Research Services (USDA-
ERS): 4, 6, 7, 8, 9, 10, 11, or 12. These UICs generally correspond 
with areas outside of metropolitan statistical areas (MSAs) and 
Micropolitan Statistical Areas, defined by the Office of Management and 
Budget (OMB). For reasons discussed in more detail in the section-by-
section analysis of Sec.  1026.35(c)(4)(vii)(H) and the Dodd-Frank Act 
Section 1022(b)(2) analysis in the SUPPLEMENTARY INFORMATION below, 
rural properties located in micropolitan statistical areas that are not 
adjacent to an MSA (UIC 8) are also included in the exemption.

[[Page 10404]]

    Each of these exemptions is discussed in turn below.

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

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

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

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

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

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

[[Page 10405]]

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

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

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

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

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

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

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

[[Page 10406]]

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

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

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

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

Acquisitions of a Property in a Federal Disaster Area
    In Sec.  1026.35(c)(4)(vii)(G), the Agencies are adopting an 
exemption for HPMLs financing the purchase of a property located in an 
area designated by the President as a federal disaster area, if and for 
as long as the Federal financial institutions regulatory agencies, as 
defined in 12 U.S.C. 3350(6), waive the requirements in title XI of the 
Financial Institutions Reform, Recovery, and Enforcement Act of 1989, 
as amended (12 U.S.C. 3331 et seq.), and any implementing regulations 
in that area. This exemption generally corresponds to an exemption in 
the FHA Anti-Flipping Rule for loans financing the purchase of 
properties located in areas designated by the President as federal 
disaster areas, if HUD has announced that these transactions will not 
be subject to the restrictions. See 12 CFR 203.37a(c)(8).
    The Agencies believe that this exemption appropriately facilitates 
the repair and restoration of disaster areas to the benefit of 
individual consumers, communities, and credit markets. The Agencies 
also recognize that disasters might result in some consumers being 
unable to meet their mortgage obligations. As a result, creditors could 
be subject to losses, which could negatively affect the safety and 
soundness of the creditors. The Agencies believe that this exemption 
would help creditors extend HPMLs that finance the purchase of 
properties in disaster areas without undue burden, thus enabling the 
creditors to improve their lending positions more effectively.
    As noted, the Agencies specified that the exemption would take 
effect only if and for as long as the Federal financial institutions 
regulatory agencies also waive application of the FIRREA title XI 
appraisal rules for properties in the disaster area. The Agencies 
believe that this provision helps protect consumers from fraudulent 
flipping by giving the Federal financial institutions regulatory 
agencies, all of which are parties to this final rule, authority to 
monitor the area and determine when appraisal requirements should be 
reinstated.
    For these reasons, the Agencies have concluded that the exemption 
in Sec.  1026.35(c)(4)(vii)(G) for the purchase of properties in 
disaster areas is in the public interest and promotes the safety and 
soundness of creditors.

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

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

[[Page 10407]]

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

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

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

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

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

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

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

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

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

[[Page 10408]]

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

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

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

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

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

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

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

[[Page 10409]]

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

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

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

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

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

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

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

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

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

[[Page 10410]]

35(c)(5) Required Disclosure

35(c)(5)(i) In General
    Title XIV of the Dodd-Frank Act added two new appraisal-related 
notification requirements for consumers. First, TILA section 129H(d) 
states that, at the time of the initial mortgage application for a 
higher-risk mortgage loan, the applicant shall be ``provided with a 
statement by the creditor that any appraisal prepared for the mortgage 
is for the sole use of the creditor, and that the applicant may choose 
to have a separate appraisal conducted at the expense of the 
applicant.'' 15 U.S.C. 1639h(d). The Agencies interpret TILA section 
129H(d) to provide the elements that a disclosure imposed by regulation 
should address. In addition, new section 701(e)(5) of the Equal Credit 
Opportunity Act (ECOA) similarly requires a creditor to notify an 
applicant in writing, at the time of application, of the ``right to 
receive a copy of each written appraisal and valuation'' subject to 
ECOA section 701(e). 15 U.S.C. 1691(e)(5); see also 77 FR 50390 (Aug. 
21, 2012) (2012 ECOA Appraisals Proposal) and the Bureau's final ECOA 
appraisals rule (2013 ECOA Appraisals Final Rule).\92\ Read together, 
the revisions to TILA and ECOA require creditors to provide two 
appraisal disclosures to consumers applying for a higher-risk mortgage 
loan secured by a first lien on a consumer's principal dwelling.
---------------------------------------------------------------------------

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

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

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

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

[[Page 10411]]

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

[[Page 10412]]

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

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

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

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

    In addition, the Agencies do not wish to include language in a 
disclosure that might inadvertently discourage consumers from 
questioning the appraisal report ordered by the creditor and providing 
the creditor with any supporting information that may be relevant to 
the question of the property's value.
    The Agencies also recognize that creditors are subject to existing 
Federal regulatory and supervisory regulations and requirements that 
provide additional guidance to creditors about appropriate and 
inappropriate use of borrower-ordered appraisals. To affirm these 
existing requirements, the final rule states in comment 35(c)(5)(i)-2 
that nothing in the text of the consumer notice required by Sec.  
1026.35(c)(5) should be construed to affect, modify, limit, or 
supersede the operation of any legal, regulatory, or other requirements 
or standards relating to independence in the conduct of appraisers or 
the prohibitions against use of borrower-ordered appraisals by 
creditors.
    Finally, comment 35(c)(5)(i)-1 reflects without change a proposed 
comment clarifying that when two or more consumers apply for a loan 
subject to this section, the creditor is required to give the 
disclosure to only one of the consumers. This interpretation is 
consistent with the statutory language requiring the creditor to 
provide a disclosure to ``the applicant.'' This interpretation is also 
consistent with comment 14(a)(2)(i)-1 in Regulation B, which interprets 
the requirement in Sec.  1002.14(a)(2)(i) that creditors notify 
applicants of the right to receive copies of appraisals. 12 CFR 
1002.14(a)(2) and comment 14(a)(2)(i)-1. This aspect of existing 
Regulation B is retained in the Bureau's 2013 ECOA Appraisals Final 
Rule, in Sec.  1002.14(a)(1) and comment 14(a)-1.

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

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

[[Page 10413]]

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

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

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

[[Page 10414]]

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

35(c)(6) Copy of Appraisals

35(c)(6)(i) In General
    Consistent with TILA section 129H(c), the proposal required that a 
creditor must provide a copy of any written appraisal performed in 
connection with a higher-risk mortgage loan (now HPML) to the 
applicant. 15 U.S.C. 1639h(c). A proposed comment clarified that when 
two or more consumers apply for a loan subject to this section, the 
creditor is required to give the copy of required appraisals to only 
one of the consumers.
    The Agencies received no comments on these aspects of the proposal 
and, in Sec.  1026.35(c)(6)(i) and comment 35(c)(6)(i)-1, adopt them 
without change.
35(c)(6)(ii) Timing
    TILA section 129H(c) requires that the appraisal copy must be 
provided to the consumer at least three days prior to the transaction 
closing date. 15 U.S.C. 1639h(c). The proposal required creditors to 
provide copies of written appraisals no later than ``three business 
days'' prior to consummation of the higher-risk mortgage loan (now 
HPML). The Agencies did not receive public comment on this aspect of 
the proposal, but are making certain changes to the proposal, explained 
below. Specifically, the Agencies have revised the proposed timing 
requirement to include a timing rule for loans that are not 
consummated. Thus, under new Sec.  1026.35(c)(6)(ii), creditors must 
provide a copy of an appraisal required under Sec.  1026.35(c)(6)(i):
     No later than three business days prior to consummation of 
the higher-priced mortgage loan; or
     In the case of a loan that is not consummated, no later 
than 30 days after the creditor determines that the loan will not be 
consummated.
    For consistency with the other provisions of Regulation Z, the 
proposal also used the term ``consummation'' instead of the statutory 
term ``closing'' that is used in TILA section 129H(c). 15 U.S.C. 
1639h(c). The term ``consummation'' is defined in Sec.  1026.2(a)(13) 
as the time that a consumer becomes contractually obligated on a credit 
transaction. The Agencies have interpreted the two terms as having the 
same meaning for the purpose of implementing TILA section 129H. 15 
U.S.C. 1639h. The Agencies did not receive comment on this aspect of 
the proposal, and adopt the proposed term ``consummation'' in Sec.  
1026.35(c)(6)(ii).
    As noted, TILA's requirement for when a creditor must give a copy 
of the appraisal to the consumer is ``at least 3 days prior to the 
transaction closing date.'' TILA section 129H(c), 15 U.S.C. 1639h(c). 
Thus, the timing requirement is clear for consummated loans.
    The Agencies interpret the statute, however, to require that a copy 
of the appraisal also be given to HPML applicants when their loans do 
not close because they are denied or withdrawn, or for any other 
reason. In reaching this interpretation, the Agencies note that TILA 
section 129H specifies that the appraisal copy shall be provided ``to 
the applicant,'' without suggesting that only applicants whose loans 
are closed are entitled to a copy. In addition, the requirement refers 
to appraisals that are ``conducted,'' a term whose meaning is 
independent of whether the loan closes. In the case of applicants' 
loans that do not close, the Agencies are adopting a requirement that 
the appraisal be provided ``no later than 30 days after the creditor 
determines that the loan will not be consummated.'' Sec.  
1026.35(c)(6)(ii)(A). The Agencies believe that this timing requirement 
is a reasonable interpretation of the statute, which is silent on the 
matter. The timing requirement is clear, which the Agencies believe 
will reduce compliance burden and risks for creditors, and generally 
consistent with longstanding timing requirements for providing copies 
of appraisals under existing Regulation B, 12 CFR 1002.14(a)(2)(ii). 
The approach is also reflected in the Bureau's 2013 ECOA Appraisals 
Final Rule in Sec.  1002.14(a)(1).
    In addition, as stated in the proposal, the Agencies believe that 
requiring that the appraisal be provided three ``business'' days in 
advance of consummation is a reasonable interpretation of the statute 
and is consistent with the Agencies' interpretation of the statutory 
term ``days'' used in the Bureau's 2013 ECOA Appraisals Final Rule, 
which implements the appraisal requirements of new ECOA section 
701(e)(1). See 15 U.S.C. 1691(e)(1). The Agencies did not receive 
comment on this aspect of the proposal, and adopt the proposed language 
``no later than three business days prior to consummation'' in Sec.  
1026.35(c)(6)(ii).
    To ensure that the consumer actually receives the appraisal in 
advance of consummation so that the consumer can use it to inform the 
consumer's credit decision, comment 35(c)(6)(ii)-1 explains that, for 
purposes of the requirement to provide a copy of the appraisal three 
days before consummation, ``provide'' means ``deliver.'' This comment 
further explains that delivery occurs three business days after mailing 
or delivering the copies to the last-known address of the applicant, or 
when evidence indicates actual receipt by the applicant (which, in the 
case of electronic receipt must be based upon consent that complies 
with the Electronic Signatures in Global and National Commerce Act (E-
Sign Act) (15 U.S.C. 7001 et seq.)), whichever is earlier. Comment 
35(c)(6)(ii)-2 clarifies that, for appraisals prepared by the 
creditor's internal appraisal staff, the date of ``receipt'' is the 
date on which the appraisal is completed.
    Finally, comment 35(c)(6)(ii)-3 clarifies that the ECOA provision 
allowing a consumer to waive the requirement that the appraisal copy be 
provided three business days before consummation, does not apply to 
higher-priced mortgage loans subject to Sec.  1026.35(c). ECOA section 
701(e)(2), 15 U.S.C. 1691(e)(2), implemented in the 2013 ECOA 
Appraisals Final Rule, Regulation B Sec.  1002.14(a)(1). The comment 
further clarifies that a consumer of a higher-priced mortgage loan 
subject to Sec.  1026.35(c) may not waive the timing requirement to 
receive a copy of the appraisal under Sec.  1026.35(c)(6)(i).
35(c)(6)(iii) Form of Copy
    Section 1026.31(b) currently provides that the disclosures required 
under subpart E of Regulation Z may be provided to the consumer in 
electronic form, subject to compliance with the consumer consent and 
other applicable provisions of the E-Sign Act. In the proposal, the 
Agencies stated their belief that it is also appropriate to allow 
creditors to provide applicants with copies of written appraisals in 
electronic form if the applicant consents to receiving the copies in 
this form. Accordingly, the proposal provided that any copy of a 
written appraisal may be provided to the applicant in electronic form, 
subject to compliance with the consumer consent and other applicable 
provisions of the E-Sign Act.
Public Comments on the Proposal
    Two commenters--a bank holding company and a credit union--
requested that the final rule not impose the E-Sign Act requirement of 
consumer consent to receiving HPML appraisals electronically. The first 
commenter

[[Page 10415]]

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

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

    TILA section 129H(c) provides that a creditor shall provide one 
copy of each appraisal conducted in accordance with this section in 
connection with a higher-risk mortgage to the applicant without charge. 
15 U.S.C. 1639h(c). In the proposal, the Agencies interpreted this 
provision to prohibit creditors from charging consumers for providing a 
copy of written appraisals required for higher-risk mortgage loans. 
Accordingly, the proposal provided that a creditor must not charge the 
consumer for a copy of a written appraisal required to be provided to 
the consumer pursuant to new Sec.  1026.35(c)(6)(i).
    A proposed comment clarified that the creditor is prohibited from 
charging the consumer for any copy of a required appraisal, including 
by imposing a fee specifically for a required copy of an appraisal or 
by marking up the interest rate or any other fees payable by the 
consumer in connection with the higher-risk mortgage loan.
    The Agencies received no comments on this aspect of the proposal 
and adopt the proposed regulation text and comment without change in 
Sec.  1026.35(c)(6)(iv) and comment 35(c)(6)(iv)-1.

35(c)(7) Relation to Other Rules

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

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

Overview

    In developing the final rule, the Bureau has considered potential 
benefits, costs, and impacts to consumers and covered persons.\99\ The 
Bureau is issuing this final rule jointly with the Federal financial 
institutions regulatory agencies and FHFA, and has consulted with these 
agencies, HUD, and the FTC, including regarding consistency with any 
prudential, market, or systemic objectives administered by such 
agencies. The Bureau also has considered the comments filed by 
industry, consumer groups, and others as described in the section-by-
section analysis. Data received from commenters relating to potential 
benefits and costs, such as the cost of an appraisal, is discussed 
below.
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    \99\ Specifically, Section 1022(b)(2)(A) calls for the Bureau to 
consider the potential benefits and costs of a regulation to 
consumers and covered persons, including the potential reduction of 
access by consumers to consumer financial products or services; the 
impact on depository institutions and credit unions with $10 billion 
or less in total assets as described in section 1026 of the Act; and 
the impact on consumers in rural areas.
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    As discussed above, the final rule implements section 1471 of the 
Dodd-Frank Act, which establishes appraisal requirements for certain 
HPMLs. Consistent with the statute, the final rule allows a creditor to 
originate a covered HPML transaction only if the following conditions 
are met:
     The creditor obtains a written appraisal;
     The appraisal is performed by a certified or licensed 
appraiser; and
     The appraiser conducts a physical property visit of the 
interior of the property.
    In addition, as required by the Act, the final rule requires a 
creditor in a covered HPML transaction to obtain an additional written 
appraisal, at no cost to the borrower, if the transaction has each of 
the following characteristics (subject to certain exemptions, as 
discussed below):
     The HPML will finance the acquisition of the consumer's 
principal dwelling;
     The seller acquired the property within 180 days prior to 
the consumer's purchase agreement (measured from the date of the 
consumer's purchase agreement); and
     The consumer is acquiring the home for a price that 
exceeds the price at which the seller acquired the home by more than 10 
percent (if the seller acquisition was within 90 days of the consumer's 
purchase agreement) or by more than 20 percent (if the seller 
acquisition was within the past 91 to 180 days of the consumer's 
purchase agreement).
    The additional written appraisal, from a different licensed or 
certified appraiser, generally must include the following information: 
an analysis of the difference in sale prices (i.e., the price at which 
the seller acquired the property and the price at which the consumer 
would acquire the property as set forth in the consumer's purchase 
agreement), changes in market conditions, and any improvements made to 
the property between the date of the previous sale and the current 
sale.
    The final rule also requires that within three days of the 
application, the creditor provide the applicant with a brief disclosure 
statement that the creditor may charge the applicant for an appraisal, 
that the creditor will provide the applicant a copy of any appraisal, 
and that the applicant may choose to have a separate appraisal 
conducted at the expense of the applicant. Finally, the final rule 
requires that the creditor provide the consumer with a free copy of any 
written appraisals obtained for the transaction at least three (3) 
business days before consummation, or within 30 days of determining the 
transaction will not be consummated.
    In many respects, the final rule codifies mortgage lenders' current 
practices. In outreach calls to industry,

[[Page 10416]]

all respondents reported requiring the use of full-interior appraisals 
in 95 percent or more of first-lien transactions \100\ and providing 
copies of appraisals to borrowers as a matter of course if such a loan 
is originated.\101\ The convention of using full-interior appraisals on 
first liens has been developing to improve underwriting quality, and 
the implementation of this rule would assure that the practice would 
continue even under different market conditions.
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    \100\ Respondents include a large bank, a trade group of smaller 
depository institutions, a credit union, and an independent mortgage 
bank.
    \101\ Respondents include a large bank, a trade group of smaller 
depository institutions, and an independent mortgage bank.
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    The Bureau notes that many of the provisions in the final rule 
implement self-effectuating amendments to TILA. The costs and benefits 
of these provisions arise largely or in some cases entirely from the 
statute and not from the rule that implements them. This rule provides 
benefits compared to allowing these TILA amendments to take effect 
without implementing regulations, however, by clarifying parts of the 
statute that are ambiguous. Greater clarity on these issues covered by 
the rule should reduce the compliance burdens on covered persons by 
reducing costs for attorneys and compliance officers as well as 
potential costs of over-compliance and unnecessary litigation.\102\
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    \102\ While it is possible that some clarifications would put 
greater burdens on creditors as compared to what the statute would 
ultimately be found to mandate, the Bureau believes that the rule's 
clarifying provisions generally mitigate burden.
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    Section 1022 permits the Bureau to consider the benefits, costs, 
and impacts of the final rule solely compared to the state of the world 
in which the statute takes effect without an implementing regulation. 
To provide the public better information about the benefits and costs 
of the statute, however, the Bureau has chosen to consider the 
benefits, costs, and impacts of the major provisions of the final rule 
against a pre-statutory baseline (i.e., the benefits, costs, and 
impacts of the relevant provisions of the Dodd-Frank Act and the 
regulation combined).\103\
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    \103\ The Bureau has discretion in any rulemaking to choose an 
appropriate scope of analysis with respect to potential benefits and 
costs and an appropriate baseline. The Bureau, as a matter of 
discretion, has chosen to describe a broader range of potential 
effects to more fully inform the rulemaking.
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    The Bureau has relied on a variety of data sources to analyze the 
potential benefits, costs, and impacts of the final rule.\104\ However, 
in some instances, the requisite data are not available or are quite 
limited. Data with which to quantify the benefits of the rule are 
particularly limited. As a result, portions of this analysis rely in 
part on general economic principles to provide a qualitative discussion 
of the benefits, costs, and impacts of the rule.
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    \104\ The estimates in this analysis are based upon data and 
statistical analyses performed by the Bureau. To estimate counts and 
properties of mortgages for entities that do not report under the 
Home Mortgage Disclosure Act (HMDA), the Bureau has matched HMDA 
data to Call Report data and National Mortgage Licensing System 
(NMLS) and has statistically projected estimated loan counts for 
those depository institutions that do not report these data either 
under HMDA or on the NCUA call report. The Bureau has projected 
originations of higher-priced mortgage loans for depositories that 
do not report HMDA in a similar fashion. These projections use 
Poisson regressions that estimate loan volumes as a function of an 
institution's total assets, employment, mortgage holdings, and 
geographic presence. Neither HMDA nor the Call Report data have loan 
level estimates of debt-to-income (DTI) ratios that, in some cases, 
determine whether a loan is a qualified mortgage. To estimate these 
figures, the Bureau has matched the HMDA data to data on the 
historic-loan-performance (HLP) dataset provided by the FHFA. This 
allows estimation of coefficients in a probit model to predict DTI 
using loan amount, income, and other variables. This model is then 
used to estimate DTI for loans in HMDA.
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    The primary source of data used in this analysis is data collected 
under the Home Mortgage Disclosure Act (HMDA).\105\ Because the latest 
wave of complete data available is for loans made in calendar year 
2011, the empirical analysis generally uses the 2011 market as the 
baseline. Data from the 4th quarter 2011 bank and thrift Call 
Reports,\106\ the 4th quarter 2011 credit union call reports from the 
NCUA, and de-identified data from the National Mortgage Licensing 
System (NMLS) Mortgage Call Reports (MCR) \107\ for the 4th quarter of 
2011 also were used to identify financial institutions and their 
characteristics. Most of the analysis relies on a dataset that merges 
this depository institution financial data from Call Reports with the 
data from HMDA including HPML counts that are created from the loan-
level HMDA dataset. The unit of observation in this analysis is the 
entity: if there are multiple subsidiaries of a parent company, then 
their originations are summed and revenues are total revenues for all 
subsidiaries.
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    \105\ HMDA, enacted by Congress in 1975, as implemented by the 
Bureau's Regulation C requires lending institutions annually to 
report public loan-level data regarding mortgage originations. For 
more information, see http://www.ffiec.gov/hmda. It should be noted 
that not all mortgage lenders report HMDA data. The HMDA data 
capture roughly 90-95 percent of lending by the FHA and 75-85 
percent of other first-lien home loans, in both cases including 
first liens on manufactured homes (which in some cases are subject 
to the final rule). HUD, Office of Policy Development and Research 
(2011), ``A Look at the FHA's Evolving Market Shares by Race and 
Ethnicity,'' U.S. Housing Market Conditions (May), pp. 6-12. 
Depository institutions (including credit unions) with assets less 
than $40 million (in 2011), for example, and those with branches 
exclusively in non-metropolitan areas and those that make no home 
purchase loan or loan refinancing a home purchase loan secured by a 
first lien on a dwelling, are not required to report under HMDA. 
Reporting requirements for non-depository institutions depend on 
several factors, including whether the company made fewer than 100 
home purchase loans or refinancings of home purchase loans, the 
dollar volume of mortgage lending as share of total lending, and 
whether the institution had at least five applications, 
originations, or purchased loans from metropolitan areas. Robert B. 
Avery, Neil Bhutta, Kenneth P. Brevoort & Glenn B. Canner, The 
Mortgage Market in 2011: Highlights from the Data Reported under the 
Home Mortgage Disclosure Act, 98 Fed. Res. Bull., December 2012, 
n.6. In addition, HMDA data used in this analysis does not include 
transactions secured by properties located in U.S. territories, or 
refinance transactions where the existing loan is already a 
refinance or a subordinate lien. Although the TILA HRM rule would 
apply to otherwise covered HPMLs in these categories, the Bureau 
does not believe there are a high number of transactions in these 
categories. To the extent this gap understates costs, that effect 
will be at least partially offset by the overstatement resulting 
from including other data on transactions that are not subject to 
the rule.
    \106\ Every national bank, State member bank, and insured 
nonmember bank is required by its primary Federal regulator to file 
consolidated Reports of Condition and Income, also known as Call 
Report data, for each quarter as of the close of business on the 
last day of each calendar quarter (the report date). The specific 
reporting requirements depend upon the size of the bank and whether 
it has any foreign offices. For more information, see http://www2.fdic.gov/call_tfr_rpts/.
    \107\ The NMLS is a national registry of non-depository 
financial institutions including mortgage loan originators. Portions 
of the registration information are public. The Mortgage Call Report 
data are reported at the institution level and include information 
on the number and dollar amount of loans originated, and the number 
and dollar amount of loans brokered. The Bureau noted in its Summer 
2012 mortgage proposals that it sought to obtain additional data to 
supplement its consideration of the rulemakings, including 
additional data from the NMLS and the NMLS Mortgage Call Report, 
loan file extracts from various lenders, and data from the pilot 
phases of the National Mortgage Database. Each of these data sources 
was not necessarily relevant to each of the rulemakings. The Bureau 
used the additional data from NMLS and NMLS Mortgage Call Report 
data to better corroborate its estimate the contours of the non-
depository segment of the mortgage market. The Bureau has received 
loan file extracts from three lenders, but at this point, the data 
from one lender is not usable and the data from the other two is not 
sufficiently standardized nor representative to inform consideration 
of the final rule. Additionally, the Bureau has thus far not yet 
received data from the National Mortgage Database pilot phases. The 
Bureau also requested that commenters submit relevant data. All 
probative data submitted by commenters are discussed in this final 
rule.
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    Other portions of the analysis rely on property-level data 
regarding parcels and their related financing from DataQuick \108\ and 
on data on the location of certified appraisers from the Appraisal 
Subcommittee Registry.\109\

[[Page 10417]]

Tabulations of the DataQuick data are used for estimation of the 
frequency of properties being sold within 180 days of a previous sale. 
The Appraisal Subcommittee's Registry is used to describe the 
availability of appraisers.
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    \108\ DataQuick is a database of property characteristics on 
more than 120 million properties and 250 million property 
transactions.
    \109\ The National Registry is a database containing selected 
information about State certified and licensed real estate 
appraisers and is publicly available at https://www.asc.gov/National-Registry/NationalRegistry.aspx.
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Potential Benefits of the Rule for Covered Persons and Consumers

    In a mortgage transaction, the appraisal helps the creditor avoid 
lending based on an inflated valuation of the property, and similarly 
helps consumers avoid borrowing based upon an inflated valuation. 
Assuming that full-interior appraisals conducted by a certified or 
licensed appraiser are more accurate than other valuation methods, the 
rule would improve the quality of home valuations for those 
transactions where such an appraisal would not be performed currently. 
While the appraisal is used by the creditor, the improved valuation 
also can prevent inflated valuations that would lead consumers to 
borrowing that would not be supported by their true home value, as well 
as deflated valuations (such as those that do not value an interior 
which is of different than average quality) that can lead consumers to 
be eligible for a narrower class of loan products that are priced less 
advantageously. The requirement that a second appraisal be conducted in 
certain circumstances would further reduce the likelihood of an 
inflated sales price for those transactions.
    Benefits to covered persons. Transactions where the collateral is 
overvalued expose the creditor to higher default risk. By tightening 
valuation standards for a class of transactions that are already priced 
as higher-risk transactions, the rule may reduce both the risk of 
default for creditors, as well as more accurately value the collateral 
available to the creditor in the event of default. Furthermore, by 
requiring the use of full interior appraisals in transactions involving 
covered HPMLs, the statute prevents creditors from attempting to 
compete on price by using less costly and possibly less accurate 
valuation methods in underwriting. Eliminating the ability to use 
lower-cost valuation methods, and thereby eliminating price competition 
on this component of the transaction, may benefit firms that prefer to 
employ more thorough valuation methods.
    Benefits to consumers. The final rule ensures that covered HPML 
transactions will have a written interior appraisal, and in some cases 
a second written interior appraisal, and that consumers will receive an 
appraisal notice and a copy of these appraisals. These requirements 
will mostly benefit consumers whose transactions would not already have 
written interior appraisals a copy of which they receive. The benefits 
enjoyed by these consumers are described below.
    Individual consumers engage in real estate transactions 
infrequently, so developing the expertise to value real estate is 
costly and consumers often rely on experts, such as real estate agents, 
as well as on list prices, to make price determinations. These methods 
may not lead a consumer to an accurate valuation of a property they 
intend to purchase. For example, there is evidence that real estate 
agents sell their own homes for significantly more than other similar 
homes, which suggests that consumers may not be able to accurately 
price the homes that they are selling.\110\ Other research, this time 
in a laboratory setting, provides evidence that individuals are 
sensitive to anchor values when estimating home prices.\111\ In such 
cases, an independent signal of the value of the home should benefit 
the consumer. Having a professional valuation as a point of reference 
may help consumers who are applying for a HPML to gain a more accurate 
understanding of the home's value and improve overall market 
efficiency, relative to the case where the knowledge of true valuations 
is more limited.\112\
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    \110\ Levitt, Steven and Chad Syverson. ``Market Distortions 
When Agents are Better Informed: The Value of Information In Real 
Estate Transactions.'' The Review of Economics and Statistics 90 no. 
4 (2008): 599-611.
    \111\ Scott, Peter and Colin Lizieri. ``Consumer House Price 
Judgments: New Evidence of Anchoring and Arbitrary Coherence.'' 
Journal of Property Research 29 no. 1 (2012): 49-68.
    \112\ For example, in Quan and Quigley's theoretical model where 
buyers and sellers have incomplete information, trades are 
decentralized, and prices are the result of pairwise bargaining, 
``[t]he role of the appraiser is to provide information so that the 
variance of the price distribution is reduced.'' Quan, Daniel and 
John Quigley. ``Price Formation and the Appraisal Function in Real 
Estate Markets.'' Journal of Real Estate Finance and Economics 4 
(1991): 127-146.
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    While the consumer can order an appraisal voluntarily at any time, 
an especially valuable time for the consumer to receive a copy of an 
appraisal is before closing an HPML--whether it is for a home purchase, 
a refinance, or a home improvement. Undoubtedly, some consumers are 
aware of the benefits of an appraisal, and could have decided for 
themselves whether they want to pay for it if one was not required or 
otherwise prepared and provided under standard industry practice. 
However, other consumers may be unaware of the benefits of an appraisal 
in terms of improving accuracy of a home valuation, and to these 
consumers the rule is especially valuable in an HPML transaction that 
would not otherwise include an appraisal. Moreover, even the consumers 
who are aware of the benefits would not be able to use the self-ordered 
appraisal for any transactions with creditors, since those require 
creditor-ordered valuations.
    The Bureau believes that ensuring HPML borrowers receive appraisals 
ensures that they will have more accurate information about the value 
of their dwelling, and therefore about their net worth and whether they 
have any equity in their dwelling. For transactions that would already 
include the appraisal, the rule ensures that in similar transactions 
consumers will continue to have an appraisal; for other transactions, 
the rule will result in the appraisal. In either case, more accurate 
information leads to better decisions and can lead to more investment 
in the property in some cases by removing the uncertainty over the 
value of the dwelling. The appraisal may also help to inform the 
consumer of whether they may be overpaying for the property with a new 
home purchase, about to invest more into a property that might be 
valued at less than they think with a home improvement loan, or about 
to pay the refinance cost on a property that they should sell instead. 
The latter two points are especially valuable for consumers who are in 
negative equity, or ``underwater'' situations (where the loan amount 
exceeds the value of the dwelling). A consumer who finds out that she 
is not underwater, when she thought that she might have been, has an 
incentive to continue investing in the property and make sure that she 
does not lose it in foreclosure or otherwise default. Conversely, a 
consumer who finds out that he is underwater, when he thought that he 
might not have been, might have second thoughts about any investments, 
and will potentially want to pursue loss mitigation options or, if they 
do not succeed and the consumer is facing financial difficulties or 
default, agree on a short-sale or on a deed-in-lieu of foreclosure with 
the creditor.
    Aside from the aforementioned decisions, depending on the 
alternative valuation, an appraisal can help the consumer to lower 
their property tax, to forgo private mortgage insurance (PMI), and to 
choose the correct property value for insurance purposes. A lower loan-
to-value (LTV) ratio might also result in a lower interest rate on the 
loan, all else equal, as discussed further below. Again, the final rule 
ensures these benefits are available to consumers in

[[Page 10418]]

transactions that do not currently have appraisals or provide copies to 
applicants.
    If a borrower is prepared to pay an inflated price for a property, 
then an appraisal that reflects its value more accurately may prevent 
the transaction from being completed at the inflated price and 
consequently, at a higher loan amount, which would be more costly to 
the consumer who, in the case of an HPML borrower, also may have fewer 
resources to repay the loan. This is particularly true when considering 
that transactions subject to the rule will be those HPMLs that are not 
qualified mortgages, and which therefore may involve higher points, 
greater fees, or a higher debt-to-income ratio, among other 
differences. In addition to the direct costs of paying more than the 
true value for a property, buying an overvalued property is associated 
with higher risk of default. If a property that is sold shortly after 
its previous sale is more likely to have an inflated price, since it 
may have been purchased the first time with the intention to improve 
the property quickly and resell it for a profit, the additional 
appraisal requirement also would help ensure an accurate estimate of 
the value of the property. This would be particularly true in 
transactions involving fraudulent flipping using an inadequate or 
improperly performed first appraisal.\113\ Ensuring a more accurate 
valuation of a flipped property might be especially valuable to a 
consumer when borrowing an HPML (due to its higher price). In the case 
of subordinate-lien transactions, the full-interior appraisal 
requirement may prevent borrowers on HPMLs from extracting too much 
equity if their property is overvalued by other valuation methods. 
Accordingly, the appraisals required by the final rule could reduce the 
chance consumers would be in a negative equity or near negative equity 
situation, which can limit refinancing and selling opportunities.
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    \113\ Congress has noted a concern, for example, that parties to 
a flipping transaction ``can often find an appraiser to inflate the 
home's value.'' H.Rep. 111-94 (May 4, 2009) at 59.
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    At the same time, if a borrower is prepared to take out an HPML 
based upon the creditor's use of a valuation other than an interior 
appraisal, that valuation may be less likely to take into account 
unique characteristics of the subject property, such as its setting in 
the immediate neighborhood, its views, the quality of the exterior or 
the residential structure, or its interior condition. For borrowers 
where direct assessments of those characteristics would have improved 
the valuation, the price of the loan may be based upon an LTV ratio 
that is overstated, and the loan may be overpriced to the extent that 
higher LTVs correlate with higher-priced loans.
    The final rule also may support greater consumer choice in HPML 
transactions, to the extent new creditors treat the appraisals required 
as portable. For example, the FHA has taken steps to ensure appraisal 
portability in the situation of an ``applicant who has gotten to the 
appraisal stage of the home loan process, but'' the applicant decides 
he or she is ``dissatisfied with [the] lender and decide[s] to find a 
new one.'' \114\ The final rule ensures that if consumers would not 
otherwise have an appraisal in HPML transactions for which they have 
applied, then they will have an appraisal that may be able to be used 
in alternative transactions that the consumer may pursue.
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    \114\ See FHA FAQ ``Are FHA Home Loan Appraisals Portable?'' 
available at http://www.fha.com/fha_article.cfm?id=350, citing FHA 
Mortgagee Letter 09-29 (Sept. 18, 2009) (stating that FHA programs 
allow for appraisal portability).
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    Codifying HPML valuation standards across the industry likely would 
simplify the shopping process for consumers who receive HPML offers. 
First, for consumers in HPML transactions that would not have otherwise 
included an appraisal, the appraisals required by the rule may help to 
improve consumers' understanding of the determinants of the value of 
the property that they intend to purchase. In cases where a loan is 
denied due to an appraiser valuing the property at less than the 
contract price, the appraisal will include support for its findings of 
the lower value, which may help the consumer in future negotiations or 
property searches. Second, codifying appraisal standards across the 
industry would simplify the shopping process for consumers by making 
the process of applying for HPMLs more consistent between lenders. 
Full-interior appraisals typically cost more than other valuation 
methods, and appraisal costs are often passed on to consumers. 
Consumers may not understand the differences between different 
valuation methods or know that different creditors will use different 
methods, and therefore may benefit from the standardization the rule 
can be expected to promote.
    The final rule also will ensure that borrowers in covered HPML 
transactions involving subordinate liens receive a notice informing 
them about the appraisal process, of their ability to order their own 
appraisal, and that they will receive copies of any appraisals at least 
three business days prior to the consummation. Under ECOA section 
701(e) and its implementing rules, applicants in transactions secured 
by a first lien on a dwelling will receive this notice and a copy of an 
appraisal; under this provision in the statute and the Bureau's 2013 
ECOA Appraisals Final Rule, which takes effect on January 18, 2014, 
these requirements do not apply to subordinate lien transactions, 
however. The final rule fills this gap for borrowers on covered HPMLs, 
ensuring they are better informed prior to entering into subordinate 
lien loans, such as for home improvement purposes and other common 
purposes.

Potential Costs of the Rule for Covered Persons

    The costs of the rule, which are predominantly related to 
compliance, are more readily quantifiable than the benefits and can be 
calculated based on the mix of loans originated by an entity and the 
number of employees at that entity. These compliance costs may be 
considered as the discrete tasks that would be required by the rule. 
These can be separated into costs that are associated with the 
origination of a single HPML and the costs of reviewing and 
implementing the regulation.
    Costs per HPML. The costs of the rule for covered persons that 
derive from requirements to obtain appraisals depend on the number of 
appraisals that would be conducted, above and beyond current practice, 
and the degree to which those costs are passed to consumers. For HMDA 
reporters, counts of HPMLs that are purchase-money loans, first-lien 
refinance loans, or closed-end subordinate lien loans are computed from 
the loan-level HMDA data. Accepted statistical methods are used to 
project loan counts for non-HMDA reporting depository 
institutions.\115\ Estimates of the number of loan officers are 
calculated from similar projections of applications per institution.
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    \115\ Poisson regressions are run, projecting loan volumes in 
these categories on the natural log of characteristics available in 
the Call Reports (total 1-4 family residential loan volume 
outstanding, full-time equivalent employees, and assets), separately 
for each category of depository institutions.
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    The calculation of costs for IMBs uses a slightly different 
approach.\116\ Consistent with the results from HMDA-reporting IMBs, 
the Bureau estimates the costs to IMBs by multiplying a cost per loan 
by the total number of loans originated by IMBs. To obtain a count of 
full-time equivalent employees, this number is imputed for HMDA-
reporting IMBs based on the number of

[[Page 10419]]

applications (assuming 1.38 days per loan application).\117\
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    \116\ ``Independent Mortgage Bank'' refers to non-depository 
mortgage lenders.
    \117\ Sumit Agarwal and Faye Wang, Perverse Incentives at the 
Banks? Evidence from Loan Officers (Federal Reserve Bank of Chicago 
Working Paper 2009-08).
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    Based on these data sources, the Bureau estimates that there were 
approximately 292,000 HPMLs in 2011. Of these, the Bureau estimates 
that 146,000 were purchase-money mortgages, 116,000 were first-lien 
refinancings, and 30,000 were closed-end subordinate lien mortgages 
that were not part of a purchase transaction.\118\ Due to the 
exemptions from the rule, only a subset of HPMLs will be covered by the 
rule. Qualified mortgages, for example, are exempt from the final rule, 
as are reverse mortgages, loans for initial construction, temporary 
bridge loans, and new manufactured housing sales.\119\ Conservatively, 
the Bureau is preparing this estimate based upon a loan count without 
subtracting construction loans, temporary bridge loans, loans for new 
manufactured housing, or reverse mortgages. While these loans are 
exempt from the final rule, the data sources do not separately break 
them out and nationally-representative data on the number of loans that 
fall into these specific categories and also meet the HPML definition 
is not available.\120\ Subtracting only those HPMLs that would be 
qualified mortgages under Regulation Z, Sec.  1026.43(e) \121\ results 
in a loan count of approximately 26,000 HPMLs that are not qualified 
mortgages, 12,000 of which were purchase-money mortgages, 12,000 of 
which were first-lien refinancings, and 2,000 of which were closed-end 
subordinate lien mortgages that were not part of a purchase 
transaction. These are the number of loans originated annually that the 
Bureau conservatively estimates currently would be subject to the final 
rule.
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    \118\ Purchase-money mortgages include subordinate-lien HPMLs 
that were part of a purchase transaction. The Bureau assumes that 
these loans were part of a transaction where the first-lien mortgage 
was not a HPML; to the extent that any of these subordinate-lien 
purchase-money HPMLs were part of a transaction where the first lien 
mortgage was a HPML the costs imposed by the rule would be double-
counted. First-lien refinancings include loans classified as first-
lien ``home improvement'' loans in HMDA.
    \119\ Very conservatively, the PRA burden estimates for Agencies 
other than the Bureau do not estimate and exclude the number of 
HPMLs that are qualified mortgages. By contrast, based upon data 
available to it, the Bureau does so in this section 1022 analysis 
and its Regulatory Flexibility Act certification.
    \120\ Similarly, no subtractions are made for boats, trailers, 
or mobile homes, which also are exempt from the final rule. The 
Bureau also notes that HMDA data includes same-creditor refinances 
with lower rates and new payment schedules, within the meaning of 12 
CFR 1026.20(a)(2). For purposes of this analysis, the Bureau assumes 
the final rule applies to those transactions, which the HMDA data 
also does not segregate. This assumption also accounts for the fact 
that these transactions would not be qualified mortgages, under 
Regulation Z comment 43(a)-1 adopted in the 2013 ATR Final Rule.
    \121\ The final rule exempts all loans that would meet one or 
more of the definitions of qualified mortgage in Sec.  1026.43(e). 
See also 2013 ATR Final Rule, available at http://consumerfinance.gov. These loans are therefore excluded from the 
HPML count.
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    The Bureau estimates that the probability that full-interior 
appraisals are conducted as part of current practice is 95 percent for 
purchase-money transactions, 90 percent for refinance transactions, and 
5 percent for subordinate lien mortgage transactions.\122\ The Bureau 
therefore estimates that the proposal would lead to full-interior 
appraisals for approximately 3,800 HPML originations annually that 
would not otherwise have a full-interior appraisal.\123\ A portion of 
these HPMLs also would be subject to the requirement that lenders 
obtain a second full-interior appraisal in situations where the home 
that would secure the higher-risk mortgage is being resold at or within 
180 days at a higher price that exceeds the seller's acquisition price 
by 10 percent (if the seller acquired the property within 90 days) or 
20 percent (if the seller acquired the property within 91 to 180 days). 
Based on FHFA estimates from DataQuick noted in the proposal, the 
Bureau estimates that the proportion of sales that are resales within 
180 days is 5 percent. A significant number of HPMLs financing resales 
would not be subject to the second appraisal requirement, however, due 
to the price increase thresholds discussed above and to various 
exemptions from the second appraisal requirement. For purposes of 
estimating the number of HPMLs that are subject to the second appraisal 
requirement, however, the Bureau conservatively only excludes the 
estimated number of loans subject to the exemption for rural 
loans.\124\ The rural exemption excludes 20.6 percent of the relevant 
market by transaction volume, according to the 2011 HMDA data. The 
Bureau therefore estimates that this provision of the rule would apply 
to approximately 500 HPMLs annually.\125\ Accordingly, the Bureau 
estimates that the number of HPMLs subject to only one new interior 
appraisal under the rule would be 3,800, and the number of HPMLs 
subject to a second interior appraisal under the rule would be 500, 
resulting in a combined addition of 4,300 interior appraisals to HPML 
transactions each year. This combined addition is the estimated total 
effect of the rule on the number of appraisals each year.\126\
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    \122\ As other Agencies noted in the proposed rule, federal 
regulations do not require interior appraisals in some cases, such 
as for transactions below $250,000. To the extent creditors in those 
transactions elect not to order interior appraisals, those 
transactions would fall within the 5 percent of purchase-money 
transactions, 10 percent of refinance transactions, and 95 percent 
of subordinate lien transactions in which the Bureau assumes no 
interior appraisal is currently performed.
    \123\ (5%*12,249) + (10%*11,950) + (95%*2,091) = 3,794.
    \124\ The Bureau has not been able to locate nationally-
representative data on the number of HPMLs that are flips that fall 
within other categories of transactions that are exempt from the 
second appraisal requirement.
    \125\ (12,249*5%*(100% - 20.6%)) = 486.
    \126\ The Bureau believes that under the 2013 ATR Final Rule 
creditors generally will be able to determine at the outset of the 
application process whether the loan will be a qualified mortgage. 
Some creditors may, for their own risk management and at their 
option, over-comply during the application process to mitigate any 
risk that due to an error the loan as closed or handled post-closing 
ultimately would not be a qualified mortgage. For example, under the 
temporary qualified mortgage provision related to GSEs, a creditor 
may determine early in the application process that a proposed HPML 
would be a qualified mortgage because it meets the criteria for 
purchase or guarantee by a GSE consistent with comment 
43(e)(4)(iii)-4 in the Bureau's 2013 ATR Final Rule, but later find 
that the loan is rejected by the GSE as ineligible for reasons 
unrelated to the HPML rule. For the loan to be a qualified mortgage, 
it is not necessary that the loan ultimately be purchased or 
guaranteed by the GSE. But if the original eligibility determination 
were invalid, then this could create a risk that the loan would not 
meet the definition of a qualified mortgage. Such a loan potentially 
still could meet the definition of qualified mortgage on other bases 
than being eligible for purchase or guarantee by a GSE. But if not, 
then under this final rule, origination of such a loan would have 
been a violation if the creditor did not comply with the 
requirements for HPML appraisals and no other exemption applied. 
While these situations may be infrequent, some creditors may seek to 
over-comply in order to mitigate the risk they may pose. The Bureau 
does not believe over-compliance, to control for the risk of an 
erroneous determination by the creditor that the loan was a 
qualified mortgage, would lead to creditors ordering a significant 
number of new appraisals above those estimated here.
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    The following discussion considers estimated compliance costs in 
the order in which they arise in the mortgage origination process. 
First, the rule requires that the creditor furnish the applicant with 
the disclosure required by Sec.  1026.35(c)(5)(i).\127\ The cost of 
this disclosure--at most, delivery of a single piece of paper with a 
standardized disclosure that could be delivered with

[[Page 10420]]

other documents or disclosures--would be very low.\128\
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    \127\ Creditors must disclose the following statement, in 
writing, to a consumer who applies for a higher-risk mortgage loan: 
``We may order an appraisal to determine the property's value and 
charge you for this appraisal. We will give you a copy of any 
appraisal, even if your loan does not close. You can also pay for an 
additional appraisal for your own use at your own cost.''
    \128\ The Bureau notes that creditors in first lien transactions 
making a disclosure required by Bureau rules implementing ECOA 
section 701(e) also would automatically satisfy the disclosure 
requirement under this rule; the final rule. In addition, the 
disclosure is included in the proposed Loan Estimate as part of the 
2012 TILA-RESPA Proposal (see 2012 TILA-RESPA Proposal, (published 
July 9, 2012), available at http://files.consumerfinance.gov/f/201207_cfpb_proposed-rule_integrated-mortgage-disclosures.pdf.); 
if that proposal were adopted, the cost of providing the disclosure 
would be part of the overall costs of implementing that disclosure.
---------------------------------------------------------------------------

    Second, the rule requires the creditor to verify whether a loan is 
a HPML. However, the Bureau believes this activity does not to 
introduce any significant costs beyond the regular cost of business 
because creditors already must compare APRs to APOR for a variety of 
compliance purposes under existing Regulation Z \129\ or to determine 
if a loan is subject to the protections of the Home Ownership and 
Equity Protection Act of 1994 (HOEPA).\130\
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    \129\ 12 CFR 1026.35.
    \130\ 15 U.S.C. 1639.
---------------------------------------------------------------------------

    The third step is an optional one. If a creditor decides to seek to 
be eligible for the safe harbor provided for in Sec.  
1026.35(c)(3)(ii), the creditor likely would take certain steps in the 
process of ordering and reviewing a full-interior appraisal as 
prescribed by the rule. The review process is described in the Appendix 
N of the rule, and the Bureau assumes it will be performed by a loan 
officer and to take 15 minutes on average (including the very brief 
time needed to send a copy to the applicant, as discussed below).\131\ 
Assuming an average total hourly labor cost of loan officers of $48.29, 
the cost of review per additional appraisal is $12.07.\132\ With an 
estimated total number of annual additional appraisals--pursuant to 
both the first and second appraisal requirements--of 4,300, the total 
cost of reviewing those appraisals is $58,000 (rounded to the nearest 
thousand).\133\
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    \131\ One community bank commenter stated that this estimate was 
too low, but did not explain the amount of time it believed would be 
required to review the appraisal under the rule. In any event, the 
15 minute assumption is on average. Some appraisals would be assumed 
to take more time, and others less. To the extent an appraisal is 
deficient, and is sent for revision and then further review by the 
creditor upon revision, this is not assumed to be a cost imposed by 
the rule and rather is part of a standard underwriting process.
    \132\ (.25* $48.29) = $12.07. The hourly wage rate is based on 
the higher of the loan officer wages at depository institutions of 
$31.69 and at non-depository institution of $32.16. Wages comprised 
66.6 percent of compensation for employees in credit intermediation 
and related fields in Q4 2011, according to the Bureau of Labor 
Statistics Series ID CMU2025220000000D,CMU2025220000000P, available 
at http://www.bls.gov/ncs/ect/#tables. All the hourly wage rates 
below are computed similarly from the same source.
    \133\ ($12.07*4,280) = $58,000 (rounded to the nearest 
thousand).
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    In purchase transactions financed by a covered HPML, creditors also 
will need to determine whether a second appraisal would be required 
based upon prior sales or acquisitions involving the property that 
would secure the loan. This would require labor costs to determine, 
through reasonable diligence, whether the seller acquired the property 
in the past 180 days, and if so, at a price that is sufficiently lower 
than the contract sale price for the current transaction to trigger the 
second appraisal requirement. The rule provides that reasonable 
diligence can be performed through reliance on written source 
documents, which may include, among others, the 10 types of documents 
listed in new Appendix O to Part 1026. The Bureau believes creditors 
typically already obtain many of the common source documents for other 
purposes during the application process for a purchase-money HPML. The 
Bureau estimates that reasonable diligence would take, on average, 15 
minutes of staff time. Because an estimated 95 percent of covered HPML 
transactions are not flips at all, in many cases this may be determined 
from the available documentation more quickly than 15 minutes, simply 
by determining that the seller's acquisition occurred more than 180 
days before the borrower's purchase agreement. Of the 5 percent that 
are flips, creditors may take more time to analyze price differences 
versus the thresholds in the rule. Thus the 15 minute estimation is an 
average. The dollar cost per covered HPML loan is therefore 
$12.07.\134\ With total annual non-QM HPMLs that are purchase 
transactions of 12,000, the total cost per year is estimated to be 
$148,000 (rounded to the nearest thousand).\135\
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    \134\ (.25*$45.80) = $11.45.
    \135\ ($12.07*12,249) = $148,000 (rounded to the nearest 
thousand).
---------------------------------------------------------------------------

    The Bureau believes based on outreach that the direct costs of 
conducting appraisals would be passed through to consumers, except in 
the case of an additional appraisal that would be required by Sec.  
1026.35(c)(4)(i) (requiring an additional appraisal for properties that 
are the subject of certain 180-day resales).\136\ Based on a 
nationally-representative dataset of the cost of appraisals, which as a 
standard matter include interior inspections per the URAR form 
discussed in the section-by-section analysis in this final rule, the 
Bureau believes that the average cost of each full-interior appraisal 
is $350.\137\ As noted above, the Bureau estimates that 486 second 
full-interior appraisals would be required each year under the rule, 
for a total cost to creditors of $170,000 (rounded to the nearest 
thousand).\138\
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    \136\ The final rule, in Sec.  1026.35(c)(4)(v), prohibits the 
creditor from charging the consumer for the cost of the additional 
appraisal. For purposes of estimating the cost the rule imposes on 
creditors, the Bureau assumes that the creditors will not pass 
through any of the cost of the second appraisal to the consumers.
    \137\ Based upon the industry dataset used in the proposal, the 
Bureau calculates the median for the United States overall is $350, 
the average is $351, and standard deviation is $92. The $350 
estimated cost also falls within the range of $225 to $750 cited by 
industry comments, most of which referred to costs between $300 and 
$600. While the proposal had assumed a $600 cost, that cost was at 
the highest state median (Alaska) in the industry dataset. Upon 
further review, the Bureau believes that $350 is a more accurate 
estimate of the average cost and that using a $600 cost would, while 
being conservative, also overestimate the cost. In any event, the 
estimated costs do not change significantly using a $600 estimate, 
as noted in the Bureau's Regulatory Flexibility Analysis below.
    \138\ (350*486) = $170,000 (rounded to the nearest thousand).
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    Finally, the rule also requires that free copies of appraisals be 
provided to borrowers at least three business days before the loan is 
consummated (or within 30 days of determining the loan will not be 
consummated). In outreach prior to the proposal stage, market 
participants, including a large bank, representatives from a national 
community banking trade association, and a large independent mortgage 
bank \139\ told the Bureau that, in cases where loans are consummated, 
copies of appraisals that are ordered are provided to consumers 100 
percent of the time. Indeed, GSEs also generally require that, as a 
condition of eligibility for their purchase of a loan, copies of 
appraisals be provided to consumers promptly upon completion but no 
later than three days before consummation.\140\ The Bureau therefore 
believes that for covered HPML first lien transactions, the requirement 
to provide copies in the rule imposes no additional costs; any cost due 
to providing copies for the small proportion of first lien transactions 
that do not currently obtain and provide copies of appraisals is 
estimated not to be significant. The only other costs of providing 
copies of the appraisals would be for the 2,000 new appraisals in 
subordinate lien transactions that the Bureau estimates would be caused 
by the rule on an

[[Page 10421]]

annual basis. As noted in the PRA section of the final rule, the time 
to send the copy can be assumed to be part of the 15 minutes of time 
needed on average to review the appraisal. Given the number of extra 
copies that would need to be provided, and the provision in the final 
rule that allows these copies to be provided electronically based upon 
consent under the E-Sign Act, the Bureau believes that this cost is not 
significant.
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    \139\ Interviews conducted on May 15, 2012 and May 24, 2012.
    \140\ Fannie Mae Selling Guide, ``Appraiser Independence 
Requirements'' (Oct. 15, 2010) (Part III), available at https://www.fanniemae.com/content/fact_sheet/air.pdf; Freddie Mac, Single 
Family Seller/Servicer Guide, Vol. 1, Exhibit 35, Appraiser 
Independence Requirements (October 15, 2010) (same).
---------------------------------------------------------------------------

    As noted above, the Bureau assumes that costs of many of the new 
first appraisals would be borne directly by the consumers. This 
increase in costs charged to HPML borrowers could deter some consumers 
from agreeing to HPMLs. In these cases, however, creditors could agree 
to fold the appraisal cost into the cost of the loan. To the extent 
consumers would still be deterred from borrowing, creditors also could 
waive the cost of the appraisal and absorb it, or otherwise reduce 
origination fees.
    Costs per institution or loan officer. Aside from the per-loan 
costs just described, the Bureau has estimated that each institution 
would incur the one-time cost of reviewing the regulation, and one-time 
training costs for loan officers to become familiar with the provisions 
of the rule.\141\
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    \141\ As stated in the proposal, the Bureau estimates that on 
average one lawyer and a variable number of compliance officers at 
each institution will review the regulation for 1.5 hours each 
person. Compliance officer review is assumed to vary by size and 
type of the institution, and it is assumed that in some cases there 
is no compliance officer review: one compliance officer at each 
independent mortgage bank; two compliance officers at each 
depository institution larger than $10 billion in assets; and half a 
compliance officer (on average) at each depository institution 
smaller than $10 billion in assets. Total hourly labor costs are 
estimated to be: $116.08 for attorneys and $52.04 for compliance 
officers. Actual review time will vary by institution. At some 
institutions that do not originate non-QM HPMLs, review time may be 
lower as lawyers and compliance officers may review secondary trade 
press or other free sources of information. By contrast, for those 
institutions that originate non-QM HPMLs, the review time may be 
greater as it may include activities to prepare for implementation, 
such as training. As also stated in the proposal, the Bureau 
estimates that on average an additional 0.5 hours of training time 
will be added to regular training programs for each loan officer. 
Here again, training time will vary depending on whether the officer 
is involved in origination of non-QM HPMLs. One community bank 
commenter stated that the estimate in the proposal of 30 minutes for 
training time was too low, but did not explain the amount of time it 
believed would be required for training. Training time per officer 
may be lower than average for many loan officers to the extent they 
do not or are not likely to originate non-QM HPMLs, and closer to or 
potentially more than average in some cases for those who do or may 
originate such loans (because those officers would need to be 
trained on how to comply with the rule, rather than simply alerted 
to its existence). Finally, the Bureau also believes that as part of 
routine software updates, creditors may make adjustments to software 
systems to ensure compliance with this rule; the Bureau does not 
believe these adjustments would impose significant additional costs 
beyond the existing routine upgrade processes.
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Potential Costs of the Rule to Consumers

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

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

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

Significant Alternatives Considered

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

[[Page 10422]]

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

Impact of the Rule on Depository Institutions and Credit Unions With 
$10 Billion or Less in Total Assets, as Described in Section 1026 \142\
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    \142\ Approximately 50 banks with under $10 billion in assets 
are affiliates of large banks with over $10 billion in assets and 
subject to Bureau supervisory authority under Section 1025. However, 
these banks are included in this discussion for convenience.
---------------------------------------------------------------------------

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

Impact of the Final Rule on Consumers in Rural Areas

    The Bureau does not anticipate that the final rule will have a 
unique impact on consumers in rural areas. The Bureau does not believe 
that requiring one interior USPAP-compliant appraisal for a covered 
HPML on a rural property will have a significantly greater impact than 
the same requirement for a covered HPML on a non-rural property.\143\ 
Further, the final rule exempts these rural transactions from the 
requirement to obtain a second appraisal on the property. Therefore, 
the cost of creditor compliance with the second appraisal requirement 
(including due diligence) will not be present for these transactions. 
For these reasons, explained in more detail below, the Bureau does not 
anticipate the final rule will have a unique or disproportionate impact 
on consumers in rural areas.
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    \143\ Despite receiving some comments requesting an exemption 
from the entire rule for rural HPMLs, the Agencies have not received 
nationally-representative data indicating that the cost of first 
appraisals for HPMLs would be disproportionately difficult to incur 
in rural transactions.
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    As in the section 1022 analysis in the proposal, the Bureau 
continues to conclude that there would be no unique impact on rural 
consumers of the requirement to obtain the first appraisal. For first 
lien transactions, conditional on taking out a mortgage, rural 
consumers may take out first lien HPMLs at a higher rate than non-rural 
consumers. Such a difference between rural and non-rural rates of first 
lien HPMLs does not have a unique impact on rural consumers, however, 
because the rule does not alter existing industry practice with respect 
to appraisals for most first lien transactions. For subordinate lien 
transactions, conditional on taking out a mortgage, in 2010 the 
proportion of subordinate liens that were HPMLs were roughly the same 
for consumers in rural areas as in non-rural areas, as illustrated in 
Table 2 of the proposal. In addition, HMDA data for 2011 indicates the 
proportion of subordinate liens in rural areas that were HPMLs (6.77 
percent) was lower than the proportion for non-rural areas (8.53 
percent). Thus, even though the rule may have a greater impact on 
subordinate lien HPML transactions because appraisals are less common 
currently for these transactions, rural consumers' subordinate liens 
appear no more likely to be HPMLs than non-rural consumers, based upon 
the recent HMDA data. As a result, there is no unique or 
disproportionate impact on rural consumers in subordinate lien 
transactions either.
    With respect to the second appraisal requirement for certain 
transactions involving flips, the Bureau believes that flips occur at 
the same rate in rural areas as in non-rural areas. The second 
appraisal requirement will not have any impact on consumers engaging in 
transactions on properties in rural areas, however, because they are 
exempt from the second appraisal requirement.\144\ As discussed in the 
preamble to the final rule, based upon comments received and further 
analysis, the Agencies have determined that there is a sufficient basis 
for concern over availability of appraisers in rural areas to conduct a 
second appraisal on rural HPML transactions, and consequently some 
concern over credit availability if the second appraisal requirement 
were applied to these transactions. The Agencies therefore have 
exempted these transactions from the second appraisal requirement. This 
determination in the final rule is based upon a broader consideration 
of appraiser availability, as well as other factors discussed in the 
section-by-section analysis above, than the Bureau considered in its 
section 1022 analysis in the proposal stage. In its section 1022 
analysis in the proposal, the Bureau concluded that sufficient 
appraisers likely would be available for a property if there were two 
active certified and licensed appraisers on the National Appraiser 
Registry in the same or adjacent county. After reviewing a number of 
industry comments

[[Page 10423]]

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

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

VI. Regulatory Flexibility Act

Board

    The Board prepared an initial regulatory flexibility analysis as 
required by the Regulatory Flexibility Act (RFA) (5 U.S.C. 601 et seq.) 
(RFA) in connection with the proposed rule. The regulatory flexibility 
analysis otherwise required under section 604 of the RFA is not 
required if an agency certifies, along with a statement providing the 
factual basis for such certification, that the rule will not have a 
significant economic impact on a substantial number of small entities. 
5 U.S.C. 604, 605(b). The final rule covers certain banks, other 
depository institutions, and non-bank entities that extend higher-risk 
mortgage loans to consumers. The Small Business Administration (SBA) 
establishes size standards that define which entities are small 
businesses for purposes of the RFA.\145\ The size standard to be 
considered a small business is: $175 million or less in assets for 
banks and other depository institutions; and $7 million or less in 
annual revenues for the majority of nonbank entities that are likely to 
be subject to the final rule. Based on its analysis and for the reasons 
stated below, the Board believes that this final rule will not have a 
significant economic impact on a substantial number of small 
entities.\146\
---------------------------------------------------------------------------

    \145\ U.S. Small Business Administration, Table of Small 
Business Size Standards Matched to North American Industry 
Classification System Codes, available at http://www.sba.gov/sites/default/files/files/Size_Standards_Table.pdf.
    \146\ The Board notes that for purposes of its analysis, the 
Board considered all creditors to which the final rule applies. The 
Board's Regulation Z at 12 CFR 226.43 applies to a subset of these 
creditors. See Sec.  226.43(g).
---------------------------------------------------------------------------

A. Reasons for the Final Rule

    Section 1471 of the Dodd-Frank Act establishes a new TILA section 
129H, which sets forth appraisal requirements applicable to ``higher-
risk mortgages.'' The Act generally defines ``higher-risk mortgage'' as 
a closed-end consumer loan secured by a principal dwelling with an APR 
that exceeds the APOR by 1.5 percent for first-lien loans, 2.5 percent 
for first-lien jumbo loans, or 3.5 percent for subordinate-liens. The 
definition of higher-risk mortgage in new TILA section 129H expressly 
excludes qualified mortgages, as defined in TILA section 129C, as well 
as reverse mortgage loans that are qualified mortgages as defined in 
TILA section 129C.
    Specifically, new TILA section 129H does not permit a creditor to 
extend credit in the form of a ``higher-risk mortgage'' to any consumer 
without first:
     Obtaining a written appraisal performed by a certified or 
licensed appraiser who conducts a physical property visit of the 
interior of the property.
     Obtaining an additional appraisal from a different 
certified or licensed appraiser if the purpose of the higher-risk 
mortgage loan is to finance the purchase or acquisition of a mortgaged 
property from a seller within 180 days of the purchase or acquisition 
of the property by that seller at a price that was lower than the 
current sale price of the property. The additional appraisal must 
include an analysis of the difference in sale prices, changes in market 
conditions, and any improvements made to the property between the date 
of the previous sale and the current sale.
     Providing the applicant, at the time of the initial 
mortgage application, with a statement that any appraisal prepared for 
the mortgage is for the sole use of the creditor, and that the 
applicant may choose to have a separate appraisal conducted at the 
applicant's expense.
     Providing the applicant with one copy of each appraisal 
conducted in accordance with TILA section 129H without charge, at least 
three (3) days prior to the transaction closing date.
    Section 1400 of the Dodd-Frank Act requires that final regulations 
to implement these provisions be issued no later than January 21, 2013. 
The Agencies are issuing the final rule to fulfill their statutory duty 
to implement the appraisal provisions added in new TILA section 129H.

B. Statement of Objectives and Legal Basis

    The SUPPLEMENTARY INFORMATION above contains this information. As 
discussed above, the legal basis for the final rule is new TILA section 
129H(b)(4). 15 U.S.C. 1639h(b)(4). New TILA section 129H was 
established by section 1471 of the Dodd-Frank Act.

C. Summary of Issues Raised by Commenters

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

D. Description of Small Entities to Which the Rules Apply

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

[[Page 10424]]

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

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

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

E. Projected Reporting, Recordkeeping and Other Compliance Requirements

    The compliance requirements of the final rule are described in 
detail in the SUPPLEMENTARY INFORMATION above.
    The final rule generally applies to creditors that make HPMLs 
subject to 12 CFR 1026.35(c), which are generally mortgages with an APR 
that exceeds the APOR by a specified percentage, subject to certain 
exceptions. The final rule generally requires creditors to obtain an 
appraisal or appraisals meeting certain specified standards, provide 
applicants with a notification regarding the use of the appraisals, and 
give applicants a copy of the written appraisals used.
    A creditor is required to determine whether it extends HPMLs 
subject to 12 CFR 1026.35(c); if so, the creditor must analyze the 
regulations. The creditor must establish procedures for identifying 
mortgages subject to the new appraisal requirements. A creditor making 
a HPML subject to 12 CFR 1026.35(c) must obtain a written appraisal 
performed by a certified or licensed appraiser who conducts a physical 
property visit of the interior of the property. Creditors seeking a 
safe harbor for compliance with this requirement must:
     Order that the appraiser perform the written appraisal in 
conformity with the USPAP and title XI of the FIRREA, and any 
implementing regulations, in effect at the time the appraiser signs the 
appraiser's certification;
     Verify through the National Registry that the appraiser 
who signed the appraiser's certification was a certified or licensed 
appraiser in the State in which the appraised property is located as of 
the date the appraiser signed the appraiser's certification;
     Confirm that the elements set forth in appendix N to this 
part are addressed in the written appraisal; and
     Have no actual knowledge to the contrary of facts or 
certifications contained in the written appraisal.
    A creditor must also determine whether it is financing the purchase 
or acquisition of a mortgaged property by a consumer from a seller (1) 
within 90 days of the seller's acquisition of the property for a resale 
price that exceeds the seller's acquisition price by more than 10 
percent; or (2) 91 to 180 days of the seller's acquisition of the 
property for a resale price that exceeds the seller's acquisition price 
by more than 20 percent. If so, the creditor must obtain an additional 
appraisal of the property and confirm that the additional appraisal 
meets the requirements of the first appraisal. The creditor also must 
ensure that the additional appraisal includes an analysis of the 
difference in sale prices, changes in market conditions, and any 
improvements made to the property between the date of the previous sale 
and the current sale.
    Creditors extending HPMLs subject to 12 CFR 1026.35(c) also must 
design, generate, and provide a new notice to applicants. Specifically, 
within three business days of application, a creditor must provide a 
disclosure that informs consumers of the purpose of the appraisal, that 
the creditor will provide the consumer with a copy of any appraisal, 
and that the consumer may choose to have a separate appraisal conducted 
at the expense of the consumer. In addition, creditors making HPMLs 
subject to 12 CFR 1026.35(c) must provide the consumer with a copy of 
each appraisal conducted at least three business days prior to closing 
and develop systems for that purpose.
    The Board believes that certain factors will mitigate the economic 
impact of the final rule. First, the Board believes that only a small 
number of loans will be affected by the final rule. For example, 
according to HMDA data, less than four percent of first-lien home 
purchase mortgage loans in 2010 or 2011 would potentially be subject to 
the appraisal requirements of 12 CFR 1026.35(c).\149\ Moreover, most 
home purchase loans do not involve properties that were previously 
purchased within 180 days and therefore would not require an additional 
written appraisal. In addition, based on outreach, the Board believes 
that many creditors are already obtaining written appraisals performed 
by certified or licensed appraisers who conduct a physical property 
visit of the interior of the property. Creditors may be obtaining such 
appraisals pursuant to other requirements, such as of FIRREA title XI 
or the FHA Anti-Flipping Rule, or they may be obtaining the appraisals 
voluntarily.
---------------------------------------------------------------------------

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

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

F. Identification of Duplicative, Overlapping, or Conflicting Federal 
Regulations

    The Board has not identified any Federal statutes or regulations 
that would duplicate, overlap, or conflict with the final rule. The 
final rule will work in conjunction with the existing requirements of 
FIRREA title XI and its implementing regulations.

G. Discussion of Significant Alternatives

    As described in the SUPPLEMENTARY INFORMATION, above, the Board has 
sought to minimize the economic impact on small entities in several 
ways. First, the final rule provides exemptions from both the written 
appraisal and the additional written appraisal requirements, and 
provides creditors with a safe harbor for determining that an appraiser 
has met certain specified requirements. The final rule also replaces 
the term ``higher-risk mortgage loan'' with ``higher-priced mortgage 
loan'' in order to use terminology consistent with that already used in 
Regulation Z. Moreover, the final rule seeks to reduce burden by 
providing that the disclosure required at application may be fulfilled 
by compliance with the disclosure requirement in Regulation B, 12 CFR 
1002.14(a)(2). Lastly, the final rule seeks to reduce burden by 
allowing a creditor subject to the additional appraisal requirement 
under TILA section 129H(b)(2) to obtain an appraisal that contains the 
analysis required in TILA section 129H(b)(2)(A) only to the extent that 
needed information is known. 15 U.S.C. 1639h(b)(2).
Bureau
    The Regulatory Flexibility Act (RFA) generally requires an agency 
to conduct an initial regulatory flexibility analysis (IRFA) and a 
final regulatory flexibility analysis (FRFA) of any rule subject to 
notice-and-comment rulemaking requirements, unless the agency certifies 
that the rule will not have a significant economic impact on a 
substantial number of small entities.\150\ The Bureau

[[Page 10425]]

also is subject to certain additional procedures under the RFA 
involving the convening of a panel to consult with small business 
representatives prior to proposing a rule for which an IRFA is 
required.\151\ A FRFA is not required because this rule will not have a 
significant economic impact on a substantial number of small entities.
---------------------------------------------------------------------------

    \150\ For purposes of assessing the impacts of the final rule on 
small entities, ``small entities'' is defined in the RFA to include 
small businesses, small not-for-profit organizations, and small 
government jurisdictions. 5 U.S.C. 601(6). A ``small business'' is 
determined by application of Small Business Administration 
regulations and reference to the North American Industry 
Classification System (NAICS) classifications and size standards. 5 
U.S.C. 601(3). A ``small organization'' is any ``not-for-profit 
enterprise which is independently owned and operated and is not 
dominant in its field.'' 5 U.S.C. 601(4). A ``small governmental 
jurisdiction'' is the government of a city, county, town, township, 
village, school district, or special district with a population of 
less than 50,000. 5 U.S.C. 601(5).
    \151\ 5 U.S.C. 609.
---------------------------------------------------------------------------

A. Summary of Final Rule

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

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

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

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

B. Number and Classes of Affected Entities

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

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

[[Page 10426]]

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

C. Analysis

    Although most DIs and non-DIs are affected by the final rule, the 
final rule does not have a significant impact on a substantial number 
of small entities, as is demonstrated by the burden estimates for small 
institutions calculated below. For each institution the cost of 
compliance is calculated and then divided by a measure of revenue. For 
DIs, revenue is obtained from the appropriate call report. For non-DIs, 
the frequency of HPMLs is not available in the MCR. However, data 
available in HMDA shows that the proportion of HPMLs in a non-DI's 
originations does not vary by origination volume. As such, HMDA data is 
used in lieu of the MCR data to calculate costs of compliance with the 
final rule.
    The creditors will incur one-time costs of review, as described in 
the analysis under section 1022 above, and ongoing costs, proportional 
to the volume of HPMLs originated, and also as described in the section 
1022 analysis above.
    The Bureau estimates that 85 percent of the creditors affected are 
going to have one-time costs of less than $300.\153\ Using an 
alternative metric, 85 percent of the creditors have a ratio of one-
time costs to their revenue of less than 0.1 percent.\154\
---------------------------------------------------------------------------

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

    For small DIs, Table 2 reports various statistics for the estimated 
annual cost of compliance with the final rule as a percentage of 
revenues using conservative assumptions. The assumptions underlying the 
Bureau's estimates are explained in the table and are generally 
discussed in more detail in the Section 1022(b)(2) analysis. The table 
shows that 85 percent of the small DIs and credit unions that originate 
any HPMLs have costs of significantly less than one percent of the 
revenue. This stays the same when the creditors are separated into 
types.\155\
---------------------------------------------------------------------------

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

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

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

[[Page 10427]]

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

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

    A more likely impact--albeit significantly reduced by the scope of 
exemptions adopted in the final rule--would be on the volume of non-QM 
HPMLs secured by subordinate liens because, in practice, these are the 
transactions on which final rule imposes a change from the status quo, 
and also because the cost of a full interior appraisal is a larger 
proportion of the loan amount to the extent subordinate lien loan 
amounts generally are lower than first lien loan amounts. However, 
changes in the volume of subordinate lien non-QM HPMLs may be mitigated 
by consumers rolling the appraisal costs into the loan or the consumer 
and the creditor splitting the incremental cost of the full-interior 
appraisal if it is profitable for the creditor to do so. In addition, 
many creditors originating subordinate lien non-QM HPMLs can offer 
alternative products that are not subject to the rule, such as 
qualified mortgages or home equity lines of credit (HELOCs). Similarly, 
the costs imposed on creditors are sufficiently small that they are 
unlikely to result in a decrease in the supply of credit.

D. Certification

    Accordingly, the Director of the Consumer Financial Protection 
Bureau certifies that this rule will not have a significant economic 
impact on a substantial number of small entities.
FDIC
    The RFA generally requires that, in connection with a final 
rulemaking, an agency prepare a final regulatory flexibility analysis 
that describes the impact of the final rule on small entities.\157\ A 
regulatory flexibility analysis is not required, however, if the agency 
certifies that the rule will not have a significant economic impact on 
a substantial number of small entities (defined in regulations 
promulgated by the Small Business Administration to include banking 
organizations with total assets of less than or equal to $175 million) 
and publishes its certification along with a statement providing the 
factual basis for such certification in the Federal Register together 
with the rule.
---------------------------------------------------------------------------

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

    As of March 31, 2012, there were approximately 2,571 small FDIC-
supervised banks, which include 2,410 state nonmember banks and 161 
state-chartered savings banks. The FDIC analyzed the 2010 Home Mortgage 
Disclosure Act \158\ (HMDA) dataset to determine how many loans by 
FDIC-supervised banks might qualify as HPMLs under section 129H of 
TILA, as added by section 1471 of the Dodd-Frank Act.\159\ This 
analysis reflected that only 70 FDIC-supervised banks originated at 
least 100 HPMLs, with only four banks originating more than 500 HPMLs. 
Further, the FDIC-supervised banks that met the definition of a small 
entity originated on average less than eight HPML loans each in 2010.
---------------------------------------------------------------------------

    \158\ The FDIC based its analysis on the HMDA data, as it 
provided a proxy for the characteristics of HPMLs. While the FDIC 
recognizes that fewer higher-priced loans were generated in 2010, a 
more historical review is not possible because the average offer 
price (a key data element for this review) was not added until the 
fourth quarter of 2009. The FDIC also recognizes that the HMDA data 
provides information relative to mortgage lending in metropolitan 
statistical areas, but not in rural areas.
    \159\ The FDIC notes that the exact number of small entities 
likely to be affected by the final rule is unknown because the FDIC 
lacks reliable sources for certain information.
---------------------------------------------------------------------------

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

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

    1. Requiring an appraisal in connection with real estate financial 
transactions that previously did not require an appraisal,
    2. mandating that the appraiser conduct a physical visit to the 
interior of the property, and
    3. requiring a second appraisal at the lender's expense in certain 
situations.
    As for the first potential impact, the FDIC notes that Part 323 of 
the FDIC Rules and Regulations \161\ (Part 323) requires financial 
institutions to obtain an appraisal for federally related transactions 
unless an exemption applies. Part 323 grants an exemption to the 
appraisal requirement for real estate-related financial transactions of 
$250,000 or less. However, Part 323 requires financial institutions to 
obtain an appropriate evaluation that is consistent with safe and sound 
banking practices for such transactions. The final rule will supersede 
this exemption, resulting in creditors having to obtain an appraisal 
for an HPML transaction regardless of the transaction amount. The 
requirement to obtain an appraisal rather than an evaluation does not 
add much, if any, new burden on FDIC-supervised institutions, as they 
are required by Part 323 to obtain some type of valuation of the 
mortgaged property. The final rule merely limits the type of 
permissible valuation to an appraisal for HPMLs.
---------------------------------------------------------------------------

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

    As for the second potential impact, the final rule's requirement 
affects a lender only to the extent that a lender must instruct the 
appraiser to conduct a physical visit of the interior of the mortgaged 
property. USPAP and title XI of FIRREA, and the regulations prescribed 
thereunder, do not require appraisers to perform on-site visits. 
Instead, USPAP requires appraisers to include a certification which 
clearly states whether the appraiser has or has not personally 
inspected the subject property. During informal outreach conducted by 
the Agencies, outreach participants indicated that many creditors 
require appraisers to perform a physical inspection of the mortgaged 
property. This requirement is documented in the Uniform Residential 
Appraisal Report form used as a matter of practice in the industry, 
which includes a certification that the appraiser performed a complete 
visual inspection of the interior and exterior areas of the subject 
property. Outreach participants indicated that requiring a physical 
visit of the interior of the mortgaged property added, on average, an 
additional cost of about $50 to the appraisal fee, which is paid by the 
applicant. Thus, the physical visit requirement creates a potential 
burden for the appraiser, not the lender, and the cost is born by the 
applicant.
    As for the third potential impact, the final rule's requirement to 
conduct a second appraisal for certain transactions should not affect 
many FDIC-supervised banks. As previously indicated, FDIC-supervised 
banks that meet the definition of a small entity originated an average 
of less than eight HPMLs each in 2010. According to estimates provided 
by FHFA, about 5 percent of single-family property sales in 2010 
reflected situations in which the same property had been sold within a 
180-day period. This information shows that most small FDIC-supervised 
banks will have to obtain a second appraisal for a nominal number of 
transactions at the bank's expense. The estimated cost of a second 
appraisal is between $350 to $600.
    In sum, the FDIC believes that the final rule will not have a 
significant economic impact on a substantial number of small entities 
that it regulates in light of the fact that: (1) Part 323 already 
requires FDIC-supervised depository institutions to obtain some type of 
valuation for real estate-related financial transactions; (2) the

[[Page 10428]]

requirement of conducting a physical visit of the interior of the 
mortgaged property creates a potential burden for an appraiser, rather 
than the lender, with the cost being born by the applicant; and (3) the 
second appraisal requirement should affect a nominal number of 
transactions. Accordingly, pursuant to section 605(b) of the RFA, the 
FDIC certifies that the final rule will not have a significant economic 
impact on a substantial number of small entities.
FHFA
    The final rule applies only to institutions in the primary mortgage 
market that originate mortgage loans. FHFA's regulated entities--Fannie 
Mae, Freddie Mac, and the Federal Home Loan Banks--operate in the 
secondary mortgage markets. In addition, these entities do not come 
within the meaning of small entities as defined in the Regulatory 
Flexibility Act. See 5 U.S.C. 601(6)).
NCUA
    The RFA generally requires that, in connection with a final rule, 
an agency prepare and make available for public comment a final 
regulatory flexibility analysis that describes the impact of the final 
rule on small entities.\162\ A regulatory flexibility analysis is not 
required, however, if the agency certifies that the rule will not have 
a significant economic impact on a substantial number of small entities 
and publishes its certification and a short, explanatory statement in 
the Federal Register together with the rule. NCUA defines small 
entities as small credit unions having less than ten million dollars in 
assets \163\ in contrast to the definition of small entities in the 
rules issued by the Small Business Administration (SBA), which include 
banking organizations with total assets of less than or equal to $175 
million.
---------------------------------------------------------------------------

    \162\ See 5 U.S.C. 601 et seq.
    \163\ 68 FR 31949 (May 29, 2003).
---------------------------------------------------------------------------

    NCUA staff analyzed the 2010 Home Mortgage Disclosure Act (HMDA) 
dataset to determine how many loans by federally insured credit unions 
(FICUs) might qualify as HPMLs under section 129H of TILA.\164\ As of 
March 31, 2012, there were 2,475 FICUs that met NCUA's small entity 
definition but none of these institutions reported data to HMDA in 
2010. For purposes of this rulemaking and for consistency with the 
Agencies, NCUA reviewed the dataset for FICUs that met the small entity 
standard for banking organizations under the SBA's regulations. As of 
March 31, 2012, there were approximately 6,060 FICUs with total assets 
of $175 million or less. Of the FICUs which reported 2010 HMDA data, 
452 reported at least one HPML. The data reflects that only three FICUs 
originated at least 100 HPMLs, with no FICUs originating more than 500 
HPMLs, and 88 percent of reporting FICUs originating ten HPMLs or less. 
Further, FICUs that met the SBA's definition of a small entity 
originated an average four HPML loans each in 2010.\165\
---------------------------------------------------------------------------

    \164\ NCUA based its analysis on the HMDA data, as it provided a 
proxy for the characteristics of HPMLs. The analysis is restricted 
to 2010 HMDA data because the average offer price (a key data 
element for this review) was not added in the HMDA data until the 
fourth quarter of 2009.
    \165\ With only a fraction of small FICUs reporting data to 
HMDA, NCUA also analyzed FICUs not observed in the HMDA data. Using 
the total number of real estate loans originated by FICUs with less 
than $175M in total assets, NCUA estimated the average number of 
HPMLs per real estate loan originated. Using this ratio to 
interpolate the likely number of HPML originations, the analysis 
suggests that small FICUs originate on average less than two HPML 
loans each year.
---------------------------------------------------------------------------

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

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

     Obtaining a written appraisal performed by a certified or 
licensed appraiser who conducts a physical property visit of the 
interior of the property.
     Obtaining an additional appraisal from a different 
certified or licensed appraiser if the HPML finances the purchase or 
acquisition of a property from a seller at a higher price than the 
seller paid, within 180 days of the seller's purchase or acquisition. 
The additional appraisal must include an analysis of the difference in 
sale prices, changes in market conditions, and any improvements made to 
the property between the date of the previous sale and the current 
sale.
     Providing the applicant, at the time of the initial 
mortgage application, with a statement that any appraisal prepared for 
the mortgage is for the sole use of the creditor, and that the 
applicant may choose to have a separate appraisal conducted at the 
applicant's expense.
     Providing the applicant with one copy of each appraisal 
conducted in accordance with TILA section 129H without charge, at least 
three (3) days prior to the transaction closing date.
    The final rule implements the appraisal requirements of section 
1471 of the Dodd-Frank Act. Part 722 of NCUA's regulations \167\ 
requires FICUs to obtain an appraisal for federally related 
transactions unless an exemption applies. Part 722 grants an exemption 
to the appraisal requirement for real estate-related financial 
transactions of $250,000 or less. However, part 722 requires FICUs to 
obtain an appropriate evaluation that is consistent with safe and sound 
practices for such transactions.
---------------------------------------------------------------------------

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

    The final rule will supersede this exemption, resulting in FICUs 
having to obtain an appraisal for a HPML transaction regardless of the 
transaction amount. The requirement to obtain an appraisal rather than 
an evaluation does not pose a new burden to financial institutions, as 
they are required by part 722 to obtain some type of valuation of the 
mortgaged property. The final rule merely limits the type of 
permissible valuations to an appraisal for HPMLs.
    The final rule's requirement to conduct a physical visit of the 
interior of the mortgaged property potentially adds an additional 
burden to the appraiser. The USPAP and title XI of FIRREA and the 
regulations prescribed thereunder do not require appraisers to perform 
on-site visits. Instead, USPAP requires appraisers to include a 
certification which clearly states whether the appraiser has or has not 
personally inspected the subject property. During informal outreach 
conducted by the Agencies, outreach participants indicated that many 
creditors require appraisers to perform a physical inspection of the 
mortgaged property. This requirement is documented in the Uniform 
Residential Appraisal Report form used as a matter of practice in the 
industry, which includes a certification that the appraiser performed a 
complete visual inspection of the interior and exterior areas of the 
subject property. Outreach participants indicated that requiring a 
physical visit of the interior of the mortgaged property added on 
average an additional cost of about $50 to the appraisal fee, which is 
paid by the applicant.
    In light of the fact that few loans made by FICUs would qualify as 
HPMLs, the fact that many creditors already require that an appraiser 
conduct an interior inspection of mortgage collateral property in 
connection with an appraisal; the fact that requiring an interior 
inspection would add a relatively small amount to the cost of an 
appraisal; and the various exemptions and exclusions from the 
requirements provided in the rule, NCUA believes the final rule will 
not have a significant economic impact on small FICUs.
    For the reasons provided above, NCUA certifies that the final rule 
will

[[Page 10429]]

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

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

OCC
    Pursuant to section 605(b) of the Regulatory Flexibility Act, 5 
U.S.C. 605(b) (RFA), the regulatory flexibility analysis otherwise 
required under section 603 of the RFA is not required if the agency 
certifies that the final rule will not, if promulgated, have a 
significant economic impact on a substantial number of small entities 
(defined for purposes of the RFA to include banks, savings institutions 
and other depository credit intermediaries with assets less than or 
equal to $175 million \170\ and trust companies with total assets of $7 
million or less) and publishes its certification and a short, 
explanatory statement in the Federal Register along with its final 
rule.
---------------------------------------------------------------------------

    \170\ ``A financial institution's asset are determined by 
averaging assets reported on its four quarterly financial statements 
for the preceding year.'' See footnote 8 of the U.S. Small Business 
Administration's Table of Size Standards.
---------------------------------------------------------------------------

    Section 1471 of the Dodd-Frank Act establishes a new TILA section 
129H, which sets forth appraisal requirements applicable to higher-
priced mortgage loans. A ``higher-priced mortgage'' generally is a 
closed-end consumer loan secured by a principal dwelling with an APR 
that exceeds the APOR by 1.5 percent for first-lien loans with a 
principal amount below the conforming loan limit, 2.5 percent for 
first-lien jumbo loans, or 3.5 percent for subordinate-liens. The 
definition of higher-priced mortgage loan expressly excludes qualified 
mortgages, as defined in TILA section 129C, as well as reverse mortgage 
loans that are qualified mortgages as defined in TILA section 129C.
    Specifically, section 129H does not permit a creditor to extend 
credit in the form of a higher-priced mortgage loan to any consumer 
without first:
     Obtaining a written appraisal performed by a certified or 
licensed appraiser who conducts a physical property visit of the 
interior of the property.
     Obtaining an additional written appraisal from a different 
certified or licensed appraiser if the purpose of the higher-risk 
mortgage loan is to finance the purchase or acquisition of a mortgaged 
property from a seller within 180 days of the purchase or acquisition 
of the property by that seller at a price that was lower than the 
current sale price of the property. The additional written appraisal 
must include an analysis of the difference in sale prices, changes in 
market conditions, and any improvements made to the property between 
the date of the previous sale and the current sale.
     Providing the applicant, at the time of the initial 
mortgage application, with a statement that any written appraisal 
prepared for the mortgage is for the sole use of the creditor, and that 
the applicant may choose to have a separate appraisal conducted at the 
applicant's expense.
     Providing the applicant with one copy of each appraisal 
conducted in accordance with TILA section 129H without charge, at least 
three (3) days prior to the transaction closing date.
    The OCC currently supervises 1,926 banks (1,262 commercial banks, 
65 trust companies, 552 federal savings associations, and 47 branches 
or agencies of foreign banks). We estimate that less than 1,400 of the 
banks supervised by the OCC are currently originating one- to four-
family residential mortgage loans. Approximately 772 OCC supervised 
banks are small entities based on the SBA's definition of small 
entities for RFA purposes. Of these, the OCC estimates that 465 banks 
originate mortgages and therefore may be impacted by the final rule.
    The OCC classifies the economic impact of total costs on a bank as 
significant if the total costs in a single year are greater than 5 
percent of total salaries and benefits, or greater than 2.5 percent of 
total non-interest expense. The OCC estimates that the average cost per 
small bank will range from a lower bound of approximately $10,000 to an 
upper bound of approximately $18,000. Using the upper bound cost 
estimate, we believe the final rule will have a significant economic 
impact on three small banks, which is not a substantial number.
    Therefore, we believe the final rule will not have a significant 
economic impact on a substantial number of small entities. The OCC 
certifies that the Final Rule would not, if promulgated, have a 
significant economic impact on a substantial number of small entities.
OCC Unfunded Mandates Reform Act of 1995 Determination
    Section 202 of the Unfunded Mandates Reform Act of 1995 (2 U.S.C. 
1532), requires the OCC to prepare a budgetary impact statement before 
promulgating a rule that includes a Federal mandate that may result in 
the expenditure by state, local, and tribal governments, in the 
aggregate, or by the private sector, of $100 million or more in any one 
year (adjusted annually for inflation). The OCC has determined that 
this final rule will not result in expenditures by state, local, and 
tribal governments, or the private sector, of $100 million or more in 
any one year. Accordingly, the OCC has not prepared a budgetary impact 
statement.

VII. Paperwork Reduction Act

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

[[Page 10430]]

respond to, an information collection unless the information collection 
displays a valid Office of Management and Budget (OMB) control number. 
The information collection requirements contained in this joint notice 
of final rulemaking have been submitted to OMB for review and approval 
by the Bureau, FDIC, NCUA, and OCC under section 3506 of the PRA and 
section 1320.11 of the OMB's implementing regulations (5 CFR part 
1320). The Board reviewed the final rule under the authority delegated 
to the Board by OMB.
    Title of Information Collection: HPML Appraisals.
    Frequency of Response: Event generated.
    Affected Public: Businesses or other for-profit and not-for-profit 
organizations.\171\
---------------------------------------------------------------------------

    \171\ The burdens on the affected public generally are divided 
in accordance with the Agencies' respective administrative 
enforcement authority under TILA section 108, 15 U.S.C. 1607.
---------------------------------------------------------------------------

    Bureau: Insured depository institutions with more than $10 billion 
in assets, their depository institution affiliates, and certain non-
depository mortgage institutions.\172\
---------------------------------------------------------------------------

    \172\ The Bureau and the Federal Trade Commission (FTC) 
generally both have enforcement authority over non-depository 
institutions for Regulation Z. Accordingly, for purposes of this PRA 
analysis, the Bureau has allocated to itself half of the Bureau's 
estimated burden for non-depository mortgage institutions. The FTC 
is responsible for estimating and reporting to OMB its share of 
burden under this proposal.
---------------------------------------------------------------------------

    FDIC: Insured state non-member banks, insured state branches of 
foreign banks, and certain subsidiaries of these entities.
    OCC: National banks, Federal savings associations, Federal branches 
or agencies of foreign banks, or any operating subsidiary thereof.
    Board: State member banks, uninsured state branches and agencies of 
foreign banks.
    NCUA: Federally-insured credit unions.
    Abstract:
    The collection of information requirements in this final rule are 
found in paragraphs (c)(3)(i), (c)(3)(ii), (c)(4), (c)(5), and (c)(6) 
of 12 CFR 1026.35. This information is required to protect consumers 
and promote the safety and soundness of creditors making HPMLs subject 
to 12 CFR 1026.35(c). This information is used by creditors to evaluate 
real estate collateral securing HPMLs subject to 12 CFR 1026.35(c) and 
by consumers entering these transactions. The collections of 
information are mandatory for creditors making HPMLs subject to 12 CFR 
1026.35(c). The final rule requires that, within three business days of 
application, a creditor provide a disclosure that informs consumers of 
the purpose of the appraisal, that the creditor will provide the 
consumer a copy of any appraisal, and that the consumer may choose to 
have a separate appraisal conducted at the expense of the consumer 
(Initial Appraisal Disclosure). See 12 CFR 1026.35(c)(5). If a loan is 
a HPML subject to 12 CFR 1026.35(c), then the creditor is required to 
obtain a written appraisal prepared by a certified or licensed 
appraiser who conducts a physical visit of the interior of the property 
that will secure the transaction (Written Appraisal), and provide a 
copy of the Written Appraisal to the consumer. See 12 CFR 
1026.35(c)(3)(i) and (c)(6). To qualify for the safe harbor provided 
under the final rule, a creditor is required to review the Written 
Appraisal as specified in the text of the rule and Appendix N. See 12 
CFR 1026.35(c)(3)(ii).
    A creditor is required to obtain an additional appraisal 
(Additional Written Appraisal) for a HPML that is subject to 12 CFR 
1026.35(c) if (1) the seller acquired the property securing the loan 90 
or fewer days prior to the date of the consumer's agreement to acquire 
the property and the resale price exceeds the seller's acquisition 
price by more than 10 percent; or (2) the seller acquired the property 
securing the loan 91 to 180 days prior to the date of the consumer's 
agreement to acquire the property and the resale price exceeds the 
seller's acquisition price by more than 20 percent. See 12 CFR 
1026.35(c)(4). The Additional Written Appraisal must meet the 
requirements described above and also analyze: (1) The difference 
between the price at which the seller acquired the property and the 
price the consumer agreed to pay, (2) changes in market conditions 
between the date the seller acquired the property and the date the 
consumer agreed to acquire the property, and (3) any improvements made 
to the property between the date the seller acquired the property and 
the date on which the consumer agreed to acquire the property. See 12 
CFR 1026.35(c)(4)(iv). A creditor is also required to provide a copy of 
the Additional Written Appraisal to the consumer. 12 CFR 1026.35(c)(6).

Comments on Proposed PRA Estimate

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

Calculation of Estimated Burden

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

    \173\ The public disclosure of information originally supplied 
by the Federal government to the recipient for the purpose of 
disclosure to the public is not included within the definition of 
``collection of information.'' 5 CFR 1320.3(c)(2).
---------------------------------------------------------------------------

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

[[Page 10431]]

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

Estimated PRA Burden

                 Table 3--Summary of PRA Burden Hours for Information Collections in Final Rule
----------------------------------------------------------------------------------------------------------------
                                                                     Estimated
                                                     Estimated       number of       Estimated       Estimated
                                                     number of    appraisals per   burden hours    total annual
                                                    respondents     respondent     per appraisal   burden hours
                                                                       \174\
                                                             [a]             [b]             [c]   [d] = (a*b*c)
----------------------------------------------------------------------------------------------------------------
                                 Review and Provide a Copy of Written Appraisal
----------------------------------------------------------------------------------------------------------------
Bureau 175 176 177..............................
Depository Inst. > $10 B in total assets +                   132            6.21            0.25             205
 Depository Inst. Affiliates....................
Non-Depository Inst. and Credit Unions..........           2,853            0.38            0.25        \178\136
FDIC............................................           2,571               8            0.25           5,142
Board \179\.....................................             418              24            0.25           2,508
OCC.............................................           1,399              69            0.25          24,133
NCUA............................................           2,437               6            0.25           3,656
                                                 ---------------------------------------------------------------
    Total.......................................           9,810  ..............  ..............          35,780
----------------------------------------------------------------------------------------------------------------
                       Investigate and Verify Requirement for Additional Written Appraisal
----------------------------------------------------------------------------------------------------------------
Bureau..........................................
Depository Inst. > $10 B in total assets +                   132           20.05            0.25             662
 Depository Inst. Affiliates....................
Non-Depository Inst. and Credit Unions..........           2,853            1.22            0.25             435
FDIC............................................           2,571              15            0.25           9,641
Board...........................................             418              24            0.25           2,508
OCC.............................................           1,399              69            0.25          24,133
NCUA............................................           2,437               6            0.25           3,656
                                                 ---------------------------------------------------------------
    Total.......................................           9,810  ..............  ..............          41,035
----------------------------------------------------------------------------------------------------------------
                            Review and Provide a Copy of Additional Written Appraisal
----------------------------------------------------------------------------------------------------------------
Bureau..........................................
Depository Inst. > $10 B in total assets +                   132            0.64            0.25              21
 Depository Inst. Affiliates....................
Non-Depository Inst. and Credit Unions..........           2,853            0.04            0.25              14
FDIC............................................           2,571               1            0.25             643
Board...........................................             418               1            0.25             105
OCC.............................................           1,399               3            0.25           1,049
NCUA............................................           2,437             0.3            0.25             183
                                                 ---------------------------------------------------------------
    Total.......................................           9,810  ..............  ..............           2,015
----------------------------------------------------------------------------------------------------------------
Notes:
(1) Respondents include all institutions estimated to originate HPMLs that are subject to 12 CFR 1026.35(c).
(2) There may be an additional ongoing burden of roughly 75 hours for privately-insured credit unions estimated
  to originate HPMLs that are subject to 12 CFR 1026.35(c). The Bureau will assume half of the burden for non-
  depository institutions and the privately-insured credit unions.

    Finally, respondents must also review the instructions and legal 
guidance

[[Page 10432]]

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

    \174\ The ``Estimated Number of Appraisals Per Respondent'' 
reflects the estimated number of Written Appraisals and Additional 
Written Appraisals that will be performed solely to comply with the 
final rule. It does not include the number of appraisals that will 
continue to be performed under current industry practice, without 
regard to the final rule's requirements.
    \175\ The information collection requirements (ICs) in this 
final rule will be incorporated with the Bureau's existing 
collection associated with Truth in Lending Act (Regulation Z) 12 
CFR 1026 (OMB No. 3170-0015).
    \176\ The burden estimates allocated to the Bureau are updated 
using the data described in the Bureau's section 1022 analysis 
above, including significant burden reductions after accounting for 
qualified mortgages that are exempt from the final rule, and burden 
reductions after accounting for loans in rural areas that are exempt 
from the Additional Written Appraisal requirement in the final rule.
    \177\ There are 153 depository institutions (and their 
depository affiliates) that are subject to the Bureau's 
administrative enforcement authority. In addition, there are 146 
privately-insured credit unions that are subject to the Bureau's 
administrative enforcement authority. For purposes of this PRA 
analysis, the Bureau's respondents under Regulation Z are 135 
depository institutions that originate either open or closed-end 
mortgages; 77 privately-insured credit unions that originate either 
open or closed-end mortgages; and an estimated 2,787 non-depository 
institutions that are subject to the Bureau's administrative 
enforcement authority. Unless otherwise specified, all references to 
burden hours and costs for the Bureau respondents for the collection 
under Regulation Z are based on a calculation that includes half of 
the burden for the estimated 2,787 non-depository institutions and 
77 privately-insured credit unions.
    \178\ The Bureau assumes half of the burden for the IMBs and the 
credit unions supervised by the Bureau. The FTC assumes the burden 
for the other half.
    \179\ The ICs in this rule will be incorporated with the Board's 
Reporting, Recordkeeping, and Disclosure Requirements associated 
with Regulation Z (Truth in Lending), 12 CFR part 226, and 
Regulation AA (Unfair or Deceptive Acts or Practices), 12 CFR part 
227 (OMB No. 7100-0199). The burden estimates provided in this rule 
pertain only to the ICs associated with this final rule.
    \180\ Estimated one-time burden is calculated assuming a fixed 
burden per institution to review the regulations and fixed burden 
per estimated loan officer in training costs. As a result of the 
different size and mortgage activities across institutions, the 
average per-institution one-time burdens vary across the Agencies.
---------------------------------------------------------------------------

    The Agencies have a continuing interest in the public's opinions of 
our collections of information. At any time, comments regarding the 
burden estimate, or any other aspect of this collection of information, 
including suggestions for reducing the burden, may be sent to the OMB 
desk officer for the Agencies by mail to U.S. Office of Management and 
Budget, Office of Information and Regulatory Affairs, Washington, DC 
20503, or by the internet to http://oira_submission@omb.eop.gov, with 
copies to the Agencies at the addresses listed in the ADDRESSES section 
of this SUPPLEMENTARY INFORMATION.

FHFA

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

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

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

List of Subjects

12 CFR Part 34

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

12 CFR Part 164

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

12 CFR Part 226

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

12 CFR Part 722

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

12 CFR Part 1026

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

12 CFR Part 1222

    Government sponsored enterprises, Mortgages, Appraisals.

Department of the Treasury

Office of the Comptroller of the Currency

Authority and Issuance

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

PART 34--REAL ESTATE LENDING AND APPRAISALS

0
1. The authority citation for part 34 is revised to read as follows:

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


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

Subpart G--Appraisals for Higher-Priced Mortgage Loans


Sec.  34.201  Authority, purpose and scope.

    (a) Authority. This subpart is issued by the Office of the 
Comptroller of the Currency under 12 U.S.C. 93a, 12 U.S.C. 1463, 1464 
and 15 U.S.C. 1639h.
    (b) Purpose. The OCC adopts this subpart pursuant to the 
requirements of section 129H of the Truth in Lending Act (15 U.S.C. 
1639h) which provides that a creditor, including a national bank or 
operating subsidiary, a Federal branch or agency or a Federal savings 
association or operating subsidiary, may not extend credit in the form 
of a higher-risk mortgage without complying with the requirements of 
section 129H of the Truth in Lending Act (15 U.S.C. 1639h) and this 
subpart G. The definition of a higher-risk mortgage in section 129H is 
consistent with the definition of a higher-priced mortgage loan under 
Regulation Z, 12 CFR part 1026. Specifically, 12 CFR 1026.35 defines a 
higher-priced mortgage loan as a closed-end consumer credit transaction 
secured by the consumer's principal dwelling with an annual percentage 
rate that exceeds the average prime offer rate for a comparable

[[Page 10433]]

transaction as of the date the interest rate is set:
    (1) By 1.5 or more percentage points, for a loan secured by a first 
lien with a principal obligation at consummation that does not exceed 
the limit in effect as of the date the transaction's interest rate is 
set for the maximum principal obligation eligible for purchase by 
Freddie Mac;
    (2) By 2.5 or more percentage points, for a loan secured by a first 
lien with a principal obligation at consummation that exceeds the limit 
in effect as of the date the transaction's interest rate is set for the 
maximum principal obligation eligible for purchase by Freddie Mac; or
    (3) By 3.5 or more percentage points, for a loan secured by a 
subordinate lien.
    (c) Scope. This subpart applies to higher-priced mortgage loan 
transactions entered into by national banks and their operating 
subsidiaries, Federal branches and agencies and Federal savings 
associations and operating subsidiaries of savings associations.
    (d) Official Interpretations. Appendix C to this subpart sets out 
OCC Interpretations of the requirements imposed by the OCC pursuant to 
this subpart.


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

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


Sec.  34.203  Appraisals for higher-priced mortgage loans.

    (a) Definitions. For purposes of this section:
    (1) Certified or licensed appraiser means a person who is certified 
or licensed by the State agency in the State in which the property that 
secures the transaction is located, and who performs the appraisal in 
conformity with the Uniform Standards of Professional Appraisal 
Practice and the requirements applicable to appraisers in title XI of 
the Financial Institutions Reform, Recovery, and Enforcement Act of 
1989, as amended (12 U.S.C. 3331 et seq.), and any implementing 
regulations, in effect at the time the appraiser signs the appraiser's 
certification.
    (2) Manufactured home has the same meaning as in 24 CFR 3280.2.
    (3) National Registry means the database of information about State 
certified and licensed appraisers maintained by the Appraisal 
Subcommittee of the Federal Financial Institutions Examination Council.
    (4) State agency means a ``State appraiser certifying and licensing 
agency'' recognized in accordance with section 1118(b) of the Financial 
Institutions Reform, Recovery, and Enforcement Act of 1989 (12 U.S.C. 
3347(b)) and any implementing regulations.
    (b) Exemptions. The requirements in paragraphs (c) through (f) of 
this section do not apply to the following types of transactions:
    (1) A qualified mortgage as defined in 12 CFR 1026.43(e).
    (2) A transaction secured by a new manufactured home.
    (3) A transaction secured by a mobile home, boat, or trailer.
    (4) A transaction to finance the initial construction of a 
dwelling.
    (5) A loan with a maturity of 12 months or less, if the purpose of 
the loan is a ``bridge'' loan connected with the acquisition of a 
dwelling intended to become the consumer's principal dwelling.
    (6) A reverse-mortgage transaction subject to 12 CFR 1026.33(a).
    (c) Appraisals required--(1) In general. Except as provided in 
paragraph (b) of this section, a creditor shall not extend a higher-
priced mortgage loan to a consumer without obtaining, prior to 
consummation, a written appraisal of the property to be mortgaged. The 
appraisal must be performed by a certified or licensed appraiser who 
conducts a physical visit of the interior of the property that will 
secure the transaction.
    (2) Safe harbor. A creditor obtains a written appraisal that meets 
the requirements for an appraisal required under paragraph (c)(1) of 
this section if the creditor:
    (i) Orders that the appraiser perform the appraisal in conformity 
with the Uniform Standards of Professional Appraisal Practice and title 
XI of the Financial Institutions Reform, Recovery, and Enforcement Act 
of 1989, as amended (12 U.S.C. 3331 et seq.), and any implementing 
regulations in effect at the time the appraiser signs the appraiser's 
certification;
    (ii) Verifies through the National Registry that the appraiser who 
signed the appraiser's certification was a certified or licensed 
appraiser in the State in which the appraised property is located as of 
the date the appraiser signed the appraiser's certification;
    (iii) Confirms that the elements set forth in appendix A to this 
subpart are addressed in the written appraisal; and
    (iv) Has no actual knowledge contrary to the facts or 
certifications contained in the written appraisal.
    (d) Additional appraisal for certain higher-priced mortgage loans--
(1) In general. Except as provided in paragraphs (b) and (d)(7) of this 
section, a creditor shall not extend a higher-priced mortgage loan to a 
consumer to finance the acquisition of the consumer's principal 
dwelling without obtaining, prior to consummation, two written 
appraisals, if:
    (i) The seller acquired the property 90 or fewer days prior to the 
date of the consumer's agreement to acquire the property and the price 
in the consumer's agreement to acquire the property exceeds the 
seller's acquisition price by more than 10 percent; or
    (ii) The seller acquired the property 91 to 180 days prior to the 
date of the consumer's agreement to acquire the property and the price 
in the consumer's agreement to acquire the property exceeds the 
seller's acquisition price by more than 20 percent.
    (2) Different certified or licensed appraisers. The two appraisals 
required under paragraph (d)(1) of this section may not be performed by 
the same certified or licensed appraiser.
    (3) Relationship to general appraisal requirements. If two 
appraisals must be obtained under paragraph (d)(1) of this section, 
each appraisal shall meet the requirements of paragraph (c)(1) of this 
section.
    (4) Required analysis in the additional appraisal. One of the two 
required appraisals must include an analysis of:
    (i) The difference between the price at which the seller acquired 
the property and the price that the consumer is obligated to pay to 
acquire the property, as specified in the consumer's agreement to 
acquire the property from the seller;
    (ii) Changes in market conditions between the date the seller 
acquired the property and the date of the consumer's agreement to 
acquire the property; and
    (iii) Any improvements made to the property between the date the 
seller acquired the property and the date of the consumer's agreement 
to acquire the property.
    (5) No charge for the additional appraisal. If the creditor must 
obtain two appraisals under paragraph (d)(1) of this section, the 
creditor may charge the consumer for only one of the appraisals.
    (6) Creditor's determination of prior sale date and price--(i) 
Reasonable diligence. A creditor must obtain two written appraisals 
under paragraph (d)(1) of this section unless the creditor can 
demonstrate by exercising reasonable diligence that the

[[Page 10434]]

requirement to obtain two appraisals does not apply. A creditor acts 
with reasonable diligence if the creditor bases its determination on 
information contained in written source documents, such as the 
documents listed in appendix B to this subpart.
    (ii) Inability to determine prior sale date or price--modified 
requirements for additional appraisal. If, after exercising reasonable 
diligence, a creditor cannot determine whether the conditions in 
paragraphs (d)(1)(i) and (d)(1)(ii) are present and therefore must 
obtain two written appraisals in accordance with paragraphs (d)(1) 
through (d)(5) of this section, one of the two appraisals shall include 
an analysis of the factors in paragraph (d)(4) of this section only to 
the extent that the information necessary for the appraiser to perform 
the analysis can be determined.
    (7) Exemptions from the additional appraisal requirement. The 
additional appraisal required under paragraph (d)(1) of this section 
shall not apply to extensions of credit that finance a consumer's 
acquisition of property:
    (i) From a local, State or Federal government agency;
    (ii) From a person who acquired title to the property through 
foreclosure, deed-in-lieu of foreclosure, or other similar judicial or 
non-judicial procedure as a result of the person's exercise of rights 
as the holder of a defaulted mortgage loan;
    (iii) From a non-profit entity as part of a local, State, or 
Federal government program under which the non-profit entity is 
permitted to acquire title to single-family properties for resale from 
a seller who acquired title to the property through the process of 
foreclosure, deed-in-lieu of foreclosure, or other similar judicial or 
non-judicial procedure;
    (iv) From a person who acquired title to the property by 
inheritance or pursuant to a court order of dissolution of marriage, 
civil union, or domestic partnership, or of partition of joint or 
marital assets to which the seller was a party;
    (v) From an employer or relocation agency in connection with the 
relocation of an employee;
    (vi) From a servicemember, as defined in 50 U.S.C. App. 511(1), who 
received a deployment or permanent change of station order after the 
servicemember purchased the property;
    (vii) Located in an area designated by the President as a federal 
disaster area, if and for as long as the Federal financial institutions 
regulatory agencies, as defined in 12 U.S.C. 3350(6), waive the 
requirements in title XI of the Financial Institutions Reform, 
Recovery, and Enforcement Act of 1989, as amended (12 U.S.C. 3331 et 
seq.), and any implementing regulations in that area; or
    (viii) Located in a rural county, as defined in 12 CFR 
1026.35(b)(2)(iv)(A).
    (e) Required disclosure--(1) In general. Except as provided in 
paragraph (b) of this section, a creditor shall disclose the following 
statement, in writing, to a consumer who applies for a higher-priced 
mortgage loan: ``We may order an appraisal to determine the property's 
value and charge you for this appraisal. We will give you a copy of any 
appraisal, even if your loan does not close. You can pay for an 
additional appraisal for your own use at your own cost.'' Compliance 
with the disclosure requirement in Regulation B, 12 CFR 1002.14(a)(2), 
satisfies the requirements of this paragraph.
    (2) Timing of disclosure. The disclosure required by paragraph 
(e)(1) of this section shall be delivered or placed in the mail no 
later than the third business day after the creditor receives the 
consumer's application for a higher-priced mortgage loan subject to 
this section. In the case of a loan that is not a higher-priced 
mortgage loan subject to this section at the time of application, but 
becomes a higher-priced mortgage loan subject to this section after 
application, the disclosure shall be delivered or placed in the mail 
not later than the third business day after the creditor determines 
that the loan is a higher-priced mortgage loan subject to this section.
    (f) Copy of appraisals--(1) In general. Except as provided in 
paragraph (b) of this section, a creditor shall provide to the consumer 
a copy of any written appraisal performed in connection with a higher-
priced mortgage loan pursuant to paragraphs (c) and (d) of this 
section.
    (2) Timing. A creditor shall provide to the consumer a copy of each 
written appraisal pursuant to paragraph (f)(1) of this section:
    (i) No later than three business days prior to consummation of the 
loan; or
    (ii) In the case of a loan that is not consummated, no later than 
30 days after the creditor determines that the loan will not be 
consummated.
    (3) Form of copy. Any copy of a written appraisal required by 
paragraph (f)(1) of this section may be provided to the applicant in 
electronic form, subject to compliance with the consumer consent and 
other applicable provisions of the Electronic Signatures in Global and 
National Commerce Act (E-Sign Act) (15 U.S.C. 7001 et seq.).
    (4) No charge for copy of appraisal. A creditor shall not charge 
the consumer for a copy of a written appraisal required to be provided 
to the consumer pursuant to paragraph (f)(1) of this section.
    (g) Relation to other rules. The rules in this section 34.203 were 
adopted jointly by the Board of Governors of the Federal Reserve System 
(the Board), the OCC, the Federal Deposit Insurance Corporation, the 
National Credit Union Administration, the Federal Housing Finance 
Agency, and the Consumer Financial Protection Bureau (Bureau). These 
rules are substantively identical to the Board's and the Bureau's 
higher-priced mortgage loan appraisal rules published separately in 12 
CFR 226.43 (for the Board) and 12 CFR 1026.35(a) and (c) (for the 
Bureau).

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

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

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

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

[[Page 10435]]

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

Appendix C to Subpart G--OCC Interpretations

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

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

Section 34.203--Appraisals for higher-priced mortgage loans

    34.203(a) Definitions.
    34.203(a)(1) Certified or licensed appraiser.
    1. USPAP. The Uniform Standards of Professional Appraisal 
Practice (USPAP) are established by the Appraisal Standards Board of 
the Appraisal Foundation (as defined in 12 U.S.C. 3350(9)). Under 
Sec.  34.203(a)(1), the relevant USPAP standards are those found in 
the edition of USPAP in effect at the time the appraiser signs the 
appraiser's certification.
    2. Appraiser's certification. The appraiser's certification 
refers to the certification that must be signed by the appraiser for 
each appraisal assignment. This requirement is specified in USPAP 
Standards Rule 2-3.
    3. FIRREA title XI and implementing regulations. The relevant 
regulations are those prescribed under section 1110 of the Financial 
Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA), 
as amended (12 U.S.C. 3339), that relate to an appraiser's 
development and reporting of the appraisal in effect at the time the 
appraiser signs the appraiser's certification. Paragraph (3) of 
FIRREA section 1110 (12 U.S.C. 3339(3)), which relates to the review 
of appraisals, is not relevant for determining whether an appraiser 
is a certified or licensed appraiser under Sec.  34.203(a)(1).
    34.203(b) Exemptions.
    Paragraph 34.203(b)(2).
    1. Secured by new manufactured home. A transaction secured by a 
new manufactured home, regardless of whether the transaction is also 
secured by the land on which it is sited, is not a ``higher-priced 
mortgage loan'' subject to the appraisal requirements of Sec.  
34.203.
    Paragraph 34.203(b)(3).
    1. Secured by a mobile home. For purposes of the exemption in 
Sec.  34.203(b)(3), a mobile home does not include a manufactured 
home, as defined in Sec.  34.203(a)(2).
    Paragraph 34.203(b)(4).
    1. Construction-to-permanent loans. Section 34.203 does not 
apply to a transaction to finance the initial construction of a 
dwelling. This exclusion applies to a construction-only loan as well 
as to the construction phase of a construction-to-permanent loan. 
Section 34.203 does apply, however, to permanent financing that 
replaces a construction loan, whether the permanent financing is 
extended by the same or a different creditor, unless the permanent 
financing is otherwise exempt from the requirements of Sec.  34.203. 
See Sec.  34.203(b). When a construction loan may be permanently 
financed by the same creditor, the general disclosure requirements 
for closed-end credit pursuant to Regulation Z (12 CFR 1026.17) 
provide that the creditor may give either one combined disclosure 
for both the construction financing and the permanent financing, or 
a separate set of disclosures for each of the two phases as though 
they were two separate transactions. See 12 CFR 1026.17(c)(6)(ii) 
and the Official Staff Interpretations to the Bureau's Regulation Z, 
comment 17(c)(6)-2. Which disclosure option a creditor elects under 
Sec.  1026.17(c)(6)(ii) does not affect the determination of whether 
the permanent phase of the transaction is subject to Sec.  34.203. 
When the creditor discloses the two phases as separate transactions, 
the annual percentage rate for the permanent phase must be compared 
to the average prime offer rate for a transaction that is comparable 
to the permanent financing to determine coverage under Sec.  34.203. 
When the creditor discloses the two phases as a single transaction, 
a single annual percentage rate, reflecting the appropriate charges 
from both phases, must be calculated for the transaction in 
accordance with 12 CFR 1026.35(a)(1) (incorporated into 12 CFR part 
34, subpart G by Sec.  34.202) and appendix D to 12 CFR part 1026. 
The annual percentage rate must be compared to the average prime 
offer rate for a transaction that is comparable to the permanent 
financing to determine coverage under Sec.  34.203. If the 
transaction is determined to be a higher-priced mortgage loan not 
otherwise exempt under Sec.  34.203(b), only the permanent phase is 
subject to the requirements of Sec.  34.203.
    34.203(c) Appraisals required.
    34.203(c)(1) In general.
    1. Written appraisal--electronic transmission. To satisfy the 
requirement that the appraisal be ``written,'' a creditor may obtain 
the appraisal in paper form or via electronic transmission.
    34.203(c)(2) Safe harbor.
    1. Safe harbor. A creditor that satisfies the safe harbor 
conditions in Sec.  34.203(c)(2)(i) through (iv) complies with the 
appraisal requirements of Sec.  34.203(c)(1). A creditor that does 
not satisfy the safe harbor conditions in Sec.  34.203(c)(2)(i) 
through (iv) does not necessarily violate the appraisal requirements 
of Sec.  34.203(c)(1).
    2. Appraiser's certification. For purposes of Sec.  
34.203(c)(2), the appraiser's certification refers to the 
certification specified in item 9 of appendix A to this subpart. See 
also comment 34.203(a)(1)-2.
    Paragraph 34.203(c)(2)(iii).
    1. Confirming elements in the appraisal. To confirm that the 
elements in appendix A to this subpart are included in the written 
appraisal, a creditor need not look beyond the face of the written 
appraisal and the appraiser's certification.
    34.203(d) Additional appraisal for certain higher-priced 
mortgage loans.
    1. Acquisition. For purposes of Sec.  34.203(d), the terms 
``acquisition'' and ``acquire'' refer to the acquisition of legal 
title to the property pursuant to applicable State law, including by 
purchase.
    34.203(d)(1) In general.
    1. Appraisal from a previous transaction. An appraisal that was 
previously obtained in connection with the seller's acquisition or 
the financing of the seller's acquisition of the property does not 
satisfy the requirements to obtain two written appraisals under 
Sec.  34.203(d)(1).
    2. 90-day, 180-day calculation. The time periods described in 
Sec.  34.203(d)(1)(i) and (ii) are calculated by counting the day 
after the date on which the seller acquired the property, up to and 
including the date of the consumer's agreement to acquire the 
property that secures the transaction. For example, assume that the 
creditor determines that date of the consumer's acquisition 
agreement is October 15, 2012, and that the seller acquired the 
property on April 17, 2012. The first day to be counted in the 180-
day calculation would be April 18, 2012, and the last day would be 
October 15, 2012. In this case, the number of days from April 17 
would be 181, so an additional appraisal is not required.
    3. Date seller acquired the property. For purposes of Sec.  
34.203(d)(1)(i) and (ii), the date on which the seller acquired the 
property is the date on which the seller became the legal owner of 
the property pursuant to applicable State law.
    4. Date of the consumer's agreement to acquire the property. For 
the date of the consumer's agreement to acquire the property under 
Sec.  34.203(d)(1)(i) and (ii), the creditor should use the date on 
which the consumer and the seller signed the agreement provided to 
the creditor by the consumer. The date on which the consumer and the 
seller signed the agreement might not be the date on which the 
consumer became contractually obligated under State law to acquire 
the property. For purposes of Sec.  34.203(d)(1)(i) and (ii), a 
creditor is not obligated to determine whether and to what extent 
the agreement is legally binding on both parties. If the dates on 
which the consumer and the seller signed the agreement differ, the 
creditor should use the later of the two dates.
    5. Price at which the seller acquired the property. The price at 
which the seller acquired the property refers to the amount paid by 
the seller to acquire the property. The price at which the seller 
acquired the property does not include the cost of financing the 
property.
    6. Price the consumer is obligated to pay to acquire the 
property. The price the consumer is obligated to pay to acquire the 
property is the price indicated on the consumer's agreement with the 
seller to acquire the property. The price the consumer is obligated 
to pay to acquire the property from the seller does not include the 
cost of financing the property. For purposes of Sec.  
34.203(d)(1)(i) and (ii), a creditor is not obligated to determine 
whether and to what

[[Page 10436]]

extent the agreement is legally binding on both parties. See also 
comment 34.203(d)(1)-4.
    34.203(d)(2) Different certified or licensed appraisers.
    1. Independent appraisers. The requirements that a creditor 
obtain two separate appraisals under Sec.  34.203(d)(1), and that 
each appraisal be conducted by a different licensed or certified 
appraiser under Sec.  34.203(d)(2), indicate that the two appraisals 
must be conducted independently of each other. If the two certified 
or licensed appraisers are affiliated, such as by being employed by 
the same appraisal firm, then whether they have conducted the 
appraisal independently of each other must be determined based on 
the facts and circumstances of the particular case known to the 
creditor.
    34.203(d)(3) Relationship to general appraisal requirements.
    1. Safe harbor. When a creditor is required to obtain an 
additional appraisal under Sec.  34.203(d)(1), the creditor must 
comply with the requirements of both Sec.  34.203(c)(1) and Sec.  
34.203(d)(2) through (5) for that appraisal. The creditor complies 
with the requirements of Sec.  34.203(c)(1) for the additional 
appraisal if the creditor meets the safe harbor conditions in Sec.  
34.203(c)(2) for that appraisal.
    34.203(d)(4) Required analysis in the additional appraisal.
    1. Determining acquisition dates and prices used in the analysis 
of the additional appraisal. For guidance on identifying the date on 
which the seller acquired the property, see comment 34.203(d)(1)-3. 
For guidance on identifying the date of the consumer's agreement to 
acquire the property, see comment 34.203(d)(1)-4. For guidance on 
identifying the price at which the seller acquired the property, see 
comment 34.203(d)(1)-5. For guidance on identifying the price the 
consumer is obligated to pay to acquire the property, see comment 
34.203(d)(1)-6.
    34.203(d)(5) No charge for additional appraisal.
    1. Fees and mark-ups. The creditor is prohibited from charging 
the consumer for the performance of one of the two appraisals 
required under Sec.  34.203(d)(1), including by imposing a fee 
specifically for that appraisal or by marking up the interest rate 
or any other fees payable by the consumer in connection with the 
higher-priced mortgage loan.
    34.203(d)(6) Creditor's determination of prior sale date and 
price.
    34.203(d)(6)(i) In general.
    1. Estimated sales price. If a written source document describes 
the seller's acquisition price in a manner that indicates that the 
price described is an estimated or assumed amount and not the actual 
price, the creditor should look at an alternative document to 
satisfy the reasonable diligence standard in determining the price 
at which the seller acquired the property.
    2. Reasonable diligence--oral statements insufficient. Reliance 
on oral statements of interested parties, such as the consumer, 
seller, or mortgage broker, does not constitute reasonable diligence 
under Sec.  34.203(d)(6)(i).
    3. Lack of information and conflicting information--two 
appraisals required. If a creditor is unable to demonstrate that the 
requirement to obtain two appraisals under Sec.  34.203(d)(1) does 
not apply, the creditor must obtain two written appraisals before 
extending a higher-priced mortgage loan subject to the requirements 
of Sec.  34.203 See also comment 34.203(d)(6)(ii)-1. For example:
    i. Assume a creditor orders and reviews the results of a title 
search, which shows that a prior sale occurred between 91 and 180 
days ago, but not the price paid in that sale. Thus, based on the 
title search, the creditor would not be able to determine whether 
the price the consumer is obligated to pay under the consumer's 
acquisition agreement is more than 20 percent higher than the 
seller's acquisition price, pursuant to Sec.  34.203(d)(1)(ii). 
Before extending a higher-priced mortgage loan subject to the 
appraisal requirements of Sec.  34.203, the creditor must either: 
perform additional diligence to ascertain the seller's acquisition 
price and, based on this information, determine whether two written 
appraisals are required; or obtain two written appraisals in 
compliance with Sec.  34.203(d)(6). See also comment 
34.203(d)(6)(ii)-1.
    ii. Assume a creditor reviews the results of a title search 
indicating that the last recorded purchase was more than 180 days 
before the consumer's agreement to acquire the property. Assume also 
that the creditor subsequently receives a written appraisal 
indicating that the seller acquired the property between 91 and 180 
days before the consumer's agreement to acquire the property. In 
this case, unless one of these sources is clearly wrong on its face, 
the creditor would not be able to determine whether the seller 
acquired the property within 180 days of the date of the consumer's 
agreement to acquire the property from the seller, pursuant to Sec.  
34.203(d)(1)(ii). Before extending a higher-priced mortgage loan 
subject to the appraisal requirements of Sec.  34.203, the creditor 
must either: perform additional diligence to ascertain the seller's 
acquisition date and, based on this information, determine whether 
two written appraisals are required; or obtain two written 
appraisals in compliance with Sec.  34.203(d)(6). See also comment 
34.203(d)(6)(ii)-1.
    34.203(d)(6)(ii) Inability to determine prior sales date or 
price--modified requirements for additional appraisal.
    1. Required analysis. In general, the additional appraisal 
required under Sec.  34.203(d)(1) should include an analysis of the 
factors listed in Sec.  34.203(d)(4)(i) through (iii). However, if, 
following reasonable diligence, a creditor cannot determine whether 
the conditions in Sec.  34.203(d)(1)(i) or (ii) are present due to a 
lack of information or conflicting information, the required 
additional appraisal must include the analyses required under Sec.  
34.203(d)(4)(i) through (iii) only to the extent that the 
information necessary to perform the analyses is known. For example, 
assume that a creditor is able, following reasonable diligence, to 
determine that the date on which the seller acquired the property 
occurred between 91 and 180 days prior to the date of the consumer's 
agreement to acquire the property. However, the creditor is unable, 
following reasonable diligence, to determine the price at which the 
seller acquired the property. In this case, the creditor is required 
to obtain an additional written appraisal that includes an analysis 
under Sec.  34.203(d)(4)(ii) and (iii) of the changes in market 
conditions and any improvements made to the property between the 
date the seller acquired the property and the date of the consumer's 
agreement to acquire the property. However, the creditor is not 
required to obtain an additional written appraisal that includes 
analysis under Sec.  34.203(d)(4)(i) of the difference between the 
price at which the seller acquired the property and the price that 
the consumer is obligated to pay to acquire the property.
    34.203(d)(7) Exemptions from the additional appraisal 
requirement.
    Paragraph 34.203(d)(7)(iii).
    1. Non-profit entity. For purposes of Sec.  34.203(d)(7)(iii), a 
``non-profit entity'' is a person with a tax exemption ruling or 
determination letter from the Internal Revenue Service under section 
501(c)(3) of the Internal Revenue Code of 1986 (12 U.S.C. 
501(c)(3)).
    Paragraph 34.203(d)(7)(viii).
    1. Bureau table of rural counties. The Bureau publishes on its 
Web site a table of rural counties under 12 CFR 1026.35(b)(2)(iv)(A) 
for each calendar year by the end of that calendar year. See 
Official Staff Interpretations to the Bureau's Regulation Z, comment 
35(b)(2)(iv)-1. A property securing an HPML subject to Sec.  34.203 
is in a rural county under Sec.  34.203(d)(7)(viii) if the county in 
which the property is located is on the table of rural counties most 
recently published by the Bureau. For example, for a transaction 
occurring in 2015, assume that the Bureau most recently published a 
table of rural counties at the end of 2014. The property securing 
the transaction would be located in a rural county for purposes of 
Sec.  34.203(d)(7)(viii) if the county is on the table of rural 
counties published by the Bureau at the end of 2014.
    34.203(e) Required disclosure.
    34.203(e)(1) In general.
    1. Multiple applicants. When two or more consumers apply for a 
loan subject to this section, the creditor is required to give the 
disclosure to only one of the consumers.
    2. Appraisal independence requirements not affected. Nothing in 
the text of the consumer notice required by Sec.  34.203(e)(1) 
should be construed to affect, modify, limit, or supersede the 
operation of any legal, regulatory, or other requirements or 
standards relating to independence in the conduct of appraisals or 
restrictions on the use of borrower-ordered appraisals by creditors.
    34.203(f) Copy of appraisals.
    34.203(f)(1) In general.
    1. Multiple applicants. When two or more consumers apply for a 
loan subject to this section, the creditor is required to give the 
copy of each required appraisal to only one of the consumers.
    34.203(f)(2) Timing.
    1. ``Provide.'' For purposes of the requirement to provide a 
copy of the appraisal within a specified time under

[[Page 10437]]

Sec.  34.203(f)(2), ``provide'' means ``deliver.'' Delivery occurs 
three business days after mailing or delivering the copies to the 
last-known address of the applicant, or when evidence indicates 
actual receipt by the applicant (which, in the case of electronic 
receipt, must be based upon consent that complies with the E-Sign 
Act), whichever is earlier.
    2. ``Receipt'' of the appraisal. For appraisals prepared by the 
creditor's internal appraisal staff, the date of ``receipt'' is the 
date on which the appraisal is completed.
    3. No waiver. Regulation B, 12 CFR 1002.14(a)(1), allowing the 
consumer to waive the requirement that the appraisal copy be 
provided three business days before consummation, does not apply to 
higher-priced mortgage loans subject to Sec.  34.203. A consumer of 
a higher-priced mortgage loan subject to Sec.  34.302 may not waive 
the timing requirement to receive a copy of the appraisal under 
Sec.  34.203(f)(1).
    34.203(f)(4) No charge for copy of appraisal.
    1. Fees and mark-ups. The creditor is prohibited from charging 
the consumer for any copy of an appraisal required to be provided 
under Sec.  34.203(f)(1), including by imposing a fee specifically 
for a required copy of an appraisal or by marking up the interest 
rate or any other fees payable by the consumer in connection with 
the higher-priced mortgage loan.

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

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

PART 164--APPRAISALS

0
3. The authority citation for Part 164 is revised to read as follows:

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


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

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

Subpart A--Appraisals

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

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

Subpart B--Appraisals for Higher-Priced Mortgage Loans

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


Sec.  164.20  Authority, purpose and scope.

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


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

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

Board of Governors of the Federal Reserve System

Authority and Issuance

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

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

0
7. The authority citation for part 226 is revised to read as follows:

    Authority: 12 U.S.C. 3806; 15 U.S.C. 1604, 1637(c)(5), 1639(l), 
and 1639h; Pub. L. 111-24, section 2, 123 Stat. 1734; Pub. L. 111-
203, 124 Stat. 1376.


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


Sec.  226.43  Appraisals for higher-priced mortgage loans.

    (a) Definitions. For purposes of this section:
    (1) Certified or licensed appraiser means a person who is certified 
or licensed by the State agency in the State in which the property that 
secures the transaction is located, and who performs the appraisal in 
conformity with the Uniform Standards of Professional Appraisal 
Practice and the requirements applicable to appraisers in title XI of 
the Financial Institutions Reform, Recovery, and Enforcement Act of 
1989, as amended (12 U.S.C. 3331 et seq.), and any implementing 
regulations, in effect at the time the appraiser signs the appraiser's 
certification.
    (2) Creditor has the same meaning as in 12 CFR 1026.2(a)(17).
    (3) Higher-priced mortgage loan means a closed-end consumer credit 
transaction secured by the consumer's principal dwelling with an annual 
percentage rate that exceeds the average prime offer rate for a 
comparable transaction as of the date the interest rate is set:
    (i) By 1.5 or more percentage points, for a loan secured by a first 
lien with a principal obligation at consummation that does not exceed 
the limit in effect as of the date the transaction's interest rate is 
set for the maximum principal obligation eligible for purchase by 
Freddie Mac;
    (ii) By 2.5 or more percentage points, for a loan secured by a 
first lien with a principal obligation at consummation that exceeds the 
limit in effect as of the date the transaction's interest rate is set 
for the maximum principal obligation eligible for purchase by Freddie 
Mac; or
    (iii) By 3.5 or more percentage points, for a loan secured by a 
subordinate lien.
    (4) Manufactured home has the same meaning as in 24 CFR 3280.2.
    (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) State agency means a ``State appraiser certifying and licensing 
agency'' recognized in accordance with section 1118(b) of the Financial 
Institutions Reform, Recovery, and Enforcement Act of 1989 (12 U.S.C. 
3347(b)) and any implementing regulations.
    (b) Exemptions. The requirements in paragraphs (c)(3) through (6) 
of this section do not apply to the following types of transactions:
    (1) A qualified mortgage as defined in 12 CFR 1026.43(e).

[[Page 10438]]

    (2) A transaction secured by a new manufactured home.
    (3) A transaction secured by a mobile home, boat, or trailer.
    (4) A transaction to finance the initial construction of a 
dwelling.
    (5) A loan with maturity of 12 months or less, if the purpose of 
the loan is a ``bridge'' loan connected with the acquisition of a 
dwelling intended to become the consumer's principal dwelling.
    (6) A reverse-mortgage transaction subject to 12 CFR 1026.33(a).
    (c) Appraisals required--(1) In general. Except as provided in 
paragraph (b) of this section, a creditor shall not extend a higher-
priced mortgage loan to a consumer without obtaining, prior to 
consummation, a written appraisal of the property to be mortgaged. The 
appraisal must be performed by a certified or licensed appraiser who 
conducts a physical visit of the interior of the property that will 
secure the transaction.
    (2) Safe harbor. A creditor obtains a written appraisal that meets 
the requirements for an appraisal required under paragraph (c)(1) of 
this section if the creditor:
    (i) Orders that the appraiser perform the appraisal in conformity 
with the Uniform Standards of Professional Appraisal Practice and title 
XI of the Financial Institutions Reform, Recovery, and Enforcement Act 
of 1989, as amended (12 U.S.C. 3331 et seq.), and any implementing 
regulations in effect at the time the appraiser signs the appraiser's 
certification;
    (ii) Verifies through the National Registry that the appraiser who 
signed the appraiser's certification was a certified or licensed 
appraiser in the State in which the appraised property is located as of 
the date the appraiser signed the appraiser's certification;
    (iii) Confirms that the elements set forth in appendix N to this 
part are addressed in the written appraisal; and
    (iv) Has no actual knowledge contrary to the facts or 
certifications contained in the written appraisal.
    (d) Additional appraisal for certain higher-priced mortgage loans--
(1) In general. Except as provided in paragraphs (b) and (d)(7) of this 
section, a creditor shall not extend a higher-priced mortgage loan to a 
consumer to finance the acquisition of the consumer's principal 
dwelling without obtaining, prior to consummation, two written 
appraisals, if:
    (i) The seller acquired the property 90 or fewer days prior to the 
date of the consumer's agreement to acquire the property and the price 
in the consumer's agreement to acquire the property exceeds the 
seller's acquisition price by more than 10 percent; or
    (ii) The seller acquired the property 91 to 180 days prior to the 
date of the consumer's agreement to acquire the property and the price 
in the consumer's agreement to acquire the property exceeds the 
seller's acquisition price by more than 20 percent.
    (2) Different certified or licensed appraisers. The two appraisals 
required under paragraph (d)(1) of this section may not be performed by 
the same certified or licensed appraiser.
    (3) Relationship to general appraisal requirements. If two 
appraisals must be obtained under paragraph (d)(1) of this section, 
each appraisal shall meet the requirements of paragraph (c)(1) of this 
section.
    (4) Required analysis in the additional appraisal. One of the two 
required appraisals must include an analysis of:
    (i) The difference between the price at which the seller acquired 
the property and the price that the consumer is obligated to pay to 
acquire the property, as specified in the consumer's agreement to 
acquire the property from the seller;
    (ii) Changes in market conditions between the date the seller 
acquired the property and the date of the consumer's agreement to 
acquire the property; and
    (iii) Any improvements made to the property between the date the 
seller acquired the property and the date of the consumer's agreement 
to acquire the property.
    (5) No charge for the additional appraisal. If the creditor must 
obtain two appraisals under paragraph (d)(1) of this section, the 
creditor may charge the consumer for only one of the appraisals.
    (6) Creditor's determination of prior sale date and price--(i) 
Reasonable diligence. A creditor must obtain two written appraisals 
under paragraph (d)(1) of this section unless the creditor can 
demonstrate by exercising reasonable diligence that the requirement to 
obtain two appraisals does not apply. A creditor acts with reasonable 
diligence if the creditor bases its determination on information 
contained in written source documents, such as the documents listed in 
Appendix O to this part.
    (ii) Inability to determine prior sale date or price--modified 
requirements for additional appraisal. If, after exercising reasonable 
diligence, a creditor cannot determine whether the conditions in 
paragraphs (d)(1)(i) and (d)(1)(ii) are present and therefore must 
obtain two written appraisals in accordance with paragraphs (d)(1) 
through (5) of this section, one of the two appraisals shall include an 
analysis of the factors in paragraph (d)(4) of this section only to the 
extent that the information necessary for the appraiser to perform the 
analysis can be determined.
    (7) Exemptions from the additional appraisal requirement. The 
additional appraisal required under paragraph (d)(1) of this section 
shall not apply to extensions of credit that finance a consumer's 
acquisition of property:
    (i) From a local, State or Federal government agency;
    (ii) From a person who acquired title to the property through 
foreclosure, deed-in-lieu of foreclosure, or other similar judicial or 
non-judicial procedure as a result of the person's exercise of rights 
as the holder of a defaulted mortgage loan;
    (iii) From a non-profit entity as part of a local, State, or 
Federal government program under which the non-profit entity is 
permitted to acquire title to single-family properties for resale from 
a seller who acquired title to the property through the process of 
foreclosure, deed-in-lieu of foreclosure, or other similar judicial or 
non-judicial procedure;
    (iv) From a person who acquired title to the property by 
inheritance or pursuant to a court order of dissolution of marriage, 
civil union, or domestic partnership, or of partition of joint or 
marital assets to which the seller was a party;
    (v) From an employer or relocation agency in connection with the 
relocation of an employee;
    (vi) From a servicemember, as defined in 50 U.S.C. App. 511(1), who 
received a deployment or permanent change of station order after the 
servicemember purchased the property;
    (vii) Located in an area designated by the President as a federal 
disaster area, if and for as long as the Federal financial institutions 
regulatory agencies, as defined in 12 U.S.C. 3350(6), waive the 
requirements in title XI of the Financial Institutions Reform, 
Recovery, and Enforcement Act of 1989, as amended (12 U.S.C. 3331 et 
seq.), and any implementing regulations in that area; or
    (viii) Located in a rural county, as defined in 12 CFR 
1026.35(b)(2)(iv)(A).
    (e) Required disclosure--(1) In general. Except as provided in 
paragraph (b) of this section, a creditor shall disclose the following 
statement, in writing, to a consumer who applies for a higher-priced 
mortgage loan: ``We may order an appraisal to determine the property's 
value and charge you for this appraisal. We will give you a copy of any 
appraisal, even if your loan does not close. You can pay for an 
additional

[[Page 10439]]

appraisal for your own use at your own cost.'' Compliance with the 
disclosure requirement in Regulation B, 12 CFR 1002.14(a)(2), satisfies 
the requirements of this paragraph.
    (2) Timing of disclosure. The disclosure required by paragraph 
(e)(1) of this section shall be delivered or placed in the mail no 
later than the third business day after the creditor receives the 
consumer's application for a higher-priced mortgage loan subject to 
this section. In the case of a loan that is not a higher-priced 
mortgage loan subject to this section at the time of application, but 
becomes a higher-priced mortgage loan subject to this section after 
application, the disclosure shall be delivered or placed in the mail 
not later than the third business day after the creditor determines 
that the loan is a higher-priced mortgage loan subject to this section.
    (f) Copy of appraisals--(1) In general. Except as provided in 
paragraph (b) of this section, a creditor shall provide to the consumer 
a copy of any written appraisal performed in connection with a higher-
priced mortgage loan pursuant to paragraphs (c) and (d) of this 
section.
    (2) Timing. A creditor shall provide to the consumer a copy of each 
written appraisal pursuant to paragraph (f)(1) of this section:
    (i) No later than three business days prior to consummation of the 
loan; or
    (ii) In the case of a loan that is not consummated, no later than 
30 days after the creditor determines that the loan will not be 
consummated.
    (3) Form of copy. Any copy of a written appraisal required by 
paragraph (f)(1) of this section may be provided to the applicant in 
electronic form, subject to compliance with the consumer consent and 
other applicable provisions of the Electronic Signatures in Global and 
National Commerce Act (E-Sign Act) (15 U.S.C. 7001 et seq.).
    (4) No charge for copy of appraisal. A creditor shall not charge 
the consumer for a copy of a written appraisal required to be provided 
to the consumer pursuant to paragraph (f)(1) of this section.
    (g) Relation to other rules. The rules in this section were adopted 
jointly by the Board, the Office of the Comptroller of the Currency 
(OCC), the Federal Deposit Insurance Corporation, the National Credit 
Union Administration, the Federal Housing Finance Agency, and the 
Consumer Financial Protection Bureau (Bureau). These rules are 
substantively identical to the OCC's and the Bureau's higher-priced 
mortgage loan appraisal rules published separately in 12 CFR part 34, 
subpart G and 12 CFR part 164, subpart B (for the OCC) and 12 CFR 
1026.35(a) and (c) (for the Bureau). The Board's rules apply to all 
creditors who are State member banks, bank holding companies and their 
subsidiaries (other than a bank), savings and loan holding companies 
and their subsidiaries (other than a savings and loan association), and 
insured branches and agencies of foreign banks. Compliance with the 
Board's rules satisfies the requirements of 15 U.S.C. 1639h.

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

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

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


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

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

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

0
11. In Supplement I to part 226:
0
a. New Section 226.43--Appraisals for Higher-Priced Mortgage Loans is 
added.
0
b. New Appendix O--Illustrative Written Source Documents for Higher-
Priced Mortgage Loan Appraisal Rules is added.
    The additions read as follows:

Supplement I to Part 226--Official Interpretations

* * * * *

Section 226.43--Appraisals for Higher-Risk Mortgage Loans

    43(a) Definitions.
    43(a)(1) Certified or licensed appraiser.
    1. USPAP. The Uniform Standards of Professional Appraisal 
Practice (USPAP) are established by the Appraisal Standards Board of 
the Appraisal Foundation (as defined in 12 U.S.C. 3350(9)). Under 
Sec.  226.43(a)(1), the relevant USPAP standards are those found in 
the edition of USPAP in effect at the time the appraiser signs the 
appraiser's certification.
    2. Appraiser's certification. The appraiser's certification 
refers to the certification that must be signed by the appraiser for 
each appraisal assignment. This requirement is specified in USPAP 
Standards Rule 2-3.
    3. FIRREA title XI and implementing regulations. The relevant 
regulations are those prescribed under section 1110 of the Financial 
Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA), 
as amended (12 U.S.C. 3339), that relate to an appraiser's 
development and reporting of the appraisal in effect at the time the 
appraiser signs the appraiser's certification. Paragraph (3) of 
FIRREA section 1110 (12 U.S.C. 3339(3)), which relates to the review 
of appraisals, is not relevant for determining whether an appraiser 
is a certified or licensed appraiser under Sec.  226.43(a)(1).
    43(a)(3) Higher-priced mortgage loan.
    1. Principal dwelling. The term ``principal dwelling'' has the 
same meaning under Sec.  226.43(a)(3) as under 12 CFR 1026.2(a)(24). 
See the Official Staff Interpretations to the Bureau's Regulation Z 
(Supplement I to Part 1026), comment 2(a)(24)-3.
    2. Average prime offer rate. For guidance on average prime offer 
rates, see the Official Staff Interpretations to the Bureau's 
Regulation Z, comments 35(a)(2)-1 and -3.
    3. Comparable transaction. For guidance on determining the 
average prime offer rate for comparable transactions, see the 
Official Staff Interpretations to the Bureau's Regulation Z, 
comments 35(a)(1)-1 and 35(a)(2)-2.
    4. Rate set. For guidance on the date the annual percentage rate 
is set, see the Official Staff Interpretations to the Bureau's 
Regulation Z, comment 35(a)(1)-2.

[[Page 10440]]

    5. Threshold for ``jumbo'' loans. For guidance on determining 
whether a transaction's principal balance exceeds the limit in 
effect as of the date the transaction's rate is set for the maximum 
principal obligation eligible for purchase by Freddie Mac, see the 
Official Staff Interpretations to the Bureau's Regulation Z, comment 
35(a)(1)-3.
    43(b) Exemptions.
    Paragraph 43(b)(2).
    1. Secured by new manufactured home. A transaction secured by a 
new manufactured home, regardless of whether the transaction is also 
secured by the land on which it is sited, is not a ``higher-priced 
mortgage loan'' subject to the appraisal requirements of Sec.  
226.43.
    Paragraph 43(b)(3).
    1. Secured by a mobile home. For purposes of the exemption in 
Sec.  226.43(b)(3), a mobile home does not include a manufactured 
home, as defined in Sec.  226.43(a)(3).
    Paragraph 43(b)(4)
    1. Construction-to-permanent loans. Section 226.43 does not 
apply to a transaction to finance the initial construction of a 
dwelling. This exclusion applies to a construction-only loan as well 
as to the construction phase of a construction-to-permanent loan. 
Section 226.43 does apply, however, to permanent financing that 
replaces a construction loan, whether the permanent financing is 
extended by the same or a different creditor, unless the permanent 
financing is otherwise exempt from the requirements of Sec.  226.43. 
See Sec.  226.43(b). When a construction loan may be permanently 
financed by the same creditor, the general disclosure requirements 
for closed-end credit pursuant to Regulation Z (12 CFR 1026.17) 
provide that the creditor may give either one combined disclosure 
for both the construction financing and the permanent financing, or 
a separate set of disclosures for each of the two phases as though 
they were two separate transactions. See 12 CFR 1026.17(c)(6)(ii) 
and the Official Staff Interpretations to the Bureau's Regulation Z, 
comment 17(c)(6)-2. Which disclosure option a creditor elects under 
Sec.  1026.17(c)(6)(ii) does not affect the determination of whether 
the permanent phase of the transaction is subject to Sec.  226.43. 
When the creditor discloses the two phases as separate transactions, 
the annual percentage rate for the permanent phase must be compared 
to the average prime offer rate for a transaction that is comparable 
to the permanent financing to determine coverage under Sec.  226.43. 
When the creditor discloses the two phases as a single transaction, 
a single annual percentage rate, reflecting the appropriate charges 
from both phases, must be calculated for the transaction in 
accordance with Sec.  226.43(a)(3) and appendix D to 12 CFR part 
1026. The annual percentage rate must be compared to the average 
prime offer rate for a transaction that is comparable to the 
permanent financing to determine coverage under Sec.  226.43. If the 
transaction is determined to be a higher-priced mortgage loan not 
otherwise exempt under Sec.  226.43(b), only the permanent phase is 
subject to the requirements of Sec.  226.43.
    43(c) Appraisals required.
    43(c)(1) In general.
    1. Written appraisal--electronic transmission. To satisfy the 
requirement that the appraisal be ``written,'' a creditor may obtain 
the appraisal in paper form or via electronic transmission.
    43(c)(2) Safe harbor.
    1. Safe harbor. A creditor that satisfies the safe harbor 
conditions in Sec.  226.43(c)(2)(i) through (iv) complies with the 
appraisal requirements of Sec.  226.43(c)(1). A creditor that does 
not satisfy the safe harbor conditions in Sec.  226.43(c)(2)(i) 
through (iv) does not necessarily violate the appraisal requirements 
of Sec.  226.43(c)(1).
    2. Appraiser's certification. For purposes of Sec.  
226.43(c)(2), the appraiser's certification refers to the 
certification specified in item 9 of appendix N. See also comment 
43(a)(1)-2.
    Paragraph 43(c)(2)(iii).
    1. Confirming elements in the appraisal. To confirm that the 
elements in appendix N to this part are included in the written 
appraisal, a creditor need not look beyond the face of the written 
appraisal and the appraiser's certification.
    43(d) Additional appraisal for certain higher-priced mortgage 
loans.
    1. Acquisition. For purposes of Sec.  226.43(d), the terms 
``acquisition'' and ``acquire'' refer to the acquisition of legal 
title to the property pursuant to applicable State law, including by 
purchase.
    43(d)(1) In general.
    1. Appraisal from a previous transaction. An appraisal that was 
previously obtained in connection with the seller's acquisition or 
the financing of the seller's acquisition of the property does not 
satisfy the requirements to obtain two written appraisals under 
Sec.  226.43(d)(1).
    2. 90-day, 180-day calculation. The time periods described in 
Sec.  226.43(d)(1)(i) and (ii) are calculated by counting the day 
after the date on which the seller acquired the property, up to and 
including the date of the consumer's agreement to acquire the 
property that secures the transaction. For example, assume that the 
creditor determines that date of the consumer's acquisition 
agreement is October 15, 2012, and that the seller acquired the 
property on April 17, 2012. The first day to be counted in the 180-
day calculation would be April 18, 2012, and the last day would be 
October 15, 2012. In this case, the number of days from April 17 
would be 181, so an additional appraisal is not required.
    3. Date seller acquired the property. For purposes of Sec.  
226.43(d)(1)(i) and (ii), the date on which the seller acquired the 
property is the date on which the seller became the legal owner of 
the property pursuant to applicable State law.
    4. Date of the consumer's agreement to acquire the property. For 
the date of the consumer's agreement to acquire the property under 
Sec.  226.43(d)(1)(i) and (ii), the creditor should use the date on 
which the consumer and the seller signed the agreement provided to 
the creditor by the consumer. The date on which the consumer and the 
seller signed the agreement might not be the date on which the 
consumer became contractually obligated under State law to acquire 
the property. For purposes of Sec.  226.43(d)(1)(i) and (ii), a 
creditor is not obligated to determine whether and to what extent 
the agreement is legally binding on both parties. If the dates on 
which the consumer and the seller signed the agreement differ, the 
creditor should use the later of the two dates.
    5. Price at which the seller acquired the property. The price at 
which the seller acquired the property refers to the amount paid by 
the seller to acquire the property. The price at which the seller 
acquired the property does not include the cost of financing the 
property.
    6. Price the consumer is obligated to pay to acquire the 
property. The price the consumer is obligated to pay to acquire the 
property is the price indicated on the consumer's agreement with the 
seller to acquire the property. The price the consumer is obligated 
to pay to acquire the property from the seller does not include the 
cost of financing the property. For purposes of Sec.  
226.43(d)(1)(i) and (ii), a creditor is not obligated to determine 
whether and to what extent the agreement is legally binding on both 
parties. See also comment 43(d)(1)-4.
    43(d)(2) Different certified or licensed appraisers.
    1. Independent appraisers. The requirements that a creditor 
obtain two separate appraisals under Sec.  226.43(d)(1), and that 
each appraisal be conducted by a different licensed or certified 
appraiser under Sec.  226.43(d)(2), indicate that the two appraisals 
must be conducted independently of each other. If the two certified 
or licensed appraisers are affiliated, such as by being employed by 
the same appraisal firm, then whether they have conducted the 
appraisal independently of each other must be determined based on 
the facts and circumstances of the particular case known to the 
creditor.
    43(d)(3) Relationship to general appraisal requirements.
    1. Safe harbor. When a creditor is required to obtain an 
additional appraisal under Sec.  226(d)(1), the creditor must comply 
with the requirements of both Sec.  226.43(c)(1) and Sec.  
226.43(d)(2) through (5) for that appraisal. The creditor complies 
with the requirements of Sec.  226.43(c)(1) for the additional 
appraisal if the creditor meets the safe harbor conditions in Sec.  
226.43(c)(2) for that appraisal.
    43(d)(4) Required analysis in the additional appraisal.
    1. Determining acquisition dates and prices used in the analysis 
of the additional appraisal. For guidance on identifying the date on 
which the seller acquired the property, see comment 43(d)(1)-3. For 
guidance on identifying the date of the consumer's agreement to 
acquire the property, see comment 43(d)(1)-4. For guidance on 
identifying the price at which the seller acquired the property, see 
comment 43(d)(1)-5. For guidance on identifying the price the 
consumer is obligated to pay to acquire the property, see comment 
43(d)(1)-6.
    43(d)(5) No charge for additional appraisal.
    1. Fees and mark-ups. The creditor is prohibited from charging 
the consumer for the performance of one of the two appraisals 
required under Sec.  226.43(d)(1), including by

[[Page 10441]]

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

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

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

[[Page 10442]]

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

National Credit Union Administration

Authority and Issuance

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

PART 722--APPRAISALS

0
12. The authority citation for part 722 is revised to read as follows:

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


0
13. In Sec.  722.3, add paragraph (f) to read as follows:


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

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

Bureau of Consumer Financial Protection

Authority and Issuance

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

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

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

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

Subpart C--Closed-End Credit

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


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

    (a) Definitions. For purposes of this section:
    (1) ``Higher-priced mortgage loan'' means a closed-end consumer 
credit transaction secured by the consumer's principal dwelling with an 
annual percentage rate that exceeds the average prime offer rate for a 
comparable transaction as of the date the interest rate is set:
    (i) By 1.5 or more percentage points, for a loan secured by a first 
lien with a principal obligation at consummation that does not exceed 
the limit in effect as of the date the transaction's interest rate is 
set for the maximum principal obligation eligible for purchase by 
Freddie Mac;
    (ii) By 2.5 or more percentage points, for a loan secured by a 
first lien with a principal obligation at consummation that exceeds the 
limit in effect as of the date the transaction's interest rate is set 
for the maximum principal obligation eligible for purchase by Freddie 
Mac; or
    (iii) By 3.5 or more percentage points, for a loan secured by a 
subordinate lien.
* * * * *
    (c) Appraisals for higher-priced mortgage loans--(1) Definitions. 
For purposes of this section:
    (i) Certified or licensed appraiser means a person who is certified 
or licensed by the State agency in the State in which the property that 
secures the transaction is located, and who performs the appraisal in 
conformity with the Uniform Standards of Professional Appraisal 
Practice and the requirements applicable to appraisers in title XI of 
the Financial Institutions Reform, Recovery, and Enforcement Act of 
1989, as amended (12 U.S.C. 3331 et seq.), and any implementing 
regulations in effect at the time the appraiser signs the appraiser's 
certification.
    (ii) Manufactured home has the same meaning as in 24 CFR 3280.2.
    (iii) National Registry means the database of information about 
State certified and licensed appraisers maintained by the Appraisal 
Subcommittee of the Federal Financial Institutions Examination Council.
    (iv) State agency means a ``State appraiser certifying and 
licensing agency'' recognized in accordance with section 1118(b) of the 
Financial Institutions Reform, Recovery, and Enforcement Act of 1989 
(12 U.S.C. 3347(b)) and any implementing regulations.
    (2) Exemptions. The requirements in paragraphs (c)(3) through (6) 
of this section do not apply to the following types of transactions:
    (i) A qualified mortgage as defined in 12 CFR 1026.43(e).
    (ii) A transaction secured by a new manufactured home.
    (iii) A transaction secured by a mobile home, boat, or trailer.
    (iv) A transaction to finance the initial construction of a 
dwelling.
    (v) A loan with maturity of 12 months or less, if the purpose of 
the loan is a ``bridge'' loan connected with the acquisition of a 
dwelling intended to become the consumer's principal dwelling.
    (vi) A reverse-mortgage transaction subject to 12 CFR 1026.33(a).
    (3) Appraisals required--(i) In general. Except as provided in 
paragraph (c)(2) of this section, a creditor shall not extend a higher-
priced mortgage loan to a consumer without obtaining, prior to 
consummation, a written appraisal of the property to be mortgaged. The 
appraisal must be performed by a certified or licensed appraiser who 
conducts a physical visit of the interior of the property that will 
secure the transaction.
    (ii) Safe harbor. A creditor obtains a written appraisal that meets 
the requirements for an appraisal required under paragraph (c)(3)(i) of 
this section if the creditor:
    (A) Orders that the appraiser perform the appraisal in conformity 
with the Uniform Standards of Professional Appraisal Practice and title 
XI of the Financial Institutions Reform, Recovery, and Enforcement Act 
of 1989, as amended (12 U.S.C. 3331 et seq.), and any implementing 
regulations in effect at the time the appraiser signs the appraiser's 
certification;
    (B) Verifies through the National Registry that the appraiser who 
signed the appraiser's certification was a certified or licensed 
appraiser in the State in which the appraised property is located as of 
the date the appraiser signed the appraiser's certification;
    (C) Confirms that the elements set forth in appendix N to this part 
are addressed in the written appraisal; and
    (D) Has no actual knowledge contrary to the facts or certifications 
contained in the written appraisal.
    (4) Additional appraisal for certain higher-priced mortgage loans--
(i) In general. Except as provided in paragraphs (c)(2) and (c)(4)(vii) 
of this section, a creditor shall not extend a higher-priced mortgage 
loan to a consumer to finance the acquisition of the consumer's 
principal dwelling without obtaining, prior to consummation, two 
written appraisals, if:
    (A) The seller acquired the property 90 or fewer days prior to the 
date of the consumer's agreement to acquire the property and the price 
in the consumer's agreement to acquire the property exceeds the 
seller's acquisition price by more than 10 percent; or
    (B) The seller acquired the property 91 to 180 days prior to the 
date of the consumer's agreement to acquire the property and the price 
in the consumer's agreement to acquire the

[[Page 10443]]

property exceeds the seller's acquisition price by more than 20 
percent.
    (ii) Different certified or licensed appraisers. The two appraisals 
required under paragraph (c)(4)(i) of this section may not be performed 
by the same certified or licensed appraiser.
    (iii) Relationship to general appraisal requirements. If two 
appraisals must be obtained under paragraph (c)(4)(i) of this section, 
each appraisal shall meet the requirements of paragraph (c)(3)(i) of 
this section.
    (iv) Required analysis in the additional appraisal. One of the two 
required appraisals must include an analysis of:
    (A) The difference between the price at which the seller acquired 
the property and the price that the consumer is obligated to pay to 
acquire the property, as specified in the consumer's agreement to 
acquire the property from the seller;
    (B) Changes in market conditions between the date the seller 
acquired the property and the date of the consumer's agreement to 
acquire the property; and
    (C) Any improvements made to the property between the date the 
seller acquired the property and the date of the consumer's agreement 
to acquire the property.
    (v) No charge for the additional appraisal. If the creditor must 
obtain two appraisals under paragraph (c)(4)(i) of this section, the 
creditor may charge the consumer for only one of the appraisals.
    (vi) Creditor's determination of prior sale date and price--(A) 
Reasonable diligence. A creditor must obtain two written appraisals 
under paragraph (c)(4)(i) of this section unless the creditor can 
demonstrate by exercising reasonable diligence that the requirement to 
obtain two appraisals does not apply. A creditor acts with reasonable 
diligence if the creditor bases its determination on information 
contained in written source documents, such as the documents listed in 
Appendix O to this part.
    (B) Inability to determine prior sale date or price--modified 
requirements for additional appraisal. If, after exercising reasonable 
diligence, a creditor cannot determine whether the conditions in 
paragraphs (c)(4)(i)(A) and (c)(4)(i)(B) are present and therefore must 
obtain two written appraisals in accordance with paragraphs (c)(4)(i) 
through (v) of this section, one of the two appraisals shall include an 
analysis of the factors in paragraph (c)(4)(iv) of this section only to 
the extent that the information necessary for the appraiser to perform 
the analysis can be determined.
    (vii) Exemptions from the additional appraisal requirement. The 
additional appraisal required under paragraph (c)(4)(i) of this section 
shall not apply to extensions of credit that finance a consumer's 
acquisition of property:
    (A) From a local, State or Federal government agency;
    (B) From a person who acquired title to the property through 
foreclosure, deed-in-lieu of foreclosure, or other similar judicial or 
non-judicial procedure as a result of the person's exercise of rights 
as the holder of a defaulted mortgage loan;
    (C) From a non-profit entity as part of a local, State, or Federal 
government program under which the non-profit entity is permitted to 
acquire title to single-family properties for resale from a seller who 
acquired title to the property through the process of foreclosure, 
deed-in-lieu of foreclosure, or other similar judicial or non-judicial 
procedure;
    (D) From a person who acquired title to the property by inheritance 
or pursuant to a court order of dissolution of marriage, civil union, 
or domestic partnership, or of partition of joint or marital assets to 
which the seller was a party;
    (E) From an employer or relocation agency in connection with the 
relocation of an employee;
    (F) From a servicemember, as defined in 50 U.S.C. App. 511(1), who 
received a deployment or permanent change of station order after the 
servicemember purchased the property;
    (G) Located in an area designated by the President as a federal 
disaster area, if and for as long as the Federal financial institutions 
regulatory agencies, as defined in 12 U.S.C. 3350(6), waive the 
requirements in title XI of the Financial Institutions Reform, 
Recovery, and Enforcement Act of 1989, as amended (12 U.S.C. 3331 et 
seq.), and any implementing regulations in that area; or
    (H) Located in a rural county, as defined in 12 CFR 
1026.35(b)(2)(iv)(A).
    (5) Required disclosure--(i) In general. Except as provided in 
paragraph (c)(2) of this section, a creditor shall disclose the 
following statement, in writing, to a consumer who applies for a 
higher-priced mortgage loan: ``We may order an appraisal to determine 
the property's value and charge you for this appraisal. We will give 
you a copy of any appraisal, even if your loan does not close. You can 
pay for an additional appraisal for your own use at your own cost.'' 
Compliance with the disclosure requirement in Regulation B, 12 CFR 
1002.14(a)(2), satisfies the requirements of this paragraph.
    (ii) Timing of disclosure. The disclosure required by paragraph 
(c)(5)(i) of this section shall be delivered or placed in the mail no 
later than the third business day after the creditor receives the 
consumer's application for a higher-priced mortgage loan subject to 
paragraph (c) of this section. In the case of a loan that is not a 
higher-priced mortgage loan subject to paragraph (c) of this section at 
the time of application, but becomes a higher-priced mortgage loan 
subject to paragraph (c) of this section after application, the 
disclosure shall be delivered or placed in the mail not later than the 
third business day after the creditor determines that the loan is a 
higher-priced mortgage loan subject to paragraph (c) of this section.
    (6) Copy of appraisals--(i) In general. Except as provided in 
paragraph (c)(2) of this section, a creditor shall provide to the 
consumer a copy of any written appraisal performed in connection with a 
higher-priced mortgage loan pursuant to paragraphs (c)(3) and (c)(4) of 
this section.
    (ii) Timing. A creditor shall provide to the consumer a copy of 
each written appraisal pursuant to paragraph (c)(6)(i) of this section:
    (A) No later than three business days prior to consummation of the 
loan; or
    (B) In the case of a loan that is not consummated, no later than 30 
days after the creditor determines that the loan will not be 
consummated.
    (iii) Form of copy. Any copy of a written appraisal required by 
paragraph (c)(6)(i) of this section may be provided to the applicant in 
electronic form, subject to compliance with the consumer consent and 
other applicable provisions of the Electronic Signatures in Global and 
National Commerce Act (E-Sign Act) (15 U.S.C. 7001 et seq.).
    (iv) No charge for copy of appraisal. A creditor shall not charge 
the consumer for a copy of a written appraisal required to be provided 
to the consumer pursuant to paragraph (c)(6)(i) of this section.
    (7) Relation to other rules. The rules in this paragraph (c) were 
adopted jointly by the Federal Reserve Board (Board), the Office of the 
Comptroller of the Currency (OCC), the Federal Deposit Insurance 
Corporation, the National Credit Union Administration, the Federal 
Housing Finance Agency, and the Bureau. These rules are substantively 
identical to the Board's and the OCC's higher-priced mortgage loan 
appraisal rules published separately in 12 CFR 226.43 (for the Board) 
and in 12 CFR part 34, subpart

[[Page 10444]]

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

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

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

    To qualify for the safe harbor provided in Sec.  
1026.35(c)(3)(ii), a creditor must confirm that the written 
appraisal:
    1. Identifies the creditor who ordered the appraisal and the 
property and the interest being appraised.
    2. Indicates whether the contract price was analyzed.
    3. Addresses conditions in the property's neighborhood.
    4. Addresses the condition of the property and any improvements 
to the property.
    5. Indicates which valuation approaches were used, and includes 
a reconciliation if more than one valuation approach was used.
    6. Provides an opinion of the property's market value and an 
effective date for the opinion.
    7. Indicates that a physical property visit of the interior of 
the property was performed.
    8. Includes a certification signed by the appraiser that the 
appraisal was prepared in accordance with the requirements of the 
Uniform Standards of Professional Appraisal Practice.
    9. Includes a certification signed by the appraiser that the 
appraisal was prepared in accordance with the requirements of title 
XI of the Financial Institutions Reform, Recovery and Enforcement 
Act of 1989, as amended (12 U.S.C. 3331 et seq.), and any 
implementing regulations.


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

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

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


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

Supplement I to Part 1026--Official Interpretations

* * * * *

Section 1026.35--Requirements for Higher-Priced Mortgage Loans

35(a) Definitions

Paragraph 35(a)(1)

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

35(c)--Appraisals

35(c)(1) Definitions

35(c)(1)(i) Certified or Licensed Appraiser

    1. USPAP. The Uniform Standards of Professional Appraisal 
Practice (USPAP) are established by the Appraisal Standards Board of 
the Appraisal Foundation (as defined in 12 U.S.C. 3350(9)). Under 
Sec.  1026.35(c)(1)(i), the relevant USPAP standards are those found 
in the edition of USPAP and that are in effect at the time the 
appraiser signs the appraiser's certification.
    2. Appraiser's certification. The appraiser's certification 
refers to the certification that must be signed by the appraiser for 
each appraisal assignment. This requirement is specified in USPAP 
Standards Rule 2-3.
    3. FIRREA title XI and implementing regulations. The relevant 
regulations are those prescribed under section 1110 of the Financial 
Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA), 
as amended (12 U.S.C. 3339), that relate to an appraiser's 
development and reporting of the appraisal in effect at the time the 
appraiser signs the appraiser's certification. Paragraph (3) of 
FIRREA section 1110 (12 U.S.C. 3339(3)), which relates to the review 
of appraisals, is not relevant for determining whether an appraiser 
is a certified or licensed appraiser under Sec.  1026.35(c)(1)(i).

35(c)(2) Exemptions

Paragraph 35(c)(2)(ii)

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

Paragraph 35(c)(2)(iii)

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

Paragraph 35(c)(2)(iv)

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

[[Page 10445]]

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

35(c)(3) Appraisals Required

35(c)(3)(i) In General

    1. Written appraisal--electronic transmission. To satisfy the 
requirement that the appraisal be ``written,'' a creditor may obtain 
the appraisal in paper form or via electronic transmission.
    35(c)(3)(ii) Safe Harbor.
    1. Safe harbor. A creditor that satisfies the safe harbor 
conditions in Sec.  1026.35(c)(3)(ii)(A) through (D) complies with 
the appraisal requirements of Sec.  1026.35(c)(3)(i). A creditor 
that does not satisfy the safe harbor conditions in Sec.  
1026.35(c)(3)(ii)(A) through (D) does not necessarily violate the 
appraisal requirements of Sec.  1026.35(c)(3)(i).
    2. Appraiser's certification. For purposes of Sec.  
1026.35(c)(3)(ii), the appraiser's certification refers to the 
certification specified in item 9 of appendix N. See also comment 
35(c)(1)(i)-2.

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

    1. Confirming elements in the appraisal. To confirm that the 
elements in appendix N to this part are included in the written 
appraisal, a creditor need not look beyond the face of the written 
appraisal and the appraiser's certification.

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

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

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

    1. Appraisal from a previous transaction. An appraisal that was 
previously obtained in connection with the seller's acquisition or 
the financing of the seller's acquisition of the property does not 
satisfy the requirements to obtain two written appraisals under 
Sec.  1026.35(c)(4)(i).
    2. 90-day, 180-day calculation. The time periods described in 
Sec.  1026.35(c)(4)(i)(A) and (B) are calculated by counting the day 
after the date on which the seller acquired the property, up to and 
including the date of the consumer's agreement to acquire the 
property that secures the transaction. For example, assume that the 
creditor determines that date of the consumer's acquisition 
agreement is October 15, 2012, and that the seller acquired the 
property on April 17, 2012. The first day to be counted in the 180-
day calculation would be April 18, 2012, and the last day would be 
October 15, 2012. In this case, the number of days from April 17 
would be 181, so an additional appraisal is not required.
    3. Date seller acquired the property. For purposes of Sec.  
1026.35(c)(4)(i)(A) and (B), the date on which the seller acquired 
the property is the date on which the seller became the legal owner 
of the property pursuant to applicable State law.
    4. Date of the consumer's agreement to acquire the property. For 
the date of the consumer's agreement to acquire the property under 
Sec.  1026.35(c)(4)(i)(A) and (B), the creditor should use the date 
on which the consumer and the seller signed the agreement provided 
to the creditor by the consumer. The date on which the consumer and 
the seller signed the agreement might not be the date on which the 
consumer became contractually obligated under State law to acquire 
the property. For purposes of Sec.  1026.35(c)(4)(i)(A) and (B), a 
creditor is not obligated to determine whether and to what extent 
the agreement is legally binding on both parties. If the dates on 
which the consumer and the seller signed the agreement differ, the 
creditor should use the later of the two dates.
    5. Price at which the seller acquired the property. The price at 
which the seller acquired the property refers to the amount paid by 
the seller to acquire the property. The price at which the seller 
acquired the property does not include the cost of financing the 
property.
    6. Price the consumer is obligated to pay to acquire the 
property. The price the consumer is obligated to pay to acquire the 
property is the price indicated on the consumer's agreement with the 
seller to acquire the property. The price the consumer is obligated 
to pay to acquire the property from the seller does not include the 
cost of financing the property. For purposes of Sec.  
1026.35(c)(4)(i)(A) and (B), a creditor is not obligated to 
determine whether and to what extent the agreement is legally 
binding on both parties. See also comment 35(c)(4)(i)-4.

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

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

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

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

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

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

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

    1. Fees and mark-ups. The creditor is prohibited from charging 
the consumer for the performance of one of the two appraisals 
required under Sec.  1026.35(c)(4)(i), including by imposing a fee 
specifically for that appraisal or by marking up the interest rate 
or any other fees payable by the consumer in connection with the 
higher-priced mortgage loan.

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

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

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

[[Page 10446]]

determine whether two written appraisals are required; or (2) obtain 
two written appraisals in compliance with Sec.  1026.35(c)(4). See 
also comment 35(c)(4)(vi)(B)-1.
    ii. Assume a creditor reviews the results of a title search 
indicating that the last recorded purchase was more than 180 days 
before the consumer's agreement to acquire the property. Assume also 
that the creditor subsequently receives a written appraisal 
indicating that the seller acquired the property between 91 and 180 
days before the consumer's agreement to acquire the property. In 
this case, unless one of these sources is clearly wrong on its face, 
the creditor would not be able to determine whether the seller 
acquired the property within 180 days of the date of the consumer's 
agreement to acquire the property from the seller, pursuant to Sec.  
1026.35(c)(4)(i)(B). Before extending a higher-priced mortgage loan 
subject to the appraisal requirements of Sec.  1026.35(c), the 
creditor must either: perform additional diligence to ascertain the 
seller's acquisition date and, based on this information, determine 
whether two written appraisals are required; or obtain two written 
appraisals in compliance with Sec.  1026.35(c)(4). See also comment 
35(c)(4)(vi)(B)-1.

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

    1. Required analysis. In general, the additional appraisal 
required under Sec.  1026.35(c)(4)(i) should include an analysis of 
the factors listed in Sec.  1026.35(c)(4)(iv)(A) through (C). 
However, if, following reasonable diligence, a creditor cannot 
determine whether the conditions in Sec.  1026.35(c)(4)(i)(A) or (B) 
are present due to a lack of information or conflicting information, 
the required additional appraisal must include the analyses required 
under Sec.  1026.35(c)(4)(iv)(A) through (C) only to the extent that 
the information necessary to perform the analyses is known. For 
example, assume that a creditor is able, following reasonable 
diligence, to determine that the date on which the seller acquired 
the property occurred between 91 and 180 days prior to the date of 
the consumer's agreement to acquire the property. However, the 
creditor is unable, following reasonable diligence, to determine the 
price at which the seller acquired the property. In this case, the 
creditor is required to obtain an additional written appraisal that 
includes an analysis under Sec.  1026.35(c)(4)(iv)(B) and 
(c)(4)(iv)(C) of the changes in market conditions and any 
improvements made to the property between the date the seller 
acquired the property and the date of the consumer's agreement to 
acquire the property. However, the creditor is not required to 
obtain an additional written appraisal that includes analysis under 
Sec.  1026.35(c)(4)(iv)(A) of the difference between the price at 
which the seller acquired the property and the price that the 
consumer is obligated to pay to acquire the property.

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

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

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

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

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

35(c)(5) Required Disclosure

35(c)(5)(i) In General

    1. Multiple applicants. When two or more consumers apply for a 
loan subject to this section, the creditor is required to give the 
disclosure to only one of the consumers.
    2. Appraisal independence requirements not affected. Nothing in 
the text of the consumer notice required by Sec.  1026.35(c)(5)(i) 
should be construed to affect, modify, limit, or supersede the 
operation of any legal, regulatory, or other requirements or 
standards relating to independence in the conduct of appraisers or 
restrictions on the use of borrower-ordered appraisals by creditors.

35(c)(6) Copy of Appraisals

35(c)(6)(i) In General

    1. Multiple applicants. When two or more consumers apply for a 
loan subject to this section, the creditor is required to give the 
copy of each required appraisal to only one of the consumers.

35(c)(6)(ii) Timing

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

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

    1. Fees and mark-ups. The creditor is prohibited from charging 
the consumer for any copy of an appraisal required to be provided 
under Sec.  1026.35(c)(6)(i), including by imposing a fee 
specifically for a required copy of an appraisal or by marking up 
the interest rate or any other fees payable by the consumer in 
connection with the higher-priced mortgage loan.
* * * * *

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

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

Federal Housing Finance Agency

Authority and Issuance

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

PART 1222--APPRAISALS

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

Subparts B to Z--[Reserved]

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

Subpart A--Requirements for Higher-Priced Mortgage Loans


Sec.  1222.1  Purpose and scope.

    This subpart cross-references the requirement that creditors 
extending

[[Page 10447]]

credit in the form of higher-priced mortgage loans comply with Section 
129H of the Truth-in-Lending Act (TILA), 15 U.S.C. 1639h, and its 
implementing regulations in Regulation Z, 12 CFR 1026.35. Neither the 
Banks nor the Enterprises are subject to Section 129H of TILA or 12 CFR 
1026.35. Originators of higher-priced mortgage loans, including Bank 
members and institutions that sell mortgage loans to the Enterprises, 
are subject to those provisions. A failure of those institutions to 
comply with Section 129H of TILA and 12 CFR 1026.35 may limit their 
ability to sell such loans to the Banks or Enterprises or to pledge 
such loans to the Banks as collateral, to the extent provided in the 
parties' agreements.


Sec.  1222.2  Reservation of authority.

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

Subparts B to Z--[Reserved]

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

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

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

    By order of the Board of Directors.

Federal Deposit Insurance Corporation.

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