Regulation B, 12 CFR Part 1002
OPPORTUNITY ACT (REGULATION B)
By Tom and Wendy
Effective January 8, 2014, the new Rules on providing appraisals and other valuations went live in accordance with the Dodd-Frank amendments to Reg B, commonly referred to as the ECOA Valuations Rule. When something relatively significant like this goes into effect, there can be some confusion as to what exactly is covered under the new criteria, and if any exemptions or waivers exist for commercial/business type ventures. However, the short answer is no. Commercial loan applications are now subject to the same disclosure requirements that have routinely applied to consumer loans, specifically a notification to the applicant that he/she has the right to receive copies of appraisals and written valuations and that they will be provided promptly upon completion. Previously, Reg B required only that the applicant be notified that they had the right to request a copy of the appraisal, and that notification could be provided at any time until the credit decision was made.
Under the ECOA Valuation rule, you have three business days to notify the applicant when the credit request is secured by a first lien on a 1-4 family dwelling. The loan purpose is not relevant.
(Un)Fortunately, it’s pretty cut and dry as to what’s covered under part 1002. It’s just about everything.
The rule states that “A creditor shall provide an applicant a copy of all appraisals and other written valuations developed in connection with an application for credit that is to be secured by a first lien on a dwelling. A creditor shall provide a copy of each such appraisal or the written valuation promptly upon completion, or three business days prior to consummation of the transaction (for closed-end credit) or account opening (for open-end credit), whichever is earlier.”
What that means, in a nutshell, is that any 1-4 family dwelling now requires a copy of the appraisal disclosure. This includes second homes, vacation homes, AND business/commercial loans. It also includes mobile homes, town homes, and condominiums as well as loss mitigation transactions, such as loan modifications, short sales and deed-in-lieu transactions. So it’s a blanket rule. This even impacts developers who are building multiple units in a localized area.
The rule’s timing requirements are not well-suited to business credit, as the rule requires lenders to provide the disclosure within three days of application. But application dates are much more esoteric for business credit than for consumer credit and may be as late as the issuance of the term sheet or the letter of intent. In addition, commercial lending platforms are not designed to trigger three day disclosures. To be safe, it is a best practice to provide the disclosure along with the credit authorization, either through the use of a commercial loan application or, for commercial lenders who do not require a written application, by including the disclosure language in the credit authorization section of the PFS.
Commercial loans obviously run into much different timing issues than a “standard” purchase or refinance. Often, the appraisal is one of the last things that is considered when a loan is approved and then closed, as the rent rolls or other cash flow hold far more sway for a loans consummation and subsequent repayment risk. Sometimes, an appraisal is run as an “abundance of caution” and is a secondary consideration in making a decision. The rule offers no solace or escape hatch for these issues, and was one of the primary sources of pushback from the industry as a whole.
There is, however, a way out for some commercial/business related transactions, and even in some consumer circumstances. The rule states:
“An applicant may waive the timing requirement and agree to receive any copy at or before consummation or account opening, except where otherwise prohibited by law. Any such waiver must be obtained at least three business days prior to consummation or account opening, unless the waiver pertains solely to the applicant’s receipt of a copy of an appraisal or other written valuation that contains only clerical changes from a previous version of the appraisal or other written valuation provided to the applicant three or more business days prior to consummation or account opening. If then applicant provides a waiver and the transaction is not consummated or the account is not opened, the creditor must provide these copies no later than 30 days after the creditor determines consummation will not occur or the account will not be opened.”
While this seems like a panacea to skirt the rule, our subject matter experts have been mulling this over and are concerned that a bank or institution that begins to use the waivers as a practice rather than an exception may be subject to additional regulatory scrutiny over the course of an examination. If a bank were to utilize the waiver on a more than an infrequent basis, we would advise the following additional steps to insulate against examination inquiry:
This may not be a catch-all, but it certainly is a start and will show good faith on your part to the examiners.
The disclosure rules/content for the appraisal issuance seem to fall in line with much of what regulation Z requires for other documents:
“For applications subject to paragraph (a)(1) of this section, a creditor shall mail or deliver to an applicant, not later than the third business day after the creditor receives an application for credit that is to be secured by a first lien on a dwelling, a notice in writing of the applicant’s right to receive a copy of all written appraisals developed in connection with the application. In the case of an application for credit that is not to be secured by a first lien on a dwelling at the time of application, if the creditor later determines the credit will be secured by a first lien on a dwelling, the creditor shall mail or deliver the same notice in writing not later than the third business day after the creditor determines that the loan is to be secured by a first lien on a dwelling.”
It should be a fairly simple matter to include this in your “three day docs” if it is not already included. The only sticky wicket is when a bank would have to change its underwriting mind in the middle of the process and then determine that a first lien would need to be taken in order to make the loan happen. It doesn’t happen often, but it does happen. In these cases, document in the underwriting section the exact moment this is determined so as to remove any ambiguity from the three business day question. And double check all of your disclosures for all loan products, as the prior language stating “should you wish a copy” now needs to read “we will promptly provide you with a copy of any appraisal or valuation, even if the loan does not close.”
The reimbursement section of the rule is straightforward, and is equitable to both borrowers and banks: “A creditor shall not charge an applicant for providing a copy of appraisals and other written valuations as required under this section, but may require applicants to pay a reasonable fee to reimburse the creditor for the cost of the appraisal or other written valuation unless otherwise provided by law.” Essentially, don’t charge your borrow for postage or 10 cents a page, and all is well. They do not expect the bank to pony up for the actual valuation/appraisal.
Finally, in our bonus round we deal with withdrawn and denied loans, incomplete applications and the appraisal disclosure rule: “The requirements set forth in paragraph (a)(1) of this section apply whether credit is extended or denied or if the application is incomplete or withdrawn.” So whatever result occurs from your application, make sure the borrower receives a copy of their valuation, stamp cost free.
One last thing about sending information: the rule allows copies in electronic format, but be sure you are in compliance with the E – Sign act [15USC 700] (and that’s a pot to stir for another time).
In summation, appraisal disclosures are going to cause a few kinks for commercial/business loans as well as, in some cases, consumer loans. But with proper procedures in place to react to the change, your institution should be able to transition to compliance relatively smoothly.
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