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Rules and Regulations: Appraisal Requirements among Newly Effective Dodd-Frank Rules

Appraisal Requirements for Higher-Priced Mortgage Loans Now Set

Higher-priced mortgage loans now have new appraisal requirements per a final rule issued by six federal regulators in mid-January. Creditors are now required to use a licensed or certified appraiser who prepares a written appraisal report based on a physical visit of the interior of the property. The rule also requires creditors to disclose to applicants information about the purpose of the appraisal and provide consumers with a free copy of any appraisal report.

If the seller acquired the property for a lower price during the prior six months and the price difference exceeds certain thresholds, creditors will have to obtain a second appraisal at no cost to the consumer. This requirement for higher-priced home-purchase mortgage loans is intended to address fraudulent property flipping by seeking to ensure that the value of the property legitimately increased.

Exemptions: The rule exempts several types of loans, such as qualified mortgages, temporary bridge loans and construction loans, loans for new manufactured homes, and loans for mobile homes, trailers and boats that are dwellings. The rule also has exemptions from the second appraisal requirement to facilitate loans in rural areas and other transactions.

Implementation and future supplements: The rule implements amendments to the Truth in Lending Act made by the Dodd-Frank Act, which defines mortgage loans as higher-priced if they are secured by a consumer’s home and have interest rates above certain thresholds.

In response to public comments, the six agencies (the Fed, CFPB, FDIC, FHFA, NCUA and OCC) plan to publish a supplemental proposal to request additional comment on possible exemptions for “streamlined” refinance programs and small dollar loans, as well as to seek clarification on whether the rule should apply to loans secured by existing manufactured homes and certain other property types.

Stress Testing Implemented, Results Coming in March

Publicly disclosed results are due in March for annual stress testing by large financial organizations, per the Dodd-Frank Act.  Smaller companies will not need to disclose publicly the results of their tests, which are to begin in October 2013.     

The Fed started conducting supervisory stress tests for the 19 bank holding companies that participated in the 2009 Supervisory Capital Assessment Program and subsequent Comprehensive Capital Analysis and Reviews.  The final rules also required these companies and their state member bank subsidiaries to conduct their own Dodd-Frank Act company-run stress tests last fall, with the results to be publicly disclosed in March 2013.  

In general, other companies subject to this stress testing are required to comply with the final rule beginning in the fall of 2013.  State member banks, bank holding companies and savings and loan holding companies with between $10 billion and $50 billion in total assets that begin conducting their first company-run stress test in the fall of 2013 will not have to disclose publicly the results of that first stress test.  

Proposed and Out for Comment Rules

Proposed rule regarding enhanced prudential standards and early remediation requirements for foreign banking organizations and foreign nonbank financial companies—The proposed rule requests comment on specified enhanced prudential standards for companies that the Financial Stability Oversight Council (FSOC) has determined pose a grave threat to financial stability. Additionally, certain foreign banking organizations would be required to form a U.S. intermediate holding company that would generally serve as a U.S. top-tier holding company for the U.S. subsidiaries of the company. The proposed rule would affect foreign banking organizations with total consolidated assets of $50 billion or more and foreign nonbank financial companies supervised by the Board. Comments are due by March 31.

Rule summary

Proposed policy statement on the scenario design framework for stress testing—The Fed is seeking comments on a proposed policy statement outlining the approach to scenario design for stress testing that would be used in connection with the annual supervisory and company-run stress tests. The proposed policy statement outlines the characteristics of the stress test scenarios and explains the considerations and procedures that underlie the formulation of these scenarios. Comments are due by Feb. 15.

Rule summary