Vol. 77 Wednesday, 

No. 172 September 5, 2012 

Part III 

Department of the Treasury 

Office of the Comptroller of the Currency 

12 CFR Parts 34 and 164 

Board of Governors of Federal Reserve 

System 

12 CFR Part 226 

National Credit Union Administration 

12 CFR Part 722 

Bureau of Consumer Financial Protection 

12 CFR Part 1026 

Federal Housing Finance Agency 

12 CFR Part 1222 

Appraisals for Higher-Risk Mortgage Loans; Proposed Rule 

mstockstill on DSK4VPTVN1PROD with PROPOSALS2

54722 Federal Register / Vol. 77, No. 172 / Wednesday, September 5, 2012 / Proposed Rules 

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 

BOARD OF GOVERNORS OF 

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-Risk Mortgage 

Loans 

AGENCIES: 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: Proposed rule; request for 

public comment. 

SUMMARY: The Board, Bureau, FDIC, 

FHFA, NCUA, and OCC (collectively, 

the Agencies) are proposing to amend 

Regulation Z, which implements the 

Truth in Lending Act (TILA), and the 

official interpretation to the regulation. 

The proposed revisions to Regulation Z 

would implement a new TILA provision 

requiring appraisals for ‘‘higher-risk 

mortgages’’ that was added to TILA as 

part of the Dodd-Frank Wall Street 

Reform and Consumer Protection Act. 

For mortgages with an annual 

percentage rate that exceeds the average 

prime offer rate by a specified 

percentage, the proposed rule would 

require 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: Comments must be received on 

or before October 15, 2012, except that 

comments on the Paperwork Reduction 

Act analysis in part VIII of the 

Supplementary Information must be 

received on or before November 5, 2012. 

ADDRESSES: Interested parties are 

encouraged to submit written comments 

jointly to all of the Agencies. 

Commenters are encouraged to use the 

title ‘‘Appraisals for Higher-Risk 

Mortgage Loans’’ to facilitate the 

organization and distribution of 

comments among the Agencies. 

Commenters also are encouraged to 

identify the number of the specific 

question for comment to which they are 

responding. Interested parties are 

invited to submit written comments to: 

Board: You may submit comments, 

identified by Docket No. R–1443 or RIN 

7100–AD90, by any of the following 

methods: 

• Agency Web Site: http://www.

federalreserve.gov. Follow the 

instructions for submitting comments at 

http://www.federalreserve.gov/

generalinfo/foia/ProposedRegs.cfm. 

• Federal eRulemaking Portal: http:// 

www.regulations.gov. Follow the 

instructions for submitting comments. 

• Email: regs.comments@

federalreserve.gov. Include the docket 

number in the subject line of the 

message. 

• Fax: (202) 452–3819 or (202) 452– 

3102. 

• Mail: Address to Robert deV. 

Frierson, Secretary, Board of Governors 

of the Federal Reserve System, 20th 

Street and Constitution Avenue NW., 

Washington, DC 20551. 

All public comments will be made 

available on the Board’s Web site at 

http://www.federalreserve.gov/

generalinfo/foia/ProposedRegs.cfm as 

submitted, unless modified for technical 

reasons. Accordingly, comments will 

not be edited to remove any identifying 

or contact information. Public 

comments may also be viewed 

electronically or in paper in Room MP– 

500 of the Board’s Martin Building (20th 

and C Streets, NW.) between 9:00 a.m. 

and 5:00 p.m. on weekdays. 

Bureau: You may submit comments, 

identified by Docket No. CFPB–2012– 

0031 or RIN 3170–AA11, by any of the 

following methods: 

• Electronic: http://www.regulations.

gov. Follow the instructions for 

submitting comments. 

• Mail: Monica Jackson, Office of the 

Executive Secretary, Bureau of 

Consumer Financial Protection, 1700 G 

Street NW., Washington, DC 20552. 

• Hand Delivery/Courier in Lieu of 

Mail: Monica Jackson, Office of the 

Executive Secretary, Bureau of 

Consumer Financial Protection, 1700 G 

Street NW., Washington, DC 20552. 

All submissions must include the 

agency name and docket number or 

Regulatory Information Number (RIN) 

for this rulemaking. In general, all 

comments received will be posted 

without change to http://www.

regulations.gov. In addition, comments 

will be available for public inspection 

and copying at 1700 G Street NW., 

Washington, DC 20552, on official 

business days between the hours of 10 

a.m. and 5 p.m. Eastern Time. You can 

make an appointment to inspect the 

documents by telephoning (202) 435– 

7275. 

All comments, including attachments 

and other supporting materials, will 

become part of the public record and 

subject to public disclosure. Sensitive 

personal information, such as account 

numbers or social security numbers, 

should not be included. Comments will 

not be edited to remove any identifying 

or contact information. 

FDIC: You may submit comments by 

any of the following methods: 

• Federal eRulemaking Portal: http:// 

www.regulations.gov. Follow the 

instructions for submitting comments. 

• Agency Web site: http://www.FDIC.

gov/regulations/laws/federal/propose.

html 

• Mail: Robert E. Feldman, Executive 

Secretary, Attention: Comments/Legal 

ESS, Federal Deposit Insurance 

Corporation, 550 17th Street NW., 

Washington, DC 20429. 

• Hand Delivered/Courier: The guard 

station at the rear of the 550 17th Street 

Building (located on F Street), on 

business days between 7:00 a.m. and 

5:00 p.m. 

• Email: comments@FDIC.gov. 

Comments submitted must include 

‘‘FDIC’’ and ‘‘Truth in Lending Act 

(Regulation Z).’’ Comments received 

will be posted without change to 

http://www.FDIC.gov/regulations/laws/

federal/propose.html, including any 

personal information provided. 

FHFA: You may submit your 

comments, identified by regulatory 

information number (RIN) 2590–AA58, 

by any of the following methods: 

• Email: Comments to Alfred M. 

Pollard, General Counsel, may be sent 

by email to RegComments@fhfa.gov. 

Please include ‘‘RIN 2590–AA58’’ in the 

subject line of the message. 

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Federal Register / Vol. 77, No. 172 / Wednesday, September 5, 2012 / Proposed Rules 54723 

• Federal eRulemaking Portal: http:// 

www.regulations.gov. Follow the 

instructions for submitting comments. If 

you submit your comment to the 

Federal eRulemaking Portal, please also 

send it by email to FHFA at 

RegComments@fhfa.gov to ensure 

timely receipt by the Agency. Please 

include ‘‘RIN 2590–AA58’’ in the 

subject line of the message. 

• Hand Delivered/Courier: The hand 

delivery address is: Alfred M. Pollard, 

General Counsel, Attention: Comments/ 

RIN 2590–AA58, Federal Housing 

Finance Agency, Eighth Floor, 400 

Seventh Street SW., Washington, DC 

20024. The package should be logged in 

at the Guard Desk, First Floor, on 

business days between 9 a.m. and 5 p.m. 

• U.S. Mail, United Parcel Service, 

Federal Express, or Other Mail Service: 

The mailing address for comments is: 

Alfred M. Pollard, General Counsel, 

Attention: Comments/RIN 2590–AA58, 

Federal Housing Finance Agency, 

Eighth Floor, 400 Seventh Street SW., 

Washington, DC 20024. 

Copies of all comments will be posted 

without change, including any personal 

information you provide, such as your 

name, address, and phone number, on 

the FHFA Internet Web site at http://

www.fhfa.gov. In addition, copies of all 

comments received will be available for 

examination by the public on business 

days between the hours of 10 a.m. and 

3 p.m., Eastern Time, at the Federal 

Housing Finance Agency, Eighth Floor, 

400 Seventh Street SW., Washington, 

DC 20024. To make an appointment to 

inspect comments, please call the Office 

of General Counsel at (202) 649–3804. 

NCUA: You may submit comments, 

identified by RIN 3133–AE04, by any of 

the following methods (Please send 

comments by one method only): 

• Federal eRulemaking Portal: http:// 

www.regulations.gov. Follow the 

instructions for submitting comments. 

• NCUA Web Site: http://www.ncua.

gov/Legal/Regs/Pages/PropRegs.aspx. 

Follow the instructions for submitting 

comments. 

• Email: Address to regcomments@

ncua.gov. Include ‘‘[Your name] 

Comments on Appraisals for High Risk 

Mortgage Loans’’ in the email subject 

line. 

• Fax: (703) 518–6319. Use the 

subject line described above for email. 

• Mail: Address to Mary Rupp, 

Secretary of the Board, National Credit 

Union Administration, 1775 Duke 

Street, Alexandria, Virginia 22314– 

3428. 

• Hand Delivery/Courier in Lieu of 

Mail: Same as mail address. 

You can view all public comments on 

NCUA’s Web site at http://www.ncua.

gov/Legal/Regs/Pages/PropRegs.aspx as 

submitted, except for those we cannot 

post for technical reasons. NCUA will 

not edit or remove any identifying or 

contact information from the public 

comments submitted. You may inspect 

paper copies of comments in NCUA’s 

law library at 1775 Duke Street, 

Alexandria, Virginia 22314, by 

appointment weekdays between 9:00 

a.m. and 3:00 p.m. To make an 

appointment, call (703) 518–6546 or 

send an email to OGCMail@ncua.gov. 

OCC: Because paper mail in the 

Washington, DC area and at the OCC is 

subject to delay, commenters are 

encouraged to submit comments by the 

Federal eRulemaking Portal or email, if 

possible. Please use the title ‘‘Appraisals 

for Higher-Risk Mortgage Loans’’ to 

facilitate the organization and 

distribution of the comments. You may 

submit comments by any of the 

following methods: 

• Federal eRulemaking Portal— 

‘‘regulations.gov’’: Go to http://www.

regulations.gov. Click ‘‘Advanced 

Search’’. Select ‘‘Document Type’’ of 

‘‘Proposed Rule’’, and in ‘‘By Keyword 

or ID’’ box, enter Docket ID ‘‘OCC– 

2012–0013’’, and click ‘‘Search’’. If 

proposed rules for more than one 

agency are listed, in the ‘‘Agency’’ 

column, locate the notice of proposed 

rulemaking for the OCC. Comments can 

be filtered by Agency using the filtering 

tools on the left side of the screen. In the 

‘‘Actions’’ column, click on ‘‘Submit a 

Comment’’ or ‘‘Open Docket Folder’’ to 

submit or view public comments and to 

view supporting and related materials 

for this rulemaking action. Click on the 

‘‘Help’’ tab on the Regulations.gov home 

page to get information on using 

Regulations.gov, including instructions 

for submitting or viewing public 

comments, viewing other supporting 

and related materials, and viewing the 

docket after the close of the comment 

period. 

• Email: regs.comments@occ.treas.

gov. 

• Mail: Office of the Comptroller of 

the Currency, 250 E Street SW., Mail 

Stop 2–3, Washington, DC 20219. 

• Fax: (202) 874–5274. 

• Hand Delivery/Courier: 250 E Street 

SW., Mail Stop 2–3, Washington, DC 

20219. 

You must include ‘‘OCC’’ as the 

agency name and ‘‘Docket ID OCC– 

2012–0013’’ in your comment. In 

general, OCC will enter all comments 

received into the docket and publish 

them on the Regulations.gov Web site 

without change, including any business 

or personal information that you 

provide such as name and address 

information, email addresses, or phone 

numbers. Comments received, including 

attachments and other supporting 

materials, are part of the public record 

and subject to public disclosure. Do not 

enclose any information in your 

comment or supporting materials that 

you consider confidential or 

inappropriate for public disclosure. 

You may review comments and other 

related materials that pertain to this 

notice of proposed rulemaking by any of 

the following methods: 

• Viewing Comments Electronically: 

Go to http://www.regulations.gov. Click 

‘‘Advanced Search’’. Select ‘‘Document 

Type’’ of ‘‘Public Submission’’, and in 

‘‘By Keyword or ID’’ box enter Docket ID 

‘‘OCC–2012–0013’’, and click ‘‘Search’’. 

If comments from more than one agency 

are listed, the ‘‘Agency’’ column will 

indicate which comments were received 

by the OCC. Comments can be filtered 

by Agency using the filtering tools on 

the left side of the screen. 

• Viewing Comments Personally: You 

may personally inspect and photocopy 

comments at the OCC, 250 E Street SW., 

Washington, DC. For security reasons, 

the OCC requires that visitors make an 

appointment to inspect comments. You 

may do so by calling (202) 874–4700. 

Upon arrival, visitors will be required to 

present valid government-issued photo 

identification and to submit to security 

screening in order to inspect and 

photocopy comments. 

You may also view or request 

available background documents and 

project summaries using the methods 

described above. 

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: Michael Scherzer or John 

Brolin, Counsels, 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, 

Mark Mellon, Counsel, Legal Division, 

at (202) 898–3884, or Kimberly Stock, 

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54724 Federal Register / Vol. 77, No. 172 / Wednesday, September 5, 2012 / Proposed Rules 

1For 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). 2Public Law 111–203, 124 Stat. 1376. 

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, or 

Ming-Yuen Meyer-Fong, Assistant 

General Counsel, Office of General 

Counsel, (202) 649–3078, Federal 

Housing Finance Agency, 400 Seventh 

Street SW., Washington, DC 20024. 

NCUA: Chrisanthy Loizos 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) 874–5411, 

Carolyn B. Engelhardt, Bank Examiner 

(Risk Specialist—Credit), (202) 874– 

4917, Charlotte M. Bahin, Senior 

Counsel or Mitchell Plave, Special 

Counsel, Legislative & Regulatory 

Activities Division, (202) 874–5090, 

Krista LaBelle, Counsel, Community 

and Consumer Law, (202) 874–5750. 

SUPPLEMENTARY INFORMATION: 

I. Overview 

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, among other things, 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). 

TILA is implemented by the Bureau’s 

Regulation Z, 12 CFR part 1026, and the 

Board’s Regulation Z, 12 CFR part 226. 

Official Interpretations provide 

guidance to creditors in applying the 

rules to specific transactions and 

interprets the requirements of the 

regulation. See 12 CFR parts 226, Supp. 

I, and 1026, Supp. I. 

On July 21, 2010, the Dodd-Frank 

Wall Street Reform and Consumer 

Protection Act (the Dodd-Frank Act) 2

was signed into law. Section 1471 of the 

Dodd-Frank Act establishes a new TILA 

section 129H, which sets forth appraisal 

requirements applicable to ‘‘higher-risk 

mortgages.’’ Specifically, new TILA 

section 129H does not permit a creditor 

to extend credit in the form of a higherrisk 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 appraisal 

from a different certified or licensed 

appraiser if the purpose of the higherrisk 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. 

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’’ 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— 

• 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 such 

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 such 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); and 

• 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, as well as reverse mortgage loans 

that are qualified mortgages as defined 

in TILA section 129C. 

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 to jointly 

prescribe regulations to implement the 

property appraisal requirements for 

higher-risk mortgages. 15 U.S.C. 

1639h(b)(4)(A). Section 1400 of the 

Dodd-Frank Act requires that final 

regulations to implement these 

provisions be issued by January 21, 

2013. 

II. Summary of the Proposed Rule 

The Agencies issue this proposal to 

implement the appraisal requirements 

for extensions of credit for ‘‘higher-risk 

mortgage loans’’ required by the DoddFrank Act, Title XIV, Subtitle F 

(Appraisal Activities). As required by 

the Act, this proposal was developed 

jointly by the Board, the Bureau, the 

FHFA, the FDIC, the NCUA, and the 

OCC. The Act generally defines a 

‘‘higher-risk mortgage’’ as 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 currently in 

Regulation Z for ‘‘higher-priced 

mortgage loans,’’ a category of loans to 

which special consumer protections 

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Federal Register / Vol. 77, No. 172 / Wednesday, September 5, 2012 / Proposed Rules 54725 

3Added to Regulation Z by the Board pursuant 

to the Home Ownership and Equity Protection Act 

of 1994 (HOEPA), the ‘‘higher-priced mortgage 

loan’’ rules address unfair or deceptive practices in 

connection with subprime mortgages. See 73 FR 

44522, July 30, 2008; 12 CFR 1026.35. 

4The ‘‘higher-priced mortgage loan’’ 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). 

5See 2012 TILA–RESPA Proposal, pp. 101–127, 

725–28, 905–11 (published July 9, 2012), available 

at http://files.consumerfinance.gov/f/201207_cfpb_

proposed-rule_integrated-mortgage-disclosures.pdf. 

6See 2012 HOEPA Proposal, pp. 44, 149–211 

(published July 9, 2012), available at http://

files.consumerfinance.gov/f/201207_cfpb_proposed

-rule_high-cost-mortgage-protections.pdf. 

7See 2012 HOEPA Proposal at 39–50, 218, 246. 

8See 75 FR 58539, 58660–62 (Sept. 24, 2010); 76 

FR 11598, 11609, 11620, 11626 (March 2, 2011). 

apply.3 In general, loans are ‘‘higher-risk 

mortgage loans’’ under this proposed 

rule if the APR exceeds the APOR by 1.5 

percent for first-lien loans, 2.5 percent 

for first-lien jumbo loans, and 3.5 

percent for subordinate-lien loans.4

Consistent with the statute, the 

proposal would exclude ‘‘qualified 

mortgages’’ from the definition of 

higher-risk mortgage loan. The Bureau 

will define ‘‘qualified mortgage’’ when 

it finalizes the proposed rule issued by 

the Board to implement the Dodd-Frank 

Act’s ability-to-repay requirements in 

TILA section 129C. 15 U.S.C. 1639c; 76 

FR 27390, May 11, 2011 (2011 ATR 

Proposal). In addition, the Agencies 

propose to rely on exemption authority 

granted by the Dodd-Frank Act to 

exempt the following additional classes 

of loans: (1) reverse mortgage loans; and 

(2) loans secured solely by residential 

structures, such as many types of 

manufactured homes. 

Consistent with the statute, the 

proposal would allow a creditor to make 

a higher-risk mortgage loan only if the 

following conditions are met: 

• The creditor obtains a written 

appraisal; 

• The appraisal is performed by a 

certified or licensed appraiser; 

• The appraiser conducts a physical 

property visit of the interior of the 

property; 

• At application, the applicant is 

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 at the 

expense of the applicant; and 

• The creditor provides the consumer 

with a free copy of any written 

appraisals obtained for the transaction 

at least three (3) business days before 

closing. 

In addition, as required by the Act, 

the proposal would require a higher-risk 

mortgage loan creditor to obtain an 

additional written appraisal, at no cost 

to the borrower, under the following 

circumstances: 

• The higher-risk mortgage loan will 

finance the acquisition of the 

consumer’s principal dwelling; 

• The seller is 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 higher price than the seller 

paid, although comment is requested on 

whether a threshold price increase 

would be appropriate. 

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. 

The proposal also includes a request 

for comments to address a proposed 

amendment to the method of calculation 

of the APR that is being 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 is 

proposing to adopt a more simple and 

inclusive finance charge calculation for 

closed-end credit secured by real 

property or a dwelling.5 As the finance 

charge is integral to the calculation of 

the APR, the Agencies believe it is 

possible that a more inclusive finance 

charge could increase the number of 

loans covered by this rule. The Agencies 

note that the Bureau currently is seeking 

data to assist in assessing potential 

impacts of a more inclusive finance 

charge in connection with the 2012 

TILA–RESPA Proposal and its proposal 

to implement the Dodd-Frank Act 

provision related to ‘‘high-cost 

mortgages’’ (2012 HOEPA Proposal).6

The Agencies also note that the 

Bureau is seeking comment on whether 

replacing APR with an alternative 

metric may be warranted to determine 

whether a loan is covered by the 2012 

HOEPA Proposal,7 as well as by the 

proposal to implement the Dodd-Frank 

Act’s escrow requirements in TILA 

section 129D. 15 U.S.C. 1639d; 76 FR 

11598, March 2, 2011 (2011 Escrow 

Proposal). The alternative metric would 

also have implications for the 2011 ATR 

Proposal. 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.8 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 also seek comment as to 

whether a modification should be 

considered for this rule as well, and if 

so, what type of modification. 

Accordingly, higher-risk mortgage loan 

is defined in the alternative as 

calculated by either the TCR or APR, 

with comment sought on both 

approaches. As explained further below 

in the section-by-section analysis of the 

Supplementary Information, the 

Agencies are relying on their exemption 

authority under section 1471 of the 

Dodd-Frank Act to propose an 

alternative definition of higher-risk 

mortgage. TILA section 129H(b)(4)(B), 

15 U.S.C. 1639h(b)(4)(B). 

III. Legal Authority 

As noted above, TILA section 

129H(b)(4)(A), added by the Dodd-Frank 

Act, requires the Agencies to jointly 

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 to 

jointly 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, the 

Supplementary Information refers to the 

section numbers of the rules that would 

be published in the Bureau’s Regulation 

Z at 12 CFR 1026.XX. As explained 

further in the section-by-section 

analysis of § 1026.XX(e), the rules 

would be published separately by the 

Board, the Bureau and the OCC. No 

substantive difference among the three 

sets of rules is intended. The NCUA and 

FHFA propose to adopt the rules as 

published in the Bureau’s Regulation Z 

at 12 CFR 1026.XX, by cross-referencing 

these rules in 12 CFR 722.3 and 12 CFR 

part 1222, respectively. The FDIC 

proposes to not cross-reference the 

Bureau’s Regulation Z at 12 CFR 

1026.XX. 

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54726 Federal Register / Vol. 77, No. 172 / Wednesday, September 5, 2012 / Proposed Rules 

9 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). 

10See Appraisal Standards Bd., Appraisal Fdn., 

Standards Rule 2–3, USPAP (2012–2013 ed.) at U– 

29, available at http://www.uspap.org. 

11The Federal banking agencies are the Board, the 

FDIC, the OCC, and the NCUA. 12See 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. 

Section 1026.XX Appraisals for HigherRisk Mortgage Loans 

XX(a) Definitions 

Proposed § 1026.XX(a) sets forth four 

definitions, discussed below, for 

purposes of § 1026.XX. The Agencies 

request comment on whether additional 

terms should be defined for purposes of 

this rule, and how best to define those 

terms in a manner consistent with TILA 

section 129H. 

XX(a)(1) 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, proposed § 1026.XX(a)(1) 

would 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. 

Proposed § 1026.XX(a)(1) generally 

mirrors the statutory language in TILA 

section 129H(b)(3) regarding State 

licensing and certification. However, the 

proposed definition uses 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. 

Specifically, proposed § 1026.XX(a)(4) 

defines 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 regulations.9See also 

section-by-section analysis of 

§ 1026.XX(a)(4), below. 

Uniform Standards of Professional 

Appraisal Practice (USPAP) 

Proposed § 1026.XX(a)(1) uses the 

term ‘‘Uniform Standards of 

Professional Appraisal Practice.’’ 

Proposed comment XX(a)(1)–1 clarifies 

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. 

TILA section 129H(b)(3) would 

require 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 proposed definition of 

‘‘certified or licensed appraiser’’ and 

proposed comment XX(a)(1)–1 clarify 

that the ‘‘date of appraisal’’ is the date 

on which the appraiser signs the 

appraiser’s certification. Thus, the 

relevant edition of USPAP is the one in 

effect at the time the appraiser signs the 

appraiser’s certification. 

Appraiser’s certification. Proposed 

comment XX(a)(1)–2 clarifies 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 2–3.10

FIRREA and Implementing Regulations 

As previously 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). 

Proposed § 1026.XX(a)(1) provides 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. As discussed in more 

detail below, proposed comment 

XX(a)(1)–3 clarifies 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,’’ but not those that relate to 

the review of the appraisal under 

paragraph (3) of FIRREA section 1110. 

Section 1110 of FIRREA directs each 

Federal financial institutions regulatory 

agency (i.e., each Federal banking 

agency 11) 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 

standards 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). 

The Dodd-Frank Act added a third 

standard—that real estate appraisals be 

subject to appropriate review for 

compliance with USPAP—for which the 

Federal banking 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 banking 

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.12 12 

U.S.C. 3339, 3350(4). 

The Agencies are proposing to 

interpret the ‘‘certified or licensed 

appraiser’’ definition in TILA section 

129H(b)(3) to incorporate provisions of 

the Federal banking agencies’ 

requirements in FIRREA title XI and 

implementing regulations ‘‘applicable to 

appraisers,’’ which the Agencies have 

clarified through proposed comment 

XX(a)(1)–3 as the regulations that 

‘‘relate to an appraiser’s development 

and reporting of the appraisal.’’ While 

the Federal banking agencies’ 

requirements, pursuant to this authority 

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Federal Register / Vol. 77, No. 172 / Wednesday, September 5, 2012 / Proposed Rules 54727 

13TILA section 103(g), 15 U.S.C. 1602(g) 

(implemented by § 1026.2(a)(17)). 

14Under title XI of FIRREA, the Federal banking 

agencies were granted the authority to identify 

categories of real estate-related financial 

transactions that do not require the services of an 

appraiser to protect Federal financial and public 

policy interests or to satisfy principles of safe and 

sound lending (e.g., transactions with a transaction 

value equal to or less than $250,000 do not require 

the services of an appraiser under the Federal 

banking agencies’ regulations). For a discussion of 

these regulatory exemptions, see Interagency 

Appraisal and Evaluation Guidelines, 75 FR 77450, 

77465–68 (Dec. 10, 2010). 

15USPAP Advisory Opinion 30 is a long-standing 

advisory opinion issued by the Appraisal Standards 

Board of the Appraisal Foundation, which holds 

that USPAP creates an obligation for appraisers to 

recognize and adhere to applicable assignment 

conditions, including, for federally related 

transactions, FIRREA title XI and the regulations 

prescribed under such title. See Appraisal 

Standards Bd., Appraisal Fdn., Advisory Op. 30, 

available at http://www.uspap.org. 

16The Federal banking agencies’ appraisal 

regulations define ‘‘market value’’ to mean the most 

probable price which a property should bring in a 

competitive and open market under all conditions 

requisite to a fair sale, the buyer and seller each 

acting prudently and knowledgeably, and assuming 

the price is not affected by undue stimulus. See 

OCC: 12 CFR 34.42(g); FDIC: 12 CFR 323.2(g); FRB: 

12 CFR 225.62(g); and NCUA: 12 CFR 722.2(g). 

Implicit in this definition is the consummation of 

a sale as of a specified date and the passing of title 

from seller to buyer under conditions whereby—(1) 

buyer and seller are typically motivated; (2) both 

parties are well informed or well advised, and 

acting in what they consider their own best interest; 

(3) a reasonable time is allowed for exposure in the 

open market; (4) payment is made in terms of cash 

in U.S. dollars or in terms of financial arrangements 

comparable thereto; and (5) the price represents the 

normal consideration for the property sold 

unaffected by special or creative financing or sales 

concessions granted by anyone associated with the 

sale. Id. 

17See OCC: 12 CFR 34.42(j); FDIC: 12 CFR 

323.2(j); FRB: 12 CFR 225.62(j); and NCUA: 12 CFR 

722.2(j). 

18See OCC: 12 CFR 34.42(k); FDIC: 12 CFR 

323.2(k); FRB: 12 CFR 225.62(k); and NCUA: 12 

CFR 722.2(k). 

19For example, the Federal banking agencies’ 

appraisal regulations require that a ‘‘State certified 

appraiser’’ be used for ‘‘[a]ll federally related 

transactions having a transaction value of 

$1,000,000 or more’’ and for ‘‘[a]ll complex 1-to 4 

family residential property appraisals rendered in 

connection with federally related transactions 

* * * if the transaction value is $250,000 or more.’’ 

See, e.g., OCC: 12 CFR 34.43(d). 

and their authority to establish safety 

and soundness regulations, apply to an 

institution’s ordering and review of an 

appraisal, the Agencies propose 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. 

The Agencies propose this 

interpretation on the grounds that it is 

consistent with TILA section 129H. 15 

U.S.C. 1639h. Congress included 

language requiring that appraisals be 

performed in conformity with FIRREA 

within the definition of ‘‘certified or 

licensed appraiser’’ under TILA section 

129H(b)(3). 15 U.S.C. 1639h(b)(3). Thus, 

the Agencies believe that Congress 

intended to limit FIRREA’s 

requirements to those that apply to the 

appraiser’s performance of the 

appraisal, rather than the FIRREA 

requirements that apply to a creditor’s 

ordering and review of the appraisal. 

Proposed comment XX(a)(1)–3 would 

also clarify 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 proposed 

§ 1026.XX(a)(1). The Agencies do not 

propose to interpret ‘‘certified or 

licensed appraiser’’ to include 

regulations 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. 

The Agencies recognize that FIRREA 

title XI applies by its terms to ‘‘federally 

related transactions’’ involving a 

narrower category of institutions than 

the group of lenders that fall within 

TILA’s definition of ‘‘creditor.’’ 13

However, by cross-referencing FIRREA 

in the definition of ‘‘certified or licensed 

appraiser,’’ the Agencies believe that 

Congress intended all creditors that 

extend higher-risk mortgage loans, such 

as independent mortgage banks, to 

obtain appraisals from appraisers who 

conform to the standards in FIRREA 

related to the development and 

reporting of the appraisal. 

Question 1: The Agencies invite 

comment on this interpretation. For 

example, do commenters believe that 

Congress intended that FIRREA title XI 

requirements would only apply to the 

subset of higher-risk mortgage loans that 

are already covered by FIRREA (i.e., 

federally related transactions with a 

transaction value greater than $250,000 

not otherwise exempted from FIRREA’s 

appraisal requirements 14)? If so, do 

commenters believe the longstanding 

existence of USPAP Advisory Opinion 

30 lends support to this approach? 15

The Agencies have not identified 

specific FIRREA regulations that relate 

to the appraiser’s development and 

reporting of the appraisal. The Federal 

banking agencies’ regulations 

implementing title XI of FIRREA 

include ‘‘minimum standards’’ 

requiring, for example, that the 

appraisal be based on the definition of 

market value in their regulations,16 and 

that appraisals be performed by Statelicensed or certified appraisers in 

accordance with their FIRREA 

regulations. The Federal banking 

agencies’ regulations also include 

standards on ‘‘appraiser independence,’’ 

including that the appraiser not have a 

direct or indirect interest, financial or 

otherwise, in the property being 

appraised. 

Question 2: The Agencies request 

comment on whether a final rule should 

address any particular FIRREA 

requirements applicable to appraisers 

related to the development and 

reporting of the appraisal. 

‘‘Certified’’ versus ‘‘licensed’’ 

appraiser. Neither TILA section 129H 

nor the proposed rule defines the 

individual terms ‘‘certified appraiser’’ 

and ‘‘licensed appraiser,’’ or specifies 

when a certified appraiser or a licensed 

appraiser must be used. Instead, the 

proposed rule, consistent with 

paragraphs (b)(1) and (b)(2) of TILA 

section 129H, would require that 

creditors obtain an appraisal performed 

by ‘‘a certified or licensed appraiser.’’ 

See proposed § 1026.XX(a)(1); 15 U.S.C. 

1639h(b)(1), (b)(2). Certified and 

licensed appraisers generally differ 

based on the examination, education, 

and experience requirements necessary 

to obtain each credential. Existing State 

and Federal law and regulations require 

the use of a certified appraiser rather 

than a licensed appraiser for certain 

types of transactions. For example, the 

Federal banking agencies’ FIRREA 

appraisal regulations define ‘‘State 

certified appraiser’’ 17 and ‘‘State 

licensed appraiser,’’ 18 and specify the 

use of a certified appraiser based on the 

complexity of the residential property 

and the dollar amount of the 

transaction.19 Several State agencies do 

not issue licensed appraiser credentials 

and issue different certified appraiser 

credentials (i.e., a certified residential 

appraiser and a certified general 

appraiser) based on the type of property. 

Question 3: The Agencies request 

comment on whether the rule should 

address the issue of when a creditor 

must use a certified appraiser rather 

than a licensed appraiser. 

Further, the proposed rule does not 

specify competency standards. 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 

Competency Rule in USPAP requires 

appraisers to determine, prior to 

accepting an assignment, that they can 

perform the assignment competently. 

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54728 Federal Register / Vol. 77, No. 172 / Wednesday, September 5, 2012 / Proposed Rules 

20See Appraisal Standards Bd., Appraisal Fdn., 

Competency Rule, USPAP (2012–2013 ed.) at U–11. 

21See OCC: 12 CFR 34.46(b); FDIC: 12 CFR 

323.6(b); FRB: 12 CFR 225.66(b); and NCUA: 12 

CFR 722.6(b). 

See USPAP, Competency Rule.20 The 

Federal banking agencies’ FIRREA 

appraisal regulations provide that a 

State certified or licensed appraiser may 

not be considered competent solely by 

virtue of being certified or licensed.21

Question 4: The Agencies request 

comment on whether the rule should 

address the issue of appraiser 

competency. 

The Agencies acknowledge that 

creditors not otherwise subject to 

FIRREA title XI may have questions 

about how to comply with the 

requirement to obtain an appraisal from 

a ‘‘certified or licensed appraiser’’ who 

performs an appraisal in conformity 

with the requirements applicable to 

appraisers in title XI of FIRREA and any 

implementing regulations. The Agencies 

also note that all creditors, including 

those already subject to FIRREA, may 

have questions about how FIRREA 

regulations relating to the development 

and reporting of the appraisal may be 

interpreted for purposes of applying 

TILA’s civil liability provisions, see 

TILA section 139, 15 U.S.C. 1640, 

including the liability provision for 

willful failures to obtain an appraisal as 

required by TILA section 129H. See 

TILA section 129H(e), 15 U.S.C. 

1639h(e). To address these concerns, the 

Agencies are proposing a safe harbor for 

compliance with TILA section 129H at 

§ 1026.XX(b)(2). See the section-bysection analysis of proposed 

§ 1026.XX(b)(2), below. 

XX(a)(2) Higher-Risk Mortgage Loans 

New 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). 

Proposed § 1026.XX(a)(2) would 

define the term ‘‘higher-risk mortgage 

loan’’ for purposes of § 1026.XX. 

Consistent with TILA sections 129H(f) 

and 103(cc)(5), proposed 

§ 1026.XX(a)(2)(i) provides that a 

‘‘higher-risk mortgage loan’’ is a closedend 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 a specified 

percentage depending on the type of 

transaction. The proposed 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 § 1026.XX(a)(2). The 

Agencies have elected to incorporate the 

substantive elements of the statutory 

definition of ‘‘residential mortgage 

loan’’ into the proposed definition of 

‘‘higher-risk mortgage loan’’ 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 

§ 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 

proposed regulation text differs from the 

express statutory language, but with no 

intended substantive change to the 

scope of TILA section 129H. 

Principal Dwelling 

Proposed comment XX(a)(2)(i)–1 

clarifies that, consistent with other 

sections of Regulation Z, under 

proposed § 1026.XX(a)(2)(i) a consumer 

can have only one principal dwelling at 

a time. Proposed comment XX(a)(2)(i)– 

1 states that the term ‘‘principal 

dwelling’’ has the same meaning as in 

§ 1026.2(a)(24), and expressly cross 

references existing comment 2(a)(24)–3, 

which further explains the meaning of 

the term. Consistent with this comment, 

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 proposed comment 

clarifies that the new dwelling is 

considered the principal dwelling. 

Average Prime Offer Rate 

Proposed comment XX(a)(2)(i)–2 

would cross-reference existing comment 

35(a)(2)–1 for guidance on APORs. 

Existing 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 fixedrate 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 Board, which 

currently publishes the APORs, uses a 

survey of creditors that both meets the 

criteria of § 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. An example of such a 

survey, and the survey that is currently 

used to calculate APORs, is the Freddie 

Mac Primary Mortgage Market Survey.®

As of the date of this proposed rule, the 

table of APORs is published by the 

Board; however, the Bureau will assume 

the responsibility for publishing all of 

the elements of the table in the future. 

Comparable Transaction 

Proposed comment XX(a)(2)(i)–3 

cross-references guidance in existing 

comments 35(a)(2)–2 and 35(a)(2)–4 

regarding how to identify the 

‘‘comparable transaction’’ in 

determining whether a transaction 

meets the definition of a ‘‘higher-risk 

mortgage loan’’ under § 1026.XX(a)(2)(i). 

As these comments indicate, 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. 

Consistent with the Board’s current 

practices, the Bureau intends to publish 

on the internet, in table form, APORs for 

a wide variety of mortgage transaction 

types based on available information. 

For example, the Board 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 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. Currently, the Board 

calculates an APR, 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 APRs 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 Board 

publishes on the internet the 

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Federal Register / Vol. 77, No. 172 / Wednesday, September 5, 2012 / Proposed Rules 54729 

22See http://www.ffiec.gov/ratespread/ 

newcalchelp.aspx#9. 

23See 2012 TILA–RESPA Proposal, pp. 101–127, 

725–28, 905–11 (July 9, 2012), available at http:// 

files.consumerfinance.gov/f/ 

201207_cfpb_proposed-rule_integrated-mortgagedisclosures.pdf). This proposal is similar to the 

simpler, more inclusive finance charge proposed by 

the Board in its 2009 proposed amendments to 

Regulation Z containing comprehensive changes to 

the disclosures for closed-end credit secured by real 

property or a consumer’s dwelling. See 74 FR 

43232, 43241–45 (Aug. 26, 2009). 

methodology it uses to arrive at these 

estimates.22

Date APR is Set 

Proposed comment XX(a)(2)(i)–4 

would cross-reference existing comment 

35(a)(2)–3 for guidance on the date the 

APR is set. Existing comment 35(a)(2)– 

3 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 proposal, for purposes of 

§ 1026.XX(a)(2)(i), the creditor should 

use the last date the interest rate for the 

mortgage is set before consummation. 

‘‘Higher-Risk Mortgage Loan’’ Versus 

‘‘Higher-Priced Mortgage Loan’’ 

TILA section 129H(f) defines the term 

‘‘higher-risk mortgage’’ in a similar 

manner to the existing Regulation Z 

definition of ‘‘higher-priced mortgage 

loan.’’ 12 CFR 1026.35(a). However, the 

statutory definition of higher-risk 

mortgage differs from the existing 

regulatory definition of higher-priced 

mortgage loan in several 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 contains 

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 have concerns that the use 

of two such similar terms within the 

same regulation may cause confusion to 

both consumers and industry. However, 

given that the definitions of the two 

terms differ in significant ways, the 

Agencies are proposing, consistent with 

the statute, to define and use the term 

‘‘higher-risk mortgage loan’’ when 

establishing the scope of proposed 

§ 1026.XX. 

Question 5: The Agencies request 

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. 

In addition, proposed § 1026.XX uses 

the term ‘‘higher-risk mortgage loan’’ 

instead of the statutory term ‘‘higherrisk mortgage’’ for clarity and 

consistency with § 1026.35, which uses 

the term ‘‘higher-priced mortgage loan.’’ 

12 CFR 1026.35(a). 

XX(a)(2)(i)(A) and (a)(2)(i)(B) 

Trigger for First Lien Loans 

Consistent with TILA section 

129H(f)(2)(A)–(B), paragraphs 

(a)(2)(i)(A) and (a)(2)(i)(B) of proposed 

§ 1026.XX set the following thresholds 

for the amount by which the APR must 

exceed the applicable APOR for a loan 

secured by a first lien to qualify as a 

higher-risk mortgage loan: 

• By 1.5 or more percentage points, 

for a loan 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 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. 

Paragraphs (a)(2)(i)(A) and (a)(2)(i)(B) 

of proposed § 1026.XX include several 

non-substantive changes from the 

statutory language for clarity and 

consistency with § 1026.35(b)(3)(v). For 

an exemption from the requirement to 

escrow for property taxes and insurance 

for ‘‘higher-priced mortgage loans,’’ 

§ 1026.35(b)(3)(v) defines a ‘‘jumbo’’ 

loan as: ‘‘[A] transaction 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.’’ 

In particular, the proposal would use 

the phrase ‘‘for a loan secured by a first 

lien with’’ in place of the statutory 

phrase ‘‘in the case of a first lien 

residential mortgage loan having.’’ See 

15 U.S.C. 1639h(f)(2)(A)–(B). As 

discussed above, all of the elements of 

the statutory definition of the term 

‘‘residential mortgage loan’’ are 

incorporated into proposed 

§ 1026.XX(a)(2)(i). The proposed rule 

also uses the phrase ‘‘for the maximum 

principal obligation eligible for 

purchase by Freddie Mac’’ in place of 

the statutory phrase ‘‘pursuant to the 

sixth sentence of section 305(a)(2) the 

Federal Home Loan Mortgage 

Corporation Act,’’ for consistency with 

§ 1026.35(b)(3)(v) and without intended 

substantive change. 

XX(a)(2)(i)(C) 

Trigger for Subordinate-Lien Loans 

Consistent with TILA section 

129H(f)(2)(C), proposed 

§ 1026.XX(a)(2)(i)(C) provides that the 

APR must exceed the applicable APOR 

by 3.5 or more percentage points for a 

loan secured by a subordinate lien to 

qualify as a higher-risk mortgage loan. 

In addition, for the reasons discussed 

above, proposed § 1026.XX(a)(2)(i)(C) 

uses the phrase ‘‘for a loan secured by 

a subordinate lien’’ in place of the 

statutory phrase ‘‘for a subordinate lien 

residential mortgage loan.’’ 15 U.S.C. 

1639h(f)(2)(C). 

Alternative Calculation Method: 

Transaction Coverage Rate 

In the Bureau’s 2012 TILA–RESPA 

Proposal, the Bureau is proposing to 

adopt a simpler and more inclusive 

finance charge calculation for closedend credit secured by real property or a 

dwelling.23 The finance charge is 

integral to the calculation of the APR, 

which is designed to serve as a 

benchmark in TILA disclosures for 

consumers to evaluate the overall cost of 

credit. 

Currently, TILA and Regulation Z 

allow creditors to exclude various fees 

or charges from the finance charge, 

including most real estate-related 

closing costs. Consumer groups, 

creditors, and some government 

agencies have long been dissatisfied 

with the ‘‘some fees in, some fees out’’ 

approach to the finance charge. The 

2012 TILA–RESPA Proposal would 

maintain TILA’s definition of a finance 

charge as a fee or charge payable 

directly or indirectly by the consumer 

and imposed directly or indirectly by 

the creditor as an incident to the 

extension of credit. However, the 

proposal would require the creditor to 

include in the finance charge most 

charges by third parties. The Bureau’s 

2012 TILA–RESPA proposal discusses 

the potential benefits to consumers of 

making the APR a more accurate and 

useful comparison tool and to industry 

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54730 Federal Register / Vol. 77, No. 172 / Wednesday, September 5, 2012 / Proposed Rules 

24See 2012 TILA–RESPA Proposal at 101–27, 

600–08. 

25See 2012 TILA–RESPA Proposal at, e.g., 101– 

12. 

26See 2012 HOEPA Proposal, pp. 44, 149–211 

(July 9, 2012), available at http:// 

files.consumerfinance.gov/f/ 

201207_cfpb_proposed-rule_high-cost-mortgageprotections.pdf. 

27Freddie Mac defines ‘‘total points’’ to include 

both ‘‘discount [points] and origination fees that 

have historically averaged around one point.’’ See 

http://www.freddiemac.com/pmms/abtpmms.htm. 

The Agencies understand that it is not clear that 

survey respondents are consistent in their reporting 

or in including origination fees not expressed as a 

point. 

28See 2012 HOEPA Proposal (July 9, 2012), 

available at http://files.consumerfinance.gov/f/ 

201207_cfpb_proposed-rule_high-cost-mortgageprotections.pdf. 

29See 2012 HOEPA Proposal at 39–50, 218, 246. 

The transaction coverage rate has been proposed 

previously by the Board for substantially similar 

reasons in a proposal related to mortgages in 2010, 

see 75 FR 58539, 58660–62, Sept. 24, 2010 (2010 

Mortgage Proposal), and 2011 Escrow Proposal, see 

76 FR 11598, 11609, 11620, 11626, March 2, 2011. 

30See 2012 HOEPA Proposal at 46–47. The 

wording of the Board’s proposed definition of 

‘‘transaction coverage rate’’ varied slightly between 

the 2010 Mortgage Proposal and the 2011 Escrow 

Proposal as to treatment of charges retained by 

mortgage broker affiliates. In its 2012 HOEPA 

Proposal, the Bureau proposes to use the 2011 

Escrow Proposal version, which would include 

charges retained by broker affiliates. The Agencies 

believe that this approach is consistent with the 

rationale articulated by the Board in its earlier 

proposals and with certain other parts of the DoddFrank Act that distinguish between charges retained 

by the creditor, mortgage broker, or affiliates of 

either company. See, e.g., Dodd-Frank Act section 

1403. 

of using simpler calculations to reduce 

compliance burden and litigation risk.24

A simpler and more inclusive finance 

charge, however, would increase the 

APR for most mortgage loans. However, 

the Agencies currently lack sufficient 

data to model the amount by which this 

change would increase the APR or how 

the increase in turn would affect the 

number of loans that will exceed the 

statutory threshold for higher-risk 

mortgages. The Agencies note that the 

Bureau is seeking data to assist in 

assessing potential impacts of a more 

inclusive finance charge in connection 

with the Bureau’s 2012 TILA–RESPA 

Proposal 25 and its 2012 HOEPA 

Proposal.26

Under TILA section 129H(f), to 

determine whether a loan is a higherrisk mortgage loan, the loan’s APR is 

measured against the benchmark APOR. 

15 U.S.C. 1639h(f). The APOR is not a 

market wide average of the APR but, 

instead, is derived from average interest 

rates, points, and other loan pricing 

terms such as margins and indices. 

Currently, the APOR is based on the 

Freddie Mac Primary Mortgage Market 

Survey (PMMS) of pricing by a 

representative sample of creditors on 

transactions with low-risk pricing 

characteristics. There are some 

important differences between the fees 

and charges used in the calculation of 

the APR and APOR. In particular, the 

APOR consistently includes the contract 

interest rate and ‘‘total points,’’ 27 but 

the reporting of other origination fees is 

not consistently included. Thus, the 

APOR derived from such surveys likely 

understates the actual cost to consumers 

of the low-risk loans intended to form 

the benchmark. 

By contrast, the finance charge used 

to calculate the APR currently includes 

both discount points and origination 

fees, together with most other charges 

the creditor retains and certain thirdparty charges. By including additional 

creditor and third-party charges, the 

proposed more inclusive finance charge 

would widen the disparity between APR 

and APOR and potentially push more 

loans into the ‘‘higher-risk mortgage 

loan’’ category, though by how much is 

uncertain. 

As noted, the Bureau, in connection 

with its 2012 TILA–RESPA Proposal, is 

proposing a more inclusive finance 

charge. The Agencies are aware that the 

more inclusive finance charge has 

implications for several rulemakings, 

including this proposal regarding 

higher-risk mortgage appraisal rules, the 

Bureau’s 2012 HOEPA Proposal,28 as 

well as the 2011 ATR Proposal and the 

2011 Escrow Proposal. Each of these 

proposals separately discusses the 

impacts of the more inclusive finance 

charge and potential modifications, and 

the Agencies believe that it is helpful to 

do so in this proposal as well. This 

approach permits assessment of the 

impacts and the merits of any 

modifications on a rule-by-rule basis. 

Question 6: Accordingly, this 

proposal seeks comment on whether 

and how to account for the implications 

of a more inclusive finance charge on 

the scope of higher-risk mortgage 

coverage. 

If the Bureau adopts a more inclusive 

finance charge, one way potentially to 

reduce the disparity between the 

resulting APR and the APOR for 

purposes of different regulatory 

thresholds would be to modify the 

numeric threshold that triggers 

coverage. The Bureau sought comment 

on such an approach in the 2012 

HOEPA proposal, as one of two 

alternatives, but lacked the data 

necessary to propose a specific numeric 

modification. The Agencies similarly 

lack such data for higher-risk mortgages. 

However, unlike the Bureau’s authority 

to adjust the threshold triggers in 

HOEPA, TILA section 129H does not 

give the Agencies express authority to 

revise the numeric threshold triggers for 

purposes of determining which loans 

are higher-risk mortgage loans. 15 U.S.C. 

1639h. See also TILA section 

103(bb)(2)(A) and (B), 15 U.S.C. 

1639h(bb)(2)(A) and (B). 

An alternative approach would be to 

use a ‘‘transaction coverage rate’’ (TCR) 

for the APR as the metric for 

determining whether a closed-end loan 

is a higher-risk mortgage loan subject to 

§ 1026.XX. This is the other alternative 

on which the Bureau seeks comment in 

the 2012 HOEPA Proposal.29 Under this 

approach, the TCR would be calculated 

in a manner similar to how the APR is 

calculated, except that the prepaid 

finance charge used for the TCR 

calculation would include only charges 

retained by the creditor, a mortgage 

broker, or an affiliate of either.30 The 

TCR would not reflect other closing 

costs that would be included in the 

broader finance charge for purposes of 

calculating the APR that would be 

disclosed to consumers. For example, 

the APR resulting from the proposed 

more inclusive finance charge would 

reflect third-party charges such as title 

insurance premiums, but the TCR 

would not. See 75 FR 58539, 58661; 76 

FR 11598, 11626. Thus, a creditor 

would calculate the TCR to determine 

coverage, but the new APR would be 

used for consumer disclosures. 

If the Bureau adopts a more inclusive 

finance charge, the Agencies will 

consider whether to adopt the TCR in 

this rule. This alternative would allow 

creditors to exclude some fees from the 

‘‘rate’’ used to determine if a loan is a 

‘‘higher-risk mortgage loan.’’ By 

excluding these fees, it is possible fewer 

loans would be covered by the rule. 

Accordingly, to adopt the TCR, the 

Agencies would rely on their authority 

to exempt a class of loans from the 

requirements of the rule if the Agencies 

determine 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). The Agencies believe 

that use of the TCR could have both 

advantages and disadvantages with 

respect to being in the public interest 

and promoting the safety and soundness 

of creditors. One advantage would be 

that loans that Congress may not have 

intended to be treated as higher-risk 

mortgage loans would remain not 

covered by the higher-risk mortgage 

appraisal requirements. On the other 

hand, some loans that Congress 

intended to be treated as higher-risk 

mortgages might end up not being 

covered by the higher-risk mortgage 

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Federal Register / Vol. 77, No. 172 / Wednesday, September 5, 2012 / Proposed Rules 54731 

31Agency examiners and enforcement staff, as 

well as consumers seeking to determine whether 

they are entitled to the higher-risk mortgage 

protections, would have to know how to determine 

and calculate the TCR and how to verify a creditor’s 

TCR calculation to ascertain whether the appraisal 

protections should apply to a given transaction. 

32 In the Board’s 2010 Mortgage Proposal, the 

definition of ‘‘transaction coverage rate’’ was 

proposed in § 226.35(a)(2)(i), and the definition of 

‘‘average prime offer rate’’ in existing § 226.35(a)(2) 

would have been redesignated as § 226.35(a)(2)(ii) 

for organizational purposes. The Board’s 2011 

Escrow Proposal contained parallel provisions, 

although they were set forth in a proposed new 

§ 226.45(a)(2)(i) and (ii). 

33 In its 2009 mortgage proposal, the Board relied 

on a 2008 survey of closing costs conducted by 

Bankrate.com that contains data for hypothetical 

$200,000 loans in urban areas. See 74 FR 43232, 

43244 (Aug. 26, 2009). Based on that data, the 

Board estimated that 3 percent of loans would be 

reclassified as ‘‘higher-priced loans’’ (which are 

similar to ‘‘higher-risk mortgages’’) if the definition 

of finance charge was expanded. See id. The 

Agencies are considering the 2010 version of that 

survey; however, the data being sought by the 

Bureau in its 2012 TILA–RESPA Proposal and 2012 

HOEPA Proposal as described above would provide 

more representative information regarding closing 

and settlement costs that would allow for a more 

refined analysis of the proposals. 

appraisal requirements. This is because 

the TCR as proposed would exclude 

some third-party fees that are currently 

included in the finance charge, such as 

upfront mortgage guaranty insurance 

premiums paid to independent thirdparty providers. The Agencies expect to 

analyze the potential differential as data 

become available. 

Another potential disadvantage is that 

adopting a TCR for determining 

coverage would require a creditor to 

make an additional calculation to 

determine whether a loan is subject to 

TILA section 129H. Creditors would 

continue to be required to calculate the 

APR to provide required disclosures to 

the consumer. Additionally, creditors 

would have to calculate the TCR to 

determine whether the loan is subject to 

the requirements of this rule. On the 

other hand, if the Bureau adopts both 

the more inclusive finance charge and 

the TCR modification in a final rule 

pursuant to the 2012 HOEPA Proposal 

and 2011 Escrow Proposal, adopting the 

TCR modification in the higher-risk 

mortgage rule could ensure consistency 

across rules. 

Question 7: Comments are invited on 

both the potential for TCR to introduce 

additional complexity in enforcement 

and litigation contexts 31 and any 

possible additional burden for the 

industry. 

In light of the uncertainty regarding 

whether the Bureau will adopt a more 

inclusive finance charge and the 

potential impact of that change, the 

Agencies have proposed two alternative 

versions of § 1026.XX(a)(2)(i), similar to 

those proposed by the Bureau in 

connection with the 2012 HOEPA 

Proposal. Alternative 1 would define the 

threshold for higher-risk mortgages 

based on APR. Alternative 2 would use 

TCR. The Agencies would not adopt 

Alternative 2 if the Bureau does not 

change the definition of finance charge. 

As noted above, if the Agencies were to 

adopt Alternative 2, the Agencies would 

rely on their exemption authority set 

forth in TILA section 129H(b)(4)(B). 15 

U.S.C. 1639h(b)(4)(B). The Agencies 

would reference the definition of 

‘‘transaction coverage rate’’ provided in 

the Board’s proposed § 226.45(a)(2)(i), 

proposed by the Bureau to be codified 

in § 1026.35(a)(2)(i), along with the 

guidance provided in its associated 

commentary. The Agencies also would 

reference the definition of ‘‘average 

prime offer rate’’ proposed by the 

Bureau to be codified in 

§ 1026.35(a)(2)(ii). This is the approach 

to defining TCR (and APOR) that the 

Bureau is proposing in the 2012 HOEPA 

Proposal. See 2012 HOEPA Proposal at 

46–47, 218.32

Again, the Agencies do not currently 

have sufficient data to model the impact 

of the more inclusive finance charge on 

coverage of the higher-risk mortgage 

loan requirements.33 Similarly, the 

Agencies lack data to assess whether the 

benefits and costs of those requirements 

are significantly different as to the loans 

that would be affected by the more 

inclusive finance charge. 

Question 8: The Agencies therefore 

seek comment on the impacts the 

proposed more inclusive finance charge 

would have on application of the 

higher-risk mortgage loan requirements, 

and whether it would be in the public 

interest and promote the safety and 

soundness of creditors to modify the 

triggers for higher-risk mortgage loans to 

approximate more closely the coverage 

levels under the finance charge and APR 

as currently calculated. 

Question 9: If potential modifications 

are warranted, the Agencies also seek 

comment on what methods may be 

appropriate, including use of the TCR in 

lieu of APR, or other methods 

commenters may suggest. The appraisal 

provisions of the Dodd-Frank Act are 

intended to protect lenders, consumers 

and investors against fraudulent and 

inaccurate appraisals. With this in 

mind, commenters are invited to 

address the relative costs and benefits of 

any modification in the context of the 

higher-risk mortgage loan appraisal 

proposal, including any potential 

impact on the market. Where possible, 

comments should include supporting 

data. In particular, data regarding the 

amount of charges currently considered 

prepaid finance charges and the amount 

of charges currently excluded from the 

finance charge would enable the 

Agencies to make an informed 

assessment of the impacts a more 

inclusive finance charge would have on 

the higher-risk mortgage loan rule, and 

may be useful as well to the Bureau in 

considering other affected rules. 

XX(a)(2)(ii) 

Exclusions from the Definition of 

Higher-Risk Mortgage Loan 

Consistent with the express language 

of TILA section 129H(f) and pursuant to 

the Agencies’ general exemption 

authority set forth in TILA section 

129H(b)(4)(B), the proposed rule would 

expressly exclude certain classes of 

consumer credit transactions from the 

definition of higher-risk mortgage loan. 

15 U.S.C. 1639h(b)(4)(B) and (f). 

Specifically, proposed 

§ 1026.XX(a)(2)(ii)) excludes from the 

definition of higher-risk mortgage loan 

the following: 

• Any loan that is a qualified 

mortgage loan as defined in 

§ 1026.43(e); 

• A reverse-mortgage transaction as 

defined in § 1026.33(a). 

• A loan secured solely by a 

residential structure. 

Each of these proposed exclusions 

from the definition of higher-risk 

mortgage loan is discussed in more 

detail below. 

XX(a)(2)(ii)(A) 

Qualified Mortgage Loans 

TILA section 129H(f) expressly 

excludes from the definition of higherrisk 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, proposed 

§ 1026.XX(a)(2)(ii) would exclude a 

qualified mortgage loan as defined in 

§ 1026.43(e) which would cover all 

qualified mortgages as defined by TILA 

section 129C as implemented in 

regulations of the Bureau. The Agencies 

believe that this single broad exclusion 

promotes clarity because the broader 

term ‘‘qualified mortgage’’ as defined in 

§ 226.43(e) of the 2011 ATR Proposal, 

includes any reverse mortgage loan that 

the Bureau may define by regulation as 

a qualified mortgage. 

The Agencies note that as of the date 

of this proposal, the Bureau has not yet 

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54732 Federal Register / Vol. 77, No. 172 / Wednesday, September 5, 2012 / Proposed Rules 

34The cross-reference in the proposed regulation 

text assumes that the Bureau’s final rule regarding 

qualified mortgages will use the same numbering as 

in the 2011 ATR Proposal (updated to reflect that 

the Bureau’s Regulation Z is set forth in 12 CFR 

1026 rather than 12 CFR 226). If the numbering of 

the Bureau’s final rule regarding qualified 

mortgages differs from the 2011 ATR Proposal, the 

Agencies will update the numbering of the crossreference to the definition of ‘‘qualified mortgage’’ 

when finalizing this proposal. 

35See CFPB, Reverse Mortgages: Report to 

Congress 14, 70–99 (June 28, 2012), available at 

http://www.consumerfinance.gov/reports/reversemortgages-report. 

36See 24 CFR 206.1 et seq., and HUD Handbooks 

4235.1 and 4330.1 (chapter 13). 

37See, e.g., CFPB, Reverse Mortgages: Report to 

Congress 18. 

38 Id. 

39 Id. 

40See http://portal.hud.gov/hudportal/HUD?src=/ 

program_offices/housing/rmra/oe/rpts/hecm/ 

hecmmenu (‘‘Home Equity Conversion Mortgage 

Characteristics’’). 

41 12 U.S.C. 3331. 

42See, e.g., 12 CFR 225.63. Under the regulations 

implementing FIRREA title XI, ‘‘real estate’’ is 

defined in part as ‘‘an identified parcel or tract of 

land, with improvements. * * *’’ 12 CFR 225.62(h). 

issued final rules implementing TILA 

section 129C’s definition of ‘‘qualified 

mortgage.’’ Prior to the transfer of 

authority regarding TILA section 129C 

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 12 CFR 

226.43(e). See 76 FR 27390, 27484–85 

(May 11, 2011). The Bureau expects to 

issue a final rule implementing, among 

other things, the definition of ‘‘qualified 

mortgage,’’ based on the 2011 ATR 

Proposal.34

XX(a)(2)(ii)(B) 

Reverse Mortgage Transactions 

Proposed § 1026.XX(a)(2)(ii)(B) would 

exclude reverse mortgage transactions as 

defined in § 1026.33(a) from the 

definition of ‘‘higher-risk mortgage 

loan.’’ TILA section 129H(b)(4)(B) 

authorizes the Agencies to jointly 

exempt, by rule, a class of loans from 

the requirements of TILA sections 

129H(a) or 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). 

Today, the vast majority of reverse 

mortgage transactions made in the 

United States are insured by the Federal 

Housing Administration (FHA) as part 

of the U.S. Department of Housing and 

Urban Development’s (HUD) Home 

Equity Conversion Mortgage (HECM) 

Program.35 To originate reverse 

mortgage transactions under HUD’s 

HECM program, a lender must adhere to 

specific standards, including appraisal 

requirements similar to those required 

under proposed § 1026.XX.36 Moreover, 

the FHA’s HECM program provides 

protections to both the lender and the 

borrower. Lenders are guaranteed that 

they will be repaid in full when the 

home is sold, regardless of the loan 

balance or home value at repayment.37

Borrowers are guaranteed that they will 

be able to access their authorized loan 

funds in the future (subject to the terms 

of the loan), even if the loan balance 

exceeds the value of the home or if the 

lender experiences financial 

difficulty.38 Borrowers or their estates 

are not liable for loan balances that 

exceed the value of the home at 

repayment—FHA insurance covers this 

risk.39

Another reason that the Agencies 

propose to exclude reverse mortgage 

transactions from the definition of 

higher-risk mortgage loan is that a 

methodology for determining APORs for 

reverse mortgage transactions does not 

currently exist. As explained in the 

discussion of proposed 

§ 1026.XX(a)(2)(i) above, determining 

whether a given transaction constitutes 

a ‘‘higher-risk mortgage loan’’ requires 

lenders to compare a transaction’s APR 

with a published APOR. See comments 

35(a)(2)–2 and 35(a)(2)–4. The Board 

currently publishes APORs for types of 

mortgage transactions potentially 

subject to proposed § 1026.XX. 

However, the Board does not currently 

publish APORs for reverse mortgages 

because reverse mortgages are exempt 

from the rules applicable to ‘‘higherpriced mortgage loans’’ in § 1026.35, for 

which the APOR was designed. See 

§ 1026.35(a)(2)–(3) . 

The Agencies are concerned that 

providing a permanent exemption for 

reverse mortgage transactions that are 

not qualified mortgages would eliminate 

the consumer protections provided by 

this rule to populations that rely on 

such products. Reverse mortgages are 

complex products that present 

consumers with a number of issues to 

evaluate that are different from a typical 

mortgage transaction, and the potential 

for reemergence of private reverse 

mortgage products in the market 

warrants careful evaluation from a 

consumer protection standpoint. 

However, the Agencies believe that 

exempting reverse mortgage transactions 

until the Agencies have additional time 

to study reverse mortgages is in the 

public interest and promotes the safety 

and soundness of creditors. The 

Agencies believe that this exemption is 

in the public interest because, without 

a clear way to determine whether a 

given reverse mortgage is a ‘‘higher-risk 

mortgage loan,’’ creditors face legal 

uncertainty that may impact credit 

availability. In addition, the costs 

associated with legal uncertainty could 

negatively impact a creditor’s safety and 

soundness. 

The Agencies request comment on the 

appropriateness of this exemption. 

Additionally, the Agencies seek 

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. For 

example, HUD publishes information on 

HECMs, including the contract rate.40

The contract rate does not cover closing 

costs and insurance associated with 

reverse mortgages and included in a 

reverse mortgage APR, but nonetheless 

may be a starting point for developing 

a ‘‘higher-risk mortgage loan’’ threshold 

for reverse mortgages similar to the 

APOR metric used for forward 

mortgages. 

Question 10: The Agencies request 

comment on whether this approach 

could be used to develop an index that 

tracks reverse mortgages. The Agencies 

also seek specific suggestions for other 

approaches to developing an index for 

reverse mortgages. 

XX(a)(2)(ii)(C) 

Loans Secured Solely by a Residential 

Structure 

The Agencies propose in 

§ 1026.XX(a)(2)(ii)(C) to exclude from 

the definition of higher-risk mortgage 

loan any loan secured solely by a 

residential structure. The Agencies 

believe that TILA section 129H was 

intended to apply only to loans secured 

at least in part by real estate. 15 U.S.C. 

1639h. TILA section 129H requires 

appraisals for higher-risk mortgage loans 

that conform with, among other 

provisions, FIRREA title XI. Id.; 12 

U.S.C. 3331 et seq. FIRREA title XI 

governs appraisals that involve real 

estate related transactions.41

Additionally, TILA section 129H 

requires that appraisals be performed by 

a ‘‘certified or licensed appraiser.’’ TILA 

section 129H(b)(1), 15 U.S.C. 

1639h(b)(1). The term ‘‘certified or 

licensed appraiser’’ has historically 

been used in Federal regulations to refer 

to appraisers who are credentialed to 

appraise real estate.42

Further, the Agencies believe that 

excluding any loan secured solely by a 

residential structure from the definition 

of higher-risk mortgage loan is 

appropriate pursuant to the exemption 

authority under TILA section 

129H(b)(4)(B). The Agencies understand 

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Federal Register / Vol. 77, No. 172 / Wednesday, September 5, 2012 / Proposed Rules 54733 

43The Agencies are proposing 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 excludes 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 are 

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. 

that loans secured solely by a residential 

structure, such as a manufactured home, 

typically more closely resemble titled 

vehicle loans. For example, 

manufactured housing industry 

representatives indicated during 

outreach calls with the Agencies that 

traditional real estate appraisals 

performed by a ‘‘certified or licensed 

appraiser,’’ as defined in TILA section 

129H(b)(3) and proposed 

§ 1026.XX(a)(1), are not appropriate or 

feasible for the majority of 

manufactured home financing 

transactions. They indicated that, 

typically, for new manufactured homes, 

the home value is based on the sales 

price listed on the manufactured home’s 

wholesale invoice to the retailer. The 

wholesale invoice details the cost of the 

home at the point of manufacture, 

adding proprietary allowances and 

calculations to arrive at a ‘‘maximum 

sales price.’’ The manufacturer certifies 

the authenticity of the invoice and the 

accuracy of the price paid by the 

retailer. For used manufactured homes, 

the home value is most commonly based 

on the price guides published by trade 

journals for manufactured homes. 

Certain variations exist, depending on a 

number of factors, such as whether the 

used home is being moved. 

In addition, the sales price solely for 

a manufactured home, but not the land 

to which it is attached, is typically 

lower than the cost of both a 

manufactured home and the land to 

which it is attached. This may make 

requiring appraisals with interior 

property visits extremely expensive 

relative to the cost of the manufactured 

home. Taken together, these factors 

could significantly increase costs for 

consumers and industry and constrain 

lending in this area of the housing 

market. Therefore, the Agencies believe 

that excluding such transactions from 

the definition of higher-risk mortgage 

loan is in the public interest and 

promotes the safety and soundness of 

creditors. 

At the same time, the Agencies 

understand based on informal outreach 

that, for manufactured home loans 

secured by both a manufactured home 

and the land to which the home is 

attached, appraisals performed by 

certified or licensed appraisers are 

feasible and that many creditors order 

such appraisals in underwriting these 

transactions. Therefore, the Agencies 

propose to exclude from the rule only 

loans secured ‘‘solely’’ by a residential 

structure.43 Accordingly, proposed 

comment XX(a)(2)(ii)(C)–1 clarifies that, 

under § 1026.XX(a)(2)(ii)(C), loans 

secured solely by a residential structure 

cannot be ‘‘higher-risk mortgage loans.’’ 

Thus, for example, a loan secured by a 

manufactured home and the land on 

which it is sited could be a ‘‘higher-risk 

mortgage loan.’’ By contrast, a loan 

secured solely by a manufactured home 

cannot be a ‘‘higher-risk mortgage loan.’’ 

Question 11: The Agencies request 

comment on whether this proposed 

exclusion is 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. In particular, the Agencies 

request comment on whether, rather 

than an appraisal performed by a 

certified or licensed appraiser, some 

alternative standards for valuing 

residential structures securing higherrisk mortgage loans might be feasible 

and appropriate to include as part of the 

final rule. 

Other Exclusions from the Definition of 

Higher-Risk Mortgage Loan 

Construction loans. In construction 

loan transactions, an interior visit of the 

property securing the loan is generally 

not feasible because construction loans 

provide financing for homes that are 

proposed to be built or are in the 

process of being built. At the same time, 

the Agencies recognize that construction 

loans that meet the pricing thresholds 

for higher-risk mortgage loans may pose 

many of the same risks to consumers as 

other types of loans meeting those 

thresholds. 

Question 12: The Agencies request 

comment on whether to exclude 

construction loans from the definition of 

higher-risk mortgage loan. If not, the 

Agencies seek comment on whether any 

additional compliance guidance is 

needed for applying TILA section 

129H’s appraisal rules to construction 

loans. Alternatively, the Agencies 

request 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. 

Bridge loans. Bridge loans are shortterm 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 

downpayment) 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. 

The Agencies are concerned 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, the Agencies recognize that rates 

on bridge loans are often higher than on 

long-term home mortgages, so bridge 

loans may be more likely to meet the 

‘‘higher-risk mortgage loan’’ triggers. 

However, these loans may be useful and 

even necessary for many consumers. 

Higher-risk mortgage loans 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. It is unclear 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. 

Question 13: For these reasons, the 

Agencies request comment on whether 

to exclude bridge loans from the 

definition of higher-risk mortgage loan. 

If not, the Agencies seek comment on 

whether any additional compliance 

guidance is needed for applying TILA 

section 129H’s appraisal rules to bridge 

loans. 

Question 14: The Agencies also 

request comment on whether other 

classes of loans should be excluded 

from the definition of higher-risk 

mortgage loan. 

XX(a)(3) National Registry 

As discussed in more detail below, to 

qualify for the safe harbor provided in 

proposed § 1026.XX(b)(2)(iii) 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 

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54734 Federal Register / Vol. 77, No. 172 / Wednesday, September 5, 2012 / Proposed Rules 

44The Agencies are proposing 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. 

45See Appraisal Standards Bd., Appraisal Fdn., 

USPAP (2012–2013 ed.) available at http:// 

www.uspap.org. 

46See 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. 

47See OCC: 12 CFR 34.43(a)(1); FDIC: 12 CFR 

323.3(a)(1); FRB: 12 CFR 225.63(a)(1); and NCUA: 

12 CFR 722.3(a)(1) (implementing FIRREA section 

1113, 12 U.S.C. 3342). 

48See, e.g., Interagency Appraisal and Evaluation 

Guidelines, 75 FR 77450 (Dec. 10, 2010). 

the Federal Financial Institutions 

Examination Council (FFIEC) is 

required to maintain a registry of State 

certified and licensed appraisers eligible 

to perform appraisals in connection 

with federally related transactions. 12 

U.S.C. 3338. For purposes of qualifying 

for the safe harbor, the proposed rule 

would require that a creditor must 

verify that the appraiser holds a valid 

appraisal license or certification through 

the registry maintained by the Appraisal 

Subcommittee. Thus, proposed 

§ 1026.XX(a)(3) would provide that the 

term ‘‘National Registry’’ means the 

database of information about State 

certified and licensed appraisers 

maintained by the Appraisal 

Subcommittee of the FFIEC. 

XX(a)(4) 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, proposed 

§ 1026.XX(a)(1) would further clarify 

that, among other things, 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, § 1026.XX(a)(4) 

would define 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. 

XX(b) Appraisals Required for HigherRisk Mortgage Loans 

XX(b)(1) In General 

Consistent with TILA section 129H(a) 

and (b)(1), proposed § 1026.XX(b)(1) 

provides 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(b)(1). 

XX(b)(2) Safe Harbor 

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). TILA section 129H(b)(3) 

goes on to define a ‘‘certified or 

licensed’’ appraiser in some detail. 15 

U.S.C. 1639h(b)(3). The statute, 

however, is silent as to how creditors 

should determine whether the written 

appraisals they have obtained comply 

with the statutory requirements under 

TILA section 129H(b)(1) and (b)(3). To 

address compliance uncertainties 

discussed in more detail below, the 

Agencies are proposing a safe harbor in 

§ 1026.XX(b)(2) that establishes 

affirmative steps that creditors may 

follow to satisfy their statutory 

obligations under TILA section 129H. 

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. 

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. 

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 banking agencies. See 12 U.S.C. 

3339, 3350. Pursuant to FIRREA title XI, 

the Federal banking 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 in 

connection with federally related 

transactions, including loans secured by 

real estate, exceeding certain dollar 

thresholds.46 Specifically, the banking 

agencies have issued regulations 

exempting most federally related 

transactions with a transaction value of 

$250,000 or less from the requirement to 

obtain an appraisal.47 In addition, the 

Federal banking agencies have issued a 

number of guidelines providing formal 

supervisory guidance on 

implementation and application of these 

appraisal requirements.48

The scope of creditors subject to 

FIRREA title XI is narrower than the 

scope of creditors subject to TILA, and 

FIRREA title XI and the rules issued 

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thereunder do not by their terms 

directly regulate the conduct of 

appraisers. However, the Agencies are 

proposing to interpret TILA section 

129H(b)(3)(B) to expand the 

applicability of certain FIRREA title XI 

requirements to cover creditors 

providing higher-risk mortgage loans, 

pursuant to the mandates of TILA 

section 129H. 15 U.S.C. 1639h(b)(3)(B). 

Similarly, the Agencies are proposing to 

interpret the statute to expand the 

applicability of these FIRREA title XI 

requirements to cover higher-risk 

mortgage loans that are otherwise 

exempt from the FIRREA title XI 

appraisal requirements, such as higherrisk mortgage loans of $250,000 or less. 

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. However, the statute is silent as 

to the extent of creditors’ obligations 

under the statute to evaluate appraisers’ 

compliance. 

Practically speaking, a creditor 

seeking to determine to a certainty 

whether an appraiser complied with 

USPAP for a residential appraisal would 

face an almost insurmountable 

challenge. 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, 

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. 

15 U.S.C. 1640. If TILA section 129H is 

construed to require creditors to assume 

liability for the appraiser’s compliance 

with these obligations, the Agencies are 

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 do not believe that the 

statute should be construed to intend 

this result. 

Accordingly, the Agencies are 

proposing a safe harbor, described in 

more detail below, for creditors to 

ensure compliance with proposed 

§ 1026.XX(b)(1) (implementing TILA 

section 129H(a) and (b)(1), 15 U.S.C. 

1639h(a) and (b)(1)) when the appraiser 

certifies compliance with USPAP and 

applicable FIRREA title XI 

requirements. The Agencies note that a 

certification of USPAP compliance is 

already an element of the Uniform 

Residential Appraisal Report (URAR) 

form used as a matter of practice in the 

industry. 

The Agencies believe 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 believe the safe harbor 

requirements provide reasonable 

protections to consumers and 

compliance guidance to creditors. 

Specifically, under the safe harbor in 

proposed § 1026.XX(b)(2), a creditor is 

deemed to have obtained a written 

appraisal that meets the requirements of 

§ 1026.XX(b)(1) if the creditor: 

• Orders that the appraiser 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 

(§ 1026.XX(b)(2)(i)); 

• 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 (§ 1026.XX(b)(2)(ii)); 

• Confirms that the elements set forth 

in appendix N to part 1026 are 

addressed in the written appraisal 

(§ 1026.XX(b)(2)(iii)); and 

• Has no actual knowledge to the 

contrary of facts or certifications 

contained in the written appraisal 

(§ 1026.XX(b)(2)(iv)). 

Proposed comment XX(b)(2)–1 

clarifies that a creditor that satisfies the 

conditions in § 1026.XX(b)(2)(i)–(iv) 

will be deemed to have complied with 

the appraisal requirements of 

§ 1026.XX(b)(1). In addition, the 

proposed comment further clarifies that 

a creditor that does not satisfy the 

conditions in § 1026.XX(b)(2)(i)–(iv) 

does not necessarily violate the 

appraisal requirements of 

§ 1026.XX(b)(1). 

Proposed appendix N to part 1026 

provides that, to qualify for the safe 

harbor provided in § 1026.XX(b)(2), 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 includes 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. 

Other than the certification for 

compliance with FIRREA title XI, the 

items in appendix N are derived from 

the URAR form used as a matter of 

practice in the residential mortgage 

industry. Compliance with the appendix 

N safe harbor review would require the 

creditor to check the key elements of the 

written appraisal and the appraiser’s 

certification on its face for completeness 

and internal consistency. The proposed 

rule would not require the creditor to 

make any independent judgment about 

or perform any independent analysis of 

the conclusions and factual statements 

in the written appraisal. As discussed 

above, imposing such obligations on the 

creditor would effectively require it to 

re-appraise the property. Accordingly, 

proposed comment XX(b)(2)(iii) clarifies 

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. 

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49See U.S. House of Reps., Comm. on Fin. Servs., 

Report on H.R. 1728, Mortgage Reform and AntiPredatory 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/mortgagefraud-2010/mortgage-fraud-report-2010. 

50 75 FR 66554 (Oct. 28, 2010); 12 CFR 

§ 1026.42(c)(3)(iv) (obtaining multiple valuations 

for the consumer’s principal dwelling to select the 

most reliable valuation does not violate the general 

prohibitions on coercion of persons preparing 

valuations or mischaracterizing the value assigned 

to a consumer’s principal dwelling). 

However, if the creditor has actual 

knowledge to the contrary of facts or 

certifications contained in the written 

appraisal, the safe harbor does not 

apply. 

Question 15: The Agencies request 

comment on the appropriateness of the 

safe harbor, the list of requirements a 

creditor must satisfy to receive the safe 

harbor under § 1026.XX(b)(2) and 

appendix N, and whether the proposed 

safe harbor should be included in the 

rule. In addition, the Agencies request 

comment on whether particular types of 

transactions exist for which certain 

information in proposed appendix N 

would be especially difficult for an 

appraiser to include in the written 

appraisal. If so, in these cases, the 

Agencies seek comment on what 

alternative information, if any, might be 

appropriate to require creditors to 

confirm is included in the appraisal. 

XX(b)(3) Additional Appraisal for 

Certain Higher-Risk Mortgage Loans 

XX(b)(3)(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). The Agencies have 

implemented this requirement through 

proposed § 1026.XX(b)(3). The Agencies 

have interpreted ‘‘second appraisal’’ to 

mean an appraisal in addition to the one 

required under proposed 

§ 1026.XX(b)(1). 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. This approach is 

consistent with regulations 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 (FHA AntiFlipping Rule, or FHA Rule). In general, 

under the FHA Anti-Flipping Rule, 

properties that have been resold within 

certain recent time periods are ineligible 

as security for FHA-insured mortgage 

financing. Specifically, as with TILA 

section 129H(b)(2) and proposed 

§ 1026.XX(b)(3), the FHA Anti-Flipping 

Rule requires creditors to determine 

information about a property’s sales 

history and obtain justification 

(including, in certain cases, an 

additional appraisal obtained at no cost 

to the borrower) supporting an increase 

in resale price. 

When a higher-risk mortgage loan will 

finance a consumer’s acquisition of the 

property, proposed § 1026.XX(b)(3) 

would require creditors to apply 

additional scrutiny to properties 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 proposed 

§ 1026.XX(b)(3), is to discourage 

property flipping scams, 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 flipped 

properties at inflated values can be 

financially disadvantaged if, for 

example, they incur mortgage debt that 

exceeds the value of their dwelling. 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. Thus, to ensure the 

appropriateness of an increased sales 

price, proposed § 1026.XX(b)(3)(i), 

implementing TILA section 

129H(b)(2)(A), would require an 

additional appraisal analyzing the 

property’s resale price before a creditor 

extends a higher-risk mortgage loan to 

finance the consumer’s acquisition of 

the property. 15 U.S.C. 1639H(b)(2)(A). 

The Agencies have replaced the term 

‘‘second appraisal’’ with ‘‘additional 

appraisal’’ throughout the proposed rule 

and commentary. The Agencies are 

proposing this change because the term, 

‘‘second,’’ may imply that the additional 

appraisal must be obtained after the first 

appraisal. Creditors may find it more 

efficient to order two appraisals at the 

same time and the Agencies do not 

intend to imply that, if two appraisals 

are required under proposed 

§ 1026.XX(b)(3), they must be obtained 

in any particular order. In addition, 

creditors may not be able easily to 

identify which of those two 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), as discussed in more 

detail in the section-by-section analysis 

of proposed § 1026.XX(b)(3)(v), below. 

15 U.S.C. 1639h(b)(2)(B). The Agencies 

do not believe that using the phrase 

‘‘additional appraisal’’ would change 

the substantive requirements of TILA 

section 129H(b)(2)(A). 

Question 16: The Agencies invite 

comment on this interpretation and 

whether the phrase, ‘‘additional 

appraisal,’’ should be used in the rule. 

Proposed § 1026.XX(b)(3) does 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. The Agencies 

recognize that creditors ordering two 

appraisals from different certified or 

licensed appraisers may receive 

appraisals providing different opinions. 

However, TILA section 129H does not 

require that the creditor use any 

particular appraisal, and the Agencies 

believe that a creditor should retain 

discretion to select the most reliable 

valuation, consistent with applicable 

safety and soundness obligations and 

prudential guidance. 15 U.S.C. 1639h. 

This position is consistent with the 

interim final rule on valuation 

independence published by the Board 

on October 28, 2010,50 which 

implemented new requirements in TILA 

section 129E to ensure the 

independence of appraisals and other 

property valuation types for consumer 

credit transactions secured by the 

consumer’s principal dwelling. 15 

U.S.C. 1639e. 

Proposed comment XX(b)(3)(i)–1 

clarifies 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 

§ 1026.XX(b)(3). 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. 

Question 17: The Agencies request 

comment on this proposed clarification. 

In addition, proposed 

§ 1026.XX(b)(3)(i) would require that the 

creditor obtain the additional appraisal 

prior to consummation of the higherrisk mortgage loan. TILA section 

129H(b)(2) does not specifically require 

that the additional appraisal be obtained 

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51As of the date of this proposal, the Bureau has 

not yet issued final rules implementing TILA 

section 129C. 15 U.S.C. 1639c. Prior to the transfer 

of authority regarding TILA section 129C to the 

Bureau pursuant the Dodd-Frank Act, the Board 

issued a proposed rule on qualified mortgages (2011 

ATR Proposal) that, among other things, would 

have defined the term ‘‘rural’’ in a new 

§ 1026.43(f)(2)(i). See 76 FR 27390 (May 11, 2011). 

The Bureau expects to issue a final rule 

implementing, among other things, the definition of 

‘‘rural’’ and ‘‘qualified mortgage’’ based on the 2011 

ATR Proposal. This proposed rule assumes that the 

Bureau’s final rule regarding qualified mortgages 

and defining the term rural will use the same 

numbering as in the 2011 ATR Proposal (updated 

to reflect that the Bureau’s Regulation Z is set forth 

in 12 CFR 1026 rather than 12 CFR 226). If the 

numbering of the Bureau’s final rule regarding 

qualified mortgages and defining the term rural 

differs from the Board’s 2011 ATR Proposal, the 

Agencies will update the numbering of the crossreference to the definition of ‘‘qualified mortgage’’ 

when finalizing this proposal. 

prior to consummation of the higherrisk mortgage loan, but the Agencies 

believe that this proposed 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). 

Potential Exemptions From the 

Additional Appraisal Requirement 

TILA section 129H(b)(4)(B) permits 

the Agencies to jointly exempt 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). 

Question 18: The Agencies invite 

commenters to submit data and other 

information supporting whether 

exempting any classes of higher-risk 

mortgage loans from the additional 

appraisal requirement would be in the 

public interest and promote the safety 

and soundness of creditors. Exemptions 

to be considered may include higherrisk mortgage loans made in rural areas 

where finding two independent 

appraisers may be difficult, as well as 

the types of transactions that are 

currently exempted from the restrictions 

on FHA insurance applicable to 

property resales in the FHA AntiFlipping 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. See, e.g., 24 CFR 

203.37a(c). 

Regarding a potential exemption from 

the additional appraisal requirement for 

higher-risk mortgage loans in ‘‘rural’’ 

areas, a number of industry 

representatives asserted during outreach 

with the Agencies that creditors making 

higher-risk mortgage loans in rural areas 

might have particular difficulty finding 

two competent appraisers in order to 

comply with the additional appraisal 

requirements of TILA section 129H. 15 

U.S.C. 1639h; see also section-bysection analysis of § 1026.XX(b)(3)(ii) 

(discussing the requirement that the two 

appraisals required be performed by two 

different appraisers), below. 

Question 19: Accordingly, the 

Agencies request comment on whether, 

in the final rule, the Agencies should 

rely on the exemption authority in TILA 

section 129H(b)(4)(B) to exempt higherrisk mortgage loans made in ‘‘rural’’ 

areas from the additional appraisal 

requirement. 15 U.S.C. 1639h(b)(4)(B). If 

so, the Agencies request comment on 

whether the rule should use the same 

definition of ‘‘rural’’ that is provided in 

the 2011 ATR Proposal.51 The Agencies 

also request that commenters provide 

data or other information to help 

demonstrate how such an exemption 

would serve the public interest and 

promote the safety and soundness of 

creditors. 

Purchase or Acquisition of the 

Consumer’s Principal Dwelling 

Under TILA section 129H(b)(2)(A), an 

additional appraisal would be required 

‘‘if the purpose of a higher-risk mortgage 

loan is to finance the purchase or 

acquisition of the mortgaged property’’ 

from a person who is reselling the 

property within 180 days of purchasing 

or acquiring the property at a price 

lower than the current sale price. 15 

U.S.C. 1639h(b)(2)(A). As discussed in 

the section-by-section analysis of 

proposed § 1026.XX(a)(2), higher-risk 

mortgage loans are defined by TILA 

section 129H(f) as loans secured by a 

consumer’s principal dwelling. 15 

U.S.C. 1639h(f). Thus, the additional 

appraisal requirement would not apply 

to refinances, home-equity loans, or 

subordinate liens that do not finance the 

consumer’s purchase or acquisition of a 

principal dwelling. Accordingly, 

proposed § 1026.XX(b)(3)(i) would 

require an additional appraisal only 

when the purpose of a higher-risk 

mortgage loan is to finance the 

acquisition of the consumer’s ‘‘principal 

dwelling.’’ 

In addition, the proposal does not use 

the statutory term ‘‘the mortgaged 

property.’’ 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.’’ 

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. As noted in the 

section-by-section analysis of proposed 

§ 1026.XX(a)(2) (defining ‘‘higher-risk 

mortgage loan’’), proposed comment 

XX(a)(2)(i)–1 cross-references the 

existing commentary on the meaning of 

‘‘principal dwelling.’’ When referring to 

the date on which the seller acquired 

the ‘‘property,’’ however, the Agencies 

propose to use the 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. 

XX(b)(3)(i)(A) 

Criteria for Whether an Additional 

Appraisal is Required—Date of 

Acquisition 

‘‘Acquisition’’ by the seller. To refer to 

the events in which the seller purchased 

or acquired the dwelling at issue, 

proposed § 1026.XX(b)(3) generally uses 

the term ‘‘acquisition’’ instead of the 

longer statutory phrase ‘‘purchase or 

acquisition.’’ The Agencies are 

proposing to use the sole term 

‘‘acquisition’’ because this term, as 

clarified in proposed comment 

XX(b)(3)–1, includes acquisition of legal 

title to the property, including by 

purchase. The Agencies have defined 

‘‘acquisition’’ broadly in order to 

encompass the broad statutory phrase 

‘‘purchase or acquisition.’’ Thus, as 

proposed, the additional appraisal rule 

in § 1026.XX(b)(3) would apply to the 

sale of a property previously acquired 

by the seller through a non-purchase 

acquisition, such as inheritance, 

divorce, or gift. 

The Agencies question, however, 

whether an additional appraisal should 

be required for transactions in which 

the seller may not have the same motive 

to earn a quick profit on a short-term 

investment. 

Question 20: The Agencies request 

that commenters who support applying 

the rule to higher-risk mortgage 

transactions where the seller acquired 

the property without purchasing it 

explain how doing so would be 

consistent with the statutory goal of 

addressing flipping scams. Moreover, if 

the final rule covers sales of properties 

acquired by the seller through nonpurchase acquisitions, the Agencies 

request comment on how a creditor 

should calculate the seller’s 

‘‘acquisition price.’’ For example, in a 

case where the seller acquired the 

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property by inheritance, the ‘‘sale price’’ 

could be ‘‘zero,’’ which could make a 

subsequent sale offered at any price 

within 180 days subject to the 

additional appraisal requirement. 

‘‘Acquisition’’ by the consumer. For 

consistency throughout the proposal, 

the Agencies have used the term 

‘‘acquisition’’ to refer to acquisitions by 

both the seller and the consumer. 

However, as noted above with respect to 

non-purchase acquisitions by the seller, 

the Agencies acknowledge that the term 

‘‘acquisition’’ may 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. If the consumer acquired 

the property by means other than a 

purchase, he or she likely would not 

seek a higher-risk mortgage loan to 

‘‘finance’’ the acquisition. Further, TILA 

section 129H(b)(2) would apply only if 

a creditor extends a higher-risk 

mortgage loan to finance the consumer’s 

acquisition of a property from a seller 

who paid a price lower than the 

consumer’s price. 15 U.S.C. 1639h(b)(2). 

If the consumer pays a nominal amount 

to acquire the property, the Agencies 

question how frequently the additional 

appraisal requirement would be 

triggered—because the seller’s 

acquisition price likely would not be 

lower than the consumer’s ‘‘price.’’ 

Question 21: The Agencies invite 

comment on whether any non-purchase 

acquisitions by the consumer may 

implicate the additional appraisal 

requirement. If the rule covers nonpurchase acquisitions by the consumer, 

the Agencies invite comment on how a 

creditor should calculate the consumer’s 

‘‘sale price.’’ 

Question 22: The Agencies also seek 

comment on 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. The 

Agencies do not expect that fraudulent 

property flipping schemes would likely 

occur in this context, but request 

comment on whether additional 

clarification about partial interests is 

warranted. 

In this regard, the Agencies note 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 Regulation Z comments 

2(a)(24)–5(i) and –5(ii); see also sectionby-section analysis of § 1026.XX(a)(X) 

(defining ‘‘higher-risk mortgage loan’’ 

and discussing the distinctions between 

the term ‘‘residential mortgage 

transaction’’ in Regulation Z and 

‘‘residential mortgage loan’’ in the 

Dodd-Frank Act). 

Question 23: In general, the Agencies 

invite comment on whether the term 

‘‘acquisition’’ is the appropriate term to 

use in connection with both the seller 

and higher-risk mortgage consumer. The 

Agencies may further clarify the term or 

use a different term, such as 

‘‘purchase.’’ 

Seller. The Agencies have used the 

term ‘‘seller’’ throughout proposed 

§ 1026.XX(b)(3) to refer to the party 

conveying the property to the consumer. 

The Agencies have used this term to 

conform to the reference to ‘‘sale price’’ 

in TILA section 129H(b)(2)(A), but the 

Agencies recognize that another term 

may be more appropriate if any 

categories of non-sale acquisitions by 

the consumer exist that should 

appropriately be covered by the rule. 

Agreement. In addition, the Agencies 

have referred to the consumer’s 

‘‘agreement’’ to acquire the property 

throughout proposed § 1026.XX(b)(3) to 

reflect that 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. However, the Agencies 

recognize that an alternate term may be 

more appropriate if categories of 

consumer acquisitions not obtained 

through an ‘‘agreement’’ should 

appropriately be covered by the rule. 

180-day acquisition timeframe. TILA 

section 129H(b)(2)(A) would require 

creditors to obtain an additional 

appraisal for higher-risk mortgage loans 

that will finance the consumer’s 

purchase or acquisition of the 

mortgaged property if the following two 

conditions are met: (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 seller purchased or acquired the 

property at a price that was lower than 

the current sale price of the property. 15 

U.S.C. 1639h(b)(2)(A). 

For a creditor to determine whether 

the first condition is met, the creditor 

would compare two dates: the date of 

the consumer’s acquisition and the date 

of the seller’s acquisition. However, 

TILA section 129H(b)(2)(A) does not 

provide specific dates that a creditor 

must use to perform this comparison. 15 

U.S.C. 1639h(b)(2)(A). To implement 

this provision, the Agencies propose in 

§ 1026.XX(b)(3)(i)(B) 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. Proposed 

comment XX(b)(3)(i)(A)–1 provides 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. 

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 higherrisk mortgage loan is to ‘‘finance the 

purchase or acquisition of the 

mortgaged property.’’ TILA section 

129H(b)(2)(A), 15 U.S.C. 1639h(b)(2)(A). 

The Agencies have interpreted this term 

to refer to ‘‘the date of the consumer’s 

agreement to acquire the property.’’ 

Proposed comment XX(b)(3)(i)(A)–2 

explains that, in determining this date, 

the creditor should use a copy of the 

agreement itself provided by the 

consumer to the creditor, and use the 

date on which the consumer and the 

seller signed the agreement. If the two 

dates are different, the creditor should 

use the date on which the last party 

signed the agreement. 

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 higher-risk mortgage loan, 

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 

§ 1026.XX, 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. 

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 

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date certain by which the loan would be 

consummated or 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 § 1026.XX(b)(3). 

Proposed comment XX(b)(3)(i)(A)–2 

clarifies that the date 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 

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 signature and the 

date on the agreement, avoids 

operational and other potential issues 

because the Agencies expect that this 

date would be facially apparent from the 

signature dates on the acquisition 

agreement. 

Question 24: The Agencies seek 

comment on whether this approach 

provides sufficient clarity to creditors 

on how to comply while also providing 

consumers with adequate protection. 

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 higherrisk mortgage loan. 15 U.S.C. 

1639h(b)(2)(A). Accordingly, proposed 

§ 1026.XX(b)(3)(i)(A) refers to the date 

on which the seller ‘‘acquired’’ the 

property. Proposed comment 

XX(b)(3)(i)–3 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 include 

acquisition of legal title to the property, 

including by purchase. See section-bysection analysis of proposed 

§ 1026.XX(b)(3)(i)(A) (discussing the use 

of the term ‘‘acquisition’’ and ‘‘acquire’’ 

in the proposed rule). 

To assist creditors with identifying 

the date on which the seller acquired 

title to the property, proposed comment 

XX(b)(3)(i)(A)–3 explains 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 explained in 

proposed comments XX(b)(3)(vi)(A)–1 

and –2 and proposed comment 

XX(b)(3)(vi)(B)–1, 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 

§ 1026.XX(b)(3)(vi)(A) and (B). 

XX(b)(3)(i)(B) 

Criteria for Whether an Additional 

Appraisal is Required—Acquisition 

Price 

TILA section 129H(b)(2)(A) would 

require creditors to obtain an additional 

appraisal if the seller 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 acquired the property. 

Accordingly, proposed 

§ 1026.XX(b)(3)(i)(B) implements 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 with 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 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. 

See section-by-section analysis of 

§ 1026.XX(b)(3)(i)(B) discussing the 

exemption for ‘‘small’’ price increases, 

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). 

Proposed § 1026.XX(b)(3)(i)(B) refers to 

the price at which the seller acquired 

the property; proposed comment 

XX(b)(3)(i)(B)–1 clarifies that the seller’s 

acquisition price refers to the amount 

paid by the seller to acquire the 

property. The proposed comment also 

explains that the price at which the 

seller acquired the property does not 

include the cost of financing the 

property. This comment is intended to 

clarify that the creditor should consider 

only the price of the property, not the 

total cost of financing the property. 

Question 25: The Agencies invite 

comment on whether additional 

clarification is needed regarding how a 

creditor should identify the price at 

which the seller acquired the property. 

See also the section-by-section analysis 

of proposed § 1026.XX(b)(3)(i)(A) 

(discussing non-purchase acquisitions 

by the seller). 

Question 26: The Agencies are 

interested in receiving 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 the Agencies 

request comment on whether guidance 

may be needed for determining the sales 

price of a such property for purposes of 

proposed § 1026.XX(b)(3)(i)(B). The 

Agencies request comment on any 

operational challenges that might arise 

for creditors in determining purchase 

prices for homes purchased as part of a 

bulk sale transaction. The Agencies also 

invite commenters’ 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. 

Proposed comment XX(b)(3)(i)(B)–1 

contains a cross-reference to proposed 

comment XX(b)(3)(vi)(A)–1, which 

explains how a creditor should 

determine the seller’s acquisition price 

through reasonable diligence. Proposed 

comment XX(b)(3)(i)(B)–1 also contains 

a cross-reference to proposed comment 

XX(b)(3)(vi)(B)–1, which explains how a 

creditor may proceed with the 

transaction if the creditor is unable to 

determine the seller’s acquisition price 

following reasonable diligence. These 

proposed comments are discussed in 

more detail in the section-by-section 

analysis of § 1026.XX(b)(3)(vi)(A), 

below. The Agencies understand that, in 

some cases, a creditor performing 

typical underwriting and 

documentation procedures may have 

difficulty ascertaining the date and price 

at which the seller acquired the 

property being financed through a 

higher-risk mortgage loan. The Agencies 

believe that, based on recent data 

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52Based on county recorder information from 

select counties licensed to FHFA by DataQuick 

Information Systems. 

53The Agencies have considered requiring that 

creditors use a housing price index as a reference 

point for normal increases in price due to 

appreciation in housing values. For example, the 

rule could require an additional appraisal if the 

current sale price exceeds the prior sale price by a 

percentage greater than a percentage change in 

value of a housing price index for the relevant 

residential housing market since the date the seller 

acquired the property. While using a price index 

would account for natural price fluctuations in a 

particular market better than the fixed dollar or 

percentage approaches described above, the 

Agencies believe such a requirement could be 

burdensome for industry and provide little benefit 

to consumers. The movement of an index covering 

all property sales in a particular market area may 

not provide accurate or useful information about 

the proper valuation of a single property, especially 

if that property is atypical in any significant aspect. 

provided by the FHFA, most property 

resales would not trigger the proposal’s 

conditions requiring an additional 

appraisal. According to estimates 

provided by FHFA, approximately five 

percent of single-family property sales 

in 2010 reflected situations in which the 

same property had been sold within a 

180-day period.52 However, in some 

circumstances, creditors may face 

obstacles in attempting to determine the 

necessary transaction date and price 

information. 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 

documents frequently reviewed by 

creditors as part of their mortgage 

underwriting procedures may report the 

date of the seller’s acquisition, but 

report on only nominal amounts of 

compensation, rather than the actual 

sales price. Moreover, several ‘‘nondisclosure’’ jurisdictions do not make 

the price at which a seller acquired a 

property publicly available. In light of 

these difficulties, the Agencies are 

proposing a standard of reasonable 

diligence in determining the seller’s 

acquisition date and price, and are also 

proposing modifications to the 

additional appraisal requirement when 

reasonable diligence does not provide 

sufficient information about the seller’s 

acquisition date and price. See the 

section-by-section analysis of proposed 

§ 1026.XX(b)(3)(vi)(A) (reasonable 

diligence) below. 

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). Proposed 

§ 1026.XX(b)(3)(i)(B) refers 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.’’ Proposed 

comment XX(b)(3)(i)(B)–2 clarifies 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. Proposed 

comment XX(b)(3)(i)(B)–2 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 proposed comment refers 

to proposed comment XX(b)(3)(i)(A)–2 

(date of the consumer’s agreement to 

acquire the property) to indicate that 

this document will be the same 

document that a creditor may rely on to 

determine the date of the consumer’s 

agreement to acquire the property. 

Proposed comment XX(b)(3)(i)(B)–2 

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 facially apparent from the 

consumer’s acquisition agreement. 

Question 27: The Agencies solicit 

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. 

Exemption for small price increases. 

TILA section 129H(b)(2)(A) provides 

that an additional appraisal is required 

when the price at which the seller 

purchased or acquired the property was 

‘‘lower’’ than the current sale price, but 

TILA does not define the term ‘‘lower.’’ 

15 U.S.C. 1639h(b)(2)(A). Thus, as 

written, the statute would require an 

additional appraisal for any price 

increase above the seller’s acquisition 

price. 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 relatively small 

increases in price. Accordingly, the 

Agencies are proposing an exemption to 

the additional appraisal requirement for 

relatively small increases in the price. 

Proposed § 1026.XX(b)(3)(i) contains a 

placeholder for the amount by which 

the price at which the seller acquired 

the property was lower than the resale 

price: ‘‘The seller acquired the property 

180 or fewer days prior to the date of the 

consumer’s agreement to acquire the 

property from the seller; and [t]he 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]’’. Although 

the proposal does not contain a 

particular price threshold, the Agencies 

may develop one in the final rule based 

on public comments received in 

response to this proposal. 

Question 28: The Agencies solicit 

comment on whether it would be in the 

public interest and promote the safety 

and soundness of creditors to include an 

exemption for transactions that have a 

sale price that exceeds the seller’s 

purchase price by a particular amount. 

The Agencies recognize that there are 

a variety of ways to determine what 

constitutes a ‘‘small’’ price increase. 

One approach would be to use a fixed 

dollar value test. For example, during 

outreach with the Agencies for this 

proposal, some consumer advocates 

suggested requiring an additional 

appraisal if the resale price is greater 

than the price at which the seller 

acquired the property by $1,000.00 or 

more. A second approach would be to 

use a fixed percentage test. During 

informal outreach, different small and 

regional lender representatives 

suggested that an exemption for a 10, 

15, or 20 percent price increase would 

be appropriate, with one large lender 

representative suggesting 25 percent. 

Question 29: In light of the diverging 

views on an appropriate exception, the 

Agencies have elected to seek public 

comment on what an appropriate 

threshold would be rather than provide 

a particular amount or formula in the 

proposal. In particular, the Agencies 

seek comment on whether a fixed dollar 

amount, a fixed percentage, or some 

alternate approach 53 should be used to 

determine an exempt price increase, and 

what specific price threshold would be 

appropriate. The Agencies request that 

commenters support their 

recommendations with specific data, 

where possible. 

XX(b)(3)(ii) Different Appraisers 

Consistent with TILA section 

129H(b)(2)(A), proposed 

§ 1026.XX(b)(3)(ii) would require an 

additional appraisal from a ‘‘different’’ 

certified or licensed appraiser. 15 U.S.C. 

1639h(b)(2)(A). Proposed 

§ 1026.XX(b)(3)(ii) provides that the two 

appraisals that would be required by 

§ 1026.XX(b)(3)(i) may not be performed 

by the same certified or licensed 

appraiser. Proposed § 1026.XX(b)(3)(ii) 

would not impose any additional 

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conditions regarding the identity of the 

appraisers. During informal outreach 

conducted by the Agencies, some 

participants suggested that the Agencies 

impose additional requirements 

regarding the appraiser performing the 

second valuation 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 first appraiser. The 

Agencies have not proposed any 

additional conditions on what it means 

to obtain an appraisal from a different 

certified or licensed appraiser because 

the Agencies expect that the valuation 

independence requirements in 

Regulation Z will be sufficient to ensure 

that the second appraiser performs an 

independent valuation. 

In 2010 the Board implemented TILA 

section 129E through an interim final 

rule, which established new 

requirements for valuation 

independence for consumer credit 

transactions secured by the consumer’s 

principal dwelling. See 12 CFR 1026.42; 

75 FR 66554 (Oct. 28, 2010). The Board 

explained that the new requirements in 

TILA 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. Among other things, 

the valuation independence 

requirements generally prohibit: 

• Creditors and providers of 

settlement services from attempting 

directly or indirectly to cause 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 valuation through 

coercion, extortion, inducement, 

bribery, or intimidation of, 

compensation or instruction to, or 

collusion with a person that prepares 

valuations (§ 1026.42(c)(1)); 

• Persons preparing valuations from 

materially misrepresenting the value of 

the consumer’s principal dwelling 

(§ 1026.42(c)(2)(i)); 

• Persons preparing a valuation or 

performing valuation management 

functions for a covered transaction from 

having a direct or indirect interest, 

financial or otherwise, in the property 

or transaction for which the valuation is 

or will be performed (§ 1026.42(d)(1)(i)); 

and 

• Creditors from extending credit if 

the creditor knows, at or before 

consummation, of a violation of 

§ 1026.42(c) or 1026.42(d), unless the 

creditor documents that it has acted 

with reasonable diligence to determine 

that the valuation does not materially 

misstate or misrepresent the value of the 

consumer’s principal dwelling 

(§ 1026.42(e)). 

Question 30: The Agencies seek 

comment on whether the rule should 

include additional conditions on how 

the creditor must obtain the additional 

appraisal under § 1026.XX(b)(3)(i). For 

example, should the rule prohibit the 

creditor from obtaining the two 

appraisals from appraisers employed by 

the same appraisal firm, or from two 

appraisers who receive the assignments 

for the two required appraisals from the 

same appraisal management company? 

XX(b)(3)(iii) Relationship to Paragraph 

(b)(1) 

Proposed § 1026.XX(b)(3)(ii) would 

require that the additional appraisal 

meet the requirements of the first 

appraisal, which includes 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. The Agencies believe that this 

approach best effectuates the purposes 

of the statute. TILA section 129H(b)(1) 

provides that, ‘‘Subject 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 

identified by the seller or the first 

appraiser were made. Thus, proposed 

§ 1026.XX(b)(3)(iii) provides that if the 

conditions in proposed 

§ 1026.XX(b)(3)(i) are present, the 

creditor must obtain an additional 

appraisal that meets the requirements of 

the first appraisal, as provided in 

proposed § 1026.XX(b)(1). 

XX(b)(3)(iv) Requirements for the 

Additional Appraisal 

TILA section 129H(b)(2)(A) would 

require 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.’’ 15 U.S.C. 1639h(b)(2)(A). 

Proposed § 1026.XX(b)(3)(iv)(A) would 

require 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. In 

addition, proposed 

§ 1026.XX(b)(3)(iv)(B)–(C) would require 

that the additional appraisal include an 

analysis of changes in market conditions 

and improvements made to the property 

between the date of the seller’s 

acquisition of the property and the date 

of the consumer’s agreement to acquire 

the property. For consistency with the 

statute, the Agencies have listed the 

requirement to analyze the difference in 

sale prices as an element distinct from 

the analysis of changes in market 

conditions and any improvements made 

to the property. 

Question 31: The Agencies invite 

comment on this interpretation and 

whether the rule should adopt an 

alternate approach. 

For consistency throughout the 

proposal, proposed 

§ 1026.XX(b)(3)(iv)(A) uses the terms 

‘‘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 agreement to acquire the 

property from the seller’’ as the prices 

that the additional appraisal must 

analyze. These are the same criteria that 

a creditor would analyze to determine 

whether the seller acquired the property 

at a price lower than the current sale 

price in proposed § 1026.XX(b)(3)(i)(B). 

Similarly, paragraphs (b)(3)(iv)(B) and 

(b)(3)(iv)(C) of proposed 

§ 1026.XX(b)(3)(iv) use the terms ‘‘date 

the seller acquired the property’’ and 

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54742 Federal Register / Vol. 77, No. 172 / Wednesday, September 5, 2012 / Proposed Rules 

54As 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 § 1026.38 (Closing 

Disclosure Form) of the Bureau’s 2012 TILA– 

RESPA Proposal, available at http:// 

www.consumerfinance.gov/regulations/. 

55See also HUD Mortgagee Letter 2003–07 (May 

22, 2003) (providing examples of documents a 

creditor could use to comply with the time-period 

restrictions in the FHA Anti-Flipping Rule). 

the ‘‘date of the consumer’s agreement 

to acquire the property’’ as the dates the 

additional appraisal must analyze in 

considering changes in market 

conditions and any improvements made 

to the property. These are the same 

dates that a creditor would analyze to 

determine whether the property is being 

resold within the 180-day period in 

proposed § 1026.XX(b)(3)(i)(B). 

Proposed comment XX(b)(3)(iv)–1 

contains cross-references to other 

proposed comments that clarify how a 

creditor would identify the relevant 

dates and prices. 

Question 32: The Agencies invite 

comment on this terminology and 

whether additional clarification of these 

requirements is necessary. 

XX(b)(3)(v) No Charge for the 

Additional Appraisal 

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). Proposed 

§ 1026.XX(b)(3)(v) provides that ‘‘[i]f the 

creditor must obtain two appraisals 

under paragraph (b)(3)(i) of this section, 

the creditor may charge the consumer 

for only one of the appraisals.’’ As 

clarified in proposed comment 

XX(b)(3)(v)–1, 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 proposed comment also explains 

that the creditor would be prohibited 

from charging the consumer for the 

‘‘performance of one of the two 

appraisals required under 

§ 1026.XX(b)(3)(i).’’ This comment is 

intended to clarify that the prohibition 

on charging the consumer under 

§ 1026.XX(b)(3)(v) applies to charges for 

the cost of performing the appraisal, not 

the cost of providing the consumer with 

a copy of the appraisal. As implemented 

by proposed § 1026.XX(d)(4), TILA 

section 129H(c) would prohibit 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 proposed 

§ 1026.XX(d)(4), below. As discussed 

above, the Agencies have not used the 

phrase ‘‘second appraisal’’ in the 

proposed rule 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 § 1026.XX(b)(3)(iv), but the 

Agencies also understand that some 

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. 

Question 33: The Agencies invite 

comment on the proposed approach of 

permitting the creditor to charge for 

only one appraisal, and whether other 

ways to identify the ‘‘second appraisal’’ 

as the one that cannot be charged to the 

consumer may exist. 

In addition, proposed 

§ 1026.XX(b)(3)(ii) prohibits the creditor 

from charging ‘‘the consumer’’ in place 

of the statutory term, ‘‘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. 

XX(b)(3)(vi) Creditor’s Determinations 

Under Paragraphs (b)(3)(i)(A) and 

(b)(3)(i)(B) of this Section 

XX(b)(3)(vi)(A) Reasonable Diligence 

Proposed § 1026.XX(b)(3)(vi)(A) 

would require the creditor to exercise 

reasonable diligence to determine 

whether the criteria in paragraphs 

(b)(3)(i)(A) and (b)(3)(i)(B) of proposed 

§ 1026.XX and are met—namely, 

whether the seller acquired the property 

180 or fewer days prior to the date of the 

consumer’s agreement to acquire the 

property from the seller, at a price that 

was lower than the price the consumer 

is obligated to pay, as specified in the 

consumer’s agreement to acquire the 

property from the seller. Although TILA 

section 129H does not include a 

diligence standard, the Agencies are 

proposing one to implement the 

statute’s requirement that the creditor 

obtain an additional appraisal. To 

determine whether an additional 

appraisal is required, the creditor would 

be required to know whether the criteria 

regarding the property’s sale prices and 

dates of acquisition are met. The 

Agencies believe it may be difficult in 

some cases for a creditor to know with 

absolute certainty whether the criteria 

in paragraphs (b)(3)(i)(A) and (b)(3)(i)(B) 

of proposed § 1026.XX are met. 

Similarly, a creditor may have difficulty 

knowing whether it had relied on the 

‘‘best information’’ available in making 

such a 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 higherrisk mortgage consumers. 

To meet the proposed reasonable 

diligence standard, the Agencies believe 

that creditors should be able to rely on 

written source documents that are 

generally available in the normal course 

of business. Accordingly, proposed 

comment XX(b)(3)(vi)(A)–1 clarifies 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 provides a list 

of written source documents 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 54); 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 

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. 

Question 34: The Agencies 

specifically invite comment on whether 

these or other source documents would 

provide reliable information about a 

property’s sales history.55 The Agencies 

also request comment on whether these 

or other source documents 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 proposed comment contains 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 

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56 During informal outreach conducted by the 

Agencies, 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. 

57Appraisal Standards Bd., Appraisal Fdn., 

Standards Rule 1–5, USPAP (2012–2013 ed.). 

58Based on county recorder information from 

select counties licensed to FHFA by DataQuick 

Information Systems. 

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 explains 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. 

Regarding the list of source 

documents described above, 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. Permitting the use of 

these documents presents the risk that 

the creditor would be presented with 

altered copies. Balanced against this risk 

is the concern that no information 

sources are publicly available in nondisclosure jurisdictions and 

jurisdictions with significant lag times 

before public land records are updated 

to reflect new transactions.56 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). 

(For a discussion of how a higher-risk 

mortgage transaction could proceed 

with limited information about the 

seller’s acquisition, see the section-bysection analysis of proposed 

§ 1026.XX(b)(3)(vi)(B), below). 

Question 35: The Agencies are 

particularly interested in whether a 

creditor should be permitted to rely on 

a signed USPAP-compliant written 

appraisal prepared for the higher-risk 

mortgage transaction to determine the 

seller’s acquisition date and price. 

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 

course of business.’’ 57 Thus, the 

Agencies expect that, in most cases, a 

creditor could rely on the first appraisal 

prepared for the higher-risk mortgage 

transaction to reveal information 

relevant to determining whether an 

additional appraisal would be required 

under § 1026.XX(b)(3)(i). However, the 

Agencies are concerned that a written 

appraisal may not be trustworthy if the 

appraiser were a party to a fraudulent 

flipping scheme. 

Question 36: In light of the abuses 

sought to be prevented by the statute, 

the Agencies invite comment on 

whether allowing a creditor to rely on 

the appraisal for the requisite 

information is appropriate and whether 

a creditor could take any specific 

measures to ensure the appraiser is 

reporting prior sales accurately. The 

Agencies are particularly interested in 

receiving comment on whether, for 

creditors that are required to select an 

independent appraiser, such as creditors 

subject to the Federal banking 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. 

The Agencies also note that some of 

the listed documents may not 

necessarily be publicly available. Even 

in jurisdictions that, at the time of the 

particular loan application, make up-todate sales information publicly 

available, the Agencies are reluctant to 

suggest that the creditor should have to 

look further than publicly available 

information that is commonly obtained 

as part of creditors’ current loan 

underwriting processes. 

Question 37: The Agencies question 

whether other information sources are 

likely to be more easily available or 

more accurate, and request commenters’ 

views on this point. 

Oral statements. Proposed comment 

XX(b)(3)(vi)(A)-2 explains that reliance 

on oral statements of interested parties, 

such as the consumer, seller, or 

mortgage broker does not constitute 

reasonable diligence for determining 

whether an additional appraisal is 

required under § 1026.XX(b)(3)(i). The 

Agencies 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. 

Question 38: However, the Agencies 

request comment 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. 

XX(b)(3)(vi)(B) Inability To Make the 

Determination Under Paragraphs 

(b)(3)(i)(A) and (b)(3)(i)(B) of this 

Section 

In general, the Agencies believe that, 

based on recent data provided by FHFA, 

most property resales would not trigger 

the proposal’s conditions requiring an 

additional appraisal.58 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 nominal 

amounts of consideration when 

describing the consideration paid by the 

current titleholder for the property. 

Moreover, as noted, several ‘‘nondisclosure’’ 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 proposed paragraphs 

(b)(3)(i)(A) and (b)(3)(i)(B) have been 

met. 

For the reasons discussed below, the 

Agencies believe that a higher-risk 

mortgage loan creditor should be 

required to obtain an additional 

appraisal if the creditor cannot 

determine the seller’s acquisition price 

or date based on written source 

documents. Accordingly, proposed 

§ 1026.XX(b)(3)(vi)(B) would require a 

higher-risk mortgage loan creditor that 

cannot determine the seller’s acquisition 

date or price to obtain an additional 

appraisal. 

Proposed comment XX(b)(3)(vi)(B)-1 

provides two examples of how this rule 

would apply: one in which a creditor is 

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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, proposed comment 

XX(b)(3)(vi)(B)-1.i assumes that a 

creditor orders and reviews the results 

of a title search showing the seller’s 

acquisition date is within the 180-day 

window, but the seller’s acquisition 

price was not included. In this case, the 

creditor would not be able to determine 

whether the price paid by the seller to 

acquire the property was lower than the 

price the consumer is obligated to pay 

under the consumer’s acquisition 

agreement, pursuant to 

§ 1026.XX(b)(3)(i)(B). Before extending a 

higher-risk mortgage loan, 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 

§ 1026.XX(b)(3) would be required 

based on that information; or (2) obtain 

two written appraisals in compliance 

with § 1026.XX(b)(3). See also proposed 

comment XX(b)(3)(vi)(B)-2. 

In the second example, proposed 

comment XX(b)(3)(vi)(B)-1.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 proposed 

comment also assumes that the creditor 

subsequently receives a written 

appraisal indicating that the seller 

acquired the property less than 180 days 

before the consumer’s agreement to 

acquire the property. In this case, 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 

§ 1026.XX(b)(3)(i)(A). Before extending a 

higher-risk mortgage loan, 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 

§ 1026.XX(b)(3) would be required 

based on that information; or (2) obtain 

two written appraisals in compliance 

with § 1026.XX(b)(3). See also comment 

XX(b)(3)(vi)(B)-3. 

Under this proposal, when 

information about a property is not 

available from written source 

documents, creditors extending higherrisk mortgage loans will routinely incur 

increased costs associated with 

obtaining the additional appraisal. One 

risk of the proposal is that, because 

TILA section 129H(b)(2)(B) prohibits 

creditors from charging their customers 

for the additional appraisal, 15 U.S.C. 

1639h(b)(2)(B), creditors will simply 

refrain from engaging in any higher-risk 

mortgage loan transaction where sales 

history data cannot be obtained. See 

also proposed § 1026.XX(b)(3)(v). In 

‘‘non-disclosure’’ jurisdictions, where 

property sales price information is 

routinely unavailable through public 

records, this requirement could limit the 

availability of higher-risk mortgage 

loans. 

The Agencies believe, however, 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 encourage the 

concentration of fraudulent property 

flipping in ‘‘non-disclosure’’ 

jurisdictions. 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. 

Question 39: The Agencies request 

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 request 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. 

Modified requirements for content of 

additional appraisal. As discussed 

above, proposed § 1026.XX(b)(3)(vi)(B) 

would require a higher-risk mortgage 

loan creditor that cannot determine the 

seller’s acquisition date or price to 

obtain an additional appraisal. 

However, proposed 

§ 1026.XX(b)(3)(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 

proposed § 1026.XX(b)(3)(iv)(A)-(C). See 

TILA section 129H(b)(2)(A), 15 U.S.C. 

1639h(b)(2)(A). Specifically, under 

proposed § 1026.XX(b)(vi)(B), the 

additional appraisal must include an 

analysis of the elements that would be 

required in proposed 

§ 1026.XX(b)(3)(iv)(A)-(C) only to the 

extent that the creditor knows the 

seller’s purchase price and acquisition 

date. As discussed in the section-bysection analysis of proposed 

§ 1026.XX(b)(3)(ii), TILA section 

129H(b)(2)(A) requires that the 

additional appraisal analyze changes in 

market conditions, improvements to the 

property, and the difference in sales 

prices. 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. 

Proposed comment XX(b)(3)(vi)(B)–2 

confirms that, in general, the additional 

appraisal required under 

§ 1026.XX(b)(3)(i) should include an 

analysis of the factors listed in 

§ 1026.XX(b)(3)(iv)(A)–(C). However, the 

proposed comment also confirms that if, 

following reasonable diligence, a 

creditor cannot determine whether the 

criteria in § 1026.XX(b)(3)(i)(A) and (B) 

are met due to a lack of information or 

conflicting information, the required 

additional appraisal must include the 

analyses required under 

§ 1026.XX(b)(3)(iv)(A), (B), and (C) only 

to the extent that the information 

necessary to perform the analysis is 

known. See section-by-section analysis 

of paragraphs (b)(3)(i) and (b)(3)(iv) of 

proposed § 1026.XX. The proposed 

comment provides two examples. First, 

proposed comment XX(b)(3)(vi)(B)–2.i 

states that, if a creditor is unable, 

following reasonable diligence, to 

determine the price at which the seller 

acquired the property, the second 

written appraisal obtained by the 

creditor is not required to include the 

analysis under § 1026.XX(b)(3)(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, 

as specified in the consumer’s 

agreement to acquire the property from 

the seller. The proposed comment also 

explains that the second written 

appraisal would be required to include 

the analysis under paragraphs 

(b)(3)(iv)(B) and (b)(3)(iv)(C) of proposed 

§ 1026.XX of the changes in market 

conditions and any improvements made 

to the property between the date the 

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Federal Register / Vol. 77, No. 172 / Wednesday, September 5, 2012 / Proposed Rules 54745 

seller acquired the property and the date 

of the consumer’s agreement to acquire 

the property. 

In addition, the Agencies note that the 

proposed rule does not provide 

commentary explaining how the 

creditor would obtain an additional 

appraisal if 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. Proposed 

§ 1026.XX(b)(3)(iv)(A) would require 

creditors to perform ‘‘an analysis 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.’’ 

Question 40: The Agencies request 

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 

invite 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 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. 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 if a 

creditor could not determine when or 

for how much the prior sale occurred. 

In sum, the Agencies’ proposed 

approach to situations in which the 

creditor cannot obtain the necessary 

information, either due to a lack of 

information or conflicting information, 

is to require an additional appraisal, 

but, to account for missing or conflicting 

information, require a modified version 

of the full additional analysis required 

under TILA section 129H(b)(2)(A) and 

proposed § 1026.XX(b)(3)(iv). 15 U.S.C. 

1639h(b)(2)(A). Among alternative 

approaches not chosen by the Agencies 

is to prohibit creditors from extending 

the higher-risk mortgage loan altogether 

under these circumstances. The 

Agencies believe, however, that a flat 

prohibition would unduly limit the 

availability of higher-risk mortgage 

loans to consumers. 

Question 41: The Agencies request 

comment 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. 

XX(c) Required Disclosure 

XX(c)(1) In General 

Title XIV of the Dodd-Frank Act 

added two new appraisal-related 

notification requirements for 

consumers. First, TILA section 129H(d) 

requires that, at the time of the initial 

mortgage application for a higher-risk 

mortgage loan, the applicant must 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). 

Proposed § 1026.XX(c) implements the 

new disclosure requirement added by 

TILA section 129H(d). 

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). Read 

together, the revisions to TILA and 

ECOA will 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. The Bureau intends 

to implement ECOA section 701(e) 

separately, using its authority to 

promulgate rules pursuant to section 

703(a) of ECOA; however, in developing 

this proposal jointly with the Agencies, 

the Bureau has been cognizant of the 

need to promote consistency for 

consumers and reduce operational 

burden for creditors in implementing 

both the new TILA and ECOA appraisalrelated disclosure requirements. 

Consumer Testing. In developing this 

proposal to implement the disclosure 

requirements in TILA section 129H(d), 

the Agencies have relied on consumer 

testing conducted on behalf of the 

Bureau as part of its development of 

integrated disclosures under the Real 

Estate Settlement Procedures Act 

(RESPA) and TILA. While a short 

summary is included below, a more 

comprehensive discussion of the 

Bureau’s consumer testing protocol and 

procedures has been published in the 

Federal Register as part of the Bureau’s 

2012 TILA–RESPA Proposal. 

Testing the Appraisal Disclosures. As 

part of its broader testing of integrated 

mortgage disclosures, the Bureau tested 

versions of the new appraisal-related 

disclosures required by both TILA and 

ECOA. The Bureau believed that testing 

both appraisal-related disclosures 

together was important to determine 

how best to provide these two 

overlapping but separate disclosures in 

a manner that would minimize 

consumer confusion and improve 

consumer comprehension. Testing 

showed that consumers tended to find 

the two notifications confusing when 

they were given together using, in both 

cases, the language in the statute. 

Consumer comprehension of both 

appraisal-related disclosures 

significantly improved when a slightly 

longer plain language version of the 

notifications was provided. The 

Agencies believe that Congress intended 

the ECOA and TILA notices to work 

together to provide consumers a better 

understanding of collateral valuations 

used by the creditor in determining 

whether to extend secured credit to the 

consumer. Based on the results of the 

consumer testing performed by the 

Bureau, the Agencies are proposing to 

implement the appraisal disclosure 

required in TILA with a new 

§ 1026.XX(c)(1) that would require the 

following disclosure: ‘‘We may order an 

appraisal to determine the property’s 

value and charge you for this appraisal. 

We will promptly give you a copy of 

any appraisal, even if your loan does not 

close. You can pay for an additional 

appraisal for your own use at your own 

cost.’’ 

While the proposed disclosure is 

longer than the express statutory 

language provided in section 129H(d), 

the Agencies believe that the additional 

explanatory text is necessary to promote 

consumer comprehension and to reduce 

any confusion associated with the 

ECOA appraisal notification that will 

also have to be given to applicants for 

most higher-risk mortgage loans. The 

proposed notification is accurate 

because, like the ECOA section 701(e) 

appraisal requirement, TILA section 

129H(c) also requires creditors to 

provide consumers with a copy of the 

appraisals at least three days prior to 

consummation. 

The proposed disclosure does not 

include the express language in TILA 

section 129H(d) that ‘‘the appraisal 

prepared for the mortgage is for the sole 

use of the creditor.’’ 15 U.S.C. 1639h(d). 

The Agencies are proposing not to 

include this express language in the 

disclosure language because, in testing 

performed by the Bureau, it confused 

consumers. Requirements to disclose 

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59See, e.g., 12 CFR 1026.19(a)(1)(i) (‘‘In a 

mortgage transaction subject to the Real Estate 

Settlement Procedures Act (12 U.S.C. 2601 et seq.) 

that is secured by the consumer’s dwelling * * * 

the creditor shall make good-faith estimates of the 

disclosures required by section 1026.18 and shall 

deliver or place them in the mail not later than the 

third business day after the creditor receives the 

consumer’s written application.’’). 

60The Bureau’s 2012 ECOA Proposal is available 

at http://www.consumerfinance.gov/regulations/. 

appraisal information to residential 

mortgage consumers, such as under 

TILA section 129H(c), are intended to 

help consumers understand the 

collateral valuation information on 

which creditors rely in reaching 

decisions on consumers’ mortgage 

applications. 15 U.S.C. 1639h(c). TILA 

section 129H(d) seeks to convey that the 

valuation conclusions in the appraisal 

are prepared for the benefit of the 

creditor, not the consumer. 15 U.S.C. 

1639h(d). The disclosure language 

proposed by the Agencies addresses this 

point by advising consumers they may 

obtain an additional appraisal at their 

own cost for their own use. In 

formulating this language without ‘‘sole 

use’’ terminology, the Agencies are not 

suggesting that TILA section 129H 

should be construed to confer upon 

consumers a status equivalent to an 

intended third-party beneficiary with 

respect to the valuation conclusion in 

written appraisals obtained by creditors. 

15 U.S.C. 1639h. 

Question 42: The Agencies request 

comment on the proposed language and 

whether additional changes should be 

made to the text of the notification to 

further enhance consumer 

comprehension. 

Proposed comment XX(c)(1)–1 

clarifies 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 for 

consistency with comment 14(a)(2)(i)–1 

in Regulation B, which interprets the 

requirement in § 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. 

XX(c)(2) Timing of Disclosure 

TILA section 129H(c) requires that the 

disclosure be provided at the time of the 

initial mortgage application. 15 U.S.C. 

1639h(c). To be consistent with other 

similar TILA and RESPA notifications 

provided to consumers 59 and to allow 

creditors sufficient time to deliver 

written disclosures to applicants, when 

an application is submitted over the 

phone, by fax, or by mail, proposed 

§ 1026.XX(c)(2) requires that the 

disclosure be delivered not later than 

the third business day after the creditor 

receives the consumer’s application. In 

addition, providing the notification to 

consumers at the same time as other 

similar notifications allows consumers 

to read the notification in context with 

other important information that must 

be delivered not later than the third 

business day after the creditor receives 

the consumer’s application. The 

Agencies believe this interpretation is 

consistent with the requirements of 

TILA section 129H(d). 15 U.S.C. 

1639h(d). 

Question 43: The Agencies request 

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. 

For example, the Agencies solicit 

comment on whether it would be 

appropriate to require that creditors 

provide the disclosure at the same time 

the application is received, or even as 

part of the application. 

Question 44: The Agencies also solicit 

comment on whether creditors who 

have a reasonable belief that the 

transaction will not be a higher-risk 

mortgage loan at the time of application, 

but later determine that the applicant 

only qualifies for a higher-risk mortgage 

loan, should be allowed an opportunity 

to cure and give the required disclosure 

at some later time in the application 

process. 

XX(d) Copy of Appraisals 

XX(d)(1) In General 

Consistent with TILA section 129H(c), 

proposed § 1026.XX(d) requires that a 

creditor must provide a copy of any 

written appraisal performed in 

connection with a higher-risk mortgage 

loan to the applicant. 15 U.S.C. 

1639h(c). 

Similar to proposed comment 

XX(c)(1)–1, proposed comment 

XX(d)(1)–1 clarifies 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. 

XX(d)(2) Timing 

TILA section 129H(c) requires that the 

appraisal copy must be provided to the 

consumer at least three (3) days prior to 

the transaction closing date. 15 U.S.C. 

1639h(c). Proposed § 1026.XX(d)(2) 

requires creditors to provide copies of 

written appraisals pursuant to 

§ 1026.XX(d)(1) no later than ‘‘three 

business days’’ prior to consummation 

of the higher-risk mortgage loan. The 

Agencies believe that requiring that the 

appraisal be provided three (3) 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 proposed 

rule amending 12 CFR 1002.14, which 

implements the appraisal requirements 

of new ECOA section 701(e)(1). See 15 

U.S.C. 1691(e)(1); and the Bureau’s 2012 

ECOA Proposal.60 In addition, the 

Agencies’ interpretation of the term 

‘‘days’’ to mean ‘‘business days’’ is 

consistent with other similar regulatory 

requirements being proposed under the 

TILA and RESPA. See Bureau’s 2012 

TILA–RESPA Proposal. 

For consistency with the other 

provisions of Regulation Z, proposed 

§ 1026.XX also uses 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 § 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. 

XX(d)(3) 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 Electronic Signatures 

in Global and National Commerce Act 

(E-Sign Act) (15 U.S.C. 7001 et seq.). 

The Agencies believe 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 such form. Accordingly, 

proposed § 1026.XX(d)(3) provides that 

any copy of a written appraisal required 

by § 1026.XX(d)(1) 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. 

XX(d)(4) No Charge for Copy of 

Appraisal 

TILA section 129H(c) provides that a 

creditor shall provide one (1) 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). The 

Agencies have interpreted this section 

to prohibit creditors from charging 

consumers for providing a copy of 

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61Specifically, 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. 

62See 2012 TILA–RESPA Proposal, pp. 101–127, 

725–28, 905–11 (published July 9, 2012), available 

at http://files.consumerfinance.gov/f/ 

201207_cfpb_proposed-rule_integrated-mortgagedisclosures.pdf. 

63See 2012 HOEPA Proposal, pp. 44, 149–211 

(published July 9, 2012), available at http:// 

files.consumerfinance.gov/f/ 

201207_cfpb_proposed-rule_high-cost-mortgageprotections.pdf. 

64Respondents include a large bank, a trade 

group of smaller depository institutions, a credit 

union, and an independent mortgage bank. 

65Respondents include a large bank, a trade 

group of smaller depository institutions, and an 

independent mortgage bank. 

written appraisals required for higherrisk mortgage loans. Accordingly, 

proposed § 1026.XX(d)(4) provides that 

a creditor must not charge the applicant 

for a copy of a written appraisal 

required to be provided to the consumer 

pursuant to § 1026.XX(d)(1). 

Proposed comment XX(d)(4)–1 

clarifies that the creditor is prohibited 

from charging the consumer for any 

copy of an appraisal required to be 

provided under § 1026.X(d)(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-risk 

mortgage loan. 

XX(e) Relation to Other Rules 

Proposed paragraph (e) would clarify 

that the proposed rules were developed 

jointly by the Agencies. The Board 

proposes to codify its higher-risk 

mortgage appraisal rules at 12 CFR 

226.XX et seq.; the Bureau proposes to 

codify its higher-risk mortgage appraisal 

rules at 12 CFR 1026.XX et seq.; and the 

OCC proposes to codify its higher-risk 

mortgage appraisal rules at 12 CFR Part 

34 and 12 CFR Part 164. There is, 

however, no substantive difference 

among the three sets of rules. The 

NCUA and FHFA propose to adopt the 

rules as published in the Bureau’s 

Regulation Z at 12 CFR 1026.XX, by 

cross-referencing these rules in 12 CFR 

722.3 and 12 CFR Part 1222, 

respectively. The FDIC proposes to not 

cross-reference the Bureau’s Regulation 

Z at 12 CFR 1026.XX. 

V. Section 1022(b)(2) of the Dodd-Frank 

Act 

Overview 

In developing the proposed rule, the 

Bureau has considered potential 

benefits, costs, and impacts to 

consumers and covered persons.61 The 

Bureau is issuing this proposal jointly 

with the Federal banking agencies and 

FHFA, and has consulted with these 

agencies, the Department of Housing 

and Urban Development, and the 

Federal Trade Commission, including 

regarding consistency with any 

prudential, market, or systemic 

objectives administered by such 

agencies. 

As discussed above, the proposed rule 

would implement section 1471 of the 

Dodd-Frank Act, which establishes 

appraisal requirements for higher-risk 

mortgage loans. Consistent with the 

statute, the proposal would allow a 

creditor to make a higher-risk mortgage 

loan only if the following conditions are 

met: 

• The creditor obtains a written 

appraisal; 

• The appraisal is performed by a 

certified or licensed appraiser; 

• The appraiser conducts a physical 

property visit of the interior of the 

property; 

• At application, the applicant is 

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 at the 

expense of the applicant; and 

• The creditor provides the consumer 

with a free copy of any written 

appraisals obtained for the transaction 

at least three (3) business days before 

closing. 

In addition, as required by the Act, 

the proposal would require a higher-risk 

mortgage loan creditor to obtain an 

additional written appraisal, at no cost 

to the borrower, under the following 

circumstances: 

• The higher-risk mortgage loan 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 higher price than the seller 

paid, although comment is requested on 

whether a threshold price increase 

would be appropriate. 

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. 

The proposal also includes a request 

for comments to address a proposed 

amendment to the method of calculation 

of the APR that is being proposed as 

part of another mortgage-related 

proposal issued for comment by the 

Bureau. In the Bureau’s proposal to 

integrate mortgage disclosures (2012 

TILA–RESPA Proposal), the Bureau is 

proposing to adopt a more simple and 

inclusive finance charge calculation for 

closed-end credit secured by real 

property or a dwelling.62 As the finance 

charge is integral to the calculation of 

the APR, the Bureau believes it is 

possible that a more inclusive finance 

charge could increase the number of 

loans covered by this rule. The Bureau 

currently is seeking data to assist in 

assessing potential impacts of a more 

inclusive finance charge in connection 

with the 2012 TILA–RESPA and its 

proposal to implement Dodd-Frank Act 

provision related to ‘‘high-cost’’ loans 

(2012 HOEPA Proposal).63

In many respects, the proposed rule 

would codify mortgage lenders’ current 

practices. In outreach calls to industry, 

all respondents reported requiring the 

use of full-interior appraisals in 95% or 

more of first-lien transactions 64 and 

providing copies of appraisals to 

borrowers as a matter of course if a loan 

is originated.65 The convention of using 

full-interior appraisals on first-liens may 

have developed to improve 

underwriting quality, and the 

implementation of this proposed rule 

would assure that the practice would 

continue under different market 

conditions. 

The Bureau notes that many of the 

proposed provisions implement selfeffectuating amendments to TILA. The 

costs and benefits of these proposed 

provisions would arise largely or in 

some cases entirely from the statute and 

not from the proposed rule that 

implements them. Such proposed 

provisions would provide benefits 

compared to allowing these TILA 

amendments to take effect alone, 

however, by clarifying parts of the 

statute that are ambiguous. Greater 

clarity on these issues 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. Moreover, the 

costs that these provisions would 

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54748 Federal Register / Vol. 77, No. 172 / Wednesday, September 5, 2012 / Proposed Rules 

66The 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. 

67The Home Mortgage Disclosure Act (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 Federal Housing 

Administration and 75–85 percent of other first-lien 

home loans. Depository institutions, including 

credit unions, with assets less than $39 million (in 

2010), for example, and those with branches 

exclusively in non-metropolitan areas and those 

that make no purchase money mortgage loans are 

not required to report to HMDA. Reporting 

requirements for non-depository institutions 

depend on several factors, including whether the 

company made fewer than 100 purchase money or 

refinance 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 2010: Highlights from the Data Reported under 

the Home Mortgage Disclosure Act, 97 Fed. Res. 

Bull., December 2011, at 1, 1 n.2. 

68Every 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/. 

69The Nationwide Mortgage Licensing System 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, the 

number and dollar amount of loans brokered. 

70 DataQuick is database of property 

characteristics on more than 120 million properties 

and 250 million property transactions. 

71The National Registry is a database containing 

selected information about State certified and 

licensed real estate appraisers. Downloaded 

February 28, 2012. 

72The American Community Survey is an 

ongoing survey conducted by the United States 

Census Bureau. 

73See Michael Lacour-Little and Stephen 

Malpezzi, Appraisal Quality and Residential 

Mortgage Default: Evidence from Alaska, 27:2 

Journal of Real Estate Finance Economics 211–33 

(2003). 

74Levitt, Steven and Chad Syverson. ‘‘Market 

Distortions When Agents are Better Informed: The 

impose beyond those imposed by the 

statute itself are likely to be minimal. 

Section 1022 permits the Bureau to 

consider the benefits, costs and impacts 

of the proposed 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 these major provisions of the 

proposed 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).66

The Bureau has relied on a variety of 

data sources to analyze the potential 

benefits, costs, and impacts of the 

proposed rule. 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 proposal. 

The primary source of data used in 

this analysis is data collected under the 

Home Mortgage Disclosure Act 

(HMDA).67 Because the latest wave of 

complete data available is for loans 

made in calendar year 2010, the 

empirical analysis generally uses the 

2010 market as the baseline. Data from 

fourth quarter 2010 bank and thrift Call 

Reports,68 fourth quarter 2010 credit 

union call reports from the National 

Credit Union Administration (NCUA), 

and de-identified data from the National 

Mortgage Licensing System (NMLS) 

Mortgage Call Reports (MCR) 69 for the 

first and second quarter of 2011were 

also 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 to the 

data from HMDA including higher-risk 

mortgage loan 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. 

Other portions of the analysis rely on 

property-level data regarding parcels 

and their related financing from 

DataQuick; 70 data on the location of 

certified appraisers from the Appraisal 

Subcommittee Registry;71 and, 

demographic data from the 2010 

American Community Survey (ACS).72

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 

and the ACS is used to characterize the 

frequency of first and subordinate liens 

in rural and urban areas. The Bureau 

seeks comment on the use of these data 

sources, the appropriateness to this 

purpose, and alternative or additional 

sources of information. 

The Bureau requests comment and 

data on the potential benefits, costs, and 

impacts of this proposal. 

Potential Benefits of the Proposed Rule 

for Covered Persons and Consumers 

In a mortgage transaction, the primary 

beneficiary of an appraisal is the 

creditor, as the appraisal helps the 

creditor avoid lending based on an 

inflated valuation of the property. 

Consumers, however, can also benefit 

from an accurate appraisal. Assuming 

that full-interior appraisals conducted 

by a certified or licensed appraiser are 

more accurate than other valuation 

methods, the proposal would improve 

the quality of home price estimates for 

those transactions where such an 

appraisal would not be performed 

currently. 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. Research has shown that 

lower appraisal quality, defined as the 

difference between price estimates 

derived via statistical models and the 

appraised value, is associated with 

higher default rates.73 By tightening 

appraisal standards for a class of 

transactions, the proposed rule may 

reduce default risk for creditors. 

Furthermore, by requiring the use of full 

interior appraisals in transactions 

involving high-risk mortgage loans, the 

statute prevents creditors from using 

less costly and possibly less accurate 

valuation methods in underwriting in 

order to compete on price. 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. 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, and 

list prices to make price determinations. 

These methods may not lead a 

consumer to an accurate valuation of a 

property. For example, there is evidence 

that real estate agents sell their own 

homes for significantly more than other 

houses, which suggests that sellers may 

not be able to accurately price the 

homes that they are selling.74 Other 

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Federal Register / Vol. 77, No. 172 / Wednesday, September 5, 2012 / Proposed Rules 54749 

Value of Information In Real Estate Transactions.’’ 

The Review of Economics and Statistics 90 no.4 

(2008): 599–611. 

75Scott, 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. 

76For example, in Quan and Quigley’s theoretical 

model where buyers and seller 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. 

77Poisson 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, fulltime equivalent employees, and assets), separately 

for each category of depository institutions. 

78 ‘‘Independent Mortgage Bank’’ refers to nondepository mortgage lenders. 

79Loan counts and loan amounts were swapped 

for the one institution that reported originating 

130,000 loans with total loan amounts of $8. 

Institutions with loan amounts above the maximum 

number of loans reported by an independent 

mortgage bank in HMDA (134,640) had their loan 

counts replaced by 134,640. This assumes that the 

largest independent mortgage bank in terms of loan 

counts would be a HMDA reporter, which is likely 

if the firm adheres to the originate-to-distribute 

model, which implies that most loans would be 

home purchase (either purchase or refinance) loans, 

it would originate more than 100 loans, and make 

at least 5 loans in an MSA or have an office in an 

MSA, which would require it to report to HMDA. 

Federal Financial Institutions Examination Council, 

A Guide to HMDA Reporting: Getting it Right! (June 

2010), available at http://www.ffiec.gov/hmda/pdf/ 

2010guide.pdf. (accessed June 11, 2012). 

80Sumit Agarwal and Faye Wang, Perverse 

Incentives at the Banks? Evidence from Loan 

Officers (Federal Reserve Bank of Chicago Working 

Paper 2009–08). 

81Purchase money mortgages includes secondlien higher-risk mortgage loans 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 higher-risk mortgage 

loan; to the extent that any of these second-lien 

purchase money HRMs were part of a transaction 

where the first lien mortgage was a higher-risk 

mortgage loan the costs imposed by the proposal 

would be double-counted. First-lien refinancings 

includes loans classified as first-lien ‘‘home 

improvement’’ loans in HMDA. 

82 (5%*117,000) + (10%*136,000)+(95%*27,000) 

= 45,100 

research, this time in a laboratory 

setting, provides evidence that 

individuals are sensitive to anchor 

values when estimating home prices.75

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 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.76

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. In addition to the direct costs of 

paying more than the true value for a 

property, buying an overvalue 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 would 

help ensure an accurate estimate of the 

value of the property. This might be 

especially valuable to a consumer. In 

the case of subordinate-lien 

transactions, the full-interior appraisal 

requirement may prevent borrowers 

from extracting too much equity if their 

property is overvalued by other 

valuation methods. 

Codifying appraisal standards across 

the industry would likely simplify the 

shopping process for consumers who 

receive HRM offers. First, it may 

improve their 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 

may provide an itemized explanation of 

why the property was overvalued, 

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 HRM 

loans 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 appraisal methods or know 

that different creditors will use different 

methods, and therefore may benefit 

from the standardization the proposal, if 

adopted, would cause. 

Potential Costs of the Proposed Rule for 

Covered Persons 

The costs of the proposed 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 proposed rule. These can be 

separated into costs that are associated 

with the origination of a single higherrisk mortgage loan and the costs of 

reviewing the regulation and training 

costs calculated per loan officer and per 

institution. 

Costs per higher-risk mortgage loan. 

The costs of the proposal for covered 

persons that derive from additional 

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 higher-risk mortgage 

loans that are purchase loans, first-lien 

refinance loans, or closed-end second 

loans are computed from the loan-level 

HMDA data. Accepted statistical 

methods are used to project loan counts 

for non-HMDA reporting depository 

institutions.77 Estimates of loan officers 

can be calculated from similar 

projections of applications per 

institution. 

The calculation of costs for 

independent mortgage banks (IMBs) 

uses a slightly different approach.78

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.79 To obtain a count 

of full-time equivalent employees, this 

number is imputed for HMDA reporting 

IMBs based on the number of 

applications (assuming 1.38 days per 

loan application).80

Based on these data sources, the 

Bureau estimates that there were 

approximately 280,000 HRMs in 2010. 

Of these, the Bureau estimates that 

117,000 were purchase money 

mortgages, 136,000 were first-lien 

refinancings, and 27,000 were closedend subordinate lien mortgages that 

were not part of a purchase 

transaction.81 The Bureau estimates that 

the probability that full-interior 

appraisals are conducted as part of 

current practice is 95% for purchasemoney transactions, 90% for refinance 

transactions, and 5% for second 

mortgages. The Bureau therefore 

estimates that the proposal would lead 

to 45,100 full-interior appraisals for 

originations that would not otherwise 

have a full-interior appraisal.82

There would also be additional 

appraisals from the proposed 

requirement that lenders obtain a 

second full-interior appraisal in 

situations where the home that would 

secure the higher-risk mortgage is being 

resold within 180 days at a higher price 

than the previous transaction involving 

the property. Based on estimates from 

DataQuick, the Bureau estimates that 

the proportion of sales that are resales 

within 180 days is 5%. For the purposes 

of this calculation the Bureau 

conservatively assumes that all of these 

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54750 Federal Register / Vol. 77, No. 172 / Wednesday, September 5, 2012 / Proposed Rules 

83 (117,000 * 5%) = 5,850 

84 (45,100) + (5,850) = 50,950 

85Creditors 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 promptly 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.’’ 

86See 2012 TILA–RESPA Proposal, (published 

July 9, 2012), available at http://files.consumer

finance.gov/f/201207_cfpb_proposed-rule_

integrated-mortgage-disclosures.pdf. 

87 12 CFR 1026.35. 

88 15 U.S.C. 1639. 

89 (.25 * $45.80) = $11.45 The hourly wage rate 

is based on a weighted average of loan officer wages 

at depository institutions of $30.66 and at nondepository institution of $31.81, weighted by the 

share of HRMs that the Bureau are originated by 

each type of creditor, and inflated to total labor 

costs. Wages comprised 67.5% of compensation for 

employees in credit intermediation and related 

fields in Q4 2010, according to the Bureau of Labor 

Statistics Series ID 

CMU2025220000000D,CMU2025220000000P. 

http://www.bls.gov/ncs/ect/#tables. 

90 ($11.45 * 50,950) = $583,000 (rounded to the 

nearest thousand). 

91 (.25 * $45.80) = $11.45. 

92 ($11.45 * 280,000) = $3,205,000 (rounded to 

the nearest thousand). 

93Proposed § 1026.XX(b)(3)(v) would prohibit the 

creditor from charging the consumer the cost of the 

additional appraisal. 

94 Industry appraisal fee information shows 

median fees ranging from $300 to $600. 

95 (600 * 5,850) = $3,510,000. 

96 Interviews conducted on May 15, 2012 and 

May 24, 2012. 

98 (83,000 * $45.85 * .5) = $1,903,000 (rounded 

to the nearest thousand)The averages hourly labor 

cost here is calculated using employment share, 

rather than share of HRM originations. 

are at a price higher than the initial sale 

and therefore subject to the second 

appraisal requirement. The Bureau 

therefore estimates that this provision of 

the proposal would lead to 5,850 

additional full-interior appraisals.83

The total effect of the proposal on the 

number of full-interior appraisals is 

therefore 50,950.84

The following discussion considers 

estimated compliance costs in the order 

in which they arise in the mortgage 

origination process. First, the proposed 

rule would require that the creditor 

furnish the applicant with the 

disclosure in proposed 

§ 1026.xx(c)(1)(I).85 The cost of this 

disclosure—at most, delivery of a single 

piece of paper with a standardized 

disclosure that could be delivered with 

other documents or disclosures—would 

be very low. In addition, the disclosure 

is included in the 2012 TILA–RESPA 

Loan Estimate integrated disclosure 

form proposal; 86 if that proposal were 

adopted, the cost of providing the 

disclosure would be part of the overall 

costs of implementing the integrated 

disclosure. 

Second, the loan officer would be 

required to verify whether a loan is a 

higher-risk mortgage. However, this 

activity is assumed 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, such as 

determining whether a loan qualifies as 

a ‘‘higher-priced mortgage loan’’ for 

purposes of Regulation Z 87 or to 

determine if a loan is subject to the 

protections of the Home Ownership and 

Equity Protection Act of 1994 

(HOEPA).88

The third step is that, in order to 

satisfy the proposed safe harbor 

provided for at § 1026.XX(b)(2), the 

creditor would likely order and review 

full-interior appraisals as prescribed by 

the proposed rule. The review process is 

described in the appendix N of the 

proposed rule, and is assumed to be 

performed by a loan officer and to take 

15 minutes. Assuming an average total 

hourly labor cost of loan officers of 

$45.80, the cost of review per additional 

appraisal is $11.45.89 With an estimated 

total number of additional appraisals 

conducted per year of 50,950, the total 

cost of reviewing those appraisals is 

$583,000 (rounded to the nearest 

thousand).90

Creditors would also need to 

determine whether a second appraisal 

would be required for the higher-risk 

mortgage loan based on prior sales 

involving the property that would 

secure the loan. This would require 

labor costs to determine, through 

reasonable diligence, whether a sale of 

the property has occurred in the past 

180 days at a price lower than the 

current sale price. The proposal 

provides that reasonable diligence could 

be performed through reliance on 

sources such as property sales history 

reports, sales price data from Multiple 

Listing Services or other records, a 

signed appraisal report that includes 

prior transactions, title abstracts or 

reports, copies of the recorded deed 

from the seller, or other documentation 

such as a copy of the HUD–1, previous 

tax bills, or title commitments or 

binders demonstrating the seller’s 

ownership of the property and the date 

it was acquired. Since many of these 

diligence activities are expected to 

already be carried out for other purposes 

during the process of closing the loan, 

and would often be curtailed if the loan 

is not related to a purchase, the Bureau 

estimates that reasonable diligence 

would take, on average, 15 minutes of 

staff time. The dollar cost per higherrisk mortgage loan is therefore $11.45.91

With total annual higher-risk mortgage 

loans of 280,000, the total cost per year 

is estimated to be $3,205,000 (rounded 

to the nearest thousand).92

The Bureau assumes 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 proposed 

§ 1026.XX(b)(3) (requiring an additional 

appraisal for properties that are the 

subject of certain 180-day resales).93. 

The Bureau conservatively assumes that 

the cost of each full-interior appraisal is 

$600.94 As noted above, the Bureau 

estimates that 5,850 second full-interior 

appraisals would be required each year 

under the proposal, for a total cost of 

$3,510,000.95

Finally, the proposed rule would also 

require that free copies of appraisals be 

distributed to borrowers three days 

before the loan is closed. Market 

participants, including a large bank, 

representatives from the Independent 

Community Bankers of America (ICBA), 

and a large independent mortgage 

bank 96 told the Bureau that, in cases 

where loans are closed, copies of the 

appraisal are sent out 100% of the time, 

so it is assumed that this imposes no 

incremental cost on creditors. 

As noted above, the costs of many of 

the additional appraisals would be born 

by the consumers. This costs increase 

may lead to a reduction in the number 

of HRMs that are originated. The total 

losses to creditors of this reduction in 

HRM originations cannot exceed the 

costs of the appraisals, which are 

estimated below to be roughly 

$27,000,000 per year, as creditors could 

choose to pay for the appraisals, rather 

than forgo the transactions. 

Costs per institution or loan officer. 

Aside from the per loan costs just 

described, the Bureau has estimated that 

each institution would incur the onetime cost of reviewing the regulation 

and one-time training costs for all loan 

officers to become familiar with the 

provisions of the rule.97 Since the 

procedures that would be required by 

the proposed rule such as ordering 

appraisals and comparing an APR to 

APOR are already familiar to creditor 

employees, one-time training costs are 

assumed to be 30 minutes. The Bureau 

estimates that there are 83,000 loan 

officers in the United States, of which 

62,000 are employed at depository 

institutions and 21,000 are employed at 

IMBs. Using an average hourly labor 

cost of $45.85, total one-time training 

costs are estimated to be $1,903,000 

(rounded to the nearest thousand).98

It is assumed that the regulation is 

reviewed by lawyers and compliance 

officers. Each person reviewing the 

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99 ($114.06) + (2 * 43.67) = $201.41; ($114.06) + 

(.5 * $43.67) = $135.90; ($113.47 + $49.48) = 

$162.95. 

100 (128 * $201.41) + (6,825 * $135.90) + (2,515 

* 162.95) = $1,363,000 (rounded to the nearest 

thousand). 

101 [45,100 * ($600-$5)] = $26,835,000 (rounded to 

the nearest thousand). Industry appraisal fee 

information shows median fees ranging from $300 

to $600. 

102Approximately 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. 

103 (28,750 * $45.42 * .25) = $326,000 (rounded 

to the nearest thousand). ($326,000/6,825) = $48. 

104 (28,750 * $45.42 * .25) = $326,000 (rounded 

to the nearest thousand). 

105 (3,350 * $600) = $2,010,000; ($2,010,000/ 

6,825) = $ 295. 

106 (28,000 * $45.42 * .5) = $636,000. 

regulation would need to review 18 

pages of text. At three minutes per page, 

this is roughly one hour of review. At 

all firms, one lawyer is assumed to 

review the regulation. Compliance 

officer review is assumed to vary by size 

and type of the institutions, 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: $114.06 for 

attorneys at depository institutions, 

$43.67 for compliance officers at 

depository institutions, $113.47 for 

attorneys at IMBs, and $49.48 for 

compliance officers and IMBs. The 

Bureau estimates therefore that the 

review cost at depository institutions 

larger than $10 billion in assets is 

$201.41; at depository institutions 

smaller than $10 billion in assets the 

cost is $135.90; and at IMBs is 

$162.95.99 The Bureau estimates that 

there were 128 depository institutions 

larger than $10 billion in assets that 

originated mortgages in 2010; 6,825 

depository institutions smaller than $10 

billion in assets, and 2,515 IMBs, so 

total one-time costs of review are 

$1,363,000 (rounded to the nearest 

thousand).100

Potential Costs of the Proposed Rule to 

Consumers 

The direct pecuniary costs to 

consumers that would be imposed by 

the proposed rule can be calculated as 

the incremental cost of having a full 

interior appraisal instead of using 

another valuation method for those 

loans where the cost of the appraisal is 

not born by the creditor. As described 

above, the Bureau assumes that 

consumers would pay directly for all 

appraisals other than the additional 

appraisals that would be required 

because of a recent sale of the property, 

for a total of 45,100 additional 

appraisals per year. Assuming, 

conservatively, the consumer pays $600 

for an appraisal that would not 

otherwise have been conducted, versus 

$5 for an alternative valuation, gives a 

total direct costs to consumers of 

[45,100 * ($600-$5)] = $26,835,000 

(rounded to the nearest thousand).101

Potential Reduction in Access by 

Consumers to Consumer Financial 

Products or Services 

Some of the costs that would be 

imposed by the proposed rule are likely 

to be passed on to consumers of HRMs, 

particularly those who would not 

otherwise have a full-interior appraisal 

or who would have an additional 

appraisal. This cost increase could be 

considered a reduction in consumers’ 

access to mortgages. However, the 

impact on access to credit is probably 

negligible. Any costs that derive from 

the additional underwriting 

requirements incurred under the 

proposal are likely to be very small. 

More important, for both first and 

subordinate lien loans, are the 

incremental costs from the difference 

between the full-interior appraisal and 

alternative valuation method costs. 

However, these are only incremental 

costs for the fraction of loans where this 

is not already accepted practice. For 

first liens, full interior inspections are 

common industry practice: passing the 

cost of appraisals on to consumers is 

current industry practice, and 

consumers appear to accept the 

appraisal fee so there is unlikely to be 

a significant adverse effect on 

consumers’ access to credit. 

Furthermore, these costs may also be 

rolled into the loan, up to loan-to-value 

ratio limits, so buyers are unlikely to 

face short-term liquidity constraints that 

prevent purchasing the home. The 

impact of the proposed rule on higherrisk mortgage loan volumes may be 

greater for subordinate liens because 

this is where, in practice, the proposed 

rule would impose a change from the 

status quo, and also because the cost of 

a full interior appraisal is a larger 

proportion of the loan amount. 

However, changes in loan 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. 

Impact of the Proposed Rule on 

Depository Institutions and Credit 

Unions With $10 Billion or Less in Total 

Assets, As Described in Section 1026 102

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 160,000 

higher-risk mortgage loans in 2010. 

Assuming the mix of purchase money, 

refinancings, and subordinate lien 

mortgages was the same at these 

institutions as for the industry as a 

whole, the Bureau estimates that the 

proposal would require these 

institutions to have 25,400 full interior 

appraisals conducted for transactions 

that would otherwise not have a fullinterior appraisal, and 3,350 additional 

full-interior appraisal (as would be 

required by proposed § 1026.XX(b)(3)), 

for a total of 28,750 appraisals). 

The Bureau estimates that the cost to 

depository institutions and credit 

unions with $10 billion or less in assets 

of reviewing the additional appraisals 

would be $326,000 (rounded to the 

nearest thousand). This would be $48 

per institution per year.103

The Bureau estimates that the cost to 

depository institutions and credit 

unions with $10 Billion or less in assets 

of determining whether to order a 

second full-interior appraisal would 

also be $326,000 (rounded to the nearest 

thousand), or $48 per institution per 

year.104

The Bureau estimates that the cost to 

depository institutions and credit 

unions with $10 billion or less in assets 

of conducting second full interior 

appraisals for recent sold properties 

would be $2,010,000, or $295 per 

institution, per year.105

The Bureau estimates that the onetime training costs to depository 

institutions and credit unions with $10 

billion or less would be $636,000, or 

$93 per institution.106

The Bureau estimates that the onetime costs of reviewing the regulation to 

depository institutions and credit 

unions with $10 billion or less are 

described above, and would be $135.90 

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54752 Federal Register / Vol. 77, No. 172 / Wednesday, September 5, 2012 / Proposed Rules 

107 ($114.06) + (.5 * $43.67) = $135.90; ($135.90 

* 6,825) = $927,000. 

108Rural is defined as a loan made outside of a 

micropolitan or metropolitan statistical area. 

per institution, or $927,000 (rounded to 

the nearest thousand) in total.107

Significant Alternatives Considered 

In determining what level of review 

creditors should be required of full 

interior appraisals related to HRMs, two 

alternatives were considered. One 

alternative considered was to require a 

full technical review of the appraisal 

that would comply with USPAP3. Such 

a requirement, however, would add 

substantially to the cost of each 

appraisal, as a USPAP3 compliant 

review can costs nearly as much as a 

full interior appraisal. Another 

alternative was to require creditors to 

have USPAP3 compliant reviews 

conducts on a sample of the appraisals 

carried out on properties related to an 

HRM loan. Reviewing a sample of 

appraisals, however, would be most 

useful for creditors making a large 

number of HRMs and employing the 

same appraisers for a large number of 

those loans. Given the small number of 

HRMs made each year, the value of 

sampling appraisals for full USPAP3 

review is likely to be small. 

Impact of the Proposed Rule on 

Consumers in Rural Areas 

The Bureau does not anticipate that 

the proposed rule would have a unique 

impact on consumers in rural areas. 

Table 1 presents some basic statistics on 

rural households’ tenure and mortgage 

behavior from the 2010 American 

Community Survey. While the 

proportion of households that own their 

dwellings (the alternatives are renting or 

occupying without paying rent) differs 

between rural (29%) and non-rural 

households (43%), conditional on living 

in an owner occupied property, there is 

not a large difference in the proportion 

of households with first mortgages or 

contracts (70% in rural areas and 67% 

in non-rural areas) and subordinate 

liens (5% in rural areas and 4% in nonrural areas). Also, conditional on living 

in owner occupied property, the 

proportion of households that have 

moved in the past year and own their 

homes is 5% for both groups and the 

proportion of individuals who have 

moved into their own homes 

conditional on having a mortgage is 5% 

for both groups. This suggests that, 

conditional on owning a home, rural 

and non-rural households use first and 

subordinate liens and move at similar 

rates. 

TABLE 1—OWNERSHIP AND MORTGAGE CHARACTERISTICS OF RURAL AND NON-RURAL HOUSEHOLDS, ACS 2010 

Rural a Not rural a

Number of Households ................................................................................................................................ 19,052,528 103,502,244 

Dwelling Owned or Being Bought ............................................................................................................... 42.92% 64.51% 

Has a First Mortgage or a Contract ............................................................................................................ 29.92% 43.14% 

Has a First Mortgage or a Contract, Conditional on Ownership ................................................................. 69.72% 66.87% 

Has a Closed-End Second Mortgage or a Contract ................................................................................... 1.99% 2.80% 

Has a Closed-End Second Mortgage or a Contract, Conditional on Ownership ....................................... 4.65% 4.35% 

Moved in in the Past Year, Conditional on Ownership ............................................................................... 5.17% 4.86% 

Moved in in the Past Year, Conditional on Ownership and Having a First Mortgage or Contract ............ 6.14% 5.71% 

Source: American Community Survey, 2010. 

Weighted using household weights (HHWT). Tabulations based on responses by person 1. 

a Rural defined as households reported to not be in a metro area in the METRO variable. Households are considered not rural if they are 

coded: in a metro area, central city; in a metro area, outside central city; central city status unknown; not identifiable. 

As mentioned earlier, many small and 

rural lenders are excluded from HMDA 

reporting. Because of this, the Bureau 

does not attempt to project the number 

of rural loans in a particular category, 

such as first-lien HRM, subordinate-lien 

HRM, etc. However, tabulations of rural 

loans 108 by HMDA reporters may be 

informative about patterns of rural HRM 

usage. As is shown in table 2, the 

proportion of both first lien purchase 

and first lien refinance loans are higher 

among loans secured by properties in 

rural counties than for properties that 

are not in rural counties—10% of rural 

first lien purchase loans are higher-risk 

mortgage loans while 3% of non-rural 

first-lien purchase loans are higher-risk 

mortgage loans. This suggests that rural 

borrowers may be more likely to incur 

the cost of the proposed rule than nonrural consumers. This assumes, 

however, that full-interior appraisal 

probabilities in the absence of the 

proposed rule are the same for rural and 

non-rural originations. 

TABLE 2—PROPORTION OF HIGHER-RISK-MORTGAGE LOANS (HRMS) BY RURAL AND NON-RURAL STATUS, HMDA 

REPORTERS

Rural Non-Rural 

% HRM Total loans % HRM Total loans 

First Lien Purchase Loans ............................................................................... 9.88 285,762 3.19 2,224,001 

First Lien Refinance Loans .............................................................................. 5.09 563,210 1.67 4,321,446 

Subordinate Liens ............................................................................................ 12.69 32,958 12.71 185,458 

Total .......................................................................................................... 7.17 941,590 2.57 6,934,172 

Source: HMDA 2010. 

Rural is defined as a loan made outside of a micropolitan or metropolitan statistical area. 

HMDA reporters only. 

One concern that has been raised is 

that rural creditors may face challenges 

in being able to hire appraisers for full 

interior appraisals, particularly when 

the second appraisal requirement 

applies. In order to investigate this 

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Federal Register / Vol. 77, No. 172 / Wednesday, September 5, 2012 / Proposed Rules 54753 

109The Bureau believes that the margin of 

differences between the TCR and current APR is 

significantly smaller than the margin between the 

current APR and the APR calculated using the 

expanded finance charge definition because 

relatively few third-party fees would be excluded 

by the TCR that are not already excluded under 

current rules. The agencies are considering ways to 

supplement the data analysis described above to 

better assess this issue. 

further, the current Appraisal 

Subcommittee Registry is used and the 

zip code provided by each registered 

appraiser is geocoded. These results are 

presented in table 3. Assuming that a 

county has access to an appraiser if he 

or she is registered in that or an adjacent 

county, then the median rural county 

has access to 107 appraisers. In order to 

obtain two independent appraisals a 

county must have access to at least two 

appraisers. Only 13 counties fail to meet 

this requirement; all of these counties 

are in Alaska. When attention is 

restricted to active appraisers, this 

number of counties increases to 22. 

Although requiring the use of licensed 

and certified appraisers who adhere to 

the requisite standards may slow down 

the origination process, available data 

suggest the requirement is unlikely to 

result in widespread inability to 

originate loans. 

TABLE 3—AVAILABILITY OF APPRAISERS BY URBAN/RURAL STATUS OF COUNTY

Rural counties Urban counties 

Mean Number of Appraisers in County ....................................................................................................... 11 155 

Median Number of Appraisers in Own County ........................................................................................... 6 39 

Mean Number of Appraisers in Own and Adjacent County ........................................................................ 188 662 

Median Number of Appraisers in Own and Adjacent County ..................................................................... 107 959 

Number with Less than 2 Appraisers in Own or Adjacent Counties .......................................................... 13 a 0 

N .................................................................................................................................................................. 1355 1788 

Source: Appraisal Subcommittee National Registry, downloaded Feb 23, 2012. 

Appraisers include all appraisers registered in the National Registry. 

Appraisers were assigned to counties based on the zip code provided to the National Registry. 

aAll counties that do not have 2 or more appraisers in the county or adjacent counties are in Alaska. 

A number of industry representatives 

asserted that they believed that creditors 

making higher-risk mortgage loans in 

rural areas would find it particularly 

difficult to comply with the second 

appraisal requirements. The Agencies, 

in the section-by-section analysis under 

the heading ‘‘Potential Exemptions from 

the Additional Appraisal Requirement,’’ 

are requesting comment on whether the 

final rule, relying on the exemption 

authority provided in TILA section 

129C(b)(4)(B), should provide an 

exemption from the second appraisal 

requirement for loans made in ‘‘rural’’ 

areas. In addition, the Agencies are 

requesting comment on whether the 

final rule should use the same definition 

of ‘‘rural’’ that is provided in the ability 

to repay and qualified mortgage 

rulemaking implementing new TILA 

section 129C. Accordingly, the Bureau 

requests that commenters provide data 

or other information to help 

demonstrate how such an exemption 

would serve the public interest and the 

promote safety and soundness of 

creditors. 

Potential Use of Transaction Coverage 

Rate 

As noted in the section-by-section 

analysis above, the Bureau is proposing 

in its 2012 TILA–RESPA Proposal a 

simpler, more inclusive definition of the 

finance charge. The broader definition 

of finance charge would likely increase 

the number of mortgage loans that meet 

the higher-risk mortgage loan trigger. 

As discussed in the Bureau’s 2012 

TILA–RESPA Proposal, in the sectionby-section analysis above, and below, 

the Bureau does not currently have 

sufficient data to model the impact of 

the more expansive definition of finance 

charge on other affected regulatory 

regimes or the impact of potential 

modifications to the triggers to more 

closely approximate existing coverage 

levels. The Bureau is working to obtain 

additional data prior to issuing a final 

rule and is seeking comment on plans 

for data analysis, and also seeks public 

comment and data submissions on these 

topics. The 2012 TILA–RESPA Proposal 

provides a qualitative assessment of the 

benefits and costs of expanding the 

finance charge definition, if the agencies 

made no modifications to the triggers for 

HRM or other regimes. In order to 

facilitate rule-by-rule consideration of 

potential modifications, this notice 

provides a qualitative assessment of the 

impact of potential changes to the APR 

for higher-risk mortgage loans. 

The Bureau’s separate proposal to 

expand the definition of finance charge 

would be expected to increase the 

number of loans classified as higher-risk 

mortgage loans, as discussed in the 

section-by-section analysis above and in 

the 2012 TILA–RESPA Proposal. The 

Agencies are seeking comment on 

whether to adopt a transaction coverage 

rate (TCR) to approximately offset this 

increase. Were the Agencies to adopt the 

proposed changes, the additional 

benefits and costs to consumers from 

further increasing the number of loans 

classified as higher-risk mortgage loans 

would not occur. The benefits and costs 

to consumers with such loans would be 

the inverse of those described above. In 

addition, because the TCR excludes fees 

to non-affiliated third-parties, the TCR 

might result in some loans not being 

classified as higher-risk mortgage loans 

that would qualify under an APR 

threshold using the current definition of 

finance charge.109

Using different metrics for purposes 

of disclosures and determining coverage 

of various regulatory regimes may also 

impose some ongoing complexity and 

compliance burden. The Bureau 

believes that any such effects with 

regard to transaction coverage rate 

would be mitigated by the fact that both 

TCR and APR would be easier to 

compute under the expanded definition 

of finance charge than the APR today 

using the current definition. If the 

Bureau adopts both the more inclusive 

finance charge and the TCR adjustment 

in a final rule pursuant to the 2012 

HOEPA Proposal and escrow rule, 

adopting the TCR adjustment in the 

higher-risk mortgage rule could ensure 

consistency across rules. In addition, 

the Agencies are seeking comment on 

whether use of the TCR or other trigger 

modifications should be optional, so 

that creditors could use the broader 

definition of finance charge to calculate 

APR and points and fees triggers if they 

would prefer. The Bureau believes 

adoption of the proposed modifications 

would as a whole reduce the economic 

impacts on creditors of the more 

expansive definition of finance charge 

proposed in the 2012 TILA–RESPA 

Proposal. 

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54754 Federal Register / Vol. 77, No. 172 / Wednesday, September 5, 2012 / Proposed Rules 

110More information about the Mortgage Call 

Report can be found at http:// 

mortgage.nationwidelicensingsystem.org/slr/ 

common/mcr/Pages/default.aspx. 

Additional Analysis Being Considered 

and Request for Information 

The Bureau will further consider the 

benefits, costs and impacts of the 

proposed provisions and additional 

proposed modifications before finalizing 

the proposal. As noted above, there are 

a number of areas where additional 

information would allow the Bureau to 

better estimate the benefits, costs, and 

impacts of this proposal and more fully 

inform the rulemaking. The Bureau asks 

interested parties to provide comment 

or data on various aspects of the 

proposed rule, as detailed in the 

section-by-section analysis. The most 

significant of these include information 

or data addressing: 

• Data on lending activity of creditors 

that are not required to report HMDA 

data, particularly small or rural 

institutions and non-reporting IMBs. 

• Nationally representative data on 

the usage of different valuation methods 

or costs 

• Measures to account for potential 

adoption of a broader definition of 

finance charge, as separately proposed 

in the Bureau’s 2012 TILA–RESPA 

Proposal; 

To supplement the information 

discussed in in this preamble and any 

information that the Bureau may receive 

from commenters, the Bureau is 

currently working to gather additional 

data that may be relevant to this and 

other mortgage related rulemakings. 

These data may include additional data 

from the NMLS and the NMLS MCR, 

loan file extracts from various lenders, 

and data from the pilot phases of the 

National Mortgage Database. The Bureau 

expects that each of these datasets will 

be confidential. This section now 

describes each dataset in turn. 

First, as the sole system supporting 

licensure/registration of mortgage 

companies for 53 agencies for states and 

territories and mortgage loan originators 

under the SAFE Act, NMLS contains 

basic identifying information for nondepository mortgage loan origination 

companies. Firms that hold a State 

license or State registration through 

NMLS are required to complete either a 

standard or expanded Mortgage Call 

Report (MCR). The Standard MCR 

includes data on each firm’s residential 

mortgage loan activity including 

applications, closed loans, individual 

mortgage loan originator activity, line of 

credit and other data repurchase 

information by state. It also includes 

financial information at the company 

level. The expanded report collects 

more detailed information in each of 

these areas for those firms that sell to 

Fannie Mae or Freddie Mac.110 To date, 

the Bureau has received basic data on 

the firms in the NMLS and de-identified 

data and tabulations of data from the 

Mortgage Call Report. These data were 

used, along with data from HMDA, to 

help estimate the number and 

characteristics of IMBs active in various 

mortgage activities. In the near future, 

the Bureau may receive additional data 

on loan activity and financial 

information from the NMLS including 

loan activity and financial information 

for identified lenders. The Bureau 

anticipates that these data will provide 

additional information about the 

number, size, type, and level of activity 

for non-depository lenders engaging in 

various mortgage origination and 

servicing activities. As such, it 

supplements the Bureau’s current data 

for IMBs reported in HMDA and the 

data already received from NMLS. For 

example, these new data will include 

information about the number and size 

of closed-end first and second loans 

originated, fees earned from origination 

activity, levels of servicing, revenue 

estimates for each firm and other 

information. The Bureau may compile 

some simple counts and tabulations and 

conduct some basic statistical modeling 

to better model the levels of various 

activities at various types of firms, such 

as the frequency of HRM loans. 

Second, the Bureau is working to 

obtain a random selection of loan-level 

data from a handful of lenders. The 

Bureau intends to request loan file data 

from lenders of various sizes and 

geographic locations to construct a 

representative dataset. In particular, the 

Bureau will request a random sample of 

‘‘GFEs’’ and ‘‘HUD–1’’ forms from loan 

files for closed-end mortgage loans. 

These forms include data on some or all 

loan characteristics including settlement 

charges, origination charges, appraisal 

fees, flood certifications, mortgage 

insurance premiums, homeowner’s 

insurance, title charges, balloon 

payment, prepayment penalties, 

origination charges, and credit charges 

or points. Through conversations with 

industry, the Bureau believes that such 

loan files exist in standard electronic 

formats allowing for the creation of a 

representative sample for analysis. The 

Bureau may use these data to further 

measure the impacts of certain proposed 

changes. Calculations of various 

categories of settlement and origination 

charges may help the Bureau calculate 

the various impacts of proposed changes 

to the definitions of finance charges and 

other aspects of the proposal, including 

loans that would meet the high rate or 

high risk definitions mandating 

additional consumer protections. 

Third, the Bureau may also use data 

from the pilot phases of the National 

Mortgage Database (NMDB) to refine its 

proposals and/or its assessments of the 

benefits costs and impacts of these 

proposals. The NMDB is a 

comprehensive database, currently 

under development, of loan-level 

information on first lien single-family 

mortgages. It is designed to be a 

nationally representative sample (1 

percent) and contains data derived from 

credit reporting agency data and other 

administrative sources along with data 

from surveys of mortgage borrowers. 

The first two pilot phases, conducted 

over the past two years, vetted the data 

development process, successfully 

pretested the survey component and 

produced a prototype dataset. The 

initial pilot phases validated that credit 

repository data are both accurate and 

comprehensive and that the survey 

component yields a representative 

sample and a sufficient response rate. A 

third pilot is currently being conducted 

with the survey being mailed to holders 

of five thousand newly originated 

mortgages sampled from the prototype 

NMDB. Based on the 2011 pilot, a 

response rate of fifty percent or higher 

is expected. These survey data will be 

combined with the credit repository 

information of non-respondents, and 

then deidentified. Credit repository data 

will be used to minimize non-response 

bias, and attempts will be made to 

impute missing values. The data from 

the third pilot will not be made public. 

However, to the extent possible, the data 

may be analyzed to assist the CFPB in 

its regulatory activities and these 

analyses will be made publically 

available. 

The survey data from the pilots may 

be used by the Bureau to analyze 

consumers’ shopping behavior regarding 

mortgages. Questions may also assess 

borrowers’ understanding of their loan 

terms and the various charges involved 

with origination. Tabulations of the 

survey data for various populations and 

simple regression techniques may be 

used to help the Bureau with its 

analysis. 

In addition to the comment solicited 

elsewhere in this proposed rule, the 

Bureau requests commenters to submit 

data and to provide suggestions for 

additional data to assess the issues 

discussed above and other potential 

benefits, costs, and impacts of the 

proposed rule. The Bureau also requests 

comment on the use of the data 

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Federal Register / Vol. 77, No. 172 / Wednesday, September 5, 2012 / Proposed Rules 54755 

111U.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. 

described above. Further, the Bureau 

seeks information or data on the 

proposed rule’s potential impact on 

consumers in rural areas as compared to 

consumers in urban areas. The Bureau 

also seeks information or data on the 

potential impact of the proposed rule on 

depository institutions and credit 

unions with total assets of $10 billion or 

less as described in Dodd-Frank Act 

section 1026 as compared to depository 

institutions and credit unions with 

assets that exceed this threshold and 

their affiliates. 

VI. Regulatory Flexibility Act 

Board 

The Regulatory Flexibility Act (RFA) 

(5 U.S.C. 601 et seq.) requires an agency 

either to provide an initial regulatory 

flexibility analysis with a proposed rule 

or certify that the proposed rule will not 

have a significant economic impact on 

a substantial number of small entities. 

The proposed regulations cover certain 

banks, other depository institutions, and 

non-bank entities that extend higherrisk mortgage loans to consumers. The 

Small Business Administration (SBA) 

establishes size standards that define 

which entities are small businesses for 

purposes of the RFA.111 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 proposed regulations. 

Based on its analysis, and for the 

reasons stated below, the Board believes 

that the rule will not have a significant 

economic impact on a substantial 

number of small entities. Nevertheless, 

the Board is publishing an initial 

regulatory flexibility analysis. The 

Board will, if necessary, conduct a final 

regulatory flexibility analysis after 

consideration of comments received 

during the public comment period. 

The Board requests public comment 

on all aspects of this analysis. 

A. Reasons for the Proposed 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 

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 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 appraisal 

from a different certified or licensed 

appraiser if the purpose of the higherrisk 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 

by January 21, 2013. 

B. Statement of Objectives and Legal 

Basis 

The SUPPLEMENTARY INFORMATION

above contains this information. As 

discussed above, the legal basis for the 

proposed regulations is new TILA 

sections 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. Description of Small Entities to 

Which the Regulation Applies 

The proposed regulations apply to 

creditors that make higher-risk mortgage 

loans, as defined above. To estimate the 

number of small entities that will be 

subject to the requirements of the 

proposed rule, the Board is relying 

primarily on data from Reports of 

Condition and Income (‘‘Call Reports’’) 

to identify asset size of depository 

institutions and certain subsidiaries of 

banks and bank companies, as well as 

home lending data reported by 

respondents subject to the reporting 

requirements of the Home Mortgage 

Disclosure Act (HMDA). The exact 

number of small entities likely to be 

affected by the proposal, however, is 

unknown because the Board lacks 

reliable sources for certain information. 

For example, reliable information is not 

available regarding the extent of 

mortgage loan origination activity by 

institutions not subject to the reporting 

requirements of HMDA; such 

institutions are predominantly those 

that have offices only in rural areas or 

that are very small entities (assets under 

$40 million as of the end of 2010). 

Moreover, for the majority of HMDA 

respondents that are not depository 

institutions, neither annual revenue 

information nor exact asset size 

information is available. 

The Board can, however, provide an 

estimate of a portion of the number of 

small depository institutions that would 

be subject to the proposed rule. 

According to the 2011 HMDA data, 

there are approximately 1,569 

commercial banks, 283 savings and 

loans, and 1,179 credit unions that 

could be considered small entities and 

that extend mortgages, and therefore are 

potentially subject to the proposed rule. 

HMDA data indicates that the majority 

of these institutions extended at least 

one higher-risk mortgage loan in 2011. 

As noted above, the available data are 

insufficient to estimate the number of 

non-bank entities that would be subject 

to the proposed rule and that are small 

as defined by the SBA. However, using 

the size standard set forth by the SBA 

for depository institutions ($175 million 

or less in assets), the Board can estimate 

based on 2011 HMDA data that about 

250 small mortgage companies extended 

mortgages in 2011. 

The number of these small entities 

that would make higher-risk mortgage 

loans in the future is unknown. The 

Board believes that of the small entities 

identified, however, the majority would 

make at least one higher-risk mortgage 

loan, and thus be subject to the 

proposed rule, because the majority 

have made such loans in the past. 

The Board invites comment regarding 

the number and type of small entities 

that would be affected by the proposed 

rule. 

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54756 Federal Register / Vol. 77, No. 172 / Wednesday, September 5, 2012 / Proposed Rules 

112For purposes of assessing the impacts of the 

proposed 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 

D. Projected Reporting, Recordkeeping 

and Other Compliance Requirements 

The compliance requirements of the 

proposed regulations are described in 

detail in the SUPPLEMENTARY

INFORMATION above. 

The proposed regulations generally 

apply to creditors that make higher-risk 

mortgage loans, which are generally 

mortgages with an annual percentage 

rate that exceeds the average prime offer 

rate by a specified percentage, subject to 

certain exceptions. The proposed rule 

would generally require 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 would be required to 

determine if it extends higher-risk 

mortgage loans and, if so, would need 

to analyze the regulations. The creditor 

would need to establish procedures for 

identifying mortgages subject to the 

additional appraisal requirements. A 

creditor making a higher-risk mortgage 

loan would need to 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 would need to 

• 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 

• Confirm that it has no actual 

knowledge to the contrary of facts or 

certifications contained in the written 

appraisal. 

A creditor would also need to 

determine whether it is financing 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, who purchased 

the property for less than the current 

sale price. If so, the creditor would need 

to obtain an additional appraisal of the 

property and confirm that the appraisal 

meets the requirements of the first 

appraisal. The creditor would also need 

to ensure that the additional appraisal 

included 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 higher-risk 

mortgages also would need to design, 

generate, and provide a new notice to 

applicants. Specifically, they would 

provide at the time of the initial 

application the statement that the 

appraisal is for the sole use of the 

creditor. In addition, higher-risk 

mortgage creditors would have to 

provide the applicant with a copy of 

each appraisal conducted at least three 

days prior to closing and develop 

systems for that purpose. 

The Board believes that certain factors 

might mitigate the economic impact of 

the proposed rule. The Board believes 

only a small number of loans would be 

affected by the proposed rule. For 

example, according to HMDA data, less 

than four percent of first-lien mortgage 

loans in 2010 or 2011 would be 

classified as ‘‘higher-risk’’ and thus 

subject to any appraisal requirement. 

Moreover, information collected by the 

CFPB indicates that fewer than five 

percent of mortgage loans involve a 

property that was previously purchased 

within 180 days. Thus, significantly less 

than one percent of mortgage loans 

would be subject to the provisions 

requiring second appraisals. 

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. 

Because of the small number of 

transactions affected, the Board believes 

the proposed rule is unlikely to have a 

significant economic impact on a 

substantial number of small entities. 

The Board seeks information and 

comment on any costs, compliance 

requirements, or changes in operating 

procedures arising from the application 

of the proposed rule to small 

institutions. 

E. 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 proposed regulations. The 

proposed rule will work in conjunction 

with the existing requirements of 

FIRREA title XI and its implementing 

regulations. 

F. Discussion of Significant Alternatives 

As noted in the SUPPLEMENTARY

INFORMATION, the Board is proposing an 

alternative definition of ‘‘higher-risk 

mortgage loan’’ that would allow 

creditors to exclude some fees from the 

‘‘rate’’ used to determine if a loan is a 

‘‘higher-risk mortgage loan.’’ By 

excluding these fees, it is possible that 

fewer loans would be covered by the 

rule, and thus burden on creditors could 

be reduced. In addition, as described in 

the SUPPLEMENTARY INFORMATION, 

adopting the alternative definition could 

ensure uniformity and consistency 

across rules. The proposed rule also 

exempts reverse mortgages and loans 

secured only by a residential structure 

from the rule’s coverage. In addition, the 

proposed rule seeks to establish a less 

burdensome means for creditors to 

determine that an appraiser has met 

certain requirements by providing 

creditors with a safe harbor. Lastly, the 

proposed 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 needed information is 

known. 15 U.S.C. 1639h(b)(2). 

The Board welcomes comments on 

any other significant alternatives to the 

proposed rule that accomplish the 

objectives of section 1471 of the DoddFrank Act, which establishes new TILA 

section 129H, and that minimize any 

significant economic impact of the 

proposed rule on small entities. 

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.112 The Bureau 

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district, or special district with a population of less 

than 50,000. 5 U.S.C. 601(5). 113 5 U.S.C. 609. 114 13 CFR Ch. 1. 115The Bureau has proposed separately in the 

2012 TILA–RESPA Proposal to expand the 

definition of the finance charge. If that change is 

adopted, it would be expected to increase the 

number of loans classified as higher-risk mortgage 

loans. The Bureau notes that it has accounted for 

the impacts of this potential change in the 2012 

TILA–RESPA Proposal, including in that Proposal’s 

Initial Regulatory Flexibility Analysis and Small 

Business Review Panel Process. In connection with 

the proposed definition change, the Agencies are 

seeking comment in this proposal on whether to 

modify the triggers, including by using the 

transaction coverage rate in place of the APR, to 

offset the impact of a broader definition of finance 

charge on higher-risk mortgage loan coverage levels. 

As discussed in the Dodd-Frank Act section 1022 

analysis, adoption of those adjustments might 

impose some one-time implementation costs and 

compliance complexity, but the Bureau believes 

adoption of the proposed modifications would as a 

whole reduce the economic impacts on creditors of 

the more expansive definition of finance charge 

proposed in the 2012 TILA–RESPA Proposal. 

116See 2012 TILA–RESPA Proposal, pp. 101–127, 

725–28, 905–11 (published July 9, 2012), available 

at http://files.consumerfinance.gov/f/ 

201207_cfpb_proposed-rule_integrated-mortgagedisclosures.pdf. 

117See 2012 HOEPA Proposal, pp. 44, 149–211 

(published July 9, 2012), available at http:// 

files.consumerfinance.gov/f/ 

201207_cfpb_proposed-rule_high-cost-mortgageprotections.pdf. 

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.113 An IRFA is not required for 

this proposal because the proposal, if 

adopted, would not have a significant 

economic impact on a substantial 

number of small entities. 

A. Summary of Proposed Rule 

The empirical approach to calculating 

the impact that the proposed regulation 

has on small entities subject to the 

proposed rule follows the methodology, 

and uses the same data, as the analysis 

conducted under Section 1022(a) of the 

Dodd-Frank Act. The impact analysis 

focuses on the economic impact of the 

proposed rule, relative to a pre-statute 

baseline, for small depository 

institutions (DIs) and non-depository 

independent mortgage banks (IMBs). 

The Small Business Administration 

classifies DIs (commercial banks, 

savings institutions, credit unions, and 

other depository institutions) as small if 

they have assets less than $175 million, 

and classifies other real estate credit 

firms as small if they have less than $7 

million in annual revenues.114

The proposed rule would implement 

section 1471 of the Dodd-Frank Act, 

which establishes appraisal 

requirements for higher-risk mortgage 

loans.115 Consistent with the statute, the 

proposal would allow a creditor to make 

a higher-risk mortgage loan only if the 

following conditions are met: 

• The creditor obtains a written 

appraisal; 

• The appraisal is performed by a 

certified or licensed appraiser; 

• The appraiser conducts a physical 

property visit of the interior of the 

property; 

• At application, the applicant is 

provided with a statement regarding the 

purpose of the appraisal, that the 

creditor will provide the applicant a 

copy of that any written appraisal, and 

that the applicant may choose to have 

a separate appraisal conducted at the 

expense of the applicant; and 

• The creditor provides the consumer 

with a free copy of any written 

appraisals obtained for the transaction 

at least three (3) business days before 

closing. 

In addition, as required by the Act, 

the proposal would require a higher-risk 

mortgage loan creditor to obtain an 

additional written appraisal, at no cost 

to the borrower, under the following 

circumstances: 

• The higher-risk mortgage loan 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 higher price than the seller 

paid, although comment is requested on 

whether a threshold price increase 

would be appropriate. 

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. 

The proposal also includes a request 

for comments to address a proposed 

amendment to the method of calculation 

of the APR that is being 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 is 

proposing to adopt a more simple and 

inclusive finance charge calculation for 

closed-end credit secured by real 

property or a dwelling.116 As the 

finance charge is integral to the 

calculation of the APR, the Agencies 

believe it is possible that a more 

inclusive finance charge could increase 

the number of loans covered by this 

rule. The Agencies note that the Bureau 

currently is seeking data to assist in 

assessing potential impacts of a more 

inclusive finance charge in connection 

with the 2012 TILA–RESPA and its 

proposal to implement Dodd-Frank Act 

provision related to ‘‘high-cost’’ loans 

(2012 HOEPA Proposal).117

B. Number and Classes of Affected 

Entities 

Of the roughly 17,747 depository 

institutions (including credit unions) 

and IMBs, 13,106 are below the relevant 

small entity thresholds. Of the small 

institutions, 9,807 are estimated to have 

originated mortgage loans in 2010. 

While loan counts exist for credit 

unions and HMDA-reporting DIs and 

IMBs, they must be projected for nonHMDA reporters. For IMBs, data on 

revenues exists for 560 of 2,515 

institutions. An accepted statistical 

method (‘‘nearest neighbor matching’’) 

is used to estimate the number of these 

institutions that have less than $7 

million in revenues from the MCR. 

TABLE 4—COUNTS AND ORIGINATIONS OF CREDITORS BY TYPE

Category NAICS code Total entities Small entity threshold Small entities 

Entities that 

originate any 

mortgage loans c

Small entities that 

originate any 

mortgage loans c

Commercial Banking a 522110 6596 $175 million in assets 3764 6362 3597 

Savings Institutions a 522120 1145 $175 million in assets 491 1138 487 

Credit Unions b .......... 522130 7491 $175 million in assets 6569 4359 3441 

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118Revenue has been used in other analyses of 

economic impacts under the RFA. For purposes of 

this analysis, the Bureau uses revenue as a measure 

of economic impact. In the future, the Bureau will 

consider whether an alternative quantifiable or 

numerical measure may be available that would be 

more appropriate for financial firms. 

119Wages comprised 67.5% of compensation for 

employees in credit intermediation and related 

fields in Q4 2010, according to the Bureau of Labor 

Statistics Series ID 

CMU2025220000000D,CMU2025220000000P. 

http://www.bls.gov/ncs/ect/#tables. 

120Since IMBs tend to originate-to-distribute 

regardless of size or urban/rural status, we believe 

that revenues per origination do not differ 

substantially between HMDA reporters and nonreporters. Thus, we believe it reasonable to 

extrapolate the results to HMDA non-reporters. 

121 Industry experts estimate that gross revenues 

per loan are approximately 3%. 

TABLE 4—COUNTS AND ORIGINATIONS OF CREDITORS BY TYPE—Continued 

Category NAICS code Total entities Small entity threshold Small entities 

Entities that 

originate any 

mortgage loans c

Small entities that 

originate any 

mortgage loans c

Real Estate Credit d,e 522292 2515 $7 million in revenues.2282 2515 2282 

Total ................... .................... 17,747 ................................... 13106 14374 9807 

aAsset size obtained from December 2010 Call Report Data downloaded from SNL. The institutions in the category savings institutions are all 

thrifts. bAsset size obtained from December 2010 NCUA Call Reports. 

cFor HMDA reporters, loan counts from HMDA 2010. For institutions that do not report to HMDA, loan counts projected based on call report 

data fields and counts for HMDA reporters. d NMLS Mortgage Call Report (MCR) for Q1 and Q2 of 2011. All MCR reporters who originate at least one loan or have positive loan amounts 

are considered to be engaged in real estate credit (instead of purely mortgage brokers). e Revenues were not missing for 560 of the 2499 institutions. For institutions with missing revenue values revenues were imputed using nearest neighbor matching of the count of originations and the count of brokered loans. 

C. Analysis 

Although most depository institutions 

and IMBs are affected by the proposed 

rule, the proposed 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.118 For 

depository institutions, revenue is 

obtained from the appropriate call 

report. For non-depository institutions, 

the frequency of HRM is not available in 

the MCR. However, data available in 

HMDA shows that the proportion of 

HRM 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 proposed rule. 

For small depository institutions, 

Table 5 reports various statistics for the 

estimated cost of compliance with the 

proposed 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) section. The third column 

shows that for all small DIs and for each 

category of small DI, the median cost of 

compliance is between 0.0% and 0.8% 

of revenues, and for each category the 

mean cost of compliance is 0.10% or 

less of revenues. No small thrifts or 

small credit unions, and 0.1% of small 

banks have cost-to-revenue ratios that 

exceed 1% of revenues. 

TABLE 5—COST OF COMPLIANCE FOR DEPOSITORY INSTITUTION AS A PERCENTAGE OF REVENUES, INSTITUTIONS LESS

THAN $175 MILLION IN ASSETS

N Mean Median 99th 

Percentile Count >1% Count >3% 

All Institutions ................................................................... 7672 0.04% 0.02% 0.26% 9 7 

Banks ............................................................................... 3764 0.08% 0.06% 0.33% 9 7 

Thrifts ............................................................................... 491 0.10% 0.08% 0.45% 0 0 

Credit Unions ................................................................... 3417 0.01% 0.00% 0.07% 0 0 

Sources: HMDA 2010, bank and thrift Q4 2010 call report (obtained from SNL Financial) and credit union call report, and Bureau calculations. 

Originations drawn from HMDA 2010 for HMDA reporters and imputed for HMDA non-reporters using call report information. 

Assumptions: The cost of providing the initial disclosure is $.10. Full-interior appraisals cost $600, alternative valuations cost $5. The probability of full-interior appraisals for a transaction is 95% for purchase-money transactions, 90% for refinance transactions, and 5% for second 

mortgages. The proportion of resales within 180 days is 5%. 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. Loan officers are trained for 1 hour on the regulation beyond what considered customary training. Every 3 years the regulation is reviewed for 45 minutes by a lawyer and 0.5 compliance officers. Wages are $29.48 

per hour for compliance officers, $30.66 for loan officers, and $76.99 for lawyers, and wages are assumed to be 67.5% of total compensation.119

The source of information on the 

number of HRMs is HMDA, but because 

HMDA does not provide revenue 

information it is not possible to 

determine which IMBs in HMDA have 

revenue less than $7 million. While 

most IMBs are small, in order to provide 

a very conservative estimate we evaluate 

the compliance costs of the smallest 

IMBs, as measured by originations. For 

IMBs that report HMDA data, Table 6 

presents estimates of the cost of 

compliance.120 Panel A presents 

estimates of the cost of compliance with 

the proposed rule for institutions in the 

first quartile (the smallest 25%) of IMBs 

by number of originations and Panel B 

presents estimates of the cost of 

compliance for all IMBs. As noted 

above, revenue information is not 

available for all IMBs so two proxies for 

revenue are employed: (1) 3% of 

origination dollar volume, and (2) the 

median revenue per origination for MCR 

reporters that report revenue.121 Using 

either proxy, the mean cost of 

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122See 5 U.S.C. 601 et seq. 

compliance is less than 2 percent of 

total revenues for first quartile IMBs and 

median cost of compliance is below 

0.3% of revenues. Using the 3% of 

origination dollar volume measure, 

9.3% of institutions in the first quartile 

have compliance costs that exceed 1% 

of revenues and 4.4% have compliance 

costs that exceed 3% of revenues. 

Similarly, using the median revenue per 

loan measure, 11.0% have compliance 

costs that exceed 1% of revenues and 

4.4% of have revenues that exceed 3% 

of revenues. Thus, the Bureau believes 

that, using the more conservative proxy, 

no more than approximately 11% of 

small IMBs would have compliance 

costs that exceed 1% of revenues, and 

no more than approximately 4.4% 

would have costs that exceed 3% of 

revenues. 

TABLE 6—COST OF COMPLIANCE FOR IMB, HMDA REPORTERS ONLY

Na Mean Median 99th Percentile Count >1% Count >3% 

Panel A: 1st Quartile of HMDA Reporting IMBs 

Cost Per Origination ........................................................ 181 $53.28 $9.50 $695.96 

Cost Per Application ........................................................ 211 $7.97 $5.10 $91.89 

Total Cost/(3% of Origination Volume)b ................... 181 1.17% 0.21% 13.98% 17 8 

(Cost Per Origination)/(Median Revenues Per Loan)c .... 181 1.60% 0.29% 20.91% 20 8 

Panel B: All IMBs 

Cost Per Origination ........................................................ 819 $17.82 $6.23 $91.89 

Cost Per Application ........................................................ 849 $5.30 $4.30 $21.60 

Total Cost/(3% of Origination Volume) ..................... 819 0.38% 0.11% 3.97% 26 11 

(Cost Per Origination)/(Median Revenues Per Loan) ..... 819 0.54% 0.19% 2.76% 32 8 

Source: HMDA 2010. 

Number of employees at IMBs imputed by application count divided by 1.38 loan-officer days per application for full time loan officers who 

work 2080 hours per year. 

Assumptions: Full-interior appraisal costs $600, alternative valuations cost $5. The probability of full-interior appraisals for a transaction are 

95% is purchase-money transactions, 90% for refinance transactions, and 5% for second mortgages. The proportion of resales within 180 days 

is 5%. 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. Loan officers are trained for 1 hour on the regulation beyond what is considered customary training. Every 3 years the regulation is reviewed for 45 minutes by a lawyer and a compliance officer. Wages are $33.40 per hour for compliance officers, $31.81 for loan officers, and $76.59 for lawyers, and wages are assumed to be 67.5% of total compensation. a Cost per origination restricted to institutions with positive origination values, cost per application restricted to institutions with positive application values, total cost divided by 3% of origination volume restricted to institutions with positive origination volume. b Industry experts estimate that gross revenues per loan are approximately 3% of origination amount. The MBA’s Mortgage Bankers Performance Report reports that in the 4th quarter of 2010 IMBs and subsidiaries reported that total production operating expenses were $4930 per loan, 

average profits were $1082 per loan, and average loan balance was $208,319. c Median revenue per origination ($3328) calculated using NMLS MCR data from Q1 and Q2 of 2011. 

Because many of the costs imposed by 

the proposed rule are likely to be passed 

on to consumers, this may result in a 

decrease in demand for mortgage loans. 

However, any possible decrease in loan 

amounts is likely to be negligible. For 

both first and subordinate lien loans, the 

incremental costs to consumers are the 

difference in costs between the fullinterior appraisal and alternative 

valuation method costs and perhaps 

some additional underwriting charges to 

reflect additional labor costs. These 

charges are unlikely to exceed $600. For 

first liens, full interior inspections are 

common industry practice so for the 

typical transaction additional costs 

passed on 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 there is 

unlikely to be an adverse effect on 

demand. 

A more likely impact would be on the 

volume of higher-risk mortgage 

subordinate liens because this is where, 

in practice, the proposed rule would 

impose a change from the status quo, 

and also because the cost of a full 

interior appraisal is a larger proportion 

of the loan amount. However, changes 

in loan 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. 

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 proposal, if adopted, 

would not have a significant economic 

impact on a substantial number of small 

entities. The Bureau requests comment 

on the analysis above and requests any 

relevant data. 

FDIC 

The RFA generally requires that, in 

connection with a notice of proposed 

rulemaking, an agency prepare and 

make available for public comment an 

initial regulatory flexibility analysis that 

describes the impact of a proposed rule 

on small entities.122 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 and a 

short, explanatory statement in the 

Federal Register together with the rule. 

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123The FDIC based its analysis on the HMDA 

data, as it provided a proxy for the characteristics 

of HRMs. While the FDIC recognizes that fewer 

higher-price 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. 

124 12 CFR part 323. 

125See 5 U.S.C. 601 et seq. 

126 68 FR 31949 (May 29, 2003). 

127NCUA based its analysis on the HMDA data, 

as it provided a proxy for the characteristics of 

HRMs. 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. 

As of March 31, 2012, there were 

approximately 2,571 small FDICsupervised banks, which include 2,410 

state nonmember banks and 161 statechartered savings banks. The FDIC 

analyzed the 2010 Home Mortgage 

Disclosure Act 123 (HMDA) dataset to 

determine how many loans by FDICsupervised banks might qualify as 

HRMs under section 129H of the TILA 

as added by section 1471 of the DoddFrank Act. This analysis reflects that 

only 70 FDIC-supervised banks 

originated at least 100 HRMs, with only 

four banks originating more than 500 

HRMs. Further, the FDIC-supervised 

banks that met the definition of a small 

entity originated on average less than 8 

HRM loans each in 2010. 

The proposed rule could impact small 

FDIC-supervised institutions by: 

1. Requiring an appraisal on 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 noted that Part 323 of the FDIC 

Rules and Regulations 124 (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 estaterelated 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 

proposed NPR will supersede this 

exemption, resulting in creditors having 

to obtain an appraisal for a HRM 

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 

323 to obtain some type of valuation of 

the mortgaged property. The proposed 

NPR merely limits the type of 

permissible valuation to an appraisal for 

HRMs. 

As for the second potential impact, 

the proposed NPR’s requirement affects 

a lender to the extent that a lender must 

instruct the appraiser to conduct a 

physical visit of the interior of the 

mortgaged property. 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. 

As for the third potential impact, the 

proposed NPR’s requirement to conduct 

a second appraisal for certain 

transactions should not affect many 

FDIC-supervised banks. As previously 

indicated, FDIC-supervised banks that 

met the definition of a small entity 

originated an average of less than 8 

HRM loans each in 2010. According to 

estimates provided by FHFA, about five 

(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 reflects that most small 

FDIC-supervised banks will have to 

obtain a second appraisal for a nominal 

amount of transactions at the banks’ 

expense. The estimated cost of a second 

appraisal is between $350 to $600. 

It is the opinion of the FDIC that the 

proposed 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 

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 

amount of transactions. Accordingly, a 

regulatory flexibility analysis is not 

required. 

The FDIC seeks comment on whether 

the proposed rule, if adopted in final 

form, would impose undue burdens, or 

have unintended consequences for, 

small FDIC-supervised institutions and 

whether there are ways such potential 

burdens or consequences could be 

minimized in a manner consistent with 

section 129H of TILA. 

FHFA 

The proposed 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 notice of proposed 

rulemaking, an agency prepare and 

make available for public comment an 

initial regulatory flexibility analysis that 

describes the impact of a proposed rule 

on small entities.125 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 126 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. 

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 HRMs under section 

129H of the TILA.127 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 

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Federal Register / Vol. 77, No. 172 / Wednesday, September 5, 2012 / Proposed Rules 54761 

128With 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 HRMs per real estate loan 

originated. Using this ratio to interpolate the likely 

number of HRM originations, the analysis suggests 

that small FICUs originate on average less than 2 

HRM loans each year. 

129Codified at section 129H of the Truth-inLending Act, 15 U.S.C. 1631 et seq. 130 12 CFR part 722. 

131 ‘‘A financial institution’s assets are 

determined by averaging the 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. 

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 HRM. The data 

reflects that only three FICUs originated 

at least 100 HRMs, with no FICUs 

originating more than 500 HRMs, and 

eighty-eight percent of reporting FICUs 

originating 10 HRMs or less. Further, 

FICUs that met the SBA’s definition of 

a small entity originated an average 4 

HRM loans each in 2010.128 For the 

reasons provided below, NCUA certifies 

that the proposed rule, if adopted in 

final form, would not have a significant 

economic impact on a substantial 

number of small entities. Accordingly, a 

regulatory flexibility analysis is not 

required. 

As previously discussed, section 1471 

of the Dodd-Frank Act 129 generally 

requires the Agencies to jointly 

prescribe regulations that require a 

creditor to: 

(i) Obtain a written appraisal for a 

higher-risk mortgage that is prepared by 

a state licensed or certified appraiser 

who: 

a. Conducted a physical visit of the 

interior of the property to be mortgage, 

and 

b. Performed the appraisal in 

compliance with USPAP and title XI of 

FIRREA, and the regulations prescribed 

under such title; 

(ii) Obtain, at not cost to the 

applicant, a second appraisal that 

includes certain analyses from a 

different certified or licensed appraiser 

if the purpose of a higher-risk mortgage 

is to finance the acquisition of the 

mortgaged property from a seller within 

180 days of the seller’s acquisition and 

at a price lower than the current sale 

price of the property; 

(iii) Provide, at the time of the initial 

mortgage application, the applicant 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 by an appraiser of the 

applicant’s choosing at the applicant’s 

expense; and 

(iv) Provide the applicant with one (1) 

copy of each appraisal without charge 

and at least three (3) business days prior 

to the transaction closing date. 

The proposed rule implements the 

appraisal requirements of section 1471 

of the Dodd-Frank Act. Part 722 of 

NCUA’s Rules and Regulations 130

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 banking 

practices for such transactions. 

The proposed NPR will supersede this 

exemption, resulting in FICUs having to 

obtain an appraisal for a HRM 

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 proposed 

NPR merely limits the type of 

permissible valuation to an appraisal for 

HRMs. 

The proposed NPR’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 HRMs, the 

fact that many creditors already require 

that an appraiser conduct an interior 

inspection of mortgage collateral 

property in connection with an 

appraisal; and the fact that requiring an 

interior inspection would add a 

relatively small amount to the cost of an 

appraisal, the proposed rule will not 

have a significant economic impact on 

a substantial number of small FICUs, 

and therefore, no regulatory flexibility 

analysis is required. 

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 proposed 

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 commercial banks, savings 

institutions and other depository credit 

intermediation with assets less than or 

equal to $175 million 131 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 proposed rule. 

Section 1471 of the Dodd-Frank Act 

establishes a new TILA section 129H, 

which sets forth appraisal requirements 

applicable to higher-risk mortgage loans. 

A ‘‘higher-risk 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-risk 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, new TILA section 129H 

does not permit a creditor to extend 

credit in the form of a higher-risk 

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 

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54762 Federal Register / Vol. 77, No. 172 / Wednesday, September 5, 2012 / Proposed Rules 

132The 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. 133The 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 to non-depository 

mortgage institutions. The FTC is responsible for 

estimating and reporting to OMB its share of burden 

under this proposal. 

134 ‘‘The public disclosure of information 

originally supplied by the Federal government to 

the recipient for the purpose of disclosure to the 

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 1,970 

banks (1,281 commercial banks, 66 trust 

companies, 576 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 originate mortgages 

and therefore maybe impacted by the 

proposed 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 thousand 

to an upper bound of approximately $18 

thousand. Using the upper bound cost 

estimate, we believe the proposed rule 

will have a significant economic impact 

on three small banks, which is not a 

substantial number. 

Therefore, we believe the proposed 

rule will not have a significant 

economic impact on a substantial 

number of small entities. The OCC 

certifies that the Proposed Rule would 

not, if promulgated, have a significant 

economic impact on a substantial 

number of small entities. 

VII. Paperwork Reduction Act 

Certain provisions of this proposed 

rule contain ‘‘collection of information’’ 

requirements within the meaning of the 

Paperwork Reduction Act of 1995 (44 

U.S.C. 3501 et seq.) (Paperwork 

Reduction Act or PRA). Under the PRA, 

the Agencies may not conduct or 

sponsor, and a person is not required to 

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 

proposed 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 proposed 

rule under the authority delegated to the 

Board by OMB. 

Title of Information Collection: 

Higher-Risk Mortgage Appraisals. 

Frequency of Response: Event 

generated. 

Affected Public: Businesses or other 

for-profit and not-for-profit 

organizations.132

Bureau: Insured depository 

institutions with more than $10 billion 

in assets, their depository institution 

affiliates, and certain non-depository 

mortgage institutions.133

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 

proposed rule are found in proposed 

paragraphs (b)(1), (b)(2), (b)(3), (c), and 

(d) of 12 CFR 1026.XX. This information 

is required to protect consumers and 

promotes the safety and soundness of 

creditors making higher-risk mortgage 

loans. This information will be used by 

creditors to evaluate real estate 

collateral in higher-risk mortgage loan 

transactions and by consumers entering 

these transactions. The collections of 

information are mandatory for creditors 

making higher-risk mortgage loans. 

The proposed rule would require that, 

within three days of application, a 

creditor provide a disclosure that 

informs consumers regarding 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 proposed 12 CFR 

1026.XX(c). If a loan meets the 

definition of a higher-risk mortgage 

loan, then the creditor would be 

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, and send a copy 

of the written appraisal to the consumer 

(Written Appraisal). See proposed 12 

CFR 1026.XX(b)(1) and (d). To qualify 

for the safe harbor provided under the 

proposed rule, a creditor would be 

required to review the written appraisal 

as specified in the text of the rule and 

appendix N. See proposed 12 CFR 

1026.XX(b)(2). If a loan is classified as 

a higher-risk mortgage loan that will 

finance the acquisition of the property 

to be mortgaged, and the property was 

acquired within the previous 180 days 

by the seller at a price that was lower 

than the current sale price, then the 

creditor would be required to obtain an 

additional appraisal that meets the 

requirements described above 

(Additional Written Appraisal). See 

proposed 12 CFR 1026.XX(b)(3). The 

Additional Written Appraisal must 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 

consumer agreed to acquire the 

property. See proposed 12 CFR 

1026.XX(b)(3)(iv). A creditor would also 

be required to send a copy of the 

additional written appraisal to the 

consumer. 12 CFR 1026.XX(d). 

Calculation of Estimated Burden 

Under the proposed Initial Appraisal 

Disclosure, the creditor would be 

required to provide a short, written 

disclosure within three days of 

application. Because the disclosure may 

be classified as a warning label supplied 

by the Federal government, the 

Agencies are assigning it no burden for 

purposes of this PRA analysis.134 In 

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Federal Register / Vol. 77, No. 172 / Wednesday, September 5, 2012 / Proposed Rules 54763 

public is not included within’’ the definition of 

‘‘collection of information.’’ 5 CFR 1320.3(c)(2). 

addition, the Agencies contemplate that 

once the TILA–RESPA integrated 

disclosure forms are finalized, the 

appraisal-related disclosure will be 

given as part of those forms. As such, 

this disclosure should not impose 

additional costs on creditors. 

The estimated burden for the 

proposed Written Appraisal 

requirements includes the burden the 

creditor bears to review for 

completeness the written appraisal in 

order to satisfy the safe harbor criteria 

set forth in the proposed rule and to 

send a copy of the written appraisal to 

the consumer. 

Under the Additional Written 

Appraisal requirement, if a loan is 

classified as a higher-risk mortgage loan 

that will finance the acquisition of the 

property to be mortgaged, and that 

property was acquired within the 

previous 180 days by the seller at a 

price that was lower than the current 

sale price, then the creditor would be 

required to obtain an additional written 

appraisal containing additional 

analyses. The additional written 

appraisal would have to be prepared by 

a certified or licensed appraiser 

different from the appraiser performing 

the other written appraisal for the 

higher-risk mortgage loan, and a copy of 

the additional appraisal must be sent to 

the consumer. The additional appraisal 

would be required to meet the standards 

of the other written appraisal for the 

higher-risk mortgage loan. Thus, in 

order to qualify for the safe harbor 

provided in the proposed rule, the 

written appraisal would also have to be 

reviewed for completeness. 

The agencies estimate that 

respondents would take, on average, 15 

minutes per appraisal to comply with 

the proposed disclosure requirements 

under the Written Appraisal 

requirement. The agencies estimate 

further that respondents would take, on 

average, 15 minutes per HRM to 

investigate and verify the need for a 

second appraisal; and then an 

additional 15 minutes to comply, where 

necessary, with the proposed disclosure 

requirements of the Second Written 

Appraisal. For the small fraction of 

loans requiring a second appraisal, the 

burden is similar to the prior 

information collection. The following 

table summarizes these burdens. 

Estimated Paperwork Burden 

TABLE 7—SUMMARY OF BURDEN HOURS FOR INFORMATION COLLECTIONS IN PROPOSED RULE

Estimated 

number of 

respondents 

Estimated 

number of 

appraisals per 

respondent 

Estimated 

burden hours 

per appraisal 

Estimated 

total annual 

burden hours 

[a] [b] [c] [d] = (a*b*c) 

Review and Provide a Copy of a Full Interior Appraisal 

Bureau: 135

Depository Inst. > $10 B in total assets + Depository Inst. Affiliates ....... 128 472 0.25 15,104 

Non-Depository Inst. ................................................................................. 2,515 24 0.25 15,090 

FDIC ................................................................................................................. 2,571 8 0.25 5,142 

Board 136 .......................................................................................................... 418 24 0.25 2,508 

OCC ................................................................................................................. 1,399 69 0.25 24,133 

NCUA ............................................................................................................... 2,437 6 0.25 3,656 

Total ................................................................................................... 9,468 65,632 

Investigate and Verify Requirement for Second Appraisal 

Bureau: 

Depository Inst. > $10 B in total assets + Depository Inst. Affiliates ....... 128 472 0.25 15,104 

Non-Depository Inst. ................................................................................. 2,515 24 0.25 15,090 

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 ................................................................................................... 9,468 70,132 

Conduct and Provide Second Appraisal 

Bureau: 

Depository Inst. > $10 B in total assets + Depository Inst. Affiliates ....... 128 24 0.25 768 

Non-Depository Inst. ................................................................................. 2,515 1 0.25 629 

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 ................................................................................................... 9,468 3,376 

Notes: (1) Respondents include all institutions estimated to originate HRMs. 

(2) There may be an additional ongoing burden of roughly 75 hours for privately insured credit unions estimated to originate HRMs. The Bureau will assume half of the burden for non-depository institutions and the privately insured credit unions. 

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54764 Federal Register / Vol. 77, No. 172 / Wednesday, September 5, 2012 / Proposed Rules 

135The information collection requirements (ICs) 

in this proposed 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). 

136The 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 proposed 

rulemaking. 

137Estimated 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. 

Respondents will also have to review 

the instructions and legal guidance 

associated with the proposed rule and 

train loan officers regarding the 

proposed rule. The Agencies estimate 

that these one-time costs are as follows: 

Bureau 32,754 hours; FDIC: 10,284 

hours; Board 3,344 hours; OCC: 19,586 

hours; NCUA: 7,311 hours.137

Request for Comments on Proposed 

Information Collection 

Comments are specifically requested 

concerning: (i) Whether the proposed 

collections of information are necessary 

for the proper performance of the 

functions of the Agencies, including 

whether the information will have 

practical utility; (ii) the accuracy of the 

estimated burden associated with the 

proposed collections of information; (iii) 

how to enhance the quality, utility, and 

clarity of the information to be 

collected; and (iv) how to minimize the 

burden of complying with the proposed 

collections of information, including the 

application of automated collection 

techniques or other forms of information 

technology. All comments will become 

a matter of public record. Comments on 

the collection of information 

requirements should be sent to the OMB 

desk officers for the agencies (i.e. ‘‘Desk 

Officer for the Bureau of Consumer 

Financial Protection’’): 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 proposed rule does not contain 

any collections of information 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. 

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. 

Text of Proposed Revisions 

Department of the Treasury 

Office of the Comptroller of the 

Currency 

Authority and Issuance 

For the reasons set forth in the 

preamble, the OCC proposes to amend 

12 CFR parts 34 and 164, as follows: 

PART 34—REAL ESTATE LENDING 

AND APPRAISALS 

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. 

2. Subpart G to part 34 is added to 

read as follows: 

Subpart G—Appraisals for Higher Risk 

Mortgage Loans 

Sec. 

34.201 Authority, purpose and scope. 

34.202 Definitions applicable to higher risk 

mortgage loans. 

34.203 Appraisals for higher risk mortgage 

loans. 

Appendix A to Subpart G—Appraisal Safe 

Harbor Review 

Appendix B to Subpart G—OCC 

Interpretations 

Subpart G—Appraisals for Higher Risk 

Mortgage Loans 

§ 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 loan without complying 

with the requirements of section 129H 

of the Truth in Lending Act (15 U.S.C. 

1639h) and this subpart G. 

(c) Scope. This subpart applies to 

higher risk 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. 

§ 34.202 Definitions applicable to higher 

risk mortgage loans. 

For purposes of this subpart: 

(a) Annual percentage rate has the 

same meaning as determined under 12 

CFR 1026.22. 

(b) Average prime offer rate has the 

same meaning as in 12 CFR 

1026.35(a)(2)(ii). 

(c) Creditor has the same meaning as 

in 12 CFR 1026.2(17). 

(d) Reverse mortgage has the same 

meaning as in 12 CFR 1026.33(a). 

(e) Qualified mortgage has the same 

meaning as in 12 CFR 1026.43(e). 

(f) Transaction coverage rate has the 

same meaning as in 12 CFR 

1026.35(a)(2)(i). 

§ 34.203 Appraisals for higher risk 

mortgage loans. 

(a) Definitions. For purposes of this 

subpart: 

(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 

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in effect at the time the appraiser signs 

the appraiser’s certification. 

(2) Except as provided in paragraph 

(a)(2)(ii) of this section, higher-risk 

mortgage loan means: 

Alternative 1: Annual Percentage Rate— 

Paragraph (a)(2)(i) 

(i) A closed-end consumer credit 

transaction secured by the consumer’s 

principal dwelling with an annual 

percentage rate, as determined under 12 

CFR 1026.22, that exceeds the average 

prime offer rate, as defined in 12 CFR 

1026.35(a)(2)(ii), for a comparable 

transaction as of the date the interest 

rate is set: 

(A) 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; 

(B) 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 

(C) By 3.5 or more percentage points, 

for a loan secured by a subordinate lien. 

Alternative 2: Transaction Coverage 

Rate—Paragraph (a)(2)(i) 

(i) A closed-end consumer credit 

transaction secured by the consumer’s 

principal dwelling with a transaction 

coverage rate, as defined in 12 CFR 

1026.35(a)(2)(i), that exceeds the average 

prime offer rate, as defined in 12 CFR 

1026.35(a)(2)(ii), for a comparable 

transaction as of the date the interest 

rate is set: 

(A) 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 principal obligation 

eligible for purchase by Freddie Mac; 

(B) 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 

(C) By 3.5 or more percentage points, 

for a loan secured by a subordinate lien. 

(ii) Notwithstanding paragraph 

(a)(2)(i) of this section, a higher-risk 

mortgage loan does not include: 

(A) A qualified mortgage. 

(B) A reverse-mortgage transaction. 

(C) A loan secured solely by a 

residential structure. 

(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) Appraisals required for higher-risk 

mortgage loans. (1) In general. A 

creditor shall not extend a higher-risk 

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 is deemed 

to have obtained a written appraisal that 

meets the requirements of paragraph 

(b)(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 to the 

contrary of facts or certifications 

contained in the written appraisal. 

(3) Additional appraisal for certain 

higher-risk mortgage loans. (i) In 

general. A creditor shall not extend a 

higher-risk 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 

180 or fewer days prior to the date of the 

consumer’s agreement to acquire the 

property from the seller; and 

(B) 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. 

(ii) Different appraisers. The two 

appraisals required under paragraph 

(b)(3)(i) of this section may not be 

performed by the same certified or 

licensed appraiser. 

(iii) Relationship to paragraph (b)(1) 

of this section. If two appraisals must be 

obtained under paragraph (b)(3)(i) of 

this section, each appraisal shall meet 

the requirements of paragraph (b)(1) of 

this section. 

(iv) Requirements for the additional 

appraisal. In addition to meeting the 

requirements for an appraisal under 

paragraph (b)(1) of this section, the 

additional appraisal 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 (b)(3)(i) 

of this section, the creditor may charge 

the consumer for only one of the 

appraisals. 

(vi) Creditor’s determination under 

paragraphs (b)(3)(i)(A) and (b)(3)(i)(B) of 

this section. 

(A) Reasonable diligence. A creditor 

shall exercise reasonable diligence to 

determine whether the criteria in 

paragraphs (b)(3)(i)(A) and (b)(3)(i)(B) of 

this section are met. 

(B) Inability to make the 

determination under paragraphs 

(b)(3)(i)(A) and (b)(3)(i)(B) of this 

section. If, after exercising reasonable 

diligence, a creditor cannot determine 

whether the criteria in paragraphs 

(b)(3)(i)(A) and (b)(3)(i)(B) of this section 

are met, the creditor shall not extend a 

higher-risk mortgage loan without 

obtaining, prior to consummation, two 

written appraisals in accordance with 

paragraphs (b)(3)(ii) through (v) of this 

section. However, the additional 

appraisal shall include an analysis of 

the factors in paragraph (b)(3)(iv) of this 

section only to the extent that the 

information necessary for the appraiser 

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to perform the analysis can be 

determined. 

(c) Required disclosure. (1) In general. 

A creditor shall 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 

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.’’ 

(2) Timing of disclosure. The 

disclosure required by paragraph (c)(1) 

of this section shall be mailed or 

delivered not later than the third 

business day after the creditor receives 

the consumer’s application. If the 

disclosure is not provided to the 

consumer in person, the consumer is 

presumed to have received the 

disclosures three business days after 

they are mailed or delivered. 

(d) Copy of appraisals. (1) In general. 

A creditor shall provide to the consumer 

a copy of any written appraisal 

performed in connection with a higherrisk mortgage loan pursuant to the 

requirements of paragraph (b) of this 

section. 

(2) Timing. A creditor shall provide a 

copy of each written appraisal pursuant 

to paragraph (d)(1) of this section no 

later than three business days prior to 

consummation of the higher-risk 

mortgage loan. 

(3) Form of copy. Any copy of a 

written appraisal required by paragraph 

(d)(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 applicant 

for a copy of a written appraisal 

required to be provided to the consumer 

pursuant to paragraph (d)(1) of this 

section. 

(e) Relation to other rules. These rules 

were developed jointly by the Federal 

Reserve Board (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 higherrisk mortgage appraisal rules published 

separately in 12 CFR 226.43 and 12 CFR 

1026.XX. 

Appendix A to Subpart G—Appraisal 

Safe Harbor Review 

To qualify for the safe harbor provided in 

§ 34.203(b)(2) a creditor must check the 

appraisal report to 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—OCC 

Interpretations 

Commentary to § 34.203—Appraisals for 

Higher-Risk 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 § 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 § 34.203(a)(1). 

34.203(a)(2) Higher-risk mortgage loan. 

Paragraph 34.203(a)(2)(i). 

1. Principal dwelling. The term ‘‘principal 

dwelling’’ has the same meaning under 

§ 34.203(a)(2) 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, comment 35(a)(2)-1. 

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)(2)-2 and -4. 

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)(2)-3. 

Paragraph 34.203(a)(2)(ii)(C). 

1. Secured solely by a residential structure. 

Loans secured solely by a residential 

structure cannot be ‘‘higher-risk mortgage 

loans.’’ Thus, for example, a loan secured by 

a manufactured home and the land on which 

it is sited could be a ‘‘higher-risk mortgage 

loan.’’ By contrast, a loan secured solely by 

a manufactured home cannot be a ‘‘higherrisk mortgage loan.’’ 

34.203(b) Appraisals required for higherrisk mortgage loans. 

34.302(b)(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(b)(2) Safe harbor. 

1. Safe harbor. A creditor that satisfies the 

conditions in § 34.203(b)(2)(i) through (iv) 

will be deemed to have complied with the 

appraisal requirements of § 34.203(b)(1). A 

creditor that does not satisfy the conditions 

in § 34.203(b)(2)(i) through (iv) does not 

necessarily violate the appraisal 

requirements of § 34.203(b)(1). 

Paragraph 34.203(b)(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(b)(3) Additional appraisal for 

certain higher-risk mortgage loans. 

1. Acquisition. For purposes of 

§ 34.203(b)(3), 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(b)(3)(i) In general. 

1. Two appraisals. 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 of § 34.203 (b)(3). 

Paragraph 34.203(b)(3)(i)(A). 

1. 180-day calculation. The time period 

described in § 34.203(b)(3)(i)(A) is 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. See also comments 

34.203(b)(3)(i)(A)-2 and -3 in this Appendix 

B. 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 

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138The Bureau has developed a successor form to 

the RESPA settlement statement as explained in the 

Bureau’s proposal for an integrated TILA–RESPA 

disclosure form. See the Bureau’s 2012 TILA– 

RESPA Proposal. 

139The ‘‘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. 

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 would 

be 181, so an additional appraisal is not 

required. 

2. Date of the consumer’s agreement to 

acquire the property. For the date of the 

consumer’s agreement to acquire the property 

under § 34.203(b)(3)(i)(A), 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 § 34.203(b)(3)(i)(A), 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. 

3. Date seller acquired the property. For 

purposes of § 34.203(b)(3)(i)(A), 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. See also comments 

34.203(b)(3)(vi)(A)-1 and -2 and comment 

(b)(3)(vi)(B)-1 in this Appendix B. 

Paragraph 34.203(b)(3)(i)(B). 

1. 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. See also comments 

34.203(b)(3)(vi)(A)-1 and (b)(3)(vi)(B)-1 in 

this Appendix B. 

2. 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. See comment 

34.203(b)(3)(i)(A)-2 in this Appendix B. 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 § 34.203(b)(3)(i)(B), a creditor 

is not obligated to determine whether and to 

what extent the agreement is legally binding 

on both parties. 

34.203(b)(3)(iv) Requirements for the 

additional appraisal. 

1. Determining acquisition dates and prices 

used in the analysis of the additional 

appraisal. For guidance on identifying the 

date the seller acquired the property, see 

comment 34.203(b)(3)(i)(A)-3 in this 

Appendix B. For guidance on identifying the 

date of the consumer’s agreement to acquire 

the property, see comment 34.203(b)(3)(i)(A)- 

2 in this Appendix B. For guidance on 

identifying the price at which the seller 

acquired the property, see comment 

34.203(b)(3)(i)(B)-1 in this Appendix B. For 

guidance on identifying the price the 

consumer is obligated to pay to acquire the 

property, see comment 34.203(b)(3)(i)(B)-2 in 

this Appendix B. 

34.203(b)(3)(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 § 34.203(b)(3)(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-risk mortgage 

loan. 

Paragraph 34.203(b)(3)(vi) Creditor’s 

determination under paragraphs (b)(3)(i)(A) 

and (b)(3)(i)(B) of this section. 

34.203(b)(3)(vi)(A) In general. 

1. Reasonable diligence—documentation 

required. A creditor acts 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 agreement to acquire the property 

if, for example, the creditor bases its 

determination on information contained in 

written source documents, such as: 

i. A copy of the recorded deed from the 

seller. 

ii. A copy of a property tax bill. 

iii. A copy of any owner’s title insurance 

policy obtained by the seller. 

iv. A copy of the RESPA settlement 

statement from the seller’s acquisition (i.e., 

the HUD–1 or any successor form 138). 

v. A property sales history report or title 

report from a third-party reporting service. 

vi. Sales price data recorded in multiple 

listing services. 

vii. Tax assessment records or transfer tax 

records obtained from local governments. 

viii. An appraisal report signed by an 

appraiser who certifies that the appraisal was 

performed in conformity with USPAP that 

shows any prior transactions for the subject 

property. 

ix. A copy of a title commitment report 139

detailing the seller’s ownership of the 

property, the date it was acquired, or the 

price at which the seller acquired the 

property. 

x. A property abstract. 

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 

§ 34.203(b)(3)(vi)(A). 

34.203(b)(3)(vi)(B) Inability to make the 

determination under paragraphs (b)(3)(i)(A) 

and (b)(3)(i)(B) of this subpart. 

1. Lack of information and conflicting 

information—two appraisals required. Unless 

a creditor can demonstrate that the 

requirement to obtain two appraisals under 

§ 34.203(b)(3)(i) does not apply, the creditor 

must obtain two written appraisals in 

compliance with § 34.203(b)(3)(vi)(B). See 

also comment 34.203(b)(3)(vi)(B)–2. For 

example: 

i. Assume a creditor orders and reviews the 

results of a title search and the seller’s 

acquisition price was not included. In this 

case, the creditor would not be able to 

determine whether the price at which the 

seller acquired the property was lower than 

the price the consumer is obligated to pay 

under the consumer’s acquisition agreement, 

pursuant to § 34.203(b)(3)(i)(B). Before 

extending a higher-risk mortgage loan, the 

creditor must either: perform additional 

diligence to obtain information showing the 

seller’s acquisition price and determine 

whether two written appraisals would be 

required based on that information; or obtain 

two written appraisals in compliance with 

§ 34.203(b)(3)(vi)(B). See also comment 

34.203(b)(3)(vi)(B)–2 in this Appendix B. 

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 an appraisal report 

indicating that the seller acquired the 

property fewer than 180 days before the 

consumer’s agreement to acquire the 

property. In this case, 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 

§ 34.203(b)(3)(i)(A). Before extending a 

higher-risk mortgage loan, the creditor must 

either: perform additional diligence to obtain 

information confirming the seller’s 

acquisition date and determine whether two 

written appraisals would be required based 

on that information; or obtain two written 

appraisals in compliance with 

§ 34.203(b)(3)(vi)(B). See also comment 

34.203(b)(3)(vi)(B)–2 in this Appendix B. 

2. Lack of information and conflicting 

information—requirements for the additional 

appraisal. In general, the additional appraisal 

required under § 34.203(b)(3)(i) should 

include an analysis of the factors listed in 

§ 34.203(b)(3)(iv)(A)–(C). However, if, 

following reasonable diligence, a creditor 

cannot determine whether the criteria in 

paragraphs (b)(3)(i)(A) and (b)(3)(i)(B) of 

§ 34.203 are met due to a lack of information 

or conflicting information, the required 

additional appraisal must include the 

analyses required under § 34.203(b)(3)(iv)(A) 

through (C) only to the extent that the 

information necessary to perform the analysis 

is known. For example: 

i. Assume that a creditor is able, following 

reasonable diligence, to determine that the 

date on which the seller acquired the 

property occurred 180 or fewer 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 

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under paragraphs (b)(3)(iv)(B) and 

(b)(3)(iv)(C) of § 34.203 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 

§ 34.203(b)(3)(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. 

34.203(c) Required disclosure. 

34.203(c)(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. 

34.203(d) Copy of appraisals. 

34.203(d)(1) In general. 

1. Multiple applicants. When two or more 

consumers apply for a loan subject to this 

subpart, the creditor is required to give the 

copy of each required appraisal to only one 

of the consumers. 

34.203(d)(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 § 34.203(d)(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-risk 

mortgage loan. 

PART 164—APPRAISALS 

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. 

§§ 164.1–164.8 [Designated as Subpart A] 

4. Sections 164.1 through 164.8 are 

designated as Subpart A. 

Subpart A—Appraisals 

4a. The heading of subpart A is added 

to read as set forth above. 

5. Subpart B is added to read as 

follows: 

Subpart B—Appraisals for Higher Risk 

Mortgage Loans 

Sec. 

164.20 Authority, purpose and scope. 

164.21 Application of requirements for 

higher risk mortgage loans. 

164.20 Authority, purpose and scope. 

(a) Authority. This subpart is issued 

under 12 U.S.C. 1463, 1464 and 15 

U.S.C. 1639h. 

(b) Purpose. This subpart implements 

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 risk 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. 

(c) Scope. This subpart applies to 

higher risk mortgage loan transactions 

entered into by Federal savings 

associations and operating subsidiaries 

of savings associations. 

§ 164.21 Application of requirements for 

higher risk mortgage loans. 

Federal savings associations and their 

operating subsidiaries may not extend 

credit in the form of a higher risk 

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 proposes to amend 

Regulation Z, 12 CFR part 226, as 

follows: 

PART 226—TRUTH IN LENDING ACT 

(REGULATION Z) 

6. 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. 

7. New § 226.43 is added to read as 

follows: 

§ 226.43—Appraisals for higher-risk 

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) Except as provided in paragraph 

(a)(2)(ii) of this section, higher-risk 

mortgage loan means: 

Alternative 1: Annual Percentage Rate— 

Paragraph (a)(2)(i) 

(i) A closed-end consumer credit 

transaction secured by the consumer’s 

principal dwelling with an annual 

percentage rate, as determined under 12 

CFR 1026.22, that exceeds the average 

prime offer rate, as defined in 12 CFR 

1026.35(a)(2)(ii), for a comparable 

transaction as of the date the interest 

rate is set: 

(A) 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; 

(B) 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 

(C) By 3.5 or more percentage points, 

for a loan secured by a subordinate lien. 

Alternative 2: Transaction Coverage 

Rate—Paragraph (a)(2)(i) 

(i) A closed-end consumer credit 

transaction secured by the consumer’s 

principal dwelling with a transaction 

coverage rate, as defined in 12 CFR 

1026.35(a)(2)(i), that exceeds the average 

prime offer rate, as defined in 12 CFR 

1026.35(a)(2)(ii), for a comparable 

transaction as of the date the interest 

rate is set: 

(A) 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 principal obligation 

eligible for purchase by Freddie Mac; 

(B) 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 

(C) By 3.5 or more percentage points, 

for a loan secured by a subordinate lien. 

(ii) Notwithstanding paragraph 

(a)(2)(i) of this section, a higher-risk 

mortgage loan does not include: 

(A) A qualified mortgage as defined in 

12 CFR 1026.43(e). 

(B) A reverse-mortgage transaction as 

defined in 12 CFR 1026.33(a). 

(C) A loan secured solely by a 

residential structure. 

(3) National Registry means the 

database of information about State 

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Federal Register / Vol. 77, No. 172 / Wednesday, September 5, 2012 / Proposed Rules 54769 

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) Appraisals required for higher-risk 

mortgage loans. (1) In general. 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. 

(2) Safe harbor. A creditor is deemed 

to have obtained a written appraisal that 

meets the requirements of paragraph 

(b)(1) of this section if the creditor: 

(i) Orders that the appraiser perform 

the written 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 to the 

contrary of facts or certifications 

contained in the written appraisal. 

(3) Additional appraisal for certain 

higher-risk mortgage loans. (i) In 

general. A creditor shall not extend a 

higher-risk 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 

180 or fewer days prior to the date of the 

consumer’s agreement to acquire the 

property from the seller; and 

(B) 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. 

(ii) Different appraisers. The two 

appraisals required under paragraph 

(b)(3)(i) of this section may not be 

performed by the same certified or 

licensed appraiser. 

(iii) Relationship to paragraph (b)(1) 

of this section. If two appraisals must be 

obtained under paragraph (b)(3)(i) of 

this section, each appraisal shall meet 

the requirements of paragraph (b)(1) of 

this section. 

(iv) Requirements for the additional 

appraisal. In addition to meeting the 

requirements for an appraisal under 

paragraph (b)(1) of this section, the 

additional appraisal 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 (b)(3)(i) 

of this section, the creditor may charge 

the consumer for only one of the 

appraisals. 

(vi) Creditor’s determination under 

paragraphs (b)(3)(i)(A) and (b)(3)(i)(B) of 

this section. 

(A) Reasonable diligence. A creditor 

shall exercise reasonable diligence to 

determine whether the criteria in 

paragraphs (b)(3)(i)(A) and (b)(3)(i)(B) of 

this section are met. 

(B) Inability to make the 

determination under paragraphs 

(b)(3)(i)(A) and (b)(3)(i)(B) of this 

section. If, after exercising reasonable 

diligence, a creditor cannot determine 

whether the criteria in paragraphs 

(b)(3)(i)(A) and (b)(3)(i)(B) of this section 

are met, the creditor shall not extend a 

higher-risk mortgage loan without 

obtaining, prior to consummation, two 

written appraisals in accordance with 

paragraphs (b)(3)(ii) through (v) of this 

section. However, the additional 

appraisal shall include an analysis of 

the factors in paragraph (b)(3)(iv) of this 

section only to the extent that the 

information necessary for the appraiser 

to perform the analysis can be 

determined. 

(c) Required disclosure. (1) In general. 

A creditor shall 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 

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.’’ 

(2) Timing of disclosure. The 

disclosure required by paragraph (c)(1) 

of this section shall be mailed or 

delivered not later than the third 

business day after the creditor receives 

the consumer’s application. If the 

disclosure is not provided to the 

consumer in person, the consumer is 

presumed to have received the 

disclosures three business days after 

they are mailed or delivered. 

(d) Copy of appraisals. (1) In general. 

A creditor shall provide to the consumer 

a copy of any written appraisal 

performed in connection with a higherrisk mortgage loan pursuant to the 

requirements of paragraph (b) of this 

section. 

(2) Timing. A creditor shall provide a 

copy of each written appraisal pursuant 

to paragraph (d)(1) of this section no 

later than three business days prior to 

consummation of the higher-risk 

mortgage loan. 

(3) Form of copy. Any copy of a 

written appraisal required by paragraph 

(d)(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 applicant 

for a copy of a written appraisal 

required to be provided to the consumer 

pursuant to paragraph (d)(1) of this 

section. 

(e) Relation to other rules. These rules 

were developed 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 Consumer 

Financial Protection Bureau (Bureau). 

These rules are substantively identical 

to the OCC’s and the Bureau’s higherrisk mortgage appraisal rules published 

separately in 12 CFR part 34, subpart G 

and 12 CFR 164.20 through 164.21 (for 

the OCC), and 12 CFR 1026.XX (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 

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54770 Federal Register / Vol. 77, No. 172 / Wednesday, September 5, 2012 / Proposed Rules 

loan association), and uninsured state 

branches and agencies of foreign banks. 

Compliance with the Board’s rules 

satisfies the requirements of 15 U.S.C. 

1639h. 

8. Appendix N to Part 226 is added 

to read as follows: 

Appendix N to Part 226—Appraisal 

Safe Harbor Review 

To qualify for the safe harbor provided in 

§ 226.43(b)(2) a creditor must check the 

appraisal report to 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. 

9. In Supplement I to part 226, new 

Section 226.43—Appraisals for HigherRisk Mortgage Loans is added to 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 § 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 § 226.43(a)(1). 

43(a)(2) Higher-risk mortgage loan. 

Paragraph 43(a)(2)(i). 

1. Principal dwelling. The term ‘‘principal 

dwelling’’ has the same meaning under 

§ 226.43(a)(2) 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, comment 35(a)(2)–1. 

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)(2)–2 and –4. 

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)(2)–3. 

Paragraph 43(a)(2)(ii)(C). 

1. Secured solely by a residential structure. 

Loans secured solely by a residential 

structure cannot be ‘‘higher-risk mortgage 

loans.’’ Thus, for example, a loan secured by 

a manufactured home and the land on which 

it is sited could be a ‘‘higher-risk mortgage 

loan.’’ By contrast, a loan secured solely by 

a manufactured home cannot be a ‘‘higherrisk mortgage loan.’’ 

43(b) Appraisals required for higher-risk 

mortgage loans. 

43(b)(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(b)(2) Safe harbor. 

1. Safe harbor. A creditor that satisfies the 

conditions in § 226.43(b)(2)(i) through (iv) 

will be deemed to have complied with the 

appraisal requirements of § 226.43(b)(1). A 

creditor that does not satisfy the conditions 

in § 226.43(b)(2)(i) through (iv) does not 

necessarily violate the appraisal 

requirements of § 226.43(b)(1). 

Paragraph 43(b)(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(b)(3) Additional appraisal for certain 

higher-risk mortgage loans. 

1. Acquisition. For purposes of 

§ 226.43(b)(3), the terms ‘‘acquisition’’ and 

‘‘acquire’’ refer to the acquisition of legal title 

to the property pursuant to applicable State 

law, including by purchase. 

43(b)(3)(i) In general. 

1. Two appraisals. 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 of § 226.43(b)(3). 

Paragraph 43(b)(3)(i)(A). 

1. 180-day calculation. The time period 

described in § 226.43(b)(3)(i)(A) is 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. See also comments 

43(b)(3)(i)(A)–2 and –3. 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 would be 181, so an additional 

appraisal is not required. 

2. Date of the consumer’s agreement to 

acquire the property. For the date of the 

consumer’s agreement to acquire the property 

under § 226.43(b)(3)(i)(A), 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 § 226.43(b)(3)(i)(A), 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. 

3. Date seller acquired the property. For 

purposes of § 226.43(b)(3)(i)(A), 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. See also comments 43(b)(3)(vi)(A)– 

1 and –2 and comment (b)(3)(vi)(B)–1. 

Paragraph 43(b)(3)(i)(B). 

1. 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. See also comments 

43(b)(3)(vi)(A)–1 and (b)(3)(vi)(B)–1. 

2. 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. See comment 

43(b)(3)(i)(A)–2. 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 

§ 226.43(b)(3)(i)(B), a creditor is not obligated 

to determine whether and to what extent the 

agreement is legally binding on both parties. 

43(b)(3)(iv) Requirements for the additional 

appraisal. 

1. Determining acquisition dates and prices 

used in the analysis of the additional 

appraisal. For guidance on identifying the 

date the seller acquired the property, see 

comment 43(b)(3)(i)(A)–3. For guidance on 

identifying the date of the consumer’s 

agreement to acquire the property, see 

comment 43(b)(3)(i)(A)–2. For guidance on 

identifying the price at which the seller 

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Federal Register / Vol. 77, No. 172 / Wednesday, September 5, 2012 / Proposed Rules 54771 

140The Bureau has developed a successor form to 

the RESPA settlement statement as explained in the 

Bureau’s proposal for an integrated TILA–RESPA 

disclosure form. See the Bureau’s TILA–RESPA 

Proposal. 

141The ‘‘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. 

acquired the property, see comment 

43(b)(3)(i)(B)–1. For guidance on identifying 

the price the consumer is obligated to pay to 

acquire the property, see comment 

43(b)(3)(i)(B)–2. 

43(b)(3)(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 § 226.43(b)(3)(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-risk mortgage 

loan. 

Paragraph 43(b)(3)(vi) Creditor’s 

determination under paragraphs (b)(3)(i)(A) 

and (b)(3)(i)(B) of this section. 

43(b)(3)(vi)(A) In general. 

1. Reasonable diligence—documentation 

required. A creditor acts 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 agreement to acquire the property 

if, for example, the creditor bases its 

determination on information contained in 

written source documents, such as: 

i. A copy of the recorded deed from the 

seller. 

ii. A copy of a property tax bill. 

iii. A copy of any owner’s title insurance 

policy obtained by the seller. 

iv. A copy of the RESPA settlement 

statement from the seller’s acquisition (i.e., 

the HUD–1 or any successor form 140). 

v. A property sales history report or title 

report from a third-party reporting service. 

vi. Sales price data recorded in multiple 

listing services. 

vii. Tax assessment records or transfer tax 

records obtained from local governments. 

viii. An appraisal report signed by an 

appraiser who certifies that the appraisal was 

performed in conformity with USPAP that 

shows any prior transactions for the subject 

property. 

ix. A copy of a title commitment report 141

detailing the seller’s ownership of the 

property, the date it was acquired, or the 

price at which the seller acquired the 

property. 

x. A property abstract. 

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 

§ 226.43(b)(3)(vi)(A). 

43(b)(3)(vi)(B) Inability to make the 

determination under paragraphs (b)(3)(i)(A) 

and (b)(3)(i)(B) of this section. 

1. Lack of information and conflicting 

information—two appraisals required. Unless 

a creditor can demonstrate that the 

requirement to obtain two appraisals under 

§ 226.43(b)(3)(i) does not apply, the creditor 

must obtain two written appraisals in 

compliance with § 226.43(b)(3)(vi)(B). See 

also comment 43(b)(3)(vi)(B)–2. For example: 

i. Assume a creditor orders and reviews the 

results of a title search and the seller’s 

acquisition price was not included. In this 

case, the creditor would not be able to 

determine whether the price at which the 

seller acquired the property was lower than 

the price the consumer is obligated to pay 

under the consumer’s acquisition agreement, 

pursuant to § 226.43(b)(3)(i)(B). Before 

extending a higher-risk mortgage loan, the 

creditor must either: Perform additional 

diligence to obtain information showing the 

seller’s acquisition price and determine 

whether two written appraisals would be 

required based on that information; or obtain 

two written appraisals in compliance with 

§ 226.43(b)(3)(vi)(B). See also comment 

43(b)(3)(vi)(B)-2. 

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 an appraisal report 

indicating that the seller acquired the 

property fewer than 180 days before the 

consumer’s agreement to acquire the 

property. In this case, the creditor would not 

be able to determine whether seller acquired 

the property within 180 days of the date of 

the consumer’s agreement to acquire the 

property from the seller, pursuant to 

§ 226.43(b)(3)(i)(A). Before extending a 

higher-risk mortgage loan, the creditor must 

either: Perform additional diligence to obtain 

information confirming the seller’s 

acquisition date and determine whether two 

written appraisals would be required based 

on that information; or obtain two written 

appraisals in compliance with 

§ 226.43(b)(3)(vi)(B). See also comment 

43(b)(3)(vi)(B)-2. 

2. Lack of information and conflicting 

information—requirements for the additional 

appraisal. In general, the additional appraisal 

required under § 226.43(b)(3)(i) should 

include an analysis of the factors listed in 

§ 226.43(b)(3)(iv)(A) through (C). However, if, 

following reasonable diligence, a creditor 

cannot determine whether the criteria in 

paragraphs (b)(3)(i)(A) and (b)(3)(i)(B) of 

§ 226.43 are met due to a lack of information 

or conflicting information, the required 

additional appraisal must include the 

analyses required under § 226.43(b)(3)(iv)(A) 

through (C) only to the extent that the 

information necessary to perform the analysis 

is known. For example: 

i. Assume that a creditor is able, following 

reasonable diligence, to determine that the 

date on which the seller acquired the 

property occurred 180 or fewer 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 paragraphs (b)(3)(iv)(B) and 

(b)(3)(iv)(C) of § 226.43 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 

§ 226.43(b)(3)(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. 

43(c) Required disclosure. 

43(c)(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. 

43(d) Copy of appraisals. 

43(d)(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(d)(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 § 226.43(d)(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-risk 

mortgage loan. 

National Credit Union Administration 

Authority and Issuance 

For the reasons discussed above, 

NCUA proposes to amend 12 CFR part 

722 as follows: 

PART 722—APPRAISALS 

10. 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. 

11. In § 722.3, add paragraph (f) to 

read as follows: 

§ 722.3 Appraisals required; transactions 

requiring a State certified or licensed 

appraiser. 

* * * * * 

(f) Higher-risk mortgages. A credit 

union may not extend credit to a 

consumer in the form of a higher-risk 

mortgage as defined in the Truth in 

Lending Act, 15 U.S.C. 1601 et seq., 

without meeting the requirements of 15 

U.S.C. 1639h and its implementing 

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54772 Federal Register / Vol. 77, No. 172 / Wednesday, September 5, 2012 / Proposed Rules 

regulations in Regulation Z, 12 CFR 

1026.XX. 

Bureau of Consumer Financial 

Protection 

Authority and Issuance 

For the reasons set forth in the 

preamble, the Bureau proposes to 

amend Regulation Z, 12 CFR part 1026, 

as follows: 

PART 1026—TRUTH IN LENDING ACT 

(REGULATION Z) 

12. The authority citation for part 

1026 continues to read as follows: 

Authority: 12 U.S.C. 5512, 5581; 15 U.S.C. 

1601 et seq. 

Subpart C—Closed-End Credit 

13. New § 1026.XX is added to read as 

follows: 

§ 1026.XX Appraisals for higher-risk 

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) Except as provided in paragraph 

(a)(2)(ii) of this section, higher-risk 

mortgage loan means: 

Alternative 1: Annual Percentage Rate— 

Paragraph (a)(2)(i) 

(i) A closed-end consumer credit 

transaction secured by the consumer’s 

principal dwelling with an annual 

percentage rate, as determined under 

§ 1026.22, that exceeds the average 

prime offer rate, as defined in 

§ 1026.35(a)(2)(ii), for a comparable 

transaction as of the date the interest 

rate is set: 

(A) 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; 

(B) 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 

(C) By 3.5 or more percentage points, 

for a loan secured by a subordinate lien. 

Alternative 2: Transaction Coverage 

Rate—Paragraph (a)(2)(i) 

(i) A closed-end consumer credit 

transaction secured by the consumer’s 

principal dwelling with a transaction 

coverage rate, as defined in 

§ 1026.35(a)(2)(i), that exceeds the 

average prime offer rate, as defined in 

§ 1026.35(a)(2)(ii), for a comparable 

transaction as of the date the interest 

rate is set: 

(A) 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; 

(B) 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 

(C) By 3.5 or more percentage points, 

for a loan secured by a subordinate lien. 

(ii) Notwithstanding paragraph 

(a)(2)(i) of this section, a higher-risk 

mortgage loan does not include: 

(A) A qualified mortgage as defined in 

§ 1026.43(e). 

(B) A reverse-mortgage transaction as 

defined in § 1026.33(a). 

(C) A loan secured solely by a 

residential structure. 

(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) Appraisals required for higher-risk 

mortgage loans. (1) In general. A 

creditor shall not extend a higher-risk 

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 is deemed 

to have obtained a written appraisal that 

meets the requirements of paragraph 

(b)(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 to the 

contrary of facts or certifications 

contained in the written appraisal. 

(3) Additional appraisal for certain 

higher-risk mortgage loans. (i) In 

general. A creditor shall not extend a 

higher-risk 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 

180 or fewer days prior to the date of the 

consumer’s agreement to acquire the 

property from the seller; and 

(B) 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. 

(ii) Different appraisers. The two 

appraisals required under paragraph 

(b)(3)(i) of this section may not be 

performed by the same certified or 

licensed appraiser. 

(iii) Relationship to paragraph (b)(1) 

of this section. If two appraisals must be 

obtained under paragraph (b)(3)(i) of 

this section, each appraisal shall meet 

the requirements of paragraph (b)(1) of 

this section. 

(iv) Requirements for the additional 

appraisal. In addition to meeting the 

requirements for an appraisal under 

paragraph (b)(1) of this section, the 

additional appraisal must include an 

analysis of: 

(A) The difference between the price 

at which the seller acquired the 

property and the price that the 

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Federal Register / Vol. 77, No. 172 / Wednesday, September 5, 2012 / Proposed Rules 54773 

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 (b)(3)(i) 

of this section, the creditor may charge 

the consumer for only one of the 

appraisals. 

(vi) Creditor’s determination under 

paragraphs (b)(3)(i)(A) and (b)(3)(i)(B) of 

this section. 

(A) Reasonable diligence. A creditor 

shall exercise reasonable diligence to 

determine whether the criteria in 

paragraphs (b)(3)(i)(A) and (b)(3)(i)(B) of 

this section are met. 

(B) Inability to make the 

determination under paragraphs 

(b)(3)(i)(A) and (b)(3)(i)(B) of this 

section. If, after exercising reasonable 

diligence, a creditor cannot determine 

whether the criteria in paragraphs 

(b)(3)(i)(A) and (b)(3)(i)(B) of this section 

are met, the creditor shall not extend a 

higher-risk mortgage loan without 

obtaining, prior to consummation, two 

written appraisals in accordance with 

paragraphs (b)(3)(ii) through (v) of this 

section. However, the additional 

appraisal shall include an analysis of 

the factors in paragraph (b)(3)(iv) of this 

section only to the extent that the 

information necessary for the appraiser 

to perform the analysis can be 

determined. 

(c) Required disclosure. (1) In general. 

A creditor shall 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 

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.’’ 

(2) Timing of disclosure. The 

disclosure required by paragraph (c)(1) 

of this section shall be mailed or 

delivered not later than the third 

business day after the creditor receives 

the consumer’s application. If the 

disclosure is not provided to the 

consumer in person, the consumer is 

presumed to have received the 

disclosures three business days after 

they are mailed or delivered. 

(d) Copy of appraisals. (1) In general. 

A creditor shall provide to the consumer 

a copy of any written appraisal 

performed in connection with a higherrisk mortgage loan pursuant to the 

requirements of paragraph (b) of this 

section. 

(2) Timing. A creditor shall provide a 

copy of each written appraisal pursuant 

to paragraph (d)(1) of this section no 

later than three business days prior to 

consummation of the higher-risk 

mortgage loan. 

(3) Form of copy. Any copy of a 

written appraisal required by paragraph 

(d)(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 applicant 

for a copy of a written appraisal 

required to be provided to the consumer 

pursuant to paragraph (d)(1) of this 

section. 

(e) Relation to other rules. These rules 

were developed 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-risk 

mortgage appraisal rules published 

separately in 12 CFR 226.43 (for the 

Board), 12 CFR part 34, subpart G and 

12 CFR 164.20 through 34.21 (for the 

OCC). 

14. New Appendix N to Part 1026 is 

added to read as follows: 

Appendix N to Part 1026—Appraisal 

Safe Harbor Review 

To qualify for the safe harbor provided in 

§ 1026.XX(b)(2) a creditor must check to 

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. 

15. In Supplement I to part 1026, new 

Section 1026.XX—Appraisals for 

Higher-Risk Mortgage Loans is added to 

read as follows: 

Supplement I to Part 1026—Official 

Interpretations 

* * * * * 

Section 1026.XX—Appraisals for HigherRisk Mortgage Loans 

XX(a) Definitions. 

XX(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 § 1026.XX(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 § 1026.XX(a)(1). 

XX(a)(2) Higher-risk mortgage loan. 

Paragraph XX(a)(2)(i). 

1. Principal dwelling. The term ‘‘principal 

dwelling’’ has the same meaning under 

§ 1026.XX(a)(2) as under § 1026.2(a)(24). See 

comment 2(a)(24)–3. 

2. Average prime offer rate. For guidance 

on average prime offer rates, see comment 

35(a)(2)–1. 

3. Comparable transaction. For guidance 

on determining the average prime offer rate 

for comparable transactions, see comments 

35(a)(2)–2 and –4. 

4. Rate set. For guidance on the date the 

annual percentage rate is set, see comment 

35(a)(2)–3. 

Paragraph XX(a)(2)(ii)(C). 

1. Secured solely by a residential structure. 

Loans secured solely by a residential 

structure cannot be ‘‘higher-risk mortgage 

loans.’’ Thus, for example, a loan secured by 

a manufactured home and the land on which 

it is sited could be a ‘‘higher-risk mortgage 

loan.’’ By contrast, a loan secured solely by 

a manufactured home cannot be a ‘‘higherrisk mortgage loan.’’ 

XX(b) Appraisals required for higher-risk 

mortgage loans. 

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54774 Federal Register / Vol. 77, No. 172 / Wednesday, September 5, 2012 / Proposed Rules 

142The Bureau has developed a successor form to 

the RESPA settlement statement as explained in the 

Bureau’s proposal for an integrated TILA–RESPA 

disclosure form. See the Bureau’s 2012 TILA– 

RESPA Proposal. 

143The ‘‘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. 

XX(b)(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. 

XX(b)(2) Safe harbor. 

1. Safe harbor. A creditor that satisfies the 

conditions in § 1026.XX(b)(2)(i) through (iv) 

will be deemed to have complied with the 

appraisal requirements of § 1026.XX(b)(1). A 

creditor that does not satisfy the conditions 

in § 1026.XX(b)(2)(i) through (iv) does not 

necessarily violate the appraisal 

requirements of § 1026.XX(b)(1). 

Paragraph XX(b)(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. 

XX(b)(3) Additional appraisal for certain 

higher-risk mortgage loans. 

1. Acquisition. For purposes of 

§ 1026.XX(b)(3), the terms ‘‘acquisition’’ and 

‘‘acquire’’ refer to the acquisition of legal title 

to the property pursuant to applicable State 

law, including by purchase. 

XX(b)(3)(i) In general. 

1. Two appraisals. 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 of § 1026.XX(b)(3). 

Paragraph XX(b)(3)(i)(A). 

1. 180-day calculation. The time period 

described in § 1026.XX(b)(3)(i)(A) is 

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. See also comments 

XX(b)(3)(i)(A)–2 and –3. 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 would be 181, so an 

additional appraisal is not required. 

2. Date of the consumer’s agreement to 

acquire the property. For the date of the 

consumer’s agreement to acquire the property 

under § 1026.XX(b)(3)(i)(A), 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 § 1026.XX(b)(3)(i)(A), 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. 

3. Date seller acquired the property. For 

purposes of § 1026.XX(b)(3)(i)(A), 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. See also comments 

XX(b)(3)(vi)(A)–1 and –2 and comment 

(b)(3)(vi)(B)–1. 

Paragraph XX(b)(3)(i)(B). 

1. 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. See also comments 

XX(b)(3)(vi)(A)–1 and (b)(3)(vi)(B)–1. 

2. 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. See comment 

XX(b)(3)(i)(A)–2. 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 

§ 1026.XX(b)(3)(i)(B), a creditor is not 

obligated to determine whether and to what 

extent the agreement is legally binding on 

both parties. 

XX(b)(3)(iv) Requirements for the 

additional appraisal. 

1. Determining acquisition dates and prices 

used in the analysis of the additional 

appraisal. For guidance on identifying the 

date the seller acquired the property, see 

comment XX(b)(3)(i)(A)–3. For guidance on 

identifying the date of the consumer’s 

agreement to acquire the property, see 

comment XX(b)(3)(i)(A)–2. For guidance on 

identifying the price at which the seller 

acquired the property, see comment 

XX(b)(3)(i)(B)–1. For guidance on identifying 

the price the consumer is obligated to pay to 

acquire the property, see comment 

XX(b)(3)(i)(B)–2. 

XX(b)(3)(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 § 1026.XX(b)(3)(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-risk mortgage 

loan. 

Paragraph XX(b)(3)(vi) Creditor’s 

determination under paragraphs (b)(3)(i)(A) 

and (b)(3)(i)(B) of this section. 

XX(b)(3)(vi)(A) In general. 

1. Reasonable diligence—documentation 

required. A creditor acts 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 agreement to acquire the property 

if, for example, the creditor bases its 

determination on information contained in 

written source documents, such as: 

i. A copy of the recorded deed from the 

seller. 

ii. A copy of a property tax bill. 

iii. A copy of any owner’s title insurance 

policy obtained by the seller. 

iv. A copy of the RESPA settlement 

statement from the seller’s acquisition (i.e., 

the HUD–1 or any successor form 142). 

v. A property sales history report or title 

report from a third-party reporting service. 

vi. Sales price data recorded in multiple 

listing services. 

vii. Tax assessment records or transfer tax 

records obtained from local governments. 

viii. A written appraisal signed by an 

appraiser who certifies that the appraisal was 

performed in conformity with USPAP that 

shows any prior transactions for the subject 

property. 

ix. A copy of a title commitment report 143

detailing the seller’s ownership of the 

property, the date it was acquired, or the 

price at which the seller acquired the 

property. 

x. A property abstract. 

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 

§ 1026.XX(b)(3)(vi)(A). 

XX(b)(3)(vi)(B) Inability to make the 

determination under paragraphs (b)(3)(i)(A) 

and (b)(3)(i)(B) of this section. 

1. Lack of information and conflicting 

information—two appraisals required. Unless 

a creditor can demonstrate that the 

requirement to obtain two appraisals under 

§ 1026.XX(b)(3)(i) does not apply, the 

creditor must obtain two written appraisals 

in compliance with § 1026.XX(b)(3)(vi)(B). 

See also comment XX(b)(3)(vi)(B)–2. For 

example: 

i. Assume a creditor orders and reviews the 

results of a title search and the seller’s 

acquisition price was not included. In this 

case, the creditor would not be able to 

determine whether the price at which the 

seller acquired the property was lower than 

the price the consumer is obligated to pay 

under the consumer’s acquisition agreement, 

pursuant to § 1026.XX(b)(3)(i)(B). Before 

extending a higher-risk mortgage loan, the 

creditor must either: perform additional 

diligence to obtain information showing the 

seller’s acquisition price and determine 

whether two written appraisals would be 

required based on that information; or obtain 

two written appraisals in compliance with 

§ 1026.XX(b)(3)(vi)(B). See also comment 

XX(b)(3)(vi)(B)–2. 

ii. Assume a creditor reviews the results of 

a title search indicating that the last recorded 

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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 fewer than 180 days before the 

consumer’s agreement to acquire the 

property. In this case, the creditor would not 

be able to determine whether seller acquired 

the property within 180 days of the date of 

the consumer’s agreement to acquire the 

property from the seller, pursuant to 

§ 1026.XX(b)(3)(i)(A). Before extending a 

higher-risk mortgage loan, the creditor must 

either: perform additional diligence to obtain 

information confirming the seller’s 

acquisition date and determine whether two 

written appraisals would be required based 

on that information; or obtain two written 

appraisals in compliance with 

§ 1026.XX(b)(3)(vi)(B). See also comment 

XX(b)(3)(vi)(B)–2. 

2. Lack of information and conflicting 

information—requirements for the additional 

appraisal. In general, the additional appraisal 

required under § 1026.XX(b)(3)(i) should 

include an analysis of the factors listed in 

§ 1026.XX(b)(3)(iv)(A) through (C). However, 

if, following reasonable diligence, a creditor 

cannot determine whether the criteria in 

paragraphs (b)(3)(i)(A) and (b)(3)(i)(B) of 

§ 1026.XX are met due to a lack of 

information or conflicting information, the 

required additional appraisal must include 

the analyses required under 

§ 1026.XX(b)(3)(iv)(A) through (C) only to the 

extent that the information necessary to 

perform the analysis is known. For example: 

i. Assume that a creditor is able, following 

reasonable diligence, to determine that the 

date on which the seller acquired the 

property occurred 180 or fewer 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 paragraphs (b)(3)(iv)(B) and 

(b)(3)(iv)(C) of § 1026.XX 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 

§ 1026.XX(b)(3)(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. 

XX(c) Required disclosure. 

XX(c)(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. 

XX(d) Copy of appraisals. 

XX(d)(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. 

XX(d)(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 § 1026.XX(d)(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-risk 

mortgage loan. 

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 

proposes to add Part 1222 to subchapter 

B of chapter XII of title 12 of the Code 

of Federal Regulations as follows: 

Chapter XII—Federal Housing Finance 

Agency 

Subchapter B—Entity Regulations 

PART 1222—APPRAISALS 

Subpart A—Requirements for HigherRisk Mortgages 

Authority: 12 U.S.C. 4511(b), 4526, and 

4617; 15 U.S.C. 1639h (TILA). 

§ 1222.1 Purpose and scope. 

This subpart cross-references the 

requirement that creditors extending 

credit in the form of higher-risk 

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.XX. Neither the Banks 

nor the Enterprises is subject to Section 

129H of TILA or 12 CFR 1026.XX. 

Originators of higher-risk 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.XX 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. 

§ 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-risk mortgage loans 

by an Enterprise or a Federal Home 

Loan Bank, or acceptance of higher-risk 

mortgage loans as collateral to secure 

advances by a Federal Home Loan Bank. 

Subparts B to Z—[Reserved] 

By order of the Board of Governors of the 

Federal Reserve System. 

August 14, 2012. 

Margaret McCloskey Shanks, 

Associate Secretary of the Board. 

Dated: August 13, 2012. 

Richard Cordray, 

Director, Bureau of Consumer Financial 

Protection. 

This rule is being proposed 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. 

By order of the Board of Directors. 

Dated at Washington, DC, this 13th day of 

August, 2012. 

Robert E. Feldman, 

Executive Secretary. Federal Deposit 

Insurance Corporation. 

Dated August 14, 2012. 

Edward J. DeMarco, 

Acting Director, Federal Housing Finance 

Agency. 

By the National Credit Union 

Administration Board. 

Dated: August 14, 2012. 

Jon J. Canerday 

Acting Secretary of the Board 

Dated: August 13, 2012. 

Thomas J. Curry, 

Comptroller of the Currency. 

[FR Doc. 2012–20432 Filed 8–28–12; 4:15 pm] 

BILLING CODE 4810–AM–P; 4810–33–P; 6210–01–P; 

6714–01–P; 7535–01–P 

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