Appraisals for Higher-Risk Mortgage Loans

The Proposed Rule

The proposal would define a new type of mortgage on a principal dwelling, called a higher-risk mortgage, for which the creditor must obtain an appraisal of the subject property, including an interior inspection. The definition of a higher-risk mortgage is based on the spread between the APR and the APOR for a comparable loan. The APOR measures market rates on mortgage loans.

Notably, flipping is a sales abuse, not a lending abuse. Thus, it is unnecessary to apply the anti- flipping rule to refinance loans.

Higher-risk mortgages would require a disclosure at loan application. If the property had sold 180 or fewer days before consummation of the higher-risk mortgage loan, at a price lower than the new purchaser’s purchase price, by an amount or percentage not yet known or proposed, an additional appraisal would be required by a different appraiser. The creditor could not charge the consumer for the additional appraisal. The rule would require delivery of the appraisal reports to the prospective borrower. The rule would also have a safe harbor from liability based on the fact that property appraisals require the exercise of judgment.

Qualified mortgage (“QM”) loans are exempt from the rule by statute,1 and the Agencies have statutory authority to exempt additional classes of loans by regulation.2 The marketplace is unlikely to provide funding to non-QM loans in all but the rarest of exceptions. This rule will therefore affect a small number of loans and will apply only to creditors willing to make non-QM loans.