Mortgage loan servicers are toiling away at executing all the new servicing requirements in the CFPB’s Regulation Z and Regulation X amendments by the January 10, 2014 deadline. Given this overwhelming task, it is understandable that some servicers may not be as familiar with the CFPB’s ECOA Valuation Rule amending Regulation B. The Rule, which imposes an obligation to furnish a copy of valuations to borrowers of first-lien loans and to provide notice to borrowers of this right, may apply to a servicer’s loss mitigation efforts.
Some might have mistakenly assumed that the ECOA rule applied only to loan originations, but the scope is not so limited. The Bureau has stated in its Small Business Compliance Guide that the Rule applies to “loss-mitigation transactions, such as loan modifications, short sales, and deed-in-lieu transactions, if they are credit transactions covered by Regulation B.” The CFPB also affirms in the preamble to its ECOA Valuation Rule that “some loan modifications can be subject to the provisions of Regulation B.”
In effect, the CFPB places the burden on the servicer to determine whether there has been an “application” for an “extension of credit” that would trigger the Regulation B requirements. Note that this is not the same analysis that a servicer may use to determine if an adverse action notice is required for certain loss mitigation denials. Under Regulation B, the term “adverse action” does not include actions on accounts that are delinquent or in default; there is no comparable exception for determining what is an “application” for an “extension of credit” under Regulation B. Since the CFPB signaled that at least “some loan modifications” can be subject to the ECOA Valuation Rule, servicers will need to brush up on these valuation-related requirements effective for applications received on or after January 18, 2014. A brief description of the basic requirements of the Rule follows.
The CFPB finalized amendments to Regulation B to make the furnishing of “any and all written appraisals and valuations” developed in connection with the application for a first-lien loan mandatory, rather than at the consumer’s request. K&L Gates has previously covered the ECOA Valuation Rule in some detail, but recall that under the Rule, if a valuation is obtained in connection with a first-lien loan, a “creditor”
• must notify an applicant of his or her right to receive a copy of all written appraisals of the property within three days of receiving an application;
• must provide an applicant a copy of each appraisal and other written valuation developed in connection with an application for credit promptly upon completion or three business days prior to loan consummation (for closed-end loans) or account opening (for open-end loans), whichever is earlier;
• may permit an applicant to waive the timing requirement for providing a copy of the appraisal or valuation materials unless otherwise prohibited by law (but the creditor still must provide the copy no later than at consummation or account opening); and
• must not charge a borrower for a copy of any appraisal or written valuation, but may charge an applicant a reasonable fee to recover the cost of the appraisal or valuation.
What is a Valuation?
The CFPB considers “any estimate of the value of a dwelling developed in connection with an application of credit” to be a “valuation.” This includes not only appraisals but also AVMs and BPOs. The Bureau recognizes that “many documents prepared in the course of a mortgage transaction may contain information regarding the value of a dwelling, but are not themselves an appraisal or other written valuation” and, thankfully, provides a list of those documents that are not deemed to be a “valuation.” The ECOA Valuation Rule also provides examples of what the CFPB considers to be “valuations,” as follows:
• A report prepared by a licensed or unlicensed appraiser that includes the appraiser’s estimate of the property’s value or opinion of value.
• A report prepared by the creditor’s staff that assigns value to the property.
• A report approved by a GSE for describing to the applicant the estimate of the property’s value developed pursuant to the proprietary methodology or mechanism of the GSE.
• A report generated by use of an AVM to estimate the property’s value.
• A BPO prepared by a real estate broker, agent, or salesperson to estimate a property’s value.
The CFPB’s examples of “documents that discuss the valuation of the applicant’s property” but which, nonetheless, are not considered valuations are:
• Internal documents that merely restate the estimated value of the dwelling contained in an appraisal or written valuation being provided to the applicant (i.e., according to the preamble to the final rule, quality checks, fraud checks, automated underwriting determinations that do not estimate the value of the dwelling, or expressions of criticism of a valuation);
• Government agency statements of appraised value that are publicly available;
• Publicly available lists of valuations including published sales prices, tax assessments, and retail price ranges.
• Manufacturers’ invoices for manufactured homes.
• Reports reflecting property inspections that do not provide an estimate of the value of the property and are not used to develop an estimate of the value of the property.
• Appraisal reviews that do not include the appraiser’s estimate of the property’s value or opinion of value.
So, in addition to implementing the servicing requirements in Regulation X and Regulation Z, mortgage servicers will need to determine if, in connection with their loss mitigation efforts, there is: (1) an “extension of credit” under Regulation B; and (2) an “application” under Regulation B. When the Rule applies, mortgage servicers will need to develop a process for providing the required notices to borrowers and fulfilling the obligations to provide a copy of each valuation developed in connection with an application for an extension of credit on a first-lien loan in accordance with Regulation B.