How Do the Federal Reserve Board Rules Affect Mortgage Lending?

Banker Resource
March 29, 2013 — 1,094 views  
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Thenew federal rules put forward by the Federal Reserve Board, along with 5 other government agencies, deals with the lending and borrowing of high priced mortgages. The other agencies which have worked along with the Federal Reserve Board to put forward the rules are the Consumer Financial Protection Bureau, the Federal Housing Finance Agency, the Federal National Deposit Insurance Corporation, the Office of the Controller of Currency, and the National Credit Union Administration. The rule features amendments to the Truth to Lending Act (TILA) of 2010, which is enacted as a part of the Dodd Frank Wall Street Reforms and Consumer Protection Act.

The Need for Amendments

The new amendments to the TILA are brought about in response to the recent mortgage crisis. This act defines the Federal Reserve Board Rules regarding the appraisal of high priced (sub prime) mortgage loans (HPMLs). The new amendments to the rules prevent lenders from making no documentation loans or from offering interests at deceptively low rates. The rule also states that the seller should make sure that the borrower is in a position to afford to repay the loan.

The First Appraisal

According to the TILA, loans are considered to be of a higher priced value, if they are secured by the consumer’s home and have rate of interest above a particular threshold. According to the amendments made to the act, the creditors of higher priced loans should use a certified or licensed appraiser to prepare an appraisal report based on the inspection of the property. The creditors should also inform the applicants of the mortgage about the purpose of the appraisal and should also provide them with copies of the appraisal report. The applicant should pay for the appraisal and he can also have another appraisal done at his own expense. The creditor should also provide the applicant with a free copy of any written appraisal, at least a period of 3 business days prior to the latter signing the loan documents.

The Second Appraisal

The creditor should also get a second appraisal done, free of cost, for the borrower. This written appraisal should also be based on the inspection conducted on the property. This appraisal is needed if the seller has acquired the property at lower price during the previous six months, and the price of the property acquired by the loan applicant or buyer exceeds a certain amount of threshold value. The threshold value will be an excess of 10 percent of the price at which the seller had obtained the property, if the property was obtained during the past 90 days.

If the seller has obtained the property between 3 to 6 months or prior to the deal, then the threshold value will increase by 20 percent of the actual price. This requirement is meant to address the issue of fraudulent flipping of property, by seeking to ensure that the property’s value has increased in a legitimate manner,

The Exemptions

According to the new amendments in TILA, several types of loan have been given a certain amount of exemption. These include temporary bridge loans, qualified mortgages, construction loans, loans for mobile homes, loans on newly manufactured homes, and loans for boats that act as dwellings. The Federal Reserve Board Rules have also provided exemptions from the requirement of a second appraisal that is aimed to facilitate the loans in rural regions and other transactions. These amendments are expected to come into effect on January 18, 2014.

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