The murky area of unfair or deceptive acts and practices
(UDAP) can be confusing for any lender. There are few
black and white UDAP regulations, but any practice that
is deemed to be unfair or deceptive (and now, “abusive”)
may subject an institution to an enforcement action.
■ ■ At the time of the application, the lender must provide the
applicant with a statement that the appraisal is for the sole use
of the lender, and that a separate appraisal may be conducted
at the applicant’s expense.
■ ■ The creditor must provide a free copy of each appraisal
These provisions will be enforced and interpreted by the new
Consumer Financial Protection Bureau, because it will have
responsibility for Reg. Z.
The Equal Credit Opportunity Act (ECOA) was also amended
to require lenders to supply a copy of the appraisal used in any
loan secured by a first lien on a dwelling at least three days prior
to closing. In this case, the lender may require the applicant to
reimburse the lender for the cost of the appraisal. In addition, the
definition of “appraisal” has been broadened to include any and
all written appraisals and valuations of the property.
Dodd-Frank also amended FIRREA, which is the statute that
generates the majority of the appraisal rules banks follow. These
amendments include the following:
■ ■ Appraisals utilized in real estate transactions must be reviewed
for USPAP compliance.
■ ■ New minimum standards will be imposed on appraisal management companies.
■ ■ Stricter appraiser qualification requirements will be set forth by
the Appraiser Qualifications Board of the Appraisal Foundation.
■ ■ A national appraisal complaint hotline will be established,
where complaints about appraisers or possible fraudulently
misstated valuations may be reported.
■ ■ AVMs must meet higher standards, including random sample
testing and reviews.
■ ■ Broker price opinions (BPOs) may not be used as the primary
basis to determine value in purchasing mortgages secured by
HVcc developments: The Home Valuation Code of Conduct (HVCC) places significant restrictions on lender-appraiser
relationships in the name of independence. It applies only to loans
purchased by Fannie Mae or Freddie Mac, but many secondary
market investors will purchase only loans that conform to those
standards. The HVCC originally was to sunset on its own, but
Dodd-Frank changes the sunset date to when final regulations
are issued to implement appraiser independence provisions of
Title XIV, which is scheduled to happen sometime in the fourth
quarter of 2010.
While the fact that the HVCC will no longer be effective sounds
like great news, new Reg. Z rules will be implemented to replace
them. The effect will be to expand the requirements beyond
Fannie and Freddie loans to all Reg. Z–covered loans secured by
a borrower’s principal dwelling.
So, after digesting all of the new appraisal rules, a mortgage
lender must be sure that its appraisers and appraisal reviewers
all are aware of the regulations that apply to them. Monitoring
appraisals is now an even more important part of the risk management process in the mortgage lending arena.
The murky area of unfair or deceptive acts and practices (UDAP)
can be confusing for any lender. There are few black and white
UDAP regulations, but any practice that is deemed to be unfair
or deceptive (and now, “abusive”) may subject an institution to
an enforcement action. Third parties that act on behalf of the
bank during the mortgage lending process can subject the bank
to liability if the third parties’ actions are deemed to violate UDAP.
For example, a broker’s deceptive advertising that ultimately results in mortgage loans for the bank, and collection agencies or
attorneys representing the bank in loss mitigation and collection
efforts, could all be problematic if they engage in practices that
are determined to be deceptive or unfair.
The best defense: good due diligence, specific and clear contracts, and diligent monitoring.
6. sAFe Act registration requirements
SAFE Act licensing and registration requirements differ from
state to state. The bank should make sure not only that its own
covered employees register, but also that all brokers it uses are
properly registered in the state under which they are governed.
Making this requirement a part of the contract and requiring
proof of licensing are keys to compliance.
what to do?
Nothing beats a well-run risk management function in the mortgage lending area to prevent problems from occurring. Here are
■ ■ Policies: Write policies that cover not only the bank’s mortgage operations, but also what is expected from third parties.
Cover the third party’s hiring process, including due diligence
and monitoring. Make copies of the policies (or relevant excerpts) and give them to the third parties, as appropriate. Have
them acknowledge in writing the receipt of the policy. Later
the bank might need to prove that the third party was aware
of the policy.