Ordering a Second Appraisal due to Low Value

QUESTION

As a lender, we use an AMC to order appraisals. If the appraisal that is done comes in at, what is, in our opinion, an extremely low value, can we order and pay for a new appraisal through a different appraiser. We don’t want to dispute the first appraisal due to the time and energy involved. We believe the comparables used were poor and reflected that the appraiser’s unfamiliarity with the local housing market. So, can we order a new appraisal or are we obligated to use the first appraisal? Of course, we will never use this particular appraiser again.

ANSWER

Under the Appraiser Independence Rules, a lender must not order, obtain, use, or pay for a second or subsequent appraisal in connection with a transaction unless:

(i) there is a reasonable basis to believe that the initial appraisal was flawed or tainted and such basis is clearly and appropriately noted in the Mortgage file, or

(ii) such appraisal is done pursuant to written, pre-established bona fide pre- or post-funding appraisal review or quality control processes or underwriting guidelines, and so long as the lender adheres to a policy of selecting the most reliable appraisal, rather than the appraisal that states the highest value, or

(iii) a second appraisal is required by law.  So, in your scenario, as the lender, if you can document your reasonable basis of belief that the initial appraisal was defective, you can order a second appraisal.

With respect to an FHA loan, a lender is prohibited from ordering an additional appraisal to achieve an increase in value for the property and/or the elimination or reduction of deficiencies and/or repairs required. As an exception to this general prohibition, the lender may order a second appraisal for Mortgages in accordance with FHA’s requirements on property flipping. A second appraisal may only be ordered if the Direct Endorsement (DE) underwriter determines that the first appraisal is materially deficient and the appraiser is unable or uncooperative in resolving the deficiency. The lender must fully document the deficiency and status of the appraisal in the mortgage file. The lender must pay for the second appraisal. Material deficiencies on appraisals are those deficiencies that have a direct impact on value and marketability. Material deficiencies include, but are not limited to:

• failure to report readily observable defects that impact the health and safety of the occupants and/or structural soundness of the house;
• reliance upon outdated or dissimilar comparable sales when more recent and/or comparable sales were available as of the effective date of the appraisal; and
• fraudulent statements or conclusions when the Appraiser had reason to know or should have known that such statements or conclusions compromise the integrity, accuracy and/or thoroughness of the appraisal submitted to the client. [Handbook 4000.1 II.A.1.a.iii.B.8] 

Don’t forget, under ECOA, as the lender, you must provide the borrower with copies of all appraisals and valuations of the property at least 3 days prior to closing. [12 CFR 1002. 14]

Joyce Wilkins Pollison

Director/Legal & Regulatory Compliance

Lenders Compliance Group

Adverse Action based on Non-CRA Information

Adverse Action based on Non-CRA Information

QUESTION

We increased the cost of credit to a borrower on the basis of information we did not receive from a consumer reporting agency. Could you let us know what are our obligations, such as disclosure, under these circumstances?

ANSWER

The type of information covered by the disclosure requirement is information obtained from a party other than a consumer reporting agency that bears upon the consumer’s creditworthiness, credit standing, credit capacity, character, general reputation, personal characteristics or mode of living. [15 USC § 1681m(b)(1)]

If a company denies or increases the charge for consumer credit in whole or in part because of certain information obtained from a party other than a consumer reporting agency, the company must, at the time that the adverse action is communicated to the consumer, clearly and accurately disclose to the consumer his or her right to make a written request for the reasons for the adverse action within sixty days.

If the consumer makes such a written request in a timely manner, the company must provide the reasons for the adverse action within a reasonable period of time. 
[15 USC § 1681m(b)(1)]

Jonathan Foxx

President & Managing Director 

Lenders Compliance Group

Exclusions from Consumer Reports

QUESTION

We believe we have a good idea about what information should be included in a consumer report. However, we would like to know what information must a consumer reporting agency exclude from consumer reports?

ANSWER

The Fair Credit Reporting Act (FCRA) actually limits the length of time that various adverse items may appear in a consumer report. There are exceptions certainly important for mortgage lenders, but consumer reporting agencies (“CRAs”) may not include in a consumer report any of the following items or information:

• Cases under the Federal Bankruptcy Code (Title 11 of the US Code) or under the Bankruptcy Act when the date on which entry of the order for relief or the date of adjudication occurred precedes the report by more than ten years;
• Civil suits, civil judgments, and records of arrest that, from the date of entry, precede the report by more than seven years; however, if the governing statute of limitations expires in less than seven years, the length of the statute of limitations applies;
• Paid tax liens, when the date of payment precedes the report by more than seven years;
• Accounts that were placed for collection or charged to profit and loss more than seven years before the report; and
• Any other adverse item of information, other than records of convictions of crimes, that precedes the report by more than seven years. [15 USC §§ 1681c(a)(1-5), 1681c(b)] 

It is important here to note that the foregoing restrictions do not apply in the case of a consumer report to be used in connection with a credit transaction involving or expected to involve a principal amount of $150,000 or more. [15 USC § 1681c(b)]

Other exemptions involve the underwriting of life insurance involving, or which may reasonably be expected to involve, a face amount of $150,000 or more, or the employment of any individual at an annual salary which equals, or which may reasonably be expected to equal, $75,000 or more.

Finally, CRAs may also not prepare any consumer report that contains the name, address, and telephone number of any medical information furnisher that has notified the agency of its status, unless the name, address, and telephone number are restricted or reported in a manner that does not identify or provide information sufficient to infer the specific provider or nature of such services, products, or devices to anyone other than the consumer the report is being provided to an insurance company for a purpose relating to engaging in the business of insurance other than property and casualty insurance. [15 USC § 1681c(a)(6)]

Jonathan Foxx

President & Managing Director

Lenders Compliance Group

Charging Consumer for Rapid Rescore

QUESTION

We are a lender that has some clients that require their credit score to be rescored via rapid rescore. We order this service through our credit vendor for each bureau that we need updated at a cost of $35 per account per credit bureau. In many cases, these costs can add up quickly. Can we pass this cost on to the applicant?

ANSWER

The short answer is no, you may not directly or indirectly charge the consumer for the rapid rescore.

Rapid rescoring is an expedited process used to update or correct a consumer’s credit file. The rapid rescore process involves the mortgage lender submitting proof from the consumer to the consumer reporting agency that information on the consumer’s report is erroneous. The consumer reporting agency, in turn, presents this information to the three national repositories of consumer information (Experian, TransUnion, and Equifax), also known as the national credit bureaus, for investigation. Depending upon the results of the investigation, the consumer’s credit file is corrected and updated, often within 72 hours as opposed to 30-45 days if the consumer were to go through the normal dispute process. 

If you review your contract with your credit vendor, you will, in all likelihood, find a prohibition against directly or indirectly charging the consumer this fee. In turn, the consumer reporting agency’s contracts with the national credit bureaus contain a similar prohibition against passing this fee on to the borrower. The root of this prohibition can be found in the Fair Credit Reporting Act (“FCRA”), 15 U.S.C. § 1681.

The Fair Credit Reporting Act sets forth the procedures to be followed if a consumer disputes the completeness or accuracy of any item of information contained in a consumer’s file at consumer reporting agency. In instances in which the consumer directly notifies a national credit bureau of the dispute or indirectly, through a reseller such as the credit vendor, the bureau must investigate the dispute within thirty days of receipt of notice of the dispute at no charge to the consumer.  [15 U.S.C. § 1681i(a)(1)(A)] 

However, nothing prevents the bureau from charging the consumer reporting agency for expediting the dispute process, which charge the credit vendor then passes on to the mortgage lender. However, in light of the foregoing FCRA provisions, the mortgage lender cannot pass the charge on to the consumer.

Charging a consumer for a repaid rescore can have harsh consequences, including termination of access to credit reports. Additionally, for a willful violation, the lender can be held liable for actual and punitive damages. [15 U.S.C. § 1681n]

Joyce Wilkins Pollison

Director/Legal & Regulatory Compliance 

Lenders Compliance Group

Notification of Mortgage Transfer Disclosure

QUESTION

We recently sold a portfolio of mortgage loans to a third party. We believe the third party is a “covered person” as defined by the statute. What we want to know is who must notify the borrower if the loan is sold to a third party? Also, when does the third party have to provide the mortgage transfer disclosure?

ANSWER

A “covered person” is a person who acquires more than one mortgage loan in a twelve-month period and becomes the owner of an existing mortgage loan by acquiring legal title to the debt obligation, whether through purchase, assignment or other transfer. [75 FR 58489, 58501, codified at 12 CFR § 226.39(a)(1)]

However, a servicer is not treated as the owner of an obligation if the servicer holds title to the loan, or title is assigned to the servicer, solely for the administrative convenience of the servicer in servicing the obligation. [75 FR 58489, 58501, codified at 12 CFR § 226.39(a)(1)]

Unless there is an exception, a covered person must provide a notice to the consumer when the covered person becomes the owner of an existing home-equity plan or mortgage loan by acquiring legal title to the debt obligation, whether through purchase, assignment or other transfer. [75 FR 58489, 58501, codified at 12 CFR §§ 226.39(a), 226.39(b)]

For the purposes of the transfer obligations, a mortgage loan is any open-end or closed-end consumer credit transaction that is secured by the principal dwelling of a consumer. [75 FR 58489, 58501, 58502, codified at 12 CFR § 226.39(a)(2); 12 CFR Supplement I to Part 226, Official Staff Commentary § 226.39(a)(2)-1]

With respect to when a covered person must provide the mortgage transfer disclosure, unless an exception applies, a covered person must provide this disclosure on or before the thirtieth calendar day following the date of transfer. [75 FR 58489, 58501, codified at 12 CFR § 226.39(b)]

As to determining a date of transfer, this date is at the option of the covered person, as either the date of acquisition of the mortgage loan recognized in the books of the acquiring party, or the date of transfer of the mortgage loan recognized in the books of the transferring party. [75 FR 58489, 58501, codified at 12 CFR § 226.39(b)(2)]

Jonathan Foxx

President & Managing Director 

Lenders Compliance Group