A Look At the Consumer Financial Protection Bureau’s Ecoa "Disclosure and Delivery" Valuations Rule

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A LOOK AT THE CONSUMER FINANCIAL PROTECTION BUREAU’S ECOA "DISCLOSURE AND DELIVERY" VALUATIONS RULE

Sanford Shatz1

Sanford Shatz Sanford Shatz is Of Counsel to McGlinchey Stafford’s Irvine, CA office where he specializes in commercial and mortgage-related litigation and compliance issues. He is a member of the California State Bar’s Consumer Financial Services Committee and the Chair of the American Bar Association’s Housing Finance Subcommittee.

I. Introduction

When the mortgage crisis engulfed America, Congress enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank Act"),2 in part to ensure transparent lending to informed consumers. Borrowers who had applied for loans to be secured by their homes did not know if the appraisal process played a fair role in the consideration of their loan terms. Because borrowers could not review the appraisal of their home until after the completion of the transaction, they could not determine whether either the appraiser or the creditor had employed discriminatory means, considered discriminatory factors, or otherwise violated their right to equal protection in connection with the origination of their loan. As part of the Dodd-Frank Act, Congress amended the Equal Credit Opportunity Act3 ("ECOA") to require creditors to inform borrowers of their right to receive a copy of any appraisal or other written valuation used in evaluating their credit application and to provide borrowers with earlier access to those written valuations.4 This amendment was intended to help borrowers uncover invidious discrimination in the preparation of property valuations used for loan origination or loss mitigation purposes.

On January 18, 2013, the Consumer Financial Protection Bureau ("CFPB") released the final rule for Disclosure and Delivery Requirements for Copies of Appraisals and Other Written Valuations Under the Equal Credit Opportunity Act ("ECOA Valuations Rule"), amending Regulation B.5 The Rule requires creditors to provide written notice to credit applicants of their right to receive a copy of the written property valuations, and to "promptly" provide those valuations to credit applicants. This rule applies to all property valuations for first lien loans—including formal appraisals, broker price opinions, and automated valuation models. This rule also applies to applications for new credit and applications for an extension of credit, and may apply to loss mitigation applications.

This article will examine the ECOA Valuations Rule and offer practice tips for borrowers and creditors following the new rule’s effective date of January 18, 2014.

II. Background On ECOA

ECOA’s purpose is to promote the availability of credit to all creditworthy applicants without regard to race, color, religion, national origin, sex, marital status, or age (provided that the applicant has the capacity to contract), or whether all or part of an applicant’s income derives from public assistance, or whether the applicant has in good faith exercised rights under certain credit laws, including the Truth in Lending Act ("TILA").6 The implementing regulations prohibit creditor practices that discriminate on the basis of any of these factors, and, amongst other things, require creditors to provide applicants with copies of appraisal reports used in connection with credit transactions.7Mortgage lending discrimination is not always obvious. Discrimination in mortgage lending may arise through the preparation of property valuations. Appraisers consider many factors in estimating a property’s value, including the characteristics of the property, its size and shape, and its condition. Discrimination may occur where the determination of the home’s value appears to be based on improper factors, including the racial or religious background of the neighborhood, or consideration of other prohibited characteristics. Congress sought to eliminate this type of discrimination, and make it easier for loan applicants to determine whether a loan was denied, or overpriced, due to a discriminatory appraisal.

III. Summary of the Prior ECOA Valuations Rule

ECOA previously required that creditors "promptly" furnish an applicant, upon written request, with a copy of the appraisal used to evaluate their application for a loan that would be secured by a lien on residential real property.8 Creditors could provide the appraisal as part of their routine practice or in response to an applicant’s written request. Under the prior rule, the creditor had to inform the applicant of the right to receive the appraisal by the end of the application process, and must have provided the appraisal report within thirty days of the applicant’s request, unless provided as part of the creditor’s routine practice. The former rule did not apply to credit unions.9

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IV. The Requirements and Operation of the New ECOA Valuations Rule

A. Overview of the ECOA Valuations Rule

The Dodd-Frank Act amended ECOA by expanding the definition of appraisals to include all "valuations," and requiring that the valuations be provided earlier in the process.10 Congress limited the application of this requirement to first-lien loans.

The ECOA Valuations Rule implements these amendments. The CFPB requires creditors to provide loan applicants with copies of all appraisals and other written valuations developed in connection with an application for credit that is to be secured by a first lien on a dwelling.11 Valuations must be provided "promptly" to the applicant and no later than three days before consummation of a closed-end loan, or an account opening for an open-end loan.12 Within three days of receiving an application for credit, creditors must also provide written notice to the applicant of the applicant’s right to receive all property valuations.13 The ECOA Valuations Rule mandates that the valuation be provided whether the loan is made or the application is even completed.14 The CFPB prohibits creditors from charging the applicant a fee for the copy of the property valuation, but permits the applicant to be charged a fee for the valuation itself.15 Finally, the exemption for credit unions provided by prior ECOA rules has been removed.16

B. The ECOA Valuations Rule Became Effective January 18, 2014

The ECOA Valuations Rule is effective for all applications received on or after January 18, 2014.17 An application received on January 14, 2014, for example, would not be covered by the ECOA Valuations Rule, even if the closing were not scheduled to close until February, 2014. However, any application received on or after January 18, 2014, would be covered by the ECOA Valuations Rule, regardless of the scheduled closing date.

C. What Loans are Covered by the ECOA Valuations Rule?

The ECOA Valuations Rule covers applications for closed-end or open-end loans secured by a first lien on a dwelling.18 It no longer covers second position or subordinate liens.

The rule applies to loans made for all purposes, including consumer, business, investment, or leisure.19 Reverse mortgages and loans secured by mobile or manufactured homes are also covered, as are time share loans, if the time-share credit transactions are covered by Regulation B.

A dwelling is a residential structure that contains one to four units, whether or not the structure is attached to the real property, including, but not limited to, homes, duplexes, individual condominium units, mobile homes, and manufactured homes. A dwelling does not include motor vehicles. Loans secured by vacant land are not subject to the new rule.20

D. The ECOA Valuations Rule May Apply to Loss Mitigation Efforts

The ECOA Valuations Rule applies where there has been an application for credit.21 An application for loss mitigation relief, either by modification, forbearance, principal reduction, short sale, deed in lieu, etc., may be an "application for credit" and subject to Regulation B.22 The determination is based on several factors.

The first factor is to determine if there is an "extension of credit." Credit includes the "right granted by a creditor to an applicant to defer payment of a debt."23 An extension of credit is "the granting of credit in any form (including, but not limited to, credit granted in addition to any existing credit . . . the refinancing or other renewal of credit . . . or the continuance of existing credit without any special effort to collect at or after maturity)."24

In an earlier bulletin, the Federal Reserve Board ("Board"), the predecessor to the CFPB, stated that, under a HAMP25 trial period plan or modification, the servicer extends the right to defer payment of a debt by capitalizing accrued interest and certain escrow advances, reducing the interest rate, extending the loan terms, and/or providing for principal forbearance. Based on this understanding, the Board stated that the trial period plan or modification would constitute an "extension of credit" for purposes of HAMP.26

The second factor is to determine whether there is an "application." The Board stated that a borrower’s request for a mortgage loan modification is an "application" — "an oral or written request for an extension of credit that is made in accordance with the procedures used by a creditor for the type of credit requested."27 Where the borrower has submitted sufficient information to be evaluated under HAMP guidelines, "the borrower has submitted an ‘application’ for an extension of credit."28

The CFPB does not state that loss mitigation applications are covered by the ECOA Valuations Rule. It states that it "believes that questions on coverage of these types of transactions are best addressed with reference to the existing provisions of Regulation B."29 The CFPB explains that if the transaction is covered by Regulation B, then the ECOA Valuations Rule applies.30 If, however, the borrower is delinquent or in default with respect to a loan, and the creditor accepts an application for loss mitigation that is covered by the rule, but then denies the loss mitigation request, the creditor does not need to provide an ECOA adverse action notice.31

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E. Defining an Appraisal or Other Written Valuation

A valuation is any estimate of the value of a dwelling developed in connection with an application for credit.32 The official interpretations to the rule provide a non-exclusive list of what constitutes a valuation.33 A valuation includes a report prepared by an appraiser, whether or not an appraiser is licensed or certified, including the appraiser’s estimate or opinion of the property’s value. It includes a document prepared by the creditor’s staff that assigns a value to the property, but it does not include the creditor’s internal documents that merely restate the estimate of value contained in an appraisal or other written valuation. A report approved by a government-sponsored enterprise ("GSE") for describing to the applicant the estimate of the property’s value developed pursuant to the proprietary methodology of the GSE is a valuation. Reports generated by automated valuation models ("AVM"), whether proprietary or publicly available, such as Zillow, are included as valuations.34 Similarly, a broker price opinion, whether prepared by a real estate broker, agent, or salesperson to estimate the property’s value, is a written valuation. The valuation also includes any attachments or exhibits that are integrated into the valuation.

Valuations do not include governmental agency statements of appraised value that are publicly available, publicly available lists of valuations, such as assessor’s tax rolls, or manufacturers’ invoices for manufactured homes. Underwriting appraisal reviews that do not state a different estimate from the appraised value are not "valuations."

F. Providing the Initial Disclosures Under the ECOA Valuations Rule

The ECOA Valuations Rule requires that a creditor, not later than the third business day after the creditor receives an application for credit, provide written notice of the applicant’s right to receive a copy of all written valuations developed in connection with the loan application.35 Where, at the time an application for credit is submitted, the credit was not proposed to be secured by a first lien on a dwelling, but it is later determined that the credit will be secured by such a lien, the creditor must deliver the same written notice within three business days of making the new determination.36

The ECOA Valuations Rule disclosures may be provided with other "three-day" disclosures, such as the estimate.37 The CFPB provided model language: "We may order an appraisal to determine the property’s value and charge you for this appraisal. We will promptly give you a copy of any appraisal, even if your loan does not close. [¶] You can pay for an additional appraisal for your own use at your own cost."38 A creditor may also include additional information, such as providing a notice of the cost the applicant will be required to pay for the appraisal or other valuation, or a telephone number where the applicants may call to leave their name and address to which a copy of the appraisal or other written valuation should be sent.39

The ECOA Valuations Rule permits written disclosures to be provided to the applicant electronically—in compliance with the consumer’s consent and other applicable provisions of the Electronic Signatures in Global and National Commerce Act. (E-Sign Act).40

G. Timing for Providing Valuations Under the ECOA Valuations Rule

The rule requires that valuations be provided "promptly."41

This term is not defined, but appears to mean seven to ten days. The official interpretations provide examples of "promptly."42 In one example, if the creditor reviews the written valuation within fifteen days of its receipt, and provides it to the applicant one week later, but more than three days before consummation, the creditor has acted promptly. Similarly, in another example, where an appraisal is being revised, and then is reviewed forty-five days after application, the appraisal is provided "promptly" when given to the applicant one week later and more than three days before consummation. Where the creditor receives an AVM report on the fifth day after receipt of the application, and then sends it to the applicant one week later, but more than three business days before consummation, the official interpretation deems this as meeting the "promptly" mandate. However, where the creditor receives a written valuation twelve days after receipt of the application, and determines that the valuation is complete and acceptable, but waits thirty more days to transmit the valuation to the borrower, the creditor has not acted promptly. This finding of non-promptness applies even though the valuation is provided more than three business days before consummation. Similarly, where the creditor receives an acceptable AVM report on the fifth day after the loan application, but waits thirty days to transmit it to the borrower so that it can simultaneously transmit the completed appraisal, the AVM report has not been promptly provided upon completion. The official illustration distinguishes between the un-prompt AVM report and what would be prompt delivery of the separate TILA-RESPA good faith appraisal report. In short, once the valuation report is received, reviewed, and accepted, the creditor should transmit it to the borrower, "promptly."

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The applicant may waive the timing requirements and agree to receive copies of valuations at or before consummation or account opening, except where otherwise prohibited by law.43 The waiver may be given in writing or orally. However, unless a clerical error is involved, the creditor must obtain the applicant’s waiver at least three business days prior to consummation or account opening.44

H. Additional Issues with Providing the Valuation

The valuation should be sent to the applicant’s last known physical or electronic address, and must include all attachments and exhibits.45

Delivery occurs three business days after it is mailed or transmitted, or whenever the creditor receives evidence that the applicant has received the valuation.46 Because the rule requires that the creditor "provide" copies of the written valuations (i.e., have copies in the applicant’s hands) not later than three business days before consummation (for closed-end credit) or account opening (for open-end credit), and delivery occurs three business days after mailing (unless the creditor can confirm actual receipt earlier than that), a creditor delivering a copy of a written valuation by mail should mail it six business days prior to consummation (or account opening, as applicable).

The creditor may not charge (or upcharge) for copies of the appraisal or written valuation, or for postage incurred in delivering the report, although the creditor may charge for the actual valuation itself.47 If several applicants have submitted a single application for credit, the creditor may send the valuation to any one of the applicants.48 The final valuation—not any interim draft—must be provided promptly upon completion.

V. Practice Tips for Consumers and Creditors

A. Practice Tips for Consumers

Consumers should not waive their right to receive the appraisal or other written valuations promptly, unless the failure to waive would result in an expiration of the credit offer. The consumer should promptly review the appraisal or written valuations, for the purpose of determining whether they fairly value the secured property, and to confirm that they are not based on invidious or discriminatory criteria. Often, consumers will not have the necessary training or valuation methodology to assess whether a particular appraisal technique or valuation practice is using discriminatory practices; the rule, however, provides no guidance as to how consumers are to make their assessment or how a particular practice may be unlawfully discriminatory.

B. Practice Tips for Creditors

  • Creditors should provide the three-day notice with other three-day mortgage disclosures.
  • The disclosures should be provided in response to an application for new credit, an extension of credit, or a modification of credit, such as a borrower’s loss mitigation efforts including a loan modification, deed in lieu, or short sale that is subject to Regulation B. Erring on the side of over-disclosure could be prudent, particularly because it may be difficult to determine whether a particular loss mitigation application is subject to Regulation B.
  • Creditors should promptly provide copies of appraisals or other written valuations developed in connection with an application for credit secured by a first lien on a dwelling, within seven to ten days after the creditor receives, reviews, and accepts the valuation.
  • Appraisals and other written valuations are not limited to formal reports. The final version of any property valuation developed in connection with a credit application must be provided to the applicant.
  • Finally, creditors should add a waiver section to their appraisal checklist to include whether the borrower requested an ECOA Valuations Rule waiver, whether the waiver was oral or written, the date of the waiver, the person to whom the waiver was delivered, and the basis for the waiver request.

In short, creditors should inform applicants that they are entitled to receive a copy of any appraisal or written valuation and then promptly provide that valuation to the applicant. Applicants should promptly review the written valuation. In this way, it is hoped, the Dodd-Frank Act’s goals of transparent lending to informed consumers can be achieved.

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Notes:

1. The author wishes to thank his colleagues John Calvagna and Hassan Elrakabawy for their valuable insights and comments. Any errors that remain are the author’s alone.

2. Pub. L. 111-203, 124 Stat. 1376 (July 21, 2010).

3. 15 U.S.C. § 1691 et seq. The implementing regulation, Regulation B, is found at 12 C.F.R. part 1002.

4. Dodd-Frank Act, § 1474, codified at 15 U.S.C. § 1691(e).

5. Disclosure and Delivery Requirements for Copies of Appraisals and Other Written Valuations Under the Equal Credit Opportunity Act Rule, 78 Fed. Reg. 7215-7250 (January 31, 2013).

6. 12 C.F.R. § 1002.1(b).

7. Id.

8. 15 U.S.C. § 1691(e), which provides:

"(e) Appraisals; copies of reports to applicants; costs Each creditor shall promptly furnish an applicant, upon written request by the applicant made within a reasonable period of time of the application, a copy of the appraisal report used in connection with the applicant’s application for a loan that is or would have been secured by a lien on residential real property. The creditor may require the applicant to reimburse the creditor for the cost of the appraisal."

9. See 12 C.F.R. § 1002.14.

10. Dodd-Frank Act, § 1474.

11. 12 C.F.R. § 1002.14 (a)(1).

12. Id.

13. 12 C.F.R. § 1002.14 (a)(2).

14. 12 C.F.R. § 1002.14 (a)(4).

15. 12 C.F.R. § 1002.14 (a)(3).

16. 12 C.F.R. § 1002.14.

17. 78 Fed. Reg. 7216.

18. 12 C.F.R. § 1002.14 (a)(1) & Official Interpretations.

19. Id.

20. 12 C.F.R. § 1002.14 (b)(2) & Official Interpretations.

21. 12 C.F.R. § 1002.14(a)(1).

22. In the context of interpreting the requirement of Regulation B that there be a notice of an adverse action on an application, for example, the Federal Reserve Board ("Board") Consumer Affairs Letter CA 09-13 (Dec. 4, 2009), noted that loan modifications can involve an "application" for an "extension of credit" within the meaning of Regulation B. See Consumer Affairs Letter CA 09-13, Mortgage Loan Modification and Regulation B’s Adverse Action Requirement (Dec. 4, 2009), http://www.federalreserve.gov/boarddocs/caletters/2009/0913/caltr0913.htm ("Letter 09-13.") The Board determined that certain transactions under the U.S. Department of Treasury’s Making Home Affordable Modification Program (HAMP) then in place did involve applications for extension of credit within the meaning of Regulation B.

23. 12 C.F.R. § 1002.2(j).

24. 12 C.F.R. § 1002.2(q).

25. Under the Obama Administration, the FHA introduced a Home Affordable Modification Program ("HAMP") to help homeowners who could not make their mortgage payments. See generally Dep’ts of the Treasury & Hous., MakingHomeAffordable.Gov, http://www.makinghomeaffordable.gov/pages/default.aspx (last visited Jan. 6, 2014).

26. See Letter 09-13.

27. 12 C.F.R. § 1002.2(f); Comment 1002.2(f)-1.

28. Letter 09-13.

29. 78 Fed. Reg. 7223.

30. Id.

31. 12 C.F.R. § 1002.2(c)(ii); Comment 1002.2(c)(2)(ii)-2.

32. 12 C.F.R. § 1002.14(b)(3).

33. 12 C.F.R. § 1002.14(b)(3) & Official Interpretations.

34. If, as part of the underwriting process a creditor’s employee obtains a "quick AVM," even from such sources as Zillow, that report constitutes a valuation and must be provided to the applicant.

35. 12 C.F.R. § 1002.14(a)(2).

36. Id.

37. 12 C.F.R. § 1026.19(a)(1)(i). See generally, Truth in Lending Act, 15 U.S.C. § 1601 et seq. ("TILA"), and Real Estate Settlement Procedures Act, 12 U.S.C. § 2601 et seq. ("RESPA").

38. ECOA Valuations Rule, Appendix C to Part 1002, form C-9.

39. See Official Interpretations to Part 1002, Appendix C—Sample Notification Forms

40. 12 C.F.R. § 1002.4(d)(2).

41. "A creditor shall provide a copy of each such appraisal or other written valuation promptly upon completion, or three business days prior to consummation of the transaction (for closed-end credit) or accounting opening (for open-end credit), whichever is earlier." 12 C.F.R. § 1002.14(a)(1) (emphasis added).

42. 12 C.F.R. § 1002.14(a)(1), Comment 5.

43. 12 C.F.R. § 1002.14(a)(1).

44. 12 C.F.R. § 1002.14(a)(1) & Official Interpretations.

45. 12 C.F.R. § 1002.14(a)(1), Comment (4)(i); 12 C.F.R. § 1002.14(b)(3), Comment (2).

46. 12 C.F.R. § 1002.14(a)(1), Comment (4)(i).

47. 12 C.F.R. § 1002.14(a)(3).

48. 12 C.F.R. § 1002.14(a), Comment 1.