How Does the New ECOA Valuations Rule Impact Lenders?

On January 18, 2014 ,the new ECOA Rules regarding appraisals went into effect. The new rules will apply to all loan applications which are seeking a first lien home loan. This will apply to all new purchases and first lien refinances from 1 to 4 units. In other words, it will include all single family homes, duplexes, triplexes and quads. It will not apply to the majority of commercial real estate deals. The rules also extend to townhomes, condominiums, and manufactured homes purchased by individuals.

There is no differentiation between owner occupied units and investments units, with regard to the new appraisal rules. Credit unions are also no longer exempt.

Basics of the New Valuation Rule

At the heart of the new ECOA Valuation Rule is with regard to providing the applicant with a copy of the valuation or appraisal of a property. When a buyer makes an offer, during the lending process the appraisal is completed, and until now, generally the buyer never saw a copy of the appraisal even though they were charged a fee for it. The buyer generally has no say in the selection of the appraiser, which lenders generally choose at random from a list of approved vendors. This measure is said to provide a more objective appraisal and reduces fraud.

The new ruling requires lenders and creditors to provide the buyer (or refinancer) with a copy of the appraisal “promptly upon completion,” or within 3 days prior to consummation or account opening. If the lender chooses to email the appraisal to the buyer, they must comply with existing eSign requirements.

Banks or lenders may charge a fee for the actual appraisal, as most already do. However, they cannot charge an additional fee for the copy or mailing of the appraisal to the applicant. If the application is withdrawn, cancelled, denied or incomplete, the lender still must provide a copy of the appraisal to the borrower. They have no more than 30 days in the event of a decline to provide the borrower a copy.

The only condition that would allow the lender to not provide a copy of the appraisal is if the borrower waives their right to the copy. This may be done orally or in writing.

Impact on Lenders

Part of the concern for lenders in providing an appraisal to borrowers is that they will take it to another lender to complete the transaction. Processing a loan has certain costs associated with the loan. By the time the appraisal is ordered, many hours have been put into approving a loan. This puts the lender at a disadvantage.

In the event that a buyer chooses to switch lenders at the last minute this will impact and delay the closing. If this becomes a frequent scenario then it will impact both lenders and realtors. Overall it may be seen that the concerns are not justified. The lending process is an arduous one and it is hard to imagine a borrower volunteering to go through the process again over a slight change in interest rates, once the process is nearly complete.

Overall this should be a good regulation change as borrowers could become more educated about the appraisal process, providing more cooperation and understanding when it comes to appraisal values.

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