The CFPB recently issued two factsheets regarding the Equal Credit Opportunity Act (ECOA) and Regulation B provisions that require creditors to provide the applicant with a copy of any written appraisal or other valuation developed in connection with an application for a first lien mortgage loan to be secured by a dwelling (ECOA Valuations Rule). One factsheet addresses the transactions that are covered by the rule, and the other factsheet addresses delivery and timing requirements of the rule. Unfortunately, the first factsheet is likely to create confusion regarding the coverage of the ECOA Valuations Rule.
Transaction Coverage Factsheet
The factsheet focuses on three elements regarding the coverage of the ECOA Valuations Rule: (1) whether there is an application for credit, (2) whether the credit would be secured by a first lien on a dwelling, and (3) whether the written appraisal or other valuation is prepared in connection with the application for credit.
Application for Credit. The factsheet provides that if an entity (1) grants “extensions of credit” as defined in Regulation B, (2) is a “creditor” as defined in Regulation B, and (3) received an oral or written request (made in accordance with its policies and procedures) for an extension of credit, then there is an application for credit. The factsheet addresses loss mitigation, and provides that if these three elements are met in a loss mitigation situation, then there is an application for credit. The factsheet indicates that as long as there is an application for credit to be secured by a first lien on a dwelling, the ECOA Valuations Rule applies even if the credit is for business purposes.
With regard to applications that are denied or withdrawn, the factsheet reflects that there is no exception to the applicant notice or the appraisal/valuation delivery requirements of the ECOA Valuations Rule for denied or withdrawn applications. Pursuant to the applicant notice requirement of the ECOA Valuations Rule, within three business days after receiving a covered application a creditor must mail or deliver to the applicant a notice advising of the right to receive a copy of any written appraisal or other valuation developed in connection with the application. The Loan Estimate under the TRID rule, which must be mailed or delivered to the applicant within three business days after receipt of an application, contains language that satisfies the notice requirement. The factsheet notes that even when a creditor decides to deny an application within three business days of receipt, the notice requirement still applies. As it is likely that no Loan Estimate would be issued in such a situation, a creditor would need to mail or deliver a notice to the applicant. The factsheet provides that the creditor could modify the notice to make clear to the applicant that the credit application was denied. Of course if an application is denied within three business days of receipt, it is likely that no written appraisal or other valuation would be developed in connection with the application and, if so, there would be no requirement to deliver a written appraisal or other valuation.
Secured by a First Lien on a Dwelling. For purposes of the ECOA Valuations Rule, a “dwelling” is defined as “a residential structure that contains one to four units whether or not that structure is attached to real property. The term includes, but is not limited to, an individual condominium or cooperative unit, and a mobile or other manufactured home.”
The factsheet provides that two factors determine whether a structure is a dwelling under the ECOA Valuations Rule: “The structure: (1) must be residential and (2) contain one-to-four units. When both factors are present, a dwelling exists.” While the factsheet states that a structure must contain one-to-four units to be a dwelling, it then provides the following examples of what are and are not dwellings:
Examples of structures that are dwellings:
- A 10-unit residential structure with three units securing a loan.
- A parcel of land with multiple residential structures totaling 20 units but with two-units in the same structure securing the loan.
- A 30-unit condominium with two condos securing a loan.
Examples of structures that are not dwellings include:
- Multiple dwellings, such as an inventory of individual housing structures, pledged as collateral.
- A building with more than four residential units securing a loan. For example, a 10-unit residential structure with eight units securing the loan.
- Land without any type of structure on it.
- Motor vehicles as defined in 12 USC § 5519(f)(1), including recreational vehicle trailers, motor homes, campers, and recreational boats.
- A three-unit commercial property.
Despite first indicating that the structure must contain one-to-four units to be a dwelling, the factsheet then provides examples based on the number of units that secure the loan and not the number of units in the structure. Thus, while the factsheet is intended to provide clarity, it may instead create confusion. Likely, the CFPB is basing the approach on the second sentence of the definition of “dwelling,” which provides that the “term includes, but is not limited to, an individual condominium or cooperative unit, and a mobile or other manufactured home.” If the CFPB is interpreting the ECOA Valuations Rule to apply when a loan is secured by a first lien on no more than four units in a residential structure that contains more than four units, it should amend the rule to provide clarity on that point and apply this interpretation only from the date that the amended rule is effective.
Additionally, the non-dwelling example in the factsheet of “[m]ultiple dwellings, such as an inventory of individual housing structures, pledged as collateral” is in need of clarification.
The factsheet notes that there is no requirement that a residential structure be owner-occupied to be a dwelling. As a result, assuming the other conditions are met, the ECOA Valuations Rule “applies to commercial transactions involving one to four unit residential structures, including rental homes and other investment properties.” With regard to mixed-use properties, the factsheet indicates that depending on the circumstances they can be dwellings, and provides the following example:
A one-to-four-unit property that includes both a residential and commercial structure would satisfy the definition of a dwelling if:
- Only the residential portion of the property is pledged as collateral for the loan; or
- The entire property (both the commercial and residential structure) is pledged as collateral.
Developed in Connection with an Application. The factsheet provides that if an appraisal was developed in connection with a prior extension of credit, and the creditor uses that same appraisal in connection with an application to renew the loan, the valuation is not developed in connection with the renewal application. However, if a written appraisal or other valuation is prepared in connection with the loan renewal application, then that appraisal or valuation would be developed in connection with the application.
The factsheet indicates that if a written appraisal or other valuation is developed in connection with an application but not used by the creditor in connection with the application, the creditor still must provide the appraisal or valuation to the applicant.
Delivery and Timing Factsheet
The factsheet notes that the ECOA Valuations Rule requires that a creditor “provide” the applicant with a copy of each written appraisal or other valuation developed in connection with a covered application. The factsheet then explains that the ECOA Valuations Rule defines “provide” to mean to “deliver” a copy of each written appraisal or other valuation, and that for purposes of the rule delivery is the earlier of:
- Three business days after mailing or delivering a copy of the valuation to the last known address of the applicant; or
- When evidence indicates actual receipt of a copy of the appraisal by the applicant.
The factsheet then provides examples of how the delivery concept interacts with the requirement that the applicant receive the copy of the appraisal or valuation no later than three business days before consummation.
The factsheet also notes the ability of the applicant to waive or modify the timing requirement, but does not reference the recent FAQ issued by the CFPB addressing the right to modify or waive the timing requirement as flexibility that is available in view of the COVID-19 national emergency.