A consumer mortgage fully funded on origination and amortized without a balloon payment which charges an excessive interest rate is classified as a Section 35 higher-priced mortgage loan (HPML). An HPML classification triggers appraisal report requirements.
The HPML appraisal report and disclosure requirements arise when the mortgage’s annual percentage rate (APR) exceeds the mortgage’s comparable average prime offer rate (APOR) by a percentage point spread as follows:
- for first trust deed mortgages with principal on origination limited to the Freddie Mac maximum amount, the spread is 1.5 or more percentage points;
- for first trust deed mortgages with a principal on origination greater than the Freddie Mac maximum amount, the spread is 2.5 or more percentage points; or
- for mortgages secured by a subordinate lien, the spread is 3.5 or more percentage points.
To originate a Section 35 HPML, a lender must obtain a written appraisal of the property prepared by a licensed appraiser based on the appraiser’s physical interior inspection of the property. [12 CFR §1026.35(c)(3)(i)]
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Application of HPML rules limited by exemptions
Numerous mortgage originations are exempt from Section 35 appraisal requirements, including:
- qualified mortgages [12 CFR §1026.35(c)(2)(i);
- mortgages of less than $28,500 during 2022, adjusted annually for inflation [12 CFR §1026.35(c)(2)(ii)];
- loans secured by a mobile home, boat or trailer [12 CFR §1026.35(c)(2)(iii)];
- mortgages funding the initial construction of a dwelling [12 CFR §1026.35(c)(2)(iv)];
- bridge mortgages due and payable within 12 months when used to fund acquisition of the borrower’s principal residence [12 CFR §1026.35(c)(2)(v)];
- reverse mortgages [12 CFR §1026.35(c)(2)(vi)]; and
- refinancing as a first mortgage by the current mortgage holder with no cash-back, no negative amortization and either no other borrowers or the mortgage is government guaranteed. [12 CFR §1026.35(c)(2)(vii)]
An HPML mortgage secured by a newly manufactured home and a parcel of real estate requires an appraisal. However, the appraiser is not required to conduct an interior inspection of the home. [12 CFR §1026.35(c)(2)(viii)(A)]
Further, when the HPML is secured by a manufactured home but does not include a parcel of real estate, an appraisal is not required when the lender provides the borrower with one of the following:
- an invoice of the cost of the unit, prepared by the manufacturer; or
- a cost estimate of the value of the manufactured home, prepared by an independent cost service provider; or
- a valuation from a person with no financial interest in the manufactured home, who has training in valuing manufactured homes. [12 CFR §1026.35(c)(2)(viii)(B)]
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Appraisals for flipped properties
Two appraisals are required when the Section 35 higher-priced mortgage funds the purchase of property on a flip of the property by the seller and:
- the seller acquired the property 90 or fewer days prior to entering into a purchase agreement with a buyer, and the purchase price exceeds the original purchase price by more than 10% [12 CFR §1026.35(c)(4)(i)(A)]; or
- the seller acquired the property 91-to-180 days prior to entering into a purchase agreement with a buyer, and the purchase price exceeds the original purchase price by more than 20%. [12 CFR §1026.35(c)(4)(i)(B)]
The second appraisal is to be completed by a different appraiser than the appraiser who completed the original appraisal. [12 CFR §1026.35(c)(4)(ii)]
One of the two appraisals must include analysis of the difference in sale prices, changes in market conditions and improvements to the property between the date the seller acquired it and the current sales date. [12 CFR §1026.35(c)(4)(iv)]
The borrower cannot be charged for the fee due for the second appraisal. [12 CFR §1026.35(c)(4)(v)]
The second appraisal is not required on mortgages that finance a consumer acquisition of property:
- from a local, state or federal government agency;
- from a person who acquired title to the property on a defaulted mortgage resulting in either a foreclosure or deed-in-lieu of foreclosure;
- from a non-profit entity which acquired the property through foreclosure or deed-in-lieu of foreclosure;
- from a person who inherited the property due to a death;
- from a person who received the property as the result of a divorce;
- from an employer or relocation agency in connection with relocation of an employee;
- from a servicemember who was deployed or received a permanent change of station order after purchasing the property;
- located in a federal disaster area; or
- located in a rural county. [12 CFR §1026.35(c)(4)(vii)]
Providing appraisal reports to the borrower
A lender originating a Section 35 HPML must provide a free copy of each appraisal report to the borrower:
- at least three days before closing the origination of the mortgage; or
- when the mortgage is not closed, no later than 30 days after the lender determines the mortgage will not be originated. [12 CFR §1026.35(c)(6)(i)-(ii); 12 CFR §1026.35(c)(6)(iv)]
The appraisal can be provided in print or electronically.
Appraisal disclosure advising of costs and entitlement
The lender is to deliver or place in the mail a written disclosure about the Section 35 appraisal requirements within three business days of:
- receiving an application for a Section 35 higher-priced mortgage; or
- determining the mortgage associated with an existing application is a Section 35 higher-priced mortgage. [12 CFR §1026.35(c)(5)(ii)]
The disclosure is to state:
“We may order an appraisal to determine the property’s value and charge you for this appraisal. We will 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.” [12 CFR §1026.35(c)(5)(i)]
Violations
A lender who willfully violates this appraisal rule will be liable to the applicant or borrower for $2,000. [15 USC §1639h(e)]
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