by Nema Daghbandan, Esq.
Geraci LLP

 

There’s a fair amount of confusion related to the coverage requirements of the Equal Credit Opportunity Act (“ECOA”) Valuations Rule (“Valuations Rule”) – which updated Federal Regulation B by requiring lenders to offer borrowers complimentary copies of all appraisals and valuations produced for ALL loans (including business purpose loans) secured by a first lien on 1-4 family residential property and to provide notification to applicants of their right to receive appraisal copies in no more than three business days. A lender must affirmatively answer the following three questions in determining whether a given transaction falls under the purview of the Valuations Rule:

  • Is there an application for credit?
  • If so, is the loan secured by a first lien on a dwelling?
  • Is there either an appraisal or written valuation affiliated with the application?

Determining an answer to each of the preceding inquiries can be nuanced and every situation is different. To provide some clarity, the following is a Q&A addressing some of the more commonly asked questions related to the Valuation Rule.

 

Does an Application for Credit Exist?

The initial step to determine if a transaction is covered by the Valuations Rule is to verify if there is an application for credit. An application for credit is defined as a formal request for an extension of credit submitted in accordance with the appropriate procedures for that particular type of credit. Credit is defined as the right granted by a creditor to an applicant to: (i) defer payment of a debt, (ii) incur debt and defer its payment, or (iii) purchase property or services and defer payment thereof. A creditor is defined as a person who, in the ordinary course of business, regularly participates in a credit decision, including setting the terms of the credit.

Putting all of this technical jargon together, once a borrower submits a request for a loan (or forbearance) to a lender, regardless of whether the loan (or forbearance) is extended, there is an application for credit under ECOA.

 

Are Business Purpose Loan Applications Considered Applications for Credit?

According to the regulations governing ECOA, if a loan is secured by a first lien on a dwelling it falls under the purview of the Valuations Rule – regardless of whether or not the credit is being granted for the purpose of business – due to the fact that the term “credit” is defined by ECOA and Regulation B as being applicable to both consumer and business purposes.

 

Does the Rule Cover Denied and Withdrawn Applications for Credit?

The short answer is yes – the rule does not provide any exceptions in the event of an application being denied or withdrawn and thus is applicable if an application is approved, withdrawn, denied or incomplete. Accordingly, in the event of a denied or withdrawn application – as long as it is secured by a first lien on a dwelling and there is an appraisal or other valuation prepared in connection with the application – then the lender must provide the disclosure and the appraisal to the borrower. In such instances, the lender must also provide applicants with a written notice of their right to obtain copies of all written appraisals prepared in connection with the application for credit within three business days.

 

Is the Credit Application Secured by a First Lien on a Dwelling?

After verification that there is an existing credit application, the second step in determining if the Valuation Rule is applicable is to see if the application is secured by a first lien on a dwelling. A dwelling is defined as a residential structure containing between one to four units and includes individual condos, coop units and mobile/manufactured residences. The structure need not be owner-occupied – rental units and similar investment
properties are also covered.

 

Are Mixed-Used Properties Considered Dwellings?

Buildings that are not used for solely residential purposes – such as buildings that contain commercial or retail space attached to a residential structure – can qualify as a dwelling for the purposes of the Valuation Rule if the residential sector of the mixed-use structure has between one and four units and is used to secure the loan. However, if only the retail space, without the residential segment attached, is pledged as collateral, it would not qualify as a dwelling for the purposes of the Valuations Rule and the transaction would not be covered.

 

How Can You Tell if the Appraisal or Written Valuation is Prepared in Connection with the Application?

In order to determine if the appraisal and/or written valuation is prepared in connection with the application, creditors first have to verify if there is an existing valuation and, if so, whether it was prepared in connection with the application. A valuation is defined as any value estimate of a dwelling prepared in connection with a credit application. As a surprise to most lenders, this includes any internal valuations that the lender performed. Publicly-available aggregated valuations including publicized sales prices or mortgage totals, tax assessments, and similar data are not considered valuations. However, if a creditor performs some analytical work ascribing a property’s value by referencing publicly available lists, then it may qualify as a valuation for the purposes of the rule.

 

Was the Valuation Developed in Connection with the Application?

A valuation is considered to have been developed in connection with a given application if it was produced over the course of the application timeline. In the case of loan renewals, for instance, in which applicants ask for a renewal of a preexisting credit extension, the associated valuation for the loan is considered to have been developed in connection with the application – giving the applicant the right to get the disclosure and appraisal copies per the Valuations Rule. On the other hand, if an appraisal was produced for the preexisting extension of credit and not the renewal, then that valuation is not considered to have been developed in connection with the application for credit and the Valuations Rule is not applicable. If the creditor chooses not to use the valuation – such as in instances where the valuation did not factor into the transaction at issue – but was nonetheless prepared in connection with the credit application, the creditor is permitted to inform the applicant that the valuation was not utilized but would still have to offer a copy of the valuation to the applicant.

 

Key Takeaways for Mortgage Lenders

The Valuations Rule mandates that all lenders provide a copy of the appraisal (or other internally produced valuation) to borrowers if all of the following conditions are met:

  1. There was an application for credit
  2. The application was secured by a first lien on a dwelling; and
  3. A valuation was prepared in connection with the credit application.

Hopefully, the nuanced scenarios discussed above should help shed some light on the Valuation Rule’s practical implementation.

The Real Estate Finance Group at Geraci LLP is managed by Nema Daghbandan, Esq., a partner with the law firm.

Mr. Daghbandan’s practice entails all facets of lending matters across the country including but not limited to the preparation of loan documents and addenda in all fifty states, loss mitigation efforts, preparation and negotiation of secondary market documents including loan sales and participation agreements, line of credit/warehouse facilities, hypothecations and securitizations. Mr. Daghbandan advises financial institutions on various lending matters including licensing, usury, and foreclosure. Mr. Daghbandan is also an expert in default management and leads the firm’s nonjudicial trustee group.