THE NATION’S HOUSING : The Lenders Secret : Applicants Have Right to Appraisal Data
Lawyers and federal regulators call it the best-kept secret in the American home mortgage field. Lenders, for their part, aren’t looking forward to the word getting out to consumers.
As one mortgage executive put it, “This could be a real can of worms for us--and frankly we’re not set up to handle it.”
So what’s the secret?
It is that since Dec. 19, 1991, home mortgage applicants have had the legal right to demand and obtain a copy of the real estate appraisal performed in connection with their new loan or refinancing application.
Very few consumers have availed themselves of this new legal right, say federal banking officials, because no one has told consumers about the change in the law. No federal regulations have been issued to lending institutions, and lenders have no affirmative responsibility as yet to tell borrowers about the change.
Some background: Tucked away in a massive piece of banking reform legislation enacted last year were two sentences amending the Equal Credit Opportunity Act. The sentences said essentially: If you as a loan applicant have paid for an appraisal used by the lender to evaluate your application, you are entitled to a copy of the appraisal report if you request it in writing. That’s true whether your application was approved or rejected by the lender.
Sounds innocuous enough, you say. What’s the big deal? For starters, lenders nationwide traditionally have refused to furnish appraisal reports, arguing that they are performed for themselves not the applicant.
More important, lenders fear that loan applicants with copies of appraisals can create huge amounts of mischief.
For example, let’s say that you’ve signed a contract on a house with several standard contingencies or escape clauses. Among them is a financing clause, allowing you 45 days to obtain an acceptable mortgage loan. The home price you agreed upon in the contract with the seller was $200,000.
You now go out and apply for a mortgage with a local lender. Two weeks later you check in with the bank and learn that an appraisal has been completed on the property. Having read this column you know your legal rights, and you request a copy.
The appraisal turns out to be a bucket of cold water. The neighborhood has problems you had never heard about. The house is rated as being in below-average condition. Using three “comparable” home sales closed during the last six months, the appraiser concludes that the house’s collateral value is about $178,000.
You take the appraisal, show it to the seller and demand a lower price. If the seller refuses, you warn, the whole deal is off. Now the can of worms that lenders worry about is wide open. The seller may back off the original price, saving you thousands of dollars. Or the seller might hit the ceiling, accuse the lender of employing an incompetent appraiser and file suit for damages.
Francis X. Grady, a Cleveland lawyer who represents financial institutions, says, “The potential for litigation (arising from disclosing appraisals) is enormous. And of course when people sue, they look for the deepest pockets in sight. That is often going to be the lender, I’m afraid.”
Grady sees other problems arising out of mandatory furnishing of appraisals.
--Spouses in the midst of divorce proceedings may try to use a lender’s appraisal to demand changes in the financial split arising from the retention or sale of the home by one partner. This would involve lenders in contentious legal battles that they would have avoided in the past.
--Loan applicants who are turned down by the lender may argue that a lower-than-expected appraisal was motivated by discriminatory “redlining”--an illegal refusal to lend in certain ethnic or geographic areas.
--Homeowners may use the appraisals to counter tax claims by the Internal Revenue Service or assessments by local tax authorities.
“Lenders are now going to be vulnerable to attack in all sorts of situations” because of the content of their appraisals, Grady said. What’s particularly unfortunate, he adds, is that they have no official guidance on how to even handle consumers’ initial requests.
Proposed regulations on the subject that were due from the Federal Reserve Board in February have been shelved by the Bush Administration’s moratorium on all new regulations until September, at the earliest.
Among the tricky issues the rules must deal with: Must lenders actively inform consumers of their right to get a copy of these appraisals, such as a written disclosure handed out to all applicants? How quickly must a lender provide a copy after the request? How much can the applicant be charged for the copy?
Whatever the federal government ultimately advises lenders, the fact remains the same for you as a borrower: You have the right to see the appraisal you pay for at application. And you are free to use it to your own advantage in sales negotiations or other aspects of your home financing transaction.
