THE NATION’S HOUSING : Borrower May Be Given Access to Appraisal Report

Psssst! Want to get a complete copy of the real estate appraisal your lender used in evaluating your application for a home loan or refinancing? No problem.

Under a proposed new federal regulation, virtually every home mortgage lender in the country will have to furnish you a copy of your appraisal within 15 days after receipt of your written request--as long as you paid for the appraisal. Equally important, lenders will have to tell you up front in writing that you have a legal right to demand a copy of your home appraisal.

That’s the upshot of a long-awaited proposed rule issued earlier this month by the Federal Reserve Board. The Fed, which regulates fair credit standards, is expected to adopt a final rule by next spring. The regulation would implement a little-publicized amendment to the Equal Credit Opportunity Act, passed by Congress a year ago.

Though the amendment’s original purpose was to enable borrowers to determine whether a faulty appraisal caused them to be denied credit, mortgage experts and federal officials say the change has far-reaching significance for home buyers and refinancers.

Many lenders traditionally have treated real estate appraisals as their own confidential information, and have restricted borrowers’ access to them. This is despite the fact that in the vast majority of home loan transactions, the borrower--not the lender--pays for the appraisal.

Part of the reason for the lack of disclosure, according to industry experts, has been the “Pandora’s box” factor: Borrowers with appraisal reports could “get into all sorts of mischief,” said Francis X. Grady, a Cleveland banking attorney. They could, for example, use their appraisal report as a negotiating tool with a home seller--particularly when the professional appraiser’s estimate of the home’s true market value turns out to be lower than the sale price on the contract.

The unhappy buyer could “nitpick” through the appraisal, according to Grady, seizing on the appraiser’s critical evaluations of the property’s location, condition, environmental risks and other factors. The buyer might then threaten to back out of the contract altogether unless the seller agreed to modify the price or other terms.

Borrowers “could also drive (their lender) nuts,” said Grady, “by claiming the appraisal contained inaccuracies,” or by arguing that their loan application was rejected due to the practice of “redlining”--illegal discrimination against entire neighborhoods because of racial or ethnic composition.

Under the proposed new regulation, the opening of Pandora’s box is likely to become a more routine occurrence in home real estate transactions. The rule would apply to all loan applications involving a “residential structure containing one to four units.” It would also cover loans on mobile homes and cooperative units--even if co-ops under state law are not treated as real estate. Excluded would be mortgages secured by unimproved land--that is, with no residential structure on it--and loans for multifamily dwellings with five or more units.

Lenders will have to provide prospective home loan borrowers with a “written notice” no later than 15 days after receipt of the mortgage application. The notice must inform all borrowers that upon written request, the lender will furnish them a copy of the appraisal used in underwriting the mortgage.

Home buyers or refinancers whose loan applications are either accepted or rejected will be allowed to request a copy of their appraisal any time during a 90-day period after they are informed of the lender’s decision on the loan application. Borrowers who withdraw their applications before getting a decision--but after paying for an appraisal--will have 90 days to request their appraisal following the date of withdrawal.

After these deadlines, lenders will not be obliged to provide copies of the appraisal, according to the proposed regulation. Significantly, the rule emphasizes “complete” disclosure. Lenders are required to provide copies not only of the signed appraiser’s report on the property, but all other documents “relied upon by a creditor in evaluating the market value” of the home. This would effectively cover situations in which appraisers carefully eliminated discriminatory “redlining” data from their formal appraisal reports to avoid the law, but lenders used other, third-party or internal data to reject applications.

Borrowers who request copies of their appraisals under the proposed new regulations can expect to pay “reasonable” copying fees and administrative expenses. Those charges are likely to vary from lender to lender, said a federal official, but “shouldn’t be so great as to discourage borrowers” from exercising their rights under the law.

Some lenders who prefer to keep their appraisal reports confidential may reverse their longstanding tradition on payments for appraisals, however. One Virginia home buyer, who asked not to be identified, reports than when he demanded a copy of his appraisal from a local lender who rejected his application, the bank instead sent him a check for $375.

The lender paid for the appraisal, in other words, rather than open Pandora’s box to a disgruntled consumer.