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WASHINGTON, DC-Today, U.S. Senator Bob Casey (D-PA) introduced an amendment to the Truth in Lending Act to combat mortgage fraud and prevent “house flipping schemes.” The amendment, introduced with the support of Senator Mel Martinez (R-FL), would require a second independent appraisal for high-risk, high interest mortgages.

“A disturbing byproduct of the increased rates of foreclosures is unscrupulous individuals trying to profit from other people’s losses,” said Senator Casey. “Stopping these flipping schemes will help give confidence to those buying homes that appraisals on their new homes are accurate and won’t come back to haunt them later.”

In a flipping scheme, an unscrupulous mortgage broker purchases a discounted property that is often out of foreclosure. An appraiser then fraudulently inflates the property’s value and it is purchased by an unsuspecting homebuyer. Later, when the buyer realizes the fraud they can find that their home is worth significantly less than what they paid. These homeowners often end up in foreclosure, the lender is left with a worthless property, the community is devastated by abandoned homes and the scammers walk away with thousands of dollars in inflated fees.

This amendment is aimed at protecting consumers and financial institutions by addressing shortcomings in the appraisal process. The amendment would ensure an accurate appraisal by, among other things, prohibiting interference with an independent appraisal and requiring lenders to obtain a second, independent appraisal before extending credit on certain properties. This would be done at no cost to the consumer, instead being paid for by the lender. The amendment would also prohibit dishonest brokers and appraisers from artificially inflating the value of properties, while retaining the ability of legitimate investors to improve properties for resale. The Truth in Lending Act would be amended in the following ways:

1) Requiring a physical property visit and a second independent appraisal for high-interest, high-risk mortgages for properties sold at a higher price within 180 days of its last purchase;

2) Ensuring appraiser independence by prohibiting interested parties from improperly influencing or attempting to improperly influence a property appraisal;

3) Ensuring that appraisers are qualified and follow certain minimum standards;

4) Requiring a mortgage originator to make available to the credit applicant all appraisal valuation reports no later than three days prior to the transaction closing date;

5) Setting increased civil penalties for violating these provisions.