How Аre CFPB's New Rules Going to Affect Mortgage Lending?
As you are probably well aware the bursting of the housing bubble in 2008 led to the adoption of аn important piece of legislation called the Dodd-Frank Act Wall Street Reform and Consumer Protection Act, commonly referred to as Dodd-Frank. As the name suggests, the law aims to protect mortgage borrowers from fraudulent or malicious practices exercised by financial institutions. Earlier last month the Consumer Financial Protection Bureau (CFPB) announced a new set of rules in compliance with the Act. As a mortgage broker you need to be well acquainted with them and educate your clients about their implications. Here are some of the most important ones.
Ability to Repay
The focal point of the new mortgage rules is a new way of assessing a borrower’s financial viability, called Ability to Repay. A lender must now assess whether a borrower will be able to make their monthly payments for the duration of the loan. That sounds like a very commonsensical requirement, right? Yet, many people are surprised to find that this has not been part of the law until now.
In an effort to underwrite more loans, some lenders in the past would lure homebuyers with so-called “teaser” rates. These rates are Adjustable-Rate Mortgages (ARMs) that offer a limited-time (typically, a few months) lower rate, which many borrowers fall for. After the end of the teaser period, rates become gradually higher and reach the full indexed rate. The problem with teaser rates is that lenders can give an estimate of the borrower’s ability to pay back the loan that is based solely on the teaser rate. But since the fully indexed rate is significantly higher than the teaser rate, some borrowers would inevitably find it impossible to make their monthly payments, leading to defaults and delinquencies.
Luckily for mortgage borrowers, the new regulations include a restriction of so-called “steering”, a malicious practice that gave many loan officers and mortgage brokers a bad name. Steering occurs when a mortgage broker pushes their clients into high interest loans or other unfavorable contract conditions because of financial incentives. Now borrowers can rest assured that the law will protect them against such schemes.
Another important change brought by the new mortgage regulations is the introduction of the so-called Qualified Mortgage (QM). One of the most important features of QMs is that the borrower’s monthly debt cannot exceed 43% of their monthly income. That doesn’t pertain to mortgage debt only, but all debts combined, such as student loans, credit card payments, utilities, etc.
Certain exceptions do apply, such as the possession of assets which are deemed to minimize the risk. If the loan qualifies for resale to Freddie Mac, Fannie Mae or a federal housing agency, an exception can also be made. This effectively puts an end to jumbo loans.
QMs won’t include many of the risky features we’ve seen in the past. Term length cannot exceed 30 years and interest-only payments are banned. Minimum payments have also seen an adjustment. No longer can the borrow pay monthly bills so small that his mortgage balance actually keeps growing. A very important change is introduced to upfront fees. All of them combined cannot exceed 3% of the total cost of the mortgage when the loan is larger than $100,000.
As part of the new mortgage rules, there is a call for greater transparency. For one thing, monthly statements will now come with a detailed breakdown of how much of the monthly payment went to escrow, transactional or service fees, etc. Whenever a borrower gets an increase in the interest rate, the lender is required to notify them by mail. Inquiries related to a borrower’s account must be responded to within 5 days and addressed in no more than 45 days. Missing payments will also be dealt with in a timely manner. Lenders have 36 days to contact borrowers with late payments, a far cry from the current average of 414 days.
People who do not meet the specific criteria mentioned above, needn’t worry just yet. Loans can still be underwritten even if they don’t meet the QM requirement and some large lenders have already said they are determined to do so and bear the potential legal consequences. Of course, lenders must still make sure that the borrower is able to repay the loan. Should they choose not the meet QM requirements, however, lenders will be offered less legal protections in case the borrower defaults. Currently 92% of the loans already conform to QM standards, according to data by the CFPB.
In light of the recent introduction of these rules, you can expect a lot of questions from clients soon. Make sure your practice is legalized and bonded, so you can be ready to welcome the new wave of potential borrowers. It’s too early to say whether these new changes will make it harder for people to obtain mortgages, but one thing is clear – expect a lot more paperwork.