Through the Dodd-Frank Act, Congress gave the Consumer Finance Protection Bureau (CFPB or the Bureau) the responsibility to adopt specific mortgage rules, which were issued in January 2013 and took effect on January 10, 2014.
The new mortgage-lending rules aim at cultivating the bedrock concepts that were devoid in the mortgage-lending process that culminated in the mortgage crisis. Now, the CFPB has codified a back-to-basics approach that seeks to create a system of no debt traps, no surprises, and no runarounds.
Overall, positive changes were made by the Act that strengthens protections by granting them federal law status. These new regulations are now federal law, as apposed to mere guidelines, and, in many cases, create a private right of action.
The two most significant requirements that mortgage lenders are being asked to comply with are the “Ability to Repay” rule and “Qualified Mortgage Standards” under the Truth in Lending Act. These requirements are explained below.
Ability to Repay
Before you get a mortgage loan, the lender must make a reasonable, good faith determination the borrower has the ability to repay the loan.
The lender generally must consider the following information using reliable documents, such as a W-2 or pay stub, when reviewing the borrower’s ability to repay:
Current income or assets
Current employment status
Monthly payment for the mortgage
Monthly payments on other simultaneous mortgage loans
Monthly payments for other mortgage-related expenses (e.g. property taxes)
The lender may also consider how much of the borrower’s money remains each month after paying her debts.
After the lender has met the “ability-to-repay” requirements, the lender can offer the borrower a Qualified Mortgage, which establishes certain protections from liability and can provide lenders certain legal protections even if the borrower fails to repay the loan.
All Qualified Mortgages must contain certain product features. For example, the loan cannot have particular risky features like negative amortization, interest-only, or balloon loans. As such, Qualified Mortgages cannot have the following loan features:
Payment of interest without paying down the principal, commonly referred to as an interest-only period
Increases in loan principal over time, even though payments are made, called negative amortization
Larger-than-usual payments at the end of the loan term, known as balloon payments (although, allowed in some limited circumstances)
Loan terms that are longer than 30 years
Qualified Mortgages have a few more features. For instance, Qualified Mortgages limit how much of the borrower’s income can go toward debt. Most Qualified Mortgages require that the consumer’s monthly debt is at or less than 43 percent of her monthly pre-tax income. This protection is to make sure the borrower is not taking on more house than she can afford. Also, Qualified Mortgages don’t allow lenders to charge borrowers excessive upfront points and fees. Typically, upfront fees and charges cannot add up to more than 3% of the mortgage balance.
Additionally, and fortunately for many, the Qualified Mortgage is not taking a one-size-fits-all approach. There is no specified minimum down payment or credit score requirement. The lack of these factors is significant. It ensures that first time homebuyers can still have a chance at a loan as they don’t have to muster up an enormous sum for a down payment. Also, because there is technically no credit score requirement, lenders can loosen currently tight underwriting standards.
However, even if a loan is not a Qualified Mortgage, it can still be an appropriate loan so long as the lender documents a reasonable, good faith determination that the borrower is able to repay the loan based on common underwriting factors determined by the past underwriting guidelines.
Effects of Change
These new regulations provide significant protections to borrowers by requiring additional appraisal by the lenders. It also requires lenders to retain evidence of compliance with the rule for three years. But, borrowers are feeling the tightened strings as well.
For those who have been through the mortgage process before, you will likely notice many differences in the process that might feel like hurdles. Don’t be surprised if you are asked to produce numerous pay stubs or provide explanations for any stray influxes of cash. You may even find yourself getting frustrated with the seemingly overindulgent inquiries and requests of the lenders, but remember these steps are there for your protection. The days of instant approval, rubber-stamping and haphazard review are over. So, try to be patient and provide the clearest financial statements and evidence requested by the lenders. It now takes some work, as it should, to get a mortgage that is both safer for you and the lender.
For further reading access “Help for Struggling Borrowers - A Guide to Mortgage Serving Rules Effective on Jan 10. 2014” at http://files.consumerfinance.gov/f/201312_cfpb_mortgages_help-for-struggling-borrowers.pdf
Also, if you have a problem with your mortgage, you can also submit a complaint with the CFPB:
By telephone: (855) 411-2372
By mail: Consumer Financial Protection Bureau
P.O. Box 4503
Iowa City, Iowa 52244
By fax: (855) 237-2392