The new CFPB New Mortgage Rules recently took effect on January 10th 2014.
You’ve probably heard several things about how this is effecting banking and lending institutions, but you may still not be sure what this means to the consumer.
First let’s take a brief look back in the not so distant past…In 2008, the rise in home foreclosures was viewed by many as the result of sub-standard mortgage lending practices. Subsequently, Congress passed the Dodd-Frank Act in 2010, which created the CFPB and set forth a number of financial industry regulations aimed at protecting consumers, including some pertaining to mortgage lending. In January 2013, the CFPB issued mortgage rules that implement the mortgage provisions set forth by Congress under the act.
The new rules which took effect on January 10th broaden coverage of existing ability-to-repay rules, which require a lender to make a reasonable, good faith determination that a consumer has the ability to repay a loan. The rules extend coverage of the ability-to-repay rules to the majority of closed-end transactions secured by a dwelling (with certain exceptions). In addition, the rules set forth specific procedures a lender must follow when determining a borrower’s ability to repay a loan, including the consideration and verification of certain consumer information (e.g., income, employment status) and the calculation of the borrower’s monthly mortgage payment.
The rules also center on what are referred to as Qualified Mortgages. According to the Dodd-Frank Act, lenders that issue Qualified Mortgages will receive a presumption of compliance with ability-to-repay rules, thereby reducing their risk of challenge from a borrower for failing to satisfy ability-to-repay requirements.
The rules specify various requirements that a loan must meet in order for it to be considered a Qualified Mortgage, including:
- Limits on risky loan features (e.g., negative amortization or interest-only loans)
- Cap on a lender’s points and fees (3% of the loan amount)
- Certain underwriting requirements (e.g., 43% monthly debt-to-income ratio loan limit)
- The new mortgage rules were mainly put into place as a way to end irresponsible mortgage lending and ensure that borrowers will only be able to obtain a mortgage loan that they can afford to pay back.
Proponents view the rules as welcome industry safeguards that simply mirror responsible mortgage lending practices that are already in place. However, some mortgage-industry experts fear that the new rules may end up making obtaining a mortgage loan more difficult than it has been in the past–especially for borrowers who have a high debt-to-income ratio. Borrowers may also find themselves burdened with the task of providing lenders with additional documentation that they may not have had to in the past.
But what does all this mean to you? The new mortgage rules mean you will have more information and more protection when you’re shopping for a loan, and while you own your home.
In the run-up to the housing crisis, some lenders made loans without checking a borrower’s income, assets, or debts. That turned out to be a pretty bad idea. And, when many borrowers couldn’t repay their loans, the economy took a devastating hit.
The CFPB new mortgage rules help protect consumers by requiring lenders to make a “good-faith, reasonable effort” to determine that you are likely to be able to repay your loan. That means the lender will check and verify your income, assets, debts, credit history, and other important financial information. And no more qualifying consumers based only on those initial “teaser” rates that trapped many new homebuyers.
Lenders who meet certain requirements called Qualified Mortgages–or QMs– are presumed to have made that good-faith, reasonable effort to check the applicant’s ability to repay. QMs have several characteristics that protect consumers.
First, QMs can’t have risky features like negative amortization or no-interest periods. Second, QMs are available with some exceptions to borrowers who have a monthly debt-to-income ratio of 43 percent or less, meaning that the total of their monthly mortgage payment, plus other fixed debts like car loans, is not more than 43 percent of their monthly gross income.
Most people taking out a mortgage now have a debt-to-income ratio of around 38%
Consumers will also have less to worry about when hiring someone to find a mortgage. Loan officers and mortgage brokers have to follow rules to protect consumers from certain conflicts of interest. That means anyone you pay to help you find a mortgage generally can’t also be paid by someone else. And the loan officer or mortgage broker can’t get paid more to put you into a loan that has a higher interest rate.
The new rules empower all consumers to get important more information about their mortgage. Consumers will now get a new periodic mortgage statement or coupon book that gives important information about monthly payments. If you have questions about your mortgage or you believe your servicer has made a mistake, the servicer is required to respond to your inquiries quickly.
If your financial situation changes and you are having trouble making your mortgage payments, servicers now have to reach-out under certain circumstances and send written information describing how you can apply for the options available to avoid foreclosure. During the housing crisis, mortgage servicers were often ill-prepared to help borrowers in trouble. Important paperwork was often lost and borrowers were frustrated by services who couldn’t give them accurate information about their options for avoiding foreclosure. Now your servicer has to ensure that employees assigned to help you will be able to answer your questions and important documentation won’t go missing.
You can think of all these changes as a “back to basics” moment for the mortgage market: no debt traps, surprises, or runarounds. And a market where if you run into trouble paying your mortgage, you will have a fair shot at all the options available to help you avoid foreclosure.