In early January, millions of Americans made New Year’s resolutions intended to improve their lives – resolutions that may or may not be fulfilled. At the same time, a consumer watchdog group implemented new rules intended to improve protection for millions of mortgage borrowing Americans – rules that are meant to stick.
The Consumer Financial Protection Bureau – an independent federal agency responsible for regulating financial protection for consumers – instituted new laws in mid-January designed to provide greater safeguards and information to borrowers and to prevent shady loans and loan-marketing strategies that were rampant prior to the recent financial meltdown.
Under the new requirements, a borrower’s ability to repay must be verified by the lender. Furthermore, loans must meet a qualified-mortgage standard based on several criteria, including:
• The borrower’s debt-to-income ratio cannot exceed 43 percent.
• Fees and points must be limited to no more than 3 percent of the loan (for loans exceeding $100,000).
• The loan cannot have features like as interest-only periods, negative amortization or a loan term greater than 30 years
• Adjustable-rate mortgages have to be underwritten to the highest possible payment in the first five years. Put another way: The borrower can’t get approval strictly based on the ability to afford a low initial payment that’s intended to rise significantly a few years later.
Further, mortgage loan servicers now are obligated to send monthly statements, credit payments on the day they’re received, and inform borrowers if they’re 36 days past due on payments. Loan servicers also are not allowed to begin a foreclosure process until at least 120 days following the borrower’s last payment or while they’re collaborating with a homeowner who has filed a completed application for help.
Brian Koss, executive vice president with Mortgage Network in Danvers, Mass., says these rules provide greater security. They also provide more limitations for borrowers who don’t fit exactly within the new guidelines.
“Now, if a lender takes liberties with a particular rule, such as qualifying a borrower, they are violating a law, which carries greater risks than before,” Koss says. “Before the new rules took effect, lenders could be flexible with such borrowers. Today, they’re not taking any chances.
“The most significant new rule, perhaps, is meeting the new debt-to-income ratio requirement of 43 percent. Borrowers who cannot will likely face less favorable terms to get a loan,” Koss adds.
Consider, for example, a prospective buyer who earns $5,000 per month. He cannot have more than $2,150 in monthly debt (including mortgage payment, credit card bill, auto and student loans, etc.) or he won’t qualify for many mortgage loan types.
“At that point, he would have to apply for an FHA loan at a cost of an extra hundred dollars or more per month,” says Tim Lucas, editor of MyMortgageInsider.com. These recent regulations don’t apply to FHA, VA, USDA and some conventional home loans. “The new rules could cost some home buyers serious green in the long run,” Lucas says.
Catherine Blocker, senior vice president of production operations with Guild Mortgage Co. in San Diego, agrees that the CFPB laws will result in stricter documentation requirements and a longer loan process for borrowers.
“Obtaining credit, particularly for lower-income borrowers and first-time homebuyers, will become more difficult. This is because many lenders will apply very conservative underwriting analyses when considering the borrower’s ability to repay out of fear of making a non-qualifying mortgage loan,” says Blocker. “The new CFPB rules are complicated, complex and burdensome for lenders to implement,” Blocker says. “The unintended consequence is higher lending costs and a tighter credit box.”