Mortgage rules released by the Consumer Financial Protection Bureau (CFPB) will change many of the mortgage lending rules as of January 1, 2014, and affect both banks and other mortgage lenders.
Created by the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) in 2010, the CFPB was required to issue new mortgage rules by January 21, 2013, with those rules scheduled to go into effect not quite one year later. The CFPB met that deadline, and publicized the new rules to banks and other mortgage lenders.
The big changes
The most significant rule is the Ability-to-Pay rule. In brief, creditors must determine a borrower’s ability to repay a mortgage, at a minimum evaluating eight underwriting factors:
- Current or reasonably expected income or assets
- Current employment status
- Monthly mortgage payment
- Monthly payments on other loans
- Current debt obligations, alimony and child support
- Monthly payment for mortgage-related obligations
- Monthly debt-to-income ratio or residual income
- Credit history
Lenders must use reasonably reliable third-party records to verify the information. In addition, lenders are encouraged to refinance "non-standard mortgages," such as those with balloon payments, into "standard mortgages" with fixed rates for at least five years that reduce consumers’ monthly payments.
The other significant new regulations affect mortgage servicing and certain fees, including:
- No dual compensation for loan originators
- No prohibition on consumer payment of upfront fees and points
- Individual loan officers, mortgage brokers, and creditors must be "qualified" and, when applicable, registered or licensed under state and federal law
- Mandatory arbitration clauses are not allowed
- Record-keeping requirements for loan originators and mortgage brokers are now three years
- Subprime mortgage loans can only be made if the creditor obtains a written appraisal; the appraisal is performed by a certified or licensed appraiser; and the appraiser conducts a physical property visit of the interior of the property
These rules aim to curb mortgage delinquencies, foreclosures, real estate "flipping," and costly surprises.