Beginning Friday January 10, consumers shopping for a mortgage will have greater protections to make sure they do not get a loan they cannot afford. The rules, enacted by the Consumer Financial Protection Bureau (CFPB), will help to prevent irresponsible underwriting practices, including practices that contributed to the housing crisis.
The new rules include protections for home buyers and homeowners. One of the key outcomes of the rules is making underwriting requirements more responsible by requiring that lenders thoroughly evaluate borrowers on their ability to repay the loan before approving it. This includes evaluating the borrower’s ability to repay the mortgage in the long-term, taking into account the highest interest rate for the loan in the case of adjustable rate mortgages.
The rules also detail a new class of Qualified Mortgages for which borrowers are presumed to be able to afford. Qualified Mortgages must be easier to understand and are restricted from including risky features like interest-only payments. Points and fees that lenders may charge on Qualified Mortgages are limited as well. A loan over $100,000 cannot be a Qualified Mortgage if points and fees exceed 3% of the loan amount, for example.
The CFPB also instituted new mortgage servicing rules to protect consumers from abusive practices, with state governments having additional options if they deem it necessary. Borrowers must be given mortgage statements in writing with details like how much is owed, how much is applied to interest, principal and escrow, how many payments have been made since the last statement, contact information for the loan servicer, and late payment information.
Borrowers’ payments must be quickly credited on the day they are received, and borrowers cannot be charged for insurance they do not need, or overcharged for insurance. Complaints must be resolved quickly and loan servicers are under new requirements to work with troubled borrowers before starting or continuing the foreclosure process.
Many consumers and bankers have expressed concern that they were not given enough time to transition into this change, and some banks are expected to slow lending as the rules take effect at the end of the week.
The rules offer protection not only for consumers, but also for lenders and investors. Qualified Mortgages have clear definitions, and investors will know what is in securities that qualify for Qualified Residential Mortgage treatment. Lenders also have powerful interest in toeing the line during underwriting.
In the wake of the financial crisis, banks — which have paid billions in settlements and loan buybacks — have tightened credit, even for well-qualified borrowers. The Qualified Mortgage designation was designed to keep banks in line while also offering protection from lawsuits. Because Qualified Mortgages are presumed safe and sound, lenders are protected from lawsuits alleging they saddled borrowers with debt they could not afford it the loan defaults.
On Tuesday, the CFPB announced it will host an event called “Protecting homeowners: New tools for empowering consumers and advocates” on January 10, the same date most of the mortgage rules take effect.
The event will take place in Phoenix and may be viewed on the CFPB’s website. It was described as an “in-depth training presentation … for housing counselors, legal aid attorneys and other advocates.”