Starting January 21, mortgage borrowers will know precisely what their mortgage product cost them and other terms based on new regulations released by the Consumer Financial Protection Bureau (CFPB). The primary purpose of the new rules is to prevent mortgage lenders from making loans to borrower who do not have the resources to pay off the mortgage, according to CFPB’s director Richard Cordray.
Purpose of Mortgage Industry Guidelines
The impetus behind the requirements was the mortgage crisis, which aggravate the financial meltdown in late 2008. The eventual housing market collapse resulted in historic levels of mortgage delinquencies and foreclosures.
Many mortgage lenders that originated home loans lowered the underwriting criteria. As a whole, the mortgage lending industry failed to enforce minimum credit scores or adequately verify borrowers’ documentation. Banks really did not make a solid determination of the ability of borrowers to repay their home mortgages.
The Dodd-Frank Wall Street Reform and Consumer Protection Act give the CFPB the authority to implement major changes to the U.S. residential mortgage system--especially centered on the “ability-to-repay” criteria.
Understanding the New Rules
William Emerson, the president of Quicken Loans, states that the new guideline covers virtually the entire mortgage lender industry—credit unions, savings and loans, community lenders, and national banks.
Going forward, loans that meet the new standards required by CFPB to approve only “qualified mortgage.” Qualified mortgages protect lenders from litigation by homeowners or mortgage-backed security or bond investors.
Here are the seven standards lenders must use to determine a qualified mortgage:
- Ensure the borrower has the income and assets adequate for the loan repayment;
- Verify the borrower’s employment history;
- Require minimum credit scores
- Loan has affordable monthly payments
- Borrower can afford to make other debt s related to the property—home equity loan
- Borrower must have the resources to pay for other expenses like home insurance, property taxes, etc.
- Mortgage lenders must consider the borrowers’ other obligations – student loan, auto loan, Credit scores must meet minimum standards;
If t a borrower cannot meet all of the guidelines listed above, it is still possible for the person to obtain a mortgage. The loan cannot exceed 43% of the individual’s pre-tax income.
Restrictions on Certain Products
The rules prevent mortgage lenders from using “interest-only loans” or “negative-amortization loans” to qualify borrowers for mortgages. The mortgage balances for these loans grow over time. In addition, lenders cannot use teaser rates loans to make a buyer eligible for a mortgage.
The interest rate on these teaser rate products adjusts after the initial term expires. The rules also prohibit loans from exceeding 30 years. Mortgage lenders cannot charge borrowers excessive points and other upfront fees.
The regulation does not prevent lenders from offering these financial products to their customers. The sole purpose of putting the client into this type of mortgage cannot be to quality the person for a loan.
Borrowers who seek jumbo loans must also qualify under the ability -to-repay rule. Jumbo loans are not guaranteed by Fannie Mae or Freddie Mac. However, industry experts expect banks will follow the qualified mortgage criteria to protect themselves. The new rules do not apply to borrowers completing mortgage refinances for adjustable-rate mortgage subprime loans and other risky mortgage products.
Although the rules go into effect in a few weeks, mortgage lenders have 12 months to fully implement the guidelines into their operations.