New Residential Mortgage Rules In Effect January 10, 2014
The housing crisis gave rise to the Dodd-Frank Act, which authorized formation of the Consumer Financial Protection Bureau (CFPB). The CFPB describes their duties:
Congress established the CFPB to protect consumers by carrying out federal consumer financial laws. Among other things, we:
· Write rules, supervise companies, and enforce federal consumer financial protection laws
· Restrict unfair, deceptive, or abusive acts or practices
· Take consumer complaints
· Promote financial education
· Research consumer behavior
· Monitor financial markets for new risks to consumers
· Enforce laws that outlaw discrimination and other unfair treatment in consumer finance
Prior to passing Dodd-Frank and formation of CFPB, Congress worked on some areas that needed attention, i.e., linking early disclosure (Good Faith Estimate or GFE) information to the loan closing statement (HUD-1). Those rules limited how much, if any, the GFE numbers could vary from final numbers on the HUD-1. These rules were designed to accurately inform the consumer in the early stages of obtaining a loan how much the new loan would cost.
The new CFPB rule carries that consumer protection a step further. The new rules will break loans down into two categories, Qualified Mortgages (QMs) and Non-Qualified Mortgages. At least for the next 7 years, all loans eligible to be purchased, guaranteed, or insured by the VA and USDA or purchased or guaranteed by Fannie Mae or Freddie Mac or insured or guaranteed by FHA or HUD must be QMs.
Remember the low-doc, no doc or stated income loans? A QM is required to have income verification to assure the borrower can afford the loan. The borrower’s debt-to-income ratio must be 43% or less. That means the borrower’s payments on the new loan plus payments on all other existing loans must not exceed 43% of the borrower’s gross income. Also, QMs must not have risky features such as negative amortization or interest-only payments. And all QM loans in excess of $100,000 are limited to no more than 3% in points and fees.
The new rules impose responsibilities on lenders to provide clear monthly statements, fix mistakes promptly and credit payments the day they are received. If the loan has an adjustable interest rate, notice of a rate adjustment must be sent to the borrower early enough to allow him to shop for a new loan or get assistance with the new payment, if necessary or desirable.
Lenders are also required to contact the borrower within 36 days after the loan goes delinquent and cannot begin foreclosure until the loan payment is more than 120 days past due.
“Dual Tracking” is not allowed. This means if a borrower has submitted a complete “loss mitigation application”, foreclosure cannot begin until all actions on the application have come to a conclusion. Further, the lender must consider all reasonable loss mitigation alternatives before the application can be denied.
Lenders making residential loans need to become familiar with the new rules and review their policies and procedures to be sure they are compliant when January 10, 2014 rolls around.
Robert Wenger has worked in banking and real estate finance since 1972, serving clients in California, Oregon, Nevada, Utah, Arizona, Colorado, Kansas, Nebraska and Hawaii. During his career, Mr. Wenger has been responsible for originating and servicing agricultural loans and managing over 100,000 acres of agricultural property for an insurance company, managing a $450 Million special asset portfolio for a niche lender and managing special assets and loan operations at three community banks. Mr. Wenger is a California real estate broker and has provided expert witness services in the areas of banking, real estate finance and agriculture for the past 10 years and has instructed home buyer education classes for the past 7 years.