With the New Year comes new protection for consumers seeking mortgages. On Jan. 10, the Consumer Financial Protection Bureau began requiring lenders to make sure borrowers can afford to repay loans based on their income, debt and credit history.
That sounds all very logical but these requirements have not been enforced in the past. Back during the last housing boom, many borrowers received loans they could not afford, leading to record numbers of foreclosures in recent years. Scotty Ball, a partner at Stewart Melvin & Frost who specializes in residential and commercial real estate law, is here to help us understand the new mortgage lending rules and what they mean for all of us.
Question: What led to these new regulations from the Consumer Financial Protection Bureau that are going into effect this year?
Scotty: You’re right. The new regulations are logical, but during the housing boom, common sense was not being used — by borrowers or lenders — in some cases. Borrowers received “no or low documentation” loans where they did not have to provide much financial information to the lender.
Common at the time were adjustable rates loans with initial low interest rates or interest-only loans. The principal balance would increase over time and the borrowers ended up with surprise payments they could not afford. The new regulations curb these types of hidden surprises for borrowers.
These new rules were issued in 2013 but are taking effect now; so many lenders are already following these guidelines. The rules also provide legal protection for lenders. Under the new rules, if a lender makes a qualified loan, it is presumed to be one that the borrower can repay and that gives the lender some legal protection.
The rules also define a new class of mortgages for which qualifying borrowers are presumed to be able to afford and repay. These mortgages are called Qualified Mortgages.
Question: What’s different about a Qualified Mortgage?
Scotty: Beginning Jan. 10, lenders making any residential mortgage loan are now required to assess a borrower’s ability to repay the loan. A Qualified Mortgage, which is presumed to meet this requirement, is a loan that avoids certain features (such as negative amortization or interest-only payments) that might sneak up on the consumer and put the loan at risk. It is also easier to understand – and therefore safer.
In general, the borrower also must have a total monthly debt-to-income ratio — including mortgage payments — of 43 percent or less.
The new rules limit the points and fees lenders can charge when they want to make a qualified mortgage. This requirement responds to the extremely high points and fees some borrowers paid during the mortgage crisis. For example, a loan of more than $100,000 can’t be a Qualified Mortgage if it has points and fees that are more than 3 percent of the loan amount.
The Qualified Mortgage provides one way to meet the ability-to-repay requirement. But, with the exception of no-documentation and low documentation loans, the new rules do not ban other kinds of mortgages. The rules simply state that lenders must make a reasonable, good-faith effort to determine that a consumer can repay a loan based on their documented income, assets, debts, and some other common factors.
Question: Do the new regulations outline specific guidelines or qualifications for making mortgage loans?
Scotty: There are eight factors that lenders must consider. The rules do not preclude a lender from considering additional factors, but they have to consider these eight factors:
•The borrower’s current or reasonably expected income or assets that will be used to repay the loan.
•The current employment status of the borrower.
•Monthly mortgage payment for the loan which is calculated using the introductory or fully-indexed rate – whichever is higher.
•Monthly payment on any simultaneous loans secured for the same property
•Monthly payments for property taxes and insurance, and other costs related to the property such as homeowners association fees.
•Debts, alimony, and child support obligations.
•Monthly debt-to-income ratio
Question: From the borrower’s perspective, what are some of the new consumer safeguards on mortgages rules that are important for us to know about?
Scotty: Homeowners will like that they will receive a clear monthly statement from the mortgage service company that handles the collection of your loan, so you can easily see how the company is crediting your payments. The mortgage servicers also must credit your payment on the day it is received and respond quickly to fix any mistake they make.
If you have an adjustable-rate mortgage, your mortgage service company must provide you early notice if the interest rate is changing. This allows you to be have time to shop for a new loan or try to get help if you can’t afford the higher payment. Also, there are rules the mortgage service company must follow if you fall behind on payments. They now must contact the borrower if they are 36 days late on their loan payment and they can’t start foreclosure until the borrower is more than 120 days late on the loan.
This is an important part of the rules, because — according to the Mortgage Bankers Association — more than a million loans were 90 days or more late in the third quarter of 2013.
Question: No matter how well we plan, there are unforeseen factors that can still keep us from making our mortgage payments. Under the new rules, what happens if we cannot make our mortgage payment?
Scotty: The new rules require mortgage servicers to help borrowers who fall behind on their mortgages by providing an explanation of all their available options.
If a borrower submits an application for assistance early enough — usually this is called a “loss mitigation application”— the mortgage servicer must evaluate the borrower for all the options that may be available to the borrower such as lower monthly payment, a reduced interest rate, or a short-sale of their home. These new rules should eliminate the need for multiple applications to be considered for different foreclosure alternatives.
If the mortgage servicer denies a loss-mitigation application, the servicer must explain why the borrower was rejected. A borrower who filed an application before foreclosure is entitled to appeal mistakes the servicer may have made in evaluating the borrower for a loan modification. These rules should eliminate or sharply reduce the runarounds and painful surprises that have hurt so many homeowners.