In January, 2014, new home mortgage lending rules aimed at strengthening protections for consumers went into effect in the United States. Created by the Consumer Financial Protection Bureau — a federal agency responsible for regulating financial protection for consumers — the new rules come in the wake of the banking crisis that left millions of Americans in foreclosure, underwater on their home loans or struggling to make payments that they were never financially qualified to make. The law tightens restrictions on the banking industry, spelling out clearly what constitutes a qualified mortgage and placing limits on the fees and terms of some home loans.
However, many lenders already have tightened their lending criteria significantly since 2012, so some of the restrictions will not come as much of a surprise. Borrowers who do not qualify for low-interest mortgage loans will still have the option of applying for a mortgage backed by the Federal Housing Authority; they will just pay more for the loan.
Some of the requirements of the new law seem glaringly obvious from a consumer’s point of view. For example, self-employed borrowers or those whose income includes regular overtime or commission income will have to provide proof of how much money they make. Just asserting that you make 20 percent more than your base pay in overtime every month will no longer work. Additionally, loans to borrowers with an income-to-debt ratio of more than 43 percent are limited.
Another restriction imposed by new law is the elimination of interest-only loans, which were popular right before the housing market collapsed and greatly contributed to thousands of foreclosures in parts of the United States. Consumers who relied on these loans to purchase homes later discovered that they could not meet the higher payments they faced when the interest-only period ended, causing them to default and lose their homes. Adjustable rate mortgages—another popular lending strategy used to help low-income borrowers qualify for a home loan — are still allowed. However, the borrower must be qualified to meet the highest possible payment within the first five years. In other words, you cannot qualify for an adjustable mortgage with very low initial payments that will increase substantially in two to three years unless you are in a position to pay those higher payments now. Further restrictions limit mortgage terms to no more than 30 years and the total cost of points and fees to 3 percent of the loan (for loans of $100,000 or more.) The law also prohibits lenders from providing financial incentives to loan officers for steering customers into high-interest loans or large loans that they cannot afford to repay.
In addition to lending guidelines, the new CFPB regulations contain stricter rules regarding the mortgage banking industry’s obligation to keep consumers informed about the status of their loans. Mortgage servicer’s must now send monthly statements, credit payments on the first day they are received and notify borrowers when their payments are 36 days past-due. Additionally, banks cannot begin foreclosure proceedings until at least 120 days after the last payment was received. Homeowners who file a completed application for assistance and are working with the bank to avoid foreclosure are also protected under the new law.
Undoubtedly, the mortgage banking industry’s response to the new regulations will be some initial belt-tightening, Nevertheless, according to Keith Gumbinger, spokesperson for the country’s largest publisher of consumer loan information, HSH.com, “…everybody has been preparing for the change for months.” The new law simply codifies much of what the industry already has put in place. What’s more, the protections it affords consumers…while they come too late for the many thousands of families who lost their homes…ensure that future home loan transactions are open, honest and above board.