Although many economists claim the recession is over, millions of Americans are still reeling from its financial effects. In particular, communities of color continue to be disproportionately affected by billion-dollar losses in family wealth. New mortgage rules, effective this month, offer a strong foundation to begin rebuilding what has been lost. These new rules will provide protections for consumers whether they are struggling with troubled mortgages, looking to buy a home or seeking access to credit.
Summarizing the reasons for the new rules, Richard Cordray, Director of the Consumer Financial Protection Bureau (CFPB) recently said, “Consumers want – and need – someone to stand on their side and provide safeguards against bad mortgage deals that ruin their credit, cost them their homes, and saddle them with additional problems. . . .No debt traps. No surprises. No runarounds. These are bedrock concepts backed by our new common-sense rules that take effect on January 10.”
A central part of the new rules is a new designation of a Qualified Mortgage (QM) that sets standards that apply to all lenders and covers about 95 percent of loans currently in the marketplace. QM loans are restricted from having the kind of risky features that caused the financial crisis. QM loans must be fully amortization, meaning that loan balances cannot increase as payments are made. Other key QM characteristics require that:
- Loan terms cannot exceed 30 years;
- Lenders are required to determine a borrower’s ability to repay the loan, reviewing consumer income and assets against debt and other obligations beyond an initial teaser rate;
- Points and fees for the total loan amount are capped at 3 percent with an adjusted threshold for smaller loans; and
- Lenders offering adjustable rate loans cannot use teaser rates to underwrite these loans and are to use the maximum rate during the first five years of the loan.
Another CFPB rule bans “yield-spread premiums,” the financial incentives formerly paid to brokers for steering borrowers into higher cost loans rather than those that were cheaper and for which they qualified.
It is important to note that none of these new rules affects the required amount of a mortgage down payment. Secondly, these rules apply to new mortgages applied for after the January 10 effective date.
In response to these rules, Barry Zigas, the director of housing policy for the Consumer Federation of America was swift to express his approval. “Consumers are finally going to be in an environment where their ability to repay a loan will be the fundamental determining factor about whether they will get a loan or not. This is a terrific week for Americans” concluded Zigas.
Similarly, Chris Polychron, president-elect of the National Association of Realtors, said, “These regulations will go a long way to protecting consumers from receiving loans that may be inappropriate for them and gives them some additional legal protections.. NAR supports these changes and has provided input throughout the rulemaking process.”
For borrowers with existing mortgages, as well as future borrowers, other rules will now affect mortgage servicing, i.e. how house payments are collected and managed. Loan servicers must now provide borrowers with a monthly statement that shows the interest rate, loan balance, escrow account balance and how payments are applied. Servicers cannot begin foreclosure proceedings until after 120 days of delinquency, giving borrowers time to apply for loan modifications before initiating a foreclosure process.
In response to critics of these mortgage servicing reforms, Director Cordray said, “Our rule means simply that mortgage servicers must now do their jobs . . . Over the past year, we have heard plenty from realtors around the country who are just as frustrated as consumers at poor mortgage servicing practices.”
A new web-based resource by the Center for Responsible Lending brings together fact sheets on the new rules, related analysis and testimony. For more information on these new rules visit: http://rspnsb.li/KxNeFa.
As CRL President Mike Calhoun has said, “Families across the country need an opportunity to rebuild their household balance sheets after the worst financial crisis in decades. . . .The CFPB is setting the course for a financial marketplace with greater transparency and accountability. Consumers, responsible lenders and out nation’s economy all benefit from the improved markets that result from this work.”
Charlene Crowell is a communications manager with the Center for Responsible Lending. She can be reached at Charlene.firstname.lastname@example.org.