The Consumer Financial Protection Bureau has issued new mortgage rules, effective January 10, that provide protections for consumers struggling with troubled mortgages, looking to buy a home or seeking access to credit.
A central part of the new rules is a new designation of a Qualified Mortgage (QM), which 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 three percent with an adjusted threshold for smaller loans
- · 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 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.
These rules apply to new mortgages that people apply for after the January 10 effective date. None of these new rules affects the required amount of a mortgage down payment.
“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,” said Richard Cordray, director of the Consumer Financial Protection Bureau (CFPB).
“No debt traps. No surprises. No runarounds. These are bedrock concepts backed by our new common-sense 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,” Zigas said.
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.”
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.
“Our rule means simply that mortgage servicers must now do their jobs,” Cordray said. “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, visit http://rspnsb.li/KxNeFa.
Charlene Crowell is a communications manager with the Center for Responsible Lending. She can be reached at Charlene.crowell@responsiblelending.org.