The real estate collapse and high number of home loans that went into default has attracted a lot of attention. It may seem that much of that attention was focused on helping the banks that made those loans which eventually went into default. But, the Consumer Financial Protection Bureau (CFPB) is squarely on the side of the individual who is obtaining a home purchase loan. New lending regulations were crafted by the CFPB in 2013, and they went into effect on January 10, 2014. The goal of the CFPB is that all people shopping for a mortgage have the information they need to make an informed decision. Furthermore, they should have that information readily available to them in an easy to understand manner.
The “ability-to-repay” rule
In 2010, the Dodd-Frank legislation overhaul of lending practices required that lenders be sure consumers can actually repay the loans being made to them, by analyzing their current assets, income, and ongoing debt against the required monthly payments.
Borrowers who have met the QM requirements have met the ability-to-repay criteria. When a mortgage company makes a QM loan, they have some legal protection against lawsuits if the borrower defaults on the loan at some point in the future.
Debt to income
Another new change to obtaining a Home Purchase Loan is that a borrower’s debt-to-income ratio cannot be more than 43 percent. That does not affect most people. The change mainly impacts the number of jumbo loans. A jumbo loan is above the $417,000 cap for conforming loans. Some “high cost” areas of the country have a conforming cap of $625,500. A 45 percent debt-to-income ratio was once common for these jumbo loans.
Interest only loans
Interest-only loans do not meet CFPB’s standards for a qualified mortgage. During the housing market boom that led up to the eventual collapse, interest-only loans were widespread among home buyers at all price points. The lenders made the loan based largely on the projected income and financial position that the borrower believed they would have in the near future. Borrowers did not have to make any payments toward principle during the initial phase of the loan. The plan was for the borrower to use that saved money for investments and paying down other obligations. But many households could not handle the larger monthly payments when the interest-only period ended.
Most lenders have stopped making any interest-only loans. The majority of the few lenders still making them are serving high-cost markets and making jumbo loans.
More protection against lender abuse
For loans exceeding $100,000, the fees and points cannot be more than three percent of the loan. Adjustable rate mortgages have to be underwritten based on what the highest possible payment could be during the initial five years.
Brian Koss is Executive Vice President with Mortgage Network in Danvers, Massachusetts. Koss says, “Now, if a lender takes liberties with a particular rule, such as qualifying a borrower, they are violating a law, which carries greater risks than before.”