Applying for a Mortgage? Banks Will Want More Info

by James on November 24, 2013 · 6 comments

Hi All,

File this under good to know if you’re going to shop for a mortgage in 2014.

Evidently the Consumer Finance Protection Bureau (CFPB) has issued new amendments regulating consumer’s ability to replay loans.  Pretty much the next time you go to the bank for a new mortgage, your lender will probably be asking you for a lot more information.  It’s part of the new Ability to Repay rule that lenders are subject to as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act).

Rule Changes

Lenders are now held accountable for the loans they make and must prove that borrowers who get home financing can actually repay it.  As an enforcement mechanism, lenders can be asked to buy a loan back from the quasi-government investors, Fannie Mae and Freddie Mac if they make a mistake. In fact, the only way to protect themselves from these buybacks is to follow a strict set of rules that result in a “qualified mortgage.”  This pretty much ensures that the rules will be followed closely.  The idea is to eliminate lending based on exaggerated or false income reports.

The law does a couple of other things.  First, it caps the borrowers debt-to-income ratio at 43 percent. It also limits the fee that can be charged by the lender to 3 percent of the total amount of the loan. Exotic loans like interest-only and negative-amortization loans do not meet the guidelines of the qualified mortgage.

Consumer Impact

What does this mean for consumers? According to the Mortgage Bankers Association, the CFPB’s definition of a qualified mortgage should not change the capacity for most borrowers to obtain mortgage loans, but others aren’t so sure.  For example critics of the CFPB say that the overall impact of the new rule will be to restrict access to credit.  This is because the law also contains significant limitations on the ability of lenders to modify loan terms.  The concern is if you limit lender flexibility in creating new loan products lending overall is going to decline.  A second criticism is that it is unfair to limit lending to only those with debt to income ratios of less than 43 percent – poor people deserve a shot at getting a home as well.

There are some practical concerns for mortgage shoppers.  Borrowers who need larger mortgages, or jumbo loans, might find getting a loan more difficult.  Of course, new lenders could move into the gap to provide these loans, even though they aren’t qualified mortgages under the rules.  The 43 percent debt to income rule will also make it harder for investors who own multiple properties or who otherwise have leverage as part of their wealth building models.

There are likely to be some exceptions to the final rule when it goes into effect next year.  With concerns about struggling borrowers, regulators may find ways for certain borrowers to bypass the rules with certain products.  These exceptions might include allowing lenders to refinance risky mortgages such as interest-only and adjustable-rate loans without having to meet the Ability to Repay requirements.  Also, the Ability to Pay rule seems somewhat more relaxed for credit unions, so your luck might be better there.

The new rule will go into full effect in January 2014, so get your paperwork in order.



{ 6 comments… read them below or add one }

1 Simply Save November 25, 2013 at 12:30 am

I’ve nominated you for the Versatile Blogger Award! http://simplysavemn.com/2013/11/24/the-versatile-blogger-award/

2 Jen @ Frugal Rules November 25, 2013 at 3:17 am

New set of rules? Banks must have suffered the “once bitten, twice shy” syndrome after the failure of many to repay loans. Problem is, it makes it harder for a first-timer who has the capacity to pay but might lack some requirements. What then?

3 James November 25, 2013 at 10:07 pm

Thanks Save, much appreciated. I feel like there isn’t often a lot of good coverage of whats going on in the various sectors of the finance industry. After all, what do you read personal finance blog for?

James

4 James November 25, 2013 at 10:09 pm

Jen,

I think the “what then” question is what will happen when the next housing boom hits? We will see what sort of products the industry comes up with meet demand. I think its possible that these rules are going to get diluted or changed when the next administration comes in.

Thanks,

James

5 Cassie November 26, 2013 at 1:10 am

It will be interesting how this plays out. All lenders are scrambling to adjust their procedures and policies for the new rules, so it’s hard to tell exactly how this will affect consumers. But the points and fees on a loan are capped at different amounts depending on the amount financed. If the amount financed is greater than or equal to $100,000, the cap is 3%. Less than $100,000 and the cap varies.

There will also be a transitional period that will not require all loans to adhere to the 43% DTI cap. Certain loans that can be guaranteed by a government sponsored enterprise (like Fannie Mae) do not have to adhere to the DTI limit for that transitional period. There’s no indication how long that transitional period is though.

6 James November 26, 2013 at 7:10 pm

Cassie,

Thanks for stopping by. Always great to get some stimulating commentary. The Ability to Pay rules will also do away with teaser rates. So under the new rule, lenders must calculate a borrower’s ability to repay his loan based on the true mortgage rate. This includes both the principal and the interest over the long-term life of the loan.

Thanks,

James

Leave a Comment

Spam Protection by WP-SpamFree

Previous post:

Next post: