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).
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.
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.