New Standards for Mortgage Lending

The banking industry has seen enormous changes in the wake of the housing crisis. In 2010, Congress passed the Dodd-Frank Wall Street Reform & Consumer Protection Act to end the improper lending practices that caused so many Americans to lose their homes to foreclosure.

Now, additional mortgage rules were recently announced that will further strengthen and define the Dodd-Frank regulations. Scotty Ball, a real estate attorney with Stewart, Melvin & Frost, offers insight into these new mortgage rules. A partner with the firm, Scotty specializes in residential and commercial real estate law. As a specialist in real estate law, Scottyhas a unique insight and perspective on what has taken place on the front lines of the real estate market crisis.

Question: We’ve recently heard about the issuance of new mortgage rules by the federal government. Is this part of the 2010 Dodd-Frank Act that reformed banking and lending?

Scotty: A better description of these new mortgage rules is a “clarification” of the Dodd-Frank regulations. In general, they provide more specific language regarding mortgage-lending rules. These new rules were issued by the federal Consumer Financial Protection Bureau.

Question: When do the new mortgage rules go into effect?

Scotty: The new mortgage lending rules were announced by the Consumer Financial Protection Bureau in January of this year. But they do not go into effect until January of 2014.

Question: Can you give us a brief summary of the new mortgage rules?

Scotty: Basically, the new rules establish specific standards for a safe loan – or what the Consumer Bureau calls a “qualified mortgage.”

A few of these rules include the following:

Banks can no longer make “no-doc” (no document) loans, which were rampant during the housing bubble that led up to the recession. Under the new mortgage rules, lenders must thoroughly document the borrower’s job status, incomes and assets, debt, and credit history. This may seem obvious, but a lot of these old-fashioned due-diligence practices simply were not followed in recent years.

To be classified as a “qualified mortgage” under the new rules, lenders are restricted from charging excessive points and fees that total more than 3 percent of the loan amount.

And the loan payments are now required to be less than 43 percent of the borrower’s income before the loan can be classified as a “qualified mortgage.”

There also are limits on interest-only loans, balloon payments, and the negative-amortization loans that retired seniors sometimes use to draw income out of their home equity. Lenders can still make these loans, but there are restrictions now in place to better protect the borrower from default.

Question: These rules seem to be common sense. In your opinion, will they have much of an impact in the housing market?

Scotty: The rules do seem very basic. But it’s very important that regulators have now spelled out the specific rules of what will be accepted in their eyes as a “qualified mortgage” as well as what is an “unqualified mortgage.”

The biggest impact for consumers is that the rules shine a big spotlight on some of the tricks, like misleading “teaser rates,” used by predatory lenders to entice people to borrow.

But the rules also are intended to protect the lenders as well. If a loan ends up in default or a foreclosure, the lender – under these new rules – cannot be sued if the home loan met the standards of a “qualified loan.” The federal government will grant them “safe harbor” from litigation.

So in this respect, the rules are intended to encourage banks to start lending again – now that the rules are more clearly defined.

So far, the banking industry seems to agree. The head of the Mortgage Bankers Association David Stevens said in a recent interview that “now everybody knows if you stay inside these lines, you are safe.”

Question: Do you have any other observations about these new rules?

Scotty: I should point out that the rules do allow some leeway for lenders who are serving low-income households. In those cases, the loans don’t have to meet the 43-percent debt-to-income limit as long as they meet certain affordability standards set by government underwriters such as Fannie Mae and Freddie Mac.

In addition, balloon-payment mortgages will still be allowed for community-based lenders in underserved areas. In making these exceptions, the Consumer Bureau is recognizing the key role of community banks in rural and under-served markets.

All in all, I think these new mortgage rules are a positive step in the right direction toward bringing back some sanity in our housing market.

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