The Consumer Financial Protection Bureau (CFPB) rolled out
long-awaited new rules for residential mortgages this week. So what
will be the impact on mortgage borrowers?
Like many newly released regulations, the full details are still
being sorted out. However, in general it's going to be more
difficult for marginally qualified borrowers to get a mortgage,
while those who do get home loans will enjoy certain protections
against excessive charges.
It's not yet clear whether the rules will make home loans more
or less available in general. Some industry critics say that by
imposing stricter standards for who can get a mortgage, the rules
will put a crimp in lending. On the other hand, others say that
finally having the rules in place eliminates uncertainty for
lenders, while new liability protections will allow them to lend
The crux of the new rules is to ensure that borrowers are only
approved for mortgages they can afford - something that didn't
always happen during the housing bubble. Toward that end, the CFPB
has put forward an "Ability to Repay" rule that applies to all
mortgages and standards for "Qualified Mortgages" that meet those
Here's what borrowers can expect, first under the Ability to
Repay rule, then for Qualified Mortgages.
Ability to Repay
Limit on total debt
Under the Ability to Repay rule, a borrower's total monthly
debt, including mortgage payments and associated costs such as
property taxes and homeowner's insurance, cannot exceed 43 percent
of monthly income. There will be a seven-year phase-in period
during which mortgages that exceed this limit but otherwise meet
, Freddie Mae, FHA or other government-backed underwriting
standards will still be allowed.
Income must be documented
Lenders must verify that a loan applicant has sufficient income
and assets to repay the mortgage. In other words, no more "liar
loans" where a borrower simply signs a statement attesting to his
or her financial status. This could present challenges for
self-employed or certain high net worth individuals who have often
relied on stated income loans in the past.
Lenders will not be allowed to assess a borrower's ability to
repay a loan based on a temporary "teaser" rate - that is, an
artificially low initial rate offered on a ARM. Instead, the lender
must look at the borrower's ability to maintain payments over the
life of the loan, based on current income and assets.
Home loans that meet the standards for Qualified Mortgages will
be assumed to meet the Ability to Repay rule. Lenders who issue a
Qualified Mortgage will enjoy certain protections against liability
if the borrower eventually proves unable to repay the loan. Not all
home loans will be required to be Qualified Mortgages, but the
financial protections they offer lenders are expected to make them
less costly and therefore dominate the mortgage market.
Limit on interest rates
The interest rate on Qualified Mortgages may not be more than
150 basis points (1.5 percentage points) higher than the base prime
rate for that type of loan. In other words, if the base prime rate
is 4 percent, the interest rate could be no higher than 5.5 percent
for a Qualified Mortgage. Since high-risk mortgages tend to carry
significantly higher rates, this will likely make it much harder
for borrowers with low credit scores to get a mortgage.
Limit on points and fees
Qualified Mortgages will have a limit of 300 basis points (3
percentage points) on fees and points charged. Charging additional
fees and points is another way lenders balance the risk of issuing
mortgages to less qualified borrowers, so this is also intended to
limit the availability of mortgages to high risk borrowers.
There is an exception for bona fide discount points, which
borrowers commonly use to reduce their interest rate by a certain
amount for every 1 percent of the loan amount paid upfront.
This rule could have a negative impact on mortgage brokers, who
receive discounted rates from wholesale lenders and add back in a
certain percentage as their fee. If so, that could limit borrowers'
options for finding their best deal. This part of the rule may be
modified to take this into account.
Ban on "toxic" features
Certain loan features that are considered inherently risky are
not allowed on Qualified Mortgages. These include loan terms of
longer than 30 years, interest-only payments, negative amortization
(where the principle owed increases over time) and balloon
Rules for high-cost mortgages
The new guidelines also include rules for high-cost home loans
that do not meet the standards for Qualified Mortgages. High-cost
mortgage loans are defined as those with interest rates more than
150 basis points (1.5 percentage points) above the average prime
rate for purchase mortgages and refinancing, or 350 basis points
(3.5 percentage points) for home equity loans.
This will likely affect jumbo loans, which carry higher interest
rates than standard mortgages. Jumbo loans are defined as loan
amounts in excess of $417,000 in most of the country, ranging up to
$729,750 in counties with high home values.
These rules include:
Restrictions on balloon payments
Balloon payments will generally be prohibited on high-cost
mortgages, although there will be an exception for loans in rural
or underserved areas, where such loans have long been a staple of
the mortgage market. Penalties for early payment will be
Closing costs paid up front
The new rules prohibit closing costs from being rolled into the
loan amount on high-cost mortgages.
Limits on fees
Late fees on high-cost mortgages will be capped at 4 percent of
the amount due. Fees may not be charged for a loan modification and
there will be a limit on the fees that may be charged for providing
a payoff statement.
Borrowers will be required to undergo housing counseling before
being approved for a high-cost mortgage.
Small lenders may handle risky loans
Homeowners deemed high-risk may still be able to get a mortgage
by going through a credit union or small lender under the new
guidelines. The CFPB is considering amendments that would grant
Qualified Mortgage status to certain loans made by such lenders,
provided that they keep the loans on their own books and do not
sell them on the secondary mortgage market; that is, they continue
to bear the risk for such loans.
The CFPB is still accepting feedback on the new rules and some
modifications are still possible before they go into effect on Jan.
This article was originally published on MortgageLoan.com at: