The Consumer Financial Protection Board recently announced changes to mortgage lending with the ultimate goal of putting a stop to predatory lending. But what do those new rules mean for the average consumer?
For most, not much, said Bill Slosberg of First Savings Mortgage.
“It’s so common sense that it’s ridiculous,” he told UrbanTurf. Slosberg readily admits that he’s a Democrat and one of the few in his business to explicitly support more regulation.
The new rules create “qualified mortgages” and institute ability-to-repay standards. Both are intended to protect the consumer from signing themselves up for mortgages they can’t afford, as well as prevent the kinds of high-risk mortgage bundling and foreclosures that were a centerpiece of the financial crisis.
To be eligible for a qualified mortgage, a borrower’s debt-to-income ratio eventually won’t be allowed to exceed 43 percent, though there are currently several exceptions to that rule. A 43 percent debt-to-income ratio essentially means that any debts that a borrower has, including a monthly mortgage payment, can not exceed 43 percent of their monthly gross income.
The ability-to-repay rule is currently a bigger deal for borrowers, and will affect the closing process on houses, Slosberg said. Basically you’ll have to document your ability to pay back the loan, and banks will be required to review that documentation prior to closing on a loan. Here is the list of requirements that lenders will have to consider (at a minimum):
- Current or reasonably expected income or assets.
- Current employment status.
- The monthly payment on the covered transaction.
- The monthly payment on any simultaneous loan.
- The monthly payment for mortgage-related obligations.
- Current debt obligations, alimony and child support.
- The monthly debt-to-income ratio or residual income.
- Credit history.
But as Slosberg pointed out, the qualified-mortgage rule doesn’t currently apply to FHA, Fannie Mae, Freddie Mac or VA loans (though it eventually will). It also doesn’t forbid mortgages that don’t meet the new standards, which are now known as “unqualified mortgages.” When banks issue qualified mortgages, they are legally protected from being sued for “reckless and abusive lending practices.” Unqualified mortgages don’t protect the bank from consumer lawsuits, and rates on such mortgages will likely be a little higher than they were in the past, Slosberg said.
“We’re going to have some more requests for paperwork and closed settlements may take a little bit longer,” he said. “It also may take a little longer for a loan to close. It’s going to add steps to the process so people are going to have their paperwork done earlier.”
The CFPB’s changes will be fully implemented over time, and more are likely on the way. Forthcoming rules might target overdraft fees, student loans, arbitration rules or debt collection, among other areas.
This article originally published at http://dc.urbanturf.com/articles/blog/new_mortgage_rules_take_effect_heres_what_it_means_for_you/8074
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