Regulations will promote sustainable mortgages, protect new homebuyers and struggling homeowners
CHICAGO—New rules taking effect on January 10, 2014, will create a safer mortgage market with fewer tricks and traps, says Woodstock Institute. The Consumer Financial Protection Bureau (CFPB) is implementing rules that require mortgage lenders to ensure that borrowers can reasonably repay their loans, provide protections for borrowers who fall behind on their mortgages, and help current homeowners stay abreast of the status of their mortgages.
“The CFPB’s rules promote safe and sustainable homeownership and prohibit some of the worst practices that led to the burst of the housing bubble,” said Dory Rand, president of Woodstock Institute. “We must ensure that the rules are strongly enforced so that mortgage borrowers can be confident that lenders are setting them up to succeed.”
Complaints from Illinois consumers to the CFPB about mortgage lenders clearly illustrate a need for mortgage market reform. A Woodstock Institute analysis found that complaints about mortgages were the most common type of complaints from Illinois consumers, comprising 49 percent of all complaints to the CFPB. The most common mortgage complaints were about loan modifications, collections, and foreclosure (56 percent); loan servicing, payments, and escrow accounts (26 percent); and applications, origination, and mortgage brokers (8 percent).
The mortgage rules address many of the issues raised by Illinois consumers. The new rules will:
- Require lenders to verify a borrower’s ability to repay virtually any mortgage. Lenders must now collect and verify documentation of a borrower’s income and assets, debts, credit history, and more. The borrower must be able to repay the mortgage at any point during the life of the loan—even after low “teaser rates” expire.
- Encourage lenders to make safer, easier to understand loans. The rules create a class of loans called “Qualified Mortgages” (QM) that are designed so that borrowers will be less likely to default on their loans. QM loans limit the amount of debt borrowers can take out relative to their income, lack risky features, and limit points and fees. Lenders receive extra legal protections for making QM loans, which creates an incentive for lenders to offer high-quality mortgages. The CFPB estimates that more than 95 percent of mortgages currently offered would qualify as QM loans.
- Protect borrowers against steering and fair lending abuses. During the housing bubble, some employees at mortgage lenders received bonuses for steering borrowers into higher-cost loans—even when borrowers qualified for more affordable mortgages. This practice disproportionately affected borrowers of color. The new mortgage rules prohibit lenders from compensating their employees for putting borrowers in more expensive loans.
- Create a clear process for borrowers who fall behind on their mortgage payments. In the wake of the housing crisis, many struggling homeowners had difficulty communicating with their loan servicers. There are many reports of servicers that have poorly trained personnel, lose paperwork or payments, and pursue foreclosure at the same time the borrower is trying to reach a solution. The new mortgage rules require servicers to educate borrowers regarding all alternatives to foreclosure available to them, notify borrowers early that they are behind on their payments, provide timely and accurate communications to borrowers, inform borrowers why a loss mitigation application is rejected, and more. The rules also prohibit servicers from moving forward with a foreclosure while a borrower is pursuing an alternative, but only if borrowers submit complete applications in a timely manner. (Advocates are working with the Federal Housing Finance Administration to adopt a stronger rule against “dual tracking.”)
- Help borrowers understand the status of their mortgages. Mortgage servicers must now provide clear monthly statements, credit payments on the same day, fix mistakes quickly, and let borrowers know about any interest rate increases on adjustable rate mortgages well in advance.
Homeowners can use a number of resources provided by the CFPB, including a summary of the new rules, tips for homebuyers, sample letters to mortgage servicers to correct errors and request information, a checklist for avoiding foreclosure, and more. Housing counselors can gain a better understanding of the new mortgage rules with this detailed guide. If borrowers suspect that their lender or servicer is not complying with the new rules, borrowers should file a complaint with the CFPB.
For more information or to speak with a homeowner who could be positively impacted by the new mortgage rules, please contact Katie Buitrago at email@example.com or 312-368-0310.