New mortgage rules went into effect earlier this year, aiming to simplify the approach to mortgage lending. At the same time, this “back to basics” alignment was done with additional goals of reducing the risk of defaults and foreclosures from borrowers. The new rules were developed by the Consumer Financial Protection Bureau, and director Richard Cordray says “No debt traps. No surprises. No runarounds.”
The new rules put a lot of pressure and responsibility on mortgage lenders, which is why it’s so critical that lenders across the board understand how to comply. Implementing changes that promote efficiency and meeting these new requirements will make it easier for lenders to transition into this phase. Some lenders may already be doing certain steps of the new requirement, reducing the amount of work they would need to do to comply.
Ability to Repay
There are two different rules that mortgage lenders are being asked to comply with: Qualified Mortgages and the Ability to Repay Rule. Lenders will be responsible for determining that a borrower actually has the assets and income to make payments over the life of the loan. To do this, lenders are asked to look at the debt-to-income ratio. As many lenders already know, this is how much money a borrower owes divided by their monthly earnings. This includes the maximum monthly mortgage payments a borrower would have to make under the loan. Obligations refer to all monthly debts, like student loans, credit cards, car payments, and costs for housing, too.
Although reviewing this information from borrowers has always been a part of the process, the new requirements mandate a deeper dive into the borrower’s ability to repay (and that now includes whatever the highest payments might be at some point in the loan).
In the past, these “teaser rates” that were held for several months or even years could be used to calculate a borrower’s ability to pay back the loan. Unfortunately, some families and lenders learned too late that once the teaser rates went away, the monthly payment obligations couldn’t be meant. Some borrowers also felt confused in realizing that after a period of time, their payments became higher.
The new regulations require that a lender takes into account the maximum loan payments to ensure that the borrower is able to make payments on the loan for the duration. In theory, this should help cut down on the number of borrowers whose homes later go into foreclosure.
Teaser rates can still be used, but only when the borrower is fully aware and able to repay under the payments for the life of the loan. If higher rates will later be introduced, the borrower has to be able to meet the qualifications then, too.
The Consumer Financial Protection Bureau also wants to see the end of low documentation or no documentation loans, where lenders approve deals without all the critical financial details for the borrower. Rather than allowing these in any format, the new ability to repay rules require that lenders must document and verify all aspects of an applicant’s financial information, such as credit history, debt, assets, and incomes.
Ultimately, this will create delays for the borrower and a bigger trail of paperwork for the lender, but compliance is required. Lenders can do a lot for themselves by establishing a streamlined checklist or procedure that verifies receipt and documentation of all information related to an applicant’s details.
Lenders should work to train all staff about the necessary information to collect from each mortgage applicant. An applicant must have their information reviewed in full including debt, assets, and income.