By MARILYN KALFUS / ORANGE COUNTY REGISTER Jan 10th 2013
A federal watchdog agency on Thursday issued new mortgage rules to prevent the type of shoddy lending standards that spawned the housing market collapse and the nation’s subsequent financial meltdown.
The Consumer Protection Financial Bureau imposed new criteria for lenders restricting risky “interest-only” or “no documentation” mortgages. The regulations also require lenders to verify borrowers’ financial statements and discourage total debt payments – including credit cards and student loans – that amount to more than 43 percent of a borrower’s annual income.
During the housing bubble, banks often didn’t require minimum credit scores or check incomes to make sure borrowers would be able to make mortgage payments.
Millions of homeowners got into trouble after taking out loans with no or low down payments that many didn’t fully understand as interest rates skyrocketed, unemployment soared and the housing market crashed.
The rules unveiled Thursday are a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act passed by Congress in 2010. The consumer bureau, created under the act, was charged with creating and enforcing the lending rules.
The new criteria represent “the true essence of responsible lending,” said Richard Cordray, the bureau’s director. “When consumers sit down at the closing table, they shouldn’t be set up to fail with mortgages they can’t afford.”
Cordray noted that in years leading up to the 2008 financial crisis, consumers could easily obtain mortgages that they could not afford to repay.
But in subsequent years, banks tightened standards so much that many people have had trouble qualifying at all.
The new rules seek out a middle ground by protecting consumers from bad loans while giving banks the legal assurances they need to increase lending, he said.
The rules do not specify a minimum down payment.
A loan that meets the new standards will be considered a “qualified mortgage,” which the bureau says will protect banks from lawsuits that may be filed by borrowers or buyers of mortgage-backed securities.
Consumer advocates and bank officials applauded the new rules, which take effect next year. But some in the banking industry say the restrictions could make it harder for lower-income buyers to get mortgages.
“We have heard the horror stories and witnessed families and communities torn apart by mortgages they could not afford,” said Natalie E. Lohrenz, a housing and credit counselor with the Consumer Credit Counseling Service of Orange County.
“However, we have also more recently watched the pendulum swing too far back, to the point that now even the creditworthy and financially stable consumers we are helping to achieve homeownership are fighting to qualify. As a result, we understand the difficult balance (the bureau) is trying to achieve.”
Highlights of the rules:
- Lenders must document a borrower’s employment, income, assets and current debts, as well as credit history and mortgage history, and make sure the borrower can repay the loan. The lenders will have to determine the consumer’s ability to repay both the principal and the interest over the long term, not just during the introductory period when the interest rate may be lower.
- “Teaser rates” that adjust upward and large balloon payments at the end of the loan period will be limited.
- A qualified mortgage will have limits on points and fees, including those used to compensate loan originators, such as loan officers and brokers. “When lenders tack on excessive points and fees to the origination costs, consumers end up paying a lot more than planned,” the consumer bureau said.
- “Toxic loan” features will be banned. A qualified mortgage cannot have terms that exceed 30 years, interest-only payments or negative-amortization payments that increase the principal amount. “In the lead-up to the crisis, too many consumers took on risky loans that they didn’t understand. They didn’t realize their debt or payments could increase, or that they weren’t building any equity in the home,” the bureau said.
- The rules cap the amount of income that can go toward debt. “Qualified mortgages generally will be provided to people who have debt-to-income ratios less than or equal to 43 percent. This requirement helps ensure consumers are only getting what they can likely afford,” the bureau said.
Lohrenz called the rules “a great start” and said the vast majority of troubled homeowners the counseling service has seen received risky mortgages or traditional loans without having to provide proof of ability to pay them back.
She notes that interest-only and no-documentation loans have all but disappeared, but said borrowers now can’t get loans. “The liability protections offered by the (bureau) are an encouraging first step to nudge banks to loosen their purse strings, but we think more can be done,” she said. She advocates pre-purchase or pre-refinance counseling by a third party for all mortgage borrowers.
Vincent Howard, a Costa Mesa attorney with mortgage and foreclosure-related cases, suggested that simply making new rules might not be the answer. “People forget that we had underwriting and servicing guidelines in place before the ‘era of greed’ that worked to qualify borrowers,” he said.
“Lenders need to use the three C’s to determine creditworthiness: credit, capacity, collateral,” he said. “If we use the rules that were previously in place, we would be fine … no stated income loans, and all financial documents must be verified.”
The Center for Responsible Lending gave the new rules a thumbs-up, but said in a statement that the center would closely monitor “a pivotal issue” the bureau is still considering: how fees that lenders pay to mortgage brokers will be counted when it comes to defining a qualified mortgage.
“These fees, known as yield spread premiums, provided incentives for brokers to steer borrowers into bad mortgages that fueled the mortgage crisis,” the North Carolina-based center stated. “The (bureau) should not create a loophole that allows high-fee loans to count as a qualified mortgage.”
The American Bankers Association said though the consumer bureau “codifies many conservative lending standards currently in place, it is complex and technical, presenting an additional regulatory burden … There is a very real impact to these rules, and they will transform our lending practices and could restrict access to credit.”
The California Mortgage Bankers Association approved of the measures and said the “safe harbor” aspect “provides lenders the confidence they need to extend credit to qualified borrowers without the fear of frivolous and costly litigation.”
But, the association added, “The wave of new regulation at the state and federal level is forcing lenders to put more and more resources toward compliance, driving up costs, which can have the effect of encouraging consolidation and eliminating choice for consumers.”
The rules include several exceptions aimed at ensuring a smooth phase-in and protecting access to credit for underserved groups. For example, the strict cap on how much debt consumers may take on will not apply immediately. Loans that meet separate federal standards also would be permitted for the first seven years.
The Associated Press contributed to this report.