As part of the 2010 Dodd-Frank Act, several major changes to the mortgage industry will take effect on January 1, 2014. Efforts by the Consumer Financial Protection Bureau (CFPB), the federal agency with rule-making authority under Dodd-Frank, to reform the mortgage lending industry from the ground up has resulted in an avalanche of new regulations, totaling nearly 4,000 pages, published in final form on January 10 this year. 

The nearly one dozen new regulations include changes such as: expanding the type of loans covered by the Home Ownership and Equity Protection Act (HOEPA); new initial rate adjustment notices for adjustable rate mortgages (ARMs); periodic statements for residential mortgage loans; mandatory escrow accounts for a broader category of loans; additional appraisal requirements for “higher-risk mortgages”; revisions to the content, format and timing of disclosures of interest rate adjustments of variable-rate transactions; and new error resolution and other servicing procedures and record keeping.

While the goal of these regulations is to prevent another housing crisis like the one that led to the worst recession in the U.S. since the Great Depression, the sheer volume of regulations may hurt consumers more than help them. “In our opinion, the pendulum has swung too far the other way,” said Rose Oswald Poels, president and CEO of the Wisconsin Bankers Association. “Under some of these provisions, none of us would qualify for a mortgage loan.”

Qualified mortgages

The reform effort is so vast that many banks are unclear on how implementing the rules will affect their customers. Of all the proposed regulatory changes, the creation of a specific definition for a Qualified Mortgage (QM) and Qualified Residential Mortgage (QRM) have the greatest potential to disrupt the mortgage and housing industries across the board. While the QRM rules have not yet been published, it is expected that those rules, along with the finalized QM, or Ability-to-Repay rule, and their practical application, will drastically affect the housing industry.

According to the CFPB rules, loans that meet the QM parameters* will be presumed to be compliant with the updated Truth in Lending Act regulations, meaning these loans will provide greater safe harbor for the lenders. This advantage is not applied to loans that do not meet the QM parameters, placing greater liability risk on the lender. QM loans are also exempt from the new HOEPA Appraisal rule, making them less costly to offer.

The net effect of implementing all the rules affecting the mortgage lending industry will most likely be fewer, more difficult-to-obtain loans that are statistically less risky … but also less helpful for consumers. “The intent of the rules are to help consumers, but the very people they’re trying to protect will be hurt,” explained Oswald Poels.

Adjusted appraisal rules

Another change to mortgage lending is the requirement for appraisals on all higher-priced mortgages, issued in a final rule amending Regulation Z. The appraisal rule applies to mortgage loans with an APR that exceeds certain thresholds, exempting QM loans. This rule goes into effect on January 18, 2014. Effective January 19, 2014 is a second appraisal rule requiring creditors to provide applicants with copies of appraisals and other written valuations used for certain mortgage loans under the Equal Credit Opportunity Act, Regulation B. 

Creditors may not charge the applicant for the copy of an appraisal or written valuation but may assess a fee to reimburse the creditor for the cost of the appraisal. Therefore, REALTORS^® should make their clients aware of the potential for these fees to be added to the cost of their home should they require high-cost financing.

Effect on homebuyers

Mortgage reform will most heavily impact first-time homebuyers who typically have smaller down payments and higher debt-to-income ratios. One of the most popular loans currently offered by many banks that does not fit into the QM parameters in most cases are balloon mortgage loans, which are designed to assist exactly that type of buyer in obtaining financing.

Buyers’ agents will need to have discussions with their local lenders to determine if the lender will continue to offer non-qualified mortgage options to consumers. If not, potential homebuyers will need to get pre-qualified and pre-approved at a variety of institutions, as different standards may apply between institutions offering exclusively QM loans and institutions offering non-QM loans.
REALTORS^® should be sure to keep open lines of communication with their preferred lenders to ensure that their clients understand how the new mortgage regulations will impact their homebuying experience.

*QM parameters include: debt-to-income ratio of 43 percent or less; loan is eligible to be purchased by Fannie Mae/Freddie Mac or guaranteed by the FHA or VA; the lender is a “small creditor” serving a rural area (as defined by the U.S. Department of Agriculture).

Eric Skrum is the Director of Communications for the Wisconsin Bankers Association, the state’s largest financial industry trade association, representing nearly 280 commercial banks and savings institutions, their nearly 2,300 branch offices and 23,000 employees.