Changes to mortgage rules

In 2010, the Federal Reserve tried to prevent another housing crisis by setting forth new rules for lending.

The intent was to ensure borrowers weren’t pushed into high-risk, high-cost mortgages by loan originators. The Consumer Financial Protection Bureau (CFPB) created by the Dodd-Frank Act oversees such rules and makes adjustments or modifications to them. The most recent revisions take effect this month.

Loan originators’ compensation will be prohibited from being tied to the terms of the loans. To further define what is prohibited (e.g., bonuses for closing higher-rate loans), the CFPB further refined the rules.

In January of last year, the Ability-to-Repay rule was formed to protect borrowers by ensuring they have the ability to repay a loan. The mortgage-servicing rules are intended to provide protection for homeowners facing foreclosure. The loan originator compensation rule discourages steering borrowers to risky, high-cost mortgages, and there is also now a requirement that escrow accounts must be set up for a minimum of five years for certain higher-priced mortgage loans.

In June 2013, the CFPB clarified what mortgage servicer activities are prohibited in a borrower’s first 120 days of delinquency. During the first 120 days, mortgage servicers are not allowed to make the “first notice of filing.” This rule was amended so servicers can send certain early delinquency notices required under state law to borrowers that may provide helpful information about legal and financial resources available to them.

Further, a change was made so that specific procedures are followed by mortgage servicers to identify and inform a borrower about the loss mitigation application process (e.g., provide a reasonable amount of time to provide missing information on an application). This regulation also enables protections for borrowers in formulating and completing the loss-mitigation application.

Modifications were also made to facilitate servicers in offering short-term forbearance plans for delinquent borrowers needing only temporary relief. The January servicing rules allow servicers to set forth an exclusive address for consumers to send complaints and information requests.

The CFPB is planning on refining further provisions applicable to certain small creditors that are in rural or underserved areas. In the meantime, these classifications will be exempt from a new ban on high-cost mortgages featuring balloon payments, providing the loans meet certain restrictions. Further, small creditors could continue to be exempt from a requirement to maintain escrows on certain higher-priced mortgage loans.

The CFPB’s loan originator compensation rule adopted the Dodd-Frank Wall Street Reform and Consumer Protection Act’s prohibition on creditors financing credit insurance premiums for certain mortgages.

The CFBP is also clarifying the definition of a loan originator so as to meet qualification for requirements and subject to restrictions on compensation practices. The board is also clarifying what compensation must be counted toward certain point and fee caps under the Ability-to-Repay rule for manufactured-home retailers and their employees. Prior to the changes made on September 13, 2013, the provisions of the bureau’s loan originator compensation rule that had yet to be in effect were scheduled to be in effect in January of this year.

 

Mary Ann Clark is a Realtor with Coldwell Banker at 177 West Putnam Avenue in Greenwich. Questions or comments may be emailed to [email protected]  

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