Mortgage Reform and Anti-Predatory Lending Act
It's Wednesday, so here's Attorney Richard D. Vetstein. Today he looks at the mortgage part of the Wall Street Reform laws passed this summer.
Buried in the fine print of the much publicized Dodd-Frank Wall Street Reform and Consumer Protection Act is the new Mortgage Reform and Anti-Predatory Lending Act, which contains strict new rules aimed at preventing another sub-prime mortgage collapse.Overview:
What Is The Impact To Mortgage Lenders and Originators?
The Mortgage Reform and Anti-Predatory Lending Act certainly changes the regulatory landscape for mortgage originators who focused on high-risk, sub-prime lending, setting tougher new standards and creating new federal remedies for consumers victimized by deceptive and predatory lending. Stripped down, the Act puts the onus on mortgage lenders and originators to ensure, based on verified and documentation information, that borrowers can afford to repay the loans for which they have applied. Pretty novel idea, huh?
The new law essentially codifies good underwriting practices by requiring consideration of a borrower’s “credit history, current income, expected income the consumer is reasonably assured of receiving, current obligations, debt-to-income ratio or the residential income the consumer will have after paying non-mortgage debt and mortgage-related obligations, employment status, and other financial resources other than the consumer’s equity in the dwelling or real property that secures repayment of the loan.” Another novel idea….The new rules also seem to prohibit so-called “no doc” “no income verification” loans. This would impact many newly self-employed borrowers who don’t have a steady W-2 income stream.
The new law also imposes on lenders a duty to verify amounts of income or assets that the lender relies upon to determine the consumer’s ability to repay the loan. Again, a novel idea…In order to “safeguard against fraudulent reporting,” lenders are now required to use IRS transcripts of tax returns.
The Dodd-Frank Act also imposes new compensation limitations by prohibiting yield-spread premium bonuses, a practice, regulators argue, tends to increase the total cost of the loan to the borrower. Yield spread premiums (YSPs) are fees paid by a lender to a mortgage originator for placing a loan in a certain loan program.
I don’t see anything in these rules that a financially prudent lender wouldn’t have already implemented in its underwriting processes. Lenders should not be placing borrowers into loans they are doomed to fail. But alas, this is exactly why they call them “sub-prime” lenders.
I’m sure these new rules will result in a few more disclosures and forms, but I don’t see this making a major impact on the conventional residential lending industry. If mortgage professionals think otherwise, I’d love to hear from you.
