The creation of the Consumer of Financial Protection Bureau (CFPB) under the Dodd-Frank Act, is meant to provide greater transparency in the mortgage loan origination market, and to help consumers better understand their origination process. This month marks the largest and most significant milestone since the CFPB launched more than a year ago. Jan. 21 marks the date that as many as eight major rules must be proposed–with the ability-to-repay and qualified mortgage definition out already.
The revitalization of the housing market will require a confluence of consumer confidence in the fairness of the market and lender confidence in the expectations and guidelines regulating the industry. At their best, the announcements provide that confidence. At its worst, the rules only further muddy the waters, delaying the recovery of the housing market.
QM and Ability-to-Repay Recent Announcement
A far-reaching proposed rule that has hopeful and significant impact is the ability-to-repay mortgage rule, which was announced on Jan. 10. The establishment of this rule is to ensure borrowers can pay back their mortgage over agreed terms before they sign any documents. Dodd-Frank mandates that lenders must make a good faith assessment of a borrower’s ability to repay their mortgage. In accordance with the ability-to-repay rule, Congress has authorized “qualified mortgages,” which are safe and underwritten to make a borrower’s ability to repay reasonable and expected.
Moving forward into 2013, this rule has potential to reduce the number of foreclosures, allow borrowers to purchase loans they can afford, with guaranteed terms they can afford to pay back, and to drive the real estate market out of a recession.
LO Comp Reform
When the mortgage crisis took the economy for an unprecedented ride beginning in 2008, the concerned public sought answers from lenders. The roles loan originators, mortgage brokers, loan officers, and brokers played in the origination process were called into question when the financial industry’s status escalated to such a bleak level. Consumers relied on their MLO to guide them and seek the best-qualified loan opportunities for their family. However, the steering of consumers toward a higher rated loan and unfavorable terms unfortunately occurred in the years before the financial meltdown.
Even though most of the worst offenders of steering have gone out of business, the CFPB has set qualification standards for loan originators and to regulate the industry’s compensation practices, the first step in earning consumers’ trust back. The revision of existing regulations regarding dual compensation and loan originator compensation will ease predatory lending and enable borrowers and lenders to have a transparent, origination relationship.
TILA/GFE Form Combination
The confusion surrounding mortgage disclosure documents was curtailed with a single document combination of the Truth in Lending Act (TILA) and the Real Estate Settlement Procedures Act (RESPA) forms. Consumer misunderstanding of redundant and opaque forms cost the borrower more money due to unexplained terms and conditions from the lender. A proposal aimed to clarify a consumer’s upfront charges and loan interest rates will significantly change the way lenders process transactions and current pricing practices.
Under this proposal, consumers will not have to pay upfront discount points, origination points or fees if the MLO is already being compensated for transactions by a mortgage brokerage firm or creditor. Dodd-Frank has granted the CFPB authority to change this specific practice, and the CFPB is proposing to use its exemption authority to allow creditors to continue receiving upfront points and/or fees if they present the consumer with comparable, alternative loans for which they are qualified.
These options have anticipated benefits for borrower and lender alike. The proposed rule will allow consumers to weigh various loans and compare prices, while still granting them the opportunity to pay upfront payments if they wish to have reduced interest rates or periodic payments over time. It will also provide stability in the uncertain lending industry and not completely require new pricing structures to comply with the Dodd-Frank Act requirement.
However, a barrage of new information to process, like multiple comparable loans from lenders, could most likely confuse consumers even more. Various loan offers with expansive, differential terms and conditions, could turn into an information overload for the weary consumer. The lender will be tasked with presenting loan options in an easy to understand format, explaining key differences for the borrower and their situation.
A Dodd-Frank provision requiring originators and employers to pass a certain set of tests, practice up to the highest standards and include license or registration numbers on specific loan documents will positively increase the code of ethics in which a lender operates. The industry saw its integrity crumble during the financial crisis when lenders were found taking advantage of borrowers’ situations. The implementation of across the board standards will improve the public’s view of the lending industry and distinguish a lender’s stature.
The proposed CFPB rules are due Jan. 21, 2013, but industry experts fear a regulatory cliff if all rule implementations simultaneously commence. These rules provide transparency and hope for consumers and the economy. However, regulators need to understand that full implementation will take time, new systems and adjustments. The smooth transition from crisis to post-crisis has hopeful possibilities only if ample time is given to the industry to implement.