New Lending Rules In this session we re going to be talking about some new lending guidelines and some new forms that will impact your clients, said Mike. We ll see how that fits in with the title of the Consumer Credit Protection Credit ActTruth in LendingRegulation Z, and talk about disclosure rules, new forms, a borrower s right to rescind, advertising rules, and how all of that is going to impact you and your clients. The Consumer Credit Protection Act was created in 1968 and includes the Truth in Lending Act. The Consumer Credit Protection Act was created to safeguard the consumer in the use of credit by requiring full disclosure of the terms and conditions of that credit or in any offers of credit. The Equal Credit Opportunity Act (ECOA) is also known as Regulation B; it was enacted in 1974 for the purpose of preventing discrimination in the granting of credit by prohibiting discrimination in financing based on protected class status, which includes race, color, religion, national origin, sex, marital status, age (over the age of 18), or dependence on public assistance. Copyright 2014 The CE Shop. All rights reserved. 1
The Community Reinvestment Act says that lenders have to meet the needs of their communities by investing in development and rehabilitation efforts that will enable low- and moderate-income individuals and families to afford a home. To ensure they do, the lender has to prepare a statement that shows its community s geographic boundaries, identifies the community reinvestment credit offered, and includes comments from the public about how the lender is doing in meeting the community s needs. Periodically, the lender is reviewed by a federal financial agency such as the Comptroller of the Currency, the Federal Reserve s Board of Governors, the FDIC, or the Office of Thrift Supervision. The lender must post a public notice that they are subject to this review, and they have to make the results of that review public. RESPA, which stands for the Real Estate Settlement Procedures Act, was enacted in 1974 by HUD, in part to eliminate illegal kickbacks and referral fees among settlement service providers. RESPA covers loans on one- to four-family residential properties, including assumptions, refinances, home improvement loans, and equity lines of credit. RESPA requires that written disclosure of estimated settlement costs be provided to the borrower. This used to be accomplished with the Good Faith Estimate, which was used to itemize these costs at the beginning of the application process, and then the HUD-1 or -1A Settlement Statement at closing, which provided a more precise accounting of these costs. As of October 2015, the new forms are the Loan Estimate and the Closing Disclosure. In spite of the sweeping changes in the financial market caused by new regulations, the Dodd-Frank Act of 2010 has yet to be fully implemented. More and more gets rolled out all the time, and in early 2014, significant changes were made that relate to qualified mortgages, the ability to repay requirement, and appraisal transparency. Copyright 2014 The CE Shop. All rights reserved. 2
So, what s a qualified mortgage, and why should you care? A qualified mortgage means it can be more easily sold on the secondary market because it can be bought or guaranteed by Fannie Mae, Freddie Mac, and the FHAthe three giants in the mortgage lending market. There are actually two types of qualified mortgages, and the one we care about for today s discussion is a qualified mortgage with a safe harbor status. A qualified mortgage with a safe harbor status means that it meets all criteria for a qualified mortgage. It also means that the consumer cannot later claim that the lender did not comply with the ability to repay requirements, which we ll talk about in a bit. A qualified mortgage with a safe harbor status is a lower-priced loan because the lender is assuming less risk. It is considered a prime loan (in contrast to a subprime loan) and is given to consumers who are considered less risky. A qualified mortgage with a safe harbor offers a lender the greatest legal certainty that the lender is complying with the ability-to-repay rule. However, a consumer can legally challenge a lender if that consumer believes the loan does not meet the definition of a qualified mortgage. The qualified mortgage with the rebuttable presumption is a higher priced loan because the lender is assuming more risk. These loans are a type of subprime loan usually offered to consumers with insufficient or marginal credit history. Legally, lenders who offer these loans are presumed to have verified that the borrower has an ability to repay the loan; that s what makes them qualified. If such a loan goes south, the consumer can rebut the presumption that the creditor properly took into account the consumer s ability to repay Copyright 2014 The CE Shop. All rights reserved. 3
the loan. The consumer must show that, at the time of the loan origination, the consumer s income and debt obligations left insufficient residual income or assets (after mortgage and other debts were considered) to meet living expenses. Let s talk about what makes a loan qualified. A qualified loan must meet the ability to repay rule. Ability to repay says that, prior to granting a loan, the lender has made a good faith, reasonable determination of a consumer s ability to repay the loan. For lenders who do this, they are granted certain protections from liability. There is no specific underwriting model and, by the way, underwriting is the process the lender uses to evaluate whether to make the loan there s no underwriting model to show that a lender has met the ability to repay requirement, but at minimum, lenders must consider eight underwriting factors: 1. Current or reasonably expected income or assets 2. Current employment status 3. The monthly payment on the covered transactionfor example, the mortgage payment 4. The monthly payment on any simultaneous loanany other mortgages on the same property 5. The monthly payment for mortgage-related obligations 6. Current debt obligations, alimony, and child support 7. The monthly debt-to-income ratio or residual income 8. Credit history Another requirement is that lenders must approve mortgages based on the maximum monthly charges the buyer will face in the first five years of the loan, not just the low teaser rates that may last only a few months, or a year or two, before ratcheting skyward. This means that some borrowers who would have qualified before, won t now. In addition, qualified mortgages require debt-to-income ratios of no more than 43%. A debt-to-income ratio is a way for a lender to measure a borrower s ability to manage the payments made every month in order to repay the money borrowed. To calculate a debt-to-income ratio, a lender will add up all of a borrower s monthly debt payments and divide that number by the borrower s gross monthly income. Gross monthly income is the amount of money a borrower earns before taxes and other deductions are removed. Copyright 2014 The CE Shop. All rights reserved. 4
Want an example? Let s say you re working with Bobby, a prospective buyer. He grosses $4,800 per month. He has an auto loan for $275. He also has a credit card payment of $325 and a student loan on which he pays $200 per month. His total debt is $800. If he is otherwise qualified, can he qualify for a qualified mortgage with a payment amount of $1,800? $1,200? Let s crunch those numbers. As you can see, under his current debt load, Bobby cannot obtain a qualified mortgage for $1,800 per month because his debt-to-income ratio would be above the 43% threshold. He can obtain a qualified mortgage for $1,200 per month, with a debt-to-income ratio of less than 42%. In this case, your client Bobby has four choices: Put more money down to reduce his loan amount. Shop for lower-priced homes, ones he can afford. Pay off his other debt. Increase his monthly incomepaper route, anyone? The 43% may sound generous, but remember that income must be verified now. These new rules are causing issues with self-employed individuals because they are hard and fast. There s not a lot of discretion left open to lenders if someone doesn t meet the 43% requirement. Also prohibited if you re a lender and you want to write qualified mortgages, are so-called toxic loan features. These include: Payback terms longer than 30 years The option to pay less than the full monthly interestalso known as negative amortization), which results in an increasing principal amount owed Interest-only payments Balloon payments Lender fees and points that total more than 3% of the loan, which includes payments to all affiliates of the lender as well Copyright 2014 The CE Shop. All rights reserved. 5
Another thing you ll see far less ofprepayment penalties. They re all but obliterated under the new rules. So, let s talk about disclosure rules under the Truth in Lending Act. Lenders are basically required to provide four primary disclosures: Annual percentage rate Finance charge Amount financed Total amount to be paid toward the mortgage in principal and interest Regulation Z, which applies to residential loans only, requires that borrowers be given all of the important information regarding the loan transactions so they can make an informed decision. Reg Z also requires these terms to be provided when advertising any credit terms. A lender couldn t simply say 3% loans! in an ad without also stating finance charges that applied, how long that rate was good for, etcetera. If any specific term is quoted, other than the annual percentage rate, all terms must be disclosed. Lenders must also provide borrowers with a disclosure statement within three days of making their loan application. This disclosure must include the actual annual interest rate on the loan, the APR, and any finance charges that apply. For borrowers who are either refinancing or obtaining a new loan on their current residence, the disclosure statement must also include the right to rescind up to three days after closing on the loan. Keira, who had been listening intently and taking notes, was happy to hear Mike then qualify the right of rescission. This is only for refinancing or new loans on current homes. Obviously, this doesn t include the right to rescind any closed real estate transactions you lovely people have put together three days after the fact. Relieved laughter ripped through the room. So, what can you say about financing? The best bet is, tell your client to call me. More laughter. But seriously, you can make general statements about financing without violating Reg Z, things like FHA financing available or assumable loan but don t quote specific terms. Copyright 2014 The CE Shop. All rights reserved. 6
Let s recap on what this means to you, as a licensee. Copyright 2014 The CE Shop. All rights reserved. 7