NEW YORK (Reuters) - In the market for a new home, or looking to refinance? You might find it easier - and perhaps cheaper - to get a mortgage, now that the Consumer Finance Protection Bureau has established new regulations requiring banks to meet detailed underwriting criteria.
“This is probably the biggest mortgage rule the industry has ever seen,” says Guy Cecala, editor of Inside Mortgage Finance, a trade publication.
Under the CFPB's new rules on what constitutes a "qualified mortgage," banks will need to verify an applicant's income and employment as well as ascertain that the loan being sought does not exceed 43 percent of that income. (link.reuters.com/bep25t)
Fee limits will be set, no more than 3 percent for points and no rates more than 1.5 points above prime. Under the new rules, a consumer cannot sue unless the bank has been remiss in meeting its obligations as laid out by the regulations.
The rules go into effect in January 2014.
None of this comes as a surprise to the financial industry, since clarity on lending standards was set out in the Dodd-Frank financial reform act of 2010. But now that the regulations have been codified, here are some answers to key consumer questions.
Q. Will I still be able to get a mortgage?
Consumers who meet lending standards will still be able to get loans, while those who fall short will have their applications turned down. That will not change, experts say. The new rules make it too risky for lenders to stray from guidelines, as that may leave them open to a lawsuit.
“Most of what is in the rule, the industry has been doing voluntarily,” Cecala says.
But the standards are now clear and on the books, says Kathleen Day, a spokeswoman for the Center for Responsible Lending. “You will know a ‘qualified mortgage’ when you see one. It is a bright line. There is no ambiguity,” she said.
Speaking for the banking industry, Debra Still, chairman of the Mortgage Bankers Association, issued this statement: “We remain concerned that certain aspects of it could curb competition, increase costs and tighten credit availability for borrowers.”
Q. Didn’t banks always do underwriting? Why are rules necessary?
The subprime lending crisis occurred after banks ignored recommended underwriting procedures for higher-risk loans, known as no-doc and low-doc loans, because less information was required to get approval. High-risk subprime loans, made to borrowers who didn’t have enough income, also fit into this category and came with high interest rates, or low teaser rates that skyrocketed later on.
“It’s crazy that we had to codify in law that lenders do underwriting,” adds Day, whose group has for years been advocating for these changes. “But this is what we wanted, and now it’s there.”
Q. Will there be any wiggle-room for lenders?
Lenders might have some flexibility in the market for large mortgages - the so-called jumbo market, where loan-to-income ratios have been traditionally higher than for conventional loans. Jumbo mortgages are typically above $625,000 in high-cost areas.
While these loans may be hard to come by for a while, banks may find, over time, that the risk of being sued for making a non-qualified mortgage is not so great, says Cecala.
Day sees the so-called “safe harbor” for lawsuits as the big win for the banks. The new rules allow borrowers to sue when the banks don’t meet the qualifying standard. (Day and other consumer advocates groups were pushing for regulations to give all consumers the ability to sue banks for not properly underwriting a loan.)
“The win for us was that on the higher-cost loans - and that’s where most of the trouble was during the housing crisis - those consumers will still have the ability to challenge their lenders,” Day says.
Q. What’s next?
Expect follow-up rules on the kinds of mortgages that can be sold in the secondary market. For example, the CFPB could require that only loans with a down payment of 10 percent or 20 percent can be sold.
“We think there should be a down payment, but we don’t think the government should set it,” Day says.
Editing by Lauren Young and Gunna Dickson