Health & Fitness
HOPING TO BUY A HOME IN 2014? Here’s How the New CFPB Regulations May Affect You
CCCS Housing Director Tom Simonton examines how the Consumer Finance Protection Bureau's new rules protect and affect homebuyers. If you hope to buy a home this year, this is one article you won't want to miss.
It’s a new year, and with it come a host of new mortgage regulations from the Consumer Finance Protection Bureau (CFPB). These rules grew out of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, which was enacted to prevent another housing crisis where millions of Americans lose their homes. We recently caught up with Tom Simonton, Director of Housing for national nonprofit Consumer Credit Counseling Service of MD & DE (CCCS), and asked him how these new rules will affect homebuyers. He said, “These new regulations mostly apply to lending institutions, but ultimately are designed to protect the borrower from abuses like those suffered in the past.”
Just exactly how will these new rules benefit those of us who are shopping for a mortgage? The CFPB says consumers can expect help in four major areas:
1. The new rules will make the mortgage market safer and easier to understand. There will be more transparency throughout the home buying process.
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2. The rules will limit the fees lenders can charge and still make what is called a “Qualified Mortgage.”
3. With limited exceptions, loan originators will now be required to be licensed or registered at a state or federal level. Anyone who is paid to offer, arrange, or assist consumers in finding mortgages can’t be paid more to steer them into a higher-cost loan product.
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4. Homebuyers will now have the right to receive a copy of home appraisals or valuations at least three business days prior to closing, giving them more time for review.
Prior to the recent mortgage collapse, many lenders made loans without making sure borrowers had enough money to repay what they owed. This was one of the primary reasons so many people ended up in foreclosure a few years down the road. To guard against this happening again, the CFPB has instituted an Ability-to-Repay (ATR) rule. Simonton says, “This rule requires that loan originators make a reasonable, good faith effort to determine a borrower’s ability to repay before approving a mortgage. While the rule doesn’t require that lenders follow specific underwriting standards, it does list eight factors that must be considered when evaluating a borrower’s ATR.”
According to the CFPB, “Lenders must generally find out, consider, and document a borrower’s income, assets, employment, credit history, and monthly expenses.” They can’t just use an introductory or “teaser” rate that goes up in later years. Instead, they must make a reasonable effort to figure out if the borrower can pay the higher interest rate too. One way a lender can follow the ability-to-repay rule is by making a “Qualified Mortgage.”
What is a Qualified Mortgage (QM)? Simonton says, “To qualify for QM status, a loan must not contain risky features or practices such as negative amortization or interest-only periods.” According to the CFPB, a qualified mortgage is one the borrower should be able to repay. It should be safer and easier to understand and offer a “fairer deal” than in the past. For example, the new rules limit the points and fees lenders can charge when they make a qualified mortgage. A loan over $100,000 can’t be a QM if it has points and fees that are more than three percent of the loan amount.
In this new environment, qualified mortgages will be easy to find. They can be issued by any type of lender. For the next seven years, loans that are eligible to be purchased, guaranteed, or insured by the VA or USDA and those which are eligible to be purchased or guaranteed by Fannie Mae and Freddie Mac are automatically QMs if they meet certain product requirements. Loans that are insured or guaranteed by HUD or FHA are also considered QMs.
Under the new rules, consumers can still opt for mortgages with higher points and fees, but they’ll be less likely to sign up for this type of loan not knowing the consequences. According to Simonton, those who decide to take out a high-cost mortgage are now required to receive pre-purchase counseling. He adds, “We always recommend homebuyer education no matter what type of mortgage consumers prefer.”
How will CCCS of MD & DE’s pre-purchase education and counseling program help clients prepare for homeownership under the new regulations? Simonton says it all comes down to one word: “Education, education, education!” CCCS has a long track record of providing consumers with the help they need to make better informed financial decisions. Its housing program is based on standards set by the National Industry Standards for Homeownership Education and Counseling and other HUD requirements and guidelines as well as its own knowledge of best practices. All of the agency’s counselors and educators are fully trained and certified.
Clients who attend the CCCS homeownership workshop or complete its online homeownership pre-purchase certificate program come away knowing how much home they can afford to buy and the types of barriers that may affect their ability to obtain one. They also learn how to budget and save for the purchase, obtain and review their credit reports and credit scores, and identify the right loan product for them. These issues are all relevant in light of the new law’s requirement that consumers only receive a mortgage once they demonstrate they can repay what they’ll owe.
To learn more about CCCS’s pre-purchase homeownership certificate program, please visit the agency website. To schedule an appointment for pre-purchase education or counseling, please call 1-866-731-8486. And stay tuned: Next month we’ll examine how the new CFPB rules affect homeowners. When it comes to being financially informed, there’s always MORE to know.
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Consumer Credit Counseling Service of MD & DE, Inc. (CCCS) is an accredited 501(c)(3) nonprofit agency that helps stabilize communities by creating hope and promoting economic self-sufficiency to individuals and families through financial education and counseling. CCCS MD State License #14-01.