Selling Mortgage Loans? Time to Brush Up on the New Laws
On January 10, 2014, the Dodd-Frank Wall Street Reform and Consumer Protection Act (or “The Dodd-Frank Act”) took effect, creating an uphill battle for mortgage lenders. Understanding the lending restrictions continues to be an ongoing process. Staying compliant relies heavily on understanding these new regulations, avoiding predatory lending practices and gaining better insight into customer data.
New regulations introduced
Dodd-Frank contains a number of requirements that apply to mortgage lenders. One purpose of this act is to prevent excessive risk-taking by mortgage lenders in the hopes of avoiding another financial crisis like the one that occurred in 2008. Additionally, the Consumer Financial Protection Bureau (CFPB) was established as a watchdog to help prevent mortgage companies and other lenders from exploiting consumers for mortgage loans. Here is a look at some of the key provisions the act has put into place:
- Appraisals: Requirements have been put in place for creditors to receive quality property appraisals before extending a high-risk mortgages.
- Documentation: New forms are in place to make disclosure statements simple and singular for easier consumer comprehension. Mortgage lenders must update their documentation to be compliant with these transparency laws.
- Counseling: Office of Housing Counseling was created to effectively communicate regulations regarding mortgage counseling, educating borrowers throughout the mortgage application process.
Avoiding predatory lending practices
Under these new laws, mortgage lenders must update training to reflect new documentation requirements, and banks must update their investment structure to minimize the potential for violating the Dodd-Frank Act. However, avoiding predatory lending practices, as determined by the U.S. Securities and Exchange Commission, can be challenging. Here are some of the key requirements:
- Lenders may not offer a residential mortgage to a consumer without “a reasonable and good faith determination…the consumer has a reasonable ability to repay the loan.” To do this, lenders must forego introductory offers with mortgage rates when determining if the borrower can afford the loan.
- Qualified mortgages, which are loans that don’t have a balloon payment, should be adjusted to be fully amortizing; have taxes, insurance and assessments included in payments; meet the requirements of debt-to-income standards; not exceed a period of 30 years; and have reasonable fees and points.
- Mortgage loans can no longer have prepayment penalties if they are nonqualified.
- Steering, the practice of encouraging good credit borrowers toward subprime mortgage, is now illegal.
These are just a few of the requirements that mortgage lenders need to put in place to remain in compliance.
Knowing your customers
Staying compliant with today’s strict lending requirements can be challenging. Knowing your borrowers is more crucial now than ever before. To get a better overall image of your borrowers and reduce your risk at the point-of-sale, gather crucial customer intelligence through credit, employment, income and property data. In addition, mortgage solutions tools can be put in place to help facilitate compliance standards. While implementation of the guidelines required by the new law is essential, using resources like these can help keep your financial institution improve its compliance processes.
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