Over the coming year the Consumer Financial Protection Bureau (CFPB) will implement a plan to ensure the mortgage industry complies with the new consumer protections mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act. As required by the Act, the CFPB issued new mortgage rules on January 21, 2013 and set a January 2014 deadline for the mortgage industry to comply with these new rules, although compliance with certain portions of the rules will be required as early as June 2013.
The new regulations impact consumer mortgage underwriting and servicing, appraisals, escrow accounts, protections for high-cost mortgages, and both qualifications and compensation for loan originators.
Under one of these rules, the so-called Ability to Repay rule, lenders will be required to make a determination that prospective consumer borrowers will be able to repay their mortgage. Unlike most of the other rules that apply to high-cost consumer mortgages secured by the consumer’s principal dwelling, the Ability-to-Repay rule also applies to prime mortgages and mortgages secured by virtually any dwelling.
If the loan is a “qualified mortgage” as defined by the Ability to Repay rule, lenders can qualify for a safe harbor that may shield them from certain types of consumer litigation. However, a lender that makes a qualified mortgage that is considered to be “high cost” or “high interest” will receive less protection under this safe harbor. For this category of loans, the lender’s compliance with the Ability to Repay rule merely creates a rebuttable presumption in favor of the lender.
The Ability to Repay rule also prohibits underwriting consumer mortgage loans with low introductory “teaser” interest rates, and they restrict practices such as so-called “no-doc” and similar loans, negative amortization loans, and interest-only loans.
In an effort to support the timely implementation of these new regulations, and to ensure the mortgage industry is prepared to comply with these new consumer protections by the deadlines prescribed in the rules, the CFPB states that it will:
- Coordinate with other agencies: The CFPB states that it is coordinating with other federal government regulators that examine mortgage companies to ensure that the CFPB’s new rules will be enforced in a consistent manner across the industry.
- Publish plain-language guides: In spring of 2013, the CFPB indicates that it will publish easy-to-understand summary guides of the new rules in both written and video form, which will be particularly helpful for smaller businesses with limited compliance staff.
- Publish updates to the official interpretations: CFPB has stated that it will, over the course of 2013, issue updates of the “official interpretations,” to assist in compliance.
- Publish readiness guides: Per the CFPB, these readiness guides will become available in summer 2013, and they will contain checklists to assist in revising policies and procedures and finalizing staff training plans.
- Educate consumers: Finally, the CFPB will disseminate information to consumers to educate the public about the benefits of consumer protections under the new rules.
Although there is no immediate need for industry participants involved in the development, sale or finance of residential properties to change their current practices, members of this industry sector should watch closely over the coming months to better understand how the new rules will affect their business practices. For example, it would not be surprising if developers of condominium projects see further tightening of their ability to secure pre-sales commitments. Also, developers should plan to structure financing offered for condominium purchases to ensure compliance with the new CFPB rules.
It is also worth noting that these new rules could affect sources of credit other than high-volume residential lenders. For example, certain sellers of vacation properties may find their lending practices subject to compliance with one or more of these new rules. In addition, various forms of seller financing may be impacted, which may potentially include the sale of residential property under contracts for deed. It is critically important for anybody involved in consumer lending to monitor CFPB’s releases in the coming months to determine whether their current business practices will continue to comply with Federal requirements.
Industry participants can keep apprised of these new developments using the resources being made available by the CFPB through the following links: