Tuesday, July 6, 2010

What's In (and Out) of the Financial Reform Bill Part II

As we anticipate the financial reform bill being signed into law next week, we will be looking at the final draft of this bill this week. A number of amendments and changes were added at the last minute, so the final bill contains quite a few changes.

The section we are examining is Title XIV--The Mortgage Reform and Anti-Predatory Lending Act. These regulations shall take effect no later than 12 months after the regulations are issued in final form. The findings on page 8 of this section of the final bill are particularly interesting: "The Congress finds that economic stabilization would be enhanced by the protection, limitation, and regulation of the terms of residential mortgage credit and the practices related to such credit, while ensuring that responsible, affordable mortgage credit remains available to consumers." Personally, I don't think that the federal government should be setting lending standards to limit the availability of mortgage credit, but that is exactly what this bill does.

The final draft of the amendments did resolve some glaring problems from the initial legislation. For instance, the final mortgage reform act does leave room for seller financing for up to 3 properties in 12 months to the purchasers of those properties. That would allow investors who want to get rid of their properties to provide seller financing. There are, however, some restrictions--the seller cannot be the builder of the home; the loan must be fully amortizing, the seller must verify that the individual has a "reasonable ability to repay the loan"; and the new loan must have a rate that is fixed for at least 5 years. These restrictions on seller financing--especially the text legislating that the seller must verify the income and ability to repay of the purchaser--are new, but at least they preserve seller financing as an option, which in these days of tightened credit standards is going to be increasingly important.

Stated income loans are outlawed under the new rules. All borrowers must be able to prove their income with at least a W2 and their income must be verified through tax transcripts with the IRS. Currently this is standard practice, but many borrowers have been looking forward to the days when credit guidelines will relax and they will be able to get stated income loans again. Those days are not coming back. This has special implications for people living in border communities like El Paso where we deal with a lot of foreign income. Traditionally, the foreign national borrower could make a large downpayment and state their income. Now, they must be able to prove their income with tax returns, which can create challenges. The new act does provide an exemption for streamline refinances as long as the consumer is not 30 days or more past due on the current mortgage, and the refinance does not increase the principal balance on the current residential mortgage except to the extent of the fees and charges allowed by new rules as written by the new governing agencies.

Finally, the new Act revises the way that mortgage originators are paid. A mortgage originator may no longer receive payments from the lender unless none of the origination fees are paid by the consumer. Further, there is a three percent cap on points and fees for qualified loans. Qualified loans have a presumption of compliance with guidelines regarding income verification, so in practical terms these loans are quickly going to become the only loans that can be originated and sold on the secondary market. As industry professonals have complained that since this cap must include all lender fees it will lead to fewer smaller loans being originated and to less financing being made available for smaller properties, the new Act calls for a study to determine whether financing is actually affected by the new rules. Prohibited practices include: "steering any consumer from a residential mortgage loan for which the consumer is qualifed...to a residential mortgage loan that is not a qualified mortgage...abusive or unfair lending practices that promote disparities among consumers of equal credit worthiness but of different race, ethnicity, gender or age...mischaracterizing the credit history of a consumer or the residential mortgage loans available to a consumer; [and] mischaracterization of the appraised value of the property securing the extension of credit."

Penalties for violating this statute are stiff--the mortgage originator determined to be in violation of this statute can be fined up to 3 times the total amount of direct and indirect compensation plus court costs and the consumer's attorney's fee.

Industry experts predict that since banks are allowed to receive payments on the servicing release premium when the loans are sold, we will see lender administrative fees rolled into higher interest rates which will be sold to the consumers. And that is probably true, because in the end nothing is free. Banks are going to pass their costs on to consumers one way or another.

The new statute ends mandatory arbitration, so consumers with a complaint have the right to go to court. This is an important change because lenders have come to rely on mandatory arbitration clauses to keep costs down in disputes.

Tomorrow we will look at the provisions of the bill as they relate to appraisers and HVCC.

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