In June, the Consumer Financial Protection Bureau (CFPB) issued three proposed modifications to the new mortgage rules published by the Bureau in January 2013. For those unfamiliar with the CFPB, the CFPB was created following the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The Bureau’s mission is to monitor financial markets and protect American consumers who use common financial products, such as credit cards, mortgages or student loans.
In the wake of the Great Recession, the CFPB has been incredibly focused on disclosures and regulations in the mortgage industry in an effort to avoid repeating the sub-prime lending crisis and to protect current consumers struggling to repay their mortgage.
The latest mortgage modification rules are meant to pave the way for more effective consumer protection in the mortgage marketplace. Lenders will be required to implement these new mortgage regulations beginning in 2014, giving financial institutions the next few months to implement these changes before the CFPB begins examining for compliance.
So how do these changes affect you?
From shopping for a mortgage to repaying your loan, the modified rules cover all stages of the mortgage experience. Whether or not you currently have a mortgage or you’re looking to take out a loan in the near future, here are three of the major modifications proposed by the CFPB that may affect your mortgage experience:
Ability-to-Repay rule: This rule protects consumers from irresponsible mortgage lending, requiring lenders to make a good-faith and reasonable determination if prospective borrowers have the ability to repay their mortgages. Most new mortgages must comply with this rule to protect consumers from taking on loans that they cannot afford to repay. For example, if a lender issues a “Qualified Mortgage” to a consumer, the lender is presumed to have complied with the Ability-to-Repay rule. What does this mean for you? If you take out a Qualified Mortgage, you can rest assured knowing that you are in a good position to repay your debt given the terms of your loan.
Loan originator compensation rule: This rule addresses practices that incentivized loan officers to encourage borrowers to take out risky, high-cost mortgages. Loan officers can no longer get compensated based on the variable of the loan term. This means they cannot earn a higher commission if the consumer takes out a loan with higher fees or a higher interest rate. The rule also prohibits a loan originator from getting paid by another person, like a creditor. With these new rules in place, consumers taking out a mortgage will now hopefully be steered toward affordable products with terms that are in the best interest of the consumer.
Mortgage servicing rule: The CFPB has now outlined rules establishing strong protections and clear protocols for homeowners facing foreclosure. Thanks to the CFPB’s new servicing and foreclosure procedure recommendations, borrowers can avoid costly foreclosure surprises and runarounds by their mortgage servicers. These rules require straightforward, open communication from lenders, ensure protections during the foreclosure process and open the doors for short-term forbearance plans for delinquent borrowers who only need temporary relief.
These rules won’t come into effect until 2014. But in the meantime, keep an eye on the CFPB as they release more information about how these new regulations will better protect and serve consumers.