Residential Mortgage Lenders: act now to avoid pain later! The regulations that will put teeth into Title XIV of the Dodd-Frank Act – the Mortgage Reform and Anti-Predatory Lending Act (the “Act”) – are still on the horizon and might not take effect until late 2011 at the earliest or early 2014 at the latest. However, lenders who plan ahead will have a smoother transition to the new residential mortgage lending market.
The Act creates strict new loan origination standards for residential mortgage lenders, primarily through the following sections:
- Section 1403 – Prohibition on Steering Incentives – this section prohibits mortgage lenders and brokers from giving or receiving compensation that varies based on loan terms other than the principal amount of the loan. This section effectively eliminates yield spread premiums. The Consumer Financial Protection Board is required to issue regulations that prohibit mortgage originators from steering any consumer to a residential mortgage loan that the consumer lacks a reasonable ability to repay.
- Section 1411 – Ability to Repay – this section requires mortgage lenders to determine that the consumer has the reasonable ability to repay the loan according to its terms based on a variety of factors including credit history, current income, expected income, and current obligations. Critically, mortgage lenders cannot rely on the consumer’s equity in the subject property. Mortgage lenders must verify income by reviewing third party documents such as W-2’s, tax returns, payroll receipts, and financial institution records.
- Section 1412 – Safe Harbor and Rebuttable Presumption – this section creates a safe harbor for mortgage lenders, allowing them to presume that any “qualified mortgage” satisfies Section 1411’s ability-to-repay requirement. Among other criteria, points and fees on a “qualified mortgage” may not exceed 3% of the underlying loan, the consumer may not defer repayment of principal, the term must not exceed 30 years, negative amortization is not allowed, and no balloon payments are permitted except under certain circumstances.
Taken together, these three sections of the Act effectively eliminate subprime, NIV, and pay-option ARM loan products. While it may take two or three years to implement the Act’s operative regulations, mortgage lenders should prepare today to comply with the Act’s strict new loan origination standards.