Don’t blame lenders if they are feeling a little punch-drunk.
Since the beginning of the year, the Consumer Financial Protection Bureau (CFPB) has been dealing out body blows like Sugar Ray Robinson working the heavy bag: Nine sweeping new final rules that implement different aspects of the Dodd Frank Act have been issued in just over three weeks, for a total of 3,081 closely printed pages of indelible lawyerese.
Local lenders are still leery as they begin to digest the sweeping changes. The CFPB task force at the Massachusetts Mortgage Bankers Association (MMBA) estimates it’ll be snowed under until February at least, said Jeremi Marshall, the association’s chair.
“While I have been contacted by many members of the MMBA for a ‘Clliffs Note version’ of the policies that have been released, due to the importance of each measure, the MMBA feels that it is more important to dissect each document [fully],” he said.
Nevertheless, some things are beginning to emerge from the fog. The implementation of the “ability to repay” rule called for in Dodd–Frank may well succeed in herding the vast majority of residential loans into underwriting standards that meet the definition of the “qualified residential mortgage” (QRM).
“Policymakers feel that the deterioration in lending standards [during the boom] brought the world to the brink of a Great Depression,” said Rich Hogan, legislative and regulatory counsel for title insurer CATIC.
Dodd–Frank attempts to close down every loophole that would allow a “liar’s loan” onto lender books, and it seems clear that they may have succeeded in one respect – the rules lay out a set of underwriting criteria for non-conforming mortgages which involves eight different criteria. The requirements include verifying a borrower’s income and assets, credit scores, and accounting for any other known costs associated with the loan (homeowner’s insurance) or other obligations (student loans, car payments) the borrower must repay. Lenders would also have to consider the full projected payment of the loan itself, not merely the payment associated with the first few years of the loan, as well as make sure a borrower has enough left over to cover other expenses.
“This is something consumer groups have really been pushing for,” Hogan explained. “Lenders will have to verify that not only does the borrower have enough money to repay the loan, but enough so that they can live a normal life – put gas in their car, afford utilities, do the things that all of us do as we live our lives.”
But even if lenders follow those strict standards, Hogan explained, it may still be possible for a borrower to sue them, claiming that the lender should have known they couldn’t repay the loan. Rather than face such liabilities, it’s likely that lenders will simply move toward making sure all their residential loans meet the QRM standards, since loans which meet those standards are protected from suit.
Back Office Challenges
Loans issued under the QRM rules will also have a lengthy implementation period – which could stretch out as far as 2021 – where lenders would have more wiggle room to bend the QRM rules around debt-to-income ratio and other features as long as they conform to the underwriting guidelines of Fannie Mae, Freddie Mac or certain other federal agencies.
The lengthy run-up and underwriting flexibility should allow borrowers to qualify for loans more easily. But many borrowers in high-cost states like Massachusetts may face a tougher road – most “jumbo” mortgages don’t meet the QRM criteria and can’t be purchased by the GSEs or other federal agencies, meaning borrowers will be held to far stricter standards, and some lenders may be reluctant to issue such loans at all.
Servicers will also face big challenges in order to realign their back office systems to comply with new rules meant to tip lenders toward issuing loan modifications rather than foreclosing. For example, the new regs prevent lenders from proceeding with a foreclosure at the same time they are evaluating homeowners for a loan modification, so-called “dual tracking.” It’s not yet clear, industry sources said, whether the new federal rules will conflict with the Bay State’s recently passed foreclosure law, which also requires servicers to prove they’ve attempted a modification, but which has different timelines and requirements for notifying borrowers of their options.
Some in the industry, however, still seemed cheerful even after facing down the barrel of thousands of pages of new regs.
“I don’t consider myself an expert, but I’ve looked at the servicing regulations and I thought, damn, that’s what we should have been doing and it’s about time. It seemed to me that in general that that’s the kind of information borrowers should be getting in this new and more complicated mortgage environment,” said Amy Tierce, regional vice president of Fairway Independent Mortgage in Needham. “But it’s going to be very disruptive.”
Email: csullivan@thewarrengroup.com
