By Gladys Lawrence, AFCPE-FINRA Foundation Military Spouse Fellowship
The consumer Financial Protection Bureau (CFPB) will implement new consumer protections in January 2014. Richard Cordray, Director of the CFPB, suggests that these new changes are a win-win situation. “Both consumers and the industry will win when the new rules are understood, applied, and carried out evenly and effectively.” It is imperative that military financial counselors, not only know these rules, but understand how they can impact military service members.
A key provision of the new rules is the “Ability to Repay Rule.” A lender must now make a “good faith” determination that a mortgagee can repay a loan. The failure to do so was one of the driving forces behind the sub-prime loans which to led to the 2008 mortgage meltdown. The new rules clarify a key provision of the Dodd-Frank Financial Reform Bill of 2010. It states that a bank can’t be sued if it make a qualified montage. The new rules by the CFPB define a “qualified mortgage.” A qualified mortgage is a loan to consumer with a debt to income ratio less than 43 percent. The effect is that many low income families no longer qualify for loans. Also, many who previously qualified are now disqualified because of high credit card debt or other personal debt.
So how is this rule good for the consumers? It protects consumers from some of the unscrupulous practices like underwriting a loan based on teaser rates and low introductory rates. It will put an end to no- document and interest-only loans, unfavorable terms like balloon payments and high up-front fees. It’s good because the consumer is not set up to fail with a mortgage which cannot possibly be repaid. Income must be documented and lenders must determine ability to pay based on the cost of the principal and interest over the life of the loan and not based on teaser rates.
New rules are also directed toward the mortgage servicing industry to ensure that consumers get fair treatment to avoid foreclosure. The time of “robo signatures” of foreclosure documents, sloppy accounting, and mortgage servicers hedging their position by working with clients on modifications, while at the same time proceeding with foreclosures, is over (mortgage servicers are the agencies responsible for collecting payments on behalf of the loan-holder).
Listed below is a brief overview mortgage servicing rules:
- If a borrower has already completed an application for a loan modification, the server cannot move forward with a foreclosure, if an application for review of loan modification or an alternative is pending.
- A foreclosure cannot be filed until a loan is at least 120 days delinquent. Servicers must provide those with delinquent accounts direct access to people responsible for their accounts. Their documents must be processed in a fair and accountable way. If paper work is missing, by law, the borrower must be notified.
- A fair review process is guaranteed. No foreclosure sale can take place until all alternatives are exhausted, not just the options that are most financially favorable to the servicer. Servicers must consider a borrower’s application for a loan modification if it is received at least 37 days before a scheduled sale.
All of these procedural changes should bring clarify to a system which has been which in the past few years been characterized by murkiness and abuse.
This post was published on the Military Families Learning Network Blog on August 16, 2013.