New rules for consumers seeking home loans are arriving in the new year. And if you already have a mortgage, new borrower protections take effect for you, too.
The rules, issued by the federal Consumer Financial Protection Bureau, were issued in early 2013 but begin next week.
Beginning Jan. 10, lenders must take steps to make sure you, as a borrower, can afford to repay the loan you are seeking, based on your income, debts and credit history. That may sound like common sense, but during the housing crisis, many borrowers ended up with loans — sometimes called “no-documentation” loans — that they couldn’t afford. Often, borrowers took out adjustable rate loans with payments that were affordable to them at an initially low “teaser” interest rate, but that became unaffordable once the interest rate increased.
Many lenders already have adopted some of the changes, but the new rules make the requirements “more precise,” said Mike Calhoun, president of the nonprofit Center for Responsible Lending. “You’re less likely to have hidden surprises.”
One way lenders can comply with the new rules is by making what’s called a qualified mortgage, which is a loan with features aimed at making it safer for consumers. For instance, such loans can’t have risky features like interest-only payments or negative amortization, in which the principal balance on your loan increases over time. In general, the borrower’s debt, including mortgage payments, can’t total more than 43 percent of gross monthly income (although there are exceptions to that cap for the next several years). And points and fees are limited to 3 percent of the loan amount.
Under the new rules, if a lender makes a qualified loan, it is presumed to be one that the borrower can repay — and that gives the lender some legal protections, Calhoun said. Lenders may make loans that don’t meet the criteria for a qualified loan, but they still must make a “good faith” effort to determine that the borrower can make the payments, according to the consumer protection bureau.
There are also new rules for mortgage servicers, the companies that handles collection of payments on loans. Servicers must send you a clear monthly statement, credit your payments on the day they are received and fix any mistakes promptly.
The rules also specify the steps servicers must take if you fall behind on your payments. For instance, servicers must take the initiative to contact most borrowers if they are 36 days late on their loan payment. Also, servicers can’t start a foreclosure until the borrower is more than 120 days delinquent on a loan. Under the new rules, you must have time to submit an application for a loan modification or other assistance, and perhaps appeal a decision that goes against you, before a foreclosure occurs.
Alys Cohen, a lawyer at the National Consumer Law Center, said the servicing rules could have a significant effect. More than 1 million loans were 90 days or more late in the third quarter of 2013, based on data from the Mortgage Bankers Association. She said she was concerned, however, that while the new lending rules might offer protections, they also might make it more difficult for lower-income borrowers to qualify for a loan.
Peter Carroll, assistant director of mortgage markets for the consumer bureau, said he did not think credit would be restricted under the new rule. The bureau’s analysis shows that roughly 95 percent of loans made in the current market meet the criteria for qualified mortgages, he said.
Here are some additional questions about the new mortgage rules:
Q: Do any new rules apply if I have an adjustable-rate mortgage, or ARM?
A: Your servicer must send you an early notice if you have an ARM and your interest rate is about to change. This is so that you can have time to shop for a new loan or seek help if you think you can’t afford the higher payment.
Q: What happens if I can’t make my mortgage payments?
A: You can submit a request for help, often known as a “loss mitigation” application. Consumer protections are strongest if you submit it within 120 days of your first missed payment, but you can submit it later. Your servicer must evaluate you for all potential options, such as a lower monthly payment or a reduced interest rate or a short sale of your home. Once your application is complete, the servicer can’t start foreclosure while evaluating your request. If it rejects your request, it must explain why. The rules set deadlines by which the servicer must respond. More details are available at consumerfinance.gov/mortgage/#homeowners.
Q: What if my servicer isn’t complying with the new rules?
A: You can complain to the Consumer Financial Protection Bureau at consumerfinance.gov/complaint. If you need direct help with your loan, you can find a government-approved counseling agency by calling 888-995-HOPE (4673).
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