“I think we’ve all adapted already. There’s been a mindset in the industry that we need to get ahead of this thing, so as a whole the industry has just jumped on board,” said Carrie Nash, sales manager at SWBC Mortgage Corp. in Boulder. “It’s not that we believe it’s better. But we just decided if they have the rules, if they run the show, we’d better get on that bandwagon.”
The CFPB was created and the rules mandated by the 2010 Dodd-Frank Act. On its face, the major new component of the rules should be what historically we had expected from the mortgage industry. In essence, the Ability-to-Repay rule requires that all mortgage applicants be properly vetted to make sure they can repay the loan.
“There’s more rules requiring we verify with the employer that you are still employed, and we are also doing a lot more to make sure the paperwork is not fraudulent,” said Jason Thomas, a senior mortgage consultant with Premier Mortgage Group of Boulder. “We order from the IRS a brief overview of your taxes to make sure that corresponds, because it’s even easier to fake a tax return than it is a W-2.”
That’s just the tip of the iceberg when it comes to the paperwork and systems that will be required next year, local experts said. While some of the rules speak directly to the Ability-to-Repay rule, some of them are more broad reporting regulations, requiring extensive coursework and testing.
“Their heart is in the right place, but the implementation’s pretty crazy,” said Nash, who has more than 25 years of experience in the mortgage business. “The testing we have to go through now is unbelievable.”
For its part, the CFPB said it is working hard to educate both lenders and consumers during the next year, so everyone will be ready to comply by Jan. 1.
“Our plan is to work with the mortgage industry to ensure that the CFPB’s new rules are implemented accurately and expeditiously,” said CFPB director Richard Cordray in an agency press release. “Both consumers and industry will win when the new rules are understood, applied, and carried out evenly and effectively. Mortgage borrowers, who have dealt with much heartache since the financial crisis, deserve this level of attentiveness.”
Besides the Ability-to-Pay rule, new regulations also protect borrowers from risky lending practices, such as underwriting loans based only on low introductory “teaser” interest rates, which contributed to many homeowners ending up in delinquency and foreclosure after the 2008 housing collapse, according to the CFPB.
“New mortgage servicing rules designed to protect borrowers from costly surprises and runarounds were also announced,” the agency said. “These rules establish new, strong protections for all homeowners. Other new rules address appraisals, escrow accounts, protections for high-cost mortgages and compensation and qualifications for loan originators.”
Beneath that, many of the regulations are surprising, however. For instance, Nash said even when a prospective homebuyer comes in with a very low credit score, she still will have to take them through the entire application process.
“We are not supposed to discourage them from applying for the loan, and that is not exactly a good use of their time,” she said. “We normally counsel people, saying, ‘We’re not in a good position now, but let me show you how you can improve that credit score.’ ”
Perhaps a more lamentable result of the new regulations is that lenders have largely lost the ability to work with people who don’t fit into a classic loan application — even those who have great credit, liquid resources and even large amounts of equity in a property. Essentially, if people can’t show they can afford the home given their monthly income, they will not get qualifying loans.
With the low cost of money today, that means the industry is losing thousands of potential deals that could help the real-estate industry, and perhaps the national economy as a whole, recover more fully.
“That’s somewhat unfortunate for the industry, because there are people who could be buying, and cannot, and just feel frustrated with the whole system,” Thomas said. “People who have complicated tax returns get bothered by the system because their income is so scrutinized these days.
“In some ways, we just threw that part of the market out with the bathwater.”