Short Answer: Yes
On January 10th, the Consumer Financial Protection Bureau’s (CFPB) “Ability to Repay Rule” went into effect. Most people in the mortgage industry, and consumers alike had questions on what it all meant. The wording of the new regulation was vague; particularly in terms of what fees in a transaction would go into the calculation to consider what was “excessive”. Even to this day there is still debate raging on within the industry on the interpretation of those rules but some common threads have emerged.
To begin, the the CFPB did release a FAQ which I believe is worth giving a quick read: http://files.consumerfinance.gov/f/201312_cfpb_mortgage-rules_fact-vs-fiction.pdf
It’s Meaning in a Nutshell
I’m not one for long-winded explanations. The new regulations essentially mean that lenders have to provide specific documentation that demonstrates that the borrower has the ability to repay the loan, and has not charged excessive fees. The excessive fees clause is interesting because certain fees such as a Lender’s affiliate fees, prepayment penalties, credit related insurances are all calculated into the 3% cap – any Lenders utilizing those fees regularly will feel the most burden of these rules. In addition, Lender’s direct fees, non-discount points & upfront PMI (more on that later) also go into that 3% cap. With the exception of upfront PMI, I welcome these changes to the industry! This really forces unethical lending practices out. Now about that upfront PMI…
My only concern with the new regulation is that it targets upfront Borrower-Paid Mortgage Insurance on Conventional loans, which is calculated into the 3% cap. Upfront Single Premium Mortgage Insurance is a great tool for homebuyers to utilize to significantly drive down their mortgage payments. For instance, it’s not unheard of for a borrower who puts 5-10% down to elect to wrap in a Single Premium Mortgage Insurance into their loan amount – in fact, it’s a GREAT option for many. By doing so, they can eliminate hundreds of dollars per month on their mortgage payment. Problem is, for someone with average credit that premium can quickly eat up a majority – if not all of that 3% cap, making it a “high cost” loan. I cannot disagree more with that sentiment.
In the end though, from the feedback I’ve seen from Mortgage Insurance companies Single Premiums may become a thing of the past, leaving Lender-Paid Mortgage Insurance which leads to a slightly higher rate for the borrower – this also can be a great product, but I’m never in favor of eliminating a viable product from the market.
The More Things Change the More They Remain the Same
Other than heaping more paperwork upon underwriting & processing staffs (which this regulation will), most of the regulations will not affect a buyer’s homebuying experience much. Truthfully, if a Lender wasn’t demonstrating that a buyer could repay their loan in the last 5 years or so, they’ve probably shuttered their doors already. They ask Lenders to verify income & assets through tax returns, paystubs, bank statements, earning statements, etc. Again, I say – if a Lender wasn’t doing this already, I would be shocked if they were still in business. This just puts specific thresholds in place that Lenders now need to demonstrate through more paperwork, and if they can’t – the consumer can come after their Lender if they default on their loan.
What this means for Consumers
With the added paperwork for Lenders to complete on the backend, it’s important for most consumers to have the following documents on-hand early on in the loan approval process:
– Last 2 Years of Tax Returns & Earnings Statements
– Last 2 month’s of Bank Statements
– Last 30 days of Paystubs
In other words – not much has changed from a Consumer’s perspective! Prepared & organized borrowers will see no changes, other than Single Premium Mortgage Insurance possibly being eliminated as a viable option for their financing.