If Congress approves the bill as currently written and President Obama signs it, the new law would hinder the return of no-documentation mortgages and some mortgage fees would be limited. Also, a Consumer Financial Protection Bureau would be charged with overseeing consumer lending, and one of its tasks will be to create new home-appraisal standards.
Consumer mortgage protections outlined in the bill are Congress’s way of legislating common-sense underwriting and more borrower protection, “to an industry that lost sight of it,” said David Berenbaum, chief program officer for the National Community Reinvestment Coalition.
Below are a few of the mortgage-related highlights of the bill as it stands currently:
Documentation required
It seems like ages ago that consumers could get a no-documentation mortgage, stating their income instead of providing proof of it. In today’s mortgage market, much more documentation usually is required.
But this legislation would work to prevent the no-doc loan from returning if and when lending standards loosen up again.
“Banks have to find out how much money a consumer is making, as opposed to taking someone’s word for it,” said Pedro Morillas, consumer advocate for the California Public Interest Research Group. In the past, some borrowers got loans they probably shouldn’t have by overstating their income and assets.
This measure amounts to creating a safeguard for the future. “It doesn’t represent a change in today’s marketplace,” said Keith Gumbinger, vice president of HSH Associates, a publisher of consumer loan information. “But it addresses what could be a future relaxation of standards.”
The bill doesn’t ban no-doc mortgages outright, but if lenders choose to make one they will be subjected to certain risk-retention regulations, otherwise known as “having skin in the game,” said John Courson, president of the Mortgage Bankers Association. That requirement would also likely increase consumers’ mortgage costs, he said.
“It’s clearly going to have a chilling effect on loans that have the feature,” he said.
Mortgage fees
The legislation also limits mortgage loan prepayment penalties. Under the bill, such penalties could only be incorporated into the most basic, straightforward mortgages, said Kathleen Day, spokeswoman for the Center for Responsible Lending. Even when such a penalty is allowed, there will be limits on how high it can be.
In the past, the penalties created a catch-22 for some borrowers. For example, a homeowner hoping to refinance out of an adjustable-rate mortgage — ahead of the loan’s skyrocketing rate reset — could be hit by a hefty prepayment penalty for paying off the original loan early.
The legislation would also restrict excessive yield-spread premiums, one form of broker compensation, Gumbinger said. The premiums have been blamed for causing mortgage brokers to steer people into more expensive loans than they qualify for, Morillas said.
“We saw some outrageous YSPs in the past,” Berenbaum said, with the premiums basically “gouging the consumer for profit.”
Under the proposed rules, “The loan originators could receive a commission based on the loan amount and bonuses on the [volume of] loans they do, but not based on the rates or the terms of the loan,” Courson said. Many lenders already have made changes with compensation or are in the process of changing it to get into alignment with the best interests of the borrower, he said.
Consumer protection
The new Consumer Financial Protection Bureau is charged with looking out for consumers with regard to loans and other financial products.
“Once this new financial bureau is established, they’re going to have wide-ranging, rule-making power,” Gumbinger said.
One of the bureau’s immediate tasks, under the legislation: The creation of new appraisal standards to ensure there’s no pressure on appraisers to produce banks’ desired property values.
“The suspicion is that banks would tend to hire more often the appraisers who would consistently come back with higher appraisals than others,” Morillas said. “That helped to drive up home prices.”
Currently, a Home Valuation Code of Conduct is aimed at addressing this issue, but it’s due to expire later this year. HVCC was met with criticism, however, that it encouraged the use of appraisal management companies that used inexperienced appraisers and those who weren’t always familiar with the local area in which the home resided.
“The intent of the HVCC was good and needed… but there is a need to update to reflect the current marketplace and insure that [appraisal management companies] aren’t creating more risk in the market,” Berenbaum said.
Another important aspect of the bureau is that it will consolidate reporting and disclosure oversight, with regard to laws including the Real Estate Settlement Procedures Act, Truth in Lending Act and Home Mortgage Disclosure Act, Courson said.
“That had been scattered through the Fed and HUD,” he said, and the change represents an opportunity for a better disclosure package for consumers.
Amy Hoak, MarketWatch
Valerie Fitzgerald specializes in luxury residential real estate in Beverly Hills, Bel Air, Brentwood, Santa Monica and Malibu. Valerie has more than 20 years of real estate experience and is known for her solid reputation in the West Los Angeles brokerage community. She’s also the author of the book published by Simon and Schuster Heart and Sold: How to Survive and Build a Recession-Proof Business.
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