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Lending Proposal Rule Change Creates Loophole in Qualified Mortgage Criteria

In today’s housing market, it seems harder and harder for the average person looking to plant roots in their community to secure the very essence and culmination of the American Dream...home ownership.

With standards in regards to qualifying for a home mortgage loan higher than ever, many people are having to resort to extended periods of renting as opposed to owners; obviously, this is not something that a young couple looking to start a family sees as a viable long-term option, but the standards set in place since the housing bubble burst in 2008 have made that a prospect looming over the heads of many.

However, a ray of hope set to illuminate the gloom surrounding the home mortgage market comes in the form of a loophole, which some propose, requires a minor changes by the Consumer Financial Protection Bureau (CFPB) to its ‘new mortgage rules’ which originally went into effect in January 2014; the changes could effectively allow lenders to define more loan applications as "qualified mortgages."

In a recent press release, CFPB Director Richard Cordray said that the rule changes are designed to ease regulation and provide access to credit on high-priced home loans removing hurdles for some charitable organizations.

"Our mortgage rules are now helping to protect consumers all across the country from debt traps, runarounds, and surprises," he said. "Today's proposal would maintain those strong protections, while making minor changes to ensure consumers have access to credit. This includes helping nonprofits that provide working families with important pathways to affordable homeownership."

The CFPB is an independent agency of the United States government responsible for consumer protection in the financial sector. Its jurisdiction includes banks, credit unions, securities firms, payday lenders, mortgage-servicing operations, foreclosure relief services, debt collectors and other financial companies operating in the United States.

Congress established the CFPB to protect consumers by carrying out federal consumer financial laws. Among other things, according to their website, they:

·         Write rules, supervise companies, and enforce federal consumer financial protection laws

·         Restrict unfair, deceptive, or abusive acts or practices

·         Take consumer complaints

·         Promote financial education

·         Research consumer behavior

·         Monitor financial markets for new risks to consumers

·         Enforce laws that outlaw discrimination and other unfair treatment in consumer finance

According to NationalMortgageNews.com, these proposed "minor" changes could actually have a major impact if used correctly; most of the amendments to CFPB’s rules are slated to add a degree of flexibility and exemptions for nonprofit lenders, which would have the effect of allowing certain nonprofits that service loans from other associated nonprofit lenders to consolidate those activities in order to meet the "small servicer" exemption within its mortgage servicing rule. Also, CFPB is also contemplating enhancing their ‘ability-to-repay’ rule so that larger nonprofits can still offer interest-free, forgivable loans even if they make less than 200 mortgages a year, which is the current exemption point.

However, the one element of the proposed changes which can be of significant benefit to not only lenders, but burrowers looking to purchase a home as well is the ability to secure what is known as a “qualified mortgage.”

According to stlamerican.com, a “qualified mortgage,” addressed in the new rules, is designed to help protect consumers from the specific kinds of risky loans that brought the housing market to its knees back in 2008. Obtaining that designation is also important to lenders because it will help protect them from lawsuits by borrowers who later prove unable to pay off their loans.

According to Enewspf.com, a key element of the rule changes affects the points-and-fees cap of 3% in order for a loan to be a “qualified mortgage”. If a lender believes it has offered a Qualified Mortgage but afterwards discovers that it has exceeded the 3 percent cap, the proposed rule changes allows for circumstances where the excess can be refunded to still have the loan meet the legal requirements of a Qualified Mortgage.

The refund must occur within 120 days after the loan is made, the press release states, and the creditor must also be sure to observe and abide by the policies and procedures for reviewing the loans and providing refunds to consumers. CFPB’s proposal is designed to encourage lenders to provide access to credit to consumers seeking loans that are at or near the points and fees limit; this helps address some of the issues lenders had about accidentally miscalculating a loan as a qualified mortgage or getting too close to the cap and taking on more liability and legal risk in the long run.

We reached out to Mark Madsen, a mortgage professional from BRHomeLoans.com for a reaction on the new proposed rule change. Madsen has over 15 years’ experience in the lending game, and said “Changing the rules by increasing debt-to-income qualifying ratios for non-profit lenders seems like we are taking a step backwards, especially since many of those exempt lenders primarily focus on helping lower-income or higher risk borrowers.  It also creates an unfair lending environment where certain types of lenders are allowed to bend or break the rules that 95% of the industry is required by law to follow.  Instead, the CFPB should create special mortgage programs with lower interest rates and stable payment options for the purpose of actually helping lower-income borrowers truly afford their mortgage payments vs increasing the DTI ratio from 43% to 50% and above just for the sake of qualifying.  This current ruling is only setting these new homebuyers up for foreclosure.”

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