CFPB: Regulating High Cost Loans
The housing and mortgage crisis of 2008 left millions of borrowers underwater, with no equity in their home, despite making reasonable downpayments and timely mortgage payments. Lenders offered easier credit to more and more borrowers who really did not have the financial capability to pay back their loans. Counting on appreciation of housing values was a great idea – until the bubble busted.
Many fingers were pointed at the lenders, who acted irresponsibly. Lawsuits, including the latest against Bank of America, claim that lenders acted fraudulently. Mortgage backed securities, once considered the safest type of non-governmental bonds busted and private money left the mortgage market.
As a result of the 2008 housing crisis Congress passed the Dodd-Frank Act and the Consumer Financial Protection Bureau (CFPB) was established to help regulate the financial industry. One of the main areas of concern is the mortgage market. The CFPB has proposed new rules and regulations that will affect the manner that lenders give out and service mortgage loans. Among these rules are the qualified residential mortgage rule, the qualified mortgage rule, the ability to pay rule, loan estimate disclosure form, and the loan closing form. Another rule the CFPB is working on is the High Cost Loan rule. The CFPB aims to protect consumers against unfair and predatory lending by widening the scope of the Home Owner's Equity Protection Act (HOEPA).
In order to help you understand what the new rule will do, learn about:
- The HOEPA rules – High Cost Loan and Predatory Lending
- How the CFPB is widening the High Cost Loan rules
- Taking a High Cost Mortgage Loan – Learn before Shopping
HOEPA – High Cost Loan and Predatory Lending
The HOEPA act was passed in 1994 and subsequently altered a number of times. The aim of the HOEPA Act is to stop predatory home lending, specifically in the home equity loan market, where lenders were charging high fees and rates to cash-poor homeowners.
The loans that were included in the original law were closed-end home equity mortgages (not lines of credit) secured by a mortgage on the borrower’s principal residence. If the interest rate had to exceeded a certain amount, about 10% over the a T-bill for the same period, or the fees were more than 8% of the total loan amount, then the loan would be considered a high-cost loan.
A loan that falls into the HOEPA high-cost loan definition requires additional disclosures to be made at least 3 days prior to the loan closing. These include a disclosure that you don’t have to complete the loan and that you are putting your home at risk by taking the loan. The lender must also disclose information about the APR (with all relevant fees included), and all special features of the loan including balloon payments, variable interest rate. In order to lessen the risk for borrowers the HOEPA loans have a number of limitations including:
- Prepayment limitations
- Rebate limitation
- Due-on-demand limitations
- Balloon and Negative Amortization limitations.
- Due-on-Demand Clause Limitation
CFPB – Widening High Cost Loan Rules
The housing crisis left many homeowners, even those that took mortgage purchase loans, with loan balances larger than the value of their homes. There are an estimated 11-14 million underwater borrowers.
Lenders sought out less qualified borrowers as the sub-prime market flourished. Often to help the borrowers make the initial payments, lenders offered sub-prime borrowers high cost loans, such as interest only, balloon payment and negative amortization loans. Borrowers who did not have sufficient income to make the loan were convinced that they could always sell the property, pay back the loan and still make money. We all know that just isn’t true, but borrowers with weak credit are often the most vulnerable to high-pressure selling tactics.
In an attempt to stem predatory lending in the mortgage market, the CFPB is proposing widening the scope of the HOEPA Act to include more types of mortgage loans including purchase and refinance loans. Some of the proposed changes include:
- Using more finance charges to calculate if a mortgage qualifies as a high-cost mortgage.
- Update the triggers (interest rate levels, APR, prepayment clauses) to determine if a mortgage qualifies as a high-cost loan.
- Impose additional required counseling requirements.
- Create more restrictions on mortgage terms including prohibiting balloon payments, pre-payment penalties, rolling loan fees and costs into the loan, loan modification or loan deferral fees. There would also be restrictions on late fees and pay-off fees.
- Apply the ability to repay rule which will affect the lender (or purchaser of the loan’s) ability to foreclose.
Taking a High Cost Mortgage Loan - Learn before Shopping
As usual with regulators, they tend to act most forcefully after the fact. While this may be good for rectifying yesterday’s mistakes, it is not always a remedy for today’s or tomorrow’s market. Swinging the pendulum too far prevents good borrowers from getting loans. It does not guarantee bad lenders from using predatory tactics. Only good enforcement of common-sense rules will do that.
While the new High-Cost rules proposed by the CFPB will create for more transparency and restrict the usage of predatory lending in the mortgage market, it will have little effect on today’s market. Private money has already fled the mortgage market and lenders underwrite conventional loans with very strict guidelines. That is not to say that in the future, when the housing market picks up, that predatory lenders will try to re-enter the market.
Hopefully, good enforcement will help to discourage predatory lenders offering high-cost loans to borrowers who really can’t qualify for a mortgage loan and don’t fully understand the price that they are paying or the risks that they are taking.
Bills.com believes that the consumer must learn about financial products before making a commitment. Here are some good first steps to take before shopping for a mortgage loan:
Your knowledge, together with tough enforcement of common-sense rules will help create a healthier mortgage market. Take advantage of Bills.com articles about qualifying for a mortgage, mortgage rates, pre-approval of mortgage loan. Learn which type of mortgage loan is appropriate for your situation, whether it is a 30-year FRM, 15-year FRM, 5/1 ARM, or I/O mortgage.