Consumer Protection for Mortgage Borrowers
The mortgage crisis of 2008-09 unfolded when lenders offering too many high-risk loans. The problem was referred to as predatory lending.
Lawmakers reacted to the crisis with lending rules that kept lenders from approving loan applicants too freely. Here, we look at how this plays out in the ordinary mortgage loan.
What Is Dodd-Frank?
In 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act was passed to prevent future financial crises. It regulates markets and protects the people who use them. Part of Dodd-Frank is Title XIV, known as the Mortgage Reform and Anti-Predatory Lending Act.
What does that part do? Basically, Title XIV amends the Truth in Lending Act to ensure that mortgage borrowers understand what they’re getting into. And it also offers loan modification policies so borrowers can get help with changes to their monthly payments. The main idea? Keeping ordinary homeowners from defaulting on loans.
How Does It Limit Lending Activity?
Dodd-Frank sets forth a lender’s duty of care to borrowers. What does this mean?
- To start, lenders who originate home loans must be qualified and must carry specific credentials to do their jobs.
- And if you’re borrowing to buy a home, your lender must make a reasonable, good-faith effort to judge your capacity to shoulder debt. Lenders have to carefully base their approval decisions on a number of detailed factors, such as your work history, income, and credit profile.
- Lenders should not “steer” you into a high-priced home loan that you’ll probably be unable to repay. For this reason, your lender isn’t allowed to earn money based on the price of the loan. The point is to make sure lenders have nothing to gain by drawing people into loans with terms that put homeowners’ financial health at risk.
- Mortgage companies must provide written disclosures that show you the interest rate and finance charges when they issue loans and post your account statements.
The language of Dodd-Frank puts other mortgage borrower protections in place as well. Let’s look at a few more highlights.
How Are Risky Mortgages Restricted?
Dodd-Frank regulates high-cost mortgages. To get high-cost loans, customers pay interest rates 6.5+ percent higher than the average prime rate (or more than 8.5 percent above prime for a second mortgage).
Under Dodd-Frank, a lender has to pay for and obtain an appraisal report for the home before it can issue a high-risk home loan. The appraisal must follow the rules for appraisal independence: there can be no undue influence or inappropriate monetary incentives. The appraisal has to be fair and accurate.
And Dodd-Frank protects borrowers by ruling out the balloon payments that blow up until the monthly payments double in size.
How Do Appraisals Fit In?
As we’ve just noted, an appraiser must provide a fair, accurate assessment of the home’s value. Dodd-Frank provides guidance to limit undue influence on appraisers.
Appraisers may confer with real estate agents. They may review the purchase contract. Mortgage companies, home buyers, and real estate agents may ask for errors to be corrected, and may offer the appraiser relevant information and ask that additional “comps” (comparable properties) be taken into account. But all parties must allow the appraiser to make an independent opinion.
The rules of your own mortgage type may have additional safeguards meant to support Dodd-Frank. For example, the Federal Home Loan Mortgage Corporation (“Freddie Mac”) directs appraisers who consider information submitted by an interested party to have an independent entity double-check that information.
Rules for Mortgage Servicers
Under Dodd-Frank, a lender needs to set up a five-year escrow account for the mortgage borrower. This is to ensure that a homeowner’s insurance policy and local taxes are paid regularly — helping the borrower avoid liens and foreclosures. (You can keep your regular insurer and have a bundled policy along with your auto insurance. Unless you, as a homeowner, fail to keep a homeowner’s insurance policy active, the company that services your mortgage may not put a policy in place.) If you decide to waive the lender’s escrow services, the lender must give you clear guidance on the responsibility to make these additional payments on your own.
Mortgage servicers aren’t allowed to bill customers for answering legitimate written requests, and they have to make information about your loan and who owns it available.
Dodd-Frank also limits late fees. And it limits penalties that mortgage services can place on borrowers who opt to overpay their monthly mortgage amount so as to save substantial amounts of interest charges over the life of their mortgages.
Lenders can’t suggest that a borrower default on an earlier mortgage. They’re barred from lending money to borrowers to cover certain fees and penalties, and from devising workarounds to avoid the law’s provisions.
Is Dodd-Frank “Protecting” Us too Much?
Lenders are responsible for educating the public about avoiding foreclosure. If they won’t modify a mortgage, they have to offer further guidance to borrowers. But what about the people whose applications are denied in the first place? If lenders are forced to be terribly risk-averse, many people will be locked out of the real estate market. Including many who have never defaulted on a loan.
The effects of Dodd-Frank have indeed been severe. Hundreds of thousands of loan applications are being rejected under its stringent rules.
In the section below, you’ll find a reference guide, linking to the language that supports key mortgage rules under Dodd-Frank. Reviewing the provisions will make you a wiser borrower. At least they explain why, in recent years, lenders have become so picky and inflexible when they’re making a decision on a loan application.
Relief is coming. In the years to come, artificial intelligence will help lenders approve more loans. Machine learning will be able to accurately predict an applicant’s default risk on a case-by-case basis.
But for now, Dodd-Frank sets broad-brush rules to keep mortgage lending in check.
Supporting References
Consumer Financial Protection Bureau: Ability to Repay and Qualified Mortgage Standards Under the Truth in Lending Act (Regulation Z).
Consumer Financial Protection Bureau: Loan Originator Compensation Requirements Under the Truth in Lending Act (Regulation Z).
National Association of REALTORS®: Appraiser Independence (PDF; Apr. 4, 2013).
The Dodd-Frank Act; P.L. 111-203. See Cornell Law School Legal Information Institute: Dodd-Frank: Title XIV – Mortgage Reform and Anti-Predatory Lending Act.
Key Provisions:
- On mortgage lender qualifications: 15 U.S.C. § 1639(a); Dodd-Frank Act § 1402.
- On high-risk mortgages: 15 U.S.C. § 1602; Dodd-Frank Act § 1431.
- On independent appraisal reports for high-risk mortgages: 12 U.S.C. § 1639h; Dodd-Frank Act §§ 1471 – 1472.
- On determining the borrower’s ability to repay, and loan prepayments: 15 U.S.C. § 1639(c); Dodd-Frank Act §§ 1411 – 14.
- On anti-steering provisions: 15 U.S.C. § 1639(b); Dodd-Frank Act § 1403.
- On escrow accounts for mortgage borrowers: 15 U.S.C. § 1638; Dodd Frank Act §§ 1461 – 1462.
- On the lender’s required disclosures: 15 U.S.C. § 1638(a); Dodd-Frank Act § 1419–20.
- On information for borrowers in the interest of averting foreclosure: 12 U.S.C. § 5219a; Dodd-Frank Act §§ 1482 – 1484.
- On the mortgage servicer’s duty to provide information about the lender and the loan: 12 U.S.C. § 2605; Dodd-Frank Act § 1463.
- On limiting balloon payments: 15 U.S.C. § 1639; Dodd-Frank Act § 1432.
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