By Rema Haddad – Delt Law Clerk – TJSL Class of 2014
Looking back to 2007, a financial crisis in the housing bubble transpired. The crux of this crisis can be attributed to the poor practices of the mortgage companies that issued loans to people who cannot afford to repay them. On January 17, 2013, the Consumer Financial Protection Bureau passed new rules that aim to prevent this kind of crisis from happening again, and also aim to avoid unnecessary foreclosures on homeowners.
In order to prevent poor practices of issuing high-risk mortgages, the rules lay out stricter requisites in order to obtain a qualified loan, with the goal being to only issue loans that people can afford to pay off in the long term. In order to determine the applicant’s ability to repay the loan, lenders will be required to look at factors, such as the applicant’s current and/or expected income, assets, debt obligations, and credit history. The buyer’s total debt obligations, including the mortgage, cannot exceed 43% of monthly income.
Although a legitimate goal, there is skepticism on whether this requirement is going to more heavily result in eliminating uncertainty of repayment or put a crutch in lending. There are concerns that persons who are only slightly qualified are going to have a more difficult time obtaining a mortgage. However, those who do get a mortgage will enjoy the new guidelines’ greater protection against foreclosure.
The new guidelines affect homeowners by enforcing stricter rules on the mortgage servicers in order to prevent foreclosures that do not need to occur. Among these requirements is the mortgage servicer must explore and communicate all possible alternatives to foreclosure, even if it is less financially beneficial to the servicer. Specifically, if a borrower applies for a loan modification at least 37 days before the foreclosure auction is scheduled, then the mortgage servicer must consider and respond to it, and give the borrower enough time to choose an alternative to foreclosure. While this will benefit homeowners in judicial foreclosure states, it is unclear whether this new guideline will help those in non-judicial states, such as here in California. This is due to the fact that notices of foreclosure sales are given within less than 37 days, making it too late for these homeowners to even consider loan modification.
Another guideline is mortgage servicers are prohibited from foreclosing on homes where the homeowner is seeking a loan modification. After these rules go into effect, servicers cannot file the first foreclosure notice until the borrower is at least 120 days behind on payment.
Some other requirements in the new guidelines include providing a clear breakdown of payments on mortgage statements, giving early notification on interest rate changes, giving advance notice and pricing information before putting clients into a force-placed insurance and terminating it within 15 days with a refund if it is found the insurance isn’t needed.
Overall, the new guidelines appear to have a beneficial effect on homeowners. However, there is criticism that these guidelines do not go far enough to achieve its goal. Enforcing a loan modification requirement seems to be fundamental in order to protect against unnecessary foreclosures. These new rules fail to issue such a requirement.
Another part of the new regulations creates a new category called a “qualified” mortgage. To be a qualfied mortgage, the loan cannot have terms longer than 30 years, structures where the principal balance increases, ballon payments and points penalties greater than 3%. If a lender follows these criteria when lending at the prime interest rate, they will have strong protection from many lawsuits by consumers. The lender gets the benefit of the doubt that it properly assessed the ability of the borrower to repay, so a borrower will only be able to challenge whether the loan was truly “qualified.” If the loan has a subprime interest rate, consumers will have more legal options. A borrower will be able to say that even though the loan fit the “qualified” terms, the lender should have nonetheless determined that the borrower couldn’t really afford the loan. The Consumer Financial Protection Bureau made this distinction because it says subprime borrowers tend to be more vulnerable to unscrupulous lending, a senior CFPB official said..
Beginning January 10th, 2014, these rules will take effect, and hopefully will provide new great protections to homeowners.
In other good news for homeowners, The Mortgage Debt Relief Act, which was set to expire at the end of 2012, has been extended for another year and is now set to expire at the end of 2013. This short sale act allows for the exclusion of income realized as a result of a mortgage modification, or foreclosure on a principal residence. As a result, homeowners who received principal reductions or other forms of debt forgiveness are exempted from paying taxes on the forgiven amount.
All of these new regulations can be overwhelming and confusing. If you are interested in getting more information, please contact our attorney, Eric Townsend at 619-550-3011.