Although the idea of regulating the ways lenders can provide mortgages to home buyers is nothing new, the housing crisis stepped it up considerably. In recent years, there have been several mortgage regulations passed by federal and state governments, designed to protect borrowers.
Here are a few of them, and how they affect your mortgage and home search.
To understand what mortgage terms will work best for your specific situation, consult with your lender or financial advisor.
What is Mortgage Regulation?
When you apply for a mortgage, you may see it as a process that involves just your lender and you, the borrower. The truth is that there are many government regulations and agencies that are also involved in the mortgage lending process. Lenders may maintain their own sets of standards and guidelines for the types of loans they offer and the applicants to whom they will loan money on top of this.
However, the rules of any lender must also conform to the laws set by state and federal governing bodies. In some cases, mortgage regulations may make it harder for certain borrowers to receive a loan. In many cases, these regulations aim to help streamline the application process for lenders and borrowers.
Why Are Mortgage Regulations Considered Necessary?
Mortgage regulations have been a factor of the mortgage lending industry for decades. However, the housing crisis several years ago brought a number of potential problems to light. Borrowing money for a home is a significant financial commitment for any home buyer, and it is very important that borrowers understand the terms of their loans and their obligations related to repayment, so that they are less likely to fall into default.
Some lenders did not make this information clear to borrowers before they agreed to the loans. An 81 percent increase in the number of foreclosures for 2008 from the years before made several politicians realize that something probably had to change. The federal government created a number of mortgage regulations to protect consumers after the housing crisis, most notably the forming of the Consumer Financial Protection Bureau (CFPB).
What is the Consumer Financial Protection Bureau?
At the time of the housing crisis, there were various local and nationwide government agencies overseeing consumer finance and making sure that lenders followed current law, both state and federal. However, it was often hard for consumers to know where to find necessary information, and who to contact in the government if they had concerns or a complaint. In 2011, the CFPB opened with a goal of providing a resource to Americans for a variety of consumer finance issues.
The CFPB creates regulations that lenders should follow, ranging from limits on the kinds of fees they can charge to the way they present the terms of the loan to you. The CFPB also communicates with consumers about problems they have with specific lenders or financial institutions. This communication allows the CFPB to determine if it should seek punitive actions against lenders who violate current mortgage regulations.
How Do These Regulations Affect My Mortgage Loan?
The buzzword of the housing crisis was “predatory lending.” Predatory lending is a somewhat vague term that describes the act of lending to people who may not fully understand the terms of the loans they receive, or who may not realistically be able to pay back their loans once the money has been disbursed. Mortgage regulations of the past several years have been designed to dramatically reduce the instances of predatory lending, through:
- standardized forms that make loan terms easier to remember
- clear explanations of all fees charged by the lender
- common standards for mortgage underwriting
- limits for the types of loans and terms offered to subprime borrowers
- restrictions on common loan features, such as prepayment penalties and balloon payments
- notification requirements concerning changes to loan terms during the application and approval process
Many of the recent regulations have targeted loans for subprime borrowers, a subgroup of borrowers who may not qualify for the best loans for some reasons. This group is more likely to default on mortgage loans, particularly if they are given unreasonable terms. However, most regulations affect all borrowers, especially those related to applications and lending disclosures.
Can Mortgage Regulations Change?
It makes sense that mortgage regulations will change over time, to meet the evolving needs of lenders and borrowers. In late 2015, the CFPB released two standard documents that lenders must release to borrowers after they submit applications and before the loan is closed. These documents are called a “Loan Estimate” and a “Closing Disclosure.” Prior to this October, 2015, borrowers received two sets of documents at each of those stages in the process.
When you applied for a loan, you used to get an “Initial Truth in Lending Disclosure” and a “Good Faith Estimate.” The CFPB consolidated these documents into the Loan Estimate, to eliminate overlap in the forms and make it easier for borrowers to follow. The Closing Disclosure also makes the closing documents more straight-forward, with a list of terms that you can see at a glance on the first page.
Do States Have Special Mortgage Regulations?
Even though the federal government hands down a complicated list of mortgage standards and regulations for lenders and borrowers to follow, the individual states also have the power to set additional requirements. For example, states with an unusually high cost of living may have a different interpretation of a “high debt-to-income ratio.” This way, borrowers have a better chance of qualifying for a loan, even if the region’s home prices are well above the national average.
States are also allowed to set some terms for loans granted within the state. Most states have banned the practice of “negative amortization,” which allowed consumers to borrow money with payments that do not cover the interest covered during each payment cycle. However, only a handful of states have regulations against prepayment penalties, which require borrowers to pay a fee if they pay off the loan prior to a certain point.
Applying for a loan should be fairly easy to understand, as well as your role as the borrower and what the lender is expecting from you in repayment. With the current mortgage regulations in place, you have the right and the responsibility to learn about all loan terms before you sign for a mortgage loan.