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 On Friday, lenders must be prepared to verify that borrowers can
repay their home loans, under rules written by the Consumer
Financial Protection Bureau and required by the 2010 Dodd-Frank Wall
Street oversight law.
Banks will have to consider a list of factors that show the
consumer's financial health, including income, existing debt
obligations and credit history.
The reform seeks to prevent a repeat of the 2007-2009 financial
crisis, when millions of people's homes went into foreclosure, in
many cases because the borrowers received loans they could not
afford.
When it was first introduced, the change spooked both banks and
housing advocates, who said a strict interpretation would force
lenders to extend loans only to borrowers with spotless credit,
potentially derailing the fragile housing recovery.
Along the way regulators softened the rule, easing those fears.
Still, banks have scrambled over the last year to update technology,
write new lending procedures and train employees to comply with the
requirements. Experts warn consumers could see some disruptions over
the next few weeks, including longer mortgage application processing
times and paperwork problems.
"We do think there could be some short-term wrinkles in the
January-February time frame as the cutover occurs and lenders have
to port over to new systems," said Stan Humphries, chief economist
at Zillow <Z.O>, an online real estate database.
But he said the rules would not have much impact on the larger
housing market because regulators broadened a carve-out for the most
basic loans, called "qualified" mortgages or QMs.
The ability-to-repay rule had been the most feared of a series of
changes looming for mortgage lenders because if borrowers' homes are
foreclosed upon, they could claim their banks should have known they
could not afford the loans.
Dodd-Frank provides some protection from these lawsuits for lenders
who issue qualified loans, which can have no risky loan features,
and any associated fees must add up to less than 3 percent of the
total loan amount.
In the final version, the consumer bureau said that for the first
few years, any loans that are eligible for purchase by Fannie Mae <FNMA.OB>
and Freddie Mac <FMCC.OB> count as qualified. That means most of the
loans made today would get extra legal protection.
"For the foreseeable future, the vast majority, or roughly 95
percent, of the market will be covered by this QM definition, which
is where the market is today," said Peter Carroll, the CFPB's
assistant director for mortgage markets, in an interview.
"We do believe that the market will figure out how to make good,
responsible non-QM loans, and they'll make them."
Wells Fargo <WFC.N> and some other lenders have already said they
will issue non-qualified mortgages to high-wealth clients, though
that market is expected to be small.
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BANKS LESS OPTIMISTIC
The ability-to-repay rule is just one piece of a set of sweeping
mortgage reforms still to come.
Tough new requirements are also set to kick in for mortgage
servicers. These firms normally collect payments and communicate
with homeowners, but made numerous mistakes after the crisis that
led many borrowers to lose their houses.
Regulators also are revamping disclosures banks must issue when
making loans, and the U.S. Congress is debating ways to overhaul
Fannie Mae and Freddie Mac, though that could take years.
Bank lobbyists are more pessimistic than other housing experts and
warn that some lenders will be overly cautious while they are
getting comfortable with new requirements.
Many small banks rely on outside vendors to build the technology
used to generate loan terms for borrowers. Some vendors made changes
as late as December, which could keep some banks from training staff
by Friday, said Robert Davis of the American Bankers Association, a
trade group.
"Until the vendors have finished tinkering with the systems to get
them right, and until bankers are more confident in the robustness
of systems and the training of their staffs to use the systems, we
believe there's going to be ... a pullback," Davis said.
Some in the mortgage industry still say it could be harder for
low-income borrowers to take out a loan because lenders will feel
they have less flexibility. But because loan applications take a
while to close, it will take a few months to generate data on the
rule's impact on the market.
U.S. officials hope to track changes at a group of lenders that
would indicate industry trends, the CFPB's Carroll said.
Some financial institutions say while it has been tough, they are
prepared. Scott Toler, chief executive of the Credit Union Mortgage
Association in Fairfax, Virginia, said on Tuesday his group made
some of its final compliance upgrades this week.
He said his company, which provides mortgage services to more than
70 credit unions, modified loan underwriting procedures, retrained
employees and upgraded technology systems.
"It's been a lot of work, but we'll be ready," Toler said. "It's
been like drinking from a fire hose to stay ahead of the new and
constantly changing regulations."
(Reporting by Emily Stephenson and
Margaret Chadbourn; editing by Karey Van Hall and Nick Zieminski)
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