The act, which went into effect Friday, may mean more paperwork required from consumers, but its provisions are intended to protect consumers from unscrupulous lenders, said Jon Paukovich, vice president of consumer lending at Ent Federal Credit Union.
“This is probably going to be the biggest change in the mortgage lending industry in 40 years,” Paukovich said. “The scope of the rules is all-encompassing.”
To prepare for the changes, Ent sent 100 of its mortgage lending team members to comprehensive training, Paukovich said, adding that “Ent has spent the better part of 11 months to develop compliance with the rules.”
One of the largest changes is called the Ability to Repay and Qualify Mortgage rule, he said.
Now, the lenders must fully document the borrower’s ability to repay the loan or they could face liability, he said. Poor practices of not requiring documentation or verification of income led to the financial downfall and subsequent foreclosures of 2008 and thereafter.
According to the Colorado Association of Realtors, Colorado’s foreclosure filings reached a high of 46,394 in 2009.
If lenders meet the criteria, they get legal protection called “safe harbor.” If a borrower were to sue a lender and if the lender met the required rules, the lender has legal protection, he added.
The ability-to-pay rule is very specific, he said. “There used to be a fair amount of judgment a lender could use when deciding to approve a loan, and now there will be less judgment. The law is more specific of what needs to be done to underwrite a loan.”
“We already had a lot of these rules in place,” said Karen Monroe, vice president and loan officer with Solera Mortgage, a division of Solera National Bank. Monroe said the rules will affect buyers who no longer can get a loan with only 3 percent down payment.
“This new act has taken that away,” Monroe said. Also, consumers now must have a credit score of 640 for a conventional and Federal Housing Administration loan, she said.
The primary point of Dodd-Frank is to “make sure the consumer really does qualify for a loan,” Monroe said. “It doesn’t change much for us, because we always had.”
Also, “they’re trying to stop lenders from making a killing off loans,” Monroe said of the rule that limits the fees allowed to 3 percent. “They’re trying to stop lenders from gouging buyers.”
“That is one of the more contentious issues, as many lenders feel that could impact their profitability,” Paukovich said.
“I think it might weed out some of the lenders that were charging very high costs to their buyers,” Monroe said. “Being limited to 3 percent — they will absolutely see a big change.”
The debt-to-income ratio is limited to 43 percent under the new regulations.
For example, if a client’s monthly income is $4,000 a month and debt such as credit card, mortgage, student loans combined to be $2,000 a month, the debt-to-income ratio would be 50 percent, and this customer would be denied a conventional loan, Paukovich said. If the debt was $1,500, the debt-to-income ratio would be 37.5 percent and the client would be qualified, if all other requirements were met.
“That automatically removed a lot of people from the ability to get a loan,” Monroe said.
There are exceptions to the 43 percent rule, Paukovich said. If the loans are eligible to be insured by the FHA or VA, or are eligible for sale to Fannie Mae or Freddie Mac, then the ratio may be higher than 43 percent, he added.
Also, lenders in small-town markets may approve loans at a debt-to-income ratio higher than 43 percent.
“That was a concession to rural communities and smaller towns. They may not have many lenders in their towns. They need flexibility to serve their community,” Paukovich said.
Another change relates to the length of the mortgage. Now, lenders can make a mortgage no longer than 30 years. Also, interest-only loans are no longer allowed.
The law was created by the Consumer Financial Protection Bureau, a branch of the federal government.
“The operative word is ‘consumer,’ ” Paukovich said. “The main purpose is protection of the consumer.”
In the long term, “we’ll have a much more stable and ethical real estate market,” Paukovich said. “A lot of us never participated in the risky lending practices. [But] we have to comply with all the regulations.”
Monroe decried the need to change the law because her firm was not one of the unscrupulous lenders the law targets.
“It’s more big government telling us how to do business,” Monroe said.