Aurora Mortgage Information

Some Mortgage Tidbits from the Dodd-Frank Mortgage Reform Act

The Dodd-Frank Wall Street Reform and Consumer Protection Act devotes more than 200 pages to a section called the Mortgage Reform and Anti-Predatory Lending Act.  This new financial reform legislation includes provisions to prevent lenders from offering mortgages borrowers can’t afford or understand.

The legislation says its purpose is “to assure that consumers are offered and receive residential mortgage loans on terms that reasonably reflect their ability to repay the loans and that are understandable and not unfair, deceptive or abusive.”

So how is this legislation going to affect your next mortgage?

The Act sets Minimum Standards for Lenders
The most basic new standard of this act prevents a creditor from offering a residential mortgage to a borrower without “a reasonable and good faith determination … that … the consumer has a reasonable ability to repay the loan.”

Ability to repay is a straightforward calculation for fixed-rate loans. For adjustable-rate mortgages, the lender must ignore the introductory (or “teaser”) mortgage rate when determining whether a borrower can afford the loan.

Instead, the lender has to calculate what the payments would be if the borrower got a fixed-rate loan at the ARM’s fully indexed rate.

The Act is to Give Favorable Treatment for “qualified mortgages”
The legislation terms qualified mortgages as plain vanilla, straight forward mortgages.  Lenders can sell qualified mortgages to investors with fewer strings attached. That gives lenders an incentive to give consumers mortgages without tricks and traps.

To be a “qualified mortgage,” the loan:

Doesn’t have a balloon payment.
Is fully amortizing — that is, it’s not interest-only or an option ARM.
Has taxes, insurance and assessments included in the monthly payments.
Meets debt-to-income standards.
Can’t be longer than 30 years.
Has reasonable points and fees.
The legislation says points and fees generally shouldn’t exceed 3 percent of the loan amount. There are exceptions for smaller mortgages.

The lender also has to verify and document the borrower’s income and savings, and there are limits on prepayment penalties on qualified mortgages. If a lender offers a loan with a prepayment penalty, the lender also has to offer a similar loan without a prepayment penalty.

The Act Restricts “Non-Qualified Mortgages”
The legislation imposes restrictions on loans that do not meet the criteria of a qualified loan.

Prepayment penalties are banned on nonqualified mortgages. This ban will make it easier for homeowners to refinance out of tricky mortgages. It probably also will make such mortgages less profitable to lenders.

Essentially, if a loan offers the possibility of negative amortization, the lender must tell the borrower that getting the loan is a bad idea. A first-time borrower won’t be able to get an option ARM without first getting housing counseling from a HUD-certified agency.

Setting Free the Truth
The Act also makes illegal some of the practices that were common during the mortgage boom.  The lender cannot “steer” a person with good credit onto a subprime mortgage when they can qualify for a low-rate prime loan.  This practice is now illegal. It is also illegal to lie about the appraised value of the property being mortgaged.

Most of the practices in truth have been implemented by the companies that are still in business. Those companies that dabbled in shady lending are out of the business now.

You can rest assured that GSF Mortgage abides by all the rules of the new legislation. Please feel free to contact or call me in regards to the Dodd-Frank Wall Street Reform and Consumer Protection Act and I can answer any questions you may have.