New regulations governing U.S. home loans will become effective on January 10, 2014. The legislation was passed as part of the Dodd-Frank Act of 2010, and requires mortgage lenders to document that mortgage borrowers can afford their mortgage payments.
Smaller Mortgage Lenders May Find Compliance Costly
Concerns among mortgage lenders include the cost of changing policies and procedures and hiring staff needed to comply with the new lending rules. David Stevens, Chairman of the Mortgage Bankers Association, said that smaller mortgage companies may be unable to comply with the new lending rules.
Mortgage lenders forced out of business by the new lending rules would further limit consumer choice and availability of mortgage loans.
The new rules require mortgage lenders to closely review, document and verify financial information submitted by borrowers. Mortgage applicants’ employment, income and assets will be subject to closer review under the government's new lending rules.
Lenders will likely need to make changes in their loan approval policies and procedures to ensure compliance with the new rules. Updating technology and hiring and training employees to meet new compliance standards could add significant operating costs to smaller lenders’ budgets. Some lenders are hiring outside firms to ensure compliance; this option may not be available to smaller companies on slim budgets.
New Lending Rules May Limit Loan Options
Home loan lenders not wanting to risk unintentional violation of federal requirements may limit their lending to only those borrowers with excellent credit and who are able to make significant down payments. The government has already advised lenders that they are unlikely to encounter legal problems if they limit the types of mortgages made available to consumers.
Affordable Mortgage Loans: On the Endangered List?
After the housing bubble burst, many mortgage lenders went out of business after widespread use of “non-traditional” mortgage loans was blamed for a glut of defaulted mortgages, foreclosures and tanking home prices.
Post recession risk management policies caused lenders to tighten lending requirements and to limit the majority of private lending to conventional mortgage loans. Although the Dodd-Frank legislation intends to protect mortgage applicants from taking on home loans that they cannot afford, the unintended consequences may include fewer mortgage loan companies and fewer mortgage options available,
A tighter supply of mortgage lenders and affordable mortgage loans would likely increase pressure on FHA 's Mutual Mortgage Insurance (MMI) fund that is used for reimbursing FHA lenders for losses related to defaulted FHA loans.
Approving mortgages for borrowers who can verify their ability to make payments makes sense, but what happens after the new laws take effect will confirm how sensible the new rules are.