The Financial Overhaul Bill which will be signed into law soon when President Obama pens his name on the legislation. The bill is over 2,300 page long and includes new rules for nearly all facets of the financial economy. Although much of the attention thus far has been on provisions focused on limiting large bank’s proprietary trading activities there are substantial new rules created for the mortgage industry. The Mortgage Banker’s Association released THIS SUMMARY last week which does a good job of touching on the highlights.
The chatter in the mortgage industry thus far is that it remains to be seen how regulators will enforce the new laws. Therefore, it could be quite some time before we can measure the bill’s impact. For now, here are a few highlights that drew my attention:
a) One of the duties of the newly created Consumer Financial Protection Bureau (CFPB) is to “conduct financial education programs out of special office of financial literacy.”
b) Prohibits loan originators from steering borrowers into loans with more adverse terms than they qualify for. If the loan originator is found to have violated this rule they will be liable for additional costs.
c) Prohibits long-term prepayment penalties. Lenders must always offer a loan option with no prepayment penalty.
d) Requires lenders who securitize mortgages to keep a least 5% of risk on their own books.
Bad & Ugly
a) The new 5% risk retention requirement above will likely improve underwriting quality but it will also cause costs to increase which will be reflected in higher interest rates.
b) Prohibits from making loans without having documentation of income that supports the ability to repay the loan. In many cases this is good but unfortunately this provision will hurt self-employed borrowers and applicant’s who have significant assets but not much in the way of “documentable” income. Stated income loans are officially dead.
c) Adds several new Truth-in-Lending disclosures many of which already are covered on the new Good Faith Estimate which came out January 1st.
d) Imposes more regulations and requirements on appraisals.
In reading through the summary it looks as though Congress wrote into law many provisions that the free market had already taken care of (i.e. “stated income” loans are no longer offered).