Late last week, the Senate passed HR: 4173 “Wall Street Reform and Consumer Protection Act.” The bill itself is thousands of pages and will take some time to understand and place into action by various regulatory agencies. The Mortgage Bankers Association put out an outline of the areas of the law that affect the mortgage business. Here are some of the highlights.
- Credit Risk- requires securitizers of loans to maintain minimum 5% interest in the loans they securitize. The hope is that the required interest will keep them from trying to package poor credit risks with out any risk on their part.
- Steering- this is a broad subject but at its core it eliminates “yield spreads” paid to brokers. In addition, it will attempt to keep mortgage originators from “steering” a borrower to a loan with higher risk or cost to the borrower.
- Establishes Consumer Financial Protection Bureau (CFPB). That agency will also take over responsibility for Real Estate Settlement Procedures Act (RESPA), Truth in Lending Act (TILA), Home Ownership and Equity Protection Act (HOEPA), the Home Mortgage Disclosure Act (HMDA) and others.
- Appraisals- the current Home Valuation Code of Conduct will be rewritten within 90 days and will include more rules and regulations.
- Duty of Care- this rule will require ALL loan originators to qualified, registered and licensed. A Nationwide Mortgage Licensing System and Registry (NMLSR) has already been established and loan officers are going through a national test currently.
- Minimum Standards- referred to as the “Ability to Repay”, it requires lenders to make good faith determination, based on verified and documented information that, at the time the loan was consummated, the consumer had the reasonable ability to repay the loan according to its’ terms. Essentially eliminating “stated income” loans from returning.
- Limits on compensation- in addition to eliminating yield spread, the government will limit points, fees and other costs paid to lenders and loan officers.
- Prepayment penalties- they are eliminated.
- Liability for Mortgage Originators- mortgage loan originators can be held liable for violating Duty of Care or anti-steering prohibitions. The originator can be fined up to 3 times the amount they received as direct or indirect compensation.
All in all, this legislation marks the largest regulatory change since the 1930′s. On the positive side is a new change coming to Fannie Mae on September 1, 2010. Currently, a lender or investor may order an electronic valuation on a home to determine value and check the accuracy of any full blown appraisal that is done. Many of these cheap, computer based reports show a lower value and the lender requires an adjustment to the purchase price. This change will allow for an appraiser to provide additional proof that the higher value is justified. In addition, lenders are allowed to order another full appraisal to back up the higher value.
It was an up and down week on the market, with Wall Street ending up in negative territory. That was not all good news for bonds but all in all rates ended up down. There is some indication that with the tax credit expired and business down, lenders and investors are narrowing their spreads to keep rates low. In addition, the tax credit was viewed by some investors as a deterrent to good credit low and loan performance. With the credit gone, they have some renewed faith int he quality of borrowers looking for loans.
