A week or so ago, we wrote a post about the Dodd-Frank Act and the titles contained within it. That post was a very high level summary meant for anyone who wanted a big picture view about the Dodd-Frank Act in its entirety. Today, we want to take a more detailed look at the title that we feel most pertains to real estate and residents of Ventura County who either own a home or are looking to buy a home. Title XIV is known as the Mortgage Reform and Anti-Predatory Lending Act and is meant to mitigate many of the bad practices that led to the housing bubble and Great Recession. Overall, this title aims to standardize the disclosure process so that potential homeowners who are obtaining a mortgage are completely clear of the risks involved and their repayment obligations. It also provides provisions for certain homeowners who have no ability to repay their mortgage to either change or reduce their loans. Below are the subtitles of Mortgage Reform and Anti-Predatory Lending Act and what they mean to Ventura County residents.
Subtitle A: Residential Mortgage Loan Origination Standards
This subtitle requires that all mortgage originators be properly qualified, registered, and licensed. They must also comply with all regulations required by the Federal Reserve Board. Mortgage originators cannot receive compensation that is based off of the amount of the loan, which will hopefully prevent them from suggesting higher balance mortgages that the borrower may not be able to afford. Subtitle A also increases the authority of the Federal Reserve Board to help protect consumers from unscrupulous practices resulting from the mortgage industry.
Subtitle B: Minimum Standards for Mortgages
Subtitle B’s goal is to prevent the practice of giving borrowers loans without documentation showing that they can afford the payments that was prevalent in the housing industry in the mid-2000s. Lenders must be able to determine that any borrower can repay their loan based off of their credit, income, and several other factors. This subtitle also prohibits certain types of prepayment penalties and states that any violation of the minimum standards for mortgages by lenders can be used by the borrower as a defense if they get into financial trouble. However, if any type of fraud or intentional misrepresentation of facts is used by the borrower, this eliminates the liability of the lender.
Subtitle C: High Cost Mortgages
This subtitle states that a high cost mortgage is a first mortgage that has an interest rate that is 6.5% higher than the average prime offer rate or a second mortgage that has an interest rate more than 8.5% higher. A borrower must receive pre-loan counseling from a certified counselor prior to obtaining a high cost mortgage. Subtitle C also prohibits balloon payments that increase to an amount more than twice that of the average of earlier payments, along with banning prepayment penalties and lenders encouraging borrowers to default on an existing loan when trying to refinance.
Subtitle D: Office of Housing Counseling
Subtitle D creates the Office of Housing Counseling within the Department of Housing and Urban Development (HUD). The primary goal of the Office of Housing Counseling is to provide education about owning a home and financial topics related to home ownership. The Office of Housing Counseling will also track foreclosures and mortgage defaults on residential properties between 1 and 4 units.
Subtitle E: Mortgage Servicing
Subtitle E amends the Real Estate Settlement Procedures Act of 1974 and also establishes rules for escrow and settlement procedures. Lenders must establish escrow or impound accounts to pay taxes, any necessary insurances, and any other required periodic payments. If a borrower chooses to waive these services, the lender must provide disclosures that clearly explain to the borrower what their responsibilities will be.
Subtitle F: Appraisal Activities
This subtitle states that a lender cannot offer a higher-risk mortgage to a borrower without getting a written appraisal of the property by a qualified appraiser. The appraisal must include a physical visit to the property, which includes walking through the interior of the home. A second appraisal must be ordered if the original appraisal is over 180 days old. The appraiser must be certified or licensed in the state in which the home is located. Subtitle F also states that a Broker Price Opinion (BPO) cannot be the primary basis for determining the value of a principal dwelling.
Subtitle G: Mortgage Resolution and Modification
Subtitle G places HUD in charge of creating a program to protect tenants (both current and future) of multifamily properties by ensuring that the property owner is able to afford the payments on the property. If necessary, this subtitle aims to create a way for the current owner to easily transfer the property to a more responsible owner in case of financial trouble. Subtitle G also mandates that lenders give more information to any borrowers who were denied loan modification requests.
Subtitle H: Miscellaneous Provisions
This subtitle includes miscellaneous provisions to title XIV which include:
- Congress stating that structural reforms to Fannie Mae and Freddie Mac are required
- Government efforts to reduce foreclosure avoidance scams and loan modification frauds
- A study of the impact of defective drywall on foreclosures
- Additional funding for Mortgage Relief and Neighborhood Stabilization programs
- The establishment of a program to provide legal assistance to low- and moderate-income families who may be facing foreclosure.