Financial Reform Bill and Its Affect on Mortgages

D. FINANCIAL REFORM BILL (a/ka FRANK/DODD ACT) AND MORTGAGES:

1. Consumer Financial Protection Bureau (“CFPB); Creates a council of regulators to oversee the financial system and look for major risks.  It will be under the control of the Federal Reserve. It will have broad oversight of financial products and far-reaching powers to ban abusive products or practices. The agency will oversee banks, mortgage lenders and credit card companies.

2. Eliminates Stated Income Loans (i.e. where borrowers offered no proof of their ability to make mortgage payments):  lenders will be required to obtain proof from borrowers that they can pay for their mortgages. Borrowers would have to provide evidence of income, either though tax returns, payroll receipts or bank documents..

3. Adjustable Rate Loans (i.e. ARMs): Lenders will have to disclose the maximum amount that borrowers could pay on adjustable-rate mortgages.

4.  Allows Expiration of Home Valuation Code of Conduct: The HVCC prohibited mortgage brokers from ordering appraisals to avoid undue influence on the process. This law expires on December 31, 2009 and is unlikely to be extended.   The CFPB will establish standards for the appraisals and appraisal management companies. Hopefully, it will permit appraisals to be portable for a consumer so that a consumer could switch lenders and use the same appraisal. Presently, each lender uses its own appraisal management company or companies so a new appraisal is needed if loan is declined or if lender is changed for any reason.

5. Prepayment Penalties: Eliminates prepayment penalties for early repayment of the principal amount on a loan for adjustable rate loans and other more “exotic” products like interest-only loans. On standard products, they will be restricted to no more than 3 years and 3% of the principal balance.  As Fannie Mae and Freddie Mac do not charge these fees any way, there will be little effect on most 30 year and fixed rate loans.

6. Mortgage Broker Fees: Known as “anti-steering” provision to prohibit mortgage brokers from putting borrowers into higher interest loans and products than they qualified for so as to earn additional fees.  Under the Act, fees cannot be paid to mortgage brokers based on either the interest rate or the loan terms.  (A copy of this section is attached hereto as Exhibit C).

a. Amount of commission will be limited to commission based on loan size and bonuses on the volume of loans that are originated.

Example: Bank A will pay all brokers 1% commission on any loan that is originated.  Any broker originating more than 5 loans per month will receive an extra .25%.

b. Mortgage brokers cannot receive some of their fee from the borrower in the form of points and other portion from the lender as yield spread premium (“YSP”).  If they receive any YSP from the lender they are prohibited from charging points to the borrower.

7. Credit Scores: If a lender denies a loan, they are required to inform the borrower of their credit score at no cost.

8. Mortgage Assistance Program: Sets aside $1B for unemployed homeowners who can borrow up to $50,000 to assist with mortgage payments.  To qualify the homeowner must have a reasonable prospect of repaying the loan within 24 months.