CFPB changes affecting Appraisers

Tuesday, June 18, 2013

The Consumer Financial Protection Bureau (CFPB) has been busy lately. Recently, the CFPB has released three new rules that will have an impact on the mortgage lending and appraisal industries.

Ability-to-Repay Rule

As you might imagine from the name, this rule requires that lenders consider the whole pictures of a borrower’s ability to repay when issuing a loan. Now, lenders will have to factor in taxes, insurance and assessments as well as verifying the borrower’s income.

In addition, if the lender knows of multiple loans on the same dwelling, the Ability-to-Repay rule requires them to ensure that repayment of all loans is possible.

Definition of Qualified Mortgage

By issuing “Qualified Mortgages”, lenders will be able to ensure that they are following the Ability-to-Repay rule. So how does the CFPB define a qualified mortgage? In the recently updated definition, qualified mortgages must meet the following requirements:
 

  • No excessive upfront points and fees. To be considered a “qualified mortgage”, the points and fees associated with processing and closing a loan must not exceed 3% of the total loan amount.  

  • No toxic loan practices, which are the high-risk activities that led to the housing collapse of 2008. Toxic loan practices include interest only loans, negative amoritization loans, repayment terms exceeding 30 years and balloon loans.

  • Limits on debt-to-income ratios. In order to be considered a “qualified mortgage”, the borrower’s debt-to-income ratios must be less than 43%. The DTI includes all of the borrower’s recurring monthly debt, not just their mortgage.

Standards for Higher Risk Mortgages

Six federal agencies recently issued an amendment to the Truth in Lending Act. This amendment imposes new standards for higher risk mortgages.

There are now new standards in place for the appraisals that lenders acquire on mortgages with an APR which exceeds the average prime rate by a certain percentage. The lender is also responsible for providing borrowers with information on the importance and meaning of appraisals as well as a written copy of the appraisal report.

What does this mean for Appraisers?

Tightened control on lenders means tightened control on Appraisers. The introduction of the Ablity-to-Repay rule, the definition of Qualified Mortgages, and the new standards for higher risk mortgages will require lenders to stay on their toes. They will be looking to real estate appraisers to ensure that reports are thorough, accurate and compliant.

All of these changes are scheduled to go into effect in January 2014.

Resources

Read more from the CFPB here.

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