DETAILS ON SIGNED FINANCIAL REFORM BILL

American Financial Stability Act of 2010

As everyone knows, massive financial reform is here. For the lending industry, the bill signed by President Obama July 21, 2010, includes several new consumer protections for those looking to obtain a mortgage. The following is a quick synopsis.

Prohibition on Steering Incentives (Sect. 1403 p. 764)
This provision prohibits steering incentives in connection with mortgage loan origination. Therefore any incentive compensation based upon the terms of the loan (other than the principal amount) is barred, i.e. lenders may not pay originators a premium for originating loans with higher interest rates than might otherwise be offered to the borrower.

Minimum Standards for Residential Mortgage Loans (Sect. 1411 p. 767)
As set forth by the bill a creditor may not make a loan "unless the creditor, based on verified and documented information, determines that, at the time the loan is consummated, the consumer has a reasonable ability to repay the loan, according to its terms, and all applicable taxes, insurance, and assessments."

The bill sets forth the basis for determining ability to pay, including:

  1. Consideration of the consumer's credit history;
  2. Current income;
  3. Expected income the consumer is reasonably assured of receiving;
  4. Current obligations;
  5. Debt-to-income ratio or the residual income the consumer will have after paying non-mortgage debt and mortgage-related obligations;
  6. Employment status; and
  7. Other financial resources other than the consumer's equity in the dwelling or real property that secures repayment of the loan.

A creditor is also required to verify income through W-2s, tax returns, payroll receipts, financial institution records, or other third-party documents that provide reasonably reliable evidence of the consumer's income or assets.

This provision does not apply to bridge loans of twelve months or less, or to reverse mortgages.

Prohibition on Certain Prepayment Penalties (Sect. 1414 p. 774)
The terms of a residential mortgage loan may not include a prepayment penalty unless the loan meets the definition of a "qualified mortgage." A "qualified mortgage" must be fully documented, fixed-rate, and fully self-amortizing (among other requirements). Even for "qualified mortgages," the use of prepayments is restricted, although not totally prohibited. For example, the pre-payment penalty must be gradually phased out over the first three years of the term. Also, a lender offering an otherwise qualified mortgage with a prepayment clause must also offer similar mortgages without the prepayment penalty.

GAO Study on the Effectiveness and Impact of Various Appraisal Methods (Sec. 1476 p. 825)
The bill does not impose any new regulations on the appraisal process, but it does require a study by the Government Accountability Office (GAO) on the "effectiveness and impact" of different appraisal methods.

The GAO study compares different appraisal methods, including "the cost approach, the comparative sales approach, the income approach, and others that may be available." As set forth by part (c) of the bill, the study will examine:

  1. The prevalence, alone or in combination, of the preceding approaches in purchase-money and refinance mortgage transactions;
  2. The accuracy of the various approaches in assessing the property as collateral;
  3. Whether and how the approaches contributed to price speculation in the previous cycle;
  4. The costs to consumers of these products;
  5. The disclosure of fees to consumers in the appraisal process;
  6. To what extent such approaches may be influenced by a conflict of interest between the mortgage lender and the appraiser and the mechanism by which the lender selects and compensates the appraiser; and
  7. The suitability of appraisal approaches in rural versus urban areas.

Department of The Treasury Study on Ending The Conservatorship of Fannie Mae, Freddie Mac, and Reforming The Housing Finance System (Sec 1074 p. 692)
The downfall of Fannie Mae and Freddie Mac, and the subsequent move into government conservatorship was one of the more prominent events causing the financial crisis that the Senate reform bill addresses. Nonetheless, the measure is strikingly bereft of provisions addressing the two government-sponsored enterprises' troubles. The only relevant provision in the bill merely orders the GAO to conduct a study and develop recommendations for ending the conservatorship. Here is what the GAO has been asked to look into:

  1. The gradual wind-down and liquidation of such entities;
  2. The privatization of such entities;
  3. The incorporation of the functions of such entities into a Federal agency;
  4. The dissolution of Fannie Mae and Freddie Mac into smaller companies; or
  5. Any other measures the Secretary determines appropriate.

Check out the final bill for more details.

Sincerely,

MBS-Compliance Team
www.ProClose.com