High cost mortgage loans
|Buzzards in Lending Tree|
Office of Consumer Financial Protection (Bureau) issued the “final rule” to the Dodd-Frank Wall Street Reform and Consumer Protection Act's amendments to the Truth in Lending Act and the Real Estate Settlement Procedures Act with the intention that this would protect consumers from getting bad loans. The final rule expanded the types of mortgage loans that are subject to the protections of the Home Ownership and Equity Protections Act of 1994 (HOEPA). Consumers who want to move ahead with a high cost mortgages receive information about homeownership counseling providers.
Certain practices were banned with the intention to help borrowers who 1. Didn’t read the disclosures they signed or 2. Couldn’t find a better deal. The rules were supposed to help the individual consumer but in some circumstances the rule harms them. This is exampled in loans under $10000, loans with layered pricing adds and certain high loan to value HARP and HomePath products.
High cost mortgage rules limited the following situations:
- Balloon payments were banned, unless they are for the seasonal or irregular income of the borrower, or part of a short-term bridge loan, or they are made by creditors meeting specified criteria, including operating predominantly in rural or underserved areas.
- Creditors are prohibited from charging prepayment penalties
- Late fees are restricted to 4% of the payment that is past due, fees for providing payoff statements are restricted, and fees for loan modification or payment deferral are banned.
- Creditors originating HELOCs are required to assess consumers' ability to repay.
- (Creditors originating high-cost, closed-end credit transactions are required to assess consumers' ability to repay under 2013 Ability-to-repay. Ability to repay by either tax returns, w-2 forms, or bank deposits?
- Mortgage brokers are prohibited from recommending a consume default on a loan to be refinanced by a high-cost mortgage.
- Before making a high-cost mortgage, creditors are required to obtain confirmation from a federally certified or approved homeownership counselor that the consumer has received counseling on the advisability of the mortgage.
HIGH PRICED MORTGAGE LOANS ARE NOT Saleable to the GSE’s so a lender who finds the spread exceeds 1.5 percent over the Average Prime Offer Rate must either reduce the costs or eat the loan.
If a current loan scenario is unsellable because it failed the federal HPML test, the lender is stuck. The APR exceeds comparable Average Prime Offer Rate by 1.5% or more (or 2.5 for Super Jumbo).Based on the date the interest rate is set (locked or re-locked), lenders must compare their APR with the Fed’s APOR index. The loan will be considered a higher-priced mortgage loan if the APR exceeds the APOR index by:
– 1.5 or more percentage points on First Liens
– 2.5 or more percentage points on Jumbo First Liens
– 3.5 or more percentage points on Subordinate Liens
There are several things that may cause a loan interest rate to go above the
Lower loan amounts – the impact of fees on the APR increases as the loan
amount decreases. A $100,000 loan is more likely to trigger an HPML than
a $300,000 loan. Unfortunately there are fixed costs that are the same for a $300000.
mortgage or a $80000. loan
Mortgage insurance on loans over 100% LTV – The loan may have MI over
a longer period of time because the LTV is in excess of 100% (common in
Shorter loan terms – APR fees are averaged over the term of a loan, so the
shorter the term the higher the fee (a 20 year loan will have a higher APR
than a 30 year loan).
Certain products such as HOME PATH that has high loan to value and no mortgage insurance
Borrowers who apply for smaller loans with layered risks will hav difficulty finding a lender. For example a borrower with lower FICO score wants to purchase a condo in Laguna Woods as an investment. There are so many pricing adds, that no rate can accommodate the request. Catch 22.