As we all know by now, common sense didn’t have much to do with the way loans were being given out a few years ago, so now the Fed has decided to make a rule about it.
Under the new rule, which takes 474 pages to explain, creditors would be prohibited from “making a mortgage loan unless the creditor makes a reasonable and good faith determination, based on verified and documented information, that the consumer will have a reasonable ability to repay the loan, including any mortgage-related obligations (such as property taxes).”
Should lenders fail to follow the rule, they could be liable for the consequences.
However, like most of the rules regarding banks, this one is so full of exceptions and vague descriptions, that it looks like a waste of 474 pages of paper and the hours it took to compile them.
For starters, the rule doesn’t spell out any guidelines with regard to what constitutes a “reasonable ability to repay the loan.” Lenders must use their own judgment and “good faith” to make that determination.
And then there are the exceptions. Pursuant to the Dodd-Frank Act, this rule would apply to all consumer mortgage loans except equity lines of credit, timeshare plans, reverse mortgages, and temporary loans. In addition, it wouldn’t apply to balloon-payment mortgages in rural or underserved areas.
And, if the mortgage term is longer than 30 years, or if the points and fees exceed 3% of the total loan amount, the loan is exempt from the rule. To make it even less effective, the underwriting doesn’t apply to adjustable rate mortgages that reset after 60 months.
That means lenders can still qualify someone on a low introductory rate, as long as the rate doesn’t reset in the first 5 years.
What does all this mean to you? Not much.
It simply means to go on doing what you’re doing – be vigilant in keeping your credit scores over 780, save money for any future down payments, and use your own common sense in determining whether a specific mortgage loan is a good financial move for you.
Our opinion? If the banks knew they wouldn’t be “bailed out” after their lending mistakes, all loans would be based on common sense and good judgment.