Understanding the CFPB's New Mortgage Rules: Keeping You Safe from Tricky Loans

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The worst financial crisis in generations resulted from a relatively simple problem: Millions of homeowners overextended themselves by borrowing more than they could afford, with the aid and encouragement of the banks. That helped artificially inflate home prices, and eventually led to a price collapse and a wave of mortgage defaults that brought the banking system to the brink of collapse.

Five years after the U.S. economy hit bottom, the Consumer Financial Protection Bureau is working to prevent a repeat of the mortgage meltdown, and its new rules, which took effect this month, represent the CFPB's attempt to protect home buyers from some of the banking behaviors that planted the seeds the housing crisis.

Mortgages Minus Gimmicks and Surprises

The main purpose behind the new CFPB mortgage rules is to make sure that home loans are safer and involve fewer unexpected surprises.

During the housing boom, many borrowers were able to obtain loans only because of gimmicks like low initial rates that automatically rose after an introductory period. Those adjustable rate loans made the early monthly payments affordable, but when their interest rates reset higher, the resulting jump in borrowers' mortgage payments suddenly put their budgets on tilt. That's when many people began defaulting, setting off the avalanche that led to a collapse in home prices.

In order to encourage lending institutions to make better loans, the CFPB has introduced the concept of a "qualified mortgage." These mortgages automatically pass the CFPB test that a lender must assess whether a borrower will be able to repay the loan -- not just in the short run, but throughout the term of the mortgage.

To get a qualified mortgage, you have to have total monthly debt-to-income ratio of no more than 43 percent. That means that when you add up mortgage payments and other debt repayment like credit cards or car loans, the total has to be less than $43 for every $100 in income you earn on a monthly basis.

In addition, qualified mortgages can't have any of the terms that got so many homeowners into trouble during the mid-2000s. Negative amortization loans, where monthly payments are so small that the loan balance actually goes up over time rather than down, aren't permitted. Nor are interest-only mortgages. This will, for the most part, compel lenders to use traditional mortgages that automatically build up homeowner equity over the term of the loan.

Protection From High Fees, Conflicts of Interest, and Aggressive Servicing Practices

Most importantly for borrowers, qualified mortgages have limits on some of the costs involved in getting a mortgage. Between "points" and other fees that lenders often charge, the maximum amount can't exceed 3 percent of the size of the loan.

Another key aspect of the mortgage rules addresses the way that mortgage brokers get compensated. In particular, if you pay someone directly to get a mortgage loan, that person usually can't also get paid a commission by somebody else. That eliminates any temptation a broker might have to offer you a high-commission product that will get you into financial trouble.

Borrowers also get protection under the new rules from the companies that service their loans. You have to receive a clear monthly statement that shows how your payments were credited, and if you have an adjustable-rate mortgage, your statement has to tell you in advance when your rate is going to change.

If you fall behind on your mortgage, the new rules also give you more leverage. Servicers generally have to wait four months before starting a foreclosure proceeding, in order to give you time to request a loan modification. Once you apply for a loan modification or other help, the servicer can't simultaneously move forward with a foreclosure proceeding, and you have the right to assistance from the mortgage servicer to help you with your options.

The CFPB's new rules won't entirely eliminate situations in which homeowners overextend themselves and get into trouble on their mortgage loans. And they don't make it against the law for lenders to make non-qualified loans, though they do make it harder. Still, by making the process easier to understand and safer upfront, the rules should help many borrowers avoid completely unnecessary risks of the type that caused so many people to lose their homes during the mortgage crisis.

You can follow Motley Fool contributor Dan Caplinger on Twitter @DanCaplinger or on Google+.

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sam54ct

Safe, according to the WSJ "interest only" loans are once again climbing back to the 40% of all loans level seen just before the crash. So where is the change, and protection for us who bailed out these same high flying borrowering clowns during the last crash.

January 27 2014 at 7:50 AM Report abuse +1 rate up rate down Reply
toosmart4u

We know the business world is run by republicans, ref. Chamber of commerce, so we need more democrats in office to make sure we are not being used. Look what went on with the bush jr. administration to put us in the position we are today. We do need regulations to protect the consumer, yup, both democrats and republicans. Hats off to President Obama for even trying to clean up this mess of the 8 years of republican bush jr's administration.

January 27 2014 at 6:13 AM Report abuse -2 rate up rate down Reply
mistergg69

BANKSTERS GOT BAILED OUT...WORKING CLASS GOT SOLD OUT

January 26 2014 at 3:36 PM Report abuse -1 rate up rate down Reply
maggie13329

Bush economics (two generations) 16 years of the bush reign, has single handedly caused this mess. Whomever took over office was doomed to fail. You can't get the country back in the black for at least 15 yrs after the bush family reign. This presidential job opening has been a nightmare for who ever was stupid enough to take the position. It was doomed. Period. The next president will do a tiny bit better, but not much good. The time of 15 ys has to go by before the country can right itself. Very bad business that the Bush Family has gotten the United States of American into. Didn't any of them go to business school before they went into office? Business skills are needed to run this country. Obviously the Bush family doesn't rate at all when it comes to business skills. I give them a big fat 0.

January 26 2014 at 9:32 AM Report abuse -4 rate up rate down Reply
3 replies to maggie13329's comment
obamasam0r0nl

ZZZZZZZZZZZZZ……

January 25 2014 at 7:47 PM Report abuse rate up rate down Reply
dmoochie72865

if all you people really knew and could see past your finger pointing....you would realize that their is a great number of people in this business that are true and honest people who are in this to help people....yes we have to charge a fee to stay in business ...just like all of you get paid a salary or an hourly wage to have your job...and you get raises....correct...we do not anymore.....if your company doesnt sell their products you dont have a job...If we dont charge a fee for our service we get paid \"0\"....and we dont have a job either..But if we can only charge a certain amount on every loan(no matter the difficulty involved) then we will never get a raise...we just have to better than the other guy so we have to work longer and harder and do more loans.I am not mad or upset ...I chose this line of work. But fair is fair.....I agree their were some unscrupulous people in the business ...they are gone...But what most people dont realize most of these laws were already on the books in some way or another before all of this ...These laws arent new they are just being inforced better now.......

January 25 2014 at 3:12 PM Report abuse +3 rate up rate down Reply
k4jlp

When the CFPB stops the Commodity Market scammers from jacking the price of energy/food/shelter/insurance from the "what if's" they use, then I will be impressed....

January 25 2014 at 7:32 AM Report abuse +1 rate up rate down Reply
betty_brock

Obama wants to bail you out.

January 24 2014 at 11:03 PM Report abuse rate up rate down Reply
1 reply to betty_brock's comment
sam54ct

The three Bush stimulus plans bailed out many, and I imagine you spent your $800 check without whining.

January 27 2014 at 7:51 AM Report abuse rate up rate down Reply
weilunion

Sure, more hype. Wall St. is still hawking loans to people who cannot afford them and who have no jobs. This will not stop until the banks are nationalized. All this trickery about protection is skullduggery.

January 24 2014 at 9:55 PM Report abuse -3 rate up rate down Reply
steblawar

As a practical matter the bust hurt banks more than borrowers -- and the only big gainers were the realtors and sellers. 'Course that's "direct" effect -- ancillary though, banks who knew they were making bad risk loans (sometimes required by law) wanted to lay off their risk by bundling them into "investment products" and selling them off ... not unlike a company might sell it's accounts receivables -- only on steroids.

January 24 2014 at 6:18 PM Report abuse +1 rate up rate down Reply