Financial Reform Includes Unsung Mortgage Reforms

The CFPA and Wall Street reforms have grabbed most of the headlines, but the financial reform bill also includes some strong and very important rules for new mortgages.  There are also some helpful foreclosure prevention provisions, though much more remains to be done for struggling homeowners.  Research suggests that up to 13 million homes could be lost in the current foreclosure crisis.  2.5 million already have.

But back to the good news.  Here’s some of what the bill will do to make the mortgage market safer:

Bans Mortgage Broker Kickbacks. A major reason high-cost loans proliferated was that brokers got paid more when they sold more expensive loans.  Many people–particularly people of color–ended up with loans that were more expensive than what they qualified for.  The bill changes the ways mortgage brokers are paid, so they aren’t encouraged to sell high-cost and risky loans to people who are eligible for better ones.

Limits Pre-Payment Penalties. Another source of the problem was these unfair penalties.  They prevented many borrowers whose loan payments skyrocketed from refinancing or selling.  Instead, many of these borrowers are facing foreclosure.  Under the new law, these penalties are banned for adjustable rate mortgages and other risky loans.

Requires That Borrowers Can Repay Their Loans. And finally, the most common-sense reform of all!  It used to be that lenders made sure borrowers could afford to pay back their loans.  But, because of seemingly endlessly rising housing prices and because so many mortgages were sold to Wall Street during the housing boom, lenders stopped worrying about this basic underwriting.  Now, that will change by law:  lenders will have to make sure borrowers can afford to pay back their loans.  It’s about time.

The bill also makes sure lenders who violate the laws are punished. Because good laws are great, but only if they are enforceable.  Now there will be a federal agency, the CFPB, whose top priority will be to protect borrowers.  In addition, borrowers will now be able to take action if their lender breaks any of these laws.  These changes promise to finally shift the balance of power between lender and borrower in the right direction.

All in all, we’re happy to report that the mortgage market will be a much safer place for consumers in the future.  To read more about the changes, see this letter from AFFIL’s partners to Congress (pdf).