If we've learned nothing else during the financial meltdown it's that buying a home is serious business. The landscape is littered with the results of consumers failing to pay attention to what they were doing.
In many cases, potential homebuyers were unaware of some of the pitfalls. The Consumer Financial Protection Bureau (CFPB) is taking steps to remedy that by issuing final rules to strengthen consumer protections for high-cost mortgages and to provide consumers with information about home ownership counseling. The agency is also finalizing a rule that requires escrow accounts be established for a minimum of five years for certain higher-priced mortgage loans.
“Addressing problems in the mortgage market is critical to helping our economy recover,” said CFPB Director Richard Cordray, adding that the changes “will better help consumers to understand the real costs of owning a home while protecting them from harmful practices that can trap them into high-cost mortgages.”
The Home Ownership and Equity Protection Act (HOEPA) was enacted in 1994 to address abuses in home-equity lending and refinances. Since then, HOEPA has deterred high-rate and high-fee lending in those markets. In recent years, high-cost mortgages have made up only about 0.2 percent of those types of loans.
The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) expanded HOEPA to cover home purchase loans and home equity lines of credit (“HELOCs”); revised HOEPA’s rate- and fee-thresholds for coverage; added a new coverage test based on a transaction’s prepayment penalties; and provided new limitations on risky loan features, as well as other new protections for high-cost mortgages. The CFPB has finalized rules to implement the Dodd-Frank Act’s amendments to HOEPA.
For loans that are high-cost mortgages, the final rule:
- Bans potentially risky features: For mortgages that qualify as high-cost, the rule generally bans balloon payments (a large, lump sum payment usually due at the end of the loan) with some exceptions, such as for certain types of loans made by creditors serving rural or underserved areas, and bans penalties for paying the loan early.
- Bans and limits certain fees and practices: The CFPB’s rule bans fees for modifying loans, caps late fees at four percent of the payment that is past due, generally prohibits closing costs from being rolled into the loan amount, and restricts the charging of fees when consumers ask for a payoff statement (a document that tells borrowers how much they need to pay off the loan). The rule also prohibits certain bad practices, such as encouraging a consumer to default on an existing loan to be refinanced by a high-cost mortgage.
- Requires housing counseling: The rule requires consumers to receive housing counseling before taking out a high-cost mortgage.
In addition to strengthening the protections for high-cost mortgages, the CFPB is implementing a requirement of the Dodd-Frank Act that lenders provide a list of home ownership counseling organizations to consumers shortly after they apply for a mortgage so consumers know where to get help when deciding what loan is best for them.
The agency is also implementing other changes made by the Dodd-Frank Act concerning escrow accounts. An escrow account is an account that a lender may set up to pay certain recurring property-related expenses on a consumer’s behalf, such as property taxes and homeowner’s insurance. Escrow accounts help to ensure that consumers have enough money to pay those bills when they come because the lender breaks the expenses down into monthly installments and adds them to the monthly mortgage payment.
Through an escrow account, consumers can better see the true cost of owning a home with insurance and tax costs laid out with each mortgage payment and are better assured that those costs are paid in a timely manner.
Under current regulations, creditors are required to establish escrow accounts for certain higher-priced mortgage loans for a minimum of one year. The new final rule implements changes from the Dodd-Frank Act that generally extend the required duration of an escrow account on such mortgage loans from a minimum of one year to a minimum of five years. To preserve access to credit, the rule exempts loans made by certain creditors that operate predominantly in rural or underserved areas, as long as certain other criteria are met.