How can TRID Regulations affect your commissions?


It is important to remember that the new closing disclosure forms, created by the CFPB, are federal loan forms and these promulgated forms are used in all 50 states.  This allows for consistency when consumers are buying or selling real estate.  Since each state has their own set of regulations, regarding real estate, they may have their own disclosures that will need to be executed at closing in addition to the federal forms.  In Texas, the Texas Department of Insurance created the Texas Disclosure (Form T-64) to adhere to Texas regulations.

The Texas Disclosure:

  • Explains and breaks out simultaneous title policy premium rates.
  • Itemizes title company fees and recording fees if combined on CD.
  • Specifies all agents receiving a portion of the commission.
  • Allows the consumer/seller to authorize the title company to fund and disburse.

Per the Texas Department of Insurance, anyone that receives funds from a real estate transaction must be disclosed at closing.  The Texas Disclosure does allow all the payees on the Commission Disbursement Authorization (DA) to be listed on the disclosure. This section of the document is on the page that is signed by the consumer and seller at closing, unlike page 2 of the 2010 HUD. If the title company does not have an agent’s DA prior to the consumer or seller executing this document, one check will be cut at funding directly to their broker. This will have no affect the other agent in the transaction as long as their DA is received in a timely manner.

How are you going to see your figures for closing?


As we near the end of 2015 I think we should focus on one detail of the new Consumer Financial Protection Bureau (CFPB) regulations, which is the American Land Title Association (ALTA) Settlement Statement. For most residential transactions the ALTA Settlement Statement is a Realtor’s new best friend. This form is quickly becoming the golden ticket among title companies as a solution for navigating new privacy rules that limit which closing documents can be shared from a real estate transaction.

New lending practices mandated by the CFPB, effective Oct. 3rd, in conjunction with existing privacy laws, prevent title companies from sharing the Borrower’s Closing Disclosure with the seller or with Realtors. The Closing Disclosure, or “CD,” combines the HUD-1 and Truth in Lending form and is prepared in most cases by the lender. There are promulgated authorizations from TREC (last paragraph of the new Third Party Financing Addendum) and TAR (“Authorization to Furnish TILA/RESPA Integrated Disclosures”), but it is unknown if lenders’ compliance departments will accept these authorizations. The Closing Disclosure contains non-public information like the term of the loan, interest rate, payment amount, and so forth.

The ALTA Settlement Statement shows all fees from the contract and the Closing Disclosure It also allows Realtors to confirm that all provisions of the contract have been honored and all agreements between parties are satisfied, without specific authorizations for the lender to release the Borrower’s CD. The ALTA form does not contain non-public information, and can be shared with all parties. Most importantly, Realtors requesting a preliminary closing statement will likely be receiving the fees on the ALTA Settlement Statement.

If your title company is unaware of this solution, feel free to refer them to the “ALTA Combined Settlement Statement”.

For more information, visit the Independence Title Blog, and our Austin Education page.

Should you have coffee with your lender?


CFPB & TRID regulations are now upon us! As of October 3rd any loan applications submitted will fall under TRID (TILA RESPA Integrated Disclosures) regulations. If you have a lender that you refer business to Independence Title Co encourages you to have coffee or lunch with them to find out how your lender will be conducting business with the new rules & regulations.

Over the last 10 months we have spoken with numerous loan officers, processors, attorneys, and compliance departments and each lender may interpret TRID regulations differently from one another. Here is a list of questions to get the conversation started with your favorite lender.
Q: Who prepares your Closing Disclosure?
ITC Perspective:
• Most lenders are taking on this responsibility
• They are responsible for the accuracy of the Closing Disclosure
• They are also responsible for adhering to the strict timeline for delivery
Q: How will you deliver the Closing Disclosure to the consumer?
ITC Perspective:
Delivery method can impact closing date
• USPS mail may require up to 7 days
• Overnight delivery may require up to 4 days
• Hand delivery or electronic delivery may require 3 days
Q: Do you require a signature on the Closing Disclosure to start the 3-day review period?
ITC Perspective:
• It is not in the regulations that the consumer must sign the Closing Disclosure
• Lenders may or may not want a signed copy returned
Q: Can I get a copy of the Closing Disclosure from the lender?
ITC Perspective:
• The regulations state that the Closing Disclosure to the consumer
• The Texas Association of Realtors created an Authorization Form for consumers to give authorization for their Realtor to receive a copy of the Closing Disclosure
• Some lenders may not accept this form but they might have a similar form to allow the Realtor to receive copies of the disclosures
Q: What is your contract to close turn around time?
ITC Perspective:
• Most lending professionals agree that a 45 day turn around time is realistic
• By early 2016 we might see a 30 day contract to close timeline
Q: Tell me about your pre-qualification/pre-approval process?
ITC Perspective:
• Prior to the CFPB there was a regulation in regards to pre-qualification/pre-approval process in existence but it was mostly overlooked
• The rule stated that a lender cannot require upfront documentation prior to a bone-a-fide loan application
• With CFPB audits right around the corner some lenders may be changing their pre-approval process
• Consumers may voluntarily provide upfront documentation for pre-approval
• See our Consumer’s Guide Brochure

For more information on CFPB check out our related blog post

Our Online Calculators ready for the New Regulations

New Regulations Are Around The Corner

Are you unsure how to best prepare your clients for closing in light of the new rules set out by the Consumer Financial Protection Bureau(CFPB)? We’ve got you covered!

Below are seven tips to help you and your client prepare for the changes effective October 3rd, 2015.

  1. Encourage your buyer to remit financial documents to the lender voluntarily for pre-approval
  2. When considering an offer on a listing that includes a pre-approval letter, confirm the following with the lender:
    1. pre-approval was based on more than a credit score
    2. proper verification documents were obtained
  3. Set realistic expectations with your clients regarding the timeline to close and emphasize items now required earlier in the closing process such as the buyer’s choice for the home warranty company
  4. When writing a contract or considering multiple offers, confirm a realistic closing time-frame with the lender.
  5. Become familiar with the new closing documents; Independence Title will be utilizing the following documents for TRID transactions:
    1. Borrower’s Closing Disclosure
    2. Seller’s Closing Disclosure
    3. ALTA Settlement Statement
    4. Texas Disclosure
  6. To ensure proper commission disbursements due to the new Texas Disclosure, remit your disbursement authorization form to the title company well in advance of closing
  7. Mark your calendar to keep track of the closing disclosure timelines for each transaction

 You’re not alone in preparing for the new regulations, we’re ready at Independence Title! 

Below are seven ways we’ve worked to ensure continued smooth closings for your clients.  We have:

  1. the largest education & training department in our industry in Central Texas
  2. taught over one thousand classes on the new regulations and implementation to the REALTOR and lender community
  3. updated our online calculators to comply with CFPB and TRID regulations and provide accurate estimates 
  4. completed software updates to our closing systems that integrate with lender portals allowing for back and forth communication of fees, documents and instructions
  5. trained all Escrow staff to prepare and are ready for your next transaction
  6. proudly become the first title company to implement a Best Practice Policy Guide to comply with CFPB requirements
  7. continued to provide resources for the real estate and lending community to communicate with clients such as A Consumer’s Guide to Buying or Selling After October, 3, 2015 and Why You Need Title Insurance


Keep Calm Independence TItle

Our Online Calculators are Ready for the New Regulations

As many of you now know the implementation date for the new TILA RESPA Integrated Disclosures (TRID) regulations set out by the Consumer Financial Protection Bureau (CFPB) is October 3rd. Most residential transactions with a loan applications dated on or after October 3rd, 2015 will be affected by these new regulations. This summer we released a brochure, The Consumer’s Guide to Buying or Selling After October 3rd, to aid in your conversations with clients.

If your clients have bought or sold a home in the past, the new forms will look different so even seasoned buyers and sellers may have questions. One change on the forms is how title insurance is disclosed; the loan policy will be disclosed as if it’s the only policy being purchased (called single issue) and the owner’s title policy is marked as an optional purchase on most literature from the CFPB. We’ve prepared a brochure for your clients, Why You Need Title Insurance to help them understand what they’re paying for.


We pride ourselves on providing some of the best online tools in the real estate community, and our calculators are no exception. If you need to know the title insurance premium; how much a seller may net from the sale of property; how much a list price needs to be in order to net a certain amount; or the closing costs and estimated payments on a particular loan, you can plug in some numbers and receive an instant estimate. To keep these figures accurate and assist with the process of gathering fees for the new disclosures we’ve been working hard with developers to update the calculators. Below are the updates you’ll find available:

Our Premium Calculator calculates the promulgated rate set by the Texas Department of Insurance of the Owner’s Title Policy, Lender’s Policy and endorsements. The update now shows the cost difference between a Loan Policy being issued alone (single issue) and  an Owners Title Policy and Loan Title Policy being issued at the same time in one fee (called simultaneous issue).

Premium Calculators: Austin | DFW | Houston | San Antonio

The Loan Estimate Worksheet is completely revamped for the new CFPB Loan Disclosure. This calculator provides lenders with all the fees needed to complete their loan estimate including:

  • title insurance premiums
  • recording fees
  • courier fees
  • escrow/closing fees
  • tax certificate fees

The Loan Estimate Worksheet prints to a PDF revealing exactly where the fees need to appear on the loan estimate.

Loan Estimate Worksheets: Austin | DFW | Houston | San Antonio

In addition to updating our calculators, preparing educational literature on these changes, and updating our software systems we have created and taught over one thousand classes to the real estate community. Our goal is to be a resource to the real estate community during this transition, if you haven’t attended one of our classes contact a Business Development Representative today.

CFPB brings changes to mortgage lending

The Consumer Financial Protection Bureau (CFPB) was created in 2010 in direct response to the financial crisis of 2008. As many remember, the crisis was set off by a number of problems in the subprime mortgage market, and the downstream selling of those mortgages in security markets. This reform process has been compared to the sweeping financial reforms of the 1930s that followed the Great Depression, which created the bulk of America’s financial regulation as we know it today.

While the idea of a federal office specifically dedicated to consumer finance has been kicked around by policymakers for decades, experience with questionable subprime mortgage loans in the nineties and then through the housing bubble during the early years of the 21st century brought the idea back to the front of public debate.

The CFPB’s objective is straightforward: To create access for all types of consumers to financial markets, products, and services that are fair, transparent, and competitive. The following are the stated goals of the CFPB, per their website:

1) Ensuring that consumers have timely and understandable information.
2) Prohibiting unfair, deceptive, abusive, or discriminatory business practices.
3) Identifying and addressing outdated or burdensome regulations.
4) Promoting transparent, efficient, and competitive markets for consumer financial products. That includes not only credit, mortgage and banking, but any predatory lending.


Nationally, home prices nearly doubled between 2000 and 2006, vastly greater than the historical appreciation rate that roughly followed the rate of inflation. For residential properties (particularly in California, Nevada, Arizona, and Florida) annual appreciation was in excess of 35%, while the rest of the country had a much lower appreciation. Here in Texas we saw 2-3% annual appreciation as a state (50th in appreciation).

Residential homes had not traditionally been treated as investments subject to speculation, but this changed during the housing boom. Homes were being purchased while under construction, then being flipped for profit without the seller ever having lived in them. Some mortgage companies identified risks inherent in this activity as early as 2005, after identifying investors assuming highly leveraged positions in multiple properties.

Speculative borrowing in residential real estate has been cited as a contributing factor to the subprime mortgage crisis. During 2006, it is estimated 22% of all homes purchased (1.65 million units) were for investment purposes, with an additional 14% (1.07 million units) purchased as vacation homes. During 2005, these figures were 28% and 12%, respectively. In other words, a record level of nearly 40% of homes purchased was not intended as primary residences. David Lereah, National Association of Realtors chief economist at the time, stated that the 2006 decline in investment buying was expected: “Speculators left the market in 2006, which caused investment sales to fall much faster than the primary market.”

Many loans were made to consumers who did not understand the consequences of borrowing 120% of their equity in their properties on a frequent basis, in some cases as often as every 90 days. The belief was that real estate would continue to appreciate dramatically in value, therefore covering the basis of making the loan. Other offerings were stated income loans with little to no verification of the stated income. In later years these would be referred to as ‘liar loans’. Additionally, zero-down and loans became common, allowing buyers to purchase a home with no down payment or equity in play.

Looking back, risky loans were based on a faith that home prices would increase to infinity. Other investments do not allow the leverage that real estate allowed at the time. Many companies did not change the underwriting treatment of a home (which was traditionally a conservative inflation hedge) to a full scale speculative investment. American Nobel Laureate, economist, academic, and best-selling author Robert Shiller argued that speculative bubbles are fueled by “contagious optimism, seemingly impervious to facts, that often takes hold when prices are rising. Bubbles are primarily social phenomena; until we understand and address the psychology that fuels them, they’re going to keep forming.” Another noted wise investor, Warren Buffett, testified to the Financial Crisis Inquiry Commission: “There was the greatest bubble I’ve ever seen in my life…The entire American public eventually was caught up in a belief that housing prices could not fall dramatically.”

Why the history lesson? Looking back, there were a small percentage of predatory lenders that took advantage of prospective home buyers by writing loans that were destined to fail when the home bubble burst and the market inevitably corrected itself. Ultimately, many of these predatory loans failed when the market crashed and many borrowers found themselves underwater.

Sure enough, after several years of these aggressive – and in some cases, fraudulent – lending practices, homeowners began to default on their loans at an alarming pace. To make matters worse, many longstanding corporate entities (like the insurance giant AIG) had made aggressive positions on these mortgages.

As the subprime market crashed, many companies like AIG and Lehman Brothers that were on the wrong side of the speculation got in deeper and deeper trouble and eventually many failed or had to be bailed out by the federal government. The stock market crash (in which the Dow Jones Industrial Average lost almost half its value) also decimated many Americans retirement accounts. It is estimated over $7.5 trillion in equity was lost nationally. The country and most of the world has still not recovered. Nationally only 65 counties out of nearly 3,100 have fully recovered in home values and employment.


With the fallout from the financial crisis fresh in the minds of lawmakers and newly elected administration, the CFPB was created in 2008 to be a “watchdog” for consumers against the potential predatory actions of financial companies. Following is a list of some of the reforms instituted by the CFPB:

Ability-to-Repay/Qualified Mortgage

Until recently, lenders were allowed to direct borrowers toward high-interest loans, which are more profitable for lenders, even if they qualified for a lower-cost mortgage—a practice that helped lead to the financial crisis. In early 2013, the CFPB issued a rule that effectively ends this conflict of interest.

Integrated Disclosures

Integrated disclosures should make the lending process easier for consumers to understand. The CFPB has set August 1, 2015 as the effective date for the new Loan Estimate and Closing Disclosure forms that will (almost) replace the Good Faith Estimate, Truth-in-Lending, and HUD-1 disclosures used today. Reverse mortgages and certain home equity transactions will continue to use the current disclosure, which could create some confusion on those rare 80/10/10 transactions.

Perhaps the biggest change is the new “three day rule,” which requires that the borrower receive the Closing Disclosure form three full business days prior to consummation. Lenders and settlement agents are already beginning to work out the details about how this new form will be produced and delivered. All real estate professionals will require training on the new forms in order to help guide their buyers and sellers. In addition, the consumer gets a low-cost home loan counselor. In January 2013, the CFPB required the vast majority of mortgage lenders to provide applicants with a list of free or low-cost housing counselors who can assist buyers in making smart lending choices.

Quality Service Providers (such as Independence title and others)

While Realtors and the industry are dealing with new borrower qualifying requirements, and will be dealing with new disclosures next year, CFPB and other regulators have been putting increasing pressure on all lenders and parties involved to ensure that their third-party service providers meet very high standards. This, in turn, has caused lenders to put title and settlement providers under a microscope as they routinely handle vast sums of lender funds and considerable amounts of consumers’ personal information. Expect lenders to be spending more time on their approved settlement provider lists as the “flight to quality” continues to accelerate.

Affiliated Business Arrangements


Most of us go to a real estate professional and take direction on where we should get our financing, title work, etc from. This is what many in the industry call ‘captured business’. The CFPB is taking a hard look at the operational and financial aspects of these arrangements. Is it a ‘kickback’ or financial gain for the referred business? CFPB has taken over enforcement of RESPA from HUD and they are serious about making sure ABA’s are operating under both the spirit and letter of the law. Recent enforcement actions demonstrate the Bureau’s intention to ensure that consumers are aware of these arrangements and understand their options for mortgage and title and settlement services. Brokers with mortgage and or title ABA’s should pay special attention to compliance in the new era.

There is much more than anyone can cover in one blog posting. But suffice to say, you as a consumer or real estate professional need to understand the implications of the new agency. If you have a question, ask. If your realtor, lender, title company, etc. cannot answer you probably need to continue to look and find an appropriate representative that can.

I would suggest that you look at lenders, builders, and title companies that are equipped to comply with the parameters put in place by the CFPB. Should you have further questions, Independence Title has a wealth of resources. Contact our Education Team and study the resources posted on our blog:

Video | CFPB- What It Is and Why We Care

New standards for mortgage lending

New Consumer Finance Protection Bureau Regulations


New standards for mortgage lending

New standards for qualified residential mortgage (QRM) lending went into effect Monday, January 10th, 2014. Based on the inquiries we have been receiving, there are many misconceptions as to what the new regulations entail, and how they may effect mortgage lending and the real estate market as a whole. I thought now was a good time to revisit these standards and explain their implications.

The Consumer Financial Protection Bureau (CFPB) issued their QM rules which went into effect January 10, 2014. The rules determine the limits on the loan types which can be offered by banks, the fee structures which can be charged by banks, and other such issues. (For more details, you can download the 7 page summary or the 804 page full document issued by the CFPB). The CFPB’s QM standard already clearly stipulates what is considered to be a safe and sound loan, and adding additional layers of regulation could limit credit availability for first-time home buyers and borrowers without large down payments, and prevent private capital from entering the market.

For most home loan borrowers, the change will have little or no impact on whether they can actually get a mortgage, experts say, but they may have to show even more proof that they can afford one. Here’s a look at the rules, what they do and why they matter.

What are the new rules, and where did they come from?

There are several terms to know. The first is the “ability-to-repay” rule. It was required by the 2010 Dodd-Frank financial overhaul legislation as a response to the financial crisis. The rule was crafted by the Consumer Financial Protection Bureau, which will oversee its enforcement.

What do the new rules do?

As you can see above, the new rules require mortgage lenders to make sure borrowers can actually afford their loans, over the long term, by weighing their income, assets, savings, and debt against their monthly house payments. “It really is pretty basic,” says Richard Cordray, head of the CFPB. He calls the changes a “back to basics” approach for mortgage lending.

What else is new?

A “Qualified Mortgage” meets new guidelines, and borrowers who get them are presumed to meet the ability-to-repay requirements. If lenders make QM loans, they have more protections against future lawsuits should the loans later go sour. Much of the industry’s attention is focused on the new Ability-to-Repay/Qualified Mortgage (ATR/QM) Standards, which require lenders to demonstrate they have made a reasonable and good faith determination, based on verified and documented information, that the consumer has a reasonable ability to repay the loan. The lack of such documentation was common during the housing boom in the late 1990s and early 2000s and was one of the contributing factors of the housing collapse that began in 2007. With the CFPB’s heightened scrutiny over lender practices, a relapse is much less likely to occur. The ATR/QM rule is just one of the new rules aimed at helping lenders close less risky loans.

The goal behind the ATR/QM rule is for lenders to demonstrate they have made a reasonable and good faith determination, based on verified and documented information, that the consumer has a reasonable ability to repay the mortgage loan according to its terms. To meet this standard, lenders must consider, verify and document that the consumer has sufficient income and assets to repay the loan, generally using the eight underwriting factors described in the ATR/QM rule.

Qualified residential mortgages

Qualified residential mortgages should make home buying more costly in 2014. On January 10, 2014, a new provision in the Dodd-Frank Wall Street Reform and Consumer Protection Act goes into effect. The “qualified residential mortgage,” or QRM, may have far-reaching effects that will lessen the number of people who can obtain home loans. In my eyes it particularly affects ‘entry level‘ buyers. Most of us started as ‘entry level‘ buyers, which forced us to save a bit more and allowed us to build equity for our next house. Not having more lenient financing for these type of buyers will have a definitive long term effect on housing. ‘Entry level’ buyers will be forced to pay more and more of their income to continually escalating rents. The inability to have tax advantages and the ability to share in one of the best leveraged ‘hard assets’ in the nation will have long range affects on the Millennials and others that also are not seeing the positive effects of inflation on other assets that the Baby Boomers saw.

QRMs were designed to set the bar for residential mortgages and to minimize the risk that borrowers may default. It requires that debt ratios be limited to 43 percent and loan fees limited to 3 percent, and interest-only loans and negative amortization are not allowed in most cases. The Dodd-Frank bill also requires the lender to retain 5% of any mortgages they make. Most lenders do not have the ability to retain 5% since they are making less than 2% on most loans. This opens the door for mortgage lending to the large banks, who have deposits and other capital they can pledge as that 5%. In other words, if they make a $100,000 loan, they must retain $5,000 to secure the loan. QRM loans are exempt from the risk retention rules. This means that the lender can sell the loan on the secondary market without having to retain the 5 percent. The effect of these provisions is already being felt in the lending industry. Citibank has restricted its lending to those areas where it has a banking presence. Compliance departments have tripled in size at many large lenders. Community banks and credit unions are being choked by the regulations and often lack the resources to meet the new compliance requirements.

Community banks and credit unions have historically had a much lower default rate compared to other lenders. The reason is that they know their customers. Community bank loans have often been based on a handshake, a borrowers character, and knowing the customer over a longer term. In terms of credit union loans, people feel they are hurting themselves and other members if they default. That is what makes the new provisions so difficult for lenders. In the past, loans have been turned down primarily due to credit issues. For the first time in history, lending decisions may be made based upon compliance issues rather than just credit issues. Imagine that you made a mistake on a purchase agreement contract. The buyer and seller want to change the agreement to correct the mistake, except the law prohibits you from doing so. If a lender makes a mistake with any part of the compliance, the lender now has to pay all of the borrower’s closing costs. Even if the mortgage agent made the mistake, the mortgage agent must still be paid. The lender cannot deduct any costs or losses resulting from the mistake. The lender still has to close the loan. These provisions will be particularly difficult for online mortgage sites.

In addition to the issues above, jumbo loans currently fall outside the QRM provisions. A jumbo mortgage is a mortgage loan that may have high credit quality, but is an amount above conventional conforming loan limits – $625,000 in Texas. This creates tremendous uncertainty as to what will be required of lenders who want to sell jumbo loans on the secondary market. The result will most likely be that be even fewer jumbo loans will be available.

What are the QM guidelines?

QM loans cannot:
• Contain risky features, such as terms that exceed 30 years, interest-only payments or payments that are less than the full amount of interest so that the home loan debt grows each month.
• Carry more than 3% in upfront points and fees for loans above $100,000.
• Push a borrower’s total debt load above 43% of his or her monthly income, unless the loan is eligible to be backed by Fannie Mae or Freddie Mac, or a federal housing agency such as the FHA, or is made by a small lender that keeps the loan on its books.

Ability to repay standards QRM / ATR guidelines are as follows:
• Current or reasonably expected income or assets
• Current employment status
• Monthly payment on the covered transaction
• Monthly payment on any simultaneous loan
• Monthly payment for mortgage-related obligations
• Current debt obligations, alimony, and child support
• Monthly debt-to-income ratio or residual income
• Credit history

The Dodd-Frank Act and ATR/QM rule provide that a lender making a special type of loan, known as a Qualified Mortgage, is entitled to presume that the loan complies with ATR requirements (safe harbor). The rule establishes different types of Qualified Mortgages that are generally identified as loans with restrictions on loan features, limits on fees being charged, and underwriting requirements.

Can lenders still make loans outside those guidelines?

Yes, but they’ll still have to make sure borrowers can afford the loans, and they’ll have less protection against future legal challenges if the borrower fails — even if they resell the loan after they first make it. Some banks will continue to do interest-only loans. Many borrowers in high housing-cost areas also frequently have debt-to-income ratios that exceed 43% and lenders will likely keep making home loans in those areas, too. Many lenders say they’ll keep making non-QM loans that are “perfectly sound”, whether they look to sell them on the secondary market or maintain them within their own mortgage portfolios. The point is QM/QRM guidelines will not rule all new mortgages.

How many mortgages are likely to fall under the QM definition?

Currently he CFPB estimates that 92% of mortgages in the current marketplace would meet the QM requirements.

Why is this needed?

One of the big causes of the ‘great recession’ was the financial meltdown caused by the lenders risky lending habits. Most analysts estimate that 50%+ of recent home loan defaults could have been prevented had the QM rule been in place when the loans were made, largely before the housing bust. Over time, should the housing market get superheated again, the new rules will “serve as a barrier,” against another financial melt down caused by aggressive risky loan practices,

Will the rules make it harder for some people to get home loans?

Some professions will find it may be tougher to qualify if they have difficult-to-validate incomes, including those for whom tips, bonuses, commissions, rents or investments constitute a big part of their total income. One in nine Americans are also self-employed, and that income is harder to substantiate than wage income. It is important to work with a competent, experienced mortgage professional.

Those borrowers above the 43% debt-to-income level will also face more hurdles, but mostly in terms of documentation. That’s because lenders have to be able to prove that they exercised extreme due diligence in making such loans. Borrowers should expect to have to produce even more tax records, pay stubs and bank and investment account information.

What’s going to be the required minimum down payment?

The rules don’t set any down-payment requirements. There appears to be a common misconception that the new rules will bring mandatory down payments for borrowers. But that is not the case presently. It was a suggestion in 2011, and met with a lot of resistance.

The lending changes should not have a direct effect on down-payment requirements in 2014. Nor will they impose a mandatory down payment of 20%, as many people believe. In 2014, as in past years, loan-to-value ratios (and their inverse, the down payment) will primarily be influenced by the mortgage insurance industry and the business practices of individual lenders. It is highly unlikely the federal government will impose any minimum down-payment requirements on borrowers in 2014.

Will the rules mean it’ll take longer to get home loans approved?

This is a great question to ask in a seller’s market. A seller will probably look at cash deals before qualified mortgages in the essence of speed. Any new guidelines slow the process historically. It’ll still take lenders more time to get systems up and running that track and handle new documentation requirements. While lenders have had months to prepare, he still expects that loan officers, underwriters, and compliance offers will need more training. Guidelines have been written, but until underwriters and the industry get some experience in what guidelines the CFRB is expecting, it will be slower and should include more conservative guidelines.

What concerns are there about these changes?

Anytime you change underwriting guidelines that come with federal penalties, you cause an industry to remain conservative. That is a big concern for entry level and affordable housing. Also many critics say minimum-down-payment requirements would be a good thing. Analysis shows that eliminating loans with risky features (zero documentation, zero down, etc.) would have eliminated over 60% of defaults that occurred in loans issued in 2007; it also would have prevented 30% of the loans that didn’t default, too.

As discussed earlier, it may be tougher for some borrowers to qualify if they have difficult-to-validate incomes, including those for whom tips, bonuses, commissions, rents or investments constitute a big part of their total income. One in nine Americans are also self-employed, and that income is harder to substantiate than is wage income.

Most underwriters are sticking to remaining conservative in their outlook and interpretation of these rules. My take is that mortgage lending will continue to be harder to qualify for, rather than easier.
There will be fewer loan choices as community banks and credit unions are squeezed out of the market, making it even harder for many borrowers to qualify. The loan process will also probably take longer due to the increased compliance measures. Lenders generally want to issue loans that meet QRM criteria. It gives them an exception to a rule they find troubling. It allows them to sell a higher percentage of their mortgages into the secondary market, thereby reducing their long-term risks. As a result, the majority of lenders will impose these guidelines upon their customers. These rules will essentially set the bar for mortgage lending standards in the U.S. Those borrowers who fail to meet these criteria will have a harder time finding a loan compared to borrowers who do meet the criteria.

Remember in 2005, the median home value in Austin was around $171,000, and today it is around $220,000. But with wages staying flat during this time in Austin as well as the rest of the country, it makes affordability and qualifying further out of reach. With a healthier economy, they might end up paying a higher interest rate as well. Lenders claim that risk retention increases their operating costs, so they will likely charge more for loans that are subject to risk retention.

So here’s the bottom line: why wait to buy? Values, rates, lending all are increasingly making it harder to buy. Encourage anyone who is on the fence about selling or buying to do so soon. Otherwise, they may be caught up in maelstrom of new regulations that can sink their sale and that might also hamper the real estate recovery.

New Consumer Finance Protection Bureau Regulations

There is an old idiom that a pendulum always swings too far, one way or the other. This seems to be the case with regulations on finance and lending. The Consumer Finance Protection Bureau recently released regulations designed to protect consumers from so-called “predatory lending” practices that were prevalent in many markets during the ‘boom’ years. My fear is that some of these regulations may restrict lending too much, swinging the pendulum too far.

In the wake of the real estate recession, the federal government introduced a variety of measures designed to protect consumers and weed out unprofessional or predatory mortgage loan originators. One of these actions has been the creation of a new federal agency, the Consumer Financial Protection Bureau (CFPB).

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act) established the CFPB, which was launched in July 2011.

Here’s the mission statement of the CFPB: “The central mission of the Consumer Financial Protection Bureau (CFPB) is to make markets for consumer financial products and services work for Americans – whether they are applying for a mortgage, choosing among credit cards, or using any number of other consumer financial products.”

The basic idea is to heighten government accountability by consolidating into one place a variety of responsibilities that had previously been scattered across various government entities. The CFPB is like a one-stop-shopping center for consumer financial affairs.

Let’s explore what this means to you. The CFPB’s activities cover three areas: to educate consumers; to enforce federal consumer finance laws; and to gather and analyze relevant information.

We want to look at the CFPB and the guidelines they have announced on mortgages. What affect they will have on the national market, history will be the judge. In this analyst’s view, it will probably make lending more difficult. In Austin and Texas, because of demand and lack of inventory, we probably won’t feel the effects as much for the next couple of years. These regulations don’t go in effect until January 2014.

What the CFPB Can and Cannot Do

At this time, the CFPB only has the authority to enforce existing regulations that were previously under the control of other agencies. With one or two exceptions discussed below, there are no new CFPB-created laws or regulations that mortgage industry professionals or consumers need to learn about. The CFPB can only streamline existing functions and act as a clearinghouse for consumer complaints.

New Mortgage Disclosure Form

One program that directly impacts lenders and consumers is “Know Before You Owe.” This is a participatory effort that consumers and mortgage loan officers (MLOs) access through the CFPB’s website at As required by federal law, consumers who apply for a mortgage loan receive two forms: a two-page Truth in Lending disclosure form and a three-page Good Faith Estimate. By informing consumers and allowing them to compare mortgage offers, the forms are supposed to help the consumer pick the mortgage product that is best for them. The two current forms have overlapping information and can be confusing to consumers. The industry has said that they needlessly drive up costs and the regulatory burden on lenders. The Dodd-Frank Wall Street Reform and Consumer Protection Act, which created the CFRB, mandated that the CFRB combine these two forms into one.

To this end, during the summer of 2011 the CFPB posted on its website two different mortgage loans using the same draft version of a new, simpler disclosure form. MLOs are invited to comment. MLOs can click on the “switch to the industry tool” icon to be taken to the page that features two prototype loan documents for a typical $121,000 loan. The samples (called “Jasmine” and “Nandina”) can be downloaded as .pdf files. The prototype forms are reviewable are designed to combine both the Good Faith Estimate and the initial Truth in Lending disclosure, as mandated by the Dodd-Frank Act.

The CFPB promises that they will post drafts throughout the process, and give MLOs a quick, simple way to offer opinions on what works and what doesn’t. In the end, the new unified disclosure form will have to work for the consumers and lenders who rely on it every day.

Consumer Mortgage Counseling

For consumers facing foreclosure, the CFPB offers a website portal that helps the consumer get connected to a HUD-approved housing counselor. At no cost to the borrower, the counselor can help them work with their mortgage company to try to avoid foreclosure. The housing counselor will help the borrower organize their finances, understand their mortgage options, and hopefully find a work-out solution that works for them.

HUD provides an online list of foreclosure prevention resources arranged by state. Military members or veterans can call or visit the Veteran Administration’s home loan website to get personalized assistance.

The CFPB encourages at-risk homeowners to call and report foreclosure prevention and loan modification scammers who promise “guaranteed” or “immediate” relief from foreclosure, and who might charge very high fees for little or no services.

The ability of lenders to ‘dual track,’ is also under greater scrutiny. ‘Dual tracking’ is when mortgage services move to foreclose on a borrower while simultaneously negotiating a loan modification under new rules issued by the U.S. Consumer Financial Protection Bureau.

Regulating Mortgage Loan Servicers

The CFPB can require that companies who collect mortgage payments do not charge illegal fees or enroll a homeowner in overpriced insurance plans, keep accurate records of what the borrower owes, and do not either deliberately or accidentally push a homeowner into foreclosure.

What does it take to qualify for a loan today?

If a borrower has at least a 620 credit score and qualifies based on their documented income, they can get an FHA loan at 3.25% interest for 30 years fixed from most lenders as of the writing of this newsletter. Most mortgage bankers and brokers say that the automated underwriting system has made it much easier to get mortgage loans approved compared to when loans had to be manually underwritten and the debt to income ratios had to be 28/36.

How has this changed from the pre-recession loans? Below is a chart from Fannie Mae showing the percentage of business below 620 credit and above 740 credit. As you can see the business has changed.

In full disclosure, these new laws, which go into effect in January 2014, make changes and actually provides some substance to the skeletal structure of the Dodd-Frank Act, which stated that a lender had to ensure the consumer could repay their mortgage loan. (In other words, if the borrower defaults on a loan, the lender could actually be held liable.)

The CFPB has now proposed that lenders, to protect themselves from possible litigation, must make only “qualified mortgages” — a type of mortgage that must meet the following conditions.

No upfront fees or points in excess of 3% of the loan

A ‘Qualified Mortgage’ limits points and fees including those used to compensate loan originators, such as loan officers and brokers as well as points paid by the seller for closings costs, mortgage costs, etc. The CFPB continues to work on improving this. These parameters were put in place to prevent lenders from tacking on excessive points and fees to the origination costs, which in turn caused the consumer to end up paying a lot more than planned.

The loan cannot exceed 30 years in term length. A qualified mortgage cannot have risky loan features

In the lead up to the crisis, too many consumers took on risky loans that they didn’t understand. They didn’t realize their debt or payments could increase, or that they weren’t building any equity in the home. This provision was put in to prevent that abuse.

One of the other discussions by the CFPB is requiring larger down payments on all ‘qualified mortgages’ to the tune of 20% to 25%. Several government agencies are reviewing data to determine what will be the minimum down payment required under the new Qualified Residential Mortgage (QRM) guidelines scheduled to be revealed in the next few months. In the original Mortgage Market Note issued by the FHFA, it was suggested that loan-to-value (the percentage of the overall purchase price which was being borrowed) was a major factor in determining if a loan would default.

Basically, the original note suggested that a 20% down payment should be the new guideline. We realize that there has been much debate on this issue since and that the minimum down payment required under the new QRM guidelines will probably be less than 20%. However, we can’t know for sure.

Bloomberg reported last week: “The six regulators drafting the separate QRM rule, including the Department of Housing and Urban Development, the Office of the Comptroller of the Currency and the Securities and Exchange Commission, must decide whether to include such a requirement — and whether to make it less than the 20 percent they originally proposed.”

Will it be more difficult to qualify for a mortgage after the new QRM rules are announced? Most of us got into our first homes and still can for minimal down of 3.5 to 5% down. I would say there is greater likelihood of less people qualifying.

Realize that we currently have abnormally low interest rates. For every 1% increase (or decrease) in rates, borrowers can spend 12% more (or less). As rates increase, the larger downpayment should have the same type of dampening effect.

Do not think that this down payment issue is not meeting resistance. House Deputy Whip Tom Price (R-GA) in a letter to the SEC and other members of the financial services committee pointed out that this requirement would knock out 20 to 25% of borrowers for qualifying for ‘QRMs’. He argued that the ‘QRM’ exclusion from risk retention was particularly important for the stability of the United States housing market. In the Deputy Whip’s view, it is hard to envision the recovery of the housing market with unnecessarily high down payments, moreover this was never the intent of Congress in his estimation.

No interest-only periods or interest-only loans

No more “No doc/low doc” loans

“No doc/low doc loans” are when a borrower does not have to prove their income. Lenders must look at a consumer’s financial information. A lender generally must document a borrower’s employment status, income and assets, current debt obligations, credit history, monthly payments on the mortgage, monthly payments on any other mortgages on the same property, and monthly payments for mortgage-related obligations. Lenders will be required to verify all of this with information from independent third-party sources. This in turn prevents lenders from offering offer no-doc and low-doc loans, where lenders made quick sales by not requiring documentation, then offloaded these risky mortgages by selling them to investors.

No negative amortization loans

In this lending scheme, the loan payment for any period is less than the interest charged over that period, so that the outstanding balance of the loan increases.

Restricts balloon principal payments and pre-payment penalties in most cases

Debt-to-income ratios for borrowers must be equal to or less than 43%

Under the Ability-to-Repay rule announced, all new mortgages must comply with basic requirements that protect consumers from taking on loans they don’t have the financial means to pay back.

A borrower has to have sufficient assets or income to pay back the loan

Lenders must evaluate and conclude that the borrower can repay the loan. For example, lenders may look at the consumer’s debt-to-income ratio – their total monthly debt divided by their total monthly gross income. Knowing how much money a consumer earns and is expected to earn, and knowing how much they already owe, helps a lender determine how much more debt a consumer can take on.

Teaser rates can no longer mask the true cost of a mortgage

Lenders can’t base their evaluation of a consumer’s ability to repay on teaser rates. Lenders will have to determine the consumer’s ability to repay both the principal and the interest over the long term – not just during an introductory period when the rate may be lower.

The loan must be a prime loan (the interest rate must be close to the national average prime mortgage rate)

The loan is eligible to be sold to Fannie Mae or Freddie Mac

The new CFPB law shouldn’t have a positive effect on the national real estate market because it continues to keep a lid on lending, and doesn’t allow the mortgage market to create what it considers to be a good loan. In other words, it puts restraints on the free market to be able to make its own choice about what should constitute a worthy borrower. It is difficult to find the middle ground between an excessively regulated environment (in which real estate markets lag because lenders are unable to approve enough borrowers), versus one with no regulations — a la 2006, when the markets gave free rein to giving mortgages to less than worthy borrowers. The CFPB’s ban on “teaser rates” (very low interest rates that increase to much higher rates after a short period of time, such as one year) might not affect the industry much in our present low-interest-rate environment, but could severely impact real estate sales if rates rise over the next few years. Thank goodness we live in Austin and Texas.

The only saving grace for the real estate industry is at least now there is some clarification of the changes that Dodd-Frank promised to bring — that is until some lawsuit brings about a whole new set of regulations designed to help the consumer (but which may have the opposite effect).

How will this play out is hard to say? On one hand, we all understand the needs to better protect the consumer. On the other, overprotection is counter protective. Only time and history will tell.