By: Stuart Saft
September 1, 2010
The Mortgage Reform and Anti-Predatory Lending Act, part of the Dodd-Frank legislation, should be called the Anti-Mortgage Lending Act, because it will further stifle the recovery of the housing and credit markets.
The labyrinth of rules that it creates and the regulations that will undoubtedly follow will discourage lending institutions from making or acquiring home mortgages; provide borrowers with an arsenal of defenses to foreclosure;and reduce the likelihood that these loans could be securitized.
The law requires that consumers be "offered and receive residential mortgage loans on terms that reasonably reflect their ability to repay the loans and that are understandable and not unfair, deceptive or abusive." Unfortunately, there is no definition of unfair, deceptive or abusive, and what is "understandable" will be left for a judge to determine. How lenders will be able to satisfy the regulators, judges and juries that they satisfied these subjective standards is a mystery.
The Ability to Repay section precludes any creditor from making a residential loan unless the creditor "makes a good-faith determination based on verified and documented information that, at the time the loan is consummated, the consumer has a reasonable ability to repay the loan, according to its terms, and all applicable taxes, insurance ...and assessments."
The creditor is required to make a determination aboutthe consumer's current income as well as the"expected income the consumer is reasonably assured of receiving" - as though lenders have some sort of crystal ball. This might mean that those on commission or who get large discretionary bonuses might not be able to obtain financing. These provisions not only provide a defaulting borrower with foreclosure defenses, but also raise questions as to how lenders will comply and still meet their Community Reinvestment Act obligations.
The Defenses to Foreclosure section stipulates that if the holder of a residential mortgage commences a foreclosure, a consumer may assert a violation of the act by the creditor as a matter of defense by recoupment without regard to the statute of limitations. This will expose lenders to every kind of defense imaginable for as long as the loan is outstanding.
Moreover, if the loan is not a "qualified mortgage," the lawrestricts the amount of prepayment penalties and requires creditorsto offer consumers not only a product with a prepayment penalty, but alsoa product without a prepayment penalty. But what happens if there are no comparable products?
Oddly, after years of pushing alternative dispute resolution, the act prohibits residential mortgages from requiring arbitration or other nonjudicial procedure to resolve controversies.
In addition, at least six months before the reset date of any adjustable-rate mortgage, the consumer must be advised of any formula used in making the adjustment;receive an explanation of how the new interest rate and payment will be determined; and be given a good-faith estimate of the new payment, among other stipulations. This leaves the creditor and servicer exposed to litigation or regulatory complaints if their estimates of the market six months later turn out to be inaccurate.
The section on High Cost Mortgages will result in a situation where if interest rates fluctuate or credit is less available, borrowers will default, because if the only mortgage available has a higher interest rate, then the mortgage cannot be refinanced.
Moreover, no creditor can extend credit under a high-cost mortgage without first receiving certification from a HUD-approved counselor that the consumer received counseling on the advisability of the mortgage.
Servicers are also precluded from obtaining force-placed hazard insurance unless there is a reasonable basis to believe that the borrower has failed to comply with the loan's insurance requirements.
Within 15 days of receiving evidence of the borrower's insurance, the servicer must cancel the force-placed insurance and refund to the borrower all forced-placed insurance premiums paid by the borrower and any related fees. This means that the lender will be forced to pay the borrower's insurance for the period in which the borrower was late in supplying the proof of insurance.
The law also requires that in the event the purchaser is seeking financing within 180 days of acquiring the property, heor she needs a second appraisal from a different appraiser. But the cost of the second appraisal cannot be charged to the applicant, which is another expense for the lender to shoulder.
Generally, the problem with this legislation is that it was written in an attempt to cure one set of problems that happened in the past. Those problems affected a relatively small group of borrowers, but the legislation will affect every creditor and borrower and will have an adverse impact on home mortgage lending and,in turn, the recovery of the housing market.And by including the detail in the act rather than leaving it to the regulators, Congress has eliminated any flexibility to deal with changing circumstances.
Stuart Saft is a partner at Dewey & LeBoeuf LLP.