REAL 17.2: Legislation Resulting from the Subprime Mortgage Crisis
the American Recovery and Reinvestment Act's (ARRA) Promise
* Homebuyer credit of $8,000 for all homes purchased between January 1, 2009 and December 1, 2009 * Repairing and modernizing public housing, including increasing the energy efficiency of units * Tax credits for financing low-income housing construction * Rental assistance through the Housing Choice Voucher program * An increase of funding for the Neighborhood Stabilization program and CDBG * Rental assistance to prevent homelessness * Mortgage assistance to wounded service members
The Housing and Economic Recovery Act of 2008 (HERA) Strategies
* The HOPE for Homeowners program * The Neighborhood Stabilization Program (NSP) * Federal Housing Finance Agency (FHFA) * The SAFE Mortgage Licensing Act * the Mortgage Disclosure Improvement Act
The Consumer Financial Protection Bureau (CFPB) three-pronged approach aka The Protection Trifecta
1. Education (through plain-English notices such as "Know Before You Owe" publications for mortgagors, credit borrowers, and consumers obtaining student loans) 2. Enforcement (through rule-making, supervision, and enforcement of federal consumer financial protection laws, and restricting unfair, deceptive, or abusive acts or practices against consumers) 3. Research (through response and investigation of consumer complaints, researching consumer behavior, and monitoring financial markets for new risks to consumers)
American Recovery and Reinvestment Act (ARRA)
A $787 billion federal government package intended to stimulate economic growth during the recession of 2008-2009
Mortgage Disclosure Improvement Act
A regulation that requires the disclosure of certain estimated settlement costs (A lender cannot require an application fee or appraisal fee from a customer until these disclosures are made)
The Housing and Economic Recovery Act of 2008 (HERA)
Act created to address the subprime mortgage crisis
Secure and Fair Enforcement for Mortgage Licensing Act (SAFE)
Act that sets a minimum standard for licensing and registering mortgage loan originators (MLOs) Specific state licensing requirements can be found in the Nationwide Mortgage Licensing System Registry (NMLSR)
Federal Housing Finance Agency (FHFA)
Agency which regulates and manages the finances of the government-sponsored entities Fannie Mae and Freddie Mac
Nationwide Mortgage Licensing System and Registry (NMLSR)
All residential mortgage loan originators must now be registered with ___
Neighborhood Stabilization**
Both the Housing and Economic Recovery Act and the American Recovery and Reinvestment Act funded a program called the ______ program, which provided emergency assistance grants to states to purchase and redevelop foreclosed and abandoned homes and residential properties
Consumer Financial Protection Bureau (CFPB)
Bureau that was established with the aim of protecting consumers from unscrupulous credit practices
RESPA**
Eliminates illegal referral fees among settlement service providers
"hero"
HERA was the legislative ____ of the recovery, with help from its minions, SAFE and MDIA
They must plan for plenty of time for closing, and make sure that any changes get prompt review
How can a licensee prevent disclosures from being delivered too close to the final closing date, causing the Mortgage Disclosure Improvement Act (MDIA) three-day rule to be triggered?
* Encouraging debt * Making loans to unqualified borrowers (a consumer who can't really afford the loan) * Flipping loans (refinancing over and over, which allows the lender to charge fees each time) * Not disclosing all fees related to the loan * Not disclosing the true nature of the loan obligation * Including toxic loan features (e.g., terms exceeding 30 years, negative amortization, usurious interest rates)
How do Predatory lenders take advantage of the consumer?
• Closing may be delayed if the proper disclosures aren't provided in a timely manner • Lenders must allow applicants at least seven business days to review the Loan Estimate, and a minimum of three business days to review the Closing Disclosure form (The loan can't be closed or signed off before this waiting period is complete) Additionally, certain changes to fees and APR triggers a new three-day window for the borrower to evaluate and determine whether the change is acceptable • can impact closings if disclosures are delivered too close to the final closing date and the three-day rule is triggered
How does the Mortgage Disclosure Improvement Act (MDIA) Affect the Real Estate Industry?
• allows consumers to conduct research, obtain unbiased professional information, and make informed decisions when choosing lending professionals • Widespread consumer use of the registry is intended to drive dishonest or incompetent MLOs out of business
How does the Secure and Fair Enforcement for Mortgage Licensing Act (SAFE) Affect the Real Estate Industry?
• large banks and credit unions that had previously been regulated • independent and privately owned "non-bank financial institutions" that hadn't previously been regulated
Included under the Consumer Financial Protection Bureau (CFPB) oversight are the large banks and credit unions that had historically been regulated by the federal government, as well as independent and privately owned "non-bank financial institutions" that hadn't previously been well regulated
carry their own loans and don't plan to sell them on the secondary market
Lenders who ___ won't always follow qualified mortgage rules
consumer-focused educational content
On the CFPB website, one would find ___ that clearly describes the phases and choices he will encounter when obtaining a mortgage loan
The Neighborhood Stabilization Program (NSP)
Part of the housing and economic recovery act of 2008 that provides grants to communities suffering from an excess number of foreclosed and abandoned homes and residential properties
subprime loan market
Predatory lending can often be found in the ___, where borrowers who can't qualify for a conventional loan are easy to take advantage of
ECOA
Prohibits lenders from denying credit to applicants on the basis of protected class status
secondary market
Qualified mortgages can also be sold more easily on the ___
HERA
Recovery act that includes SAFE and MDIA
CRA
Requires financial institutions to invest in the communities they serve
HMDA
Requires financial institutions to report their mortgage data
TILA
Requires lenders to make full disclosure of the terms and conditions of credit
Private Mortgage Insurance (PMI)
Requiring ___ is common practice when a borrower doesn't meet the lender's minimum down payment requirements
Wounded servicemen and servicewomen
The American Recovery and Reinvestment Act provided mortgage assistance to ______
researches
The CFPB gathers consumer and industry comments as it ___ new rules related to payday loans
Responding to and investigating consumer complaints regarding financial services
The CFPB promotes consumer protection in the credit market through a number of strategies, including ______
Know Before You Owe
The CFPB uses education to accomplish its mission, such as the ______ publications
watch-dog agency
The Consumer Financial Protection Bureau (CFPB) is a ___, not a lender.
Non-bank lenders
The Dodd-Frank Act created the CFPB in part to regulate ______, which were among the largest originators of subprime mortgages prior to the financial crisis of 2007‒2008
providing stricter regulation of the financial services industry
The Dodd-Frank Act created the Consumer Financial Protection Bureau (CFPB) to support its mission of __
home's new appraised value
The HOPE for Homeowners program encouraged lenders to write down principal loan balances to a maximum of 96.5% of the ___
The SAFE Mortgage Licensing Act (SAFE) and Mortgage Disclosure Improvement Act (MDIA)
The Housing and Economic Recovery Act of 2008 (HERA) includes two key provisions, ___, which help to provide improved consumer protection by giving borrowers better information when applying for a loan
credit report fee
The Mortgage Disclosure Improvement Act (MDIA) also stipulates that the only advance fee that a creditor can charge a borrower (before disclosing the terms of the loan) is a ___
the Community Development Block Grant (CDBG)
The Neighborhood Stabilization Program (NSP) is a component of which Grant program?
Mortgage Disclosure Improvement Act (MDIA)
This act amends TILA to require specific timing related to disclosures that give consumers time to think about the loan they're about to obtain
* Easier credit increased the number of subprime mortgages * Fannie Mae's efforts increased homeownership rates * People generally believed that housing prices would continue to rise * The SEC relaxed capital requirements on investment firms
What factors contributed to the economic crisis that created the need for recovery legislation?
to promote fairness and transparency for mortgages, credit cards, and other consumer financial products and services
What is the purpose of the Consumer Financial Protection Bureau (CFPB)?
• create and save jobs • spur economic activity • increase accountability and transparency in government spending
What was the American Recovery and Reinvestment Act (ARRA) aka the "stimulus package" goals?
Loan Flipping
Which Predatory practice involves talking the consumer into refinancing over and over so a lender can charge fees?
1. the Housing and Economic Recovery Act 2. the American Recovery and Reinvestment Act
Which two legislative efforts were designed to clean up the 2007-2008 economic crisis?
they have built-in legal protections for the lender in the case of borrower default
Why are Qualified mortgages less risky for lenders to make?
so that they can help your clients know that they have rights and resources when it comes to obtaining a mortgage
Why is it good for a licensee to know about SAFE and MDIA requirements?
The HOPE for Homeowners program encouraged lenders to write down principal loan balances to a maximum of 96.5% of the home's new appraised value
Why was The Federal Housing Administration (FHA) authorized to insure up to $300 billion in new 30-year fixed rate mortgages?
tax cuts
With the American Recovery and Reinvestment Act (ARRA), Billions of dollars were budgeted to provide ___ for millions of families and businesses, as well as funding for entitlement programs, including unemployment benefits
Collateralized Debt Obligation (CDO)
an asset-backed security (created in 2000) comprised of a bundle of collateralized mortgages or other debt from multiple sources
mortgage loan originators (MLOs)
an individual who takes residential mortgage loan applications or offers or negotiate terms of a residential mortgage loan for compensation and also Finds loans for you
The SAFE Mortgage Licensing Act
designed to enhance consumer protection and reduce fraud by encouraging states to establish minimum standards for the licensing and registration of state-licensed mortgage loan originators, and for the establishment of a nationwide mortgage licensing system and registry for the residential mortgage industry
Securities and Exchange Commission (SEC)
monitors the stock market and enforces laws regulating the sale of stocks and bonds
mortgage-backed security (MBS)
mortgages pooled together to form a debt obligation - a bond - that entitles the holder (investor) to cash that flows in from the bundled mortgages
The HOPE for Homeowners program
program which aimed to stabilize the housing market by preventing foreclosures and helping subprime borrowers refinance into more affordable fixed-rate mortgages
The Consumer Financial Protection Bureau (CFPB) role
• Consolidates consumer financial protection into one agency • Regulates the actions of large banks as well as non-bank financial institutions • Works to educate consumers about how credit works • Enforces federal consumer financial protection laws • Monitors financial markets for risks to consumers
A White House briefing titled, "Consumer Financial Protection Bureau 101: Why We Need a Consumer Watchdog" cited statistics
• Nearly 20 million Americans use payday lenders, which charge their clients, on average, $16 for a $100, two-week loan—a 400% annual percentage rate (If borrowers miss payments, they begin to accumulate huge penalties and can fall into a debt-and-fee downward spiral) • In the run-up to the financial crisis, unregulated non-bank lenders were among the largest originators of subprime mortgages (The default rate on subprime mortgages issued in 2006 exceeds 50%)
Mortgage Disclosure Improvement Act (MDIA) Act Facts
• The act amends the timing of TILA disclosures • It prohibits lenders from charging anything other than a credit report fee prior to disclosing the terms of the loan • Changes to the disclosed fees or APR on the Closing Disclosure retrigger a three-day window for a borrower to evaluate the loan • Following MDIA rules for disclosure could put a scheduled closing in jeopardy
subprime loan market is risky for and when
• borrowers who can't qualify for a conventional loan • any borrower who doesn't understand how mortgages work • any borrower who isn't encouraged to understand all of the ramifications of the loan terms • Encouraging a buyer to take on more debt and to obtain that debt through them (and cashing in on more fees)
SAFE Act Facts
• sets minimum standards for licensing of mortgage loan originators • helps consumers make an informed choice about the lending professionals they use • should help drive dishonest mortgage loan originators out of business • provides consumers with information that they can use to protect themselves, but not insurance
