The same day as it introduced more protections for borrowers seeking home loans of all kinds, a federal consumer watchdog also unveiled rules to specifically safeguard consumers trying to obtain mortgages that carry far bigger price tags.
The Consumer Financial Protection Bureau’s efforts to add certainty and safety to the housing market for both borrowers and lenders recently included a new rule for high-cost mortgages that should make the market more secure in general, according to a report from the agency. The rules refined the existing Home Ownership Equity and Protection Act of 1994 that was created to prevent abuses in home equity lending and refinances, and were mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act.
[Free Resource: Check your credit score and report card for free with Credit.com]
“Addressing problems in the mortgage market is critical to helping our economy recover,” said CFPB director Richard Cordray. “Today’s 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.”
Specifically, the rules mandate that lenders cannot include risky features — such as balloon payments, or penalties for paying off the loan principal prior to the agreed-upon end of its term — from being included in high-cost mortgage agreements, the report said. Further, it bans and limits certain fees, such as those for modifying loans, and caps late fees at 4 percent of a payment that lapses into being past-due.
The rules also prevent lenders from encouraging struggling homeowners to intentionally default on their existing agreement so that it can be refinanced to become more affordable, the report said. This may be financially beneficial in some ways, but will also take a significant toll on a borrower’s credit standing.
Finally, the rules state that consumers will have to receive housing counseling prior to their obtaining such a high-cost mortgage, the report said. This is intended to better prepare potential borrowers for the financial rigors of such a purchase, and alert them to the risks they may face.
[Credit Cards: Research and compare credit cards at Credit.com]
The housing market may still be rather tricky for many consumers to navigate, and approaching a massive undertaking such as a home loan with all due caution is likely the wisest path they can pursue. Working with a lender to find a mortgage deal they can reasonably afford is therefore in the best interest of both parties.
Image: Andrew Guyton, via Flickr