With multiple provisions and offering more than eight hundred pages of text, the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) of 2010 represents some of the most sweeping financial reform legislation since the Great Depression.
The Dodd-Frank Act was enacted in response to the 2007 -08 housing crisis and financial recession. It aimed to stabilize the American financial systems and penalize predatory lending practices in the mortgage industries.
The Act created new agencies and mandated action from existing agencies for the purpose of broadening consumer protection rules by restricting the activities of lending companies and banks. Legislative activities in 2017 and 2018 modified various provisions under the Dodd-Frank Act.
With respect to consumers seeking qualified residential mortgage loans, the law applies to mortgage originators. Mortgage originators are in the business of financing loans for residential homes. Much of the provisions relating to these residential mortgage loans were made effective in January 2014.
The Dodd-Frank Act defines a mortgage originator as any person who receives compensation for offering a mortgage loan, assists a consumer in applying for such loans, or negotiates the terms for those loans. A residential mortgage loan is defined generally as being secured by a mortgage, deed of trust or equivalent on a dwelling.
The Act establishes and clarifies certain mortgage underwriting procedures as well. For example, the mortgage creditor must make a reasonable and good faith determination about a consumer’s ability to repay a qualified mortgage loan, limit prepayment penalties and fees charged to a borrower, preclude certain risky loan features and keep records of its compliance with these regulations.
Further, the Dodd-Frank Act calls on mortgage loan creditors to:
- Correct errors based on information provided by borrowers;
- Provide certain information when requested by borrowers;
- Provide forced-placed insurance protection for borrowers;
- Establish reasonable policies and processes pursuant to the Act’s consumer protection objectives;
- Provide loss mitigation information to delinquent borrowers and satisfy procedures for reviewing applications for mitigation options;
- Restrict compensation on loan origination;
- Lengthen mandatory escrow time;
- Educate consumers about their rights by providing loan counseling in certain situations;
- Provide applicants with free copies of appraisals made in connection with a qualified loan application rather than pursuant to a request from the borrower;
- Streamline loan servicing documentation requirements; and
- Adhere to rules that shape the content and timing of disclosures to consumers about their variable-rate transactions.
The law outlines some helpful criteria that the mortgage creditor should consider when fulfilling its obligation for determining a consumer’s ability to repay a loan. This ability to repay assessment must be conducted for the borrower before the mortgage loan originator issues a qualifying mortgage loan. Those criteria include a review of the consumer’s:
- Credit history;
- Current income;
- Expected income;
- Current financial obligations;
- Debt-to-income ratio;
- Employment status; and
- Other financial resources.
The consumer’s income can be verified by reviewing the following Internal Revenue Service documents:
- Form W–2;
- Tax returns;
- Payroll receipts; and
- Financial institution records.
Supporters of the Act believe it provides much needed restrictions on financial institutions and greater consumer protections that will help to avoid another recession. Like any other law, the Dodd-Frank also has been criticized. Thusly, it has been described as unnecessarily complex and burdensome on investors, thereby contributing to a sluggish economy.
Since its enactment, there have been efforts to roll back some of the provisions of the Dodd-Frank Act, including proposed legislation to raise oversight thresholds, reduce financial reporting, and ease conditions of bank stress tests. An executive order was issued in February 2017 to reevaluate the Act, followed by new legislation in May 2018.
The new legislation carves out exemptions for meeting the consumer’s ability to repay rule (income verification criteria above) and increases consumer access to mortgage loans by easing regulatory restrictions for certain lending institutions (including community banks and credit unions). Additionally, the following are some of the intended effects of the amendment to the Act:
- Increased protection for access to consumer credit by requiring credit reporting agencies to provide fraud alerts and to place security freezes on consumer files;
- Modification of the requirement by creditors to provide appraisals, such as in rural areas;
- Modification of escrow requirements; and
- Increased foreclosure protections
Many still regard the Dodd-Frank Act as a much needed regulatory reform to put a check on banks and other financial institutions that take lending risks and to protect consumers of residential mortgage loans. Some of the provisions of the Act have been rolled back by recent legislation. If you are a lender, investor or a mortgage consumer, you can learn more about how these modifications affect you by consulting with a qualified real estate attorney.