In 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into law. The Dodd Frank Act is a massive piece of legislation (more than 2,300 pages), which was passed with the purpose of addressing countless problem areas in order to prevent a recurrence of the 2008 U.S. housing and financial crisis.
These new requirements have and will continue to affect the way mortgage loans are generated in the U.S.
Among other things, this act required the creation of new rules for the mortgage industry as well as a new Consumer Financial Protection Bureau to enforce the rules. Many of the new rules and regulations have already been implemented; however, the mortgage industry continues to receive new guidance with the latest rules slated to go into effect in January 2014.
Prior to these new requirements, mortgage lenders frequently utilized “low doc” loan programs requiring little or no documentation. For many consumers, these programs were utilized successfully and they and allowed responsible borrowers to go through the mortgage process without having to provide an unreasonable amount of financial documentation. Unfortunately, other consumers and lenders used these programs irresponsibly-- It is widely accepted that such practices contributed to the U.S. housing and financial crisis. At the heart of the new rules going into effect in 2014 is the Ability-to-Repay rule designed to prevent the recurrence of such events.
The Ability-to-Repay rule requires that specific financial documents be provided and verified. Under these new rules, for most consumers, the mortgage underwriting process will continue to generally feel more rigid and require more documentation. Despite the ever-changing nature of the regulatory landscape, many mortgage professionals are adapting and adjusting well to this environment. As a borrower, it may help to be aware of these new documentation requirements and understand the variables that affect the length and difficulty of the mortgage underwriting process. The best thing you can do during the mortgage process is stay in touch with your loan officer, and resolve any documentation conditions that may arise as quickly as possible.