Upcoming regulatory changes for high-cost loans spell the end of hard-money lending.
On Oct. 1, higher-priced mortgages will be subject to new Home Ownership and Equity Protection Act requirements. The changes are part of a number of updates to the Truth In Lending Act by the Federal Reserve Board.
New HOEPA requirements apply when a first mortgage is priced 150 basis points above the going rate for prime first mortgages. Junior liens priced 350 BPS above the going rate for prime junior liens are also subject to the new rules.
Among new requirements for HOEPA loans is that a creditor must consider income and repayment ability and cannot extend credit based only on the value of the borrower’s collateral. Creditors must follow HOEPA requirements in assessing repayment ability, current income and reasonably expected income. They must also consider employment, current obligations and mortgage-related obligations as well as assets other than the collateral.
A creditor is presumed to have complied with the repayment ability assessment requirement if — after verifying income, assets and debt and considering the maximum mortgage payment during the first seven years — a satisfactory assessment has been made on either the total debt-to-income ratio or the remaining income after payment of debt.
Hard-money loans — high-yield mortgages made based only on the loan-to-value — are prohibited under the new rules, Richard Andreano, partner with the Washington, D.C.-based firm of Patton Boggs LLP, said in an interview.
“When people start trying to go back to the old practices, this rule will stop them,” Andreano said.
However, loans with terms of 12 months or less and short-term construction loans are exempt from the new rule, according to Andreano. In addition, home-equity conversion mortgages — which have their own set of requirements — and home-equity lines-of-credit are also exempted.
