Among the many nuggets of wisdom King Solomon offers in his Book of Proverbs, prudence remains the watchword for successful Christian investing. “Blessed is the man that findeth wisdom and is rich in prudence,” he says in Proverbs 3:13. Staying informed and clear-eyed protects an investor from costly and risky moves in all stages of the investing process, beginning with applying for mortgage funding. Because newly implemented regulations designed to protect borrowers don’t apply to all types of lenders, prudent investors need to investigate lenders thoroughly and educate themselves about the provisions put in place by recent legislation and consumer protection agencies.
Oversight of the mortgage lending industry has been progressively tightening over the past few years, spurred by the spectacular subprime mortgage collapse of 2008 and the scandals that followed. Fraudulent practices ranging from the widely publicized robosigning fiasco to more subtle failures to disclose terms and rates to borrowers came to light. The result? Settlements by major banking lenders and legislation such as the Dodd-Frank act, which aimed to impose tighter standards on lenders.
Now, as more pieces of the Dodd-Frank act are implemented and other new regulations are put into place, standards for mortgage lending are tightening even more. While these standards are aimed at protecting both lenders and borrowers from the same kinds of problems that created the housing collapse, they also make it more difficult for more marginal borrowers to get home loans, even as rates are the lowest they’ve been in years.
New regulations released by the Consumer Financial Protection Bureau prohibit practices such as “dual tracking,” in which a loan provider institutes foreclosure proceedings while simultaneously working with a homeowner to avoid it, and institute new requirements for disclosure and statement information. And loan servicers must now take steps to ensure that a borrower is able to pay off the loan before processing it.
While major loan providers such as major banks and the government’s FHA, Fannie Mae and Freddie Mac are now required to abide by these regulations, other kinds of loan providers aren’t – leaving the door open for misleading and fraudulent practices that can trap the unwary mortgage seekers.
The new servicing rules approved by the CFPB apply to institutions servicing more than 5,000 loans annually. That means that some credit union, which are typically smaller and serve a localized customer base, are most likely exempt from these regulations. Although credit union representatives claim that these institutions already implement sound lending practices targeted to their users, borrowers who run into problems won’t have recourse to the new rules.
Another kind of loan provider not affected by the new borrower protection standards is the lender in a seller financing arrangement. Traditionally, seller financing was a private arrangement between a buyer and an individual who owned a property. But now, this kind of lending is often handled by large investment groups that have bought up a number of low cost foreclosed homes. Operating outside traditional mortgage lending institutions, these lenders may not be bound by mortgage industry regulations either.
For prudent investors following Jason Hartman’s guidelines for investing in income property, it pays to work with established mortgage lenders who operate under the rules designed to make the lending process work better for both sides – rather than those who continue to escape scrutiny. (Top image: Flickr/raiderofgin)
The Solomon Success Team