Regulators Approve Amendment To New Mortgage Rules

In the aftermath of the 2008 recession, the Obama administration passed what came to be known as the Dodd-Frank law in the summer of 2010.  The law brought some of the biggest changes to the financial industry since the Great Depression of the 1930s, including stricter rules for creditors to approve and lend mortgage loans.

The original Dodd-Frank law was written by financial regulators to ensure banks only approved loans they knew could be repaid.  To do that, regulators demanded that banks hold up to 5 percent of the risk on mortgage backed securities, or require borrowers to pay a minimum down payment of 20 percent on the loan.

However, those restrictions were opposed by many consumer and industry trade groups across the country.  As a result, regulators created a new proposal in the fall of 2013 that allowed banks to drop the down payment requirement provided applicants have a manageable debt to income ratio when they seek approval for mortgages.

It took another year for the new proposal to satisfy three of the largest financial agencies in the country.  But the Federal Deposit Insurance Corp., the Office of the Comptroller of the Currency, and the Federal Housing Finance Agency approved the new rule this week.  The new rule will become effective in the fall of 2015, meaning mortgage applicants can put less money up front for a loan provided their personal debts are low.

Mel Watt, Director of FHFA and former advisor to President Obama, believes the new rule provides more clarity in the housing market, and will support America’s recovering, yet still fragile housing market.

“Lenders have wanted and needed to know what the new rules of the road are, and this rule defines them.”

After the new rules are put into effect, regulators will review their impact on the economy in 2019.