The recent economic meltdown worldwide has brought changes in lending systems to the top of the list in terms of legislative priorities. Many new changes in lending systems are already being felt in US.
One of the most recent changes in lending systems is a new requirement from the Department of Housing and Urban Development (HUD). This requires lenders to provide a Good Faith Estimate (GFE) that clearly disclosing key loan terms and closing costs, estimating to help save consumers a few hundred dollars at the closing table. Having met with approval by consumers and lenders alike, these steps fulfils the needs of consumers and those in the lending business. Marking a positive change in the housing market, it is for the first time since 1974 that such large changes have been made to the home ownership process.
The Truth in Lending Act (TILA ) has also seen most significant changes since it was enacted by the Federal Reserve. Imposing new limitations on payments to mortgage lenders, the main purpose behind these recent changes in lending systems is to curb predatory lending practices. Expected to improve the borrower’s loan affordability, Federal Reserve wants to ensure that lenders make the right loans to the right borrowers.
One of the root causes contributing to the current financial crisis is often the failure to qualify for the borrower’s loan affordability. Working off the partial and static information throughout the decision process, many consumers were either overcharged or approved for the loans that were not affordable by them. The main victims were the “high risk borrowers”, who were vulnerable, due to their future financial conditions.
How to improve the borrower’s loan affordability should be one of the main priorities, from the lessons learned from the recent economic crisis. There is a clear need to be able to define and measure it. A complete loan affordability definition and measurement needs to go beyond current borrower’s qualifications, monthly payment, property appraisal, etc. Changes in lending systems should be forward-looking and be able to effectively predict borrower’s future loan affordability and financial vulnerability. The future states of the market and economy will depend a lot on it.
With U.S economy emerging from recession, the lending business will soon return to normal levels. However, keeping up with the current changes in lending systems, it is crucial that banks remain compliant with the most up-to-date regulations in order to avoid costly fees and penalties. Banks can achieve this through:
• Inform the employees about new changes in lending systems
• Make sure that they are aware of the ways in which it will be affecting their roles and responsibilities.
• Be diligent while monitoring the latest changes to the Real Estate Settlement Procedures Act (RESPA) regulations.
• Explain the recent changes in lending systems and policies to consumers successfully.
• Understand how these changes will affect bank policies and procedures.
• Provide regular training to all employees to keep them aware of the latest changes in lending systems and other issues regarding mortgage.
Today, we all need to ask a basic question “Are we doing things differently now? More specifically, are loans being made using current changes in lending systems? Or, they are still using the same broken systems with bandages? The costly lessons learned from the economic crisis have led many lenders to tighten their underwriting policy. They have become more careful with their loan origination practices. However, future lending success will depend upon the lender’s ability to measure and effectively predict the borrower’s future loan affordability. Merely adjusting the current underwriting policy is not enough. A repetition of the financial crisis cannot be prevented unless the root problems are fixed.
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