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ACE Cash Express to pay $10 million over 'cycle of debt' allegations

ACE Cash Express, a leading payday lender, has agreed to pay $10 million to settle federal allegations it used false threats of lawsuits and other illegal tactics to pressure customers with overdue loans to borrow more to pay them off.

The Irving, Texas, firm, which has 1,500 locations in California and 35 other states, will pay a $5-million fine and $5 million in refunds to tens of thousands of borrowers, the Consumer Financial Protection Bureau, which oversees payday lenders, said Thursday.

ACE was relentlessly overzealous in its pursuit of overdue customers.- Consumer Financial Protection Bureau Director Richard Cordray

“ACE used false threats, intimidation and harassing calls to bully payday borrowers into a cycle of debt,” said bureau Director Richard Cordray. “This culture of coercion drained millions of dollars from cash-strapped consumers who had few options to fight back.”

The agency, created by the 2010 financial reform law, has complained that the short-term loans — typically two-week advances on a paycheck — can trap borrowers in a cycle of debt.

In March, the bureau said an analysis of the industry found four out of five people who took out a payday loan either rolled it over or took out another one within two weeks.

lRelated BusinessInspector general criticizes consumer bureau headquarters renovationSee all related1

The case against ACE is the first time that bureau officials have accused a payday lender of intentionally pushing people into a debt cycle.

The allegations came after an investigation triggered by a routine examination of the company’s operations as part of the bureau’s oversight.

The investigation found that ACE’s in-house and third-party debt collectors used illegal tactics, such as harassing phone calls and false threats to report borrowers to credit reporting companies, to try to force customers to take out new loans to pay off the old ones, the bureau said.

“ACE was relentlessly overzealous in its pursuit of overdue customers,” Cordray said.

The bureau provided a graphic from an ACE training manual, used from September 2010 to September 2011, that showed a circular loan process of customers being contacted to take out new loans after being unable to pay off old ones.

The company did not admit or deny the allegations in a consent order in which it agreed to pay the fine and refunds.

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In a statement, ACE said it cooperated with the bureau’s investigation for two years and hired an outside expert who found 96% of the company’s calls to customers “met relevant collection standards.”

Since 2011, ACE has voluntarily taken steps to prevent abuses, including increasing monitoring of collection calls and ending the use of a third-party collection agency that the bureau had raised concerns about, the company said.

“We settled this matter in order to focus on serving our customers and providing the products and services they count on,” said ACE Cash Express Chief Executive Officer Jay B. Shipowitz.

As part of the settlement, ACE will hire a third-party firm to contact eligible customers and issue refunds, the bureau said.

For breaking economic news, follow @JimPuzzanghera on Twitter

Copyright © 2014, Los Angeles Times […]

Payday loans turn into debt traps | The Journal Gazette

WASHINGTON – About half of all payday loans are made to people who extend the loans so many times that they end up paying more in fees than the original amount they borrowed, a report by a federal watchdog has found.

The report released last month by the Consumer Financial Protection Bureau also shows that four of five payday loans are extended, or rolled over, within 14 days. Additional fees are charged when loans are rolled over.

Payday loans, also known as cash advances or check loans, are short-term loans at high interest rates, usually for $500 or less. They often are made to borrowers with weak credit or low incomes, and storefronts often are located near military bases.

The equivalent annual interest rates run to three digits.

The loans work this way: You need money today, but payday is a week or two away. You write a check dated for your payday and give it to the lender. You get your money, minus the interest fee. In two weeks, the lender cashes your check or charges you more interest to extend, or roll over, the loan for another two weeks.

The bureau?s report was based on data from about 12 million payday loans in 30 states in 2011 and 2012.

It also found that four of five payday borrowers either default on or extend a payday loan over the course of a year.

Only 15 percent of borrowers repay all their payday debts on time without re-borrowing within 14 days, and 64 percent renew at least one loan one or more times, according to the report.

Twenty-two percent of payday loans are extended by borrowers six times or more; 15 percent are extended at least 10 times, the report found.

?We are concerned that too many borrowers slide into the debt traps that payday loans can become,? bureau Director Richard Cordray said.

Some states have imposed caps on interest rates charged by payday lenders.

The industry says payday loans provide a useful service to help people manage unexpected and temporary financial difficulties.

[…]

CFPB: Payday loans not so short-term after all – CreditCards.com

Image payday-loans-cfpb.jpg

When strapped for cash and hit with an unexpected bill, some people may feel as if they have no other choice but to turn to a payday lender. But new research from the Consumer Financial Protection Bureau shows that taking out one of these short-term loans could just sink you deeper into debt.

For a price, payday lenders offer small, unsecured loans (usually no more than $1,000 at a time) that, in theory, are supposed to be paid off when you get your next paycheck. Typically, payday lenders charge approximately $10 to $20 for every $100 borrowed and charge a fee every time the loan is rolled over.

But according to a new report, released March 25 by the CFPB, most people who take out high-interest payday loans can’t afford to repay the loan in full when their paycheck comes through. So they wind up rolling the loan over from month-to-month, like a credit card. And, in some cases, they roll the debt over so many times that they eventually owe more in fees than they borrowed in the first place.

“Many consumers would never dream of paying an annual percentage rate of 400 percent on a credit card or any other type of loan,” said CFPB director Richard Cordray in prepared remarks. But some consumers will bite the bullet for a payday loan, he said, because they mistakenly think they can quickly repay the loan as soon as they get paid.

“For consumers in a pinch, getting the cash they need can seem worth it at any cost,” he said. The problem is too many consumers find they can’t break free that quickly. So they take on additional loans and sink even deeper into debt.

“Our study today again confirms that payday loans are leading many consumers into longer-term, expensive debt burdens,” Cordray said. And that’s taking a toll on “short-term” borrowers. “The stress of having to re-borrow the same dollars after paying substantial fees is a heavy yoke that impairs a consumer’s financial freedom.”

Inside the study
The CFPB studied more than 12 million loans taken out at storefront payday loan shops around the country and analyzed how they were used over the course of 12 months.

Among the study’s key findings:

Borrowers keep coming back. Eighty percent of all payday loans, for example, are either rolled over to the next month, or they’re renewed within a few weeks. That means that consumers who take out the payday loans are holding them for much longer than originally intended. “The core payday loan product was designed and justified as being expressly intended for short-term emergency use,” said Cordray in his prepared remarks. But instead, most payday loans last for months — and sometimes even longer, according to the CFPB.The fees add up quickly. More than half of all payday loans end up being renewed or rolled over so many times that consumers wind up repaying at least twice the amount they originally borrowed. That’s because the fees associated with payday loans are often so high that they end up costing as much as the loan itself. “With a typical fee of 15 percent, consumers who take out an initial loan and six renewals will have paid more in fees than the original loan amount,” said the CFPB. Payday loans are hard to escape. When consumers roll over their loans from month to month, the loan amounts grow quickly, thanks to the hefty interest consumers are charged. As a result, many payday borrowers wind up with a lot more debt than they can afford to repay. According to the CFPB, more than 80 percent of all repeat borrowers end up borrowing the same amount or more than they borrowed the previous month. A large percentage of borrowers, meanwhile, are mired in so much debt that they become “trapped” by it, said the CFPB. That’s especially true for borrowers who are on a fixed monthly income. For example, 20 percent of payday borrowers living on a fixed income — such as elderly borrowers living off Social Security — were in debt for at least 12 months.

Your bottom-line
Avoid turning to a payday loan company to solve a temporary cash-flow problem. If possible, consider borrowing from a friend or family member, selling something of value or taking on extra work. Getting stuck in the payday debt cycle is something you want to avoid at all costs.

If you have a complaint about a specific payday loan company, you can submit your complaint to the CFPB online or by calling 1-855-729-2372.

[…]

Payday loans trap consumers in 'spider webs of debt' | Nightly …

When you’re strapped for cash and need some money right away—with no credit check required—a payday loan seems mighty appealing, even if the interest rate is sky high.

About 12 million Americans are using a payday loan to bridge a gap in their cash flow. These “cash advances” or “check loans” are generally for $500 or less, and they’re supposed to be paid back in two weeks.

But a new report from the Consumer Financial Protection Bureau found that the vast majority of these short-term loans—4 out of 5—are not paid off within 14 days and are rolled-over or renewed.

In fact, more than 60 percent of the borrowers who use a payday lender will roll over that loan so many times that they wind up paying more in fees than the amount they borrowed.

“This renewing of loans can put consumers on a slippery slope toward a debt trap in which they cannot get ahead of the money they owe,” said CFPB Director Richard Cordray in a speech in Nashville on Tuesday.

Payday loans are marketed as an easy way to deal with a short-term need for cash. That’s why so many people are willing to pay the staggeringly high interested rates.

Read More Why do we hate debt collectors? Mistaken identity

Cordray said the new report shows that the industry’s business model is really quite different.

It “depends on people becoming stuck in these loans for the long term, since almost half their business comes from people who are basically paying high-cost rent on the amount of their original loan,” he said.

The bureau has received thousands of complaints about payday lenders since it started accepting them in November. Cordray said these complaints are from people who “have gotten caught in these spider webs of debt.”

Payday lenders see things quite differently. They insist they are providing a valuable service to people who need short-term credit.

“Some customers use the product for financial emergencies; some use it more periodically. So, I would caution against this desire to paint everybody with the same brush,” said Jamie Fulmer, senior vice president of public affairs at Advance America, the largest payday lender in the country with about 2,500 stores in 29 states.

Serious problems for people living on a fixed income

Many payday borrowers, such as people who are retired or living on disability, get paid once a month. The CFPB report found that 1 in 5 of these borrowers remained in debt for every month of its year-long study. The net effect for these people, Cordray said, was living with “a high-cost lien against their everyday life.”

Read More US says credit scores should be free to all

Evelyn McRae, an 81-year-old widow from Beaumont, Texas, found herself in this situation when she took out a payday loan—her first ever—back in 2012 to help pay for her dying daughter’s cancer treatments.

Her loan was for $380.

McRae lives on a fixed income and did not have enough money to pay off the loan and new fees in full on the due date, so she was forced to renew the loan over and over again.

“I paid every month, but it never got any smaller. I kept paying and paying, but all the money I paid was just the interest,” she said.

It’s been 18 months now and McRae now owes more than $700. She’s not sure she’ll ever be able to pay down that debt.

“It’s kind of frightening,” she said in an interview.

[…]

Payday loans trapping more consumers

When you’re strapped for cash and need some money right away—with no credit check required—a payday loan seems mighty appealing, even if the interest rate is sky high.

About 12 million Americans are using a payday loan to bridge a gap in their cash flow. These “cash advances” or “check loans” are generally for $500 or less, and they’re supposed to be paid back in two weeks.

But a new report from the Consumer Financial Protection Bureau found that the vast majority of these short-term loans—4 out of 5—are not paid off within 14 days and are rolled-over or renewed.

In fact, more than 60 percent of the borrowers who use a payday lender will roll over that loan so many times that they wind up paying more in fees than the amount they borrowed.

“This renewing of loans can put consumers on a slippery slope toward a debt trap in which they cannot get ahead of the money they owe,” said CFPB Director Richard Cordray in a speech in Nashville on Tuesday.

Payday loans are marketed as an easy way to deal with a short-term need for cash. That’s why so many people are willing to pay the staggeringly high interested rates.

Read MoreWhy do we hate debt collectors? Mistaken identity

Cordray said the new report shows that the industry’s business model is really quite different.

It “depends on people becoming stuck in these loans for the long term, since almost half their business comes from people who are basically paying high-cost rent on the amount of their original loan,” he said.

The bureau has received thousands of complaints about payday lenders since it started accepting them in November. Cordray said these complaints are from people who “have gotten caught in these spider webs of debt.”

Payday lenders see things quite differently. They insist they are providing a valuable service to people who need short-term credit.

“Some customers use the product for financial emergencies; some use it more periodically. So, I would caution against this desire to paint everybody with the same brush,” said Jamie Fulmer, senior vice president of public affairs at Advance America, the largest payday lender in the country with about 2,500 stores in 29 states.

Serious problems for people living on a fixed income

Many payday borrowers, such as people who are retired or living on disability, get paid once a month. The CFPB report found that 1 in 5 of these borrowers remained in debt for every month of its year-long study. The net effect for these people, Cordray said, was living with “a high-cost lien against their everyday life.”

Read MoreUS says credit scores should be free to all

Evelyn McRae, an 81-year-old widow from Beaumont, Texas, found herself in this situation when she took out a payday loan—her first ever—back in 2012 to help pay for her dying daughter’s cancer treatments.

Her loan was for $380.

McRae lives on a fixed income and did not have enough money to pay off the loan and new fees in full on the due date, so she was forced to renew the loan over and over again.

“I paid every month, but it never got any smaller. I kept paying and paying, but all the money I paid was just the interest,” she said.

It’s been 18 months now and McRae now owes more than $700. She’s not sure she’ll ever be able to pay down that debt.

“It’s kind of frightening,” she said in an interview.

[…]

Most Payday Loans Are Rolled Over, Report Finds

Thumbnail

By Christine DiGangi, Credit.com

Four out of five payday loans are renewed or rolled over, essentially negating the purpose of the loan product as a short-term financial solution for cash-strapped consumers, according to a report Tuesday from the Consumer Financial Protection Bureau.

Ross D. Franklin / AP

Most payday loans are renewed or rolled over, and consumers can end up paying much more than they borrowed in the first place.

Payday loans are small-dollar loans — typically $500 or less — that are designed as emergency financing to be repaid with the borrower’s next paycheck. In addition to the triple-digit APRs that are often charged, these loans (sometimes called cash advances or check loans) carry steep origination fees, and consumers can end up paying much more than they borrowed in the first place. The CFPB report found that three of five payday loans are made to borrowers whose fee expenses exceeded the initial loan amount.

If you’re wondering how that adds up, it’s because these loans become much more cyclical than they were intended to be. Only 15 percent of borrowers repay their payday debts when due without re-borrowing within 14 days (the CFPB considers payday loans taken out within 14 days of paying off the previous loans to be renewals, or part of a loan sequence). Conversely, four of five borrowers end up defaulting on or renewing a payday loan within a year.

“We are concerned that too many borrowers slide into the debt traps that payday loans can become,” CFPB Director Richard Cordray said in a news release about the report. “As we work to bring needed reforms to the payday market, we want to ensure consumers have access to small-dollar loans that help them get ahead, not push them farther behind.”

About half of initial loans are repaid within one loan renewal, but about one in five initial loans leads to a sequence of seven or more loans.

About 12 million Americans currently have payday loans. Cordray says payday loan changes could be on their way soon, saying the CFPB is in the late stages of considering ways to reform the industry.

More from Credit.com:

The Truth About Payday Loans

The Payday Loan Laws in Your State

What is a Payday Loan?

First published March 25 2014, 10:45 AM

[…]

Payday loan borrowers stuck in 'revolving door of debt'

WASHINGTON — Four out of five people who take out a short-term payday loan either roll it over or take out another one within two weeks, pushing them into a cycle of debt, according to a report to be released Tuesday by the Consumer Financial Protection Bureau.

Nearly a quarter of borrowers — 22% — renewed the loan at least six times, causing them to end up paying more in fees than they originally borrowed, the bureau said in an analysis of 12 million loans made by storefront payday loan companies.

“We are concerned that too many borrowers slide into the debt traps that payday loans can become,” said Richard Cordray, the bureau’s director. “As we work to bring needed reforms to the payday market, we want to ensure consumers have access to small-dollar loans that help them get ahead, not push them farther behind.”

The bureau, created by the Dodd-Frank financial reform law, has been overseeing payday lenders since 2012, the first such federal oversight.

The loans are cash advances on a paycheck, typically for two weeks with a flat 15% fee or an interest rate that doesn’t sound too high. But the costs can quickly multiply if the loan is not paid off or if the borrower needs to take out another to pay off the first one.


Pictures: Orlando power couples

Payday loans have been a fixture in working-class neighborhoods, and their use expanded during the Great Recession and its aftermath.

Some banks and credit unions also offer the loans, which they often call deposit advances. But some large institutions, such as Wells Fargo & Co. and U.S. Bancorp, stopped offering them this year after federal banking regulators said they would examine the products to make sure they were affordable for the borrower.

Payday lenders have said some consumers need access to short-term credit and value the loans as long as the terms are clear.

In December, the Community Financial Services Assn. of America, a trade group representing storefront lenders, touted a nationwide poll it commissioned by Harris Interactive that found that 91% of borrowers were satisfied with their payday loan experience.

But public interest groups have argued that payday loans take advantage of vulnerable borrowers, and the consumer bureau has made regulating storefront lenders a priority.

“For consumers in a pinch, getting the cash they need can seem worth it at any cost,” Cordray said in remarks prepared for a Tuesday hearing on payday loans in Nashville, Tenn.

“Many consumers would never dream of paying an annual percentage rate of 400% on a credit card or any other type of loan, but they might do it for a payday loan where it feels like they can get in and out of the loan very quickly,” he said.

The bureau’s report said it can be difficult for borrowers to pay off such loans, causing their costs to skyrocket.

Only 15% of borrowers are able to pay off the loan within 14 days without rolling it over or taking out another, the bureau said.

California and eight other states prohibit payday lenders from rolling over a loan, but allow them to make another loan to the same borrower the day the first one is repaid. Four states impose a waiting period of at least a day. The bureau considers a new loan taken out to pay off an old one to be, in effect, a renewal and part of the same “loan sequence.”

About 48% of initial payday loans are paid off with no more than one renewal or additional loan.

But 1 in 5 borrowers default on a payday loan at some point. And more than 80% of people who renewed or took out new loans ended up borrowing at least the same amount with each successive loan, pushing them into what Cordray called a “revolving door of debt.”

Almost half of payday loans are made to people as part of sequences of 10 or more loans. Given that figure, Cordray said, “one could readily conclude that the business model of the payday industry depends on people becoming stuck in these loans for the long term.”

jim.puzzanghera@latimes.com

[…]

Payday Loan Borrowers Pay More in Fees Than Original Loan …

NEW YORK (CNNMoney) — Desperate consumers often turn to payday loans as a financial quick fix, but many get stuck in a “revolving door of debt” in which they end up paying more in fees than their original loan was worth.

More than 60% of payday loans are made to borrowers who take out at least seven loans in a row — the typical point at which the fees they pay exceed the original loan amount, according to a study of more than 12 million loans made over 12-month periods during 2011 and 2012 by the Consumer Financial Protection Bureau.

Also known as cash advances or check loans, payday loans are typically for $500 or less and carry fees of between $10 to $20 for each $100 borrowed, according to a separate CFPB report last year.

A $15 fee, for example, would carry an effective APR of nearly 400% for a 14-day loan. Yet, payday lenders defend these loans as a source of emergency cash for consumers who are unable to secure more favorable credit products.

The problem is that borrowers often can’t afford to pay off the first loan, forcing them to roll over their debt and even take out a new, sometimes larger loan so they can pay off the original debt. The CFPB found that more than 80% of all payday loans are rolled over or renewed within two weeks.

“This renewing of loans can put consumers on a slippery slope toward a debt trap in which they cannot get ahead of the money they owe,” CFPB Director Richard Cordray said in a statement.

The agency has been cracking down on payday lenders since 2012 and considering possible new lending rules for the industry.

Not all payday borrowers get trapped in a cycle of debt, however. When looking solely at initial loans — meaning those that aren’t taken out within 14 days of a previous loan — the CFPB found that nearly half of borrowers were able to repay with no more than one renewal.

But for those who aren’t able to pay off the loans quickly, it can be difficult to get out from under the debt. The CFPB has heard from thousands of struggling consumers since it began accepting payday loan complaints last fall.

For example, one Pennsylvania woman who took out a total of $800 in payday loans to help pay for rent after losing her job told the CFPB that she meant for the loan to be only short-term. But after rolling over her first loan and eventually taking out another one to help pay for it, she has already paid more than $1,400 towards the debt and still owes more.

Many payday borrowers live on fixed monthly incomes, such as retirees or disabled Americans receiving Social Security disability benefits. Of those payday borrowers receiving monthly payments, the study found that one out of five borrowed money every single month of the year.

“These kinds of stories are heartbreaking and they are happening all across the country,” Cordray said in a prepared statement. “They demand that we pay serious attention to the human consequences of the payday loan market.”

[…]

Most payday loan borrowers get stuck in 'revolving door of debt'

WASHINGTON — Four out of five people who take out a short-term payday loan either roll it over or take out another one within two weeks, pushing them into a cycle of debt, according to a report to be released Tuesday by the Consumer Financial Protection Bureau.

Nearly a quarter of borrowers — 22% — renewed the loan at least six times, causing them to end up paying more in fees than they originally borrowed, the bureau said in an analysis of 12 million loans made by storefront payday loan companies.

“We are concerned that too many borrowers slide into the debt traps that payday loans can become,” said Richard Cordray, the bureau’s director. “As we work to bring needed reforms to the payday market, we want to ensure consumers have access to small-dollar loans that help them get ahead, not push them farther behind.”

The bureau, created by the Dodd-Frank financial reform law, has been overseeing payday lenders since 2012, the first such federal oversight.

The loans are cash advances on a paycheck, typically for two weeks with a flat 15% fee or an interest rate that doesn’t sound too high. But the costs can quickly multiply if the loan is not paid off or if the borrower needs to take out another to pay off the first one.

Payday loans have been a fixture in working-class neighborhoods, and their use expanded during the Great Recession and its aftermath.

Some banks and credit unions also offer the loans, which they often call deposit advances. But some large institutions, such as Wells Fargo & Co. and U.S. Bancorp, stopped offering them this year after federal banking regulators said they would examine the products to make sure they were affordable for the borrower.

Payday lenders have said some consumers need access to short-term credit and value the loans as long as the terms are clear.

In December, the Community Financial Services Assn. of America, a trade group representing storefront lenders, touted a nationwide poll it commissioned by Harris Interactive that found that 91% of borrowers were satisfied with their payday loan experience.

But public interest groups have argued that payday loans take advantage of vulnerable borrowers, and the consumer bureau has made regulating storefront lenders a priority.

“For consumers in a pinch, getting the cash they need can seem worth it at any cost,” Cordray said in remarks prepared for a Tuesday hearing on payday loans in Nashville, Tenn.

“Many consumers would never dream of paying an annual percentage rate of 400% on a credit card or any other type of loan, but they might do it for a payday loan where it feels like they can get in and out of the loan very quickly,” he said.

The bureau’s report said it can be difficult for borrowers to pay off such loans, causing their costs to skyrocket.

Only 15% of borrowers are able to pay off the loan within 14 days without rolling it over or taking out another, the bureau said.

California and eight other states prohibit payday lenders from rolling over a loan, but allow them to make another loan to the same borrower the day the first one is repaid. Four states impose a waiting period of at least a day. The bureau considers a new loan taken out to pay off an old one to be, in effect, a renewal and part of the same “loan sequence.”

About 48% of initial payday loans are paid off with no more than one renewal or additional loan.

But 1 in 5 borrowers default on a payday loan at some point. And more than 80% of people who renewed or took out new loans ended up borrowing at least the same amount with each successive loan, pushing them into what Cordray called a “revolving door of debt.”

Almost half of payday loans are made to people as part of sequences of 10 or more loans. Given that figure, Cordray said, “one could readily conclude that the business model of the payday industry depends on people becoming stuck in these loans for the long term.”

jim.puzzanghera@latimes.com

[…]

The new mortgage rules that are likely to affect your next home purchase

The policies require lenders to better verify that borrowers can afford the houses they are seeking to buy and can repay the loans. Some are intended to protect borrowers while holding lenders more accountable for their business practices.

For instance, one set of rules requires mortgage servicers to provide consumers regularly with accurate information about their loan balances and fix mistakes quickly. The rules also prohibit servicers from starting the foreclosure process until 120 days after the borrower’s last payment.

“By bringing back these basic building blocks of responsible lending and servicing the customer, we will improve conditions for consumers seeking to enter the market and for all those who are still struggling to pay down their existing loans,” Richard Cordray, director of the Consumer Financial Protection Bureau, said in prepared remarks made last week to the Consumer Federation of America.

“By making the mortgage market work better, we will build consumer confidence and strengthen this essential foundation of our economy,” he added.

Another big change affecting the Washington region is a Federal Housing Administration (FHA) plan to decrease the maximum loan amount for borrowers in this area beginning Jan. 1.

The agency announced this week that its mortgages will be limited to a maximum of $625,500, down from $729,750. Metropolitan Washington has high-priced housing — about one in four homes in the region sells for $600,000 and above, according to RealEstate Business Intelligence, a subsidiary of Rockville-based multiple listing service MRIS. The FHA’s new loan limit next year will match the caps for conventional loans purchased by Fannie Mae and Freddie Mac.

The FHA said in a statement that the agency wants to reduce the government’s role in mortgage lending to borrowers who are “underserved” — who either are low-income or have difficulty obtaining loans. The higher limits were put in as an emergency measure in 2008 and were supposed to last one year but were allowed to continue because of the lack of private loans.

Borrowers who need a loan of more than $625,500 will have to get a jumbo loan, which typically requires a down payment of at least 20 percent. FHA loans are not only a little more flexible in terms of their qualification guidelines, but, more important for many people, they require a down payment of just 3.5 percent.

“Switching on the fly from a down payment of 3.5 percent to 20 percent or more of the purchase price is not really an option for most people,” says Patrick Cunningham, vice president of Home Savings and Trust Mortgage in Fairfax.

“It could be a $100,000 difference in money needed,” Cunningham adds. “Not something most people just pull out of the couch cushions.”

Ability-to-Repay rules

On Jan. 10, the Consumer Financial Protection Bureau will implement a new set of rules designed to address predatory lending practices that spurred a wave of foreclosures the past five years.

Authorized by the Dodd-Frank Act, the “Ability-to-Repay” regulations are aimed at preventing lenders from approving mortgages for borrowers with questionable credit scores and poor debt-to-income ratios, and steering them into adjustable-rate loans or interest-only loans with little or no money down.

The housing crisis emerged in part when rates on ARMs were reset upward. Millions of homeowners who were not completely qualified for their mortgages lost their properties in foreclosure because they could no longer afford them.

The good news for borrowers is that the new rules will cap loan origination fees — they will be no more than 3 percent of the amount for mortgages of $100,000 and above. Currently, loan origination fees are not capped. However, to stay competitive, most lenders keep their fees low enough to attract customers yet high enough to make their business profitable.

The rules establish a standard for what the government considers a “qualified mortgage.”

Risky mortgages — negative-amortization, interest-only or balloon-payment loans — fall outside the qualified-mortgage standard.

Lenders will be required to thoroughly verify consumers’ income, assets and obligations — or otherwise risk a lawsuit from borrowers who default on their mortgages.

But while the regulations are intended to benefit consumers, some experts say that, like the Affordable Care Act, the changes may lead to complications and unintended consequences.

One example they cite is a provision in the rule that requires borrowers’ debt to make up 43 percent or less of their gross income.

“People who are right on the line of qualifying right now may not qualify in 2014” because of the policies set by Dodd-Frank, says David Zugheri, executive vice president of Envoy Mortgage in Houston.

In his prepared remarks, Cordray called it a myth that the new standard will prohibit lenders from issuing mortgages to borrowers who don’t meet the 43 percent debt-to-income ratio. Lenders, he said, would still have flexibility to make exceptions for buyers with excellent credit scores, significant assets or extenuating circumstances that make it difficult to verify income.

This “particular claim is wrong in three ways,” Cordray said. “First, lenders can also rely on the standards for loans backed by [Fannie Mae and Freddie Mac] or federal housing agencies. Second, smaller local creditors can make the same kinds of solid loans they have always made if they choose to keep those loans in their own portfolio, as they often have done in the past. Third, lenders can simply use their own judgment when looking at your ability to repay, just as they always have done.”

But some experts assert that lenders will be unwilling to make loans that don’t meet the qualified-mortgage standard. Because Fannie Mae and Freddie Mac won’t buy those mortgages, the lenders would be forced to keep them on their books.

More expensive mortgages?

Another criticism cited by some experts is that borrowers seeking conventional mortgages meeting the criteria of Fannie Mae and Freddie Mac may face higher fees.

Fannie Mae and Freddie Mac announced this week that guarantee fees they charge to lenders for servicing their loans will rise an average of 14 basis points on 30-year fixed-rate loans, on top of the 10 basis point increases in both December 2011 and August 2012.

Since lenders indirectly pass on the cost of paying the guarantee fees to consumers, Richard Green, director of the Lusk Center for Real Estate at the University of Southern California in Los Angeles, asserted that the change could have a negative impact on consumers’ ability to borrow money.

The fees charged to consumers used to be roughly 11 to 13 basis points, and now they are about 50 basis points, says Green. A basis point equals 1/100th of 1 percent, so 100 basis points would be equal to a one percentage point change in an interest rate. He says they could go as high as 70 to 75 basis points in the coming year or two.

Since borrowers are limited by qualified-mortgage rules to a debt-to-income ratio of 43 percent or less, higher mortgage rates and higher fees that increase the size of their housing payment make it more difficult for some borrowers to qualify for a loan.

Zugheri says that new regulations and higher expectations for compliance with rules established by Fannie Mae and Freddie Mac are hitting some groups of borrowers harder than others, such as low- to moderate-income consumers.

“If you have slightly spotty credit, your income isn’t clearly defined, your assets are hard to verify or the value of your home is difficult to appraise, you’ll have a hard time getting credit and you may not qualify at all,” Zugheri says.

Difficulties for the self-employed

Doug Benner, vice president and sales manager of 1st Portfolio Lending in Rockville, says the hard line requiring a maximum debt-to-income ratio of 43 percent will make it especially harder for self-employed borrowers who have trouble documenting their income.

“If you don’t have a W-2 to prove your income, it’s very difficult to get a loan, but the data shows that a larger percentage of the population is self-employed or doing contract work and they should be able to get loans,” Benner says.

Benner says loans with reduced documentation were a good fit for self-employed borrowers, but regulations have eliminated those programs. Benner says he knows of borrowers with high net worth, perfect credit and a home valued at $2 million with $1 million in home equity who were unable to qualify for a mortgage because they lacked the documentation to prove their income meets the debt-to-income ratio.

“It won’t get better, either, because state legislation in Maryland and the QM [qualified-mortgage] rules all say that borrowers need to prove their ability to repay a loan based on cash flow,” Benner says.

Zugheri says the bigger problem right now in the housing market is that overregulation and capped compensation mean that many lenders will drop out of the business. Ultimately, he says, less competition among lenders will lead to higher fees and higher mortgage rates, which will hurt the housing market and particularly affect low- to moderate-income borrowers who have a harder time affording a loan.

“As the rule is written, the most a lender can charge for an $80,000 loan is $2,400, while the most they can charge for a $500,000 loan would be $15,000,” says Zugheri. “Some of the fixed costs are the same no matter what size loan you make, so some mortgage companies will just stop making smaller loans or will do fewer of them because they may even lose money on them.”

“The biggest issues that bite everyday people are rising guarantee fees, the difficulty of self-employed people to get a loan and the concern about loan buybacks,” says Green. “Unfortunately, nothing’s changing those things anytime soon.”

Michele Lerner is a freelance writer. Freelance writer Sheree R. Curry also contributed to this report.

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