CFPB announces new “ability-to-repay” mortgage lending rule

January 10, 2013 at 12:20 pm 1 comment

Today the Consumer Financial Protection Bureau (CFPB)announced a new “ability-to-repay” rule, which is aimed at making sure that lenders do not saddle borrowers with loans that they can’t afford.  In order to qualify for a loan, the borrower must have enough assets or income to pay it back, they must provide financial information that is verified by the lender, and the lenders have to assess the borrower’s ability to pay over the long term, including both the principal and the interest. CFPB also announced a few proposals: to exempt designated nonprofit lenders and homeownership stabilization programs, and to create a new category of “qualified mortgages” for small creditors like community banks and credit unions. Qualified mortgages are meant to reduce the amount of risk in mortgage lending by eliminating risky features, such as negative amortization and interest-only mortgages, and offer borrowers more protection. In exchange, lenders that make certified qualified mortgages will be protected from consumer lawsuits.

The ability-to-repay rule seems like common sense, but the fact that it has to be spelled out points to just how far banks and lenders had gone in making loans to people who could not afford them. Lending standards had become so lax that people were qualifying for loans without even providing validation of their income, credit history, or even showing an understanding of the terms that they were agreeing to. Previous rules issued by the CFPB, which will be finalized this month, were meant to increase transparency with mortgage lenders and provide consumers with timely and accurate information. Borrowers need to be provided with the information they need to make sound decisions. This new rule, which will take effect in January 2014, will take it a step further. Now lenders and borrowers will have to provide some assurance that they will, in fact, be able to pay the loan. Here’s how the Chicago Tribune sums it up:

For all types of mortgages, to help determine a borrower’s ability to repay, lenders must look at eight factors. They include current income and assets, employment status, credit history, the mortgage’s monthly payment, other loan payments associated with the property, monthly payments for such things as property taxes, other debt obligations and a borrower’s monthly debt-to-income ratio.

Some banks have expressed concerns, particularly around the criteria for qualified mortgages. According to the rule, borrowers’ debt-to-income ratio is capped at 43 percent. The American Bankers Association says that this may be too low and might unnecessarily tighten access to credit. Banks will be encouraged to follow the qualified mortgage lending criteria due to the protections it offers, but the result, they claim, may be fewer borrower who can qualify for loans– in particular, low-income or first-time homebuyers.

Though the new rule may contain some tighter standards, the mortgage lending industry had run so amok that it is not surprising that the process of reigning it in is causing some consternation. Whether the debt-to-income ratio will have a significant impact is yet to be seen, and the industry has a year to adjust to the new regulations. The rest of the rule, however, is simply common sense. Banks and lenders should not be making loans to people who can’t afford them. For those who are excluded under the new rules, such as low-income families seeking to build up their assets, perhaps adjusting the rules and providing hands-on financial counseling to ensure their financial success can help balance out the equation.

 

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Entry filed under: Banks, CDFI, Credit Unions, Economic Development, Economy, Financial Reform, Housing. Tags: , , , , , , , .

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