WASHINGTON - The Consumer Financial Protection Bureau set new rules last week that will require credit unions, banks and other mortgage lenders determine a borrower's ability to repay their loans.
The rules, aimed at curbing some of the excesses of the mortgage crisis when many borrowers were induced to take out attractive mortgages for which they were ultimately unqualified, will require lenders to verify financial information on loan applications, determine that a borrower has sufficient assets and income to repay a loan, and bar teaser rates that mask the true cost of a mortgage.
"Our Ability-to-Repay rule will restore more certainty to a market that was deeply destabilized by the financial crisis," said Richard Cordray, director of the consumer agency. "By providing common-sense discipline in the housing market, this rule creates a level of assurance for all participants that will open up more access to credit for consumers."
The new rules, which take effect in January 2014, also set parameters for a Qualified Mortgage that will be sold on the secondary market through Fannie Mae or Freddie Mac that will bar excess upfront fees and points and "toxic" loan features, like terms that exceed 30 years, interest-only payments or negative amortization payments; and a cap on how much of a borrower's income can go toward debt.
Qualified Mortgages generally will be provided to people who have debt-to-income ratios less than or equal to 43%. This requirement will help ensure borrowers are only getting what they can likely afford, according to the CFPB. For a temporary, transitional period, loans that do not have a 43% debt-to-income ratio but meet government affordability or other standards, such as that they are eligible for purchase by Fannie and Freddie, will be considered Qualified Mortgages.
NAFCU President Fred Becker said last week his group has concerns about the new rules. "In our view, a rigid approach to regulation is counterproductive, often unworkable and frequently leads to unwanted results," he said. "We are concerned that the rule could curtail lending by credit unions, and ultimately, negatively impact consumers by limiting the choices of prudent lenders in the mortgage market."
CUNA President Bill Cheney issued a statement saying the trade group supports "agency's steps to minimize disruptions in the availability of mortgage credit for consumers," including the safe harbor approach for QM loans.
"Higher-priced loans will still be entitled to a rebuttable presumption that the lender complied with the rule, should the borrower challenge the loan in court," said Cheney. "This approach should provide legal certainty to lenders such as credit unions.
The CFPB's Cordray said it all comes down to protecting consumers.
"When consumers sit down at the closing table, they shouldn't be set up to fail with mortgages they can't afford," said Cordray. "Our Ability-to-Repay rule protects borrowers from the kinds of risky lending practices that resulted in so many families losing their homes. This common-sense rule ensures responsible borrowers get responsible loans."