WASHINGTON The Consumer Financial Protection Bureau set new rules this morning that will require credit unions, banks and other mortgage lenders to determine a borrower’s ability to repay their loans before approving a mortgage.
The rules, aimed at curbing some of the excesses of the mortgage crisis when many borrowers were induced to take out attractive mortgages they were ultimately unqualified for, 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 participant that will open up more access to credit for consumers.”
The new rules, which take effect in January 2014, also sets 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 this morning 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.”
“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.”
Leading up to the mortgage crisis, certain lenders originated mortgages to consumers without considering their ability to repay the loans. The gradual deterioration in underwriting standards led to dramatic increases in mortgage delinquencies and rates of foreclosures. What followed was the collapse of the housing market in 2008 and the subsequent financial crisis. The 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act created broad-based changes to how creditors make loans and included new ability-to-repay requirements, which the CFPB is charged with implementing.