January 10, 2013

The Consumer Financial Protection Bureau introduced new mortgage lending rules in its continuing efforts to reform the mortgage market after the 2008 financial collapse. The rule will require that lenders make certain that prospective mortgage buyers can actually repay the mortgage. The rule will also protect borrowers from risky lending practices that the bureau says contributed to many foreclosures after the 2008 housing crisis such as "no doc" and "interest only" features.

The new rule, called the Ability-to-Repay rule by the bureau, is aimed at improving the low underwriting standards that led to homeowners taking on mortgages that they couldn't afford. The Dodd-Frank Consumer Protection Act changed standards that set how creditors can make loans and included requirements to ensure that borrowers could repay, according to a statement released today by the CFPB.

"When consumers sit down at the closing table, they shouldn't be set up to fail with mortgages they can't afford," Richard Cordray, the CFPB's director, said in the statement. "Our Ability-to-Repay rule protects borrowers fro 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."

Under the new rule, according to the bureau's statement, all new mortgages will have to meet basic requirement set by the CFPB to ensure the borrower can repay the loan. Lenders will have to verify a borrower's financial information and document the borrower's employment status, financial assets, current debts, credit history, monthly payments on the mortgage, monthly payments on any other mortgage on the same property and monthly payments for mortgage-related obligations. The bureau says that this will prevent lenders from offering "no doc" loans that don't require this kind of documentation, which lenders offered before the housing crisis and then sold to investors.

Lenders will also no longer be able to their evaluation of a consumer's ability to repay the loan based on the mortgage's teaser rate, the bureau said. The lender will have to evaluate the borrower's ability to repay the loan based on the long term provisions of the mortgage, not on the introductory rate.

Lenders who issue "qualified mortgages" will be presume to be in compliance with the Ability-to-Repay rule, the statement said. The CFPB said that a "qualified mortgage" must have no excess or upfront fees or points such as those used to compensate loan officers and brokers; they must have no toxic loan features such as terms that exceed 30 years, interest-only payments or negative-amortization payments; and they must cap how much of the borrower's income can go towards debt.

The CFPB said in the statement that if the rule is adopted it will go into effect in January 2014.

Jonathan Camhi is a graduate of the City University of New York's Graduate School of Journalism, where he focused on international reporting and interned at the Hindustan Times in Delhi, ...