New Rules Protect Consumers from Overzealous Mortgage Lenders

A new federal regulation puts the onus on lenders to take meaningful steps to ensure a person can afford a home loan, before they actually give them one.

The “ability-to-repay” rule was issued by the Consumer Financial Protection Bureau (CFPB) to help keep borrowers from wading into mortgages too deep for them to handle. It took specific aim at the “interest only” and “no documentation” loans that helped create the real estate bubble that burst in 2008.

The regulation, which still has a few elements to be finalized, goes into effect in January 2014.

“When consumers sit down at the closing table, they shouldn’t be set up to fail with mortgages they can’t afford,” Richard Corday, director of the CFPB said in a statement. “This rule is designed to ensure that lenders are offering mortgages that consumers can actually afford to pay back. It is nothing more than the true essence of responsible lending.”

Banks Must Investigate

The rule requires lenders to take into account a minimum of several underwriting factors, including income, employment, debt obligations, credit history and monthly debt-to-income ratio not exceeding 43 percent. In essence, the lender must prove that the applicant can afford the mortgage, where in the past, it was the other way around.

The ruling gives banks some legal protection against lawsuits if they follow certain requirements and issue what the CFPB considers “qualified mortgages.”

A loan would not be considered a qualified mortgage if it included negative amortization, interest-only payments, balloon payments or terms exceeding 30 years. The rules also state that “no doc” loans, where the creditor does not verify income or assets, can’t be considered qualified mortgages.

The rule also says that loans generally can’t be considered qualified mortgages if the points and fees paid by the consumer exceed 3 percent of the total loan amount.

Should Be Easier to Get a Loan

This ruling comes in response to the 2008 financial crisis when it was easy for consumers to get loans they could not possibly repay. After the housing bubble burst, banks went the other way and tightened lending requirements so much that very few people qualified for a home loan.

“Our goal is to make sure that people who work hard to buy their own home can be assured of not only greater consumer protections but also reasonable access to credit so they can get a sustainable mortgage,” Cordray said.

The ruling received favorable, though not overwhelming support from consumer protection groups.

“We think the rule will help consumers avoid bad loans,” Pamela Banks, senior policy counsel for Consumers Union, said on her company’s website. “While it’s good that the CFPB is going after some of the worst abuses in the mortgage market, we urge them to keep the pressure on to ensure all mortgages offered to consumers are fair and appropriate.”

Meanwhile, at least one bank, San Francisco-based Wells Fargo, is loving the mortgage business. Wells Fargo reported a $5.1 billion in profit for the fourth quarter of 2012 by taking advantage of low-interest rates and refinancing activity.

The boost in profit represents a 24 percent increase, making it 12 straight quarters the bank has increased its profit.

In debt? We can help!

  • Amount
  • Type
  • Contact

How much do you owe?

What can we help you with today?

Related Articles

Millennial Home Buyer Wanted

Why Millennials Aren’t Buying Homes

Data shows that homeownership among millennials is down, but that doesn’t mean they aren’t interested in buying a home. In the last two decades, homeownership in the U.S. has declined across the board and especially so for young Americans. The rate of ...

Continue Reading
JPMorgan Fined for Illegal Lending Practices

JPMorgan Accepts $13 Billion Fine For Lending Practices

JPMorgan Chase Bank agreed to pay a $13 billion fine to the U.S. government for its role in the disastrous mortgage lending practices that landed more than 15 million American homeowners underwater. The announcement was made by Eric Schneiderman, the ...

Continue Reading
FDA finances nursing home mortgages

FHA Steps in to Help Nursing Homes by Backing Mortgages

Attempts by nursing home operators to stay relevant and profitable in the constantly changing world of health care, received a boost from the Federal Housing Administration (FHA) last year. The FHA stepped up to insure 458 mortgage loans worth roughly $3 ...

Continue Reading
Bank of America settlement

Bank of America to Pay $10B to Fannie Mae to Settle Claims

The first week of 2013 has not been a happy new year for some of the nation’s largest banks, particularly Bank of America. On Monday, Bank of America agreed to pay $10 billion to Fannie Mae to clear up claims made on troubled mortgages, mainly associated ...

Continue Reading
Fix-and-flip houses

FHA Extends Program that Allows Quick ‘Flips’ of Properties

As the nation continues to wrestle with high unemployment rates and a recuperating real estate market, the Federal Housing Administration (FHA) decided to continue one of its popular programs. The FHA extended its temporary waiver allowing loans on quick ...

Continue Reading
Housing market

Housing Market Expected to Rebound in 2013

With just a few weeks remaining until the end of the year, millions of Americans are seeking ways to make 2013 better, especially from a financial perspective. From making new real estate investments, refinancing mortgages, entering into reverse mortgages or ...

Continue Reading
FHFA

Obama Eyeing New Leader for Federal Housing Finance Agency

Facing increased scrutiny from housing advocates and community groups, President Barack Obama is being asked once again to sidestep political protocol to replace Ed DeMarco, the acting head of the Federal Housing Finance Agency (FHFA). Obama is being asked ...

Continue Reading
Housing market rebounds

Foreclosures on Hold for Holidays as Housing Market Slowly Recovers

With an improving economy and programs aimed at helping homeowners stay current with their mortgages, housing-market analysts say that 2012 will prove to be a turnaround year for homeowners and the country. In addition, mortgage giants Freddie Mac and Fannie ...

Continue Reading
Get Help Now

Overwhelmed with debt? You have options for lower monthly payments!

x