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.
Bill “No Pay” Fay has lived a meager financial existence his entire life. He started writing/bragging about it seven years ago, helping birth Debt.org into existence as the site’s original “Frugal Man.” Prior to that, he spent more than 30 years covering college and professional sports, which are the fantasy worlds of finance. His work has been published by the Associated Press, New York Times, Washington Post, Chicago Tribune, Sports Illustrated and Sporting News, among others. His interest in sports has waned some, but his interest in never reaching for his wallet is as passionate as ever. Bill can be reached at firstname.lastname@example.org.
- Douglas, D. (2013, January 9). Why the CFPB’s new mortgage rule matters. The Washington Post. Retrieved from http://www.washingtonpost.com/business/economy/why-the-cfpbs-new-mortgage-rules-matters/2013/01/09/563c39e2-59cd-11e2-beee-6e38f5215402_story.html
- Woodruff, M. (2013, January 10). New Rule Lets Lenders Judge Whether People Can Actually Afford Mortgages. Businessinsider.com. Retrieved from http://www.businessinsider.com/cfpb-new-ability-to-pay-mortgage-rule-2013-1
- Silver-Greenberg, J. (2013, January 11). Wells Fargo Profit Jumps 24% in Quarter, Driven by Mortgage Gains. The New York Times. Retrieved from http://dealbook.nytimes.com/2013/01/11/wells-fargo-profit-jumps-24-percent-in-fourth-quarter-driven-by-mortgages/