CFPB Issues Rule to Protect Consumers from Irresponsible Mortgage Lending
by: Anna DeSimone
January 10, 2013 the Consumer Financial Protection Bureau (CFPB) adopted a new rule that will protect consumers from irresponsible mortgage lending by requiring lenders to ensure prospective buyers have the ability to repay their mortgage. The rule also protects borrowers from risky lending practices such as “no doc” and “interest only” features.
Under the Ability-to-Repay rule, all new mortgages must comply with basic requirements that protect consumers from taking on loans they don’t have the financial means to pay back. Among the features of the new rule:
Financial information has to be supplied and verified: Lenders must look at a consumer’s financial information. A lender generally must document: a borrower’s employment status; income and assets; current debt obligations; credit history; monthly payments on the mortgage; monthly payments on any other mortgages on the same property; and monthly payments for mortgage-related obligations. This means that lenders can no longer offer no-doc, low-doc loans, where lenders made quick sales by not requiring documentation, then offloaded these risky mortgages by selling them to investors.
A borrower has to have sufficient assets or income to pay back the loan: Lenders must evaluate and conclude that the borrower can repay the loan. For example, lenders may look at the consumer’s debt-to-income ratio – their total monthly debt divided by their total monthly gross income. Knowing how much money a consumer earns and is expected to earn, and knowing how much they already owe, helps a lender determine how much more debt a consumer can take on.
Teaser rates can no longer mask the true cost of a mortgage: Lenders can’t base their evaluation of a consumer’s ability to repay on teaser rates. Lenders will have to determine the consumer’s ability to repay both the principal and the interest over the long term − not just during an introductory period when the rate may be lower.
With the January 10th announcement, the CFPB also released proposed amendments to its Ability-to-Repay rule. These amendments would, among other things, exempt certain nonprofit creditors that work with low- and moderate-income consumers. The proposed amendments would also make exceptions for certain homeownership stabilization programs, such as those that offer loans made in connection with the Making Home Affordable program which help consumers avoid foreclosure.
The proposed amendments would also provide Qualified Mortgage status for certain loans made and held in portfolio by small creditors, such as community banks and credit unions. Finally, today’s proposed amendments invite comment on how to calculate loan origination compensation under the points and fees provision of Qualified Mortgages. If adopted, would be finalized this spring and go into effect at the same time as the Ability-to-Repay rule in January 2014.
For up-to-date information on the Qualified Mortgage and QRM Rules, please refer to Compliance Monitor articles authored by Marissa Blundell, Esq.
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