Before offering a mortgage, banks must now establish that the potential homeowner can afford the loan under a new ability-to-repay rule issued by the Consumer Financial Protection Bureau (CFPB) yesterday, Jan. 10. This move is to protect borrowers from irresponsible lending practices such as those that led to the housing collapse and financial crisis of 2008.
When considering a mortgage loan application, lenders must take into account a borrower’s current or reasonably expected income, employment status, the amount of monthly payment on the requested loan as well as any simultaneous loans, current debt obligations, credit history and monthly debt-to-income ratios.
“When consumers sit down at the closing table, they shouldn’t be set up to fail with mortgages they can’t afford,” — CFPB Director Richard Cordray.
Lenders may no longer qualify applicants based on introductory rates, often called “teaser rates,” but must calculate ability to repay over the life of the loan. A borrower’s financial information must be supplied and verified to demonstrate the ability to repay the mortgage. Lack of documentation requirements on loans issued during the housing bubble is cited by the CFPB as a factor in the housing collapse.
Compliance with the ability-to-repay rule will be presumed by the CFPB if the lender issues Qualified Mortgages. A Qualified Mortgage is one with no excessive upfront fees and points and no risky features such as interest-only payments and negative amortization loans that do not reduce principle amounts owed with each payment. Qualified Mortgages repayment term cannot exceed 30 years.
The CFPB was established in 2010 under the Dodd-Frank Wall Street Reform and Consumer Protection Act as a response to the financial crisis of 2008. President Barack Obama appointed Richard Cordray as the Bureau’s director January 2012.