In an effort to eliminate the negligent lending practices that resulted in the housing collapse of 2006, the Consumer Financial Protection Bureau implemented a new set of regulations regarding mortgage loans. The Ability-to-Repay Rule was created by the CFPB (as required by the 2010 Dodd-Frank Act) to ensure that mortgage loans are handled more responsibly, protecting both homebuyers and lenders.
Ultimately, mortgage lenders will be responsible for making sure a prospective buyer can actually afford to pay back a mortgage loan.
Changes in the mortgage lending process include a new classification, referred to as qualified mortgages. Types of mortgage loans excluded from this category include loans with balloon payments and interest-only loans. A mortgage that has fees and points totaling more than three percent of the loan would also not be considered a qualified mortgage.
Lenders would be required to verify income and assets of a prospective homebuyer. His or her total debt cannot rise about 43 percent of the gross monthly income to qualify for the loan. Ideally, buyers would be protected from being approved for a loan that they truly can’t afford.
Under the Ability-to-Repay rule, lenders would also receive formidable protection. After the housing collapse in 2006, thousands of homeowners in foreclosure sued their respective lenders, faulting them for approving a loan that was clearly out of their ranges and ability to repay. Lenders who abide by the rule, properly demonstrating that correct procedures were followed to verify and determine eligibility are then protected from such lawsuits.
As part of the new rule, prospective buyers will be required to furnish financial records detailing their income and assets. Upon receipt of this information, lenders must verify all financial information given to them. It must be determined that a prospective buyer’s income and/or assets demonstrate the ability to pay back the loan in order to qualify. During the financial review process, the lender must ensure that the buyer possess the ability to pay back both the principal and interest for the life of the loan.
Full implementation of the new rule will be done in stages; it’ll be at least a year before the first phase of the plan takes effect. Despite opposition by some consumer groups, lenders, and political figures, the CFPB is confident that the end result will have a positive effect on the housing recovery, and prevent another industry collapse from occurring.
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