We just told you about the Consumer Financial Protection Bureau's new rules to curtail high-risk consumer mortgages. The CFPB has just issued this informative press release, a fact sheet on the new rules, and a summary of the ability-to-repay and qualified mortgage rule.
Here are the key attributes of the ability-to-repay 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.
Here are the key attributes of a "qualified mortage":
- No excess upfront points and fees: A Qualified
Mortgage limits points and fees including those used to compensate loan
originators, such as loan officers and brokers. When lenders tack on
excessive points and fees to the origination costs, consumers end up
paying a lot more than planned.
- No toxic loan features: A Qualified Mortgage cannot
have risky loan features, such as terms that exceed 30 years,
interest-only payments, or negative-amortization payments where the
principal amount increases. In the lead up to the crisis, too many
consumers took on risky loans that they didn’t understand. They didn’t
realize their debt or payments could increase, or that they weren’t
building any equity in the home.
- Cap on how much income can go toward debt:
Qualified Mortgages generally will be provided to people who have
debt-to-income ratios less than or equal to 43 percent. This requirement
helps ensure consumers are only getting what they can likely afford.
Before the crisis, many consumers took on mortgages that raised their
debt levels so high that it was nearly impossible for them to repay the
mortgage considering all their financial obligations. For a temporary,
transitional period, loans that do not have a 43 percent debt-to-income
ratio but meet government affordability or other standards − such as
that they are eligible for purchase by the Federal National Mortgage
Association (Fannie Mae) or the Federal Home Loan Mortgage Corporation
(Freddie Mac) − will be considered Qualified Mortgages.