More on the CFPB’s New Mortgage Rules

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.

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