New Mortgage Lending Rules Adopted Today

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The federal Consumer Financial Protection Bureau (CFPB) announced today the adoption of new rules for mortgage lenders that prohibit deceptive teaser rates or no-documentation from borrowers, as well as requirements that lenders make a better effort to determine a borrower’s ability to repay the loan.

The CFPB’s director said:

When consumers sit down at the closing table, they shouldn’t be set up to fail with mortgages they can’t afford. Our Ability-to-Repay rule protects borrowers from the kinds of risky lending practices that resulted in so many families losing their homes. This common-sense rule ensures responsible borrowers get responsible loans.

The ability to pay rules require that lenders document a borrower’s financial information, evaluate and decide that the borrower can repay, and not base the ability to repay on a teaser rate.

A second set of rules applies to qualified mortgages. Lenders may still make loans to consumers with “insufficient or weak credit history”, but those will carry higher interest rates and the lender will be presumed to have assured itself that the borrower can repay the loan. Borrowers may challenge that presumption if they can prove that they did not have sufficient income to repay the mortgage. In general, a qualified mortgage will be available to borrowers whose debt-to-income ratio is less than or equal to 43%.

The new rules are intended to loosen lending for mortgages by differentiating between qualified and unqualified loans. Qualified loans will be protected by a safe-harbor provision.

The chairman of the Mortgage Bankers Association commented:

Our concern has always been that we balance this goal with other housing policy objectives, particularly the objective to ensure the availability of mortgage credit to qualified borrowers. And right now, credit is tighter than at any point we can remember. … We remain concerned that certain aspects of it could curb competition, increase costs and tighten credit availability for borrowers. In particular, the 3% cap on points and fees appears to be overly inclusive as it relates to compensation and affiliates. Loans with the same interest rate, terms and out of pocket costs should be treated the same under the rule regardless of the organizational structure or business model of the lender.

Additionally, we will be looking carefully at whether the interest rate threshold for the safe harbor, which is set at 150 basis points above the benchmark rate, will adversely impact too many borrowers. These pricing-related restrictions need to be carefully examined to ensure that they do not unnecessarily restrict consumer access to ‘qualified mortgages,’ including smaller balance loans, as well as jumbo loans.

The CFPB’s announcement is available here.

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