CFPB's New Rules for Mortgage Lenders

In an effort to prevent another mortgage crisis, the Consumer Financial Protection Bureau has published a new rule that’s intended to ensure that homebuyers end up with mortgages they can afford, barring unforeseen changes in income or other expenses.

We know the mortgage crisis was caused, in part, because many homebuyers allowed to take out mortgages they couldn’t afford over the long term. Some of the borrowers qualified for adjustable rate mortgages with initially low interest rates, but they could no longer afford the mortgage once the interest rate adjusted upwards. Other borrowers were given mortgages though lenders failed to fully assess the borrowers’ ability to repay the loan.

The CFPB's Ability-to-Repay Rule

The Ability-to-Repay rule sets minimum requirements for lenders to determine whether borrowers can truly afford their mortgages, not just in the short-term, but over the life of the mortgage. Lenders are required to consider (at least) these eight factors:

• current income and assets
• employment status
• the monthly payment on the mortgage
• monthly payment on simultaneous loans, e.g. 80-20 loans
• payment for other mortgage-related expenses
• current debt obligations including alimony and child support
• the monthly debt-to-income ratio
• credit history

When assessing the ability to pay on an adjustable rate mortgage, the lender has to calculate the monthly payment using the fully indexed rate (the rate after the mortgage adjusts) or the introductory rate, whichever is higher. This will ensure that borrowers can still afford payments on the ARM even after the rate increases.

Lenders participating in certain programs, like Fannie Mae and Freddie Mac, may be exempt from the Ability-to-Repay rule because they already have rules for discerning whether applicants can afford to repay mortgages.

Qualified Mortgages

The CFPB also exempts “qualified mortgages” from the new rule. It’s strongly presumed that qualified mortgages, i.e. those made to prime borrowers, have already satisfied the ability-to-repay requirements. Qualified mortgages cannot include: loans with negative amortization, interest-only payments, balloon payments, loans with repayment greater than 30 years, no-doc loans, and loans where consumer-paid points and fees exceed 3% of the total loan amount.

Payments on qualified mortgages should not exceed 43% of the borrower’s pretax income. Unfortunately, that part of the rule could prevent borrowers from purchasing homes in some of the most expensive areas of the country. There may be some exceptions for mortgages that meet the standards of Fannie Mae and Freddie Mac. These exceptions, however, are expected to phase out within seven years.

Some refinance loans are also exempt from the requirements, especially for borrowers who are seeking to refinance out of a risky loan.

Safe Harbor Protection for Lenders

Lenders who give loans outside these standards may give up some of the protections they receive from the ability-to-pay rule, e.g. protection from lawsuits made by consumers who say they should never have been given a loan in the first place.

The safe harbor granted to lenders who follow the ability-to-repay rules don’t necessarily prohibit consumers from suing mortgage lenders. However, it will be more difficult for consumers to sue these lenders. For example, to sue a lender, consumers have to show that lenders approved the mortgage despite knowing that the mortgage payments at the time of loan origination didn’t leave enough money for other living expenses. The longer a consumer makes timely payments on such a mortgage, the less likely they’re able to sue.

The rule will not become effective until January 10, 2014. The CFPB seeks comments on whether certain lenders, like non-profit organizations, should be exempt because they have their own underwriting criteria. The CFPB also seeks comment on creation of a new category of qualified mortgages for those held on portfolio by small creditors.

Source: ConsumerFinance.gov