NEWS ANALYSIS: Government Issues New Rules to Protect Home Buyers from 'Irresponsible Mortgage Lending'

NEWS ANALYSIS: Government Issues New Rules to Protect Home Buyers from 'Irresponsible Mortgage Lending'
At a time when members of the homebuilding and real estate brokerage industries are complaining that lender application of existing rules is making it difficult for qualified borrowers to obtain home loans, an agency of the federal government -- the Consumer Financial Protection Bureau (CFPB) --- on Thursday, Jan. 10, 2013 issued new rules that the CFPB hopes will "restore trust in the mortgage market."



One of the rules -- really the centerpiece -- is the "Ability-to-Repay" rule that requires lenders to obtain and verify information to determine whether a consumer can afford to repay the mortgage. The CFPB hopes this rule and the others will meet its goal to help restore trust in the mortgage market."

Link to Jan. 10, 2013 CFPB fact sheet: http://files.consumerfinance. gov/f/201301_cfpb_ability-to- repay-factsheet.pdf

"It's important not to forget where we came from," says CFBP Sirector Richard Cordray. "We have a financial crisis and a lot of pain and misery in this country that was caused by reckless lending and toxic products that should never have been offered and that this rule will see are never offered again."

"We've gotten tens of thousands of mortgage complaints at this point. A big number of them are people who are in trouble now because of reckless lending practices that occurred before the crisis," he says. "If the consumer bureau had been in place 10 years ago, I think none of that would have occurred."

Cordray said the CFPB worked with banks and outside groups to hammer out the rules. Among other things, the rules define what are called "qualified mortgages." These cap upfront fees at 3 percent of the loan amount, do not balloon over time and limit borrowers' debt payments to less than 43 percent of their pretax income. In exchange, lenders that issue mortgages meeting those standards can reduce their legal liability.
Richard Cordray
Richard Cordray

Virtually every news release on housing data from the nation's two largest trade associations: The National Association of Home Builders (NAHB) and the National Association of Realtors (NAR) say lending standards have swung the other direction. The two organizations believe it's become too hard for consumers to get mortgages. To try to address that problem and to encourage lenders to find a healthy middle ground, the CFBP established an alternative, more permissive definition of "qualified mortgage." So, for example, if a borrower's debts exceed the cap by a little, banks will still have some flexibility.

By offering a more relaxed standard in the short term, the bureau hopes to give both the banks and consumers time to get through this period of relatively tight credit. The rules will go into effect next January.



Under the new Ability-to-Repay rule, lenders will have to determine the consumer’s ability to pay back both the principal and the interest over the long term − not just during an introductory period when the rate may be lower. Lenders can no longer offer no-doc, low-doc loans, otherwise known as “Alt-A” loans, where some lenders made quick sales by not requiring documentation, then offloaded these risky mortgages by selling them to investors.

• Financial information has to be supplied and verified: Lenders must look at a consumer’s financial records and verify them.

• A borrower has to have sufficient assets or income to pay back the mortgage: Lenders must make the determination the borrower can repay the loan by looking at the borrower’s income and any assets they have on hand.

• 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 the loan on teaser rates. Lenders will have to determine the consumer’s ability to repay both the principal and the interest over the long term.

• For consumers trying to refinance a risky loan, exemptions apply: Creditors refinancing a borrower from a risky mortgage – such as an adjustable-rate mortgage, an interest-only loan, or a negative- amortization loan – to a more stable, standard loan can do so without undertaking the full underwriting process required by the new rules.


Cordray noted that In the lead up to the financial crisis, certain lending practices set consumers up to fail with mortgages they could not afford. Lenders sold no-doc and low-doc loans where consumers were “qualifying” for loans beyond their means. Lenders also sold risky and complicated mortgages like interest-only loans, negative-amortization loans where the principal and eventually the monthly payment increases, hybrid adjustable-rate mortgages where the rate was set artificially low for years and then adjusted upwards, and option adjustable-rate mortgages where the consumer could “pick a payment” which might result in negative amortization and eventually higher monthly payments.

• The deterioration in underwriting standards contributed to dramatic increases in mortgage delinquencies and rates of foreclosures. What followed was the collapse of the housing market in 2008, and the subsequent financial crisis.

• The Dodd-Frank Wall Street Reform and Consumer Protection Act recognized the need to mandate that lenders ensure consumers have the ability to pay back their mortgages. Under the law, responsibility for drafting the Ability-to-Repay rule initially fell to the Board of Governors of the Federal Reserve System. Then, the CFPB took over responsibility in July 2011. The Act also provides the CFPB the authority to define criteria for certain loans called “Qualified Mortgages” that are presumed to meet the Ability-to-Repay rule requirements.

• The CFPB conducted extensive research and analysis. In May 2012, the CFPB sought public comment on new data and information. Through meetings with stakeholders on all sides, and rigorous analysis and research, the CFPB has come up with today’s rule.

• The Ability-to-Repay rule protects consumers from risky practices that helped cause the crisis. It helps ensure that responsible consumers get responsible loans. And it helps ensure that lenders can extend credit responsibly – without worrying about competition from unscrupulous lenders.

About the Consumer Financial Protection Bureau:

The Consumer Financial Protection Bureau (CFPB) is the federal agency that holds primary responsibility for regulating consumer protection with regards to financial products and services in the United States. It was founded as a result of the Dodd–Frank Wall Street Reform and Consumer Protection Act, which passed during the 111th United States Congress in response to the Late-2000s recession and financial crisis The bureau began operation on July 21, 2011. The bureau was set up by Elizabeth Warren, who was passed over for Director in favor of Richard Cordray. Warren was elected to the Senate from Massachusetts last November.


The jurisdiction of the bureau includes banks, credit unions, securities firms, payday lenders, mortgage-servicing operations, foreclosure relief services, debt collectors and other financial companies, and its most pressing concerns are mortgages, credit cards and student loans, according to Director Richard Cordray. It was designed to consolidate employees and responsibilities from a number of other federal regulatory bodies, including the Federal Reserve, the Federal Trade Commission, the Federal Deposit Insurance Corporation, theNational Credit Union Administration and even the Department of Housing and Urban Development The bureau is an independent unit located inside and funded by the United States Federal Reserve, with interim affiliation with the U.S. Treasury Department. It writes and enforces bank rules, conducts bank examinations, monitors and reports on markets, as well as collects and tracks consumer complaints

The CFPB opened its website in early February 2011 to accept suggestions from consumers via YouTube, Twitter, and its own website interface. According to the United States Treasury Department, the bureau is tasked with the responsibility to "promote fairness and transparency for mortgages, credit cards, and other consumer financial products and services." According to the bureau's own webpage, "The central mission of the Consumer Financial Protection Bureau (CFPB) is to make markets for consumer financial products and services work for Americans—whether they are applying for a mortgage, choosing among credit cards, or using any number of other consumer financial products."
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