By Steve Kilar, The Baltimore Sun
January 10, 2013
Richard Cordray, the director of the Consumer Financial Protection Bureau, is expected to announce the issuance of a pioneering federal rule Thursday that is intended to help prevent a repeat of the risky mortgage lending that led to the recent housing boom and bust.
He is scheduled to declare the adoption of the final "ability-to-repay" rule in remarks prior to a town hall meeting about mortgage policy at Westminster Hall in downtown Baltimore. The rule is set to take effect one year from Thursday.
The rule is "designed to ensure that lenders are offering mortgages that consumers can actually afford to pay back," said Cordray in prepared remarks. "This is a simple, obvious principle that needs to be re-established in the housing market. It is nothing more than the true essence of 'responsible lending.'"
The rule is similar to one adopted by the Federal Reserve Board that went into effect in 2009 but applied only to mortgages with high interest rates. The new rule covers the entire mortgage market and implements portions of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, which also created the bureau.
The Dodd-Frank act aims to eliminate so-called "no doc" or "low doc" loans that were common during the housing boom. When credit flowed freely several years ago, lenders routinely offered mortgages without verifying applicants' financial information.
The new rule requires mortgage lenders to determine, using documentation and third-party verification, that the borrower will be able to repay the loan. Records of compliance with the ability-to-repay review must be kept by the lender for three years, according to the bureau.
Lenders must review several factors when underwriting a home loan, including the borrower's employment status, credit history, and income or assets. The bank also is obliged to compare the monthly payment on the mortgage, combined with other loans or debts held by the borrower, with the borrower's income.
The rule prevents lenders from using "teaser" rates — low initial interest rates that end up jumping — as a basis for evaluating whether a borrower qualifies for the loans.
"The rapid spread of introductory teaser rates made a bad situation worse," Cordray said. "Low initial teaser rates led many consumers to believe they could afford to take out loans. … That led inevitably to home foreclosures."
The rule also sets up a category of low-risk mortgages, called "qualified mortgages." A lender who follows the standards for a qualified mortgage will be presumed to have complied with the ability-to-repay requirements, limiting the borrowers' ability to challenge the lender in court.
Qualified mortgages cannot exceed 30 years or have interest-only payments, among other limitations. A borrower of a qualified mortgage will be required to have a total debt-to-income ratio (total monthly debt payments divided by monthly gross income) of not more than 43 percent.
"If you are a borrower getting a qualified mortgage … barring some unexpected turn of events, you should be able to make your house payments," Cordray said.
On Thursday, the bureau also is planning to release proposed amendments to the new rule, including exemptions from the ability-to-repay criteria for some community-based lenders, housing stabilization programs, Fannie Mae and Freddie Mac refinancing programs, federal agencies and creditors with small portfolios.
The bureau is seeking comments about whether these lenders should be exempt because they are subject to more stringent underwriting criteria. The bureau expects those amendments to be finalized this spring.
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