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Consumer bureau releases ‘safe’ mortgage rules

Thursday, January 10, 2013

The Consumer Financial Protection Bureau (CFPB) has announced mortgage rules designed to ban deceptive practices, limit risky loans and establish safe lending standards to ensure borrowers can afford the mortgages they receive. The Bureau has been trying to balance protecting consumers from abusive loans with encouraging lending.

The CFPB has created a rule that requires lenders to verify and evaluate a borrower’s ability to repay the mortgage and has established requirements for 'safe,' or qualified, mortgages. Here are the key elements of the Ability-to-Repay rule and Qualified Mortgages.

Ability-to-Repay rule

Lenders must evaluate a borrower's:

• income/assets
• employment
• credit history
• monthly mortgage payments
• other monthly mortgage-related obligations
• property taxes
• other debts (student, car, credit card loans)
• monthly debt-to-income (DTI) ratio

Loan affordability must be based on the full interest rate (highest monthly payment during the loan’s first five years), and total debt payments cannot exceed 43% of income.

Lenders offering prime rate loans under the new rules will qualify for legal protection (“safe harbor”) from most borrower lawsuits.

Consumers who are sold high interest rate subprime loans will have stronger legal protections to sue if they end up with a reckless, unaffordable loan.

Qualified Mortgages (QMs)

A loan must meet certain requirements to be a Qualified Mortgage:

• No ‘no-doc’ loans
• No financial evaluations based only on ‘teaser’ rates
• No interest-only loans
• No negative-amortization loans (where principal loan amount rises)
• No loans over 30 years
• No prepayment penalties
• Limits upfront fees to 3% of loan
• No balloon payments, generally

Exceptions

For the next seven years, QM loans can exceed the 43% debt-to-income limit if they meet all other Fannie Mae, Freddie Mac or FHA standards.

Small lenders in rural or underserved areas that do not sell their loans may include a balloon payment in some cases.

The CFPB has proposed an exemption from the rules for credit unions, small community banks, and small non-profit lenders who work to promote affordable housing for low- and moderate-income consumers.

Outstanding issues

The CFPB has yet to decide if broker bonus fees (yield spread premiums) will be included in the 3% upfront fee cap. Consumer Action supports including all upfront fees in the 3% cap.

We have joined other consumer advocates in continuing to call for stronger legal protections for all mortgage loans, but believe these rules will go a long way toward helping to encourage more affordable lending practices.

The rules take effect January 2014.

For further information, read the new Consumer Financial Protection Bureau mortgage regulations.

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On January 18, 2013, the CFPB adopted a new rule that requires mortgage lenders to provide applicants with free copies of all appraisals and other home-value estimates.

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