By Matthew Vann
With the goal of avoiding another housing bubble, the Consumer Financial Protection Bureau today announced new lending guidelines to ensure mortgage borrowers can afford to repay their loans.
Banks must now verify a borrower’s income, debt and employment status before approving a loan.
“The Ability-to-Repay rule will help ensure that lenders and consumers share the same basic financial incentives,” said Richard Cordray, the bureau’s director, in a statement on the agency’s website. “When consumers sit down at the closing table, they shouldn’t be set up to fail with mortgages they can’t afford.”
With these rules, lenders can expect several restrictions, such as bans on “interest-only”, “no documentation” loans, and loans that burden borrowers with payments exceeding 43 percent of their income.
Lenders must follow several guidelines to make sure the loan they provide is a “qualified mortgage”, which eliminates risky loan features such as interest only or balloon payments.
The new rules aim at getting banks back into the habit of lending again, which they have been slow to after the Dodd-Frank Act placed new banking regulations into effect in 2010.
The CFPB guidelines also create a safe harbor for banks and lenders who follow the rules, which effectively ensures they can’t be sued for reckless practices. Borrowers can only sue if they are able to show they didn’t have the required income to pay the mortgage and living expenses
Banks will have up until January of next year to begin complying with the CFPB guidelines.