When it comes to placing blame on mortgage lenders, regulators, or consumers for 2008's crippling housing crisis, it's fair to say each played a role.
Yes, banks issued millions of mortgage loans that homebuyers couldn't afford, targeted minorities for subprime loans, and made the entire lending experience a muddled, confusing mess. And yes, federal regulations made it possible for them to do so. But, as some consumer critics argue, it wasn't as if borrowers were nailed down to a chair and forced to sign the dotted line.
In the end, the Consumer Financial Protection Bureau has come out on the side of the consumer. On Wednesday, the agency issued a new set of regulations that will put the onus on lenders to decide whether homebuyers are worthy of a loan.
They're calling it the "Ability-to-Pay" rule.
“When consumers sit down at the closing table, they shouldn’t be set up to fail with mortgages they can’t afford,” CFPB Director Richard Cordray said in a statement. “Our Ability-to-Repay rule protects borrowers from the kinds of risky lending practices that resulted in so many families losing their homes. This common-sense rule ensures responsible borrowers get responsible loans.”
Here's what the new rule entails:
The end of quick sale loans. In the past, lenders could get away with offering quickie low- or no-doc loans (they required few financial documents, if any, from the borrower and then could sell off the risky loans to investors). With the new rule, lenders must do a proper financial background. That means sizing up borrowers' employment status; income and assets; current debt obligations; credit history; monthly payments on the mortgage; monthly payments on any other mortgages on the same property; and monthly payments for mortgage-related obligations.
Risky borrowers will have a harder time securing a loan. The lender must prove the borrower has "sufficient assets" to pay back the loan eventually. According to the CFPB, that's determined by calculating debt-to-income ratio (total monthly debt divided by monthly income).
No more "teaser rates" to suck borrowers in. Lenders love to roll out juicy low introductory rates on mortgages to lure borrowers in, but under the new rule, they must calculate a borrower's ability to repay his loan based on the true mortgage rate –– including both the principal and the interest over the long-term life of the loan.
The agency will likely make exceptions for nonprofit lenders who work specifically with low- and middle-income borrowers.
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