The Consumer Financial Protection Bureau, or CFPB, has adopted a new rule that requires lenders to ensure prospective buyers have the ability to repay their mortgage.
Ability to Repay
Under the Ability-to-Repay rule announced today, all new mortgages must comply with basic requirements that protect consumers from taking on loans they don’t have the financial means to pay back. Among the features of the new rule:
- Financial information has to be supplied and verified: Lenders must look at a consumer’s financial information.
- A borrower has to have sufficient assets or income to pay back the loan: Lenders must evaluate and conclude that the borrower can repay the loan.
- 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 on teaser rates.
Lenders will be presumed to have complied with the Ability-to-Repay rule if they issue “Qualified Mortgages.” These loans must meet certain requirements which prohibit or limit the risky features that harmed consumers in the recent mortgage crisis. If a lender complies with the clear criteria of a Qualified Mortgage, consumers will have greater assurance that they can pay back the loan. Among the features of a Qualified Mortgage:
- No excess upfront points and fees: A Qualified Mortgage limits points and fees including those used to compensate loan originators, such as loan officers and brokers.
- No toxic loan features: A Qualified Mortgage cannot have risky loan features, such as terms that exceed 30 years, interest-only payments, or negative-amortization payments where the principal amount increases.
- Cap on how much income can go toward debt: Qualified Mortgages generally will be provided to people who have debt-to-income ratios less than or equal to 43 percent.
There are two kinds of Qualified Mortgages that have different protective features for a consumer and different legal consequences for the lender. The first, Qualified Mortgages with a rebuttable presumption, are higher-priced loans. These loans are generally given to consumers with insufficient or weak credit history. Legally, lenders that offer these loans are presumed to have determined that the borrower had an ability to repay the loan. Consumers can challenge that presumption, though, by proving that they did not, in fact, have sufficient income to pay the mortgage and their other living expenses.
The second, Qualified Mortgages that have a safe harbor status, are generally lower-priced loans. They are generally prime loans that are given to consumers who are considered to be less risky. They will also offer lenders the greatest legal certainty that they are complying with the new Ability-to-Repay rule. Consumers can legally challenge their lender if they believe the loan does not meet the definition of a Qualified Mortgage.
The Ability-to-Repay rule does not affect the rights of a consumer to challenge a lender for violating any other federal consumer protection laws.
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