New Mortgage Rules: Lenders Must Consider 'Ability-to-Pay' Factors

New Mortgage Rules: Lenders Must Consider 'Ability-to-Pay' FactorsThe U.S. Consumer Financial Protection Bureau has created new standards for mortgage lenders when considering consumers’ ability to repay home loans before extending them credit.
The new requirements will take effect on January 10, 2014, but the bureau is also getting public input on whether to adjust this requirements for certain community-based lenders, housing stabilization programs, certain refinancing programs of the Fannie Mae and Freddie Mac  and small portfolio creditors.
The reason for the new standards was borne out of the 2007-2008 financial crisis, fueled by loose lending standards in which too many mortgages were extended to borrowers who could not afford them.
“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.”
The 2010 Dodd-Frank Wall Street reform legislation requires that creditors must make a reasonable and good-faith determination that the consumer has a reasonable ability to repay a mortgage according to its terms.
Congress also established a presumption of compliance for a certain category of mortgages, called “qualified mortgages.” But consumer advocates say the rules provide a legal protection for banks that may prove to be detrimental to borrowers. A “qualified mortgage” under the new rules protect banks from lawsuits filed by aggrieved borrowers or buyers of mortgage-backed bonds.
In its balancing act,  the bureau also needs to protect community banks and ensure that the new regulations don’tt further restrict lending in an environment already keeping many borrowers from taking advantage of historically low mortgage rates.
The new rules describe certain minimum requirements for creditors making ability-to-repay determinations, but does not dictate that they follow particular underwriting models.
At a minimum, creditors generally must consider eight underwriting factors:
(1) current or reasonably expected income or assets;
(2) current employment status;
(3) the monthly payment on the covered transaction;
(4) the monthly payment on any simultaneous loan;
(5) the monthly payment for mortgage-related obligations;
(6) current debt obligations, alimony, and child support;
(7) the monthly debt-to-income ratio or residual income; and
(8) credit history. Creditors must generally use reasonably reliable third-party records to verify the information they use to evaluate the factors.
The bureau also provides special rules to encourage creditors to refinance non-standard, variable-rate mortgages into “standard mortgages” with fixed rates for at least five years that reduce consumers’ monthly payments.
The new standards also establish general underwriting criteria for qualified mortgages. Most importantly, the general rule requires that monthly payments be calculated based on the highest payment that will apply in the first five years of the loan and that the consumer have a total (or “back-end”) debt-to-income ratio that is less than or equal to 43 percent.
In case where individual consumers can afford a debt-to-income ratio above 43 percent based on their particular circumstances, such loans are better evaluated on “an individual basis under the ability-to-repay criteria rather than with a blanket presumption,” the bureau states.

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