Consumer Financial Protection Bureau’s Ability to Repay Rule
Over the last few years, mortgage lenders have been cited as one of the culprits and causes of the foreclosure crisis. Lenders were very aggressive in “putting money on the street” so to speak and didn’t look nearly as closely as they should have at the borrower’s ability to repay.
On January 10th, the Consumer Financial Protection Bureau’s Ability To Repay Rule will go into effect. Designed to protect the consumer, this new rule will require mortgage lenders to scrutinize borrowers more closely to make sure they can afford to pay back the mortgage over the long-term. This is especially important when looking at loans that offer “teaser” rates for an introductory period.
Loans that fall within these guidelines will be considered “Qualified Mortgages”. To be considered as such, the loan must meet the following:
Cannot be for a term longer than 30 years;
Cannot have “risky features” such as interest only or even having payments that are less than the monthly accrued interest causing the total obligation to increase each month;
Cannot have excessive upfront points and fees;
Must fall into one of three categories:
1. The monthly payment, together with the borrower’s other monthly debt payments, cannot exceed 43% of the borrower’s monthly income; or
2. The loan qualifies for guarantee/purchase by an agency such as Fannie Mae, Freddie Mac or is insured/guaranteed by a federal housing agency; or
3. The loan stays “in house” in the lender’s portfolio.
Since the rule was finalized at this time LAST YEAR, many lenders have been operating under the guidelines already to make sure they were up to speed and the transition will be seamless.
Personally we are happy to see this new ruling. While it should be common sense for a borrower to know whether or not he/she can afford to borrow money for the long-term, it isn’t. In actuality, it was more commonplace for a borrower to get overextended because they trusted that the bank had their “best interest” at heart. I cannot tell you how many times I heard “Surely they wouldn’t have loaned me the money if they didn’t think I could afford it” as they were losing their home.
If you would like a copy of the “Fact vs Fiction” Flyer presented by the CFPB, please CLICK HERE and indicate in the message box that you’d like the flyer. Include your email address and we’ll send you a pdf version.
Bill and Cyndi