The Consumer Financial Protection Bureau announced new lending rules Jan. 10 that will prohibit lenders from making loans without sufficient documentation of a borrower’s ability to repay and will outlaw “teaser” interest rates, The New York Times reported Jan. 10.
The new rules, which take effect Jan. 1, 2014, set limits on interest-only loans as well as negative-amortization loans. While banks still will be able to issue these types of loans, they will not be protected from consumer lawsuits if they do so. The changes also will stipulate that mortgage originators cannot charge excessive upfront fees and points nor can they offer loans with balloon payments or payments that represent more than 43 percent of a borrower’s income.
Additionally, the rules will create a legal distinction between “qualified” and “unqualified” loans.
The changes will give banks a “safe harbor” that protects them from lawsuits related to abusive lending practices. “Our ability-to-repay rule protects borrowers from the kinds of risky lending practices that resulted in so many families losing their homes,” Richard Cordray, CFPB director, told the Times.
Mortgage bankers are largely supportive of the new rules. David Stevens, Mortgage Bankers Association chief executive officer, told the Times that “these rules offer protection for consumers and a clear, safe environment for banks to do business.”
There are circumstances under which banks can bypass the new rules for up to seven years. If new loans are backed by Fannie, Freddie or another government agency, they still can be considered “qualified” even if the borrower’s payment-to-income ratio is greater than 43 percent. Also, balloon mortgages still will be available through smaller lenders in rural or underserved areas.
CFPB hopes the revisions will encourage banks to start lending again and keep them from engaging in the types of lending practices that spurred the financial crisis in the first place now that they will be required to evaluate borrowers’ ability to repay rather than just resell newly originated mortgages to third parties.