17
Jan

As part of its broad effort to make sure consumers are fully protected from financial deals they cannot afford, a federal watchdog agency recently passed a new rule related to the ways in which lenders must verify borrowers can afford potential mortgages.

The Consumer Financial Protection Bureau issued its Ability-to-Repay rule, which puts into place more stringent mortgage protections for consumers who might not be able to afford the home loans they're seeking, according to a report from the agency. Under the new rule, consumers applying for a mortgage from a lender must provide that institution with financial information that proves they can be counted upon to make the monthly payments, and the lender must then verify that all that data is accurate.

Why the new rule was passed
The CFPB has prioritized the passage of the Ability-to-Repay rule, which it calls one of its most important to date, because there were so many problems related to consumers taking on mortgages that lenders knew they couldn't afford prior to the start of the recession, the report said. At that time, the credit availability of these massive loans was so broad that just about any borrower could obtain one, and that in turn led to millions of Americans falling into delinquency, default and even foreclosure within a few years of obtaining their home loans. Much of the blame for these problems lies with the lenders who granted borrowers untenable loans.

"Unaffordable loans helped cause the worst financial crisis since the Great Depression," the CFPB wrote in announcing the new rule. "People across the country were sold unsustainable mortgages. Some may have entered with their eyes open, seeking to ride the wave of rising housing prices, but many were led astray. For many borrowers, it appears that lenders ignored the numbers to get the loan approved. This kind of reckless lending was an endemic problem."

What the new rule says
In addition to mandating that lenders verify the financial information they receive from would-be borrowers, there are other provisions the new Ability-to-Repay rule puts forth, the report said. For instance, to qualify for a loan, consumers must have the sufficient assets and income required to pay back the loan in full, and lenders have to determine whether those consumers have the ability both pay back the entire loan principal over the life of the agreement, but the interest as well. In the past, many may have only considered an introductory period during which rates and terms may be more affordable.

In addition to these provisions, the CFPB made a few other proposals designed to better protect consumers, the report said. The first involves an exemption for nonprofit creditors and homeownership stabilization programs, as well as various organizations related to the federal government, including Fannie Mae and Freddie Mac. This is because the vast majority of these organizations already have their own writing standards which in some cases may be more stringent than what the CFPB now requires.

Second, the agency also proposed a new category of home loans issued by smaller community lenders, known as qualified mortgages, the report said. These loans would generally carry far more protections than the average mortgage because they legally cannot carry some features that other mortgages might.

The CFPB acknowledges potential issues
Of course, the agency is well aware that many of the nation's mortgage lenders are keeping their financing under very tight wraps, which often makes it difficult for many consumers to qualify in the first place, the report said. Even as home affordability hovers near all-time highs, millions of Americans who may want to take on a mortgage might not be able to do so.

The CFPB is working to create all of its rules in such a way that it makes the lending ecosystem safer for both lenders and consumers so that credit eventually loosens and borrowers can take on loans knowing they have more protections in place, the report said.

"Consumers should be able to trust the American dream of homeownership without worrying about losing the roofs over their heads and the shirts off their backs," the CFPB said. "The Ability-to-Repay rule will help ensure that lenders and consumers share the same basic financial incentives — that both of them win when borrowers can afford their loans. With this confidence, consumers can be active participants in the market and choose which of a wide variety of products they believe is best for them."

Potential borrowers who want to make sure they can qualify should first take the time to check their credit reports for any unfair markings. If such an entry is discovered, it might be a good idea to work with a credit repair service, which may be able to correct the issue.