New CFPB Rule a Safeguard
No one in the mortgage and real estate industry would deny that lax lending practices did much to compound the collapse of the sub-prime loan market leading to the recent economic turmoil in the U.S.
On the other hand, for several years now many in the industry have complained that the only way to get the industry back to the forefront of leading the way to full economic recovery is to loosen up reactionary and over restrictive lending rules put in place after the mortgage meltdown.
No one is suggesting a return to the lose standards that created the previous problems, but it is well know that many qualified buyers are being denied loans for any number of reasons in the current lending environment. Steps are now being taken to try and rectify the situation so that qualified borrowers are no longer denied loans they can afford.
Last week the Consumer Financial Protection Bureau (CFPB) revealed a new rule called the Ability-to-Repay rule that will hopefully solidify mortgage standards while also protecting lenders. The intent of the rule is help loosen the lending pipeline by providing legal protection to banks, many of which have been reluctant to loan available funds for fear that the borrower will default and sue. At the same time the rule will help protect consumers from deceptive lending practices. The rule was part of the requirements under the 2010 Dodd-Frank Act, Part of the new CFPB rule will require lenders to consider several factors in establishing whether a borrower can repay the loan. These factors include overall debt, employment status along with the borrower’s credit history. In looking at a borrower’s total debt this cannot exceed 43 percent of the borrower’s pre-tax income and must include mortgages, auto loans and school loans.
In essence this is simply reaffirming old lending practices that were often set aside as a means of making home loans more affordable and accessible to borrowers to meet government encouraged levels of home ownership during the 1990s and early 2000s.
As a protection for both consumers and lenders, the new CFPB rule prohibits some of the more “exotic” loan features such as no-doc loans and interest-only loan payments, factors that contributed to loan default. At the same time the rule tries to avoid being overly restrictive. As an example, it doesn’t require a certain level for down payments, a factor that may deny a loan to otherwise qualified borrowers.
The rule will not go into effect until next year and is only one step in restructuring a lending environment that will hopefully avoid an over reliance on the current Fannie Mae/Freddie Mac dominance of the market.