Consumer Finance Protection Bureau – New Mortgage Lending Standards

Small home in Zacatecas, Mexico

Today, the Consumer Financial Protection Bureau (CFPB) issued the final rules designed to strengthen consumer protections for “high cost” mortgages. Here’s the link.


The CFPB designates non-high cost mortgages as “qualified mortgages.” The CFPB has offered lenders two ways of assuring a loan is a qualified mortgage. A loan will be judged as “qualified” under the new regulations, which take effect in January 2014, if either of the following criteria is met.

1. The borrower’s total debt payments cannot exceed 43% of their pretax income.

2. The loan receives a rating of “approved,” after it is run through the automated underwriting programs maintained by Fannie Mae, Freddie Mac or the Federal Housing Administration, regardless of whether these institutions ultimately buy or guarantee the mortgage. Note: Jumbo loans must satisfy the first criteria and can’t qualify using this automated methodology.


As I noted in yesterday’s post, lenders will be required to satisfy new ability – to – repay standards to maximize their liability from lawsuits, in the event the mortgagor finds the loan, at some point in the future, to be unaffordable. Among the features of the new Ability – to – Repay rule:

1. Potential borrowers have to supply financial information and lenders need to verify it;

2. To qualify for a particular loan, a consumer has to have sufficient assets or income to pay back the loan; and

3. Lenders will have to determine the consumer’s ability to repay both the principal and the interest over the long term – not just during an introductory period when the rate may be lower.


The interest rate on the loan will be a second important variable, in assessing the liability of the lender, in the event of a mortgagor lawsuit. The CFPB has stated that it would grant the lender the strongest level of legal protection to loans that carry a prime mortgage rate, or one within 1.5 percentage points of the national average. (Presumably, based upon the rate at the time of issuance.)


In my opinion, these new rules will serve to limit the number of mortgages that will be approved in the years ahead and maintain or increase the stringent informational requirements now in place. The largest negative impact will be on the subprime borrower, who may be locked out of the mortgage market, since the liability associated with writing such mortgages will be too high for most lenders.

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