Mortgage Lenders Must Assess Borrowers’ Ability to Repay in New CFPB Guidelines

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The Consumer Financial Protection Bureau’s (CFPB) new rules that took effect on January 10, 2014 are getting mixed reviews from industry insiders.  This is particularly true of rules related to a consumer’s ability to repay and the steps loan originators must go through to ensure the numbers are correct.  The rules have been created to curtail risky lending practices that led to the housing market problems in 2008, and are part of the steps required by 2010’s Dodd-Frank Wall Street Reform and Consumer Protection Act.

Industry insiders’ concerns lie in the fact that the rules are further restricting an already heavily-restricted lending environment.  Additionally, the loans that are government backed—primarily those purchased or guaranteed by Fannie Mae and Freddie Mac—remain temporarily unaffected, even if the applicant’s debt-to-income ratio is above the 43% limit created by the new rules. 

The Center for Responsible Lending, a consumer watchdog group, has stated that the CFPB’s approach of increased regulation is a good idea.  However, the group believes that the CFPB should have gone one step further with their rule making, particularly related to allowing the borrower to file a lawsuit against any lender who does not effectively evaluate that borrower’s ability to repay the loan. 

These new rules require lenders to eschew “no documentation” and “low documentation” loans.  The hope is that these new rules will help the American economy avoid the crisis that hit in 2008.  Since that time, approximately 4 million American homeowners have lost their homes to foreclosure. 

Richard Cordray, the Director of the Consumer Financial Protection Bureau, said in a statement: "When consumers sit down at the closing table, they shouldn’t be set up to fail with mortgages they can’t afford.  Our ability-to-repay rule protects borrowers from the kinds of risky lending practices that resulted in so many families losing their homes.  This common-sense rule ensures responsible borrowers get responsible loans."