New federal rule: Make sure borrower can pay loan

The Consumer Financial Protection Bureau has issued new guidelines for home mortgages. The rules require income verification, but don't specify a minimum down payment.

By Teresa at MSN Real Estate Jan 10, 2013 12:08PM

After months of discussion, the Consumer Financial Protection Bureau has come out with rules it says will help protect consumers from toxic mortgages.


The new “Ability to Repay” rule is designed to make lenders determine that borrowers can actually pay back their mortgages. Lenders whose loans follow the guidelines for what is called a "Qualified Mortgage" are protected against certain lawsuits. While lenders can issue mortgages outside the rules, they won’t have the same legal protections.


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The rules don’t include any guidelines about the size of a down payment. There had been much speculation during the two years that the rule was under discussion that a qualified mortgage would include a 20% down payment. That didn’t happen, though the CFPB is planning to issue more rules on mortgages later.


Couple signing mortgage application (© Corbis)The new rules essentially end the no-doc and low-doc “liar loans,” in which customers did not have to document their income. The rules also limit borrowers’ debt-to-income ratio to 43% in most cases. Interest-only and negative amortization loans don’t qualify, and the qualified mortgages will limit fees.

Whether the rules will do anything to make loans more available is a big question. In general, the standards are similar to those lenders are using on their own now.


The rules will take effect in January 2014. You can read them here and see an analysis by the Center for Responsible Lending here. The Wall Street Journal has a Q&A.

The housing industry and consumer advocates generally praised the new rules.


"The Consumer Financial Protection Bureau’s new rules generally strike a balanced, reasonable approach to mortgage lending and implement important consumer protections," the Center for Responsible Lending wrote in a news release. "The standard CFPB establishes for a safe, well-underwritten mortgage is appropriately broad enough to include the vast majority of creditworthy homeowners, and  it is clear enough for lenders and borrowers alike to understand. And the rules preserve legal protection for borrowers with the riskiest loans."


Barry Rutenberg, chairman of the National Association of Home Builders, said in a statement that his organization "is encouraged that regulators heeded concerns from the housing industry to craft a broad standard that includes many of today's sound mortgage products, including fixed-rate and adjustable-rate mortgages, under the QM standard."

The new rules were required by the 2010 Dodd‐Frank Wall Street Reform and Consumer Protection Act, which called for restricting mortgages to people who had the ability to pay them back – something that wasn’t a concern during the heady days of the real-estate boom.


"In the run-up to the financial crisis, we had a housing market that was reckless about lending money," CFPB Director Richard Cordray wrote on the agency’s blog. "Lenders thought they could make money on a loan even if the consumer could not pay back that loan, either by banking on rising housing prices or by offloading the mortgage into the secondary market. This encouraged broad indifference to the ability of many consumers to repay loans, which dramatically increased mortgage delinquencies and rates of foreclosures."

Mar 31, 2013 3:41AM
oh what i love about this whole situation is that when we were talked into refinancing our house in 2001 we got caught up in the preditory lending so we have a varible rate interest so we are underwater in our loan and because we make enough money and are on time with payments no one will touch us to refi us into a fixed rate we have tried several until we are blue in our face all because of what we make per year we dont qualify for any of the refinancing programs and because we are never late on our payments we are punished for this, really???!!! i would think they would want to refi us because of that but no instead they show that they are prejudice against home owners that are responsible and can show that they make their payments on time! thanks for letting me vent
Mar 18, 2013 8:06PM

The banks are already working with the new rule.  If you are retiree and need a bridge loan you may very well not get past the first question, what is your income?  Since you are living off your savings, or 401k, technically you do not have an income and you are denied for "lack of Income".   So if you plan on moving when you retire, you will need to plan accordingly.  No income, no loan.  If you think your net worth will help, forgetaboutit.   I have a net work of several million but NO INCOME, no loan.   Thank you Wells Fargo!!  


The law of unintended consequences!!!!1

Mar 18, 2013 2:27PM
I believe in individual responsibility, sure, which comes in second to institutional responsibility. The banks are the professionals, they need to make reasonable loans in the first place, and if they don't, then they pay the consequences RIGHT ALONG WITH ME. I don't get off scott-free if I don't pay up. If they knew the loan might well fail going in, they deserve to foot some, or even most of the bill once a default happens. THAT is right. THAT is fair. THAT is TRUE responsibility. Any other way is simply corrupt, and there is no other way to describe it.
Jan 18, 2013 12:00PM

Wow!  This is amazing to me.  Does anyone else find it amusing that the government wants to make sure that someone who borrows money can repay?.... Yes let's raise the debt ceiling... again!  That must mean we have a plan to balance the budget (because no one should borrow money if they cannot repay).  Oh, we do not have a plan?  Come on people.  The problem is not the banks.  Let's talk about lack of personal accountability in our society.  It is very simple.  LIVE WITHIN YOUR MEANS!  READ a contract before you sign it (yes even a mortgage contract)!  If you do not understand it, DO NOT SIGN IT!!!!  If you DO sign it.  You are responsible!  You don't get to just stop paying.  If you stop paying, you lose your house.  Pretty simple.  You don't like that big bad bank. No problem, take your money and your business to another bank.  But my house isn't worth that much anymore? I picked the house.  I signed the contract.  I do not have the credit or money to refinance.  It must be their fault.  Really?????

Jan 11, 2013 8:45AM
in responce to the clowns that replied to my original post    you are idiots you should know that it was in 1996 that  bill clinton signed the mortgage redemption act and you say  that it helped people pay off their mortgages you are wrong on that it lowered the standards  so that anyone could get an approval for a mortgage and that forced  lenders to make bad loans to people that could not pay off the loans they were getting. it did nothing to help pay off those loans  but what it did was forced banks and other lenders to make bad loans that they knew would end up in defaultand therefore had to offset them with the crisis that lead to banks making those packaged mortgages with high risk  speculation and inturn when they were sold they ended up in foreclosure   now the banks are being called all sorts of names for getting rid of those mortgages that bill clinton  forced them to make against the shareholders wishes  why do you think they were bundled together   because they were well known to be defaulted after being forsed to give that money out to people that could never have repaid them to begin with that caused the housing market to fail and that is why your house is worth about 25% less than what you paid for it    

you need to follow the cause of things before you say  it is crap   do not be stupid  because that is what the white house wants  you to be so the stupid can be controlled   with out a fight   get smart

Jan 10, 2013 5:42PM

At least they`re doing something about the "bad loan" ,etc problem. They should have had that in place a long time ago. Just going by somebodys credit score and approving them for a loan has always been kind of unfair to people that didnt have good credit but actually were a better risk in letting them buy a house just on income,or promise to pay,without worrying if their credit score was alright.


Jan 10, 2013 4:36PM



What bank processed that loan?  And why did the rules allow it?  Could it be because it was over 25% down and the borrower had great credi t???  Combine that with the fact that the loan was going to become part of a mortgage-backed security which the bank was going to make a killing on, and you've got a recipe for disaster.


Doh !

Jan 10, 2013 4:25PM
well now does this mean common sense is coming back in style...what a concept...duhhhhhhh
Jan 10, 2013 4:24PM

This has got to set some kind of record for closing the barn door after the horse has run away.  In this case, the horse escaped, galloped across the whole continent, and died of old age before the farmer finally got around to thinking about maybe possibly closing the door.

Jan 10, 2013 4:16PM

Most of those 'liar loans; were made to people who could afford them.  They were people with exceptional credit and 20% down and they were purchasing homes which were at or below appraised value. 


What happened next is that the property value plummeted.   Many people did 'strageic defaults] and who could blame them?  Many other people lost their jobs or at least significant income and couldn't pay.


The Fleecing of America is almost complete. 


Doh !

Jan 10, 2013 4:15PM
This  new rule will only hurt the consumers. It will make it more difficult to get a loan ect. Why the new rules do not fornce the bankers to charge a fair interest rate instead. A person with a not so good  credit rating gets high interest rate  even when he minimize the risk by getting other persons to garanteed the loan. If  a person gets   somew garanteed on the loan the bank should charge lower interest rates  but that is not the case ...the bank will charge the hightest rates regardless of how many garantees tou offer.
Jan 10, 2013 4:12PM
it was bill clinton  that set up the mortgage crisis  by saying "no one should be denied  a home  even if they are on welfare and with no way to pay for it  because they will default under some other president but it will make me" (bill clinton) "look good and people will say that i care about  poor people"  so now you have barry trying to convince those same poor people that "we don't have a spending problem"    those same people  are still drawing welfare and can't pay their rent  let alone a mortgage   
Jan 10, 2013 4:03PM
Be smart consumers and know what you are getting into!  I worked as a mortgage collections rep for a super huge player in the subprime game.  You cannot tell me that a janitor living off $1200.00 a month somehow knew on some level that she could not afford a $580,000 house in a west LA suburb.  PLEASE tell me that there is still hope out there for common sense somewhere!  She said that she had "roommates" and it was extra income.  What's the matter?  Junior decided to finally leave the nest?  Hubby get up and leave?  Look, I blame big banks for a lot of what happened, but not a soul forced them to sign the dotted line.
Jan 10, 2013 4:01PM
is there any lender still doing no doc loans ?  the new rules don't take effect till 2014 and i would love to sell my house to a bank now...
Jan 10, 2013 3:42PM
How about they stop talking people into 'adjustable rate' mortgages where they lure them in at a low interest  rate and then jacking up the interest rate so high they can no longer afford the payments. A vast majority of people that lost their houses could afford their original payments......
Jan 10, 2013 3:40PM
Maybe after the Democrats get rid of the "liar loans", they will get rid of the "liar politicians"!  Nope, they won't commit actual suicide, just political!
Jan 10, 2013 3:39PM
 Let's be totally honest here.  The whole damm mess was caused by greedy banks and mortgage companies not by the borrowers!  They were lied to about the costs by these people and had they been told the truth would not in most cases have agreed to continue.

 So these new rules are a good thing.  The only way to hurt a greedy banker is to hit him in his pocket lol.  Personally I would like to see these same CEO's taken to court for the lies they made their employees tell but I guess that's not going to happen anytime soon.

Jan 10, 2013 3:26PM
The Democrats giveth and the Democrats taketh away
Jan 10, 2013 3:20PM
Racism, pure and simple.  Just because someone has a rotten credit rating, have not enough income to make the loan payments according to the terms is no reason to not give them a loan.  

That was the approach taken by the government against the evil, profit driven banks.
Jan 10, 2013 3:14PM
That's right car86, all this started with the dumboRATS cuz "everybody deserved a home". Then they had  the gall to say, "oh not we, must be the Republican behind that tree" that caused the resulting financial disaster. The public now knows better.
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