Mortgage Lending Rules Tightened by Consumer Watchdog

By Sari R. Updated on 1/10/2013

Yesterday, it was proclaimed by the government’s consumer finance watchdog that banks will be required to utilize new criteria to determine whether or not a borrower will be able to repay a home loan.  This is a direct effort to cease “loose lending” so that the economy may begin to recover.  Banks will have to check a borrower’s employment, amount of debt to their name, and income. 

The CFPB said their aim with tightening mortgage lending rules is also to eradicate irresponsible lending on behalf of the lenders.  Lenders will be provided with several legal shields if they offer safer loans.  This will most likely lead to lenders only offering “qualified mortgages” to their borrowers.  Lenders have been waiting for the new rules, and have been nervously awaiting the definition of a “qualified mortgage” as it could drastically reduce the types of loans that are offered.

As of yesterday, mortgage bankers are happy with the new rules and have praised the fact that legal protection comes only with offering a “qualified mortgage.”  Undoubtedly, this will allow lenders to give reasonable mortgage credit to qualified borrowers without having too much risk involved. 

As for the widespread response, consumer groups are also happy.  Several representatives from the groups have commented that these standards will result in a more competitive housing market and will aid the economic downturn.

In 2011, Dodd-Frank allowed for the designation of a “qualified mortgages” category that would have automatic compliance with the ability-to-repay requirement. 

The CFPB stated that in order to be considered a “qualified mortgage,” the loan wouldn’t have any risky features (such as balloon payments) and would have fees no higher than three percent of the original loan amount.  These loans must also be limited to borrowers who don’t have debt over 43% of their income. 

Under these new rules, the lowest priced and most qualified mortgages will receive the largest level of protection.  These mortgages will most likely go to low-risk consumers with incredible credit histories.  High-priced loans won’t receive as much protection, so lenders will have to use their best judgment to verify their borrower’s statistics.  Borrowers now have the ability to sue their lenders if they can prove that their income was less than sufficient to repay the mortgage loan on time.

Many lenders were originally worried that these new rules would actually set back the mortgage market instead of propelling it forward.  However, CFPB representatives designed the rules while keeping in mind that the overall goal was to keep credit running smoothly.  In addition, these new rules will spur the creation of an extra category of loans that would be considered “qualified.”    These mortgages will be exclusively for those who exceed the 43% DTI ratio if they meet current underwriting standards imposed by the various housing agencies.  This particular provision will phase itself out within seven years or sooner depending on various circumstances.

Banks have until January 2014 to adapt to the new rules.

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