Consumer Financial Protection Bureau introduces new mortgage rules

The Consumer Financial Protection Bureau announced new rules this week that are designed to prevent banks from issuing mortgages to consumers who cannot afford them. It’s called the Ability-to-Repay rule.

In the years leading up to the Great Recession, there was a housing bubble driving by a spate of sub-prime loans — loans given to low income consumers that they often could not afford. Many of those consumers alleged the banks lied about the terms of the loans, which usually involved a very high interest rate and a big balloon payment. Some lost their jobs or faced other hardships that made it impossible to keep up payments.

This led to millions of foreclosures, many of which could have been avoided. Banks have faced government investigation and fines after refusing to renegotiate terms, mishandling paperwork and other abuses that added to the spate of foreclosures.

The new rule is designed to prevent another bubble and collapse by ensuring that consumers can repay the money they borrow to buy a house. From the CFPB’s release:

The 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act created broad-based changes to how creditors make loans including new ability-to-repay standards, which we are charged with implementing. Among the features of our new Ability-to-Repay rule:

  • Potential borrowers have to supply financial information, and lenders must verify it;
  • To qualify for a particular loan, a consumer has to have sufficient assets or income to pay back the loan; and
  • 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.

In addition to the Ability-to-Repay rule, today we are also issuing a proposal for potential adjustments. There are two key parts to the proposal:

  • First, a proposed exemption for designated non-profit creditors and homeownership stabilization programs, as well as certain Fannie Mae, Freddie Mac, and Federal agency refinancing programs. These programs generally appear to be already subject to their own specialized underwriting criteria, and they are designed to help consumers refinance into a more affordable home loan.
  • Second, a proposed a new category for certain loans made and held in portfolio by small creditors, such as small community banks and credit unions, called “Qualified Mortgages.”

If you are currently struggling to pay your mortgage, BBB warns you to be wary of mortgage relief scams, which promise to help modify or refinance a mortgage to stave off foreclosure. The victims pay their last dime in a Hail Mary attempt to keep their homes, but end up in a worse position than when they started.

Chris Schneider, a spokesman for the Texas Department of Savings and Mortgage Lending, said if consumers have been unable to reach a settlement with their bank, there are reputable services that can help. He advised consumers to check the company’s license before agreeing to any terms and avoid paying an advanced fee for services.

In addition, BBB offers the following tips:

  • Talk to your lender. Before paying an outside company to negotiate with your mortgage provider, try to get some relief yourself for free. Many companies will work with a consumer to avoid foreclosure.
  • Use a licensed company. Any business offering loan modification services must be licensed. Search the agent or company name in the National Mortgage Licensing System to ensure you are not dealing with a scammer.
  • Know where to turn. If you feel your mortgage provider is treating you unfairly, file a complaint with the Texas Department of Savings and Mortgage Lending online or by phone at 1-877-276-5550.
  • Start with trust. Check out the company’s BBB Business Review at bbb.org to see its BBB rating, complaint history and more.
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