New rules; banks are legally responsible for ensuring that borrowers have an “ability to repay” a mortgage.
NEW YORK (The Street) – The Consumer Finance Protection Bureau is set to unveil on Thursday new rules for the mortgage market designed to protect borrowers from abusive lending practices that characterized the boom years.
Under the new rules, banks are legally responsible for ensuring that borrowers have an “ability to repay” a mortgage.
Banks that make a”qualified mortgage”, as defined by the final rule, are assumed to have met the ability- to- repay criteria and will receive legal protection from lawsuits. The degree of legal protection will be greater in the case of prime loans and lower in the case of high-priced sub-prime loans.
Qualified mortgages cannot have risky loan features such as interest-only payments, or negative amortization features or terms that exceed 30 years. There will also be no excessive upfront points or fees.
To ensure that borrowers have an ability to repay the loan, banks will have to verify that consumers’ total monthly debt does not exceed 43% of his or her pre-tax income.
Loans that meet the affordability standard of Fannie Mae, Freddie Mac and the FHA also will be considered a qualified mortgage, though this standard is likely to phased out once the GSEs are out of conservatorship or at the end of seven years, whichever is earlier.
The rules are to take effect in January 2014.