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NEW YORK (
TheStreet) - 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
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.
Read more on the criteria
"When consumers sit down at the closing table, they shouldn't be set up to fail with mortgages they can't afford," said CFPB Director Richard Cordray in a statement. "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."
Cordray will make a formal announcement of the rule in a hearing in Baltimore on Thursday at 11 a.m.
KBW analyst Brian Gardner said in a note early Thursday that the final rule had few surprises and might not do much to shake up the mortgage market as it currently stands. "We doubt it will be a game changer for the mortgage and housing markets because many of the lending practices the QM rule will try to restrict were discontinued in 2007-2008. This will be a classic case, in our view, of the horses already being out of the barn," he wrote.