Keeping mortgage lending honestOnce the rule goes into effect, which is slated for January 2014, so-called no-doc and low-doc mortgages will mostly be a thing of the past. Lenders will be required to verify a borrower's finances to determine whether they can repay their debt. Among the items that must be documented are:
- Employment status
- Income and assets
- Credit history
- Other debt obligations
- Monthly payments on the mortgage, other mortgages on the property and mortgage-related obligations
Tough love from the governmentThe rule will undoubtedly make it more difficult for some consumers to obtain mortgages. However, the government appears willing to box some people out of the housing market in exchange for avoiding a repeat of the housing bubble. "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 written 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."
Still, the Consumer Financial Protection Bureau hasn't gone as far as to entirely eliminate high-risk loans. Along with the Ability-to-Pay rule, the bureau has proposed exemptions for certain creditors, such as nonprofits working with low- and moderate-income families.If the exemptions are approved, it raises the question of whether the new rule will lack some of the teeth needed to ensure subprime mortgages aren't allowed to run rampant again. For now, the bureau is taking comments on the proposed exemptions.