Controversy Over New Mortgage Rules - New mortgage rules unveiled by the federal government don’t go into effect until January 21st, but they’re already creating some controversy. That’s because they’re designed to make mortgages safer for at-risk borrowers, but some say they may end up having the opposite effect!
The new mortgage rules were developed by the Consumer Financial Protection Bureau (CFPB) and apply to all lenders – national banks, savings and loans, community banks, and credit unions. Their goal is to prevent lenders from issuing loans to people who can't afford to pay them back.But leaders at the National Community Reinvestment Coalition say the rules only provide a legal shield for lenders, and they fear the mortgage industry will continue risky business practices. Basically, the rules were created to prevent another housing market collapse that triggered the start of the Great Recession in 2008.
You may remember, lenders didn’t have strong enough underwriting standards, and consequently, approved home loans for borrowers who were never going to be able to meet their payment requirements. That led to countless foreclosures and short sales, and ultimately caused the housing market to fall in a downward spiral. These new rules force all lenders to follow a set of guidelines before granting a loan approval. If the borrower meets the criteria, then the loan is considered by the CFPB as a “qualified mortgage,” which legally protects the lender from lawsuits filed by borrowers who default on their loan. So, what are the criteria?
The CFPB established a list that a lender must consider before approving a prospective borrower for a home loan application:
1. The lender must document that the borrower's income and assets are sufficient to repay the loan
2. Borrowers must provide documentation from their jobs proving income level, etc.
3. Credit scores must meet minimum standards.
4. Monthly payments on the loan must be affordable for the borrower.
5. Borrowers must be able to afford other debts associated with the property and home, like home equity loans and property taxes.
6. Lenders must consider a borrower's other financial obligations like credit card debt, student loan debt, and car loans, before approving the loan.
Lenders say the legal protection and new criteria give them more confidence in the system, so they are likely to approve more loans than in the past. But that's exactly what consumer advocacy groups fear the most. There are exceptions to the new criteria, and if lenders grant loans using these loopholes, they may still be approving unsustainable mortgages, but will now be protected from any legal action from the borrower. For example, one exception to the rule that is causing a lot of uproar is the 43% loophole. It states that if a prospective borrower does not meet all of the criteria laid out by the CFPB, the lender can still approve a loan as long as the monthly payment does not exceed 43% of the borrower's pre-tax income. So, if a prospective homebuyer makes $1,000 a month, the lender is allowed to approve a home loan as long as the monthly mortgage payment is no more than $430 a month.
Consumer advocates claim that, in this scenario, the borrower would not be able to pay their mortgage payment and still cover the rest of their bills, so they will likely default on the loan. John Taylor, the president of the National Community Reinvestment Coalition, says he fears that the new system only protects lenders, and not borrowers. Taylor says his group believes that borrowers should be able to sue lenders if they knowingly put them into unsustainable mortgages. But because the loans, even those with the 43% loophole, would be considered “qualified mortgages,” the lenders would have a legal shield protecting them from lawsuits filed by borrowers. Leaders at the CFPB say they are confident that the new rules will have the intended effects, and protect the borrowers more than the lenders.
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