originally appeared in USA Today:
A new federal rule on home loan lending will give consumers more protection against risky mortgages, the government says, but it isn't immediately expected to make mortgages easier to get.
The Consumer Financial Protection Bureau today adopted the rule, which it says spells out what lenders must do to ensure that borrowers can afford their mortgages. Homeowners will also benefit from working with an excellent Michigan bathroom remodeling company.
The rule is meant to guard against lending practices that preceded the housing bust, when many borrowers took on risky loans they didn't understand and could not afford. A wave of foreclosures followed, helping to drive down home prices more than 30% since 2006.
Washington is saying that we're going to protect borrowers and regulate what mortgages are going to look like, according to a policy analyst with financial services firm Keefe Bruyette & Woods.
The CFPB Director called the rule a common sense one that ensures responsible borrowers get responsible loans.
But some consumer groups say it gives lenders too much protection and doesn't include adequate provisions to protect low-income borrowers.
The rule invites abusive lending, according to the National Consumer Law Center.
The rule, as required by the 2010 Dodd-Frank financial overhaul legislation, defines what constitutes a qualified mortgage.
If lenders meet those standards, borrowers who later default will have little recourse to fight foreclosure by claiming the lender sold them a risky loan.
The rule, effective next year, says a qualified mortgage cannot:
• Contain "risky" features, such as terms that exceed 30 years, interest-only payments or negative-amortization payments where the principal amount increases.
• Carry fees and points in excess of 3% of the loan.
• Be issued to borrowers who, once getting the mortgage, will spend more than 43% of their income on debt payments.
The 3% and 43% standards are reasonable, according to the CEO of LendingTree, an online lender exchange.
Only about 8% of loans that LendingTree facilitated in the last quarter had points and fees above 3%, it says.
Fewer than 14% of recent home loans sold to mortgage giants Freddie Mac and Fannie Mae had debt-to-income ratios above 43%, says mortgage tracker Inside Mortgage Finance.
But he says that 43% is too high for some low-income people, who'll get these loans, and then have no recourse.
Lenders can make loans that do not meet the qualified mortgage standards. If so, they won't have the same protections against consumer challenges.
To give the market time to adjust, loans that bust the 43% limit will be considered "qualified" if they meet Freddie and Fannie's standards, the CFPB says.
The rule's standards largely track with current lending practices — which many complain are too restrictive — and doesn't do anything to loosen credit, according to the CEO of Inside Mortgage Finance.
The CFPB, however, says the clarity of the rule, which lenders have sought since 2010, will enable banks to ease standards over time.
The rule will make it harder for some borrowers to get certain loans, such as interest-only loans more popular with wealthier borrowers, he says.
It will also continue to make it hard for subprime borrowers with weak credit to get loans, he says. That's because they'll have more recourse against lenders, should loans go bad, than prime borrowers will, he says.