Federal regulators announced new rules Thursday that are intended to protect homeowners from getting sucked into the kinds of risky loans that caused millions to lose their properties during the collapse of the housing market.
The rules laid by the Consumer Financial Protection Bureau (CFPB) take effect one year from now. Sadly, they’re too late to help families who’ve already foreclosed because they couldn’t afford the terms of their loans. Still, it’s better late than never.
Under the terms of the rules, lenders will be required to offer loans to borrowers that they actually have the ability to repay.
“When consumers sit down at the closing table, they shouldn’t be set up to fail with mortgages they can’t afford,” CFPB Director Richard Cordray says. “This common-sense rule ensures responsible borrowers get responsible loans.”
Loan and other debt payments won’t be allowed to exceed 43 percent of person’s pre-tax income (though financial experts say mortgage payments are best kept to 30 percent of one’s debt-to-income ratio). The rules will also limit upfront fees and tighten rules for interest-only loans.
Remember those teaser interest rates that lured borrowers to accept what they thought were competitive loan terms, only to discover that their mortgage payments doubled within a year or so? The new rules rein in that practice. Lenders will have to evaluate a consumer’s ability to afford the loan based on the principal and the interest over the long term — not just during the introductory period when the rate is rock bottom.
Another unscrupulous practice — the no-doc loan process — will be put to rest. During the housing bubble, some lenders made quick sales and offloaded risky mortgages by not verifying that borrowers could pay their mortgages.
The new rules will require lenders to examine borrowers’ financial records — documenting their employment status, income, assets, debt load and credit history — to try to ensure that the loan is affordable.
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