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Consumer watchdog: lenders should not set up consumers to fail

Staff writer |
The Consumer Financial Protection Bureau (CFPB) published the new set of guidelines for banks to use new criteria to determine is a borrower able to pay a home loan or not.

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"Today, we're issuing one of our most important rules to date, the Ability-to-Repay rule," said CFPB in its statement. "It's designed to assure the reliability of mortgages – making sure that lenders offer mortgages that consumers can actually afford to pay back. This is a simple, obvious principle that needs to be cemented in the housing market."

In the run-up to the financial crisis, we had a housing market that was reckless about lending money. Lenders thought they could make money on a loan even if the consumer could not pay back that loan, either by banking on rising housing prices or by off-loading the mortgage into the secondary market. This encouraged broad indifference to the ability of many consumers to repay loans, which dramatically increased mortgage delinquencies and rates of foreclosures.

To put it simply: lenders should not set up consumers to fail.

The 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act created broad-based changes to how creditors make loans including new ability-to-repay standards, which CFPB is charged with implementing.

Among the features of our The Consumer Financial Protection Bureau's ability-to-Repay rule:
- Potential borrowers have to supply financial information, and lenders must verify it;
- To qualify for a particular loan, a consumer has to have sufficient assets or income to pay back the loan
- Lenders will have to determine the consumer's ability to repay both the principal and the interest over the long term, not just during an introductory period when the rate may be lower.

In addition to the Ability-to-Repay rule, CFPB also issued a proposal for potential adjustments. There are two key parts to the proposal. First, a proposed exemption for designated non-profit creditors and homeownership stabilization programs, as well as certain Fannie Mae, Freddie Mac, and Federal agency refinancing programs.

Second, a proposed a new category for certain loans made and held in portfolio by small creditors, such as small community banks and credit unions, called "Qualified Mortgages," a category of loans where borrowers would be the most protected. They, among other things, cannot have certain risky features like negative-amortization, where the amount owed actually increases for some period because the borrower does not even pay the interest and the unpaid interest gets added to the amount borrowed.

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