A new federal rule is meant to guard against lending practices that preceded the housing bust.(Photo: Getty Images)
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.
Financial Protection Bureau today adopted the rule, which it says
spells out what lenders must do to ensure that borrowers can afford
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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%
"Washington is saying that we're going to protect
borrowers and regulate what mortgages are going to look like," says
Brian Gardner, policy analyst with financial services firm Keefe
Bruyette & Woods.
CFPB Director Richard Cordray called the rule a "common sense" one that "ensures responsible borrowers get responsible loans."
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," says Alys Cohen of the National Consumer Law Center.
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The rule, as required by the 2010 Dodd-Frank financial overhaul legislation, defines what constitutes a "qualified mortgage."
lenders meet those standards, borrowers who later default will have
little recourse to fight foreclosure by claiming the lender sold them a
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," says Doug Lebda, 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 Cohen says that 43% is too high for some low-income people, who'll get these loans, and then have no recourse.
can make loans that do not meet the qualified mortgage standards. If
so, they won't have the same protections against consumer challenges.
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
The rule's standards largely track with current lending
practices - which many complain are too restrictive - and "doesn't do
anything to loosen credit," says Guy Cecala, 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.
rule will make it harder for some borrowers to get certain loans, such
as interest-only loans more popular with wealthier borrowers, Cecala
It will also continue to make it hard for subprime
borrowers with weak credit to get loans, Lebda says. That's because
they'll have more recourse against lenders, should loans go bad, than
prime borrowers will, he says.