It was announced on Thursday by the government that its consumer watchdog will force banks to use brand new criteria to determine if a borrower can repay a home loan, according to Reuters. Banks will now be required to verify a possible borrower’s income, the amount of debt they have and what their employment situation is.
“Credit is going to be restricted, at least a little,” Christian deRitis said, deRitis is a senior director at Moody’s Analytics. “The debt-to-income cap, for instance, is going to affect some folks at the lower end of the income scale.”
The new guidelines from the Consumer Financial Protection Bureau, the CFPB, also protects borrowers from irresponsible mortgage lending. The protections afforded to borrowers come from lenders who provide safer, lower-priced loans.
“When consumers sit down at the closing table, they shouldn’t be set up to fail with mortgages they can’t afford,” Richard Cordray, the bureau’s director, said in a statement.
Another goal of the changes is to reform the housing market and also give a major jolt to lending, which has been down since the credit crisis. The new rules have been anxiously awaited by consumer groups and lenders and they are the strictest as allowed by the 2010 Dodd-Frank law.
After the new rules were announced, mortgage bankers agreed with them for the most part and said that they were largely satisfied with them.
“This approach should allow lenders to offer sustainable mortgage credit to a great number of qualified borrowers without having to risk unreasonable and overly punitive litigation and penalties,” Debra Still, chairman of the Mortgage Bankers Association, said in statement.
With the announcement of the new rules, some consumer groups have questioned if the rules protect lenders too much from lawsuits, but they appeared generally happy with the new rules. Mike Calhoun, the president for the Center for Responsible Lending, called the rules “reasonable approach to mortgage lending, for the most part. Applying these fair, understandable standards to the mortgage market will foster a more competitive and robust housing industry,” he said.
The new rules provide the highest amount of protection to lower-priced, qualified mortgages. Less protection would be afforded to higher-priced loans.
Other consumer groups have criticized the new rules. The president of the National Community Reinvestment Coalition, John Taylor, said, “I thought it was unnecessary to create the legal protection. [Now that the lenders have it, though,] the major excuse for not lending is removed and I’m looking forward to seeing if there’s a massive amount of loans being made available.”