New Standards for ‘Safe’ Loans

New York Times
February 7, 2013
Prevost, Lisa

New mandates under the U.S. Dodd-Frank Act will require mortgage lenders, starting next January, to verify that prospective borrowers can pay back loans. During the housing bubble, many lenders were lax on traditional underwriting standards. An “ability-to-repay” rule, adopted last month by the Consumer Financial Protection Bureau, is meant to protect borrowers from risky lending. “The rule sets standards for what’s a safe loan and what isn’t,” according to Kathleen Day of the Center for Responsible Lending, “and it takes away a lot of the tricks and traps that lenders were using to talk people into refinancing.” Under the rule, lenders must document the borrower’s job status, income and assets, debt, and credit history before approving a loan. The lender also must calculate the borrower’s ability to repay the principal and interest. “Qualified mortgages” must meet a series of requirements: points and fees cannot exceed 3 percent of the loan amount, for example, and borrowers must have a debt-to-income ratio of no more than 43 percent. In exchange for their compliance, the lenders would, in the event of a foreclosure, have a “safe harbor” from litigation challenging the legality of a loan. Mortgages that fail to meet the 43-percent debt-to-income cutoff but that do meet affordability standards under Fannie Mae and Freddie Mac can still be considered qualified mortgages. Also, balloon-payment mortgages will be treated as qualified mortgages when originated and held in portfolio by community-based lenders in underserved markets.
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