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During the years preceding the mortgage crisis, too many mortgages were made to consumers without regard to the consumer’s ability to repay the loans. Loose underwriting practices by some lenders contributed to a mortgage crisis that led to the nation’s most serious recession since the Great Depression.

In response to this crisis, Congress passed the Dodd-Frank financial overhaul act in 2010. On January 20, 2014, the Consumer Financial Protection Bureau (CFPB) implemented new regulations and will also oversee enforcement of the rules.

The final rules contain two key elements:


The final rule describes certain minimum requirements for creditors to follow to verify that the borrower has the Ability-to-Repay the loan. At a minimum, creditors must consider eight underwriting factors: (1) current or reasonably expected income or assets; (2) current employment status; (3) the monthly payment on the covered transaction; (4) the monthly payment on any simultaneous loan; (5) the monthly payment for mortgage-related obligations; (6) current debt obligations, alimony, and child support; (7) the monthly debt-to-income ratio or residual income; and (8) credit history. Creditors must generally use reasonably reliable third- party records to verify the information they use to evaluate the factors.

Finally, to make sure consumers aren’t taking on more debt than they can afford, the debt-to-income ratio generally must be below 43%. At first, most lenders will not make loans to borrowers whose debt-to-income ratio exceeds the 43% rule. However, the rules will permit them if the bank is convinced that other factors, such as a high asset levels, justify the risk.


The new regs set certain product-feature prerequisites and affordability underwriting requirements for qualified mortgages and vests discretion in the CFPB to decide whether additional underwriting or other requirements should apply. The final rule prohibit loans with negative amortization, interest-only payments, balloon payments, or terms exceeding 30 years from being qualified mortgages. So-called “no-doc” loans where the creditor does not verify income or assets also cannot be qualified mortgages. Finally, a loan cannot be a qualified mortgage if the points and fees paid by the consumer exceed three percent of the total loan amount, including title insurance, origination fees and points paid to lower mortgage interest rates.

An analysis by Goldman Sachs showed that, if these rules had been in effect in 2007, it would have prevented 59% of defaults. However, it would have also prevented 30% of the loans that did not default.

Here is how you may be affected by these new regs:

It may be tougher for borrowers to qualify if they have difficult-to-validate incomes, including those for whom tips, bonuses, commissions, rents or investments constitute a big part of their total income. One in nine Americans are also self-employed and self-employment income is more difficult to substantiate than is income from wages.

The 43% debt-to-income ratio will also prevent some borrowers from qualifying for the loan needed to buy the house they want.

Finally, the new rules will mean it will take longer to get home loans approved, especially early on. It will take lenders more time to get systems up and running to track and handle new documentation requirements. Lenders have had months to prepare. But loan officers, underwriters and compliance officers will need training on the new systems once they are implemented.

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Fred Creek, Sandra Creek and Jolynn Doty-Beck


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