New Standards for ‘Safe’ Loans

By LISA PREVOST

Mortgages

New federal regulations require mortgage lenders to do what should go without saying: verify that prospective borrowers can pay.

Yet during the housing bubble, many lenders all but abandoned traditional underwriting standards, and the resulting wave of foreclosures has taken years to recede. An “ability-to-repay” rule, adopted last month by the Consumer Financial Protection Bureau and effective January 2014, is intended to protect borrowers from again falling victim to risky lending.

“The rule sets standards for what’s a safe loan and what isn’t,” said Kathleen Day, a spokeswoman for 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.”

Required under the Dodd-Frank Act, the rule prohibits the “no-doc” loans common during the bubble. Before making a loan, lenders must document the borrower’s job status, income and assets, debt, and credit history. Lenders must also calculate a borrower’s ability to pay the principal and interest over the length of the loan. They may not base their calculation solely on the payment due when an introductory “teaser rate” is in effect.

Via The NY Times

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