The U.S. Consumer Financial Protection Bureau on Thursday announced new mortgage rules that seek to ensure borrowers do not take on loans they cannot repay.
Regulators said the new rules would prevent irresponsible mortgage lending by requiring lenders to verify consumers' ability to pay back loans or face potential lawsuits.
The bureau also created a special class of loans known as "qualified mortgages" that are assumed to be in compliance with the new rules and that would give lenders some protection from consumer lawsuits.
The "ability to repay" rules are the consumer watchdog's biggest to date. Lenders have worried the new rules could be overly restrictive and lead to a tightening of credit, while housing advocates have worried they might prevent some borrowers from being able to buy homes.
The new rules take effect in January 2014.
Here is a breakdown of what the consumer watchdog announced:
ABILITY TO REPAY
-- For all new loans, lenders must determine that borrowers have sufficient income or assets to pay back a loan
-- Lenders must document borrowers' employment status, income, debt obligations, credit history and other financial information
-- Lenders must show that borrowers can repay both the principal of the loan and interest over time. They can not base this evaluation on teaser rates that will later rise
-- So-called "low-doc, no-doc" loans - in which lenders make quick, risky sales, then flip the loans to investors - will not be permitted
-- Creditors refinancing non-prime mortgages into a more stable loan would not need to follow the full underwriting process
-- Loans that meet certain requirements will be considered compliant with the ability-to-repay rule
-- Points and fees paid by consumers for these loans cannot exceed 3 percent of the total loan amount
-- Terms of more than 30 years, interest-only loans and other risky features are not allowed
-- Borrowers must have a debt-to-income ratio of no more than 43 percent
-- For a temporary period, mortgages extended to borrowers who do not meet the debt-to-income requirement could be considered "qualified" if they meet standards laid out by Fannie Mae, Freddie Mac or other U.S. government housing programs
-- Regulators are accepting comments on a proposal to offer "qualified" status to certain loans made by community banks and credit unions
-- Lower-priced loans that are considered "qualified" would give lenders a higher level of protection against lawsuits known as a "safe harbor"
-- Higher-priced loans that count as "qualified" trigger a legal protection known as "rebuttable presumption." Under this standard, a borrower could sue a lender if they could show that after all of the costs associated with the loan, they did not have enough money remaining for living expenses
-- Neither of these legal standards prevents borrowers from suing lenders who break other consumer protection laws
(Reporting by Emily Stephenson and Margaret Chadbourn; Editing by Lisa Shumaker)