On Thursday, January 10, 2013, the Consumer Financial Protection Bureau (CFPB) issued one of its most anticipated rules, the Ability-to Repay Rule. This rule attempts to redress, at least in part, what led to the housing bubble and the resulting financial crisis by ensuring what Richard Cordray, the director of the CFPB, describes as “responsible lending.” Furthermore, the rule builds on the regulations set out more broadly in Dodd-Frank (2010) by actually defining what a “qualified mortgage” is.
While Dodd-Frank set out criteria to consider for this designation, this 804 page rule goes into much greater detail. Defining “qualified mortgage” is significant because categorizing a mortgage as qualified entitles the lender to safe harbor by providing the lender with a conclusive presumption of compliance with the regulation. Thus, as long as the lenders properly vet the consumers by following the procedure set forth in this rule, the lender is afforded limited liability.
Prior to the financial crisis, many lenders provided loans to borrowers while receiving little or no proof of their financial status or the borrower’s ability to repay their obligations. These types of loans have been called no-doc or low-doc loans because they required the borrowers to provide no documents or very limited documents about their financial status. Not surprisingly, this practice allowed for individuals to obtain loans which were beyond their means.
This rule attempts to encourage responsible lending by taking consumer financial information into account when issuing loans. Cordray describes the information which lenders will need to evaluate before issuing a loan: “The consumer’s total monthly debts – including the mortgage payment and related housing expenses such as taxes and insurance – generally cannot add up to more than 43 percent of a consumer’s monthly gross income.”
It will be interesting to see the impact of this regulation on the housing market and the economy as a whole after regulation goes into effect in January of 2014. There are concerns that the implementation of this rule could reduce access to credit by creating more obstacles to obtaining loans, possibly constraining an already beleaguered economy.