In the wake of the national housing collapse that helped bring on the Great Recession, federal regulators for the first time are laying out rules aimed at ensuring that borrowers can afford to pay their mortgages.
The long-anticipated rules being unveiled Thursday by the Consumer Financial Protection Bureau impose a range of obligations and restrictions on lenders, including bans on the risky “interest-only” and “no documentation” loans that helped inflate the housing bubble.
Lenders will be required to verify and inspect borrowers’ financial records. They generally will be prohibited from saddling borrowers with loan payments totaling 43 percent of the person’s annual income.
CFPB Director Richard Cordray, in remarks prepared for an event Thursday, called the rules “the true essence of responsible lending.”
The rules, which take effect next year, aim to “make sure that people who work hard to buy their own home can be assured of not only greater consumer protections but also reasonable access to credit,” he said.
Analysts say that skittishness by lenders has severely held back the U.S. housing market, despite 30-year mortgage rates that are scraping along at historical lows. The low rates have sparked a surge in refinancings but have not restored the market overall to health.
Mr. Cordray noted that in the years leading up to the 2008 financial crisis, consumers could easily obtain mortgages that they could not afford to repay. In contrast, borrowers complain that in subsequent years banks tightened lending so much that few could qualify for a home loan.
The new rules seek out a middle ground by protecting consumers from bad loans while giving banks the legal assurances they need to increase lending, he said.
The mortgage-lending overhaul is a priority for the agency, which was created under the 2010 financial law known as the Dodd-Frank Act. The agency is charged with reducing the risk of a credit bubble by helping to ensure that borrowers are better informed and loans are more likely to be repaid.
The agency is charged with writing and enforcing rules that flesh out the law enacted by Congress. Some provisions are required under the law, but the agency had broad discretion in designing many of the requirements.
The rules limit features such as so-called teaser rates that adjust upward and large “balloon payments” that must be made at the end of the loan period.
They include several exceptions aimed at ensuring a smooth phase-in and protecting access to credit for underserved groups. For example, the strict cap on how much debt consumers may take on will not apply immediately. Loans that meet separate federal standards also would be permitted for the first seven years.