Ability-to-Repay Rule Provides New Provisions for Lenders

Based in the Washington, D.C., area, WEI Mortgage Corporation helps consumers realize their dream of home ownership. WEI Mortgage Corporation provides a range of financial products and lending services while adhering to industry guidelines.

In recent history, some mortgage lenders made loans to consumers without regard to their ability to repay the loan. A lack of analysis of a consumer’s existing debts and qualifications based on introductory rates that would escalate after a few years caused many consumers to assume mortgage payments they could not ultimately afford. The resulting mortgage crisis led to a major economic recession in the United States.

In response to this problem, the Consumer Financial Protection Bureau (CFPB) is working to implement laws to require lenders to evaluate a consumer’s ability to pay before initiating any home mortgage loan. Under the new guidelines, to make adequate ability-to-repay determinations, loan underwriters must assess several key factors, including current income, current employment, debt-to-income ratio, credit history, and more. The ability-to-repay rule takes effect on January 10, 2014.

In May 2013, the Bureau amended the original ruling to address specific lending needs of small creditors, including community banks, which have less than $2 billion in assets and make 500 or fewer first-lien mortgages per year. These amended rules allow small lenders to make loans to consumers with a greater than 43 percent debt-to-income ratio and allows short-term continuation of mortgage loans with balloon payment features.

Federal Government Finalizes Ability-to-Repay Rule

Prospective homebuyers who seek a mortgage loan will soon start seeing new requirements when they visit a lender like WEI Mortgage Corporation. It’s all part of the new “ability-to-repay” rule, which was finalized in January of 2013.

This rule was written by the Consumer Financial Protection Bureau in response to the financial crisis of 2008. During the crisis, home values dropped and many homeowners found they owed more money on their mortgage than their house was worth. The resulting foreclosures created a chain reaction that rippled through the economy. The government’s goal with the ability-to-repay rule is to prevent similar circumstances in the future by making sure homebuyers don’t take out mortgages that are too large and risky.

For consumers, this means that when they visit a lender like WEI Mortgage Corporation, they will be asked to document their income and other assets that can be used to pay off the loan. This will include current income, employment status, credit history, and monthly payments on other obligations like property taxes. The lender will use this information to make sure the mortgage is prudent for everyone involved.