The Federal Reserve just suggested demanding banks to make certain that debtors can repay their mortgages before they give them a loan. This may sound clear-cut and not uncommon, but there are a few specifics that I thought were of interest.
This rule is currently required by the Dodd-Frank Act, and it establishes minimum mortgage underwriting standards. Borrowers could essentially sue lenders if a suitable effort isn’t engaged to warrant they can repay the loan.
This allows lenders to make a qualified mortgage, a loan that meets standards that allow it to escape the liability associated with the provision.
The proposal is a reaction to a surge of falsified loans that lenders offered in the years leading up to the current economic crisis. Lenders in many of these cases asked borrowers to state their income without verifying whether they could afford the loan. This then had a key part in the wave of foreclosures, which then contributed to the crisis.
One specific qualified mortgage outlined in the proposal authorizes lenders special protection from borrower suits if the loan doesn’t have certain features such as negative amortization, which is where the loan balance increases because payments are made that fail to cover the interest due. The process of writing rules based on the Fed’s proposal is scheduled to transfer to Consumer Financial Protection.
The Dodd-Frank Act requires the creation of the bureau, which will write rules for mortgages and other consumer credit products.