Consumer finance agency bids to stop predatory lending

A new rule forces lenders to take responsibility for their loans

Topics: U.S. Economy, Housing, Financial Crisis, Wall Street, Elizabeth Warren, Mortgage Crisis,

The Consumer Financial Protection Bureau, brainchild of now-Sen. Elizabeth Warren (D.-Mass.), has created the Ability to Repay rule, a set of guidelines for lenders that are designed to protect consumers from predatory lending. The practice of lenders offering mortgages to unqualified homebuyers and then selling the debt to third parties like banks caused the 2008 economic collapse after too many consumers couldn’t keep up on their payments.

Boiled down, the new rules force lenders to take responsibility for the loans they write. It will no longer be possible for lenders to say a customer bears all the responsibility for what they sign. This could curtail overly pushy salesmanship and other lending practices that enabled mortgage lenders to write risky loans before getting them off their books. After the economy cratered there were numerous reports of lenders offering “liar loans” that required minimal or no documentation from customers or deceptively low teaser rates that exploded soon after the loans were signed.

According to the agency the Ability to Repay rule requires that:

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  • Potential borrowers have to supply financial information, and lenders must verify it;
  • To qualify for a particular loan, a consumer has to have sufficient assets or income to pay back the loan; and
  • Lenders will have to determine the consumer’s ability to repay both the principal and the interest over the long term − not just during an introductory period when the rate may be lower.
The New York Times reports that the banks will, with some exceptions, “be given a ‘safe harbor,’ which ensures that they cannot be successfully sued for reckless or abusive lending practices.”
The rule takes effect next January, giving a strong incentive to hold off on signing a mortgage until then.

Alex Halperin is news editor at Salon. You can follow him on Twitter @alexhalperin.

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