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Cordray Dispels Ability-to-Repay Myths

DTI ratios addressed

Dec. 5, 2013

By Mortgage Daily staff

The head of the Consumer Financial Protection Bureau said that some rumors circulating about the Ability-to-Repay rule are just not true. He said that loans can still be made to borrowers with debt-to-income ratios that exceed 43 percent.

CFPB Director Richard Cordray explained that the Ability-to-Repay rule requires lenders to make a reasonable, good-faith determination that a borrower can afford a mortgage before the loan is approved. This includes an analysis of income, assets and debts.

He noted that Qualified Mortgages allow only relatively low points and fees and must follow some general underwriting guidelines. They can't include features like interest-only or negative-amortization payments.

Cordray made the comments Thursday during a speech at the Consumer Federation of America's 26th Annual Financial Services Conference, according to a copy of his prepared remarks.

Lenders can avoid QM and Ability-to-Repay requirements as long as they make a reasonable, good-faith determination that a borrower is able to repay a loan by verifying and documenting the numbers and considering certain factors.

The CFPB chief said that myths have been circulating about the Ability-to-Repay rule and took a moment to dispel them.

He said that only mortgage applications taken on or after Jan. 10, 2014, are impacted by the rule. Existing loans aren't affected.

Cordray also explained that the rule doesn't stop lenders from making loans with DTI ratios above 43 percent, noting that such a claim is wrong in three ways.

"First, lenders can also rely on the standards for loans backed by the GSEs or federal housing agencies," he said.. "Second, smaller local creditors can make the same kinds of solid loans they have always made if they choose to keep those loans in their own portfolio, as they often have done in the past. Third, lenders can simply use their own judgment when looking at your ability to repay, just as they always have done."

The director said that another myth is that the rule restricts down payments when, in fact, it says nothing about required down payments and leaves that decision to the lender and the borrower.

"In the end, our Ability-to-Repay rule is straightforward," Cordray stated. "It puts behind us the irresponsible lending that disrupted the housing market and so badly damaged our economy. And it provides strong new consumer protections while preserving needed access to mortgage credit."

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