At long last, the Consumer Financial Protection Bureau has determined what constitutes a borrower's ability to repay a mortgage loan.
CFPB's definition, part of a qualified-mortgage rule effective next January, isn't as restrictive as many in the housing industry had predicted and will not unnecessarily limit the number of borrowers benefiting from its protections.
"All in all, the rule is not the end of the world and gives guidelines for lenders to follow if they want protections," says Jerome Scarpello, of Leo Mortgage in Ambler.
"Frankly, many of the factors should always be considered at a minimum before granting a loan," Scarpello says. "It seems obvious that the reasonable ability of the borrower to repay should be the first criterion when lending money."
The suggestion of an ability-to-repay rule made just about everyone edgy.
The housing industry believed that a qualified mortgage would come with a 20 percent down payment, limit the numbers of borrowers capable of such an outlay to a trickle, and undermine any real estate recovery.
A study by the Center for Responsible Lending showed loans requiring even a 10 percent down payment would lock 40 percent of all creditworthy borrowers out. As the center noted, the cause of our current problem was "substandard underwriting, not low down payments."
CFPB's new rule requires lenders to consider income, assets, employment, payments, and credit history in approving a mortgage.
"In practice, if lenders do their due diligence, as they should have done all along, they can continue to lend," Scarpello says.
Criteria for a qualified mortgage require that a lender's fees cannot exceed 3 percent of the loan amount, and that the debt-to-income ratio cannot exceed 43 percent.
Another rule has been crafted for borrowers of high-cost mortgages, with points and higher rates than lower-risk borrowers get. With some exceptions, it bans balloon payments - large lump sums usually due at the end of the loans - as well as penalties for early repayment, and prohibits or limits certain fees and practices.
Fees for modifying loans are banned, for example, and late fees are capped at 4 percent of the past-due payment.
CFPB's new rule generally prohibits closing costs from being rolled into the loan amount, and restricts charging fees for payoff statements. It also prohibits such practices as encouraging a borrower to default on an existing loan to be refinanced by a high-cost mortgage.
In addition, someone taking out a high-cost mortgage must first receive housing counseling from an approved agency.
The ability-to-pay regulation "is not a perfect rule, but at least it allows lenders to know what they must do to have certain protections from liability," Scarpello says. He hopes lenders don't turn away good borrowers because of fear of the rule.
"What we need is more sound, reasonable lending to grow the economy - not another drag on good people being able to get funding."
In the Sunday Business section, Alan J. Heavens takes a look at real estate and life throughout the Philadelphia region. This week's focus: Evesham Township.