The Consumer Financial Protection Bureau (CFPB) announced today the passing of the Ability-to-Repay rule, which prevents borrowers from obtaining loans that they do not have the financial means to pay back.
The rule is also intended to protect consumers from predatory lending practices such as “no doc” and “interest-only” features “that contributed to many homeowners ending up in delinquency and foreclosure after the 2008 housing collapse,” says the CFPB in prepared remarks.
The new rule requires borrowers provide documents that prove their financial health, such as ones on employment status, credit history and current debt obligations. Lenders also have to evaluate whether or not borrowers have the capability to pay back loans by evaluating debt-to-income ratios.
“When consumers sit down at the closing table, they shouldn’t be set up to fail with mortgages they can’t afford. Our Ability-to-Repay rule protects borrowers from the kinds of risky lending practices that resulted in so many families losing their homes,” said CFPB Director Richard Cordray.