The Ability to Repay rule, a regulation of the Consumer Financial Protection Bureau, which was created under the financial reforms of the 2010 Dodd-Frank Act, seeks to eliminate lending for borrowers who cannot repay loans. Under the rule, loan originators are required to determine a borrower’s ability to repay a loan before the loan is issued, according to HousingWire.
Jerome Scarpello of the Pennsylvania-based Leo Mortgage said that the rule is unnecessary.
“In typical government fashion, they will create a solution to a problem that doesn’t exist,” Scarpello said, LoanSafe reports. “The subprime loans and no-income-verification loans are gone. The underwriting criteria currently in place [are] hard enough without smothering the little improvement I see in the market.”
The rule is intended to ensure quality mortgage products and services. Critics, however, say that requiring a high down-payment intended to ensure quality — or a “gold-plated mortgage” — may cut out some borrowers, ultimately forcing them to seek out higher-priced home loans that lack security and protection.
Research conducted by the Center for Responsible Lending and the Center for Community Capital reveals that the proposed mortgage standards could possibly push 60 percent of borrowers either out of the market or into high-priced home loans.
“While higher down payments do result in fewer defaults, restricting [qualified residential mortgage] loans to borrowers who can come up with a 10 percent down payment would exclude nine creditworthy borrowers to prevent just one foreclosure,” the centers said, according to LoanSafe.
The centers maintain that standard underwriting, not low down payments, was a contributing factor to the 2008 financial crisis. For a registered nurse earning $64,690 per year, the center said, it would take 15 years to come up with a 10 percent down payment on a median-priced $172,900 home.
Thirty-three mortgage and lending groups sent a letter to the Consumer Financial Protection Bureau this month warning the agency about the potential negative impacts of the rule.
“Congress intended that all creditworthy borrowers—especially low- and moderate-income borrowers and families of color—should be extended the important protections of a qualified mortgage,” the letter said, according to LoanSafe.