Assuring consumers have access to mortgages they can trust


Today, we’re issuing one of our most important rules to date, the Ability-to-Repay rule. It’s designed to assure the reliability of
mortgages – making sure that lenders offer mortgages that consumers can actually afford to pay back. This is a simple, obvious principle that needs to be cemented in the housing market.

In the run-up to the financial crisis, we had a housing market that was reckless about lending money. Lenders thought they could make money on a loan even if the consumer could not pay back that loan, either by banking on rising housing prices or by off-loading the mortgage into the secondary market. This encouraged broad indifference to the ability of many consumers to repay loans, which dramatically increased mortgage delinquencies and rates of foreclosures.

Earlier this year, we heard from a California man named Henry, who was in the process of foreclosure. He was desperate. During the overheated years, a lender sold him a mortgage valued at more than half a million dollars. This was far more than he could afford on his annual salary of less than $50,000. He said he’d assumed that the lender knew what it was doing when he qualified for such a large loan. He’s now worried not only about losing his home, but about losing his family’s entire future.

Henry is not alone. Unaffordable loans helped cause the worst financial crisis since the Great Depression. People across the country were sold unsustainable mortgages. Some may have entered with their eyes open, seeking to ride the wave of rising housing prices, but many were led astray. For many borrowers, it appears that lenders ignored the numbers to get the loan approved. This kind of reckless lending was an endemic problem.

To put it simply: lenders should not set up consumers to fail.

The 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act created broad-based changes to how creditors make loans including new ability-to-repay standards, which we are charged with implementing. Among the features of our new Ability-to-Repay rule:

  • 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.

In addition to the Ability-to-Repay rule, today we are also issuing a proposal for potential adjustments. There are two key parts to the proposal:

  • First, a proposed exemption for designated non-profit creditors and homeownership stabilization programs, as well as certain Fannie Mae, Freddie Mac, and Federal agency refinancing programs. These programs generally appear to be already subject to their own specialized underwriting criteria, and they are designed to help consumers refinance into a more affordable home loan.
  • Second, a proposed a new category for certain loans made and held in portfolio by small creditors, such as small community banks and credit unions, called “Qualified Mortgages.”

Qualified Mortgages are a category of loans where borrowers would be the most protected. They, among other things, cannot have certain risky features like negative-amortization, where the amount owed actually increases for some period because the borrower does not even pay the interest and the unpaid interest gets added to the amount borrowed.

In the wake of the financial crisis, credit is achingly tight. Interest rates are low, but it is hard to qualify for a home mortgage. As the American mortgage market ebbs and flows, we have the duty to protect responsible lending in the housing market for borrowers, lenders, and everyone else who is engaged in the economic life of our country. We have been working hard, and we will continue to work hard, to do just that.

Consumers should be able to trust the American dream of homeownership without worrying about losing the roofs over their heads and the shirts off their backs. The Ability-to-Repay rule will help ensure that lenders and consumers share the same basic financial
incentives – that both of them win when borrowers can afford their loans. With this confidence, consumers can be active participants in the market and choose which of a wide variety of products they believe is best for them.

Today the Bureau also issued rules to strengthen protections for high-cost mortgages.

  • cm

    Does this mean loans like interest only will also be banned?

    • Xebico

      Not banned, but not able to be backed by (or sold to) the government. The lender would have to keep the loan on its own books.

      • Anonymous

        They will essentially be banned since banks that follow the guidelines will be protected from lawsuits.

        • Xebico

          Oh, sure, banks want WANT to make those loans, but they’ll be allowed to. (And if you think a loan is too risky to keep on your books, you shouldn’t be foisting it onto the government anyway!)

          • The Knowledge Coop

            They can still hoist them on the government because FNMA FHLMC loans are exempt!

  • Matt Thornton

    The Lenders cannot be the ones who decide the ability to repay. That is dumb.

    • Xebico

      Um, what? So the lenders should have to loan to anyone who asks for money without checking whether they can afford it? It very much is the lender’s responsibility to determine whether it should lend out its money to someone.

      • Brian W

        Xebico, who says the lenders don’t check if a borrower can afford a payment? With a stated income loan a borrower states his income and that’s teh a mount the lender used,a s well as credit history, assets, equity etc.

      • Matt Thornton

        The lenders are not fit to decide if someone can afford the mortgage they are selling, because they make money if they “can”. In 2009 they “decided” that the people they were lending to must have been able to “afford” their mortgage. It would be a real tragedy if no one was able to make money off of these engineered financial “bubbles”, but you and I can, and you can be sure your Congress will.

    • Larry

      You’re insane. If you were the lender, who would you expect to make the decision on whether or not to grant the loan?

      • Matt Thornton

        You’re insane if you think that these banks will regulate themselves.

        • Larry

          Matt: You did not answer the question. In your opinion, who would make the credit decision?

          Now, go to the FDIC’s website and search for Manual of Examination Policies. In that manual are guidelines for effective loan policies that bankers should adopt. During examinations of banks, federal regulators (Federal Reserve, FDIC, and OCC) evaluate loan and other policies for their effectiveness. Also, select loans are reviewed for quality. They are then “passed” or are adversely classified “Substandard,” Doubtful,” or “Loss.” All these definitions are defined. I could go on, but you should do a little research about regulating banks. And again, who would you want to make the decision on whether or not to grant a loan.

  • Canstangia

    Poor poor consumer. They were duped into lying about their income so they could live in a home that they couldn’t afford but loved to brag to their friends about the 4000 square foot home they bought on $50k a year. My heart bleeds for you. Wake up and small the bull crap Washington!!

    • Response

      In California, half a million dollars hardly buys you 1000 square feet. Do some research.

      • Canstangia

        California is a made up of many markets, not just San Jose, Orange County or LA. Yes, you can by 4000 in CA for half a mil. You’re missing the point. The consumer is not the victim. They were as much as the cause as the products offered.

        • Mr G

          lender’s both public and private were pushing these loans for their high yield potential to sell in secondary markets, many consumers were in fact preyed upon.

        • Billy Bo Bob Smith

          “The consumer is not the victim. They were as much as the cause as the products offered.”

          A title to an investigation is needed to confirm, not just the mere assumptions.

  • Chuck Plimmer

    Stated or “liar” loans have a place, and have always had a place in the mortgage place. Yes, Wall Street loost their minds by offering this product to everyone who could sign their name, but they need to come back in their proper form.Self employed, 720 FICO, and 20 percent down or equity.I have 100′s of clients who simply want to lower their interest rate or get out of an ARM product or buy a new home who could benifet from responsible stated income loan products. This decision is a poor one. You are hurting the consumer, not helping them.

    • Anonymous

      Ageee with you Chuck. There is a market for responsible people who for whatever reason – self employed in my case – who don’t fit in the cookie cutter product.

  • Greg

    Mr. Cordray, With due respect, I believe you are truly trying to fix some of the issues that have helped magnify the financial problems facing our country. Unfortunately, you lose significant credibility on these issues when you write about straw man “Henry” and his story. The title of your new regulation “Protecting consumers from irresponsible mortgage lending” should’ve probably also included “and protecting consumers like Henry from himself”. I am asking you to go ahead and publish ALL of the details of “Henry’s” story; including 1. The lender 2. Purchase or cash-out refinance? 3. Value of the home when this “half a million” dollar loan was completed and did Henry put cash down? 4. Type of loan 5. Information from Henry’s application listing his income. (did he happen to tell the truth?). Only when we stop with the hyperbole and realize that lenders and consumers must take responsibility for their actions by being allowed to fail or lose a “future” in a home someone can’t truly afford will we start to see real improvement in the economy vs. the Fed induced real estate improvements of today.

    These regulations you are proposing as well as many of the others won’t really fix the underlying problems. Stop pretending they will and you may just gain some respect and could actually help the consumers you propose to assist.

    • Matt

      Now Greg, presenting all of the facts would take the emotional plea out of the argument and allow logic to prevail! That’s just far too reasonable of a stance to take when we’re talking about a consumer protection regulation. This kind of regulation tells that the government sees consumers as mindless sheep wandering around, the financial must protect them or they will surely get themselves in trouble.

    • walidmrealtor

      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.

      Looks like Henry won’t need to worry the second time around under the “new rules”, will he?

    • Tim Bradford

      Greg, I would hope that Mr Cordray or his staff does provide the details you listed in your comments. In the conversation with Henry, I wonder is Mr Cordray told Henry that if these Qualified Mortgage Rules were in place he would have never recieved his Half a Million Dollar Loan. With the details you requested, maybe objective people could determine if it was the loan given to Henry that was the problem or it is was Henry’s desire for the Million Dollar Loan and Million Dollar home. Did he expect “Surf and Turf” on a Hamburger Budget. I stand by “If the Facts are on your side, argue the facts, otherwise argue.”

    • Billy Bo Bob Smith

      ” 5. Information from Henry’s application listing his income. (did he happen to tell the truth?). ” Seems to be the key. Might have to go back and see how things were calculated and filed. Check dates and verify Henry received a copy at the escrow closing.

  • Tom

    So rather than truly address the problem, let’s just continue to churn out more regulations that make mortgages even more difficult to obtain. If Henry didn’t know he couldn’t afford a $500,000+ house on a $50,000 a year salary, how can he be an active participant “in the market and choose which of a wide variety of products” he believes is best for himself as your blog states? People are greedy by nature and consumers are just as much at fault as those you portray to be the problem. We ultimately need an educational system that teaches the hard facts of life with a good dose of personal responsibility.

  • Jake

    I have been an originator for the past 9 years. I too have heard many stories like Henry’s. What the article fails to mention is that the $500,000 loan Henry was given he used to buy motorcycles, big screens, and vacations. Yes the lender made a poor decision in lending him the money, hence why they are most likely out of business. Shame on the government for turning a blind eye and purchasing these loans under the guise of increasing home ownership. While Henry may have suffered from this loan I have other clients who benefited from these type of loans.

    I urge to stop treating the symptoms and to start treating the cause. Henry is a symptom not a cause. The cause is much more complex and includes lack of personal and corporate responsibility. Our country allows for failure, failure is what moves us forward. Please allow stop protecting people and corporations from themselves. Allow them to fail so that as a whole we can grow into something better.

    • Zeeba Neighba

      Henry used his loan to buy motorcycles and vacations? No, he used it to buy a house – a house his mortgage lender advised him he could afford. You’re confusing the abuse of home equity loans with the gimmicks used to disguise the real cost of these mortgages, and which loan officers used to persuade people like Henry they could afford a half million dollar home.

      Expecting the average borrower to understand the ins and outs of complex financial products is like expecting a patient to understand the ins and outs of open heart surgery. Put the blame where it belongs – on the people who bent over backwards to convince everyone these loans were affordable.

      • Brian W

        Zeeba, a mortagge is not a “complex” product. Henry knew excatly what he was getting into. He was provided all the GOVERNMENT required documents to make an informed decision. No one can advise you on what you can afford, that is absurd, only YOU know what you can afford. Henry obviously believed he could afford the payment that was clearly disclosed to him. In fact, interest only loans are so simple, you can figure the payment with grammar school arithmatic via a pencil and paper, no calculator is even needed.

        • Zeeba Neighba

          wanna bet? First, who says Henry took out an interest only loan? Maybe it was a balloon mortgage. Maybe it was an ARM. You don’t know Henry, so you don’t know how much he understood about his mortgage. But the fact it imploded on him strongly suggests he didn’t understand the implications.

          • Ray Williams

            Was he college educated? Did he at least make it through high school? I would think so, if so, he would know if he could afford the house prior to closing on the house, let’s not be ignorant Zeeba. What kind of car did Henry drive? how about credit card debt he had easy access to obtaining? Or easily obtaining even after his mortgage payments likely fell behind. Did he have a previous bankruptcy and trouble managing debt? Did he actually have a savings account unlike the rest of average Americans? I am sure that Henry’s debt was not solely comprised of a house payment, and likelihood is high he wasn’t scraping by to pay this house (i.e vacations, buying things he didn’t need). I would love to see Henry’s credit report at the time of this situation. How about his assets? Did he spend his savings to pay for the house or do a strategic default? Not talked about. The commentary doesn’t say Henry had a neg-am, an interest only, an ARM or a specific product that I read as cited by Mr. Cordray in his release.

      • Anonymous

        All of these borrowers new what they were getting into, I have seen many clients that purchased $500k $400k homes, once their home was under water they decided to let it go, not making the payment and saving and staying at their home only to use another family member to buy a cheaper home.

  • Larry

    Unbelievable. This has always been a sound tenet of banking. The three areas that should be resolved positively in any decision to make a loan should be character (willingness to repay a loan), capacity (ability to repay a loan), and collateral (ability of the security to repay the loan if the borrower can’t or won’t), a/k/a the “the three C’s.”

  • Anonymous

    What the CFPB seeks to do with overly-restrictive, ill-conceived regulation emanating from the Washington bubble of narcissism could be solved with a simple mandate that high school students give up just one of their feel-good, squishy, meaningless “social studies” classes and replace it with a course in how money works. Seriously, Mr. Cordray. More regulation issued by people who have zero understanding of the inner-workings of an industry isn’t the answer. In fact, it’s the problem. But why should common sense reign when you’re the (unconstitutionally appointed) political head have a massive agency full of unaccountable bureaucrats taking taxpayer money to throw up more window dressing? What should the taxpayer expect but more divisive rhetoric and vilification?

  • Brad

    If Henry were so innocent, and his problems are all the fault of the lender, the government should go a step further and require the lender to restore Henry’s credit score to what it was prior to his default. This way, Henry can go to any lender and borrow money once again. Then in a few months, when Henry flakes out on his loan again, our government will again blame the lender and create more regulations.

  • Ray

    Sure, that’s what we need, more underwriting criteria to further tighten access to capital. [Sarcasm] Why don’t you address the real problem? Look the “banks” that made these these loans. They were allowed to create “derivatives” from the loans, which is a fancy way of saying that they cut up and sold the $h@t (that they new was $h@t) like it was a credible mortgage-backed security to pensions and other unsuspecting investors. If banks weren’t allowed to sell their sell pieces of mortgages like they were securities, the problem would solve itself. Henry is not the problem. Banks that create mortgages then sell them off in pieces, that’s the problem. If they kept the loans they made, you better believe the would start making better loans.

    • Anonymous

      And how would you propose that banks make all of these loans, given the new risk-weighting on mortgage assets in the Basel III rules? If banks were required to hold 100% of the loans they make, the pool of available money for loans would dry up faster than a thimble of water in the Mojave Desert.

  • GNero

    Where is the actual regulation? i know Thursday is not over, but after seeing all the chatter today I would like to be able to lay eyes on it!!

    • GNero


  • Matt Fuller

    Is there a place where the actual “ability to pay” rule can be viewed? I can’t seem to find it on this site. Thanks in advance.

  • LKB

    new rules have been promulgated to protect banks from irresponsible borrowers?

  • tom

    One last comment: in re Henry: As I read you commentary, Henry took out a loan that was over $500,000, which was more than ten times his income. Even though any competent borrower would realize that such a large loan was not “affordable,” Henry said “ok” because he “assumed the lender knew what it was doing.”
    Now I and others would agree that the lender was “irresponsible.” But almost anyone would also agree that Henry was irresponsiblle. So one has two “irresponsible” players. Was Henry’s loan for the purchase of a home? Or was it a refi, where Henry used the proceeds to “buy stuff.” Is the lender responsible for Henry’s predicament? Or is Henry? Should Henry, with such a modest income relative to the apparently high-priced home he is in, be mre suited to a lower-priced (say, a $150,000) more suited to his income?
    The moral of the story, of course, is that lenders were irresponsible, but so were borrowers, and borrowers who don’t understand their obligations, well, shouldn’t be borrowing

    • Harry

      Is it possible that there is no consumer victim here because Henry bought a house that he couldn’t afford because, rather than buying a residence, he was trying to cash in on rapidly increasing house prices and a healthy resale market?

  • Tim Bradford

    Today one hot topic is “Gun violence” Some people will say that the guns or the bullets are the problem. Others may say that it is the person that is selling the guns that are the problem. I am not a gun owner nor do I believe I ever want to be one. With that said “I do not believe passing a background check would make me a responsible gun owner”. I also believe that only with training and experience would I be a responsible gun owner and not get myself killed. I hope other will see the relationship this has to loans. If you are not responsible with your finances and live within your means, the taking of a loan can kill you. Do not blame it on the person that sold you the gun, Do not blame the maker of the gun, Do not blame the maker of the bullets. Remember guns do not kill people, people kill people. When you purchased the gun you know it could kill someone. You also knew when you took a mortgage that you would have to repay the loan. Do not try to tell me, it was someone elses doing when you are unable to make your payment just like when you have an accident with your gun and someone gets shot. Hopefully you did not kill the other person, but they will deal with a pain similar to your losing the life style you wanted versus what you could afford.

  • Rob Clayton

    Why does everyone try to blame the lender – it is the also up to the borrower to understand what they can afford or what they can’t. Most know they can’t afford that house or loan but they do it anyways – they too can’t stop their own greed. You may blame an ice cream maker for getting kids fat – but, you don’t blame Walmart for selling it and for some reason you don’t blame the kid for eating it (or the parent for letting them). The same is true here. Borrowers need to beware – not the lender who is just trying to make moeny themselves. Do you know that both sides sign a contract and the lender – when they fund – fulfill their side but the borrower – who agrees to the payment and term – does not fulfill their side and you blame the lender. Why not spend this effort and energy eeucating borrowers about what they can afford instead of keeping them in the dark and going after lenders who really don’t have any blame. If you don’t educate the borrower – they will just end up in this situation again and again and again. What are you goign to do about that? Go after all lenders until there are none left!

  • Nonprofit Originator

    2 words: Homebuyer Education

  • Knows More

    If “Henry” only made $50,000 per year and was given the mortgage “during the overheated years” which would have meant prior to 2008, and is just now in the foreclosure process – how did he make PITI payments that would have been greater than his whole income for four plus years? The only thing crazier than your example is the fact you have been given such broad powers to regulate something you know so very little about!

  • Bruce Colwin

    I appreciate the common sense in this, but best of luck stuffing the genie back in the bottle. Unfortunately, the denials of Barney Frank, the duplicity of Chris Dodd and Clinton’s well-intentioned but seriously abused CRA, have done some signficant economic damage.

  • Peter Hurley

    Reading the rule* the CFBP lists several factors a lender should take into account. None of these factors are the down payment being made by the borrower, or the value of the house relative to the amount of the loan. Down payment is the single most important pre-issuance determinant of the probability of foreclosure. Debt to income ratio is barely predictive at all, whereas down payment is quite predictive. The most predictive factor of foreclosure is being underwater. And a high loan to value ratio increases the probability of being underwater, whereas a high down payment decreased that chance. Why did the rule not address these factors which most strongly correlate with ability to repay, as opposed to the near-fanatical focus on payment as a percent of income? After all, your income 4 years ago when you took out the loan is fairly irrelevant when you’ve lost your job that paid that income, whereas whether or not you took out a 100% LTV mortgage versus 80% is still quite relevant.

    *I am referring specifically to sec. 1026.43(c)(2) i-viii.

  • Nancy

    Its really good to see this new regulatory movement-obviously, after the huge mess that took place in the marketplace over the last two years, Consumer Protection Rules are badly needed in the home mortgage finance arena. Mr. Cordray, don’t deviate from this path, and please ignore the contrary comments included here. Most American’s are not vocal, and are waiting for a dose of common sense to be applied in mortgage finance, and its no surprise some are pushing back, since the jig is now up for those originators who were once “seizing the moment” and now no longer able take advantage. I find it interesting that many in the home mortgage field subscribe to the “buyer beware” approach, where a consumer who may be well informed about many aspects they deal with in their life (such as their job requirements or field of expertise that relates little to finance) are expected to match up knowledge-wise with well informed mortgage lenders (informed in mortgage finance techniques) when it comes to loan terms and ability to repay. Numbers are easy to massage if the goal is to move the loan out the door, push it to the secondary, grab the premium, and get your pay bonus as the originator or underwriter. There are many programs for consumers who are emerging into the home ownership arena, such as FHA, VA and USDA, FMae and FredM and state supported programs that assist with underwriting and servicing for those starting out with a new mortgage.
    I ask that you review credit reporting standards and redlining along with your work in this area. Redlining doesn’t just hurt minority borrowers or women, it truly affects economic classes of borrowers nationwide. The 3 reporting agencies are unregulated, and quite happy to adhere to lenders desire to reject or approve loans, under the guise of being the “objective party” in the development of a report and formulation of a score that significantly affects consumers lives. The sheer fact that a credit report can be issued about a consumer that is inaccurate-and claim no responsibility for that? Damaging to say the least. Fair Isaac’s formula for the score ignores many things in its calculation. It ignores catostrophic illness and job loss impacts, which are nowadays commonplace. In a sense, Fair Isaac is a bit obsolete in a climate where job change and loss, lack of health insurance and pension and now home forclosure are commonplace. Considering the overwhelming impact that just one of those life events can place on a consumers, how can the score truly tell a lender, an insurance issuer or an employerl anything about the willingness of a consumer to pay their bills?
    Lastly, I sincerely urge your agency to analyze the benefits of credit unions and non traditional lenders in the provision of mortgages. Those resources focus more on building financial literacy, credit capacity, and economic development through home ownership that truly benefits communities. Let the subsidized private sector lenders draw their line and loan to those at the top. Its going to be a small group!

The CFPB blog aims to facilitate conversations about our work. We want your comments to drive this conversation. Please be courteous, constructive, and on-topic. To help make the conversation productive, we encourage you to read our comment policy before posting. Comments on any post remain open for seven days from the date it was posted.