Federal regulators for the first time are laying out rules aimed at ensuring that mortgage borrowers can afford to repay the loans they take out.
The rules being unveiled Thursday by the Consumer Financial Protection Bureau impose a range of obligations and restrictions on lenders, including bans on the risky "interest-only" and "no documentation" loans that helped inflate the housing bubble.
Lenders will be required to verify and inspect borrowers' financial records. The rules discourage them from saddling borrowers with total debt payments totaling more than 43 percent of the person's annual income. That includes existing debts like credit cards and student loans.
CFPB Director Richard Cordray, in remarks prepared for an event Thursday, called the rules "the true essence of `responsible lending."'
The rules, which take effect next year, aim to "make sure that people who work hard to buy their own home can be assured of not only greater consumer protections but also reasonable access to credit," he said.
Cordray noted that in years leading up to the 2008 financial crisis, consumers could easily obtain mortgages that they could not afford to repay. In contrast, in subsequent years banks tightened lending so much that few could qualify for a home loan.
The new rules seek out a middle ground by protecting consumers from bad loans while giving banks the legal assurances they need to increase lending, he said.
The mortgage-lending overhaul is a priority for the agency, which was created under the 2010 financial law known as the Dodd-Frank Act. The agency is charged with reducing the risk of a credit bubble by helping to ensure that borrowers are better informed and loans are more likely to be repaid.
The agency is charged with writing and enforcing rules that flesh out the law passed by Congress. Some provisions are required under the law, but the agency had broad discretion in designing many of the new requirements.
The rules limit features like teaser rates that adjust upwards and large "balloon payments" that must be made at the end of the loan period.
They include several exceptions aimed at ensuring a smooth phase-in and protecting access to credit for underserved groups. For example, the strict cap on how much debt consumers may take on will not apply immediately. Loans that meet separate federal standards also would be permitted for the first seven years.
Balloon payments would be allowed for certain small lenders that operate in rural or underserved communities, because other loans may not be available in those areas.
The bureau also proposed amendments that would exempt from the rules some loans made by community banks, credit unions and nonprofit lenders that work with low- and moderate-income consumers.