Following on the heels of Canada’s tightening of the mortgage and lending landscape, the United States has announced a new rule aimed at preventing consumers from taking on high-risk loans.
The Consumer Financial Protection Bureau’s (“CFPB”) new Ability-to-Repay rule requires lenders to take steps to ensure that potential borrowers will be able to repay their loan. Under the new rule:
Lenders will be required to obtain and verify financial information from potential borrowers;
Borrowers will be required to demonstrate that they have sufficient assets or income to pay back the loan; and
So-called “teaser rates” will no longer be allowed to mask the true cost of a mortgage. Lenders will be required to determine the borrower’s ability to repay the loan over the long term − not just during an introductory period when the rate may be lower.
Many financial analysts have alleged that one of the factors fueling the boom and subsequent bust in the United States’ housing market was borrowers receiving mortgages without being required to provide evidence of income to repay them.
The new rule also introduces “Qualified Mortgages,” which are required to have no excess upfront fees, no risky loan features (such as amortization periods of more than 30 years or interest-only payments), and a cap on how much income can go toward debt. Lenders who issue Qualified Mortgages will be presumed to have complied with the Ability-to-Repay rule.
Of particular interest to owners of units in condominiums, the new rule will require lenders to take into account condominium fees (referred to as “homeowner association assessments” in the USA) when determining a borrower’s ability to repay a loan.
This change is an important recognition by the US government that owning a unit in a condominium involves a greater financial commitment than just making mortgage payments. Condominium living also involves monthly fees and special assessments, and borrowers need to plan accordingly to keep their mortgages in good standing. A significant number of power of sales of condominium units in Canada involve unit owners who went into arrears following a special assessment.
The new rule is scheduled to come into effect in January of 2014.
The CFPB is a US federal agency. Created in 2010 in response to the recent financial crisis, it is charged with the goal of watching out for American consumers in the market for consumer financial products and services.
In June of 2012, the Canadian government reduced the maximum amortization period from 30 years to 25 years. These changes came just a year after the government reduced the maximum amortization period from 35 years to 30 years.