What's truly new about the CFPB's rules is not that lenders must consider a customer's ability to repay. It's that lenders must now substitute the decisions of the CFPB for their own judgment about whether a borrower can repay the loan.

More specifically, the CFPB has declared that a lender must review the following eight factors before it makes a loan: (1) current or reasonably expected income or assets; (2) current employment status; (3) the monthly payment on the mortgage; (4) the monthly payment on any simultaneous loan; (5) the monthly payment for mortgage-related obligations; (6) current debt obligations, alimony, and child support; (7) the monthly debt-to-income ratio or residual income; and (8) credit history. Lenders have to verify all this with information from independent third parties.

Gone are the days of no-doc or low-doc loans. Also gone are the days when a lender could make a loan counting on its being repaid with a refinancing before its initial teaser rate or interest only period runs out. For loans with variable rates, lenders will have to assess a customer's ability to repay both principal and interest over the long term.


One ironic effect of the Qualified Mortgage rule is likely to be the birth of a new type of lender specializing in loans that fall outside the safe harbor. These loans will still have to be made with an eye toward the eight tests for a customer's ability to repay. But a lender who can fairly say that a borrower with a 44 percent debt to income ratio likely has the ability to pay his loan could do a good business.

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