Banks and other lenders will be prohibited from making home loans that offer deceptive teaser rates or require no documentation from borrowers, and will be required to take more steps to ensure that borrowers can repay, under new consumer protections to be announced on Thursday.
The rules, being laid out by the Consumer Financial Protection Bureau and taking effect next January, will also set some limits on interest-only packages or negative-amortization loans, where the balance due grows over time. Banks can make such loans, but the new rules would not protect them from potential borrower lawsuits if they do so.
And mortgage originators will in most cases be restricted from charging excessive upfront points and fees, from making loans with balloon payments and from making loans that load a borrower with total debt exceeding 43 percent of income.
With the sweeping rules, financial regulators are trying to substantially overhaul the market for home mortgages by creating a legal distinction between “qualified” loans that follow the new rules and are immune from legal action, and “unqualified” mortgages that continue practices that regulators have frowned on. The new rules are also aimed at getting banks to lend again, something they have been slow to do since the financial crisis and since the Dodd-Frank Act required new limits on bank activities.