Ability-to-repay rule draws more scrutiny

The Consumer Financial Protection Bureau (CFPB) proposed a new rule in January that requires lenders to carefully scrutinize borrowers’ ability to repay their mortgages.

The ability-to-repay rule, which first was greeted with positive reaction, now has some lawmakers and community banks concerned that it may cause lending to tighten even more at smaller banks, The Wall Street Journal reported.

At a House hearing this week lawmakers asked CFPB officials to tweak the new rule to make sure that it doesn’t have a negative impact on smaller banks.

“One concern expressed by several lawmakers is that the rule doesn’t give small lenders enough latitude to make loans with ‘balloon’ payments – a loan that requires a large final payment of the principal balance,” The Wall Street Journal reported. “Those loans fit into the CFPB’s ability-to-repay framework for loans that banks hold in their portfolios in certain rural areas, and lawmakers want to see those areas expanded.”

Lawmakers and smaller banks also expressed concern to CFPB officials over the rule that caps fees at 3 percent of the total amount. The Independent Community Bankers of America also urged CFPB to expand the definition of “rural” so that it includes areas with fewer than 50,000 residents.

CFPB officials said at the hearing that they will consider tweaking the rule, if necessary.

“We will continue to watch the health of mortgage markets once this rule takes effect to ensure it is working as we expect it will,” said Peter Carroll, the bureau’s assistant director for mortgage markets.