Not everyone could qualify for a mortgage, so lenders began to relax their requirements. They began offering those who couldn’t obtain an ordinary mortgage loan what has been called the “sub-prime mortgage.” With the sub-prime mortgage, many lenders offered those who could not meet the income requirements to qualify for a regular mortgage a chance to purchase a house with reasonable interest rates. However, many of these rates were set to adjust higher after about five years. When this time came, people began to default on their loans.
Predatory lending practices were blamed in large part for the reason that people obtained these sub-prime loans. Some people claimed not to understand what they were signing when they agreed to take these loans. The announcement the federal government made on January 10 explained how a future sub-prime mortgage crisis would be prevented. Simply put, the federal government has new rules in place that will keep lenders from offering loans to people who cannot afford to repay them.
The Ability-to-Pay Rule
The Consumer Financial Protection Bureau (CFPB) wrote the principle described above into the Ability-to-Pay Rule. This rule states that lenders will only offer mortgage loans to people who can actually afford to repay them. According to this rule, lenders must not offer a loan to an applicant without first asking for financial information, such as their income. Once received, the lenders will be required to verify the information the applicant has give them.