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New mortgage rules protect American dream

Crossposted from This opinion editorial originally ran on January 7, 2014 online and in the print edition on January 8, 2014. 

Let me tell you a common story I hear. It starts with a woman in 2005 or 2006 who took out a mortgage to buy her first home. After two years, her teaser interest rate expired. Her monthly payments doubled so she could no longer afford them.

When she sought help from her lender, she found that a different company, a mortgage servicer, was handling the loan. When she tried to contact the servicer to figure out a way to save her home, she got passed from one representative to another, each giving conflicting information about her options. She sent in the same paperwork multiple times. Finally, she thought her application for a loan modification was being considered, but before she heard anything further, her home was in foreclosure.

Ending the broken system

This happened again and again, all across the country. But this broken system ends Friday, when the Consumer Financial Protection Bureau’s new rules take effect. The common-sense rules for banks and other mortgage companies do two main things: ensure that consumers are sold only mortgages they can actually afford to repay, and make sure consumers are not hit with surprises or given the runaround if they have problems paying their mortgage and are trying to avoid foreclosure.

Under the new rules, lenders must determine that borrowers can afford a mortgage before making the loan. Of course, mortgage lenders do not have a crystal ball: They cannot predict layoffs and health problems. But they must look at a consumer’s income and assets, along with debt, and weigh this against the long-term monthly payments — not just a teaser rate. This back-to-basics approach is the very foundation of responsible lending. But in the lead-up to the financial crisis, it often did not happen.

For people who already have mortgages and are making payments, the new rules will act as a backstop. Mortgage servicers have to clean up their act by promptly crediting payments, tracking paperwork accurately and responding directly to consumers. If you fall behind on your mortgage, your servicer will now be required to reach out to see whether you need help. If you apply for a loan modification, it will have to process your application and provide you with any help available.

Never again

Most important, these new rules put in place safeguards to help make sure the great mortgage meltdown never happens again. It wrecked our economy and did untold damage to millions of Americans. These rules will ensure that the past will not repeat itself.

There is a lot of misinformation out there about these rules. Our rules do not dictate who can and cannot get a mortgage. Lenders can make a loan to anyone as long as they reasonably determine that the consumer is in a position to repay. Down payments are still entirely up to the lender and home buyer. And we are not requiring loads of red tape: Lenders will likely ask a potential home buyer for proof of things such as income or assets — the kinds of things responsible lenders like our good community banks and credit unions have been asking for all along.

In the end, our new mortgage rules put behind us the irresponsible lending that disrupted the housing market and upended our economy. And they protect all homeowners against sub-par mortgage servicers not doing their jobs. Americans deserve these basic protections.

Richard Cordray is the first director of the Consumer Financial Protection Bureau.