Question

The clients obtained the mortgage in 2006 from a broker who told them that they did not need any proof of income, savings, or assets. Which instrument was put into practice after the mortgage crisis in 2008 that changed this for future loans?

Answer 1

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 introduced financial reforms after the 2008 financial crisis, which included the Ability-to-Repay and Qualified Mortgage rules that mandated lenders to verify borrowers' ability to repay their mortgages.

Step-by-step explanation:

After the 2008 financial crisis, a significant piece of legislation called the Dodd-Frank Wall Street Reform and Consumer Protection Act was enacted in 2010. This act was introduced to reduce the risk in the financial system by implementing various reforms. One of its primary goals was to prevent lenders from issuing mortgages without proper verification of the borrower's ability to repay the loan, effectively ending practices such as the notorious 'NINJA loans' (No Income, No Job, or Assets) that contributed to the crisis.

The Consumer Financial Protection Bureau (CFPB), established by the Dodd-Frank Act, set forth the Ability-to-Repay and Qualified Mortgage (QM) rules. These regulations require lenders to make a reasonable and good faith assessment of a borrower's ability to repay a mortgage before making the loan. The implementation of these rules marked a departure from the pre-crisis lending practices where sufficient borrower scrutiny was often neglected.