The Consumer Financial Protection Bureau on Thursday announced a new rule that require lenders to ensure prospective buyers have the ability to repay the mortgages offered to them.

The rule prohibits risky lending practices, such as “no doc” and “interest only” offerings, that led to widespread foreclosures and fueled the 2008 housing collapse. A first for government agencies, the CFPB has also defined the criteria for loans designated as a “qualified mortgage.”

The backdrop to the new rule, as explained in a statement issued by the CFPB, was the “gradual deterioration in underwriting standard.” The Dodd-Frank Act mandated broad-based changes to how creditors make loans, including new ability-to-repay requirements the CFPB was tasked with implementing. Congress also directed the Bureau to define a category of loans where borrowers would be the most protected

Among the criteria established by of the Ability-to-Repay rule:

Financial information has to be supplied and verified. Lenders must document: a borrower's employment status; income and assets; current debt obligations; credit history; monthly payments on the mortgage; monthly payments on any other mortgages on the same property; and monthly payments for mortgage-related obligations.

Lenders can no longer offer no-doc, low-doc loans, where lenders made quick sales by not requiring documentation, then offloaded these risky mortgages by selling them to investors.

Lenders must evaluate and conclude that the borrower can repay the loan, including a review of a potential buyer's consumer's debt-to-income ratio – their total monthly debt divided by their total monthly gross income.

Lenders can't base their evaluation of a consumer's ability to repay on teaser rates. They will have to determine the consumer's ability to repay both the principal and the interest over the long term - not just during an introductory period when the rate may be lower.

Lenders will have complied with the Ability-to-Repay rule if they issue qualified mortgages  that prohibit or limit the sort of risky features that have consistently harmed consumers.That led the CFPB to issue a long-awaited definition of what features constitute a qualified mortgage. Among them:

Limiting points and fees, including those used to compensate loan originators.

They cannot have risky loan features, such as terms that exceed 30 years, interest-only payments, or negative-amortization payments where the principal amount increases.

These mortgages are generally provided to those with debt-to-income ratios less than or equal to 43 percent. For a temporary, transitional period, loans that do not have a 43 percent debt-to-income ratio but meet government affordability or other standards, including eligibility for purchase by the Federal National Mortgage Association (Fannie Mae) or the Federal Home Loan Mortgage Corporation (Freddie Mac).

There are two kinds of Qualified Mortgages that have different protective features for consumers and different legal consequences for the lender, the CFPB explains. The first, qualified mortgages with a rebuttable presumption, are higher-priced loans generally offered to consumers with insufficient or weak credit history. Legally, lenders that offer these loans are presumed to have determined that the borrower had an ability to repay the loan.There are also qualified mortgages with a safe harbor status that are typically generally lower-priced, prime loans offered to consumers who are considered to be less risky. These loans offer lenders the greatest legal certainty by complying with the new Ability-to-Repay rule.

The proposed amendments, if adopted, would be finalized this spring and go into effect at the same time as the Ability-to-Repay rule in Jan. 2014.

 A fact sheet further explaining the new rule is available here, and a summary of the final Ability-to-Repay rule is also online.