Well, the Consumer Finance Protection Bureau finally released its “Ability to Repay” and “Qualified Mortgage” rules today.
At first glance, they look to be pretty lackluster, and the CFPB seems to be asking more questions than it is giving answers.
As part of Dodd-Frank reform arising out of the latest mortgage crisis, lenders must now ensure that borrowers have the ability to repay their mortgages.
While this sounds like a no-brainer, prior to the crisis just about anyone with a pulse could take out a home loan.
The CFPB included the story of a victimized borrower in its press release, though you have to wonder how many of these homeowners actually knew they couldn’t afford the loans before agreeing to apply for one.
Sure, it went both ways, but it was both lenders and borrowers who were at fault for the crisis.
Ability-to-Repay Rule
The new “Ability-to-Repay rule” requires lenders to underwrite ALL new home loans a lot more stringently than in past years, namely the 2000s.
However, the new rules are pretty much on par with today’s underwriting standards, which have become much more rigorous in light of past abuses.
As part of this rule, lenders must consider and verify eight (8) underwriting criteria:
- Current income or assets
- Current job status
- Credit history
- Monthly payment on mortgage
- Monthly payment on any other loan tied to subject property
- All other debt obligations
- The borrower’s debt-to-income ratio
So basically underwriters need to do their due diligence, which has always been the case.
There is nothing groundbreaking here, just basic underwriting at its purest and best, including verifying that borrowers have sufficient income and assets to take out a sizable home loan.
This means no stated income loans or no doc loans.
Additionally, lenders can’t use teaser rates to qualify borrowers; only the principal and interest payment will suffice.
However, if a borrower is being refinanced out of a high-risk loan, such as an ARM, interest-only loan, or option arm, into a more stable loan, the full underwriting process is not necessary.
Certain federal refinancing programs such as HARP 2 would also be exempt from these rules.
Qualified Mortgages
The CFPB also released its definition of a “qualified mortgage,” which is “presumed” to meet the ATR rule requirements as well, and provide the most protection to borrowers (and lenders).
Qualified mortgages have even more mandatory features, including the following:
- No excessive upfront points/fees
- No interest-only loans
- No negative amortization loans
- No loan terms beyond 30 years
- Max debt-to-income ratio of 43%
- No balloon mortgages (unless small creditor in rural/underserved area)
For a transitional period, the DTI limit will not be enforced if the loans are eligible for purchase by Fannie Mae, Freddie Mac, or the FHA.
Types of Qualified Mortgages
Qualified Mortgages with Rebuttal Presumption
This category of QMs covers “higher-priced loans” reserved for borrowers with insufficient or poor credit history.
Assuming the loan finds its way into default, the borrower can “rebut the presumption” that the lender actually considered their ability to repay the loan.
The CFPB notes that the borrower would have to prove that the lender didn’t consider their other living expenses after the mortgage and other debts were accounted for.
Qualified Mortgages with Safe Harbor
The second category of QMs is reserved for lower-priced loans made to borrowers who present little risk.
Lenders will be assumed to have “legally satisfied” ATR requirements, meaning they won’t be on the hook for the loan if it goes bad.
However, borrowers can still challenge the lender if they believe the loan fails to meet the rules of a QM.
In both categories, borrowers also have the right to challenge lenders for violating any other federal protection laws.
More Ability-to-Repay Proposals
The CFPB is also seeking public comment for a number of other proposals, including whether there should be exemptions for non-profit creditors and housing finance agencies promoting affordable housing and community development (grey area).
Exemptions are also being floated for homeownership stabilization programs intended to prevent foreclosures, such as the Making Home Affordable initiative.
Additionally, community banks and smaller credit unions that originate and hold loans in their own portfolios could be given QM status.
Finally, the CFPB wants advice on how best to calculate the loan origination compensation rules, including specific limits on mortgage points and fees.
All said, there are plenty of unanswered questions here, and much of it sounds like the same nonsense all over again. The type of rule making that is circumvented before it’s even written.
Still, it will be interesting to see if “QM loan” becomes a household name, and makes non-QM loans much more expensive.
The Ability-to-Repay rule and proposed amendments are expected to go into effect in January 2014.
(photo: Joe Shlabotnik)
