Government Releases Qualified Mortgage and Ability-to-Repay Rules
On January 10, 2013, the Consumer Financial Protection Bureau enacted some new rules for mortgage lenders and borrowers. Starting in 2014, borrowers must fully document their income, as well as their ability to repay the mortgage debt.
Jan. 10, 2013 - PRLog -- The U.S. Consumer Financial Protection Bureau (CFPB) recently finalized the first in a new series of mortgage-lending rules that will take effect in 2014. The first rule is referred to as the "ability to repay" rule. In short, mortgage lenders must verify and document a borrower's ability to repay the loan obligation.
The full definition of the ability-to-repay provision can be found on the CFPB website, and also on QualifiedMortgage.org, a not-for-profit educational website. Here is a brief overview of the new rules.
Required by the Dodd-Frank Act
In July 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into law. It was passed in response to the financial crisis of the late 2000s. This act brought the most sweeping set of financial reforms since the Great Depression.
Title 14 of the Dodd-Frank Act calls for various reforms within the mortgage-lending industry, including the creation of a "qualified mortgage" rule, or QM for short. The QM rules are designed to reduce the level of risk within the lending industry.
The Dodd-Frank Act also created the Consumer Financial Protection Bureau, and gave that agency the task of finalizing the new regulations. On January 10, 2013, the CFPB released the full parameters of the ability-to-repay rule, as well as an outline of the proposed QM requirement.
The Ability-to-Repay Rule
It has been well documented that certain high-risk mortgage products contributed to the housing and financial crisis of the late 2000s. So-called "low doc" and "no doc" loans are two examples. These are scenarios where the lender approves the borrower based on very little documentation. The borrower is essentially allowed to state his or her income, without the use of supporting documents.
The federal government has since taken bold steps to prevent a recurrence of the financial crisis. Within the context of mortgage loans, they are doing this by limiting or prohibiting certain high-risk features, such as low-documentation loans. The CFPB's ability-to-repay rule does exactly that.
At a minimum, lenders must now consider eight criteria when reviewing mortgage applicants:
1. Current income and assets
2. Current employment status
3. Monthly payment on the covered transaction
4. Monthly payments for any simultaneously occurring loans
5. Monthly payment for the mortgage loan itself
6. Current debt obligations (credit cards, car loans, alimony, etc.)
7. The borrower's debt-to-income ratio or DTI
8. The borrower's credit history (credit report and credit score)
All of these checkpoints are designed for the same purpose: The lender must ensure that the borrower has the ability to repay the loan, in light of his/her current income and debt situation.
The Qualified Mortgage (QM) Rule
In addition to the ability-to-repay concept outlined above, the CFPB has also published a definition of the qualified mortgage, or QM. This is another requirement of the Dodd-Frank Act. In short, a qualified mortgage is a home loan that has certain "safety" features built into it. The QM rule also prohibits certain high-risk loan features.
This rule will, in most cases, prohibit loans with the following features:
* Negative amortization
* Interest-only payments
* Balloon payments
* Payment terms exceeding 30 years
* Points and fees exceeding 3% of the loan amount
In addition, the consumer's total debt-to-income ratio must not exceed 43%. The total or "back-end" ratio includes all debt obligations (mortgage payment, credit cards, car payments, etc.).
This is a partial list of rules and provisions. For a more complete definition of the qualified mortgage and ability-to-repay rules, please visit QualifiedMortgage.org.
Lenders who adhere to the guidelines listed above will receive some degree of legal protection from consumer lawsuits. This will make it harder for consumers to sue their lenders in the event of foreclosure. It also gives lenders an incentive for adopting the QM standards.
The concept of a qualified mortgage was first proposed in 2010, within the Dodd-Frank Act. But the rules were not finalized until January 2013. In the interim, a spate of rumors and speculations were circulated. This led to widespread confusion over the true definition and meaning of the qualified mortgage. The creators of the Home Buying Institute have launched a new website, QualifiedMortgage.org, to alleviate such confusion.
QualifiedMortgage.org is a not-for-profit educational resource for consumers, mortgage professionals and journalists. The website is frequently updated as new details emerge. It is a collaborative effort. Readers can submit corrections and/or additions, with fact checking performed by the site's editors.