Today the CFPB released the “ability-to-repay” and “qualified mortgage” rule which is set to go into effect next year on January 10, 2014. These new laws will require that lenders consider a borrowers ability to repay a mortgage.
From Richard Cordray:
“Today, we’re issuing one of our most important rules to date, the Ability-to-Repay rule. It’s designed to assure the reliability ofmortgages – making sure that lenders offer mortgages that consumers can actually afford to pay back. This is a simple, obvious principle that needs to be cemented in the housing market.”
The CFPB states that “Lenders can no longer offer no-doc, low-doc loans, otherwise known as “Alt-A” loans, where some lenders made quick sales by not requiring documentation…” Please keep this in mind when you’re considering or in the mortgage process and your Mortgage Originator has just asked you to document your life history…well, at least the last two years of your financial history.
Qualified Mortgage aka “QM”
The CFPB presumes the lender has complied with the Ability to Repay rule IF the borrowers new mortgage passes the QM sniff test. Here are the requirements:
- No excess upfront points and fees.
- No toxic loan features: including interest-only loans, mortgages with negative amortization (aka option arms, no loans with terms greater than 30 years.
- Cap on how much income can go to debt of 43%. Before you panic over this cap, please see my notes below.
Ability to Repay
Lenders must determine if the borrower has the ability to repay the proposed mortgage. The “ability to repay” rule require that lenders consider the following factors:
- current or reasonable expected income or assets.
- current employment status
- credit history
- the proposed monthly mortgage payment
- the monthly payment on any simultaneous loans associated with the property (ie piggy backed second mortgages or HELOCs/home equity lines of credit)
- monthly payment of other mortgage related obligations (such as property taxes). NOTE: I assume this includes insurance and any home owners association dues.
- current debt obligation, alimony, and child support
- the monthly debt-to-income ratios.
My first impression is that this doesn’t seem to be a huge change from what we’re currently dealing with under present underwriting standards.
About the 43% DTI cap for a qualified mortgage… CFPB is excluding most loans from this cap. “For a temporary transitional period, loans that do not have a 43 percent debt-to-income ratio but meet government affordability or other standards – such as they are eligible for purchase by…Fannie Mae or…Freddie Mac – will be considered Qualified Mortgages.”
What about the Home Affordable Refi program (aka HARP)?
The CFPB (Consumer Financial Protection Bureau) is proposing the certain programs (such as HARP) and small community based lenders have special adjustments or exemptions to this rule.
Here is a summary of CFPB’s Ability to Repay Rule and CFPB’s Fact Sheet.
This is just the beginning… more regulations, including how loan officers are compensated, are set to be unveiled soon.
We’ll have to wait and see how banks and lenders react to these rules and what their overlays may be.
UPDATE 4:23 PM: Here’s a link to the rule from CFPB.
UPDATE 1/11/2013: MBA’s helpful chart summarizing QM.
My impression is the same as yours, that this isn’t a huge change from how we’re already doing things.
The ability to repay is a logical lending guideline, one that was lost by many leading to the crash, but has been back in full force at reputable companies since the crash.
Hi Lauren,
It’s unfortunate that the government is having to step in to create or enforce underwriting guidelines because of the mortgage meltdown.
I’ve never been a fan of stated income loans – however, I admit I would like to see reduced doc loans for well qualified self-employed borrowers – similar to what was available pre-subprime.
What was available pre-subprime for self-employed borrowers?
We get 2 years tax returns, a P &L; the big pain though for the SE borrowers I see is documenting the many large business deposits into personal accounts. “May have have a copy of that check” for the 500th time can definitely make people feel in-vad-ed.
Prior to the subprime crisis, low-doc loans or stated income, was available for self employed borrowers if they had excellent credit, plenty of assets and a substantial down payment or home equity. They would not have to provide years of their tax returns or document deposits to their checking accounts. The program was not available to everybody – as it was during the meltdown. The loan had to make sense and it was up to a human underwriter vs automated underwriting if the loan would be approved.
When W2 employees who are paid a salary are getting a mortgage by stating their income – there’s a problem… HUGE PROBLEM.
In my career, I’m thankful I pretty much avoided stated income loans as I did not want my clients to be in position to potentially lie about their income on applications.
I did do one stated income loan and it’s ironic, as it was towards the “end” of the meltdown. However, my client was over qualified – she just didn’t want to provide all of her tax returns for her business and personal due to the cumbersome paperwork. Her loan was also a jumbo/non-conforming – she was not the type of client who contributed to the crisis.
Following the crisis I received several phone calls from other borrowers (not my clients) who did stated income full knowing they did not make the income they put on their loan aps and who just thought that somehow, they’d make ends meet and make that mortgage payment. Again, I am so thankful I turned those loans away – I lost several real estate agents who were angry with me for not originating loans that did not make sense… I can live with that!
It’s unfortunate that the loan programs were abused my many – loan originators (banker and broker), borrowers, real estate agents and let’s not forget the banks and wholesale lenders who created the programs and the underwriting guidelines and promoted them to mortgage originators.
Okay… I’m off my soap box… for now.
Thanks Rhonda!
The new rule adds a requirement for no more than a 43 percent debt-to-income ratio. Do you know if that is gross or net monthly income?
Hi Aaron, Gross monthly income – however I believe that only applies if the mortgage does not meet the “ability to repay” test.
This also has not gone into effect yet.