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.
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.