CFPB Proposes Long Awaited Ability-to-Repay, “Qualified Mortgage” Rules

After many months of discussion as to what constitutes a “qualified mortgage,” and a borrower’s ability to repay his or her loan, the Consumer Financial Protection Bureau has announced its proposed definition for each, a task mandated under the Dodd-Frank Act.

Federal Housing Administration-insured reverse mortgages are exempt from the rule, according to the CFPB, but negative amortizing loans including private reverse mortgages will fall outside of the qualified mortgage definition, the agency says.

The ability-to-repay rule requires a financial history check of prospective borrowers including current income or assets; employment status; credit history; and other obligations to gauge how much more debt borrowers can take on. Financial information must be verified and teaser rates can no longer mask the true cost of a loan, the CFPB states.

“When consumers sit down at the closing table, they shouldn’t be set up to fail with mortgages they can’t afford,” said CFPB Director Richard Cordray during prepared remarks for delivery in a field hearing scheduled for Thursday. “Our Ability-to-Repay rule protects borrowers from the kinds of risky lending practices that resulted in so many families losing their homes. This common-sense rule ensures responsible borrowers get responsible loans.”

Those practices include “no-doc” and “low-doc” loans, according to the CFPB, where lender have in the past not required thorough documentation before selling loans to investors, which the bureau attributes to the collapse of the housing market in 2008 as the number of foreclosures and delinquencies increased during that time.

Lenders will be presumed to have complied with the Ability-to-Repay rule if they issue “Qualified Mortgages,” the CFPB says. These are loans meeting certain requirements which prohibit or limit risk.

In May 2012, the CFPB sought the help of the mortgage industry through analysis in defining ability to repay guidelines, through research and meetings with stakeholders to come to the conclusion it reached today.

With the Bureau’s announcement of this new rule, all new mortgages must comply with basic requirements meant to protect borrowers from taking on loans they cannot pay back if the rule

Under compliance with ATR, qualified mortgages look to limit points and fees including those used to compensate loan originators, officers and brokers.

Also, these mortgages cannot have risky loan features such as terms that exceed 30 years, interest-only payments or negative-amortization payments where the principal amount increases, notes CFPB. These types of loans will generally be provided to borrowers who have debt-to-income ratios of 43% or less, which CFPB believes will ensure that consumers only receive services they can afford.

There are two types of qualified mortgages containing different protective features for borrowers as well as different legal consequences for lenders.

The first are higher-priced qualified mortgages with what the CFPB calls a “rebuttable presumption.” Under these QMs, consumers can challenge lenders’ presumptions that borrowers have the ability to repay the loans, by proving they did not have sufficient income to pay the mortgage.

The second, lower-priced qualified mortgage has a “safe harbor status.” These are loans given to borrowers considered to be less risky. They also provide lenders the greatest legal assurance that they are complying with the ATR rule. Under this mortgage, borrowers can legally challenge their lender if they believe the loan does not meet the definition of a qualified mortgage, writes CFPB.

The CFPB will also release proposed amendments to its ATR rule that would exempt certain nonprofit creditors who work with low- and moderate-income consumers. The proposed amendments would also extend to homeownership stabilization programs which help borrowers avoid foreclosure, such as the Making Home Affordable program.

The rule will next be finalized to go into effect in January 2014.

Written by Jason Oliva

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