The financial services law firm of BuckleySandler issued the following analysis of QM Monday morning.
On January 10, 2013, the Consumer Financial Protection Bureau (CFPB) issued its keenly awaited final "Ability to Repay" rule under Regulation Z that will require lenders to verify a consumer's ability to repay a mortgage loan as required by Sections 1411 and 1412 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. This rule will become effective on January 10, 2014.
Concurrently, the CFPB released a proposal seeking comment on amendments to the final rule. Together, the releases containing the final and concurrent proposed rules total almost 1,000 pages. This alert highlights some key issues that the releases resolve and leave open; we will send a summary of the releases with additional analysis of the key issues once we have had more time to review.
Because of the severe penalties established by Congress for violating the "Ability to Repay" requirements - a borrower in foreclosure can assert a violation against the creditor or assignee seeking up to three years of finance charges paid on the loan - the key definitions and exemptions established by the rule are expected to greatly influence the availability and cost of residential mortgage credit for years to come.
The statute defines a subset of mortgage loans to be "Qualified Mortgages" (or QMs), which would be more difficult for consumers to challenge on ability-to-repay grounds. The rule resolves three of the major policy debates surrounding the QM concept, as discussed below, but leaves open many related matters:
- The rule takes the more objective path, using as its underwriting criteria (i) a numerical standard of 43% debt to income (DTI) ratio as the QM cut-off or, alternatively, for the time being, (ii) eligibility for purchase, guarantee or insurance by the GSEs or Federal agencies. (This alternative to the 43% cut-off will become unavailable after seven years or, if earlier and as applicable, until the Federal agencies write their own qualified mortgage rules or the GSE conservatorships end.) Note that jumbo loans, by definition, could not qualify under the GSE/Federal agency alternative; thus, they will have to be made at a 43% DTI just to pass the QM underwriting test.
- The definition clearly includes much of the market. The underwriting criteria described above would make well over 90% of the current residential mortgage marketplace QM eligible. How many of those loans would also pass the separate "points and fees" test for QM (discussed below) is an open question, however.
- The rule provides a safe harbor for loans with APRs below the "higher-priced" threshold of 150 basis points over the Average Prime Offer Rate (APOR), and a "rebuttable presumption" for loans with an APR above that threshold.
The expansive underwriting criteria adopted in the final rule for QMs will place relatively more importance on the separate QM requirement that points and fees be limited to 3% of the loan amount. Indeed, to many observers, the components of that cap present the most significant unresolved issues in the rule. The final rule includes in the 3% cap both (i) direct and indirect loan originator compensation, as well as (ii) closing charges paid to affiliated settlement providers such as a lender-owned title company.
The inclusion of those items in the 3% cap will place a lot of stress on mortgage brokers and wholesale lending business models (and the brokers that send applications to those lenders) and on the use of affiliates. By including these items in the 3% cap, there will be little room for upfront lender charges. At least on the issue of indirect loan originator compensation, however, the Bureau has shown some potential flexibility by raising the matter in the concurrent proposal.
Article submitted/drafted by BuckleySandler LLP