|Theme||Retail Housing Finance|
Jan 9, 2013
The Consumer Financial Protection Bureau revealed its much awaited ability-to-repay and qualified mortgage guidelines, The rule will take effect on January 10, 2014.
The final rule contains the following key elements:
Ability-to-Repay Determinations. The final rule describes certain minimum requirements for creditors making ability-to-repay determinations, but does not dictate that they follow particular underwriting models. At a minimum, creditors generally must consider eight underwriting factors: (1) current or reasonably expected income or assets; (2) current employment status; (3) the monthly payment on the covered transaction; (4) the monthly payment on any simultaneous loan; (5) the monthly payment for mortgage-related obligations; (6) current debt obligations, alimony, and child support; (7) the monthly debt-to-income ratio or residual income; and (8) credit history. Creditors must generally use reasonably reliable third-party records to verify the information they use to evaluate the factors.
General Requirements for Qualified Mortgages. The final rule implements the statutory criteria under the Dodd-Frank Act, which generally prohibit loans with negative amortization, interest-only payments, balloon payments, or terms exceeding 30 years from being qualified mortgages. So-called “no-doc” loans where the creditor does not verify income or assets also cannot be qualified mortgages. Finally, a loan generally cannot be a qualified mortgage if the points and fees paid by the consumer exceed three percent of the total loan amount, although certain “bona fide discount points” are excluded for prime loans. The rule provides guidance on the calculation of points and fees and thresholds for smaller loans.
Most importantly, the general rule requires that monthly payments be calculated based on the highest payment that will apply in the first five years of the loan and that the consumer have a total (or “back-end”) debt-to-income ratio that is less than or equal to 43 percent.
The final rule creates two types of qualified mortgages with different legal liability standards.
The first QM-loan classification includes a safe-harbor provision, which essentially eliminates 'ability-to-repay' litigation risk for qualified loans. The 'safe harbor' standard applies to lower-risk loans that meet all of the QM requirements.
The second-type of QM loan comes with a rebuttable presumption of safe lending and applies to higher-cost loans. This loan type is presumed safe for the most part, but can still be challenged on narrow grounds in court later on.
Link to summary
Link to full ruling