The Consumer Financial Protection Bureau (CFPB) has released the parameters of a major regulation dictated by the 2010 Dodd Frank Wall Street Reform & Consumer Protection Act. Even though the features of the Qualified Mortgage (QM) regulation will curtail the making of risky loans, the lenders have already implemented tighter criteria over the past few years. Partially because of the market condition, and partially because of the knowledge the Dodd Frank regs were on the drawing board, and didn’t know what they were going to reflect. The lenders will have a year (till January 10, 2014) to put their loan origination and compliance systems in place before the regulation will be enforced. No doubt there will be modifications along the way, as the unintended consequences of certain provisions will be realized.
There were many bad loans made prior to the mortgage meltdown. Most of the high risk loan products should not have existed, and there should not have been a secondary market for them on Wall Street… But this “One Size Fits All” regulatory approach will have issues. Ironically, now we have government regulations attempting to tell financial institutions not to do what the government was telling them to do before. I guarantee, the same politicians that twisted the lender’s arms to make marginal loans previously, that vilified banks for making the same bad loans, will be the same politicians screaming that the new regulations are too restrictive for their constituents.
Here’s an overview of the sections of the Qualified Mortgage Rule (most are common sense, and are already applicable to a standard “full doc” loan):
?Financial information has to be supplied and verified: Lenders must look at a consumer’s financial information. A lender generally must document: A borrower’s employment status; income and assets; current debt obligations; credit history; monthly payments on the mortgage; monthly payments on any other mortgages on the same property; and monthly payments for mortgage-related obligations. This means that lenders can no longer offer no-doc, low-doc loans.
?A borrower has to have sufficient assets or income to pay back the loan: Lenders must evaluate and conclude that the borrower can repay the loan. For example, lenders may look at the consumer’s debt-to-income ratio—their total monthly debt divided by their total monthly gross income. Knowing how much money a consumer earns and is expected to earn into the future, and knowing how much they already owe, helps a lender determine how much more debt a consumer can take on. Primary problem here is how underwriters are going to look at the vocational, and financial stability of a borrower going forward. They HATE self employed borrowers (maybe not, but it seems like it). Bottom line, expect more scrutiny, even if the loan package is solid using today’s numbers.
?Teaser rates can no longer mask the true cost of a mortgage: Lenders can no longer base their evaluation of a consumer’s ability-to-repay on teaser rates. Lenders will have to determine the consumer’s ability-to-repay both the principal and the interest over the long term—not just during an introductory period when the rate may be lower.
?No excess upfront points and fees: A QM limits points and fees including those used to compensate loan originators, such as loan officers and brokers.
?No toxic loan features: A QM cannot have risky loan features, such as terms that exceed 30 years, interest-only payments, or negative-amortization payments where the principal amount increases. (i.e. legislating fewer program options for borrowers)
?Cap on how much income can go toward debt: QMs generally will be provided to people who have debt-to-income (DTI) ratios less than or equal to 43 percent. (temporary 7 year transition period)
Lenders will be able to make loans that won’t meet the above criteria, but will have to portfolio them, and not sell them to the secondary moarket.
Also note the rule is some cases expands the ability of a borrower to challenge the lenders reasoning for issuing them a loan. However, if the result is a tightening of credit as lenders pull back from offering loans that would create greater risk of litigation, the CFPB may need to quickly revisit the rule to avoid harming the housing recovery.
More information and regulations to come…
The rule and proposed amendments will be available on Thursday at: http://www.consumerfinance.gov/regulations
A factsheet further explaining the new rule is at: http://files.consumerfinance.gov/f/201301_cfpb_ability-to-repay-factsheet.pdf
A summary of the final Ability-to-Repay rule is at: http://files.consumerfinance.gov/f/201301_cfpb_ability-to-repay-summary.pdf
Ron Henderson GRI, RECS, CIAS
Multi Real Estate Services, Inc
Gov’t Affairs Chair – California Association of Mortgage Professionals