U.S. Consumer Financial Protection Bureau Announces Qualified Mortgage Guidelines
| Date Published | 1/9/2013 |
| Author | Marja Hoek-Smit |
| Theme | Retail Housing Finance |
| Country |
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