Introducing the Qualified Mortgage
On January 10, the Consumer Financial Protection Bureau (CFPB) issued its final rule, "Ability to Repay and Qualified Mortgage Standards under the Truth in Lending Act" (Final Rule), which defines the term "qualified mortgage" and interprets the ability-to-repay requirements mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act. The Final Rule affects all creditors of residential mortgage loans subject to the Truth in Lending Act and goes into effect on January 10, 2014.
The Rule states that "no creditor may make a residential mortgage loan unless the creditor makes a reasonable and good faith determination based on verified and documented information that, at the time the loan is consummated, the consumer has a reasonable ability to repay the loan, according to its terms, and all applicable taxes, insurance (including mortgage guarantee insurance), and assessments." The Final Rule requires that lenders verify several underwriting standards, including a borrower's 1) current income or assets, 2) employment status, 3) credit history, 4) monthly mortgage payment and any other mortgage-related obligations and loans associated with the property, 5) other debt obligations, and 6) monthly debt-to-income (DTI) ratio. These ability-to-repay requirements apply to any consumer credit transaction secured by a dwelling, except a home equity line of credit, a timeshare plan, a reverse mortgage, or any temporary or bridge loan with a term of 12 months or less.
The Final Rule defines "qualified mortgages" as those that, in addition to meeting the above-identified ability-to-repay requirements, satisfy the following criteria: 1) the loan does not feature negative amortization, interest-only payments, balloon payments, or a term exceeding 30 years; 2) the total points and fees do not exceed 3% of the total loan amount for loans exceeding $100,000 (with a provision for a sliding scale of acceptable caps on fees for lesser loan amounts); 3) the borrower's income or assets are verified and documented; and 4) the borrower's DTI ratio is not greater than 43%.
Once it's determined a borrower has received a qualified mortgage, lenders will need to know what legal risks apply to the mortgage. The qualified mortgage rule with a safe-harbor provision protects lenders from 'ability-to-repay' legal liability for the life of the loan as long as the loan complies with the guidelines. Qualified mortgages with a safe harbor are those mortgages described as "lower-priced loans that are typically made to borrowers who pose fewer risks."
Mortgage industry observers are hopeful that the new set of rules will help lenders get off the fence and make more capital available to borrowers. After all, mortgages deemed “qualified” under the ability-to-pay rules represent the vast majority of the plain vanilla mortgage market and the safe harbor provisions remove a significant source of risk from the equation.
Attached is the CFPB article Protecting Consumers From Irresponsible Mortgage Lending & a Summary of The Ability to Repay & Qualified Mortgage.