CFPB to release qualified mortgage(s) rule

(Updated 2013-01-10 at 11:17 to clarify the limit on points and fees that can be charged.)

The Consumer Financial Protection Bureau, after years of discussions, comments, hearings, and the like, will finally be releasing its Qualified Mortgage (QM) rules. These set minimum qualifications for borrowers — at least if lenders want government backing and protection from consumer lawsuits.

Put another way: For the vast majority of loans, this will be the standard borrowers will have to meet.

We’ll be analyzing the rules in detail — as will the entire world of financial punditry — but for now here’s how they appear to work.

There are two levels to the rules: Ability to Pay and Qualified Mortgages.

Ability to Pay

Ability to Pay is the standard that all new mortgages must meet. As the CFPB explained, “[L]enders too often offered mortgages to consumers who could not afford them.” (Some of those lenders even tried to blame borrowers for accepting the loan!)

So there are eight things a lender must consider — it must look at a consumer’s financial records and verify them:

  • Current income or assets;
  • Current employment status;
  • Credit history;
  • The monthly payment for the mortgage;
  • The monthly payments on any other loans associated with the property;
  • The monthly payment for other mortgage related obligations (such as property taxes);
  • Other debt obligations; and
  • The monthly debt-to-income ratio or residual income the borrower would be taking on with the mortgage.

Nothing unusual there; any lender with a triple-digit IQ was already checking those things.

In fact, the rule gives lenders leeway; it “does not dictate that they follow particular underwriting models,” but “Creditors must generally use reasonably reliable third-party records to verify the information they use to evaluate the factors.”

Further, lenders have to consider the borrowers’ ability to pay the loan over the longer term (five years, to be precise), not just during a teaser-rate period.

Finally, an exemption: Consumers who are refinancing from a “risky mortgage” (e.g., an ARM, an interest-only loan, or a negative-amortization loan) to a traditional mortgage. They don’t have to meet all the standards that a new borrower would.

Qualified Mortgages

OK, those rules apply for every loan. But if a lender wants a mortgage to be “eligible to be purchased, guaranteed, or insured by” the Federal government (e.g., Fannie, Freddie, HUD, VA, etc.), that loan must also meet the CFPB’s Qualified Mortgage standards. The important ones:

  • No excess upfront points and fees: Points and fees are fine, as long as they are for the loan itself, not “to compensate loan originators, such as loan officers and brokers.” Points and fees cannot exceed three percent of the total loan amount in most cases.
  • No “toxic” features: Terms can’t exceed 30 years; interest-only and negative-amortization payments (where the principal amount increases) are banned.
  • Debt-to-income limit: A borrower’s debt-to-income ratio must be less than or equal to 43 percent. (There’s an exception — see below.)

Got it? Keeping that in mind, the CFPB created two types of QMs: prime and sub-prime. Why? Because consumer groups wanted borrowers to be able to challenge a lender if that lender didn’t underwrite properly, while lenders wanted a “safe harbor” from lawsuit and loan buybacks if it followed the rules.

So the CFPB did something for everyone. It created two QMs.

Sub-prime QMs: higher priced, but borrowers can challenge. These loans are for folks with lower credit ratings. They still meet all the standards, but if the borrower ends up defaulting (“if the loan goes south,” as the CFPB put it), he can can attempt to prove that the lender shouldn’t have qualified him.

This is known as “rebuttable presumption,” meaning the lender is presumed to have complied; the onus is on the borrower to prove otherwise. If the borrower does prove that, the government can require the lender to buy back the loan.

Prime QMs: lower priced, and safe harbor for the lender. These are for your less-risky consumers — the ones with high credit ratings etc. etc. With these loans, if the lender meets the QM underwriting criteria it has “safe harbor” — the government can’t force the lender to buy back the loan if the borrower defaults. (However, the borrower “can legally challenge their lender if they believe the loan does not meet the definition of a Qualified Mortgage.”)

Finally, there’s a temporary exception to that 43 percent rule. CFPB was concerned that there are loans that might not meet the specific and detailed QM requirements, but still qualify for government backing.

The Bureau also believes that there are many instances in which individual consumers can afford a debt-to-income ratio above 43 percent based on their particular circumstances, but that such loans are better evaluated on an individual basis under the ability-to-repay criteria

So it created a temporary category of loans “that have more flexible underwriting requirements” but still satisfy the general QM rules; this will be in effect for the next seven years (or less, if Federal agencies issue their own guidelines). The details of these aren’t available yet, but we’ll update you when they’re released.

Going forward

The CFPB has some other plans for loans — proposed amendments to these rules.

For example, it wants to “exempt certain nonprofit creditors that work with low- and moderate-income consumers” and “make exceptions for certain homeownership stabilization programs.”

It also wants to provide Qualified Mortgage status “for certain loans made and held in portfolio by small creditors, such as community banks and credit unions.”

For now, though, we have plenty to chew on.

Click here to read the CFPB’s factsheet (short PDF).

Click here to read the CFPB’s summery (longer, detailed PDF).

Click here for the press release.

About Andrew Kantor

Andrew is VAR's editor and information manager, and -- lessee now -- a former reporter for the Roanoke Times, former technology columnist for USA Today, and a former magazine editor for a bunch of places. He hails from New York with stops in Connecticut, New Jersey, Cincinnati, Columbus, and Roanoke.
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2 Responses to CFPB to release qualified mortgage(s) rule

  1. Dawn M says:

    Hello Editor: This article has sparked some juices here:

    First, “Thank you” for the updates surrounding the housing & the all aspects of our never ending, merry-go-round political plate of rules and regulations, again, pertaining to the housing market. Always great readings & mind alike process.

    Second, If I see this…… (pulling out a crystal ball).. look’s like we are about to ride the same train that got us into a big mess already w/our housing? right? But this time… it sounds like their will be some sort of Governmental offical, “NEW DEPT” looking over everyone’s shoulder and selecting buyers? Well, to a cetain degree, I see.”

    Amazing at how so micro this to everything with this fundimentally changing society and yet, it is possibly the very base of our society; A home, a family… in one of the greated Countries…. and yet, the tenticles run deep. I am kinda feeling like a mouse that was good in following the cheese in a maze and now, deserves a home…. Boy oh boy, pursuing happiness has a whole new meaning.

    History is so repeating itself for the worst… The 1930’s come to mind…. specially w/the German’s during that time. And w/the media/hollywood, we, the Americans are so asleep at the wheel…….again!!!

    (Throwing the shovel down & walking away)…from the rabbit’s hole. “This issue is so deep, I pray for our Country & it’s people.” These words/thoughts have been channeled through the many senior friends that I am pleased to know & have met at one time or another in my life time. Folks that know, remember……. history on all levels, THEREFORE, my thoughts, my words are from truthful, wise & historical sources.

    I just felt that it “needs to be noted”. The house is just a block of cheese …to the Government NOW, and we… are the mice…, that is about to be taken through the maze of rules and regs….. again. I do not know about you but do you feel the push in your back right shoulder and hearing the words, “lean forward……or else”…in today’s society of living?

    VERSES, ………oh boy, that would be a whole nother story….. one that we have lived…. Too & to be short: A family, a home, fortunes even if was just quarters rolling in your pocket, TRUST, fairness, morals…. & GOD with very little Government. “Education of history & involvement in your surroundings, are the keys.”

    If I can suggest: watch this documentary: http://www.runawayslavemovie.com/ This documentry explains it in a nutshell… Again, talk to anyone over the age of 50. They can share their historical knowledge of things & with the way things are with our homestead…. in America it is important to know as much as you can from truthful sources.

    Third & last: As a Realtor, I have decided to add an item to my house warming gift & I hope other Realtors will follow: An American flag w/post mount: minimum size of 3’X5′.

  2. Dawn M says:

    p.s. Ironic I would receive this other artilce… AFTER this VABuzz article. Just more evidence, I mean…… information you would see in the rabbit’s whole:
    (Chuckles) “If you know history, you do not need a crystal ball”

    http://www.motherjones.com/politics/2013/01/democracy-initiative-campaign-finance-filibuster-sierra-club-greenpeace-naacp

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