'Qualified Mortgage' Rules Released

The Consumer Financial Protection Bureau (CFPB) introduced its long-awaited new rule Thursday on what will constitute a Qualified Mortgage under such laws as the Dodd-Frank Act and the Consumer Protection Act. In tandem, the bureau also unveiled the new Ability to Repay rule aimed at further protecting borrowers from bad mortgages.

Under CFPB’s definition, a Qualified Mortgage meets three essential criteria:

• A loan that limits points and fees, including those used to compensate loan originators, such as loan officers and brokers;
• A loan that does not include such features as terms exceeding 30 years, interest-only payments, and negative-amortization payments where the principal amount increases; and
• A cap on how much income can go toward debt – QMs are to be provided to people who have debt-to-income ratios less than or equal to 43 percent.

Mortgages that do not meet the third element may still be considered QMs for a temporary, transitional period if they meet government affordability or other standards, such as eligibility for purchase by Fannie Mae or Freddie Mac.

The Ability to Repay rule lists strict procedures lenders are to follow to ensure borrowers will be able to pay off their mortgages. Provisions include:

• Financial information has to be supplied and verified. Lenders must analyze the 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 eliminates the risky no-doc and low-doc loans offered before and during the mortgage crisis.
• All borrowers must be evaluated on their ability to repay the loan. For example, the CFPB cites a borrower’s debt-to-income ratio as one measure for gauging repayment ability.
• The above evaluation cannot be based on repayment at teaser rates; lenders must make the assessment based on the principal and interest over the long term.

CFPB has already released a set of proposed amendments to the rule, which would exempt “certain nonprofit creditors that work with low- and moderate-income consumers” as well as make exceptions for certain homeowner stabilization programs.