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Qualified Mortgage: The ‘Ability To Repay’ Rule

CFPB

CFPB – Enforcer of the Qualified Mortgage Rule

In January of 2014, the mortgage game is going to change significantly — and probably for the better, all things considered.

The Dodd-Frank Wall Street Reform and Consumer Protection Act did a lot of things that actually helped to reform Wall Street and protect consumers — but not everything from Dodd-Frank is friendly to Main Street.  One of the elements that Dodd-Frank will implement as of January 10th, 2014 is known as the ‘Ability to Repay’ rule. This will be enforced by the Consumer Financial Protection Bureau.

The Ability to Repay rule states that if a lender is able to verify that a borrower’s ability to repay the loan they are seeking, the lender will receive a mandate that judges will automatically rule in their favor should the borrower contest a foreclosure down the road. In such a situation, the loan is referred to as a qualified mortgage. This sounds like it’s a protection for the lender. But the truth is, if you make the grade and get a qualified mortgage, it will be a rare turn of events that leaves you in such bad straits that you’ll be fighting a foreclosure in the first place, and that’s the point. It’s a way of preventing lenders from risking their money by making shoddy mortgage loans in the first place.

What Makes A Qualified Mortgage?

In order for a mortgage to become a qualified mortgage, the borrower must have a debt-to-income ratio of at least 43%. In other words, the borrower must be able to pay off the monthly mortgage payment using no more than 43% of their gross income. (Exceptions can be requested and obtained if the mortgage is underwritten by Fannie Mae and Freddie Mac.  HARP loans are also excempt.) A qualified mortgage must also have an interest rate within 1.5% of the national benchmark rates.

The Act adds powerful incentive for lenders to transform existing ‘bad’ loans such as Hybrid ARMs, Negative Amortization loans, Interest-Only Loans, and other toxic mortgages into qualified mortgages in order to gain the litigious immunity mentioned above. 

What Effects Will This Have On The Lending Market?

David Stevens, the chief executive of the Mortgage Bankers Association, went on record as saying that the debt-to-income requirements could tighten standards for jumbo loans, which are already harder to obtain, saying “It will restrict credit on the margin over the current environment and that’s something we can not afford.”

Qualified mortgages will also institute a 3% cap on the fees that lenders can charge, which will make it harder for smaller lenders, mortgage brokers, and multi-function housing firms such as those that offer mortgages but also offer title insurance or home building, because the fees for those other services would also count toward the 3% cap.

The Consumer Financial Protection Bureau is considering extending qualified mortgage exemptions to mortgages taken out by nonprofit groups and housing finance agencies that serve low-income consumers, but hasn’t decided whether or not it’s in their best interests to do so. 

All in all, this is a common sense requirement. It’s common sense that a lender needs to confirm a borrower’s ability to service the new debt. It is common sense that a borrower should not contest a foreclosure if they are no longer able, or willing, to pay back the loan. Therefore, having a qualified mortgage streamlines the foreclosure process and gives a higher incentive for lenders to offer high quality mortgage options.

Contact us if you have any questions or are seeking help with a mortgage.

 

 

Scott Storace

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