At the stroke of midnight on Jan. 10, the Consumer Financial Protection Bureau (CFPB) formally unveiled its long-anticipated qualified mortgage (QM) definition and Ability-to-Repay rule.
In a press statement, the agency stated that these regulatory changes are designed to ‘protect consumers from irresponsible mortgage lending by requiring lenders to ensure prospective buyers have the ability to repay their mortgage.’ Both the new QM definition and Ability-to-Repay rule will formally take effect on Jan. 10, 2014.
As determined by the CFPB, a QM is defined by the following traits:
- 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%.
The CFPB adds that during a ‘temporary, transitional period,’ loans that do not meet the 43% debt-to-income ratio but meet current government affordability standards or are eligible for purchase by the government-sponsored enterprises will be considered as QMs.
The CFPB adds that there will be two kinds of QMs, each with different protective features for a consumer and different legal consequences for the lender. The first QM is a higher-priced loan that is ‘generally given to consumers with insufficient or weak credit history.’ The second QM has a safe harbor status and is generally a lower-priced prime loan given to consumers who are considered to be less risky. The CFPB says that consumers can legally challenge a lender if they believe a loan does not meet the new QM definition.
Under the Ability-to-Repay rule, lenders originating new mortgages are required to verify a borrower's employment status, income and assets, current debt obligations and credit history. When applicable, verification is also required on a borrower's monthly payments on the current mortgage or other mortgages on the same property, as well as on monthly payments for mortgage-related obligations. Furthermore, lenders are required to evaluate and affirm that a borrower has the ability to repay both the principal and the interest over the long term.
‘Lenders will be presumed to have complied with the Ability-to-Repay rule if they issue qualified mortgages,’ says the CFPB. ‘These loans must meet certain requirements which prohibit or limit the risky features that harmed consumers in the recent mortgage crisis.’
In addition to its new rule, the CFPB has released proposed amendments that would exempt ‘certain nonprofit creditors that work with low- and moderate-income consumers" and make exceptions for ‘certain homeownership stabilization programs’ designed to help borrowers avoid foreclosure. The agency is also seeking comment on the best way to calculate loan origination compensation under the points and fees provision of the new QM definition. The proposed amendments, if adopted, would be finalized this spring and incorporated into the new rulings.
Industry reaction to the CFPB's announcement was mixed, with praise for the CFPB's efforts but unease that certain considerations remained vague or could create new problems.
‘This is a very complex rule,’ warns Debra W. Still, chairwoman of the Mortgage Bankers Association. ‘We remain concerned that certain aspects of it could curb competition, increase costs and tighten credit availability for borrowers. In particular, the three percent cap on points and fees appears to be overly inclusive as it relates to compensation and affiliates. Loans with the same interest rate, terms and out of pocket costs should be treated the same under the rule regardless of the organizational structure or business model of the lender.Â
‘Additionally,’ Still adds, ‘we will be looking carefully at whether the interest rate threshold for the safe harbor, which is set at 150 basis points above the benchmark rate, will adversely impact too many borrowers. These pricing-related restrictions need to be carefully examined to ensure that they do not unnecessarily restrict consumer access to 'qualified mortgages,' including smaller balance loans, as well as jumbo loans.’
‘We continue to have concerns about the rule and its impact on credit unions,’ says Fred Becker, president and CEO of the National Association of Federal Credit Unions. ‘In our view, a rigid approach to regulation is counterproductive, often unworkable and frequently leads to unwanted results. We are concerned that the rule could curtail lending by credit unions, and ultimately, negatively impact consumers by limiting the choices of prudent lenders in the mortgage market.’
‘The rules also leave a pivotal issue unresolved: How fees that lenders pay to mortgage brokers will be counted when it comes to defining a qualified mortgage,’ says Mike Calhoun, president of the Center for Responsible Lending. ‘These fees, known as yield spread premiums, provided incentives for brokers to steer borrowers into bad mortgages that fueled the mortgage crisis. The CFPB should not create a loophole that allows high-fee loans to count as a qualified mortgage under Dodd-Frank. This must be addressed.’
‘Although the CFPB promised to create a level playing field and competition with their rules and regulations, once again we see a strong bias against licensed mortgage brokers when it comes to their ability to serve borrowers,’ says Marc Savitt, president of the National Association of Independent Housing Professionals. ‘We need a rule that treats all originators the same, instead of one that picks winners and losers. This rule appears to be anti-consumer, especially for low and mod individuals and anti-small business in its current form. Every crisis needs a scapegoat and this one targeted brokers.’
‘We were surprised to learn that the CFPB is considering exempting yield spread premiums from the points and fees cap, which could unacceptably water down the qualified mortgage standard,’ says Julia Gordon, director of housing finance and policy at the Center for American Progress. ‘These back-door payments from lenders to loan originators encouraged originators to sell borrowers the unnecessarily risky and expensive loans that triggered the financial crisis. As regulators now turn to implementing Dodd-Frank's risk-retention requirements for issuers of mortgage-backed securities, we encourage them to use today's 'qualified mortgage' definition as the 'qualified residential mortgage' definition. Such alignment would reduce confusion and burden on lenders while providing the protection and flexibility needed to ensure adequate access to credit for all families.’
‘We believe permanently removing certain loan programs with risky features such as no-doc loans to W-2 borrowers will help the housing market in the long run,’ says John H. P. Hudson, chairman of the National Association of Mortgage Brokers' government affairs committee. ‘However, arbitrary caps on points and fees which do not impact a consumer's ability to repay, without any clear definitions, will ultimately harm consumers by reducing competition, raising borrower costs and promoting the policies of 'Too Big to Fail' institutions. The congressional intent of the Ability-to-Repay Rule was not to put the CFPB in a position of picking industry winners and losers.’
The new rule and new proposed amendments are online. The CFPB has also published a fact sheet further explaining the new rule, as well as a summary of the final Ability-to-Repay rule.