Consumer Financial Protection Bureau (CFPB) Has Released Ability-to-Repay and Qualified Mortgage Standards Rules

The Consumer Financial Protection Bureau (CFPB) released a new rule effective Friday January 10, 2014.  Known as the Ability-to-Repay and Qualified Mortgage Standards, the rule implements provisions of the Dodd-Frank Act and requires all mortgage lenders to consider whether a consumer will be able to repay a home loan before offering credit.  The rule encompasses two essential provisions:

First, in considering whether a consumer has the ability to repay a home loan, mortgage lenders must examine, at a minimum, eight factors at origination.  These factors are: current or reasonably expected income or assets (other than the value of the property securing the loan) that the consumer will rely on to repay the loan; current employment status, if a lender relies on employment income when assessing the consumer’s ability to repay; monthly mortgage payment for this loan, using the introductory or fully-indexed interest rate, whichever is higher, and monthly, fully-amortizing payments that are substantially equal; monthly payments on any simultaneous loans secured by the same property; monthly payments for property taxes and required insurance, and certain other costs related to the property such as homeowners’ association fees or rent; debts, alimony, and child support obligations; monthly debt-to-income ratio and residual income using the total of all of the mortgage and non-mortgage obligations, as a ratio of gross monthly income; and credit history.

Second, CFPB offers certain legal protections to loans that meet additional underwriting criteria on top of the ability-to-repay considerations.  The new rule refers to these loans as “Qualified Mortgages” (QMs).  The regulations allow for three categories of QMs: General QMs; Temporary QMs; and Small Creditor QMs.  Loans qualify for General or Temporary QM status if, among other things, their terms do not exceed thirty years, and they do not feature negative-amortization, interest-only, or balloon payment features.  Only Small Creditor QMs may allow balloon payments.

For General QMs, additional underwriting considerations must be made before a lender extends credit.  These include underwriting based on a fully amortizing schedule that uses the maximum rate permitted in the first five years and a determination that the consumer’s monthly debt-to-income ratio does not exceed forty-three percent.

For Temporary QMs, the loan must be eligible for purchase, insurance, or guarantee by Freddie Mac or Fannie Mae, VA, FHA, USDA, or the Rural Housing Service.

For more information, contact one of the attorneys in the Credit Union and Real Estate Law departments.

Article written by Rebecca A. Koval, Esq. For more information, contact Ms. Koval at (607) 723-5341 or via email at rkoval@hhk.com. 

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