Dodd-Frank 2014 Update : Ability to Repay & Qualified Mortgage Rules
In January 2013, the Consumer Financial Protection Bureau (CFPB) issued their final rules on Ability-to-Repay (ATR) and Qualified Mortgages (QM), as required under the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank). These rules require that lenders make a reasonable, good faith determination of an applicant’s ability to repay before originating a mortgage loan and provides certain legal protections from liability for “qualified mortgages.” Both the ATR rule and QM rule will be effective for applications dated on or after January 10, 2014.
Qualified Mortgages Summary
Under Dodd-Frank, Congress established a category of mortgages titled “Qualified Mortgages.” The QM rule prohibits certain loan terms and features such as negative amortization, interest-only payments, balloon payments, a term greater than 30 years, and points and fees exceeding established thresholds (as described in “Points and Fees Summary” section below).
1. General QM – In addition to the restrictions on certain features, a lender must consider and verify several factors related to income, assets, debt obligations, mortgage related payments, and most importantly, the DTI cannot exceed 43%.
2. Agency/GSE QM – The rule also grants QM status to loans originated during an established transitional period if they are eligible for purchase by a GSE or if they are eligible for guarantee insurance as required by FHA, VA, or RHS. These loans must meet all general QM requirements but NOT the 43% DTI ratio limit. To qualify for this temporary status, loans must meet the eligibility requirements of Fannie Mae, Freddie Mac, FHA, VA, or Rural Housing Service and have an acceptable approval from the applicable automated underwriting system (AUS).
Safe Harbor and Presumption of Compliance for Qualified Mortgages
Qualified Mortgages can have two levels of liability protection: Safe Harbor and Rebuttable Presumption. The level of protection is determined by comparing a loan’s APR with the Average Prime Offer Rate (APOR) at the time the rate is set. The Safe Harbor threshold for Qualified Mortgages aligns with the established HPML threshold of APOR plus 1.50%. Loans exceeding the Safe Harbor threshold are considered Rebuttable Presumption Qualified Mortgages.
Points & Fees Summary
A loan cannot be considered a QM if the points and fees exceed the established threshold based on the loan amount (the points and fees limit varies by loan amount, please see the final rule). Points and fees include:
All fees included in the finance charge except Interest or the time price differential
- All compensation paid directly or indirectly by an applicant consumer that can be attributed to that transaction
- Compensation paid by a lender to a mortgage broker is included
- Compensation paid by a mortgage broker to a loan originator employee or paid by a lender to a loan originator employee is not included
- Any upfront private mortgage insurance amount that exceeds the FHA premium
- Real estate-related fees or charges retained by the creditor, loan originator, or their affiliate(s)
- Certain discount points that do not meet the requirements specified in the rule
- All prepayment penalties
The ATR rule sets forth minimum requirements for demonstrating a consumer’s ability-to-pay. Complete details on the calculation of income and DTI ratios can be found in Appendix Q of the final ATR rule. Loans with a QM status (general or agency/GSE types) are presumed to have complied with all ATR requirements, including (but not limited to) evaluation of the following:
• Current or reasonably expected income or assets
• Employment status
• Monthly payment for the loan being requested
• Monthly payment(s) on any related loan(s)
• Monthly payments for mortgage-related obligations
• Current debt obligations, alimony and child support
• Monthly debt-to-income (DTI) ratio or residual income
• Credit history as determined by a credit repository
Want to know how this impacts you? Contact us today to find out!
-Austin Lampson, NMLS #517060 firstname.lastname@example.org