SUMMARY
OF THE ABILITY-TO-REPAY
AND QUALIFIED MORTGAGE RULE
The Consumer
Financial Protection Bureau is issuing a final rule to implement laws requiring
mortgage lenders to consider consumers’ ability to repay home loans before extending them
credit. The rule will take effect on January 10, 2014.
Background
During the years
preceding the mortgage crisis, too many mortgages were made to consumers without
regard to the consumer’s ability to repay the loans. Loose underwriting practices by some
creditors including failure to verify the consumer’s income or debts and qualifying
consumers for mortgages based on “teaser” interest rates that would cause
monthly payments to jump to
unaffordable levels after the first few years contributed to a mortgage crisis that led to
the nation’s most serious recession since the Great Depression.
In response to this
crisis, in 2008 the Federal Reserve Board ,Board, adopted a rule under the Truth in
Lending Act which prohibits creditors from making “higher-price mortgage loans” without assessing
consumers’ ability to repay the loans. Under the Board’s rule, a creditor is presumed to have
complied with the ability-to-repay requirement if the creditor follows certain specified
underwriting practices. This rule has been in effect since October 2009.
In the 2010
Dodd-Frank Wall Street Reform and Consumer Protection Act, Congress required that for
residential mortgages, creditors must make a reasonable and good faith determination based
on verified and documented information that the consumer has a reasonable ability to repay
the loan according to its terms. Congress also established a presumption of compliance for a
certain category of mortgages, called “qualified mortgages.”
Summary
of Final Rule
Ability-to-Repay
Determinations. The final rule
describes certain minimum requirements for creditors making ability-to-repay
determinations, but does not dictate that they follow particular underwriting
models.
At a minimum,
creditors generally must consider eight underwriting factors:
1. Current or reasonably expected income or
assets;
2. Current employment status;
3. The monthly payment on the covered
transaction;
4. The monthly payment on any simultaneous loan;
(5) the monthly payment for mortgage-related obligations;
6. Current debt obligations, alimony, and child
support;
7. The monthly debt-to-income ratio or residual
income; and
8. Credit history. Creditors must generally use
reasonably reliable third party records to verify the information they use to
evaluate the factors.
The rule provides
guidance as to the application of these factors under the statute. For example, monthly
payments must generally be calculated by assuming that the loan is repaid in substantially equal
monthly payments during its term. For adjustable-rate mortgages, the monthly payment
must be calculated using the fully indexed rate or an introductory rate, whichever is
higher. Special payment calculation rules apply for loans with balloon
payments, interest-only
payments, or negative amortization.
The final rule also
provides special rules to encourage creditors to refinance “nonstandard mortgages” which include
various types of mortgages which can lead to payment shock that can
result in default into “standard mortgages” with fixed rates for at least five
years that reduce
consumers’ monthly payments.
Presumption
for Qualified Mortgages. The Dodd-Frank Act provides that “qualified mortgages” are
entitled to a presumption that the creditor making the loan satisfied the
ability to repay requirements.
General Requirements for Qualified
Mortgages. The
Dodd-Frank Act sets certain product-feature
prerequisites and affordability underwriting requirements for qualified
mortgages and vests
discretion in the Bureau to decide whether additional underwriting or other requirements should
apply.
The final rule implements the statutory criteria, which
generally prohibit loans with negative amortization, interest-only
payments, balloon payments, or terms exceeding 30 years from being qualified
mortgages. So-called “no-doc” loans where the creditor does not verify
income or assets also cannot be qualified mortgages.
Finally, a loan generally cannot be a qualified mortgage if the points and fees paid by the consumer exceed three percent of the total loan amount, although certain “bona fide discount points” are excluded for prime loans.
The general rule requires that monthly payments be calculated
based on the highest payment that will apply in the first five years of the
loan and that the consumer have a total (or “back-end”) debt-to-income ratio
that is less than or equal to 43 percent unless GSEs or HUD apply flexible
underwriting standards. In that case the
ratios would conform more to current LP and DU guidelines.
Bureau is concerned
that creditors may initially be reluctant to make loans that are not qualified
mortgages, even though they are responsibly underwritten. The final rule
therefore provides for a second, temporary category of qualified mortgages that
have more flexible underwriting requirements so long as they satisfy the
general product feature prerequisites for a qualified mortgage and also satisfy
the underwriting requirements of, and are therefore eligible to be purchased,
guaranteed or insured by either (1) the GSEs while they operate under Federal
conservatorship or receivership; or (2) the U.S. Department of Housing and
Urban Development, Department of Veterans Affairs, or Department of Agriculture
or Rural Housing Service. This temporary provision will phase out over time as
the various Federal agencies issue their own qualified mortgage rules and if
GSE conservatorship ends, and in any event after seven years.
Other
Final Rule Provisions. The final rule also implements Dodd-Frank Act provisions that generally
prohibit prepayment penalties except for certain fixed-rate, qualified
mortgages where the penalties
satisfy certain restrictions and the creditor has offered the consumer an alternative loan
without such penalties.
770-279-0222
