CFPB’s qualified mortgage rule (ability to repay)
by: Allen P. DeLeon
In January 2013, the Consumer Financial Protection Bureau (CFPB) adopted a new rule that implements the “Ability to Repay/Qualified Mortgage” (ATR/QM) provisions of the Dodd-Frank Act. The rule became effective on January 10, 2014.
The new rule is aimed at reducing the number of foreclosures and eliminating the conditions in the housing market that created the large real estate bubble. It requires lenders to ensure that borrowers have the ability to repay their mortgages while protecting lenders from borrower lawsuits in the event of a default. The CFPB estimates that 92% of mortgages being originated meet the new “qualified mortgage” (QM) requirement. The new rule is expected to chiefly affect self-employed individuals and those earning tips, commissions, and rents as a large portion of their income.
The final rule includes a very broad QM standard which applies to most types of mortgages. Creditors are now required to make a reasonable, good faith determination of a borrower’s ability to repay any consumer credit transaction that is secured by a dwelling and also establishes certain protections from liability under this requirement for QMs. The rule does not apply to open-end credit plans, time-share plans, reverse mortgages, or temporary (bridge) loans with terms less than 12 months. The rule also implements the following other provisions of the Dodd-Frank Act: (1) bans most prepayment penalties and (2) requires creditors to retain documentation of compliance with the rule for three years after a covered loan is originated.
The mandatory requirements for all QMs are:
- Points and fees must be less than or equal to 3% of the loan amount for loans up to $100,000
- No risky features such as interest-only payments, negative amortization, or balloon loans