Government Protects Consumers from Unaffordable Mortgages with "Ability-to-Repay" Rule
“A Qualified Mortgage must have the following attributes: (1) no negative amortization, (2) no interest-only payments, (3) no balloon payments, (4) terms cannot exceed 30 years, (5) cannot be a “No-doc” loan, (6) points and fees cannot exceed 3 percent of the total loan amount, and (7) the consumer’s debt-to-income ratio must be less than or equal to 43 percent.” (Pepper Hamilton)
On January 10, 2013, the Consumer Financial Protection Bureau (CFPB) issued its long-awaited “ability-to-repay” rule, which requires mortgage lenders to assess – and sign off on – a borrower’s long-term capability to make loan payments before extending credit.
One key element of compliance with the rule: issuing loans that meet certain standards designed to protect consumers. Steve Quinlivan of law firm Leonard, Street and Deinard explains:
“Lenders will be presumed to have complied with the Ability-to-Repay rule if they issue ‘Qualified Mortgages.’ These loans must meet certain requirements which prohibit or limit the risky features that harmed consumers in the recent mortgage crisis. If a lender complies with the clear criteria of a Qualified Mortgage, consumers will have greater assurance that they can pay back the loan.”
The rule doesn’t go into effect until January 10, 2014 (and may be further revised based on comments the CFPB receives over the next six weeks). In the meantime, here’s a look at five ways the new rules will help consumers seeking a home loan:
1. The burden is on lenders to ensure borrowers can pay:
“An important aspect to the [Qualified Mortgage] rule is the lender determining the borrower’s ability to repay the principal and the interest over the long term….Borrowers must have sufficient assets or income to pay back the mortgage. Exemptions may apply for consumers trying to refinance a risky loan for more stability.” (Schecter Law)
2. Using “teaser” mortgage rates to determine ability to repay is prohibited:
“So-called ‘teaser rates’ will no longer be allowed to mask the true cost of a mortgage. Lenders will be required to determine the borrower’s ability to repay the loan over the long term − not just during an introductory period when the rate may be lower.” (Heenan Blaikie)
3. Strict limits on points and fees:
“The points and fees may not exceed 3 percent of the loan amount, although there is an exclusion for certain bona fide discount points. Compensation paid to both employee loan originators and mortgage brokers directly or indirectly by a consumer or creditor that is attributable to the transaction is included in the 3 percent amount, as are any third-party charges to the extent retained by the creditor, a loan originator, or affiliate of either.” (Ballard Spahr)
4. Toxic loan provisions are out:
“A Qualified Mortgage cannot have risky loan features, such as terms that exceed 30 years, interest-only payments, or negative-amortization payments where the principal amount increases.” (Leonard, Street and Deinard)
5. Some exceptions to the rule are permitted:
“Certain balloon-payment loans will be Qualified Mortgages if they are originated and held in portfolio by small creditors operating predominately in rural or underserved areas. The CFPB will issue a list of such areas.” (Pepper Hamilton)
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The updates:
Qualified Mortgage Rule - Schecter Law
United States Aims To Limit Risky Mortgages - Heenan Blaikie LLP
CFPB Final Ability-To-Repay Rule Prompts Cautious Optimism from Industry - Ballard Spahr LLP
CFPB Issues Rules On Qualified Mortgages - Leonard, Street and Deinard
CFPB Issues Final Ability To Repay Rule And ‘Qualified Mortgage’ Standard - Pepper Hamilton LLP
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Further reading:
U.S. Consumer Financial Protection Bureau Issues Rules on Qualified Mortgages and Ability to Repay -Dechert LLP
The Consumer Financial Protection Bureau Finalizes the Ability-To-Repay and Qualified Mortgage Rule - Snell & Wilmer L.L.P.
Final Rule Issued on Ability-to-Repay/Qualified Mortgages - Foley & Lardner LLP
CFPB Finalizes Ability-to-Repay Rule for Mortgage Lenders, Defines “Qualified Mortgage” and Proposes Exemption to Ability-to-Repay Rule for Community Banks and Credit Unions - Patton Boggs LLP
CFPB Rules on Ability-to-Repay and Qualified Mortgages – Orrick
Quoth the CFPB: “Nevermore” on loans made to consumers who can’t repay - Ballard Spahr LLP
CFPB Issues Ability-To-Repay/Qualified Mortgage Rule - BuckleySandler LLP
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