The Consumer Financial Protection Bureau's long-awaited definition of a Qualified Mortgage and its Ability to Repay rule, released earlier this month, was greeted with sighs of relief from housing market stakeholders.
Required by the Dodd-Frank financial reform law, a Qualified Mortgage generally is a loan that a creditor says a homeowner is able to repay, based on his or her financial status.
So the QM definition prohibits conditions that could affect the ability to repay, such as negative amortization, interest-only payments, balloon payments or loan terms of more than 30 years. Asset and income information of mortgage applicants must be verified. The debt-to-income ratio of a qualified loan generally is limited to 43 percent, and points and fees paid by consumers cannot exceed 3 percent of the total loan amount.
The mortgage industry, however, was more concerned with the Ability to Repay final rule, which Kathleen Day, of the nonpartisan, nonprofit Center For Responsible Lending, calls "Lending 101."
"Assessing a borrower's ability to pay back what they borrowed used to be called traditional underwriting," she said, but it was lenders' failure to do it that "was one of the root causes of the housing collapse."
The industry recognized underwriting is necessary to avoid another housing catastrophe but feared the final rule would be overly strict, costly and burdensome to implement, ultimately restricting the availability of credit, especially to first-time homebuyers and those in underserved communities. There also was concern that some smaller lenders, such as community banks and credit unions, might stop writing mortgages entirely.
"Our members were concerned that a too-stringent rule would chill the markets and make it impossible for their customers to get loans," said Scott Brunner, head of the Virginia Association of Realtors. "Everyone was relieved that there were, frankly, not a lot of surprises."
Mortgage bankers, home builders, community banks, credit unions and consumer advocacy groups echoed those sentiments.
The rule requires lenders to look at a mortgage applicant's financial records and verify them, considering at least eight underwriting standards: current income or assets, employment status, credit history, monthly mortgage payment, monthly payments on other loans associated with the property, monthly payments for other mortgage-related obligations such as taxes and insurance, other debt and monthly debt-to-income ratio.
"Any lender with smarts is probably already doing what the rule requires, and none of our members sees this as a threat to their customers or their business," Brunner said.
The rules provide a "safe harbor" from lawsuits for lenders who write a Qualified Mortgage and a "rebuttable presumption" that lenders have acted properly in writing the 2 percent to 3 percent of loans that do not qualify as QM.
Day said this gives lenders a streamlined way to show they have properly underwritten a loan and assures them they are protected from borrower lawsuits if they follow the rules.