TheMReport — News and strategies for the evolving mortgage marketplace.
Issue link: http://digital.themreport.com/i/106030
The Latest S e c on da r y M a r k e t a na ly t ic s se r v ic i ng or ig i nat ion ORIGINATION Ability vs. Eligibility: Inside the QM Rule Finalizing the controversial qualified mortgage rule and establishing legal protections for lenders and borrowers, the CFPB faced feedback—and pushback—from the mortgage industry. A fter many long months of waiting, the Consumer Financial Protection Bureau (CFPB) has finally issued its finalized qualified mortgage (QM) rule designed to protect both consumers and responsible lenders. And though it may take awhile before the impact of regulation is fully realized, the CFPB's decisions seemed to reflect the pleas of housing advocates, who feared a rule that would further inhibit the nation's incipient recovery. 38 | The M Report Via lobbying efforts, banks harped on the idea that overly strident regulations would stop housing's progress in its tracks, and indeed, the bureau cited the "fragile state" of the market as the catalyst for implementing a sevenyear phase-in period for the rules. The concession drew detractors, however, based on fears that lenders could make "qualified" loans with higher debt-to-income ratios if the mortgage fell within standards set by the governmentsponsored enterprises. While Fannie Mae and Freddie Mac have set new, reasonably high standards postcrisis, a higher debt burden is a loophole banks could exploit. The absence of any down payment standards—a response to groups that argued it was burdensome to lower-income borrowers—is also considered potentially perilous. Another major provision of the QM rule is the newly set ability-to-repay statute, which demands that all new mortgages comply with basic requirements to protect consumers from taking on loans they can't repay. The rule does away with socalled "no doc" and "low doc" mortgages, requiring that all of a borrower's pertinent financial information must be supplied and verified, including employment status, income and assets, current debt obligations, credit history, and monthly payments on the mortgage, among other information. Based on that information, the lender must be able to make a fair judgment on whether or not the borrower can really take on more debt. The ability-to-repay rule also stipulates that lenders base their evaluation of a consumer's ability to pay on long-term views, discounting "teaser" or "starter" rates typically used in the introductory period. CFPB director Richard Cordray explained the abilityto-repay provisions as a commonsense answer to curb the borrowing and lending behavior that led to the financial crash. "When consumers sit down at the closing table, they shouldn't be set up to fail with mortgages they can't afford," Cordray said. "Our ability-to-repay rule protects borrowers from the kinds of risky lending practices that resulted in so many families losing their homes. This commonsense rule ensures responsible borrowers get responsible loans." Still, the CFPB will consider proposed amendments to the ability-to-repay rule, and such amendments could, among other things, exempt certain nonprofit creditors that work with low- and moderate-income consumers. They would also provide QM status for certain loans made and held in portfolios by small creditors such as community banks and credit unions, and exceptions to the rule would apply for consumers trying to refinance from a risky mortgage to a more stable loan. If adopted, the proposed amendments would be finalized this spring and would be implemented alongside the abilityto-repay rule, which will take effect with the full complement