Long-awaited "qualified mortgage" rules were issued on January 10th by the Consumer Financial Protection Bureau, setting forth guidelines to protect borrowers from predatory lending while shielding lenders who follow the rules from litigation.
The new guidelines effectively ban many types of high-risk loans that were implicated in the growth and collapse of the housing bubble, including interest-only mortgages, stated income loans (so-called liar loans), most mortgages with balloon payments and negative amortization loans where the principal owed continues to grow over time.
Debt limit of 43 percent of income
Key to the new guidelines is an "ability to repay" rule that sets standards lenders must follow when qualifying a borrower for a mortgage. Lenders will be required to look at a borrower's ability to repay over the long term, as opposed to based on a temporary "teaser" rate, and will also be required to take into account a borrower's income, assets, debt load and credit history, in addition to the monthly loan payment.
A borrower's total debt obligations, including the mortgage and assorted costs, would be limited to 43 percent of monthly income under the new guidelines.
"In the run-up to the financial crisis, we had a housing market that was reckless about lending money," said CFPB Director Richard Cordary, in a statement accompanying the announcement of the rules. "Lenders thought they could make money on a loan even if the consumer could not pay back that loan."
"To put it simply: lenders should not set up consumers to fail," he added.
No restrictions on down payments
Absent from the new guidelines is any mention of a minimum down payment requirement for qualified mortgages, an issue that had generated a great deal of concern from the mortgage industry. Early proposals were for a down payment requirement as high as 20 percent for a mortgage to be considered as qualified, which lenders said would severely restrict mortgage lending.
Lenders who follow the rules in making a loan will be exempt from liability if the borrower later defaults on the mortgage. Consumers would still be able to make a claim that the lender did not properly follow the guidelines, however.
Industry reacts with caution
The new guidelines received a cautious embrace from mortgage industry representatives.
"The rule was just issued, and we must examine it carefully," said Debra Still, chair of the Mortgage Bankers Association. "Nevertheless, we applaud the Bureau for offering a legal safe harbor to lenders when they originate loans that meet the rigorous ‘qualified mortgage' standards in the rule."
Still said the guidelines should enable lenders to originate mortgages to a great number of qualified borrowers without fear of unreasonable or overly punitive litigation or penalties. However, she did express concern over certain provisions of the new rules that limit the interest rates and fees lenders can charge and still have a loan be considered a qualified mortgage.
Could adversely affect brokers
She noted a new limit of 300 basis points (3 percentage points) on fees and points that a lender may charge. This restriction is of particular concern to mortgage brokers, whose receive discounted rates from wholesale lenders, then charge up to 2.5 percent of the loan amount as their fee, leaving little room for other costs. The concern is that the limit would put brokers at a disadvantage to retail lenders.
The new rules also limit the interest rate that can be charged on a qualified mortgage to 150 basis points (1.5 percentage points) above the benchmark rate, which Still said could be an issue with both small-balance and jumbo loans.
No immediate effect
The new rules take effect Jan. 10, 2014, with a seven-year phase in for certain provisions. In addition, lenders will be exempted from certain restrictions if it can be shown they are refinancing a borrower from a high-risk type loan to a more stable financial product.
Lenders would still be able to originate mortgages that do not follow the guidelines after the rules take effect, but those loans would not be qualified mortgages, and would therefore not be shielded from liability protection and would likely be considerably more expensive to the borrower.
The CFPB has a summary of the new rules here.
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