More regulations are on the way for our industry. As of January 10, 2014 the new Qualified Mortgage Rule will become effective. Issued by the Consumer Financial Protection Bureau (CFPB), the QM rule will tighten the underwriting standards for qualifying borrowers.
The Qualified Mortgage Rule has two categories. The first protects the consumer by tightening lending practices. The second addresses the legalities for lenders. The main rules are simple: Lenders will be required to ensure that borrowers have the ability to repay their mortgages.
The following is a brief overview of a Qualified Mortgage:
3% Cap on Points and Fees:
Points and fees are additional costs charged by the lender during mortgage application, processing and closing. The QM rule puts a limit on these additional charges, including those used to compensate mortgage brokers and loan officers. These points and fees paid by the borrower must not exceed 3% of the total amount borrowed.
No Toxic Features:
A ‘toxic’ loan feature can refer to any high-risk feature that may cause default.
No Interest Only Loans: These are mortgages where the borrower defers the repayment of principal and pays only the interest, usually for a certain period of time.
No Negative-Amortization Loans: These are loans where the principal amount borrowed increases over time, even while monthly payments are being made. This often happens as the result of the interest-only payments mentioned above.
No Terms Beyond 30 Years: The loan must have a repayment term of 30 years or less.
No balloon loans. A balloon mortgage is one that has a larger-than-normal payment at the end of the repayment term. *Some provisions are still being considered for rural properties
Limits on Debt-to-Income Ratios
Debt-to-income ratios must be no higher than 43%. The debt-to-income ratio compares the amount of money a person earns each month (gross) to the amount he or she spends on recurring debt.
Legal Protections: Safe Harbor & Rebuttable Presumption
Lenders that generate QM loans will receive some degree of legal protection against borrower lawsuits. The level of protection they receive will depend on the type of loan they make. There are two types of qualified mortgages:
Safe Harbor – This loan gives lenders the highest level of legal protection. These are lower-priced loans with interest rates closer to the prime rate. Borrowers have good credit history and are low-risk.
Rebuttable Presumption – These are higher-priced loans that are typically obtained by borrowers with lower credit scores, which make the risk base higher. Lenders who grant these types of mortgages will receive less protection than the safe harbor.
I believe that once these changes take come into play, not all borrowers will be affected and ultimately will put more responsibility on the loan officers to be informed and knowledgeable.