ABILITY TO REPAY - QUALIFIED MORTGAGE The Dodd-Frank Act states that a creditor may not make a mortgage loan without first determining that the borrower has a reasonable ability-to-repay the loan. This means that mortgage companies may only originate a “qualified mortgage” (QM). However, there are some facts about measuring ability-to-repay and QMs, Dodd-Frank, and the Consumer Financial Protection Bureau (CFPB) that every one of us including real estate agents, builders, title companies and consumers need to be aware of because the landscape of mortgage finance is about to be changed again. Let me first explain how Dodd-Frank defines what a QM really is. In order to measure an ability-to-repay, a mortgage lender must consider and verify eight points: income, employment, qualifications based on fully-indexed rates, payments on simultaneous loans, mortgage obligations, current debt, residual income and credit history. This is pretty simple stuff considering that this is how lenders are now-a-days underwriting potential mortgages anyways. The parts of Dodd-Frank’s “ability-to-repay” that most are not aware of are the “three percent cap” on total points and fees and the “safe harbor vs. rebuttable presumption” theories, which will determine litigation risk for mortgage originators. As currently drafted in Dodd-Frank, the “three percent cap” will include title fees, loan originator (LO) compensation and amounts of taxes and insurance held in escrow. That’s right, escrows can be included in the three percent cap on points and fees And QMs apply to ALL types of mortgages. Now, on to the “safe harbor” vs. “rebuttable presumption” debate. The mortgage industry, including the National Association of Realtors (NAR), are pushing for a “safe harbor,” meaning if a mortgage company originates a QM loan, the originator will be protected from certain liabilities and legal challenges. Consumer groups are pushing for the “rebuttable presumption” because if a lender follows the rules and originates a QM loan, the consumer can still litigate years down the road and use this as a defense of foreclosure. An example would be if a borrower were to lose their job 15 years into a 30-year mortgage, they could challenge a foreclosure proceeding by making the originating creditor prove in court that they properly measured the consumer’s ability-to-repay. Under this alternative, lenders will be forced to only lend well within the realm of qualified mortgages, meaning there will be tighter underwriting guidelines and fewer homebuyers. Remember, severe financial liabilities exist for ANY lender failing to meet the “ability-to-repay” definitions of the Dodd-Frank Act.
Posted on: Mon, 23 Sep 2013 15:13:14 +0000
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