Since July 2010, when the Dodd-Frank Wall Street Reform and Consumer Protection Act officially created the Consumer Financial Protection Bureau (CFPB), the group has sought to eliminate the deceptive, illegal practices that led to the financial crisis and create an environment where consumers understand financial risks, credit costs and product availability - and where companies' business models are built on fairness, honesty and transparency.
As part of the bureau’s efforts "to make markets for consumer financial products and services work for Americans," the CFPB works to prevent predatory mortgage lending, improve the clarity of mortgage paperwork for consumers and reduce incentives for mortgage brokers to push home buyers into more expensive loans.
Similarly, the CFPB works with credit card companies and other consumer lenders to disclose their terms to consumers.
In any case, the CFPB requires loan terms to be presented in a new, easy-to-read-and-understand format. As an independent operating unit of the Federal Reserve System, the bureau also enforces nearly 20 rules and regulations previously spread over seven different agencies including the Fair Debt Collection Practices Act, Fair Credit Reporting Act, Truth in Lending Act, Real Estate Settlement Procedures Act (RESPA), Electronic Funds Transfers Act and the Privacy of Consumer Financial Information Act, among others.
The bureau has also been working to create additional regulations covering international money transfers, more extensive supervision over non-bank financial service companies, extended requirements for lenders to consolidate mortgage disclosures and to examine borrowers' ability to repay loans.
As a result, beginning Jan. 10, 2014, the Qualified Mortgage (QM) rule will go into effect, and according to Terry Conley, Executive Vice President of Lake Mortgage Company, which has been providing local home buyers with mortgage banking services from its Merrillville headquarters for 67 years, it could radically change the home lending environment.
“A recent analysis of home loans showed that as many as one in five current mortgages would not qualify under the new rule,” he said. “Any residential mortgage on a 1-4 unit property will fall under the new rules including purchase money and refinance transactions. The rules for loan approval will be stricter especially when it comes to the Ability to Repay (ATR) and Debt-to-Income (DTI) ratio test.”
Whether it’s called QM or the Ability-to-Repay rule, the CFPB will now require lenders to take more into consideration when making mortgage loans.
When looking into the years leading up to the financial crisis, the bureau found that lenders too often made mortgages to consumers who could not pay them back – resulting with many of them in delinquency and foreclosure.
After discovering that many people struggle with understanding how big a monthly payment they can afford, the bureau also found that these same people often assume lenders and mortgage brokers will not offer them a loan they cannot afford.
“To comply and be able to sell mortgages on the secondary market to Fannie Mae and Freddie Mac, lenders won’t be able to offer any risky loan with features such as interest-only, negative-amortization, loans longer than 30 years or balloon loans, and they cannot charge the borrower points and fees that exceed three percent of the mortgage amount,” Conley explained.
“Lenders must also adhere to the Ability-to-Repay rule, which says a borrower’s total monthly debt expense – including the proposed monthly mortgage payment – should be less than 43 percent of income. According to the Consumer Financial Protections Bureau, lenders must ‘make a reasonable, good faith determination of a consumer’s ability to repay any consumer credit transaction secured by a dwelling.’ When conducting a reasonable good-faith evaluation of the borrower’s ability to repay, a creditor must consider eight specific underwriting factors outlined by the CFPB. A residential income test, similar to VA loans, may also be required. Lenders who issue mortgages that meet the QM criteria have a safe harbor - meaning they cannot be sued by borrowers claiming the loan terms are unfair.”
By limiting risky features that harmed consumers during the mortgage crisis, placing a cap on how much income can go towards debt and placing a limit on the amount of upfront points and fees that consumers can be charged, the Ability-to-Repay/QM rule is designed to help ensure you borrowers get a mortgage loan they can afford. The rule also helps make sure responsible lenders are not forced to compete with reckless lenders engaged in risky practices.
In light of the new rule taking effect, Conley, who has 41 years of experience in mortgage lending, offers the following advice for homebuyers hoping to gain loan approval as of Jan. 10, 2014.
“Begin by consulting a mortgage professional and sharing your income and debt information,” he said. “Ask to have your credit report run to determine your qualifications for a new mortgage. Get pre-approved for a specific mortgage amount. You’ll then be ready to shop for a home or refinance your existing mortgage.”