Yesterday, the Consumer Financial Protection Bureau (CFPB) issued its much-anticipated final rule concerning qualified mortgages. In July, 2010, Congress passed the Dodd-Frank Financial Reform Act mandating that the CFPB propose rules to protect consumers from toxic mortgage products. The CFPB, following its Congressional mandate, has created a final rule after reviewing 1,800 public comments from industry groups, trade associations, lobbyists and members of the public.
The final rule can be summarized as follows:
Ability to Repay
In the years leading up to the financial crisis, lenders too often offered mortgages to consumers who could not afford them. Under the Ability-to-Repay rule announced today, all new mortgages must comply with basic requirements that protect consumers from taking on loans they don’t have the financial means to pay back. Among the features of the new rule:
- Financial information has to be supplied and verified: Lenders must look at a consumer’s financial information. A lender generally must document: a borrower’s employment status;
ncome and assets; current debt obligations; credit history; monthly payments on the mortgage; monthly payments on any other mortgages on the same property; and monthly payments for mortgage-related obligations. This means that lenders can no longer offer no-doc, low-doc loans, where lenders made quick sales by not requiring documentation, then offloaded these risky mortgages by selling them to investors.
- A borrower has to have sufficient assets or income to pay back the loan: Lenders must evaluate and conclude that the borrower can repay the loan. For example, lenders may look at the consumer’s debt-to-income ratio – their total monthly debt divided by their total monthly gross income. Knowing how much money a consumer earns and is expected to earn, and knowing how much they already owe, helps a lender determine how much more debt a consumer can take on.
- Teaser rates can no longer mask the true cost of a mortgage: Lenders can’t base their evaluation of a consumer’s ability to repay on teaser rates. Lenders will have to determine the consumer’s ability to repay both the principal and the interest over the long term − not just during an introductory period when the rate may be lower.
Lenders will be presumed to have complied with the Ability-to-Repay rule if they issue “Qualified Mortgages.” These loans must meet certain requirements which prohibit or limit the risky features that harmed consumers in the recent mortgage crisis. If a lender complies with the clear criteria of a Qualified Mortgage, consumers will have greater assurance that they can pay back the loan. Among the features of a Qualified Mortgage:
- No excess upfront points and fees: A Qualified Mortgage limits points and fees including those used to compensate loan originators, such as loan officers and brokers. When lenders tack on excessive points and fees to the origination costs, consumers end up paying a lot more than planned.
- No toxic loan features: A Qualified Mortgage cannot have risky loan features, such as terms that exceed 30 years, interest-only payments, or negative-amortization payments where the principal amount increases. In the lead up to the crisis, too many consumers took on risky loans that they didn’t understand. They didn’t realize their debt or payments could increase, or that they weren’t building any equity in the home.
- Cap on how much income can go toward debt: Qualified Mortgages generally will be provided to people who have debt-to-income ratios less than or equal to 43 percent. This requirement helps ensure consumers are only getting what they can likely afford. Before the crisis, many consumers took on mortgages that raised their debt levels so high that it was nearly impossible for them to repay the mortgage considering all their financial obligations. For a temporary, transitional period, loans that do not have a 43 percent debt-to-income ratio but meet government affordability or other standards − such as that they are eligible for purchase by the Federal National Mortgage Association (Fannie Mae) or the Federal Home Loan Mortgage Corporation (Freddie Mac) − will be considered Qualified Mortgages.
What does this mean for title agents?
The rule is directed at lending institutions, but the impacts will also be felt by title agents. One area in particular that our members will notice is the fact that the new rule limits banks from tying their services to “affiliate” sources. Charges of “affiliates” will now count as part of the 3% cap on points and fees under the qualified mortgage definition. Thus, any bank-owned title insurance affiliate will have their fees count, whereas, any independent title agency fees will not count towards the QM cap. The National Association of Independent Land Title Agents (NAILTA) pushed hard to make sure that the CFPB preserved the “affiliate” limitation in the final rule and independent title agents should be relieved that the provision actually did survive. This is a victory for those who understand the harm these conflict-riddled “affiliates” have on the consumer experience.
The lone exception to the affiliate provision is the fact that the term “affiliate” is defined as any interest greater than 25% in the service provider. Thus, banks may still own up to 24.99% in a given settlement provider without having to count those fees paid to the provider as QM capped fees. Regardless, getting a limitation of these fees will help consumer avoid the opaque nature of these referrals and, perhaps, serve as a disincentive to more banks attempting to cross over into the title spectrum.
Click here for the CFPB Qualified Mortgage Rule Fact Sheet
Click here for the full text of the new CFPB Qualified Mortgage Rule