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   ARTICLE   |   From Scotsman Guide Residential Edition   |   September 2013

Reforms May Hit Self-Employed Borrowers Hard

After QRM guidelines go into effect, will credit dry up for low-doc clients?

The Dodd-Frank Wall Street Reform and Consumer Protection Act already has changed the mortgage banking industry significantly, and some of its provisions still have yet to go into effect. Future reforms, including the impending qualified residential mortgage (QRM) provision that is slated to go into effect this coming January, may be the next governmental mandate that adversely impacts yet another group of homeowners.

With the ability-to-repay standard set by the Consumer Financial Protection Bureau (CFPB), many in the industry are concerned that self-employed borrowers, low-income clients and first-time homebuyers may be left out in the cold when it comes to financing a home.

QRM requirements

The QRM provision requires mortgage lenders to justify a borrower’s ability to repay based on eight basic criteria. The CFPB’s ability-to-repay standards call for lenders to verify the following information when underwriting qualified residential mortgages:

  • Current income or assets relied upon in making the loan
  • Current employment status
  • Monthly payment on the mortgage
  • Monthly payment on any simultaneous mortgage
  • Monthly payment for mortgage-related obligations
  • Current debt obligations
  • Monthly debt-to-income ratio or residual income
  • Credit history

These requirements may eliminate a significant number of high-credit, self-employed borrowers who have successfully paid on a mortgage loan and often have high downpayments. By imposing these standards when underwriting mortgage loans for the self-employed, a class of virtually unfinanceable individuals has been created. Many self-employed individuals financed their housing needs before 2007 and have exemplary credit, but they will not qualify to refinance or get other mortgages because of the debt-to-income requirements of the ability-to-repay provision.

In addition, the risk-retention provision of the QRM will keep many mortgage lenders from making any non-QRM loans. This provision mandates that any institution that sells its mortgages on the secondary market as asset-backed securities must maintain a 5 percent share of the risk of each loan originated that does not meet the requirements of a qualified residential mortgage.

The idea behind this provision was to force mortgage lenders to lend to higher creditworthy borrowers by requiring lenders to have “skin in the game.” Because of the possible penalties and risks associated with non-QRM loans, however, lenders may well abandon the self-employed borrower.

Industry reactions

In a recent research study conducted by the author on the subprime mortgage crisis, 22 loan officers with 10 years or more of experience were interviewed, and the plight of the self-employed borrower was found to be one of their greatest concerns. Although regulations, investor overlays, impact on loan-officer income and reduced availability of mortgage financing to consumers were all major topics of discussion, the elimination of mortgage financing options for the self-employed was discussed at length.

Many of the participants in the study named legislation such as the Secure and Fair Enforcement for Mortgage Licensing Act and the Dodd-Frank Act as seminal points in redirecting the mortgage industry. Most of the participants concluded that the new regulations have created unintended consequences, including increased paperwork, lack of flexibility, and confusion and frustration for consumers.

Participants in this study complained that many current homeowners — specifically the self-employed, despite strong credit and significant equity in their homes — will not qualify to refinance to lower rates. One of the participants believed that the QRM proposal eliminated self-employed borrowers from qualifying to refinance their current mortgages to lower rates or qualifying for purchase mortgages. The rule may eliminate many strong-credit, high-downpayment borrowers from getting mortgages because they will not qualify for conventional financing because of tax write-offs allotted to self-employed borrowers. 

Ninety-five percent of the participants in this study concluded that the recent regulations eliminated many fixed-income, self-employed and low-income individuals from qualifying for a mortgage. The subprime meltdown and new rules implemented from the Dodd-Frank Act have eliminated no-documentation and low-documentation mortgage products, thereby abandoning millions of current homeowners with excellent credit, significant equity in their homes and substantial reserves. Previously, these buyers’ attributes would have been considered compensating factors, but under the QRM guidelines, these loan characteristics may no longer be considered.

The QRM requirements could add restrictions to debt-to-income requirements, not only eliminating financing options for homeowners and homebuyers, but also eliminating potential homeowners entirely by requiring larger downpayments. Many of the participants in the study were shocked that there were no options available to current homeowners who did not meet QRM standards.

Most of the participants in this study stated that they were extremely concerned about the increasingly stringent qualification standards and the elimination of loan availability to self-employed, first-time or low-income buyers. If the QRM guidelines are not adapted to become friendlier to self-employed and fixed-income borrowers, many borrowers could be forced into short sales and/or foreclosures.


The QRM requirements could change the mortgage industry dramatically from where it is today. Many mortgage lenders and homebuyers simply will not be able to meet these lending standards. Many of the participants of the study suggested that the new regulations could encumber current homeowners and first-time homebuyers significantly, limiting their ability to qualify for a mortgage.

Loan officers are at the front line in the mortgage industry and are the direct connection between borrowers and lending institutions. Considering that, regulatory agencies should welcome these professionals’ input when creating corrective legislation. Collaboration between licensed loan officers and governing agencies would be advantageous to all parties involved in the mortgage process.  


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