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   ARTICLE   |   From Scotsman Guide Residential Edition   |   January 2014

The Effects of QM

The new qualified mortgage rule brings with it a multitude of changes

The Consumer Financial Protection Bureau (CFPB) has been given the task of finalizing the definition of the qualified mortgage (QM) rule, and as many mortgage professionals know, that rule is set to take effect on Jan. 10. The Dodd-Frank Wall Street Reform and Consumer Protection Act provided the general parameters for the QM rule, but there’s been great debate as to the rule’s specifics.

Essentially, Dodd-Frank requires lenders to make a good-faith determination of a consumer’s ability to repay. The requisite parameters of that determination, however, are far from simple. Let’s peel back the onion and take a look at how the pending changes may affect lenders going forward.

Restrictions

The QM rule includes a number of limitations on loan features. For one thing, a QM loan will no longer be able to have a negative amortization feature or any interest-only component. Additionally, there cannot be a balloon-payment feature, and the loan’s amortization cannot exceed 30 years. For those working on the Fannie Mae side, this will not be much of a change, as these types of loans have been nonexistent since 2008.

There are also limits on points and fees, generally capping closing costs at 3 percent of the total loan amount. That said, the cap doesn’t apply to bona fide discount points or upfront private mortgage insurance (PMI). For mortgage brokers who offer standard Fannie Mae and Freddie Mac A-paper loans, this cap should not be an issue, especially since the discount points and PMI issues have been addressed.

The QM rule brings with it some new quantified underwriting requirements, as well. Lenders now must verify income, assets, debts and alimony. Again, this represents no visible major change for A-paper originators.

Perhaps the biggest change will be that a borrower’s monthly debt-to-income ratio cannot exceed 43 percent. Many brokers and originators submit loans on a daily basis to get Desktop Underwriter findings. Of course, Fannie and Freddie don’t have published acceptable ratios. In effect, the underwriting engine will examine the loan-to-value ratio, credit score, reserves, housing type and other ratios before giving an answer.

In the experience of many banks and brokerages, it’s not the typical salaried W-2 earner who exceeds the 43 percent ratio. Rather, it’s often the self-employed borrower or the borrower who is relying on work bonuses, commissions or overtime to qualify. In the past, mortgage professionals frequently ignored these types of earnings because they had a Loan Prospector approval with a 49 percent back ratio. In the future, however, originators may have to require acceptable bonus letters or commentary from the employer on future bonus, commission and overtime income. It also may result in a subjective analysis of allowable income for a borrower.

Loan originators should know that there is a temporary exception to the 43 percent debt-to-income ratio rule, an exception that will be granted for loans that are eligible to be sold or insured by Fannie, Freddie, the Federal Housing Administration or the U.S. Department of Veterans Affairs, among other federal agencies. This exception extends to 2021. Assuming that Fannie and Freddie don’t change their internal automated underwriting systems, however, this may not have a huge effect on consumers.

Protections for lenders

Lenders that generate QM-compliant mortgage loans will receive some legal protection against borrower lawsuits. The level of protection they receive will depend on the type of loan that they offer.

There are two types of QM loans: safe harbor and rebuttable presumption. Safe-harbor standards give lenders the most protection. These are typical A-paper loans and involve consumers who have good credit histories, documented assets and acceptable loan-to-value ratios. If the borrower ends up in default, it’s more difficult to sue the lender. That noted, borrowers still can challenge their lenders if they feel that their loan fell short of QM parameters.

Rebuttable-presumption standards typically will be used for higher-priced loans that fall into the private-label loans in the market. Lenders that grant these types of mortgages will receive less defense than those with the safe-harbor protection. Essentially, rebuttable presumption says that borrowers who default could win ability-to-repay lawsuits if they can prove that the creditors “did not consider their living expenses after their mortgage and other debts.” Again, however, there’s a notable gray area when it comes to this claim.

Finally, related to this, the CFPB recently finalized its new disclosure forms, and mortgage originators should know that they’ll be required to provide consumers with the new Closing Disclosure form three business days before closing. This form will replace the final Truth in Lending statement and the U.S. Department of Housing and Urban Development settlement statement (i.e., the HUD-1 form).

The three-day stipulation of this disclosure requirement means that the form must be presented to the borrower on the Monday before a Friday purchase closing, despite the fact that the consumer still could be shopping for homeowner’s insurance or that the lender still could be waiting for the certificate of occupancy on new construction. As such, many lenders will have to change their closing operations to comply with this new rule. This new guideline won’t be part of the changes that go into effect this Jan. 10, however, and will instead take effect in August 2015.

•  •  •

There’s no doubt that the QM rule will change the mortgage industry — and the secondary market — in a wide variety of ways. Throughout the transition process, the brokers and originators who persevere will be those who are the most vigilant and well-prepared. Staying on top of the QM rule’s specifics can help you fortify your business and improve your success on the secondary market.  



 
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