Ability to Repay and Qualified Mortgage Rules Under the Dodd-Frank ActBanker Resource
March 19, 2014 — 1,530 views
The Dodd-Frank Act was made a law on July 21, 2010. This Act needed the making of a Qualified Mortgage Rule (QM rule) to lessen the probability of risk due to default in the US lending industry. The Consumer Financial Protection Bureau (CFPB) was entrusted with the job of making this new rule. CFPB announced the final QM description in the first month of 2013 and it came into effect from January 10, 2014.
Basics of QM rule
It was formulated with the intention of creating “safer” mortgages. To achieve this, QM does the following:
- Inhibits a few features of the loan
- Caps mortgage fees and points
- Imposes specific underwriting needs for all loans
In lieu of making QM loans, the lenders will be provided with partial legal protection if there are consumer lawsuits, which could take the nature of a rebuttable presumption or safe harbor.
A Qualified Mortgage is described as a loan for a home which meets particular standards set by the federal administration. Lenders who create such loans are presumed to meet “Ability to Repay” rule as stated by the Dodd-Frank Act.
The important points of a Qualified Mortgage are:
- There is a fee cap and three percent points for the amount of loan more than $100,000.
- The maximum ratio of debt to income is 43 percent.
- There should be negative amortization and balloon payments.
- Only interest should be repaid.
- The maximum loan term is 30 years.
Ability to Repay Rule
Under the Ability to Repay Rule, the lender must ensure that a borrower has the financial ability to repay the mortgage obligation. This can be achieved by reviewing some financial documents:
- The documents proving that the asset and income is verified.
- Proof of employment.
- All payments towards monthly mortgage, like insurance and taxes.
- Verification of liabilities and debts, including child support and alimony.
- Residual income or DTI.
- Documents relating to credit history.
Prohibition of deceptive teaser rates
The rate of mortgage displayed to the borrower should not hide the loan's true cost. Also, the lenders are unable to measure the ability of the borrower to repay loans based on teaser rates. Lenders must compulsorily measure the ability of the borrower to repay the mortgage in the long term. The Ability to Repay rule is the first of a number of measures taken by CFPB to promote a culture of riskless lending in the United States.