Oh joy. We’re well into the second month of 2014 and the new rules created by the Consumer Financial Protection Bureau are in full effect. This agency was created under the Dodd-Frank Act to ban, among other things, the practices that many lenders employed leading up to the housing bubble burst in 2008.
The CFPB also created a new class of loans called Qualified Mortgages (QM). In order for lenders to meet the criteria of a “qualified mortgages”, the loan can’t be interest-only and negatively amortizing. Also, the amount of points, fees, or prepaid interest on the mortgage must not go above 3% of the loan’s value. In addition, the loan’s loan amount cannot exceed a total debt-to-equity income ratio of 43%. (That’s your total debt payment amounts which includes all recurring monthly obligations that affect your ability to repay). Finally, balloon payment loans and anything over 30 years does not qualify either.
So what’s the lender get from all of this new rule-following you ask? Good question! If a mortgage lender follows the criteria and meets the standards of a qualified mortgage, then they are basically freeing themselves from liability claims under the Truth in Lending Act (TILA). Consumers won’t be able to use the ability-to-repay defense against the lender. In other words, if the lender meets the QM criteria, they’re placing themselves in a “safe harbor” and consumers won’t be able to sue the lender if they default on the loan. Sounds good, right? Okay, maybe you don’t really care about the lender that much. It is something to keep in mind before pushing the limits on those payment amounts.
An interesting question is about the necessity of these rules, or for that matter the necessity of another bureau to “protect” us. Lenders already started implementing these kinds of standards before the CFPB rules went into effect. (You probably know this already if you applied for a loan last year). According to the CFPB’s own publication, 95% of current mortgages already meet this criteria Whether lenders changed their guidelines in anticipation of these rules or if they were just prudent business decisions can be debated, but the fact still remains.
So really, there won’t be any dramatic change in the way lenders currently operate and the way you apply for your next loan. The biggest changes may come to the way some full service companies where real estate agents, brokers, title agents and mortgage brokers are all working together. It may be difficult for them to keep their total fee amounts below 3%. It will be interesting to see how (if) the CFPB addresses this. Time will tell.
There’s a lot to this. If you have any thoughts on the new rules, or questions, post them below. I’ll do my best to answer them or at least point you in the right direction. Don’t agree with me? Please let me know why by commenting. Thanks for reading.