The Dodd-Frank Act prohibits a creditor from making a residential mortgage loan unless the creditor makes a reasonable and good faith, verified determination that the consumer has a reasonable ability to repay the loan. This determination of a consumer’s ability to repay must be based on the following factors: the consumer’s current and expected income and other financial resources excluding equity in the dwelling which secures the loan; employment status; payment of the loan based on a fully amortizing payment schedule and the fully-indexed rate; payment of any simultaneous liens; payment of applicable taxes, insurance and assessments; the consumer’s current obligations; the consumer DTI ratio or residual income; and the consumer’s credit history.
Dodd-Frank also provides for a presumption of compliance with the ability-to-pay requirement for a “qualified mortgage.” However, due to ambiguity with respect to whether or not this presumption of compliance was intended to serve as a safe harbor or rebuttable presumption, two alternative definitions of the term “qualified mortgage” have been proposed by the Federal Reserve Board. Below are key points regarding the rule’s two alternative proposed definitions of the term “qualified mortgage.” The comment period ends July 22, 2011 and final rules will be implemented by the new Consumer Financial Protection Bureau.
Qualified Mortgage Definition Providing Safe Harbor for Creditors
- Pursuant to the first alternative definition, a creditor will be considered compliant with the Ability to Repay rule if a covered transaction is a “Qualified Mortgage” (QM).
- QMs are defined as loans which provide for regular periodic payments that do not: result in an increase of the principal balance, allow the consumer to defer repayment of principal or result in a balloon payment.
- In addition, a QM may not have a loan term exceeding 30 years.
- The total points and fees payable in connection with a QM may not exceed a tiered-based threshold. Two alternative tiered-based thresholds have been proposed.
Tiered-Based Threshold Alternative 1:
- For a Loan Amount of $75,000 of greater - 3% of total
- For a Loan Amount of $60,000 or greater and Less than $75,000 - 3.5% of total
- For a Loan Amount of $40,000 or greater and Less than $60,000 - 4% of total
- For a Loan Amount of $20,000 or greater and Less than $40,000 - 4.5% of total
- Loan Amount of less than $20,000 - 5% of total
Tiered-Based Threshold Alternative 2:
- For a loan amount equal to or greater than $75,000: 3% of total
- For a loan amount equal to or greater than $20,000 and less than $75,000 in accordance with the following formula:
Total loan amount - $20,000 = $Z
$ Z x.0036 basis points = Y basis points
500 basis points - Y basis points = X basis points
X basis points x.01 = % of total loan amount allowable points and fees
- For a loan amount of less than $20,000: 5% of total
- QMs must be underwritten using a period payment of principal and interest based on the maximum interest rate that may apply during the first 5 years after consummation, and those period payments would fully repay either the loan amount over the loan term or the outstanding principal balance as of the date the interest rate adjusts to the maximum rate. The creditor must also account for any mortgage-related obligations when underwriting the loan in accordance with this provision.
- The creditor must also consider and verify the consumer’s current or reasonably expected income or assets in connection with the making of the loan.
Qualified Mortgage Definition Providing Rebuttable Presumption of Compliance for Creditors
- Under the second alternative definition of QM, a creditor will be presumed compliant with the Ability to Repay requirement if the loan transaction qualifies as a QM.
- QMs are defined as loans which satisfy each requirement set forth in the proposed alternative definition above and, in addition, the creditor must consider additional factors.
- The additional factors the creditor must consider include: the consumer’s employment status, any simultaneous loans, the consumer’s current debt obligations and the consumer’s credit history.
- Even if the loan is a QM in accordance with this definition, the consumer may rebut the presumption of compliance with evidence that the loan did not comply with the general ability to repay requirements.
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To learn more about these mortgage industry topics, visit http://www.allregsmortgage.com.
Marissa Aquila Blundell, Esq. is Vice President and Senior Counsel at Bankers Advisory, Inc. Marissa manages the regulatory research and updating of AllRegs State Compliance Rule Matrices and Checklists for 50 U.S. States.
Disclaimer: The information presented in this article represents the opinion of the author and not that of AllRegs. This article is not meant to be nor should it be construed as advice of legal counsel. The applicability of the information contained herein will vary based on the nature of each lending institution’s business, under what law it was created, and its loan products and procedures. Readers are strongly urged to consult with their legal counsel and/or contact local counsel as appropriate in the various states and jurisdictions to determine the applicability of the materials contained herein to the specific facts and circumstances of each organization’s programs and products and to identify other law applicable to its business operations. The information contained herein was not reviewed or approved by counsel in the respective jurisdictions. |
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