Non-Qualified Loan

CFPB Assesses Effectiveness of ATR/QM Rule, Seeks Public Input

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The Consumer Financial Protection Bureau is assessing the effectiveness and impact of the ability-to-repay/qualified mortgage rule. It is currently seeking public input to help with its assessment on the ATR/QM rule, which will be made public by January 2019.

CFPB Director Richard Cordray in his agency’s request for information said, “The Bureau anticipates that the assessment will primarily focus on the ATR/QM rule’s requirements in achieving the goal of preserving consumer access to responsible, affordable credit.”

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ATR/QM Rule: The Creation

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 was enacted following the financial crisis of 2008. Enshrined in the Dodd-Frank Act are:

  • A set of new standards requiring mortgage lenders to assess a consumer’s ability to repay a mortgage.
  • A class of qualified mortgage loans that don’t contain risky features, e.g. negative amortization, balloon payments, etc., and must comply with the ATR.

To make these rules effective and clear, the CFPB is authorized by Congress to issue implementing regulations. The CFPB consequently issued the Ability-to-Repay and Qualified Mortgage Standards Under the Truth in Lending Act (Regulation Z) in January 2013, as further amended and became effective in January 2014.

ATR/QM Rule: The Assessment

To fulfill its mandate, the CFPB is conducting an assessment of the effectiveness of the ATR/QM rule. The assessment involves a review of the rule’s major provisions, as outlined:

  • The ATR requirements, including the eight underwriting factors a creditor must consider;
  • The QM provisions, with a focus on the DTI threshold, the points and fees threshold, the small creditor threshold and the Appendix Q requirements, and
  • The applicable verification and third-party documentation requirements.

It will look at how these major provisions influence consumer outcomes, i.e. mortgage cost, origination volumes, approval rates, and subsequent loan performance.

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Of special interest to the CFPB is the effect of the rule on certain groups borrowers who:

  1. Are generating income from self-employment
  2. Are anticipated to rely on income from assets to repay the loan
  3. Rely on income from assets to repay the loan
  4. Rely on intermittent, supplemental, part-time, seasonal, bonus, or overtime income
  5. Are seeking smaller-than-average loan amounts
  6. Have a DTI ratio exceeding 43%
  7. Are in the low and moderate income bracket
  8. Are minority borrowers
  9. Are rural borrowers

The agency will also examine the impact of the Temporary GSE QM category, a set of QM loans eligible for purchase or guarantee by Fannie Mae or Freddie Mac with the earlier termination or expiration of the category included in the review. This set of QM loans will expire on January 10, 2021, or when the conservatorship of the GSEs ends.

Interested parties can submit comments electronically, via email, mail or hand delivery.

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MBA Proposes Changes to Existing ATR / QM Rules

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MBA Proposes Changes to Existing ATR QM Rules

The Mortgage Bankers Association has proposed changes to the existing Ability-to-Repay and Qualified Mortgage (QM) rules.

By these tweaks formally submitted to Senators Brown and Crapo of the Senate Committee on Banking, Housing and Urban Affairs, the MBA hopes for an expanded QM credit box where more lenders can make QM loans and serve more borrowers.

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ATR / Qualified Mortgages: Now and Future

The ATR essentially requires lenders to make a determination that a borrower can reasonably afford to repay his/her mortgage. Lenders can comply with this requirement by making Qualified Mortgages.

Under QM rules, there is a presumption of compliance that loans originated as QMs per their requirements. This is called a safe harbor and protects lenders from being sued by borrowers who claimed that the lenders did not have any reason to believe they could afford the loan.

Notwithstanding the safe harbor provision, lenders face hefty fines and penalties if they fail to meet the ATR rule.

In the face of a potential costly litigation, the MBA found that lenders have been making compliance safe harbor QM loans only. This prevents borrowers who could have qualified for a QM loan from accessing “safe, sustainable and affordable mortgage credit.”

Consequently, the MBA proposes these changes that would improve on or update existing ATR/QM rules, as follows.

  1. An expanded safe harbor. That the safe harbor provision will be applied to all mortgages that meet the QM standards. Specifically, the MBA proposes to increase the QM safe harbor threshold from 150 bps to 200 bps over Average Prime Offer Rate (APOR), a benchmark rate.
  2. An updated “small loan” definition. That the ATR rule be amended to update the basis of a small loan to $200,000 from $101,953, where points and fees may exceed 3%. This allows for more borrowers with smaller loans to qualify as QM loans.
  3. A broadened right to correct technical errors. That the MBA seeks an amendment that would allow for correction of errors in case the three-percent limit on fees and points is exceeded, debt-to-income ratios have been miscalculated, and other technical errors have been made.
  4. A revised definition of points and fees. That the MBA calls for fees paid to service providers that are affiliated with lenders to be excluded from the computation of loan fees and points. This creates more competition among third-party providers.
  5. A replacement of the QM patch. QMs are required to have a DTI ratio limit of 43% or as required by FHA, Fannie Mae or Freddie Mac. The MBA urges the CFPB alongside stakeholders to develop a set of rules including compensating factors that will address loans with higher DTI ratios. This will replace the QM patch and the 43-percent DTI cap.

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Is a Stated Income Loan Suitable for Your Situation?

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Is a Stated Income Loan Suitable for Your Situation

Stated income loans used to be so commonplace prior to the housing crisis. Since then they pretty much disappeared for many years. This left people with less common methods of income production without home loans because they could not meet the requirements of conventional loans, especially their new stricter standards. The Dodd Frank regulations made things even more difficult for these borrowers as every loan now needs to pass the Ability to Repay Rule in order for banks to be protected from litigation as well as to be able to sell the products on the secondary market. Since the economy has made a comeback, however, a few lenders have dabbled in stated income loans again. They are not the loans you would have found in the market a few years ago, but they are still a great way for the self-employed or commissioned borrower to get a home loan.

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Credit Guidelines

Credit scores are often the bane of existence of mortgage programs. If you don’t have the minimum score, you can count yourself out of the program. This is not necessarily the case for state income loans; however, you do need to have good credit in order to qualify. What good credit means depends on which lender you are talking to, though. Because stated loans pose a greater risk to the lender because the loan must remain on the books of the lender providing the loan, any way that the lender can minimize your risk of default, they are going to take. The easiest way to do this is to limit the number of low credit scores they allow. As a general rule, lenders require a credit score of at least 700 to qualify for the program. As with any program, however, there are exceptions. If you are able to make up for the lower credit score with excessive reserves (more than the required 12 months); a large down payment; and minimal current debts, you might be able to get away with a lower credit score.

Income Guidelines

It might seem out of the scope of the program to require borrowers to verify income in order to qualify for stated income loans, but it is a necessity as that is what got banks in trouble in the first place. It is one thing to provide a loan that allows a borrower to state their income and verify it with alternative documents rather than a standard paystub, W-2, or tax return. What got the industry in trouble was the lack of verification these loans had before. Borrowers were able to state their income and get a loan based off of that if they had the credit score to back them up. Today, these loans with the same name, have a completely different verification process. You still have to be able to verify your income, but it can be with a different document, such as your bank statements. While the lender will not see a deposit from XYZ Company every two weeks for your paycheck; they will be able to see a pattern in your deposits and withdrawals over the period of a year or two. This enables the lender to see how much money you bring in and pay out; helping them to determine if you can in fact, afford the new mortgage.

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Down Payment Requirements

How much you put down on a home purchase helps to dictate its risk level. The less money you put down, the less you have invested in the home. If you were to run into financial difficulty down the road and have little invested in the home, then you could end up giving up on the home, leaving it in the hands of the bank. This is a large reason why lenders require large down payments for stated income loans. Typically, 30 percent is the minimum, but you will find different programs with every lender. Your credit score, amount of stated income, and the purchase price of the home will help to determine what level of a down payment the lender will be willing to accept. Remember that the more you are willing to put down, the less risky your loan becomes.

Investment Home Requirements

One area that the Dodd Frank regulations do not hit is with investment homes. Owning an investment home is considered a business, rather than anything else. This means that the same rules do not apply to you, enabling you to obtain this type of loan for your real estate investment business. As with any owner occupied property, however, you will have to prove your worthiness for the loan. You cannot just state your income and the fact that you plan to purchase the home for investment and get it – you have to qualify for it with good credit, plenty of reserves, and verifiable income in your bank statements. Because the Qualified Mortgage guidelines to not apply to you, this loan could be sold on the secondary market, enticing more lenders to provide investment home loans for qualified borrowers.

As is the case with any loan, there are restrictions on who qualifies. Banks today want to be much more careful than ever before in order to avoid the chance of homes being foreclosed upon. Contrary to popular belief, banks do not want to take possession of a home; they would rather find a way to get the borrower to be able to afford the payments. When a bank has to take a home back it takes up a lot of their resources, not to mention funding. All lenders today will be careful who they provide stated income loans to, but at the very least, they are a great way for people that were forced to become self-employed or to take on a commissioned job to become home owners once again after they get their finances in order and are able to prove their worthiness in other ways than the standard income verification that most loans require.

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