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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Downpayment Can’t Be Verified as Asset on Non-QM Loans, Says CFPB

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Downpayment Can’t Be Verified as Asset on Non-QM Loans, Says CFPBThe Consumer Financial Protection Bureau released its spring 2017 Supervisory Highlights touching on, among other things, the ability-to-repay rule as it relates to the origination of non-qualified mortgages or non-QM loans. In line with that, the Bureau clarified that a downpayment can’t be treated as an asset for verification purposes under the ATR.

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Verification of Income and Assets

The ATR rule requires lenders to make a reasonable and good faith determination of a borrower’s ability to repay his/her mortgage. Consequently, the ATR has set minimum guidelines with which lenders can incorporate in their own underwriting standards.

To form the basis of a borrower’s repayment ability, the lender will consider the following eight factors under 12 CFR 1026.43 (c) (2).

(i) the consumer’s current or reasonably expected income or assets, other than the value of the dwelling, including any real property attached to the dwelling, that secures the loan;
(ii) if the creditor relies on income from the consumer’s employment in determining repayment ability, the consumer’s current employment status;
(iii) the consumer’s monthly payment on the covered transaction, calculated in accordance with paragraph (c) (5) of the ATR rule;
(iv) the consumer’s monthly payment on any simultaneous loan that the creditor knows or has reason to know will be made;
(v) the consumer’s monthly payment for mortgage-related obligations;
(vi) the consumer’s current debt obligations, alimony, and child support;
(vii) the consumer’s monthly debt-to-income ratio or residual income; and
(viii) the consumer’s credit history.

The Bureau noted that a lender can verify a borrower’s income or assets as set forth above and on reliable records from third-party sources.

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If a lender deems to verify a borrower’s assets in making non-QMs; it should reasonably and in good faith determine that the verified assets were indeed sufficient to establish the borrower’s ability to repay.

Moreso that the lender who relied on those verified assets and not on income can properly determine that income is not necessary for a reasonable and good faith determination of the borrower’s repayment ability.

Downpayment not an Asset

In its supervisory highlights, the CFPB made clear that downpayment is not an asset and is excluded from the verification of either assets or income under the ATR rule.

The Bureau put emphasis on point (i) above whereby the “value of the dwelling, including any real property attached to the dwelling, that secures the loan” is excluded from a borrower’s current or reasonably expected income or assets to be verified by the lender.

A downpayment forms part of the house securing the QM loan. While the size of the downpayment can decrease the loan amount and thus enhance the chances of it getting repaid, there is no direct link between the downpayment size and ability-to-repay performance going forward. Add to that the downpayment is not part of the ATR’s minimum standards for underwriting.

“Therefore, standing alone, down payments will not support a reasonable and good faith determination of the ability to repay,” the CFPB wrote.

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Balloon Mortgages: Will They Float or Burst This 2017?

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Balloon mortgages have floated in and out of the U.S. mortgage industry. It’s easy to see why: they offer smaller monthly payments until a big one comes at the end of the loan. The Consumer Financial Protection Bureau has released guidelines that exclude a balloon payment feature in qualified mortgages, subject to certain exceptions.

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Balloon Mortgages: How They Work

Balloon mortgages have features similar to an adjustable-rate mortgage and a fixed-rate mortgage. Let’s look at their characteristics:

Rate. Balloon mortgages often have rates lower than other mortgages. The rate is fixed throughout the life of the loan.

Payment. Monthly payments on balloon loans are slightly lower and fixed. One can make smaller payments or interest-only payments until such time as a one-time big-time payment is required to pay off the loan.

Term. Balloon mortgages have shorter repayment schedules, usually spanning five to seven years.

Due date. This is when the larger monthly payment becomes due. The borrower has the option to refinance, sell off the property or pay off the loan in full in cash.

Borrower. Given its nature, a balloon mortgage is for borrowers who don’t have much cash in the short term but can afford to make a large final repayment as the loan term ends.

Balloon Mortgages: How to Deal With the Due Date

If you are dreading your mortgage’s due date, here are some actions you can take:

Option 1: You can take out another loan and use the loan proceeds to pay off the old balloon mortgage. This allows you to repay the old loan in full and fly into the safety of a fixed-rate mortgage.

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Consider This
Refinance makes the most sense when rates are lower or at least on the same level when you first took out the loan. To refinance, you must meet the lenders’ qualifications — credit, income, assets, and equity. Also when you switch from a 5-year or 7-year balloon mortgage to a 15-year or 30-year fixed mortgage, you are effectively extending the time you need to repay the mortgage loan.

Option 2: You can sell the home and use the proceeds from the sale to pay off the balloon mortgage in full.

Consider This
A sale makes the most sense if the value of the home exceeds the debt owed on the loan. Otherwise, you could be pushed to do a short sale, which is a negative mark on your credit report and lowers your credit score in the process.

Option 3: Face the due date and fully repay the balloon loan.

Consider This
This won’t be a problem if you are liquid enough to make the ballooned payment as it becomes due. But for those who can’t produce that twice as much money for the final repayment, they’d have to consider the options above.

To answer the question, it’s hard to tell what future awaits balloon mortgages. One thing is certain: In taking out a balloon mortgage, be prepared to deal with contingencies that come with owning one.

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