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.
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.
- 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.
- 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.
- 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.
- 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.
- 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.