In January, the Consumer Finance Protection Bureau passed a set of new regulations labeled as the Ability to Repay Rule. This collection of regulations requires mortgage lenders to make good-faith efforts to ensure that all borrowers have the ability to repay their new loans.
The Ability to Repay Rule has been designed to add a new layer of protection for both consumers and mortgage lenders and brokers and was prompted by the large number of “no documentation” and “interest only” mortgages issued before 2007.
The key element of the rule is that new loans should not put a borrower above a 43 percent debt-payment-to-income ratio. That is, the total amount of monthly debt obligations a borrower will have after the proposed mortgage is included cannot be greater than 43 percent of the borrower’s pretax income.
If the borrower meets the criteria established by the Ability to Repay Rule, the mortgage is deemed a Qualified Mortgage (QM). As the new rules protect the borrower, a Qualified Mortgage also protects the lender should the borrower default on the loan. Congress has directed that the Ability to Repay Rule include such provisions that would help shield lenders adhering to the guidelines if challenged in court.
The highlights of a Qualified Mortgage loan are as follows:
(1) Must be a full documentation loan
(2) Borrower must have sufficient assets and income to pay the loan payment
(3) No excessive upfront points and fees
(4) No interest-only, negative-amortization, no term longer than 30 years
(5) Maximum DTI ratio of 43%
(6) No balloon payments (except for smaller creditors in rural and underserved areas)
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