New Mortgage Rules – Getting Qualified and Ability to Repay

Under the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, lenders are required to make a reasonable and good faith determination based on verified and documented information that the borrower has a reasonable ability to repay a loan.

The law also established a presumption of compliance for a certain category of mortgages called “qualified mortgages.”

The final rule implementing the Act is Lenders must consider a minimum of eight underwriting factors: current or reasonably expected income; other assets; current employment status; monthly payment on the loan; monthly payment on any simultaneous loan; monthly payment for mortgage related obligations; current debt obligations; and alimony.

Presumption for Qualified Mortgages: The Act provides that qualified mortgages are entitled to a presumption that the lender making the loan satisfied the above ability to repay requirement.

The final rule provides a safe harbor for loans that satisfy the definition of a qualified mortgage and are not “higher priced.” For loans that are “higher priced” the rule provides a rebuttable presumption.

General Requirements for Qualified Mortgages: The final rule generally prohibits loans with negative amortization, interest only payment, balloon payments, or terms exceeding 30 years. No-doc loans cannot be qualified mortgages and generally loans with points and fees that exceed 3% of the loan amount (bona fide discount points are excluded).

There are also general underwriting criteria – the general rule of which is that monthly payments be calculated based on the highest payment that will apply in the first five years of the loan and that borrower have a total debt to income ratio that is less than or equal to 43%.

There also exists a second, temporary category of qualified mortgages that have more flexible underwriting requirements so long as they satisfy general prerequisites for qualified mortgages and also satisfy underwriting requirements of the GSE’s, VA or HUD.

The new rule is meant to address the problems created in the housing market resulting from loans made without consideration of a borrower’s ability to repay it, particularly ALT-A and adjustable pick-a-payment.

As one might imagine, there is a lot of detail related to this final rule. This article is meant as a topical treatment of the rule to provide the reader with some familiarity with the requirements and purpose.