On January 10, 2013, the Consumer Financial Protection Bureau issued much-anticipated revisions to Regulation Z to implement provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act that require lenders to make a reasonable good faith determination that borrowers have the ability to repay their mortgage loans. The final rule (“ATR Rule”) continues a process that began with a May 2011 proposal from the Federal Reserve Board and is effective for applications received on or after January 10, 2014. But, we’re not done yet. Along with the ATR Rule, the CFPB issued proposed changes to it dealing with balloon payments, points and fees calculations, and other possible revisions.
At first blush, the ATR Rule might seem straightforward. Mortgage lenders must make an ability to repay determination by verifying and evaluating a list of traditional indicia of creditworthiness. They obtain a compliance safe harbor or a rebuttable presumption of compliance (depending on the loan’s annual percentage rate) if they originate a Qualified Mortgage (“QM”). QMs are regularly amortizing loans, underwritten to standard rules and assumptions, that carry no more than a prescribed number of points and fees (3% of the “total loan amount” for loans of $100,000 or more) and a maximum 43% total debt-to-income (DTI) ratio. The 43% DTI limit does not apply, for a limited time, if a QM loan could be sold to Fannie Mae or Freddie Mac, or guaranteed or insured by a federal agency. In addition, some of the rules don’t apply when certain “non-standard” mortgages are refinanced into safer “standard” mortgages.
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