01/10/2013 - Final
Qualified Mortgage (QM) Rules Released.
The Consumer Finance Protection Bureau, or CFPB, released new rules
for mortgages that will make it harder for some borrowers to
qualify, but, will prevent risky lending that caused the housing
These new rules will limit up-front fees, and also set standards for
how much income a consumer must make to qualify. These new
rules will go into effect on January 10, 2014.
These rules spring from the Dodd-Frank Act that includes provisions
that require creditors to determine whether the consumer has the
ability to repay their mortgage. Under the Act, a creditor can
assume that the borrower has met the ability-to-repay requirement if
the loan is deemed a QM. The QM definition is important for two
reasons: 1) lenders are unlikely to originate mortgages that do not
qualify as a QM; and 2) the Qualified Residential Mortgage (QRM)
definition can be no broader than QM.
Under the final rule, creditors must generally consider the
following factors in determining ability-to-repay (though the rule
does provide specific underwriting criteria): 1) current income or
assets; 2) current employment status; 3) credit history; 4) monthly
mortgage payment; 5) monthly payments on any other loans associated
with the property; 6) the monthly payment for other related
obligations (i.e. property taxes); 7) other debt obligations; and 8)
monthly debt-to-income ratio the borrower would be taking on with
Generally, QM requirements prohibit loans with negative
amortization, IO loans, balloon payments, loans with terms greater
than 30 years, and loans in which the points and fees are greater
than 3% of the loan amount. The general QM rule requires the
consumer to have a debt-to-income (DTI) ratio less than 43%, in line
with FHA standards.
The CFPB provides two different ways for lenders to meet the new
ability-to-repay standards. Under the first, borrowers' total debt
payments can't exceed 43% of their pretax income. Under the second,
loans must receive an approval after being run through the automated
underwriting engines maintained by Fannie Mae, Freddie Mac or the
Federal Housing Administration, even if those institutions don't
ultimately buy or guarantee the mortgages.
Roughly three-quarters of all loans in 2011 had a 43% debt-to-income
ratio and met most of the other characteristics of the definition,
according to data estimates developed by the CFPB. An additional 20%
of loans that were above a 43% debt ratio met the second test.
That second test will be temporary, ending either when Fannie and
Freddie's government conservatorship ends or after seven years,
whichever comes first. The CFPB said the expanded definition was
necessary given the "fragile state of the mortgage market."
The reason banks will want to only offer QM loans is that they
are then protected from many homeowner lawsuits. This 'safe harbor'
rule is very attractive to most lenders.
What does it mean for you?
These rules will make it harder for lower income folks to qualify,
and generally the mortgage process will remain strict with all
aspects of the application being verified.
However, the rules will build in some exceptions to the cap for the
next seven years so the real estate market nationwide has a chance
to heal. During that period, people with higher incomes and top
credit ratings could get qualified mortgages even if the loan brings
total debt above 43 percent of monthly income.
The rule and proposed amendments are
A factsheet further explaining the new rule is
A summary of the final Ability-to-Repay rule is