Effective January 2014, many regulations of the Mortgage Reform and Anti-Predatory Lending Act, Title XIV of the Dodd-Frank Act, became law, regulated by the Bureau of Consumer Financial Protection. The new regulations set standards for Qualified Mortgages and the obligations for lenders to determine borrowers’ Ability to Repay.
While the majority of home loans are Fannie Mae, Freddie Mac, FHA and other federally backed loans, which are exempt, private lenders must comply with these new standards. And with the tightening of requirements for those federally backed loans, we anticipate an increase in private lending, including seller carrybacks. To determine a borrower’s Ability to Repay, lenders must evaluate at least these eight specific factors: (1) income/assets, (2) employment, (3) monthly mortgage payment, (4) monthly payments on other related loans, (5) monthly taxes and insurance, (6) other debts and financial obligations, (7) debt to income ratio (generally not to exceed 43%) and (8) credit history. The evaluation must be based on verifiable third-party records, including such documents as tax records, bank records, credit reports and invoices.
While lenders are required to keep loan documents for at least three years to establish the Ability to Repay, the regulations provide that Qualified Mortgages are presumed to have complied with the Ability to Repay provisions. All Qualified Mortgages are prohibited from such risky features as interest-only periods, negative amortization, and terms longer than 30 years and limit fees and points to 3% of the total loan (more for loans less than $100,000.00). For Higher-Priced loans, defined as loans that have an Annual Percentage Rate (APR) that exceeds the Average Prime Offer Rate (APOR) by 1.5% for first liens and 3.5% for subordinate liens, if the loan meets the criteria for a Qualified Mortgage, the lender has a rebuttable presumption that the Ability to Repay rules were satisfied. For loans that are not Higher-Priced, if the loan meets the criteria for a Qualified Mortgage, the lender has a conclusive presumption that the Ability to Repay rules were satisfied.
Small Creditors can originate two other types of Qualified Mortgages. Small Creditors have less that $2 billion in assets and, together with affiliates, originate no more than 500 first-lien home loans in the prior year. Qualified Mortgages by Small Creditors must be fully amortized and cannot be sold other than to a Small Creditor for at least three years. For the next two years, Small Creditors can make balloon-payment loans if the loans have fixed interest rate and period (i.e. monthly) payments for at least five years before the balloon-payment. After the two years, balloon-payment loans only may obtain Qualified Mortgage protection in rural or underserved areas.
Other regulations under the Mortgage Reform and Anti-Predatory Lending Act require the use of qualified Loan Originators for most home loans, including restrictions on the Loan Originators’ compensation and fees, although there are exceptions that may apply to seller carrybacks. Regulations under the Home Ownership and Equity Protection Act (HOEPA), regarding high-cost mortgages, as defined by limits on APR, points and fees and pre-payment penalties, require disclosure and consumer counseling prior to closing. These regulations will be addressed in subsequent newsletters.