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CFPB DEFINES QM, FINALIZES HIGH-COST MORTGAGE RULES After many long months of waiting, the Consumer Financial Protection Bureau (CFPB) issued its finalized qualified mortgage (QM) rule designed to protect both consumers and responsible lenders. One of the biggest provisions of the QM rule is the newly set ability-to-repay rule, which demands that all new mortgages comply with basic requirements to protect consumers from taking on more debt than they can afford. The rule does away with so-called "no doc" and "low doc" mortgages, requiring all of a borrower's pertinent financial information be documented and verified, including employment status, income and assets, current debt obligations, and credit history, among other information. With all this supporting material, the lender is expected to be able to make a fair judgment on whether or not the borrower has the ability to repay the loan, and that evaluation must be based on the long-term view of the borrower's situation, discounting "teaser" or "starter" rates typically used in introductory periods. CFPB director Richard Cordray called the ability-to-repay rule a "common-sense" answer to curb the borrowing and lending behavior that led to the financial crash. The QM rule takes effect January 2014. Exceptions to the rule apply for consumers trying to refinance from a risky mortgage to a more stable loan. The CFPB is also considering amendments to the ability-to-repay rule that would, among other things, exempt certain nonprofit creditors that work with low- and moderate-income consumers from meeting all of the new requirements as well as grant QM status to certain loans made and held in portfolio by small creditors such as community banks and credit unions. If adopted, the proposed amendments will be finalized this spring and go into effect at the same time as the ability-to-repay rule. The bureau also announced other features of a QM beyond the ability-to-repay criteria. In order to 14 meet QM requirements, a mortgage loan must limit points and fees (including those used to compensate originators) and have no toxic or risky loan features, such as interest-only payments or terms that exceed 30 years. In addition, there is a 43 percent cap on the acceptable debt-to-income (DTI) ratio, but the CFPB will allow for a transitional period during which loans that meet all affordability standards except DTI will be considered QMs. The CFPB explained there are two kinds of QMs, each with different protective features for consumers and legal consequences for lenders. The first kind—QMs with rebuttable presumptions—are higher-priced loans given to consumers with insufficient or weak credit history. Legally speaking, it is presumed the lender made a determination regarding the borrower's ability to repay the loan. Consumers can challenge that presumption by showing they did not actually have the income to cover their mortgage payments and other living expenses. The second type of QM has safe harbor status—generally lower-priced prime loans given to low-risk consumers. These safe harbor mortgages offer lenders the greatest legal certainty that they are complying with the ability-to-repay rule, and consumers can only legally challenge their lender if they believe their loan does not fit the criteria of a QM. While QM status does not grant a lender complete immunity from borrower disputes, Cordray says the CFPB has "limited the opportunities for unnecessary litigation" by setting up clear guidelines. Mike Calhoun, president of the Center for Responsible Lending, said the new rules "strike a balanced, reasonable approach to mortgage lending—for the most part." He contends the bureau left a pivotal issue unresolved: mortgage broker fees. "The CFPB should not create a loophole that allows high-fee loans to count as a qualified mortgage under Dodd-Frank," Calhoun said. "If the broker payment issue is appropriately resolved, the rules will be—all in all—good for consumers, investors, and the economy." Debra Still, chairman of the Mortgage Bankers Association, applauded the CFPB's approach and effort to this "very complex rule" but said mortgage bankers "remain concerned that certain aspects of it could curb competition, increase costs, and tighten credit availability." Still called attention to the "overly inclusive" 3 percent cap placed on points and fees and questioned how the interest rate threshold for safe harbor loans, which has been set at 150 basis points above the benchmark rate, might adversely impact borrowers. "Ultimately," she said, "the final verdict on this rule will be made by the market." Fitch Ratings says the final word from regulators on what constitutes a qualified mortgage will give the industry some insight into what can be expected of a qualified residential mortgage (QRM)— another Dodd-Frank-delineated acronym on the CFPB's 2013 agenda, which is tied to the legislation's 5 percent risk retention rider. At a minimum, Fitch says the QM rule will bring some clarity to the market and allow institutions, particularly banks, to assess the costs of re-entering the secondary investment market for mortgages. The CFPB also issued new rules to protect consumers with high-cost mortgages. A first mortgage with an annual percentage rate (APR) that is more than 6.5 percentage points higher than the average prime rate would be considered a high-cost mortgage, for example. Currently, consumers with high-cost loans are provided certain protections under the Home Ownership and Equity Protection Act (HOEPA), which covers first mortgages for homes, loans to refinance, and a home equity loan or home equity line of credit (HELOC). For borrowers with high-cost mortgages, the bureau's final rule bans potentially risky features such as balloon payments (with some exceptions) and early payoff penalties. Fees for certain practices are banned or limited, such as fees for modifying loans and for requesting a payoff statement. In addition, borrowers in high-cost mortgages cannot be charged late fees higher than 4 percent of their monthly payment. Certain practices described by the CFPB as "bad" are also banned, such as encouraging borrowers to default so they can refinance into a high-cost mortgage. Consumers who take out a high-cost loan are also required to receive housing counseling. The CFPB's new protections for high-cost mortgage borrowers take effect in January 2014. The CFPB also established another rule requiring escrow accounts to be established for at least five years for certain higher-priced mortgage loans. The bureau noted, however, that certain creditors in rural or underserved areas are exempt from this rule in an effort to preserve credit.

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