Richard Sweum: CFPB's Fact v. Fiction sheet on Ability to Repay rule.
Whether you agree or disagree with the CFPB's "Fact or Fiction" sheet, it's always good to know what folks are saying, no matter what perspective they are coming from. What the end result will be won't be known for a year at least... but one can only hope that the implementation of the new rule going into effect on January 10th will not have a negative impact on the housing market or on the consumers that the CFPB was charged with protecting.
"We will see!" said the Zen Master.
1. Fiction: TheCFPB’sAbility-to-Repay Rulewillcutoff consumers' accessto creditby requiring all loans to beQualifiedMortgages.
Fact: TheAbility-to-RepayRuledoesnotrequirelenderstoofferanyspecifictype ofmortgage. Lenderscan offer anymortgagethey believea consumer hastheabilitytorepay,aslong asthey
havedocumentation tobackup theirassessment.Notall loanswill beQualifiedMortgages.
2. Fiction: Banksaren’t going to makeany loansthat arenotQualified Mortgages.
Fact: TheAbility-to-RepayRuleisdesigned toprotectconsumerswithoutdisrupting theU.S. housing market. Someof the nation’slargestbankshavealreadysaid theyplanonmaking loansthatfall outsideoftheQualified Mortgageguidelines.
Moreimportantly,however,thevastmajorityof loansbeing madetodayarealreadycompliantwith theQualifiedMortgageguidelines. TheCFPBestimatesthatroughly92 percentof mortgagesin the currentmarketplace meettheQualifiedMortgagerequirements,and reportsbyindependent economistshaveconfirmed theBureau’scalculations.
3. Fiction: TheAbility-to-Repay Rulerequires all mortgagesto cap debt-to-incomeat43 percent.
Fact: TheAbility-to-RepayRuledoesnotmandatedebt-to-incomeratios.Therulesimplyrequires lenderstoevaluatea borrower’sdebt-to-incomeratioand usetheirjudgmentabouthowmuch debt a consumercan afford totakeon.
Nor doestheAbility-to-RepayRulerequireallQualified Mortgagesto meetthe43percentdebt-to- incomeratio. Aloancan alsobea QualifiedMortgageif itmeetsstandardsfor loansbackedor purchased byFannieMaeor FreddieMac,if it’sinsured bya federalhousing agency,or if itis offered bya small lender thatholdstheloan in portfolio. Rightnow,roughly92percentof mortgagesfallintooneof thosethreecategories.
4. Fiction: Thenewruleshaveexcessivedocumentation requirements,and aregoingto makeitnearly impossibleforanyonewho’sself-employed or hasan unusual financial situation to qualify fora mortgage.
Fact: Under thenewrules,lendersdo havetoverifythatconsumerscanaffordtorepaytheir mortgage–that’sthewholepoint.Lenderswillmakethatdetermination bylooking atdocuments such aspayroll stubs,taxreturns,studentloan statements,credithistory,andotherfinancial information.These documentshelp lendersweigh borrowers’debtagainsttheincomeand assets availabletopayoff thedebt. Withoutthisinformation,lenderscannotmakean accurate assessmentofaffordability,and borrowerscould windup in overtheir heads.
Looking atthiskind of documentation is something thatresponsible mortgagelendershavealways done,and thenewrulemakessurethateverylenderfollowsprudentunderwriting practices.
Theruleisdesignedtopreserveconsumers’access tocredit,and theCFPB hasissued guidanceto small lenderswith advice on howto verifyseasonalorirregular income.
5. Fiction: Thenewrulerequires20percentor 30 percent down paymentsfor newmortgages,which will pricemany borrowersoutof themarket.
Fact: TheAbility-to-RepayRuleand QualifiedMortgageguidelinesdo notestablish a minimumdown payment.
6. Fiction: Thepointsand fees cap isgoing to putmortgagebrokersoutof business,and ultimatelywill
harmconsumerswhowill justend up paying higherinterestrates.
Fact: TheAbility-to-RepayRuledoesnotcap all pointsand fees.LoansthatarenotQualified
Mortgageshavenorestrictionson thetotal amount ofpointsand fees.
If a loan isa Qualified Mortgage,itcannotinclude upfrontpointsand feesgreaterthan 3percentof thetotal loan amount. Excessiveupfrontfeescanencouragea“takethe moneyand run”business model,wherelendersdonothaveabig financial incentivetoevaluatetheriskinessof theloan becausetheymake most of theirmoneyattheclosingtable. The3 percentcapon Qualified Mortgagefeesisa reasonablelimitthatprotects consumersand giveslenderstheincentiveto evaluateaffordability overthelifeoftheloan. Therulealsomakesallowancesfor smallermortgages toensurethatresponsibleloansarenotunintentionallyaffected.
7. Fiction: Lendershaven’thad enough timeto updatetheirsystemsand getready forthenewrules.
TheCFPBhasamended therulesrepeatedly,making itimpossibleforlendersto adaptin time.
Fact: TheAbility-to-RepayRulewasfinalized in January2013,afull year beforeit wasscheduled to takeeffect. TheCFPBhasissued variousamendmentsoverthecourseoftheyear,with asingleaim in mind:toensuretheeffectivenessoftherulesby making iteasierfor lenderstocomply. The Bureau recognizesthatcoming intocompliancewiththerulesisa significantchallenge,and ithas worked closelywith theindustrytoanswer questions,provideresources,and addressconcerns.
Housing industryexpertshavepredictedthat mostnewmortgageoriginationswill notbeaffected bythenewruleswhen theytakeeffectonJanuary10,and theMortgageBankersAssociation has
said that“manylendersarealreadyacting asif theruleis in place.”