The last three requirements are satisfied prior if the loan is eligible for GSE purchase or guarantee. backend debt-to-income ration of no more than 43% (including simultaneous loans).underwritten using the maximum interest rate in the first five years to ensure repayment.limited fees/points (caps vary with mortgage size).regular payments that are substantially equal (ARMs and step-rate mortgages excepted) and always positively amortizing.The CFPB has defined a QM (with some minor exceptions) as a mortgage meeting six criteria The Dodd-Frank Act directs the CFPB to create a safe harbor for “Qualified Mortgages” or QMs. Title XIV of the Dodd-Frank Act amends the Truth in Lending Act (TILA) to provide that “no creditor may make a residential mortgage loan unless the creditor makes a reasonable and good faith determination based on verified and documented information that, at the time the loan is consummated, the consumer has a reasonable ability to repay the loan, according to its terms, and all applicable taxes, insurance (including mortgage guarantee insurance), and assessments.” The single-most substantive regulation for consumer banking included in the Dodd-Frank Act is the Ability to Repay (ATR) requirement for mortgages (sorry Durbin Amendment, I love you, but mortgages are just bigger than debit). Ninth, it suggests that ATR may not really matter in terms of access to credit, as the real limitation will be the lack of liquidity for loans that do not meet the GSEs’ underwriting guidelines independent of QM. Seventh, it attempts to calculate a reasonable loss given default rate for ATR and the affect on mortgage pricing (please note that I am not attempting to work in compounding anywhere here this is a ballpark analysis, not a precise figure) Įighth, it considers whether the real issue is ATR so much as the costs imposed by contested foreclosures (which ATR might make more common) and Sixth, it addresses the likelihood of liability of ATR liability Third, it covers the civil liability to the CFPB for failing to verify ATR įourth, it covers private civil liability for ATR violations įifth, it covers the private civil damages for ATR violations Second, it covers the Qualified Mortgage safe harbor to the ATR requirement What matters is the lack of liquidity-meaning a secondary market-in non-QM loans, as lenders aren't going to want a lot of illiquid loans on their books, and that is a function of the GSEs' credit box, not CFPB regulation.īecause this post is REALLY long, here’s where it goes (yes, I feel like I'm doing one of those unwieldy 100+ page UFTA decisions, so I'm going to have a table of contents!):įirst, it gives the legal background on the Dodd-Frank Act ATR requirement Ultimately, I don't think ATR liability really matters in terms of availability of credit. I invite those who would calculate this differently to weigh in in the comments-it’s quite possible that there are factors I have overlooked here, as this is a really preliminary analysis. Even with rounding up, that's 25 basis points to recover additional credit losses, which is not a big impact on credit availability. Still, my back-of-the-envelope calculation suggests that it is quite low in terms of loss given default and could probably be priced in at around 10 basis points in additional cost for a portfolio with weighted average maturities (actual) of five years. (I note that all of this is my tentative readings of the statute we really don’t know how courts will interpret it, and others may see better readings than I do now.) Based on a preliminary analysis, I think this concern is overblown, and in this very long post I attempt to work through the potential liability for lenders that make non-Qualified Mortgages. I've blogged on aspect of QM before ( here, here, here, here, here, here, here, and here). There is a real concern that the Dodd-Frank Act’s mortgage reforms will reduce the availability of mortgage credit because lenders’ fear liability for making mortgage loans that fail to qualify as “Qualified Mortgages” (QM) and are thus potentially subject to an Ability-to-Repay (ATR) defense. One of the huge questions hanging over the mortgage market today is what will happen to access to credit for credit impaired or non-traditional borrowers.
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