New Mortgage Lending Regulations January 2014

By: Susan Brown (MLO-471817), Umpqua Bank
Michael Neef (MLO-227081), American Pacific Mortgage
Eric Wiley (MLO-17831), Pacific Residential Mortgage

In response to the financial crisis of 2007, The Dodd Frank Act of 2010, also known as The Wall Street Reform and Consumer Protection Act, was passed. In 2014 the next series of rules within this law will be implemented that bring about a new era in mortgage lending oversight across the nation. Dodd Frank requires a new, single regulator to oversee all consumer finance activity. Mortgage finance is covered within these new regulations and by the new regulator, the Bureau of Consumer Financial Protection (better known as the CFPB).

As a requirement of the Dodd Frank Act, the next phase of mortgage lending rules is being implemented in
January, 2014. These rules include the newly defined Qualified Mortgage (QM) and Ability to Repay (ATR)
standards. While the burden to adhere to these new rules is placed upon the mortgage industry specifically, there are some practical points that real estate professionals should be aware of.
Lenders will generally want the loans that they write to be QMs. If the loan is originated and closed as a QM (that is not considered a Higher Priced Mortgage Loan, or HPML) there is a legal Safe Harbor achieved for lenders that protects them from a future claim by the homeowner that the loan offered was unaffordable. If a loan is not closed as a non-HPML QM, there is only a Rebuttable Presumption established which means there is a risk of litigation by the consumer who could claim that the loan they purchased was not appropriate for their ability to repay. This future claim represents an unknown liability for the lender. Consequently, non QM loans may be hard to find and more expensive and HPML QM loans will be more scrutinized in underwriting.

The Bottom Line
Most loans offered today will still be able to be offered within the QM and ATR standards. Many of the newly mandated QM requirements just add concrete to the standard guidelines that banks have already been
underwriting against. This means that moving forward lenders will not bend on guidelines with the same flexibility as in the past. Whereas before some banks could make executive decisions in “Grey” area’s based on their opinion of the borrower or loan file’s strengths without inheriting large amounts of risk. The risk of making a loan outside the QM and ATR standards is defined by the consumer’s right to legal action.

There are a few aspects of this regulation which will be impossible to measure until we have had experience
underwriting to the new standards. However, for the most part, we would like to believe that for the MAJORITY of our clients, this will have little negative impact.

A New 43% Debt-to-Income Standard
Before you get too excited, this only applies to a small portion of loans in today’s marketplace. Namely the larger, or Jumbo loans and some other niche, portfolio loans. Loans slated for Fannie Mae, Freddie Mac, FHA, VA and USDA do not currently have the 43% debt-to-income (DTI) maximum cap. These lending institutions, collectively labeled as “Agencies”, have up to 7 years to comply with this new requirement, or as late as 2021.

Risqué Features No More
QM loans will be required to have a lack of risky features. Risky is defined as loans with:
o Terms over 30 years
o Pre-payment penalties (some exceptions apply)
o Interest-only payments
o Negatively amortizing balances
o Balloon payments
o Deferred principal reduction
o An introductory interest rate fixed for less than 5 years