CFPB Working on Residual Income Test

Lenders are waiting for the Consumer Financial Protection Bureau to agree on a residual income test that will be critical in the origination of “rebuttable presumption” QM loans.

Industry officials have been urging CFPB officials to adopt the Department of Veterans Affairs residual income test that has been used for years to underwrite low-downpayment VA guaranteed loans.

But it appears the consumer bureau is working on its version.

Under the qualified mortgage rule, lenders making rebuttable presumption QM and non-QM loans can use a residual income test as a legal defense when sued by a borrower who claims they could not afford their mortgage payments. (QM loans that meet the requirements of a safe harbor don’t need such a defense because they are largely shielded from litigation.)

CFPB director Richard Cordray doesn’t want the credit box limited to safe harbor QM loans. And he claims community banks and credit unions can stick to their traditional underwriting standards when the QM rule goes into effect in January 2014.

Consumer Mortgage Coalition executive director Anne Canfield recently told a congressional panel that “there is not much reason to believe” lenders will make loans outside the narrow QM safe harbor until the CFPB defines a residual income standard.

“A well-defined residual income test, such as the VA’s standard, would open the door for lenders to make rebuttable presumption QM loans and potentially non-QM loans,” Canfield told NMN.