As expected, the final rule bans negative amortization, interest-only loans and other toxic products and features that were prevalent during the subprime era.
The new QM ability to repay underwriting standards requires full documentation of loans that lenders must preserve for three years in case they are sued by the borrowers. Points and fees on a QM loan cannot exceed 3% of the loan amount under the DFA. And the debt-to-income ratio cannot exceed 43% if the lender wants a safe harbor from litigation.
CFPB officials looked for ways to ensure lenders would make safe and sustainable loans in a normal environment. But they didn’t want to go too far and restrict credit in a lending environment that is already too tight.
“Our goal is not only to stop reckless lending, but to enable consumers to access affordable credit,” according to CFPB director Richard Cordray.
So they created a safety valve. During a transition period that could last up to seven years, lenders can rely on Fannie Mae, Freddie Mac and Federal Housing Administration automated underwriting systems to ensure they meet the QM underwriting standards.
Loans approved by the GSE and FHA AU systems (even with DTI ratios above 43%) will be considered QM loans and shielded from litigation.
That should ensure that most government-backed loans being originated today will not be interrupted when the QM rule goes into effect Jan. 10, 2014.
It also gives the CFPB a year to work with industry and consumer groups to work out some of the kinks.
One of those kinks involves the 3% cap and the treatment of fees charged by affiliated title companies and other service providers.
Mortgage brokers are particularly on edge because it appears the CFPB has taken a strict interpretation of the Dodd-Frank Act, which results in a double-counting of loan origination compensation.
In a broker transaction, the fee the mortgage brokerage firm receives from the wholesaler is counted toward the 3% cap. When a brokerage firm turns around and pays its loan officer, that 50 basis point commission is counted toward the 3% cap, too.
In adhering to the legislative language of the DFA, CFPB has given retail originators a huge pricing advantage over the broker channel.
The Mortgage Bankers Association is concerned because their members also broker loans from time to time.
The MBA is also concerned the QM rule penalizes mortgage companies that are affiliated with title companies and other service providers.
At closing, the fees charged by the affiliated entities are counted toward the 3% cap.
“The 3% cap on points and fees appears to be overly inclusive as it relates to compensation and affiliates,” according to MBA chairman Debra Still. “Loans with the same interest rate, terms and out-of-pocket costs should be treated the same under the rule regardless of the organizational structure or business model of the lender.”