Qualified Mortgage Rule
On January 10, 2013, the Consumer Financial Protection Bureau released the Qualified Mortgage (“QM”) rule. The QM rule provides standards a lender must use to minimize risky loans and help a borrower avoid an eventual default. Implementing the QM rule will provide banks some protection from consumer lawsuits by helping lenders prove they adequately evaluated the borrower.
Offering no-doc or low-doc loans will become a thing of the past. Lenders will consider several financing standards to judge whether a loan is qualified: (1) current income or assets, (2) current employment status, (3) credit history, (4) the monthly payment for the mortgage, (5) the monthly payments on any other loans associated with the property, (6) the monthly payment for other mortgage related obligations, (7) other debt obligations, and (8) the monthly debt-to-income ratio or residual income the borrower would be taking on with the mortgage.
An important aspect to the QM rule is the lender determining the borrower’s ability to repay the principal and the interest over the long term. Low teaser rates during the introductory period cannot be used to hide the true cost of a mortgage. Borrowers must have sufficient assets or income to pay back the mortgage. Exemptions may apply for consumers trying to refinance a risky loan for more stability.
A QM will be presumed to have no excess upfront points and fees. Further, a QM will not contain unconventional features such as interest-only loans, negative amortization loans, or loans with a term longer than 30 years. Although no loans with balloon payments will qualify, exceptions may apply to small creditors in rural or under-served areas. Additionally, there will usually be a 43 percent cap on debt-to-income ratios.
Many in the real estate industry believe the QM rule fairly balanced consumer protections and consumer access to mortgage loans. Some feared the inclusion of a 20 percent down payment requirement would disqualify potential home buyers. While the QM rule did not provide for a 20 percent down payment, a Qualified Residential Mortgage rule will be announced soon and may include that type of provision. Lenders have 12 months to fully comply with the QM rule.