The Consumer Financial Protection Bureau’s (CFPB) ability to repay rule is designed to add a new layer of protection for both consumers and mortgage lenders.
Prompted by the “no documentation” and “interest only” mortgages issued before 2007, the rule requires lenders to prove that the borrower has the ability to repay the mortgage loan by examining and affirming eight areas in the borrower’s financial makeup.
These areas include current income or assets; employment status, monthly mortgage payment, monthly payment on any concurrent loans; monthly payment for mortgage-related obligations (such as property taxes, insurance, etc.); current debt obligations (such as alimony or child support); monthly debt-to-income ratio and credit history.
If the borrower meets the criteria for the ability to repay rule, he or she may be eligible for a qualified mortgage (QM). A qualified mortgage provides lender protections should the borrower default on the loan.
Credit Union National Association (CUNA) notes that Congress directed that the ability to repay rules include provisions that would help shield lenders whose loans meet QM standards if challenged in court by a borrower alleging the loan is not in compliance.
CFPB director Richard Cordray said in a statement that the new rule should help borrowers by reducing the pain of foreclosure in the future. "For many borrowers, dealing with mortgage servicers has meant unwelcome surprises and constantly getting the runaround. In too many cases, it has led to unnecessary foreclosures."
Credit Unions Cautious About CPFB Changes
CUNA President/CEO Bill Cheney said that the CFPB, "should provide legal certainty to lenders such as credit unions."
"We support the agency's steps to minimize disruptions in the availability of mortgage credit for consumers," he said. "CUNA strongly supported a 'safe harbor' approach for QM loans that would provide the maximum legal protection to credit unions under the 'ability to repay' rule."
Last Thursday, Pam Davis, vice president of real estate services at Delta Community Credit Union ($3.5 billion, Atlanta, GA) testified as a witness for CUNA about the regulatory burdens the new rules may present. “There is absolutely no evidence that credit unions have engaged in abusive practices regarding mortgage loan originator compensation and additional requirements will needlessly add to the regulatory burden credit unions already face.”
Davis said CUNA, her institution and many other credit unions are, “concerned about the regulatory burden imposed on lenders and will be reviewing the new rules from that perspective.”
When Credit Unions Online talked with Mark A. Skinner, mortgage origination manager at IBM Southeast Employees’ Federal Credit Union ($828 million, Boca Raton, FL) one concern he expressed with the ability to repay rule was the change in the borrower’s total debt payments.
“The ability to repay rule also limits the borrowers total debt payments to 43% which for decades has traditionally been 45% for most lending institutions,” he said. “What this means for a family with $60,000 annual income is their mortgage payment plus car, credit card, and other monthly obligations cannot exceed $2,150 a month. In determining the 43% debt to income ratio the mortgage payment includes the principal and interest payment plus 1/12th of the yearly tax and insurance payment amount along with any home owners association payment as computed to a monthly amount if it is paid quarterly, semiannually or annually.”
The CFPB approximates that nearly 75% of mortgages originated in 2011 met the 43% standard.
Rules don’t go into effect immediately and some won’t become law for several years. For more information about new CFPB rules, find a credit union and talk to a mortgage professional.