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25
New Rule in Mortgage Lending
The consumer Financial Protection Bureau's Ability - to - Repay Rule (ATR) went into effect on January 10th. This rule protects consumers from debt traps by requiring mortgage lenders to evaluate whether borrowers can afford to pay back the mortgage before signing up. The rule was required by Congress as a response to the financial crisis and nationwide foreclosure epidemic. We asked Ruhl Mortgage Loan Officer, McKenzie Mathews to explain the rule. She stated, "the purpose of this new guideline is not to diminish the ability for consumers to acquire home loan financing but to insure they are getting a responsible loan that insures they have a payment and program they can truly afford." The Ability - to - Repay Rule is about helping borrowers understand the true costs of the mortgage they apply for. It is designed to keep lenders from granting money to borrowers who cannot afford to make those payments over time. This should help the number of foreclosures drop in the coming years. Certain types of mortgages are more likely to become a debt trap for the borrower. This new rule lays out basic guidelines that lenders can follow. Qualified Mortgages (QM) give lenders more assurance that they are meeting the Ability - to - Repay requirement. To be a Qualified Mortgage, the loan cannot:
- Have excessive up-front points and fees
- Be longer than 30 years
- Have "risky features". These include interest only loans (no pay down of principal) or paying less than the full amount of interest so that the total debt continually grows.
Under the new rule, creditors must consider current or reasonably expected income, the monthly payment on the covered transaction, monthly payment on any simultaneous loan, current debt obligations, alimony, child support and employment status. Credit score is not a factor in this new rule. Key components include:
- Lenders must obtain and verify information supporting the borrower's ability to make payments.
- Lenders must document how it determines the borrowers' income and its likelihood to continue.
- Borrowers providing a lender's failure to meet ATR standards can win damages equal to all financing charges and fees.
- There are two levels of legal protection for Qualified Mortgages.
- QMs with an APR within 1.5% of average rates have a "Safe Harbor" that is a shield against Ability - to - Repay litigation. However, borrowers in foreclosures can still say that they did not have the ability to pay the mortgage by disputing that the loan was not within Qualified Mortgage Standards.
- QM with APR more than 1.5% above Ability - to - Repay Overview have "Rebuttable Presumption"
The rule is effective for all new applications taken after January 10, 2014. Ultimately, the Ability - to - Repay rule is intended to prevent consumer from getting trapped in mortgages that they cannot afford, and to prevent lenders from making loans that consumers do not have the ability to repay. All Circumstances are different. If you have further questions please speak with your mortgage representative or contact Ruhl Mortgage.
