Dodd-Frank, ATR, QM, QRM…and the CFPB.
The date it all comes to pass: January 10, 2014. Why is this in the news, and why should it be that we care? These are sweeping financial reforms we must all live by that will impact consumers, real estate and financial professionals for many years to come. The rules and the game are different as of 1-10-14….find a grab handle and hold on…
Federal regulations, primarily affecting financial institutions and their customers, that the Obama administration passed in 2010 in an attempt to prevent the recurrence of events that caused the 2008 financial crisis. The Dodd-Frank Wall Street Reform and Consumer Protection Act, commonly referred to as simply “Dodd-Frank”, is designed to lower risk in various parts of the U.S. financial system. It is named after U.S. Senator Christopher J. Dodd and U.S. Representative Barney Frank because of their significant involvement in the act’s creation and passage.
QM, ATR and QRM are born
After enactment of Dodd-Frank, the Federal Reserve Board announced a proposed qualified mortgage (QM) rule that would establish “ability to repay” standards for mortgage lending. The Federal Reserve, along with other federal regulatory agencies, also jointly released a proposed risk retention or qualified residential mortgage (QRM) rule to require parties involved in a transaction in which mortgage originations are sold to retain “skin-in-the-game” (a minimum percentage of the credit risk of financial products), which would result in the sharing of any eventual losses. Theoretically, adoption of ability to repay and risk-retention standards may discourage lenders from excessively relaxing lending standards, even during economic boom periods, thus making loan repayment more resilient to sudden shifts in short-term economic and financial conditions.
The Consumer Finance Protection Bureau (CFPB)
The CFPB is the federal agency that holds primary responsibility for regulating consumer protection with regards to financial products (mortgage guidelines) and services in the United States. It was founded as a result of Dodd-Frank.
Consumers, real estate brokers and financial professionals will benefit in knowing the ATR & QM definitions and rules:
What is a Qualified Mortgage (QM)?
The QM Rule focuses on: 1) A borrower’s Ability to Repay (ATR), and: 2) Defines what a QM is.
Ability to Repay (ATR)
Determining Ability to Repay:
The CFPB’s rules require lenders to consider eight factors when processing a loan application:
1. Current or reasonably expected income or assets.
2. Current employment status.
3. The monthly payment on the covered transaction.
4. The monthly payment on any simultaneous loan.
5. The monthly payment for mortgage-related obligations.
6. Current debt obligations, alimony, and child support.
7. The monthly debt-to-income ratio.
8. Credit history.
Qualified Mortgage (QM)
QM refers to all mortgages that will be available to consumers and sets specific standards for consumer loans. Generally, if a lender originates a QM as defined by the Rule, it is presumed that the lender has made a good faith and reasonable determination of the consumer’s “Ability to Repay (ATR)” and is therefore compliant with the Rule at the time the loan is consummated. Below is a general definition of a QM. There are some additional caveats for higher-priced loans and certain loans in rural areas, as well as for the 43% rule.
A Qualified Mortgage must have the following attributes:
1. No negative amortization.
2. No interest-only payments.
3. No balloon payments.
4. Term cannot exceed 30 years.
5. Cannot be a “No-doc” loan.
6. Points and fees cannot exceed 3 percent of the total loan amount.
7. The consumer’s debt-to-income ratio must be less than or equal to 43 percent.
Qualified Residential Mortgage (QRM)
QRM relates more to investors/lenders as opposed to consumers, and defines the actual criteria of a purchase or refinance for a one-to-four unit family property (where at least one unit is the principal dwelling of a borrower), and is related to required risk retention for those investors who create, sell, or transfer asset/mortgage-backed securities to third parties. These investors must retain at least 5% of the credit risk for this activity. However, among the exceptions in the currently proposed rule is that the risk retention requirements do not apply if all of the assets collateralizing the securities are QRMs.
QRM is still awaiting a Final Rule; unlike ATR/QM Rules, which are under the CFPB, the Federal Reserve Board (The Fed), the Office of the Comptroller of the Currency (OCC), the Federal Deposit Insurance Corporation (FDIC), the Securities and Exchange Commission (SEC), the Federal Housing Finance Agency (FHFA), and the Department of Housing and Urban Development (HUD), collectively, the “QRM Agencies,” are responsible for issuing final QRM rules.