Want to see the future of mortgage loan underwriting in the United States? It was published earlier this month by the Consumer Financial Protection Bureau (CFPB). The document, a “small entity compliance guide,” is meant to clarify new lending rules for mortgage lenders.
Among other things, the document lists eight specific underwriting guidelines lenders must verify, in order to meet new federal rules. We will get to those underwriting guidelines in a moment. But first, a bit of background.
The Birth of QM and ATR
In 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into law. This piece of legislation was created in response to the financial crisis that preceded it. Among other things, the Dodd-Frank Act calls for the creation of a Qualified Mortgage (QM) rule. It also requires lenders to verify a borrower’s ability to repay the mortgage debt.
In January 2013, CFPB finalized the definition of QM and announced the creation of the Ability-to-Repay (ATR) rule. Collectively, these new rules are designed to reduce risk within the lending industry. They are intended to ensure the creation of “safe” mortgage loans – loans with fewer exotic features and high-risk components.
Minimum Underwriting Guidelines
The CFPB document released this month spells out the underwriting requirements associated with the ATR rule. The document states that “a reasonable, good-faith ATR evaluation must include eight ATR underwriting factors:”
- Lenders must document the current or “reasonably expected” income and assets the borrower will use to repay the mortgage loan.
- Lenders must verify the borrower’s employment status at the time he/she applies for the mortgage loan. This is required for all borrowers using employment income to qualify for, and to repay, a mortgage loan.
- Lenders must determine the monthly mortgage payments using the introductory or fully indexed interest rate, whichever rate is higher.
- Lenders must also include monthly payments on any other loans associated with the property (i.e., second mortgages).
- Other property-related costs must be included in the ATR underwriting assessment. These include property taxes, homeowners insurance and HOA fees, when applicable.
- Lenders must identify and review all recurring debts currently being paid by the borrower. These include such things as car loans, credit card debt, alimony, and child support.
- Lenders must measure the borrowers debt-to-income (DTI) ratio to ensure it falls within QM and ATR underwriting guidelines. Current QM guidelines state that borrowers must have a total or “back-end” debt-to-income ratio no higher than 43%.
- Lastly, lenders must review the borrower’s credit history to ensure there is a pattern of responsible credit usage.
These are the minimum underwriting requirements attached to QM and ATR. Lenders can consider additional factors as they see fit.
Both of these new rules – Qualified Mortgage and Ability-to-Repay – take affect on January 10, 2014. Many lenders are already moving in this direction, in anticipation of the January implementation date.
In addition to the underwriting guidelines listed above, the QM rule prohibits a variety of high-risk mortgage products and features. For a more thorough explanation of this rule, visit QualifiedMortgage.org.