This time last year, many mortgage lenders and lobbyists were screaming about a new set of lending laws that were going to destroy the industry, as they saw it. Turns out that didn’t happen. The Qualified Mortgage rule, or QM, may have standardized documentation and underwriting procedures to some degree. But that’s about all it has done.
We’ll get to the current state of things in a moment. But first, a bit of back story.
Financial Crisis Leads to New Mortgage Regulations
In the wake of the housing crisis, when America was mired in the worst economic slump since the Great Depression, Congress set out to regulate the financial industry like never before. The resulting legislation, the Dodd–Frank Wall Street Reform and Consumer Protection Act, contains a broad set of rules and requirements designed to prevent a recurrence of our financial meltdown.
Among other things, the Dodd-Frank Act called for the creation of a “Qualified Mortgage” rule that would prevent the sort of reckless lending that was common during the housing boom. In short, a QM loan cannot have any risky features such as negative amortization or interest-only payments. Lenders must also verify the borrower’s ability to repay the loan by requesting sufficient documentation.
According to QualifiedMortgage.org, the Ability-to-Repay / ATR rule (part of the broader QM rule set) “protects consumers from taking on mortgages that exceed their financial means, by mandating the documentation / proof of income and assets.”
We wanted to know how these new lending laws are affecting the mortgage industry as a whole. So we put out some feelers. Here’s what we’ve learned…
New Lending Laws Require More Documents, But Little Else
The new rules took effect in January 2014. And yet, the lending industry did not grind to a halt. Lenders are not rejecting well-qualified borrowers in droves, due to overly strict requirements imposed by the government. The sky is not falling. In fact, the mortgage application, underwriting and approval process of 2014 looks much like it did in 2013 — with a few extra paperwork requirements.
As mentioned earlier, the new lending laws require mortgage lenders to make sure borrowers can repay their loans. Obviously, lenders cannot predict the future. But they can make a “good faith determination of a consumer’s ability to repay any consumer credit transaction secured by a dwelling,” as spelled out in the new rules. They can do this by requesting certain financial documents — lots and lots of documents. These can include tax records, bank statements, pay stubs and the like.
But all of this can be filed under “C” for common sense. It only makes sense for lenders to verify a borrower’s ability to handle the monthly mortgage payments. Otherwise, both parties could face a default and foreclosure situation down the road.
Which begs the question: Why does the government need to impose common-sense business practices with these new lending laws? They’ve done this, primarily, to prevent a backslide in terms of loan qualification standards. In short, the new rules are designed to prevent a return to the “anything goes” mortgage lending environment of the boom years.
We reached out to two dozen mortgage lenders across the United States, asking if the new lending laws and requirements have changed how they do business. The general consensus was that QM didn’t change much, because most lenders were already adopting stricter underwriting guidelines simply as a matter of self-protection. Several respondents said they are paying closer attention to income and asset verification these days, to avoid future legal hassles. But aside from that, it appears to be business as usual.
Not All Loans Will Be QM
It’s also important to note that mortgage lenders can still make loans outside of the QM parameters. They just won’t benefit from the legal protections associated with the new lending laws, such as the “safe harbor” protection from consumer lawsuits.
The new laws encourage responsible lending practices. They give lenders an incentive to make safer and smarter loans, specifically by offering legal protections on QM-compliant products.
At the end of last year, the Consumer Financial Protection Bureau (CFPB) — the federal agency that finalized and implemented the QM rule — issued a “fact versus fiction” document to clear up various rumors about the new lending regulations. Among other things, they addressed the false notion that all loans must meet QM/ATR standards.
“The Ability-to-Repay Rule does not require lenders to offer any specific type of mortgage,” CFPB explained. “Lenders can offer any mortgage they believe a consumer has the ability to repay, as long as they have documentation to back up their assessment.”
Translation: Not all loans will be QM compliant.