It is one of the most common sense regulations in the works by the government’s new consumer watchdog, but one that stands to radically change the nation’s housing market: the qualified mortgage rule.
On Thursday, the Consumer Financial Protection Bureau will finalize the criteria that lenders will use to determine whether a borrower can repay a home loan. The rule is aimed at protecting consumers from some of the worst abuses of the mortgage meltdown but could make it more difficult or expensive for some home buyers to get a loan.
There is little doubt the industry, which has paid billons over the past year to settle lawsuits related to mortgage abuses, will gravitate toward the protections offered by issuing “qualified mortgages.” Under the Dodd-Frank financial reform law, lenders that issue loans using the government criteria would receive broad legal protections against borrower lawsuits.
Mortgage finance giants Fannie Mae and Freddie Mac, which back the majority of new home loans, are also expected to only buy mortgages with that government seal of approval.
The bureau is attempting to define a category of mortgages that would offer borrowers the most protection. In the run up to the meltdown, banks relaxed lending standards by failing to verify income, glazing over credit history or issuing mortgages with skyrocketing interest rates. The result was hundreds of thousands of homeowners who were ill-equipped to manage their mortgages once the market tanked.
But the provision is generating angst among some industry officials and consumer advocates who say that it could have unintended consequences that would harm the mortgage market or borrowers.
Lenders say that if the rule is too restrictive, it will become even harder for lower-income and first-time home buyers to get mortgages. Consumer advocates question whether the new criteria will provide lenders too much protection against borrower lawsuits.
However the final rule shakes out, here are a few points that might be helpful to home buyers:
Debt-to-income ratio: Analysts expect regulators to limit the total debt-to-income ratio, a measure of a consumer’s monthly debt payments, that would qualify under the provision to 43 percent. That was the standard being considered by the bureau last year.
Caps on points and fees: The provision will attempt to prevent mortgage brokers from collecting excessive fees from consumers. The bureau is expected to limit the fees that brokers could collect to 3 percent of the total mortgage. But industry officials want the bureau to clarify whether some required transaction costs, such as title insurance, will be counted against the cap.
Legal rights: A key element of the provision is the extent of legal protection lenders earn by issuing qualified mortgages. Under one version of this “safe harbor” provision, borrowers could win a lawsuit against their lender by claiming their loan does not meet the qualified mortgage standard.