Change Is upon Us
Green, David, Mortgage Banking
There is no shortage of information describing the upcoming Dodd-Frank Wall Street Reform and Consumer Protection Act's Qualified Mortgage (QM)/ability-to-repay (ATR) rule. Nor has there been a vacuum of coverage on the many other mortgage rules and investor guidelines that have been created since the 2008 mortgage meltdown. [paragraph] Just go to Google and enter the keywords "qualified mortgage," and more than 400,000 pages of information appear.
[paragraph] The Consumer Financial Protection Bureau (CFPB) itself has been the most prolific on the subject, with detailed descriptions of upcoming regulatory activity. The bureau has provided much-needed transparency on its rulemaking. The Mortgage Bankers Association (MBA), too, has been in steady communication with its members about advocacy efforts, modifications to pending regulations and the idiosyncrasies of new laws.
But just knowing what the new rules are, when they will be implemented and how the mortgage investors are changing their seller guidelines won't be enough.
As we quickly approach implementation dates on QM, ATR, new servicing rules and changes to Regulation X and Regulation Z, companies need to have a strategy as well as a clear interpretation of the new requirements. It will also be critical to know how to ensure compliance and what must be done to build the rules into the fabric of your loan manufacturing.
Quick review of the rules
Let's take a quick look at the major rules that will take effect next month. Since the CFPB has been open to comments and has, thankfully, made prudent changes to rules based on feedback, it took a while to get to the final interpretation from the agency and other regulators.
As of mid-November when this was written, this is what was ahead of us:
* QM/ATR--This has been the biggest focus in our industry over the last 12 months as it greatly affects our origination and underwriting practices. In short, the CFPB states a lender must make a reasonable, good faith determination of a consumer's ability to repay any consumer credit transaction secured by a dwelling. This ability-to-repay standard brings us to a Qualified Mortgage that would be considered to have the components that meet the ATR test.
The agency lists some specifics regarding a QM, including keeping upfront fees under 3 points; mortgage terms at 30 years or less; and no ballooning principals, negative amortization or interest-only periods. There are a few exemptions, including the ability to allow balloon payments by small creditors operating in rural and underserved communities.
There is a safe harbor for loans that meet QM requirements. Further, loans that are eligible for sale or guarantee by Fannie Mae, Freddie Mac, the Federal Housing Administration (FHA), Department of Veterans Affairs (VA) and U.S. Department of Agriculture (USDA) are considered to be QM loans. Government-sponsored enterprise (GSE) reform can change the QM model, but that's a worry for another day.
* Servicing--Modifications to Regulation X and Regulation Z change the landscape for loan servicers, especially the larger institutions. The new guidelines lay out specific courses of action a servicer must follow in communicating with homeowners (with consistency) regarding delinquency and loss-mitigation options to prevent foreclosure. Servicers also have new requirements for adjustable-rate mortgage (ARM) adjustment notices and periodic statements. There are also new rules regarding escrow accounts and force-placed insurance.
* Loan originator compensation--How loan originators and originating companies are paid through the new loan originator compensation rules changes the sales approach for home loans. Prohibition against compensation based on a term of a transaction or proxy for a term of a transaction; prohibition against dual compensation; prohibition on mandatory arbitration clauses and single premium credit insurance; and strict loan originator qualifications and identifier requirements add to the complexity of your relationship with originators. …