New Mortgage Regulations Look to Protect Borrowers and Strengthen the Financial System

Mortgage banking regulatory reform is a necessary component of maintaining a healthy lending environment and real estate market. We may not agree with how far the pendulum of regulation has swung or believe all of the changes are necessary, but if we can educate ourselves we will be able to take the new guidelines in stride and be armed with the knowledge to educate ourselves and our clients. On January 10th 2014, the mortgage world as we know it will be changing as a result of the implementation of the Ability to Repay (ATR) and Qualified Mortgage (QM) rules, which are aspects of the Financial Reform Bill authored by Senator Chris Dodd and Congressman Barney Frank.

New Mortgage Regulations

Over the last fifteen years the role a mortgage plays in a bank’s portfolio has dramatically changed. Mortgages changed from being a loan that your local bank would keep in house for 30 yrs to an investment vehicle called a Mortgage Backed Security (MBS). The goal of the Ability to Repay (ATR) and the Qualified Mortgage (QM) rules are to protect the consumer from getting into a loan that he or she cannot repay and to protect lenders from having over leveraged balance sheets so they will no longer be “too big to fail”. These newly regulated mortgages that get sold on the secondary market will in theory now be safer investments and reduce the risk of another credit crisis like we experience in late 2008.

The Rules Below are for “Covered Loans”  which is  Federally Regulated closed-end Mortgage Loan to a consumer for the purchase, refinance or home equity on a primary, secondary or investment property. This is for “non FHA” loans with applications on or after January 10th. For FHA loans it is for case numbers assigned on or after January 10th. 

  What is the Ability to Repay Rule (ATR)?

Dodd Frank Bill Signing
  •  The ATR requirement is simple enough, the lender must make a reasoned determination that the borrower has the ability to repay the loan.  Basically a sound underwriting decision.
  •  If the ATR isn’t satisfied, the borrower can sue the lender for money damages or to stop a foreclosure, even if the loan is       then owned by a  subsequent purchaser. This ATR requirement is presumed to be satisfied if the loan is a “Qualified  Mortgage”. This is the easier of the two new rules  to understand.

What is a Qualified Mortgage (QM)? 

 A qualified mortgage must meet certain requirements:

          a. Debt To Income must be  equal or less than 43%

          b. Determine the max rate the borrower qualifies for in the first 5 years

          c. Asset and Income Information must be verified

          d. No negative amortization, interest only, or similar risky terms

          e. Loan cannot exceed a 30 year term

          f. Point and fees equal or less than 3% of total loan amount for loans ? $100,000 (except bona fide discount points and charges)

                i. 3% for loan amounts equal or greater than $100,000

                ii. $3,000 for loan amounts $60,000 to $99,999.99

                iii. 5% for loan amounts $20,000 to $59,999.99


How Does the QM Effect PMI & Discount Points?


Included amounts:

          a. Non-refundable up-front premiums

Excluded amounts:

          a. Monthly mortgage insurance
          b. Lender Paid Mortgage Insurance
          c. Up-front premium is refundable on a pro-rated basis and that the amount does not exceed 1.75% Ability to Repay & Qualified Mortgage Rule

Partially excluded:

          a. If the PMI is refundable but it exceeds the 1.75% amount, then only the amount by which it exceeds 1.75% counts into the points and fees.

Discount Points:

          a. A discount point is bona fide if it reduces the consumer’s interest rate by an amount that reflects industry practices, such as secondary market norms.
          b. Up to 2 bona fide discount points can be excluded if the interest rate before the discount does not exceed the average prime offer rate (“APOR”) by more than 1% or 1 point may be excluded if the interest rate before the discount does not exceed the APOR by more than 2%. – (keytest) “Industry practices” as defined in the CFPB commentary states that a creditor may show that the calculation complies with requirements prescribed by Fannie Mae and Freddie Mac.

How Does the QM Rule Affect Affiliates?:

          a. All lender affiliate fees are included in the points and fee test

          b. Not all Broker affiliates are included in the points and fees test, examples:


  • Title
  • Escrow
  • Closing
  • Processing


  • Appraisal companies or AMCs
  • Credit report fees
  • Inspection companies
  • Flood insurance
  • Hazard insurance

The unfortunate reality of these new rules is the timing. The housing market is coming of a year in which it regained its footing and the economy seems to be steadily heading in the right direction. The reduction in the debt to income ratio requirements and the new guidelines for qualifying adjustable rate mortgages will push many prospective new homeowners into the rental market. It is now more important than ever to prepare early on in the process so we can make informed financial decisions in order to create a plan and a path towards realizing the American Dream.


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