How Will the New “Qualified Mortgage” Regulations Affect Your Transactions?
The final rules and regulations implementing portions of the federally enacted Dodd-Frank Act will become mandatory on January 10, 2014. These rules require creditors to make a reasonable, good faith determination of a consumer’s ability to repay any consumer credit transaction secured by a dwelling (the, “Ability To Repay (ATR) Standard”) and provides lenders with certain protections from liability under this requirement by making a “qualified mortgage (QM)”. If you are a real estate agent or broker you may be thinking that these regulations don’t impact you because it regulates lenders. However, unless you are handling only “all cash” transactions, your purchaser will need a mortgage and whether your purchaser can meet the requirements to obtain a QM may have a significant impact on their ability to close on the purchase.
The legislation and regulations referenced above contain provisions creating significant penalties and liability for mortgage lenders which make a loan where the consumer did not have an ability to repay. If the Consumer Financial Protection Board finds that a lender failed to follow the ATR standard, it can issue a cease-and-desist order and impose civil penalties of up to $1 million per day! In addition, the consumer (borrower) can bring a lawsuit for an ATR violation seeking payment of actual damages as well as statutory damages of up to $4,000 per transaction and, further, receives a foreclosure defense that has no statute of limitations. The “good news” for lenders is that Congress created a “safe harbor” for them by providing that if they make a loan which meets the requirements of a “Qualified Mortgage” under the regulations then it is presumed automatically that the QM loan meets the ability to repay standard and the consumer cannot contest that issue. In other words, it creates a secure buffer from liability for the mortgage lender if the lender makes a Qualified Mortgage.
Congress, however, didn’t make the QM standards easy to satisfy. A QM loan must have regular, equal periodic payments, it cannot exceed a thirty (30) year term and total points and fees cannot exceed 3% of the loan amount. The monthly payment has to be calculated on the highest interest rate applicable during the first five years of the loan and the borrower’s debt-to-income ration cannot exceed 43%. The lender must consider the borrower’s current income, debt obligations, alimony and child support. Although it’s not always the simplest standard to meet, many lenders will want to make (and some will only make) QM loans. Fannie Mae and Freddie Mac have already announced that they will only be purchasing QM loans. Therefore, if you have a buyer who can’t qualify for a QM loan, there is a possibility that the borrower will have great difficulty obtaining any loan for the purchase transaction.
If you have further questions about this new law and its application please don’t hesitate to contact one of our offices.