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CFPB Releases Long-Awaited Qualified Mortgage Rule

After many long months of waiting, the Consumer Financial Protection Bureau (CFPB) has finally issued its finalized qualified mortgage (QM) rule designed to protect both consumers and responsible lenders.

One of the biggest provisions of the QM rule is the newly set Ability-to-Repay rule, which demands that all new mortgages comply with basic requirements to protect consumers from taking on loans they can’t repay.

The rule does away with so-called “no doc” and “low doc” mortgages, requiring that all of a borrower’s pertinent financial information must be supplied and verified, including: employment status, income and assets, current debt obligations, credit history, and monthly payments on the mortgage, among other information. Based on that information, the lender must be able to make a fair judgment on whether or not the borrower can really take on more debt.

The Ability-to-Repay rule also stipulates that lenders base their evaluation of a consumer’s ability to pay on long-term views, discounting “teaser” or “starter” rates typically used in the introductory period.

CFPB director Richard Cordray explained the Ability-to-Repay rule is a common-sense answer to curb the borrowing and lending behavior that led to the financial crash.

“When consumers sit down at the closing table, they shouldn’t be set up to fail with mortgages they can’t afford,” Cordray said. “Our Ability-to-Repay rule protects borrowers from the kinds of risky lending practices that resulted in so many families losing their homes. This common-sense rule ensures responsible borrowers get responsible loans.”

The rule will go into effect January 2014, according to theCFPB. Exceptions to the rule would apply for consumers trying to refinance from a risky mortgage to a more stable loan.

The CFPB also announced it is considering proposed amendments to the Ability-to-Repay rule. These amendments would, among other things, exempt certain nonprofit creditors that work with low- and moderate-income consumers. They would also provide QM status for certain loans made and held in portfolio by small creditors such as community banks and credit unions. If adopted, the proposed amendments would be finalized this spring and would go into effect at the same time as the Ability-to-Repay rule.

The bureau also announced other features of a QM beyond the Ability-to-Repay criteria. In order to meet QM requirements, a mortgage loan must limit points and fees (including those used to compensate originators) and have no toxic or risky loan features, such as interest-only payments or terms that exceed 30 years.

There is also a 43 percent cap on the acceptable debt-to-income ratio, though there will be a transitional period during which non-qualifying loans that meet other affordability standards will be considered QMs.

In addition, the CFPB explained there are two kinds of QMs that have different protective features for consumers and legal consequences for lenders.

The first kind, QMs with a rebuttable presumption, are higher-priced loans given to consumers with insufficient or weak credit history. Legally speaking, the lenders who give these are presumed to have determined that the borrower has the ability to repay. Consumers can challenge the presumption by proving that they did not actually have the income to repay the mortgage and other living expenses.

The second type of QMs are those that have a safe harbor status—generally lower-priced prime loans given to low-risk consumers. They offer lenders the greatest legal certainty that they are complying with the Ability-to-Repay rule, and consumers can only legally challenge their lender if they believe the loan does not fit the criteria of a QM.

While QM status does not grant a lender complete immunity from borrower challenges, Cordray said in prepared remarks he believes the CFPB has “limited the opportunities for unnecessary litigation” by setting up clear guidelines.

Mike Calhoun, president of the Center for Responsible Lending, said in a response that the new rules “strike a balanced, reasonable approach to mortgage lending—for the most part.”

“But the rules also leave a pivotal issue unresolved: How the fees that lenders pay to mortgage brokers will be counted when it comes to defining a qualified mortgage. The CFPB should not create a loophole that allows high-fee loans to count as a qualified mortgage under Dodd-Frank,” Calhoun said. “If the broker payment issue is appropriately resolved, the rules will be—all in all—good for consumers, investors and the economy.”

Debra Still, chairman of the Mortgage Bankers Association, expressed her own reservations, but said the organization applauds the approach and effort given.

“This is a very complex rule. We remain concerned that certain aspects of it could curb competition, increase costs and tighten credit availability for borrowers. In particular, the 3 percent cap on points and fees appears to be overly inclusive as it relates to compensation and affiliates,” Still said.

“Additionally, we will be looking carefully at whether the interest rate threshold for the safe harbor, which is set at 150 basis points above the benchmark rate, will adversely impact too many borrowers,” she continued. “Ultimately, the final verdict on this rule will be made by the market.”

By: Tory Barringer, DSNews

Housing Prices are Falling and Closing Costs are Rising

 Housing prices may be dropping across the country, but closing costs are on the rise nationwide. The average origination and title fees on a $200,000 home are $4,070 according to Bankrate’s most recent survey of closing costs for 2011. That is a jump of 8.8 percent from 2010 when the average rate was $3,741. New York is leading the pack with average closing costs being $6,183, and is followed by Texas at $4,944. The cheapest closing costs nationwide are Arkansas, North Carolina and Indiana where the average is $3,400.

Now that the facts and figures have been established the question to be asked is: Why are closing costs going up? The biggest bulk of that answer lies in direct lender fees. Mortgage lenders claim the reason their fees have increased is because of tighter mortgage regulations implemented by the government over the past two years. Strict regulations require more personnel to ensure complete compliance. Next in line are third party fees including title, appraisal, postage/courier, and survey charges averaging around $2,456, up 7.9 percent from 2010. Among these third party fees title insurance has changed very little compared to last year.

Even though closing costs have risen since 2010 that doesn’t mean you have to be chained to the highest fees on the market. You can shop around and negotiate most fees. When shopping around be sure to get good faith estimates (GFE’s) from at least three different lenders and use a reputable lender who you can access. A good GFE will include a breakdown of estimated closing costs, rate and payment information.

If you’re going to shop around for title insurance you want to make sure the savings is going to be worth your time spent shopping. Some states regulate title insurance premiums while in other states they vary. The Bankrate survey discussed above indicates the average premiums for title insurance was $1,653 nationwide. North Carolina has the cheapest average at $993 while New York is the most expensive at $2,811. Whether you live in a state that regulates title insurance premiums or not it never hurts to shop around. But remember with anything, sometimes you get what you pay for….usually if you find someone who is far less is costs than the majority of the service providers out there, typically you will find they deliver a substandard product.

View original article here.