CFPB Ability-to-Repay Rule

The Consumer Financial Protection Bureau (CFPB) will later today issue its final ability-to-repay rule -- along with its “qualified mortgage” standard and related safe harbor provisions.

However, earlier this morning, the CFPB issued a press release with a fact sheet and summary of the final rule that show the “qualified mortgage” -- or QM -- definition under the regulation will be broad enough to encompass almost all current types of mortgages.

Loans that are not considered qualified mortgages under the rule are those with negative amortization, interest-only payments, balloon payments, or terms exceeding 30 years. So-called “no-doc” loans also cannot be QMs.

“Finally, a loan generally cannot be a qualified mortgage if the [consumer’s] points and fees … exceed 3 percent of the total loan amount, although certain ‘bona fide discount points’ are excluded for prime loans,” the CFPB summary said.

The summary explained that qualified mortgages generally will be provided to people with debt-to-income ratios less than or equal to 43 percent.

For a temporary, transitional period, however, loans that don’t have a 43 percent debt-to-income ratio but meet government affordability or other standards -- such as those that are eligible for purchase by Fannie Mae or Freddie Mac -- will be considered QMs.

The final rule also implements a special Dodd-Frank Act provision that treats certain balloon-payment loans as qualified mortgages if they are originated and held in portfolio by small banks in predominantly rural or underserved areas.

While the summary didn’t provide the details the final rule will, it noted that safe harbor legal protections would be given to lower-priced qualified mortgages, which are typically made to borrowers who pose fewer risks.

A different legal standard -- a rebuttable presumption -- would apply to higher-priced qualified mortgages, which are typically for consumers with an insufficient or weak credit history. “If the loan goes south, the consumer can rebut the presumption that the creditor properly took into account their ability to repay the loan,” the bureau said.

The ability-to-repay final rule will take effect in January 2014.

Read the ability-to-repay rule summary.

Read the ability-to-repay fact sheet.