Will the new “Ability-to-Pay” Rule protect consumers, or banks?


Since the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 passed, all of us in the real estate industry have been waiting to see how it would affect us.

Will the new regulations help or hurt a consumer’s ability to purchase a home?

On January 10, 2013 the Consumer Financial Protection Bureau issued much-anticipated revisions to Regulation Z and gave us a partial answer to our questions.

The new “Ability-to-Repay” rule that accompanies the Qualified Mortgage regulation will go into effect on
January 10, 2014 – and with it will come uncertainty and confusion.

At first glance, it appears that we will be reverting to the underwriting guidelines of the past. The basic principle is to assure that borrowers have the ability to repay their mortgage loans. The publicized reason for the new rule is to protect consumers from the risky lending practices that caused the crisis.

The real reason may be to protect banks – so they can sell their loans as “Qualified Residential Mortgages” and avoid liability.

Under the new rules, lenders must verify the consumer’s ability to repay both principal and interest over the long term. In other words, borrowers can’t be qualified based on an introductory rate.

Lenders will not be able to offer no-doc and low-doc loans, but will be required to verify ability to pay following eight underwriting standards:

• Current income or assets
• Current employment
• Credit History
• The monthly payment for the mortgage
• Monthly payments on other loans associated with the property
• Other mortgage related obligations – such as property taxes and HOA fees
• Other debt obligations
• Debt to income ratio (not over 43%)

This is, of course, not good news for self-employed individuals who write off every possible expense for income tax purposes. Borrowers with good credit, stable employment, good income, and a minimum of other debt obligations should have no trouble obtaining a mortgage loan under the new regulations.

The good news – teaser rates can no longer entice unsophisticated borrowers into a loan they have no hope of repaying after the rates reset. This is where the “consumer protection” comes in.

The not-such-good news – the new Appendix Q to Regulation Z sets forth pages upon pages of HUD-based underwriting guidelines that dictate, among other things, how the debt to income ratio should be calculated. To give an example of how detailed these guidelines are: rent from boarders may be considered as income; rent from roommates probably will not.

As with all things governmental, along with confusion and contradictions, the regulations are filled with loopholes and exceptions. In addition, along with announcement of the Ability-to-Pay rule, the CFPB issued a proposed rule that would amend the ATR Rule before it even goes into effect.

Stay tuned. More rules – and changes to rules – will be announced as we make our way through 2013.

Mike Clover
Homewood Mortgage,LLC

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