Good news for small local banks and credit unions. After a several months of accepting comments from industry groups and the public, the Consumer Financial Protection Bureau made several changes to its ability-to-repay rules — changes that are a boon for smaller lenders.
CFPB’s ability-to-repay rule is the standard that all loans must meet. It explains what a lender must consider when offering a mortgage. It’s to prevent lenders from offering loans to people who can’t afford them. (Click here for the Buzz post that explains it.)
Some loans, called qualified mortgages (QM), automatically meet those ability-to-repay rules. These loans have no excess points or fees, can’t be interest-only or have increasing principal, and require a 43 percent or better debt-to-income ratio.
Finally, only lenders in ‘rural or underserved’ areas could offer loans with balloon payments (a large final payment) and still have them considered QMs.
So what’s the big deal now?
After hearing the outcry from smaller lenders, CFPB made some changes to what qualifies for QM status.
0. It defined "small creditors" as those A) with no more than $2 billion in assets, and B) that don’t write more than 500 first-lien mortgages a year.
1. Some lenders get a looser definition of QM. A small creditor that keeps a loan on its own books for at least three years doesn’t have to worry about the borrower’s debt-to-income ratio. (Normally 43 percent would be required.) These lenders can be in rural/underserved areas or not.
2. More lenders are allowed to offer balloon-payment mortgages… at least for now. Staring January 10, 2014, for two years small lenders in any area can offer balloon-payment mortgages and still have those loans be considered QMs, if they hold the loans.
3. Some lenders are exempt from ability-to-repay rules, period. Non-profits that offer mortgages only to low-to moderate income consumers (and no more than 200 of them a year) don’t need to follow ability-to-pay regulations. Neither do "Community Development Financial Institutions," "Community Housing Development Organizations, and "Downpayment Assistance Providers of Secondary Financing" (various government agencies define those terms).
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CFPB is trying to ride the lines between A) making sure that lenders don’t repeat their mistakes and give loans to people who can’t repay (and then beg you and me to bail them out); B) ensuring that people who can afford loans don’t have a hard time getting them; and C) helping those who need help afford the homeownership part of the American Dream.
We wish director Richard Cordray and his crew good luck with that.
Want the gory details? Click here for the CFPB’s explanation of the tweaked regs. (Scroll down to page 4.)