The mortgage industry has seen it’s fair share of government intervention. Enough is enough right? Wrong! Today’s mortgage landscape barely resembles itself from a few years back. Despite the massive changes, more regulatory changes are on the way.
Reasonable and Good Faith Underwriting
The government must not have had a single member go through the loan process during the past 2 years. If they had, the 2014 Dodd Frank changes may not even exist. After all, what they are introducing mirrors what lenders have been doing. Dodd Frank holds lenders responsible for making sure that borrowers applying for a new mortgage have the “ability to repay” their new home loan.
Those who have gone through the loan process can testify, they proved their ability to pay their monthly mortgage payments.
The Dodd Frank Act introduced 8 different rules of which the “ability to repay” is just one. However, the ability to repay is the MOST important of the 8. It will have the most direct impact on mortgage lenders and the consumer. The rule established 2 fundamentals:
- An “ability to repay” burden of proof
- A way to “prove” the lender met the “ability to repay” burden of proof
What Specific Rules Does Dodd/Frank Give Lenders?
Are you ready for this? The Dodd Frank Act does not set specific underwriting guidelines. Instead, Dodd Frank states a mortgage lender must underwrite a new loan in good faith when determining a borrower’s “ability to repay.” A lender can determine their own methods of underwriting. However, the lender should feel they have proven a borrower ability to repay. Dodd Frank’s “Ability to Repay” rule also requires a mortgage lender evaluate the following 8 categories on each home loan:
- The Mortgage Payment
- Other Payments Associated with the Property (HOA, Taxes, Insurance)
- Payments on Simultaneous Loans for the Subject Property
- Other Debts, Child Support, Alimony
- Credit History
- Current or Reasonably Expected Income or Assets
- Employment Status
- Monthly Debt to Income Ratio
This is what lenders did prior to Dodd Frank. However, shhh – let the government think they are revolutionizing the mortgage industry and “protecting” us all. Now, Dodd Frank does give mortgage lenders a method to protect themselves. It is called a “Presumption of Compliance.” A Presumption of Compliance means it is automatically assumed a lender met Dodd Frank’s Ability to Repay requirement.
What is a Qualified Mortgage – “QM”
A Qualified Mortgage is a mortgage originated under a specific set of standards. Qualified Mortgages deserve their own blog article. There are 4 different types of QM outlined in the Ability to Repay rule. The most important are the General QM rules and the Temporary QM rules.
Why Does Dodd Frank Act Matter?
When lenders document they properly determined a borrower’s ability to repay, it is difficult for consumers to sue in the event of a foreclosure. When they originate a QM the lender is protected in the event that a consumer decides to sue.
Did you just have an “ah ha” moment? This fact is what will drive most of the mortgage industry changes you will see as lender’s will seek guaranteed protection. Want another Dodd Frank Act Curve ball – there is a 7 year transition period that allows mortgage lenders to continue using pre-Dodd Frank guidelines rather than having to adopt the “General QM” guidelines.
By Jeremy House