LEGAL NEWSLINE

WASHINGTON (Legal Newsline) - In addition to new rules and regulations governing appraisals and mortgage originations, new provisions of the Dodd-Frank Act were formulated by the Consumer Financial Protection Bureau this month that govern how much risk a bank must retain when making new mortgage loans.

The final rules governing qualified mortgages and qualified residential mortgages were finalized Jan. 10. While the Dodd-Frank Act required banks to retain 5 percent of the risk of all new mortgages made, certain loans were exempted- for example, loans that meet the "ability to repay" test and loans backed by the government through Fannie Mae and Freddie Mac.

"The QM and QRM rules will reshape mortgage lending, changing what loans are made and by whom," the American Bankers' Association wrote in a policy brief for community banks before the final rules were issued.

"Most lenders will not want the financial or reputational risk associated with loans outside the QM designation and will simply not make loans that are not Qualified Mortgages. The proposed QRM takes most underwriting decisions away from the lender and requires a 'check the box' approach that will make many current loan products impossible to offer or undesirable due to cost and risks involved. Some community banks may stop providing mortgages altogether as the requirements and compliance costs make such a service unreasonable without considerable volume."

The concern that some borrowers would be locked out of the mortgage market was echoed all across the industry. Requiring banks to hold a percentage of the risk for the life of the loan would increase the expense of those loans to the consumers as banks had to hold higher levels of capital in reserve and had to spend more money on regulatory compliance.

Certain loans were never a concern of the Dodd-Frank act: the so-called "traditional mortgage" taken on by a credit-worthy borrower with an ample down payment and low debt-to-income ratio. These borrowers pass an "ability-to-repay" test codified by the CFPB.

After the rules were issued, the ABA issued a formal statement.

"The Consumer Financial Protection Bureau has ensured that most consumers will continue to have access to safe credit," said Frank Keating, ABA president and CEO. "While the rule codifies many conservative lending standards currently in place, it is complex and technical, presenting an additional regulatory burden. We appreciate the thought, time and work CFPB put in to developing this rule. It is clear that the bureau has implemented tough consumer protections with an eye toward limiting market disruptions. ABA will continue to work with CFPB to achieve a strong housing recovery."

He still cautioned that the CFPB could be restricting access to mortgage loans for some borrowers.

"Qualified mortgage, as defined by the rule, imposes strict lending standards," Keating said. "While QM encompasses many of the loans being underwritten today, it must also interact with a number of other mortgage rules that CFPB will be issuing this month. There is a very real impact to these rules, and they will transform our lending practices and could restrict access to credit."

Among the requirements, lenders must be able to prove borrowers:

- Have income and assets sufficient to repay the loan

- Have steady, documented employment history with no gaps longer than one month over the previous two-year period;

- Have a minimum credit score;

- The borrower must be able to pay the debt associated with the mortgage and all other property-related expenses, including taxes and home equity loans

- Lenders must consider the borrower's debt-to-income ratio not only for the mortgage loan, but also the borrower's other obligations including student loans, credit cards and other installment loans such as car loans.

Additionally, the lender must prove the consumer's total monthly debt to total monthly income does not exceed 43 percent.

The type of loan that qualifies is also restricted: a qualified mortgage cannot allow borrowers to defer repayment of the principal balance, such as in "Interest payment only loans."

Loans cannot be for a term greater than 30 years; and loans that also add to the borrower's balance over time (negative amortization) also will not be considered "qualified" mortgages. Some balloon payment loans would be eligible for "qualified mortgage" status, provided the lender can show they have a reasonable expectation the borrower will be able to meet the balloon payment.

Points and fees on qualified mortgages are also capped, a provision that could also restrict access to loans, observers say. Before the rules were issued, the National Association of Realtors worried that the CFPB would issue overly stringent rules that would strangle the real estate and mortgage market.

"NAR forged a coalition of partners that urged regulators to honor Congressional intent by crafting a broad QM and we are pleased that the rule encompasses the vast majority of the safe, high quality lending being done today," the Realtor association said in a distributed statement. "We will continue to work closely with the CFPB to ensure that the cap on fees doesn't restrict consumers' mortgage options, but believe today's QM rule is a positive step to bringing certainty to the housing finance system."

The majority of the provisions in this month's rules will phase in over the coming 12 months.

A number of provisions of the Dodd-Frank Act are still awaiting final rulemaking from the CFPB. According to the Davis Polk & Wardell law firm, which issues a monthly report on the government's progress with the law, as of January 2013, 237 provisions had been implemented, with 99 provisions still outstanding.