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Dodd-Frank Changes and Mortgage Loans

You can certainly recall the turmoil that roiled the mortgage markets in 2008 and 2009. Mortgage companies in Alpharetta and the Greater Atlanta area certainly do. Leading up to that period was a series of loan programs that, shall we say, led to quite a bit of toxic mortgages in the marketplace. Approval requirements were slowly rolled back as it relates to credit scores and down payment requirements and other important aspects of a conventional loan approval. As mortgage lenders sought more customers, they relaxed their guidelines to the point that someone without any verified income or assets could buy and finance a home.

In 2011, the Consumer Financial Protection Bureau, or the CFPB was created. As the name implies it was formed to provide specific consumer lending protections that primarily required lenders, including mortgage companies, to verify the applicant’s ability to repay the mortgage. Eventually, the Qualified Mortgage Rule was crafted and implemented in 2013. The ‘QM’ rule provided guidelines lenders could follow. When these guidelines were followed, the lender received a ‘safe harbor’ and protected from lawsuits by borrowers who claimed they were issued a loan they could not afford.

When a loan met these guidelines, the protection would be issued. A QM loan required the loan not be amortized more than 30 years, interest-only loans are not permitted, negative amortization is banned and there can be no balloon payments associated with the mortgage and other requirements.

One of the main components of the QM model was the formal introduction of the Ability to Repay, lenders sometimes refer to this as the ATR rule. A borrower’s debt to income ratios, or the total monthly credit obligations including the mortgage payment with gross monthly income, cannot exceed 43 percent. If it did exceed 43 percent, it no longer received QM protection.

The changes signed into law by the Administration made adjustments to the ATR requirement. New guidelines allow lending institutions with less than $10 billion in assets approved a loan with ratios greater than the current 43 limit. If a lender wanted to approve a loan with a debt ratio higher than the ATR rule, the lender can exceed that ratio as long as the lender keeps the loan in-house and does not sell the loan on the secondary market. The rest of the QM guidelines still remain.

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