Following the 2008 financial crisis, which was largely triggered by loose mortgage lending practices, the Consumer Financial Protection Bureau (CFPB) was created to protect consumers in the financial marketplace and enforce consumer finance laws. The Qualified Mortgage rule and Ability-to-Repay rule were created to protect consumers from dangerous lending practices and improve stability in the mortgage marketplace.
What Is a Qualified Mortgage?
The Qualified Mortgage (QM) rule created a category of home loans with specific stable features that increase the likelihood of the borrower being able to afford the loan. QM loans cannot have risky features such as:
Terms longer than 30 years
Negative amortization, which means the borrower can pay less than the interest due per month
Interest-only features that allow borrowers to make interest-only payments without paying toward the principal
Fees and points that exceed 3% of the loan amount
Debt-to-income ratio exceeding 43%
There is no down payment requirement for a Qualified Mortgage, an issue that was debated when the QM rules were written.
To originate a Qualified Mortgage, lenders must also follow specific approval factors to ensure the borrower can afford to repay the loan.
The ability-to-repay rule is a reasonable and good-faith determination that lenders must make to ensure borrowers can afford the loan. Lenders must assess, document, and consider a borrower’s credit history, employment, assets, income, and monthly expenses during the underwriting process. Lenders may not use an introductory rate to determine if a borrower can afford a loan. If a mortgage has a low rate that increases later, the lender must make a reasonable effort to determine if the borrower can afford the higher rate later.
Benefits of Qualified Mortgages
A Qualified Mortgage offers benefits for lenders and borrowers. Consumers benefit from a loan with stable features they are more likely to be able to afford in the long-term. The safeguards built into a QM protect borrowers from entering into a long-term loan that may be unfair or contain features that affect the borrower’s ability to pay in the future. Lenders also benefit from originating Qualified Mortgages. Freddie Mac and Fannie Mae can only purchase loans that meet QM standards. These loans also protect lenders from lawsuits from borrowers who cannot repay their loans.