Consumer Protection from Irresponsible Mortgage Practices

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Congress enacted the Dodd-Frank Act in 2010 in response to the mortgagecrisis that led to America’s Great Recession.  The two parts that applyclosely to homebuyers are the Ability-to-Repay (ATR) and Qualified Mortgages(QM).

A Qualified Mortgage is a category of loans that have certain, more stablefeatures that help make it more likely that borrowers will be able to affordtheir loan.  These loans do not allow certain risky features like aninterest-only period when no money is applied to reduce the principal; negativeamortization that would allow the mortgage balance to increase; and,“balloon payments” at the end of the loan that are larger than thenormal periodic payments.

A debt-to-income ratio of less than or equal to 43% has been established toprovide a limit on how much of a borrower’s income can go toward total debtincluding the mortgage and all other monthly debt payments.  However, theConsumer Finance Protection Bureau believes these loans should be evaluated ona case-by-case basis and in some cases, can exceed 43%.

There is a limit for up-front points and fees the lender can charge.

By showing that the lender made an effort to be certain that the borrowerhas the ability to repay the loan, the lender in turn, receives certain legalprotections.  Underwriting factors considered by the lender include:

  1. current or reasonably expected income or assets 
  2. current employment status
  3. the monthly payment on the covered transaction 
  4. the monthly payment on any simultaneous loan 
  5. the monthly payment for mortgage-related obligations
  6. current debt obligations, alimony, and child support
  7. the monthly debt-to-income ratio or residual income
  8. credit history

For more information, see theConsumer Financial Protection Bureau fact sheet … protectingconsumers from irresponsible mortgage lending.