GSEs: Ability-to-Repay and Qualified Mortgages

Yesterday, the Federal Housing Finance Agency (FHFA) announced that it is directing Fannie Mae ("Fannie") and Freddie Mac ("Freddie") to limit their future mortgage acquisitions to loans that meet the requirements for a qualified mortgage ("qualified mortgage" or "QM"), including those that meet the special or temporary qualified mortgage definition, and loans that are exempt from the “ability to repay” ("ATR") requirements under the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank).

In January, the Consumer Financial Protection Bureau (CFPB) issued a final rule implementing the “ability to repay” provisions of Dodd-Frank, including certain protections from liability for loans that meet the criteria of a qualified mortgage as outlined in the rule.

We have discussed the ability to repay provisions HERE, HERE, HERE, HERE, and HERE.

I would like to call your attention to a few important details.*

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IN THIS ARTICLE

Overview

Eligible for Sale to Fannie and Freddie

Additional Guidance and Notifications

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Overview

Considered historically, the Consumer Financial Protection Bureau (CFPB) issued a final rule on January 10, 2013, implementing the “ability to repay” provisions of the Dodd-Frank. That rule generally requires lenders to make a reasonable, good faith determination of a consumer’s ability to repay before originating a mortgage loan and establishes certain protections from liability for QMs.

The ATR rule takes effect for applications dated on or after January 10, 2014.

It is significant that, beginning January 10, 2014, Fannie and Freddie will no longer purchase a loan that is subject to the ATR rule if the loan:

• is not fully amortizing,

• has a term of longer than 30 years, or

• includes points and fees in excess of three percent of the total loan amount, or such other limits for low balance loans as set forth in the rule.

The FHFA announcement states that "effectively, this means Fannie and Freddie will not purchase interest-only loans, loans with 40-year terms, or those with points and fees exceeding the thresholds established by the rule."

Fannie and Freddie will continue to purchase loans that meet the underwriting and delivery eligibility requirements stated in their respective selling guides. This includes loans that are processed through their automated underwriting systems and loans with a debt-to-income ratio of greater than 43 percent. But loans with a debt-to-income ratio of more than 43 percent are not eligible for protection as QMs under the CFPB’s final rule unless they are eligible for purchase by Fannie and Freddie under the special or temporary qualified mortgage definition. 

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Eligible for Sale to Fannie and Freddie

Just a few days ago, on May 2, 2013, the FHFA directed Fannie Mae and Freddie Mac to limit future acquisitions to loans that:

• are qualified mortgages under the ability to repay rule, including those meeting the special or temporary qualified mortgage requirements; or

• are exempt from the ability to repay requirements, such as investor transactions.

Thus, effective for mortgages with application dates on or after January 10, 2014, Fannie and Freddie will not be allowed to purchase any loans if they are subject to the ATR requirements and are either:

• loans that are not fully amortizing (e.g., no negative amortization or interest-only loans);

• loans with terms in excess of 30 years (e.g., no 40-year terms); or

• loans with points and fees in excess of 3% of the total loan amount or such other limits for low balance loans as set forth in the ability to repay final rule.

Fannie will continue to purchase loans that meet the underwriting and delivery eligibility requirements (i.e., existing debt-to-income ratios, loan-to-value ratios, and reserves) stated in the Selling Guide, including loans processed through Desktop Underwriter®.

Freddie will limit future purchases to:

• Mortgages that are “qualified mortgages” under the final rule, including those meeting the special or temporary qualified mortgage requirements, and

• Mortgages that are exempt from the ATR, such as investor transactions.

Therefore, effective for mortgages subject to the final rule with applications received on or after January 10, 2014, Freddie will not be permitted to purchase the following:

• Mortgages that are not fully amortizing (e.g., Mortgages with a potential for negative amortizations or interest-only Mortgages);

• Mortgages with terms in excess of 30 years (i.e, 40-year fixed-rate Mortgages); and,

• Mortgages with points and fees in excess of 3% of the total loan amount or such other limits for low balance Mortgages as set forth in the final rule.

Fannie Mae: Credit Reports Prior To Closing

OVERVIEW

Under Fannie Mae’s new Loan Quality Initiative guidelines, there is an affirmation that the lender is responsible for implementing "practices to identify undisclosed liabilities in a transaction."

Thus, it is the lender's responsibility to develop and implement its own business processes to support compliance with Fannie Mae's requirements  through the closing of a transaction.

Fannie Mae has not changed the policy as it relates to credit reports. Credit documents, including the credit report, are valid for 90 days from the date of the report and may not be older than 90 days at time of closing (i.e., the date that the Note is signed by the borrowers).

However, the lender is responsible for confirming and factoring in the undisclosed liabilities that were not present in the loan processing reviews conducted prior to and through to the date of closing.

Therefore, if the lender pulls a new credit report the day before closing and no differences are found compared with the original credit report, the lender is not relieved of representations and warranties for undisclosed liabilities.

Although pulling a new credit report may reduce the lender's risk exposure related to its representations and warranties on undisclosed liabilities, lenders remain responsible for any and all borrower debt up to and concurrent with closing.

HIGHLIGHTS

Actions

●Retrieving a refreshed credit report just prior to the closing date and reviewing it for additional credit lines.

●New vendor services are becoming available to provide borrower credit report monitoring services between the time of loan application and closing - Equifax's Undisclosed Debt Monitoring™ is one example.

●Direct verification with a creditor that is listed on the credit report under recent inquiries to determine whether a prospective borrower did in fact enter into a financial arrangement with the creditor, which may not be listed on the loan application.

●Running a Mortgage Electronic Registration System (MERS®) report to determine if the borrower has undisclosed liens or another mortgage is being established simultaneously.

New P-T-C Credit Report Finds Undisclosed Liabilities

If additional liabilities are discovered prior to closing, the lender must consider any such additional debts of the borrower in the qualification:

●If the lender is using Desktop Underwriter® (DU®) and identifies differences between the new and/or refreshed credit report and the credit report used when underwriting the loan case file through DU, the lender must take appropriate action when information that was not considered by DU might result in a recommendation other than that returned by DU.

Examples of situations in which loan case files should be resubmitted to DU:

     o If additional debt has been incurred and the inclusion of the additional debt would increase the total expense ratio to a level outside the tolerance specified in section B3-2-10, Accuracy of DU Data, DU Tolerances, and Errors in the Credit Report, of the Fannie Mae Selling Guide.

     o If new derogatory information is detected and/or the credit score has materially changed.

Example of a situation in which the lender should not have to resubmit the loan case file to DU would be if credit balances have changed slightly but the change in the total expense ratio remains within the DU Tolerances policy.

VISIT OUR LIBRARY FOR ISSUANCE

Fannie Mae: Loan Quality Initiative (LQI) Program
FAQs - Update

5/28/10