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Written by
Noel Cookman


Published On 
March 14, 2013


Okay, that’s a bit dramatic. But, it’s not totally untrue. (How’s that for word-smithing!)
The CFPB is the Consumer Finance Protection Bureau created by Dodd-Frank [Wall Street Reform and Consumer Protection Act] (2010).
The CFPB’s new rules will dramatically change mortgages beginning January 2014. The lynchpin of Dodd-Frank’s answer to the mortgage crisis is called the “Ability to Repay.” By adhering to a set of prescribed guidelines, the CFPB has created a “qualified mortgage” or QM. This QM is supposed to help lenders escape government scorn and reprimand (which can be very expensive for the offending lenders). But, to the casual reader, the new QM seems to also avoid legal peril - borrowers that come back and charge them with indigence; that is, failing to verify that the borrower could repay the loan.

The CFPB is actually creating a new and unprecedented legal recourse for borrowers to pursue action against the lenders who advanced funds for their home purchase. To be clear, a borrower will be able to sue their lender and demand forgiveness for the loan based upon the claim that the (plaintiff) borrower could not repay the loan. In other words, the borrower doesn’t have any obligation to keep their commitment – it is the lender which must suffer loss should the borrower incur expenses which he may consider more expedient than his house payment. “Perish the thought,” you say? Responsible citizens have always limited their purchases and debts to what fit in after they made their house payment. Too bad for the lender whose borrower decides to upgrade their XBOX, mobile phone account, cable access, vehicles and vacations . . . and cannot seem to make the house payment. The lender should have known that their borrower could not “afford” the house.

A “safe harbor” is allegedly created by the lender who adheres to the standards of QMs. But, the actual safety of this “safe harbor” is really unclear as only in the rarest of circumstances does the lender not retain what is called “rebuttable presumption.”

“Rebuttable presumption” seems to mean, in the context of the CFPB’s rule, that the lender gets a presumption that they have satisfied the rule (verifying the borrower’s “ability to repay”); but, hold on here - the borrower never gives up their right to rebut that presumption. In other words, if a borrower does not make his house payment for any reason, he can now blame the lender for lending him money he could not repay.

Yes, it is counterintuitive. Yes, it is incredulous. Yes, it is insane. Yes, it is the product of regulation-happy politicians and bureaucrats whose IQ is somewhere south of a door-knob.
In case you think I’m the door-knob here, please read directly from the CFPB bulletin.
Types of Qualified Mortgages:

 Qualified Mortgages with rebuttable presumption: These are higher-priced loans typically for consumers with insufficient or weak credit history. If the loan goes south, the consumer can rebut the presumption that the creditor properly took into account their ability to repay the loan. They would have to prove the creditor did not consider their living expenses after their mortgage and other debts. This does not affect the rights of a consumer to challenge a lender for violating any other federal consumer protection laws.

 Qualified Mortgages with safe harbor: These are lower-priced loans that are typically made to borrowers who pose fewer risks. If the loan goes south, the lender will be considered to have legally satisfied the ability-to-repay requirements. But consumers can still legally challenge their lender under this rule if they believe that the loan does not meet the definition of a Qualified Mortgage.This does not affect the rights of a consumer to challenge a lender for violating any other federal consumer protection laws.

There really is no “safe harbor.” At the end of the day, there really is no sure way that a lender can satisfy the presumption that they have created a “qualified mortgage.”

Speaking of the new pope, enough of my pontificating, for now anyway. Let’s talk about the rules. And here they are (see if you can guess where I inserted my own moniker for each rule). Otherwise, I have copied and pasted these rules directly from the CFPB bulletin.

Features of Qualified Mortgages:

The “We-Didn’t-Think-This-One-Through-Just-Ask-Texas-Mortgage-Originators” 3% Rule
No excess upfront points and fees: A Qualified Mortgage limits points and fees including those used to compensate loan originators, such as loan officers and brokers. When lenders tack on excessive points and fees to the origination costs, consumers end up paying a lot more than planned.

The “Let’s-Kill-The-Fly-On-Grandpa’s-Head-With-a-Sledge-Hammer” Rule
No toxic loan features: Qualified Mortgages can’t have the loan features that were associated with risky mortgages in the lead up to the crisis. Certain loans cannot be Qualified Mortgages:

O No interest-only loans, which are when a consumer only pays the interest for a specified amount of time so the principal does not decrease with payments;
O No loans where the principal amount increases, such as a negative-amortization loan; and
O No loans where the term is longer than 30 years.

The “Moron-Borrower” 43% Rule
Cap on how much income can go toward debt: Qualified Mortgages generally will be provided to people who have debt-to-income ratios less than or equal to 43 percent. This cap on debt ensures consumers are only getting what they can likely afford. Before the crisis, many consumers took on mortgages that raised their debt levels so high that it was nearly impossible for them to repay the loan considering all their financial obligations. For a temporary, transitional period, loans that do not have a 43 percent debt-to-income ratio but meet government affordability or other standards such as that they are eligible for purchase by the Federal National Mortgage Association (Fannie Mae) or the Federal Home Loan Mortgage Corporation (Freddie Mac) will be considered Qualified Mortgages.

The “We-Assume-That-Borrowers-Are-Stupid-If-Not-Totally-Irresponsible” Rule
No loans with a balloon payment except those made by smaller creditors in rural or underserved areas: The law generally prohibits loans with balloon payments from being Qualified Mortgages. Balloon-payment loans require a larger-than-usual payment at the end of the loan term. A small creditor operating in rural or underserved areas is…
In the next few articles I will examine each rule and its major impact upon borrowers and especially upon divorcing borrowers. I will also deal with the significant and major flaw in Dodd-Frank, why it should be repealed and – SURPRISE - how the newly created CFPB could actually become a profoundly helpful agency of government regulations.



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