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As the New Year swept in bitter cold temperatures, 2014 also swept in new regulations in the lending industry. The 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act charged the Consumer Financial Protection Bureau (“CFPB”) with the authority to implement rules related to residential mortgages aimed at shielding borrowers (now labeled “consumers”) from the harmful lending practices which contributed to the recent financial crisis. For the past few years, the CFPB has been gathering information throughout the industry from consumers and lenders (now known under the rules as “creditors”) and on January 10, 2014, some of the CFPB’s new rules made their debut.

Whether you are soon to be a first-time homebuyer or whether you consider yourself a seasoned veteran in the mortgage application process, the lender that you select will now be required to make “a reasonable and good faith determination” that you have a reasonable “ability to repay [“ATR”]the loan.” 15 USC 1639c. Of course, underwriting guidelines have always had to consider a consumer’s ATR, but the CFPB’s new rules take this concept one step further by establishing a new set of criteria which, if met, designate a mortgage as a “Qualified Mortgage” (“QM”). Typically, a QM is a loan that will not (1) contain any excessive fees or points; (2) be an interest-only loan or a negative amortization loan; (3) contain a balloon feature; or (4) exceed a debt-to-income ratio of 43%.

From a lender’s standpoint, extending a QM over a non-QM may be preferable because a QM is presumed to have met the ATR requirement and, therefore, under the new rules, it is afforded certain protections from a consumer lawsuit. But what does this all mean for you as the consumer?

First, more than ever, consumers seeking mortgages today will need to prepare themselves to furnish their lenders with documentation about their current sources of income, assets and other financial obligations. In addition, for those consumers who may only qualify for non-conforming loans, understand that it may take some time to find the right lender who is willing to take on the additional risk of extending a non-QM. The CFPB does not prohibit a lender from making a non-QM loan if it otherwise determines that the ATR rule is satisfied. However, the lender, among other things, would not be entitled to some of the safe harbor protections under the rules, should the consumer later default and commence an action against the lender for failure to comply with the CFPB rules. Thus, this brings rise to a second main point for consumers today. Under the new rules, consumers who later find themselves facing foreclosure may potentially have an additional defense to foreclosure if it is shown that the lender failed to properly verify the consumer’s ATR, for instance, by not considering the consumer’s living expenses in addition to his or her mortgages and other debts.

In conclusion, the purpose of the new rules is to encourage safer loans and eliminate risks for the consumers. Only time will tell, however, whether the CFPB’s rules will negatively or positively impact the consumer’s home-buying experience and ability to obtain financing. As always, it will remain of utmost important for you, as the consumer, to conduct your due diligence ahead of time and understand what will be expected from you in order to qualify for financing before you sign that Contract of Sale on the dotted line.

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