Ability to Repay & Qualified Mortgage Exemption

Safe harbor for lenders

Qualified Mortgage rules are now in place requiring lenders to determine each borrower's ability to repay his or her mortgage. The QM rule provides for a safe harbor for lenders. Most lenders are expected to make only QMs. Non-QM loans can still meet the requirements of the Dodd-Frank Act, but borrowers have the ability to sue the lender if they default on the mortgage by claiming that the lender should have known that the borrower could not pay.

Non-QM loans will probably be limited to wealthy borrowers with strong balance sheets. QMs will most likely hurt the ability of lower income borrowers to obtain mortgages. Cautious mortgage practices could end up impacting fair lending. The agencies recently issued a guidance stating that limiting lending to QM loans would not necessarily expose banks to enforcement actions.

Federal regulators are still working on the Dodd-Frank risk retention/qualified residential mortgage exemption. The Act requires asset-backed lenders to retain a 5 percent interest in each loan sold unless certain requirements are met. The RR/QRM, as originally proposed, would have required a 20 percent down payment. The agencies have since backed down. The final proposal is expected to be similar to the QM regulation.