Questions? Feedback? powered by Olark live chat software

Chrisman's Corner: The CFPB's QM Changes Don't Help Borrowers with APR

How’s that for a lot of acronyms? JMAC’s brokers know that we now have the new rules for Qualified Mortgages (QM) – but do the rules make borrowing money any easier for their clients? No, not really, and in fact the industry is upset about the Consumer Financial Protection Bureau’s (CFPB) two new disclosure forms designed to make the mortgage process “more manageable” for borrowers. Unfortunately lenders have shown that the new disclosures will not protect borrowers from unjustified price changes while the loan is in process, nor will they help borrowers shop for the best price. Can the disclosures help borrowers select the type of mortgage that best meets their needs from JMAC or any other lender?

The new Loan Estimate form retains the Annual Percentage Rate (APR) disclosure from Truth in Lending, which makes sense. The APR is a good measure of the cost of the loan to the borrower over the period the borrower has it. The problem with the APR has always been that it is calculated over the full term of the mortgage, though very few borrowers have their mortgage for the full term – borrowers usually sell their home or refinance prior to the full 30 or 15 years. Compressing any fees into a shorter period raises the APR.

To help cure this, our brokers know that there are two possible remedies for this problem. The best is to ask borrowers to provide a best guess as to how long they will have the mortgage, and calculate the APR over that period. An alternative is to calculate the APR over several periods. While borrowers would have to do their own interpolations, this would be far better than encouraging them to believe that the APR calculated over the full term applied to them. The industry points out that the CFPB has done neither: only one APR is shown on the Loan Estimate, and it is the same full-term APR that is on the TIL.

Turning to variable rate mortgages, the APR on adjustable rate mortgages (ARMs) has another problem: an APR calculation requires an interest rate for every month the loan is in force. On ARMs the rate is known only for the initial rate period. For ARMs the CFPB has decided to leave the APR as it is, and to add 3 additional measures: total interest paid over the loan term, total payments of all types over 5 years, and total principal payments over 5 years. These measures seem to have been selected because borrowers understood them, but that does not make them helpful in choosing between different mortgage types. For that purpose they are largely useless.