The Ability to Repay mortgage reform provision stipulated in the 2010 Dodd-Frank law and written by the Consumer Financial Protection Bureau became effective on Friday, Jan. 10.

We’ve known it was coming since at least late 2009. The difference as of now is the compliance deadline by which lenders had to implement good underwriting practices to support so-called Qualified Mortgages (QM).  

In 2010, Congress required that creditors make a good-faith determination based on verified and documented information that the consumer has a reasonable ability to repay the loans according to the contract terms. The final rule requires creditors to consider underwriting factors that used to be basics: income, assets, employment, current debt obligations, and monthly debt to income ratio (a monthly debt burden of no more than 43 percent of a household’s monthly gross pay, still a pretty high bar if a household isn’t asset-rich); residual income, and credit history. Creditors must use reasonably reliable third party records to verify the information.

Housing industry pessimists say that the QM requirement will shut as much as 20 percent of prospective buyers out of the market, and that lenders will stop making non-QM loans because of the risks of borrower lawsuits claiming the lender should have known the borrower couldn’t afford the loan. Well, maybe that 20 percent of the market is the real problem. If you go by the 80-20 rule, which states that 80 percent of effects are determined by 20 percent of the causes, why lend to trouble? CFPB head Richard Cordray recently cited a statistic from Goldman Sachs, finding that of the mortgage loans made from 2005 to 2008 which later defaulted, 50 percent of them would not have met Ability to Repay standards.

Here’s another reason QM should be a non-issue. Any mortgages sellable to Fannie Mae or Freddie Mac are considered QM. That’s an estimated 92 to 95 percent of today’s mortgages, and they receive the ‘safe harbor’ legal protection that holds lenders harmless from borrower lawsuits.   

A QM can’t exceed a 30 year term or have fees in excess of three percent on loans above $100,000. It can’t contain risky features such as interest-only, variable rate, and what used to infamously be called ‘Pick a Pay’, all of which were baited traps for borrowers. The rule also encourages creditors to refinance such non-standard loans into QMs.  

There’s still flexibility in the market. For buyers who seek a lower interest rate than a 30-year fixed mortgage, without compromising their financial future, there’s the ‘hybrid’ mortgage, with fixed rates for at least five years before a rate reset, a good choice for the typical borrower who expects to live in the house for at least that long. Within five to 10 years, a borrower’s income could go up, or their family could outgrow the home (hopefully, the first event would support the second). In the interim, the borrower who doesn’t expect to live in that house for 30 years has saved significant cost.

So, the sky isn’t falling.