Another definition of Qualified Mortgage
(QM) was rolled out for comment today.
This one, proposed by the Department of Housing and Urban Development
(HUD) would apply to mortgages insured, guaranteed, or administered by HUD and
to single family mortgages insured by the Federal Housing Administration (FHA).
HUD says its proposal, open for public
comments until October 30, is aligned with the Ability-to-Repay criteria set
out in the Truth in Lending Act (TILA) and also builds off of the QM rule from
the Consumer Financial Protection Bureau (CFPB) finalized earlier this year.
In order to meet HUD's QM definition, mortgage loans must
first of all,
Require periodic payments;
Have terms not to exceed 30 years;
Limit upfront points and fees to no
more than three percent with adjustments to facilitate smaller loans (except
for Title I, Section 184 and Section 184A loans); and
Be insured or guaranteed by FHA or
HUD proposes to designate Title I
(home improvement loans), Section 184 (Indian housing loans), and Section 184A
(Native Hawaiian housing loans) insured mortgages and guaranteed loans covered
by this rulemaking to be safe harbor qualified mortgages and proposes no
changes to their underwriting requirements.
for its largest volume of mortgage products, those insured under Title II of
the National Housing Act, HUD sets out two categories for Qualified Mortgages
which are determined by the relation of the Annual Percentage Rate (APR) of the
loan to the Average Prime Offer Rate (APOR). Both use the same formula for an APR; APOR + 115 basis points (bps) + on-going Mortgage
Insurance Premium (MIP). The first category, A Rebuttable Presumption Qualified Mortgage will have an APR greater than the product of that formula,
the second category Safe Harbor Qualified Mortgages will have an APR that is lower.
lenders making loans in the first category are presumed to have qualified the
borrower under the Ability-to-Repay standard. Consumers can challenge that
presumption, however, by proving that they did not, in fact, have sufficient
income to pay the mortgage and their other living expenses.
originating the Safe Harbor mortgages
have the greatest legal certainty that they are complying with the
Ability-to-Repay standard but can still be challenged by consumers who believe
the loan does not meet the definitions of a Safe Harbor Qualified Mortgage.
HUD says that its proposed definition would have only
a small impact, reclassifying about 19 percent of Title II loans insured under
the National Housing Act from rebuttable presumption QMs under the CFPB rule to
safe harbor mortgages. About 7 percent
of Title II loans would continue to not qualify as QMs based on the points and
fees limit, while the remaining FHA loans (about 74 percent) would qualify for
QM status with a safe harbor presumption with both the CFPB final rule and that
proposed by HUD.
through this rulemaking, will no longer insure loans with points and fees above
the CFPB level for qualified mortgages, but expects that these loans will adapt
to meet the points and fees limit. In addition, HUD classifies all Title I,
Section 184 and Section 184A insured mortgages and guaranteed loans, which most
likely would have been nonqualified mortgages under the CFPB final rule, as
safe harbor qualified mortgages.
HUD says lenders face lower costs of
compliance under HUD's qualified mortgage rule than under the CFPB final rule
and therefore receive incentives to continue making these loans without having
to pass on their increased compliance costs to borrowers. While borrowers
benefit from not having to pay for the higher lender costs, they also face less
opportunity to challenge the lender with regard to ability to repay. HUD
expects that almost all borrowers will gain from the reduction in litigation
and that the reduction of the interest rate will compensate for the loss of the
option to more easily challenge a lender. As a result of the reclassification
of some HUD loans, the maximum expected impact of the proposed rule would be an
annual reduction of lender legal costs by $41 million.