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.
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.
However, 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.
Legally, 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.
Lenders 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.
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.
