The Department of Housing and Urban Development (HUD) has issued its final rule defining a "Qualified Mortgage" (QM) as required by the Dodd-Frank Act. The new rule, HUD says, builds off of the existing QM rule issued by the Consumer Financial Protection Bureau (CFPB) earlier this year. Like the CFPB QM the new HUD, which applies only to loans insured, guaranteed, or administered by HUD/FHA will go into effect on January 10.
In order to be a qualified mortgage as defined by HUD as loan must meet the following requirements:
- Require periodic payments without risky features;
- 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, Title II Manufactured Housing, Section 184,Section 184A loans and others as detailed below); and
- Be insured or guaranteed by FHA or HUD.
HUD's rule establishes two types of QM. The Rebuttable Presumption QM will have an annual percentage rate (APR) greater than the Average Prime Offer Rate (APOR), the rate for the average borrower receiving a conventional mortgage, plus 115 basis points plus the on-going (FHA) Mortgage Insurance Premium (MIP) rate. Lenders that offer these loans are presumed to have determined that their borrower meets the Ability-to-Repay standard set out in the Truth-in-Lending Act (TILA) but consumers can challenge that presumption by proving they did not have sufficient income to pay the mortgage and other living expenses.
The second type of qualified mortgage is the Safe Harbor QM. These loans must have an APR less that that laid out under the formula above for Rebuttable Presumption loans. This QA type offers lenders the greatest legal certainty they are complying with TILA. Consumers can still challenge their lender but only on the basis that their loan does not meet Safe Harbor requirements.
HUD has also adopted CFPB's list of transactions that are exempt from the ability-to-repay requirements including Reverse Mortgages; short term (12 months or less) bridge loans, construction to permanent loans, and a list loans available under specialized HUD financing
The new QA rule also covers Title II manufactured housing, Title I manufactured housing and property improvement loans, Section 184 Indian Home Loan Guarantee Program mortgages, and Section 184A Native Hawaiian Housing Loan Guarantee Program mortgages. The rule designates loans insured under these programs as Safe Harbor Qualified Mortgages regardless of upfront points/fees and APR to APOR ratio so as not to interfere with current lending practices until appropriate parameters can be determined.