Qualified Mortgages

With the publication of its Qualified Mortgage Rule (QM Rule) in January 2013, the CFPB established qualified mortgage standards for conventional mortgages.  Eleven months later, HUD finalized a rule for FHA qualified mortgages.  In the preamble to its rule, HUD stated that all Title II loans and other FHA loan products should be defined as qualified mortgages.  HUD based this statement on the fact that FHA loans do not include risky features such as negative amortization, and on its longstanding guidelines that have “…always required lenders to determine a borrower’s ability to repay a mortgage…” (78 Fed. Reg. 238, p. 75215). The CFPB and HUD rules for qualified mortgages both became effective in January 2014.

 HUD’s rule for FHA qualified mortgages must begin with a discussion of the CFPB’s Qualified Mortgage Rule because the rules are interrelated. Both rules are intended to give lenders the incentive to base lending decisions on “…a reasonable and good faith determination based on verified and documented information that, at the time the loan is consummated, the consumer has a reasonable ability to repay the loan, according to its terms…” (15 U.S.C. §1639c(a)). Standards for determining repayment ability are set forth in the CFPB’s Ability to Repay Rule (ATR Rule), and HUD has incorporated these standards into its rule.

Even though it maintained that FHA loans were already in compliance with the general requirements for qualified mortgages, HUD issued a rule that more closely aligns its standards with those established by the CFPB. The HUD rule incorporates definitions, points and fees limitations, and standards for determining repayment ability that are found in the QM Rule (24 C.F.R. §201.7).
The CFPB’s QM Rule offers lenders a presumption of compliance with the ATR Rule when they make loans that meet particular product feature prerequisites and underwriting requirements. The product feature prerequisites for conventional qualified mortgages are:

• A loan term that does not exceed 30 years
• Points and fees that do not exceed 3% of the total loan amount
• No periodic payments that increase the principal balance (i.e. no negative amortization)
• No interest-only loans or other products that permit the deferral of payments of principal
• No balloon payments (with some exceptions)

The underwriting requirements for conventional qualified mortgages include:

• A maximum debt-to-income ratio of 43%
• Verification of the borrower’s income and assets
• Calculation of regular and substantially equal periodic payments that will repay the mortgage by the end of the loan term
• Qualified mortgages may have either a conclusive or rebuttable presumption of compliance with the ATR Rule.  Those that have a conclusive presumption of compliance are known as “safe harbor qualified mortgages.” These are mortgages that are not higher-priced mortgage loans.  If a loan is a higher-priced mortgage, it is subject to a rebuttable presumption of compliance.
• After completion of its rule making process to define FHA qualified mortgages, HUD finalized a rule that extends a conclusive presumption of compliance and safe harbor qualified mortgage status to any Title II FHA-insured single-family mortgage that meets the points and fees limitations of the CFPB’s QM Rule and that has an APR that does not exceed the average prime offer rate by more than the sum of the Annual MIP plus 1.15 percentage points for a first-lien transaction.
  The HUD rule extends a rebuttable presumption of compliance to FHA-insured single-family mortgages that:
  
  • Meet the points and fees limitations established under the CFPB’s QM Rule, and
  • Have an APR that exceeds the average prime offer rate by more than the sum of the MIP plus 1.15 percentage points
  • HUD has adopted the CFPB’s definition of “points and fees” that is found in Regulation Z, which defines the term to include:
    
  • Compensation paid by a consumer or by a creditor to a mortgage loan originator
  • Most items included in the finance charge
  • Real estate-related fees that are not reasonable, those for which the creditor receives compensation, or those that are paid to an affiliate of the creditor
  • Premiums paid at or prior to consummation for optional credit insurance products or insurance that names the creditor as the beneficiary
  • The maximum prepayment penalties that may be charged under the loan terms (note, however, that FHA loans may not legally include prepayment penalties)
  • HUD has stated that it will no longer insure single-family homes that have points and fees that exceed the CFPB’s limit for qualified mortgages (24 C.F.R. §203.19(b)(1)). As a result of this rule, single-family mortgages insured under Title II of the National Housing Act may not exceed the following amounts, which are adjusted annually for inflation:
    
  • 3% of the total loan amount for a loan of $100,000 or more
  • $3,000 for a loan of $60,000 or more but less than $100,000
  • 5% of the total loan amount for a loan of $20,000 or more but less than $60,000
  • $1,000 for a loan of $12,500 or more but less than $20,000
  • 8% of the total loan amount for a loan of less than $12,500
  • higher-priced mortgage loan, which is defined as a loan with an annual percentage rate (APR) that exceeds the average prime offer rate (APOR) for a comparable transaction by 1.5 or more percentage points for a first-lien covered transaction 
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