HUD proposed a new definition of “qualified mortgage” (QM) in a statement released Monday. To meet the new QM requirements, a mortgage will have to require periodic payments, have terms not exceeding 30 years, limit upfront points and fees to no more than three percent with adjustments to facilitate smaller loans, and be insured or guaranteed by FHA or HUD.
The Dodd–Frank Act required HUD to propose a QM definition that is aligned with the ability-to-repay criteria set out in the Truth-in-Lending Act (TILA) as well as the department’s historic mission to promote affordable mortgage financing options for qualified lower income borrowers.
“The new limit on upfront points and fees for all Title II FHA-insured single family mortgages is consistent with the private sector and conventional mortgages guaranteed by Fannie Mae and Freddie Mac to attain qualified mortgage status under CFPB’s final rule.” HUD said in a statement. “Currently, HUD does not insure, guarantee or administer mortgages with risky features such as loans with excessively long terms (greater than 30 years), interest-only payments, or negative-amortization payments where the principal amount increases. Moreover, HUD’s existing underwriting standards require lenders to assess a borrower’s ability to repay their mortgage debt.”
The proposed rule establishes two categories of QMs that have different protective features for consumers and different legal consequences for lenders. HUD’s proposed Qualified Mortgage categories are determined by the relation of the Annual Percentage Rate (APR) of the loan to the Average Prime Offer Rate (APOR).
According to HUD’s statement the two categories of QMs will be: 1) “A Rebuttable Presumption Qualified Mortgage will have an APR greater than APOR + 115 basis points (bps) + on-going Mortgage Insurance Premium (MIP). Legally, lenders that offer these loans are presumed to have determined that the borrower met 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,” and 2) “Safe Harbor Qualified Mortgages will be loans with APRs equal to or less than APOR + 115bps + on-going MIP. Lenders originating these mortgages have the greatest legal certainty that they are complying with the ability-to-repay standard. Consumers can still legally challenge their lender if they believe the loan does not meet the definitions of a Safe Harbor Qualified Mortgage.”
HUD said the new rules serve to provide credit access to creditworthy, but underserved borrowers.