New HUD QM Definition: Biggest Impact, Lower Lender Legal Costs

Another definition of Qualified Mortgagern(QM) was rolled out for comment today. rnThis one, proposed by the Department of Housing and Urban Developmentrn(HUD) would apply to mortgages insured, guaranteed, or administered by HUD andrnto single family mortgages insured by the Federal Housing Administration (FHA).</p

HUD says its proposal, open for publicrncomments until October 30, is aligned with the Ability-to-Repay criteria setrnout in the Truth in Lending Act (TILA) and also builds off of the QM rule fromrnthe Consumer Financial Protection Bureau (CFPB) finalized earlier this year.</p

In order to meet HUD’s QM definition, mortgage loans mustrnfirst of all, </p<ul class="unIndentedList"<liRequire periodic payments; </li<liHave terms not to exceed 30 years;</li<liLimit upfront points and fees to nornmore than three percent with adjustments to facilitate smaller loans (exceptrnfor Title I, Section 184 and Section 184A loans); and</li<liBe insured or guaranteed by FHA orrnHUD.</li</ul

HUD proposes to designate Title Irn(home improvement loans), Section 184 (Indian housing loans), and Section 184Arn(Native Hawaiian housing loans) insured mortgages and guaranteed loans coveredrnby this rulemaking to be safe harbor qualified mortgages and proposes nornchanges to their underwriting requirements.</p

However,rnfor its largest volume of mortgage products, those insured under Title II ofrnthe National Housing Act, HUD sets out two categories for Qualified Mortgagesrnwhich are determined by the relation of the Annual Percentage Rate (APR) of thernloan to the Average Prime Offer Rate (APOR).   Both use the same formula for an APR; APOR + 115 basis points (bps) + on-going MortgagernInsurance Premium (MIP).  The first category, A Rebuttable Presumption Qualified Mortgage will have an APR greater than the product of that formula,rnthe second category Safe Harbor Qualified Mortgages will have an APR that is lower.  </p

Legally,rnlenders making loans in the first category are presumed to have qualified thernborrower under the Ability-to-Repay standard. Consumers can challenge thatrnpresumption, however, by proving that they did not, in fact, have sufficientrnincome to pay the mortgage and their other living expenses.</p

Lendersrnoriginating the Safe Harbor mortgagesrnhave the greatest legal certainty that they are complying with thernAbility-to-Repay standard but can still be challenged by consumers who believernthe loan does not meet the definitions of a Safe Harbor Qualified Mortgage. </p

HUD says that its proposed definition would have onlyrna small impact, reclassifying about 19 percent of Title II loans insured underrnthe National Housing Act from rebuttable presumption QMs under the CFPB rule tornsafe harbor mortgages.  About 7 percentrnof Title II loans would continue to not qualify as QMs based on the points andrnfees limit, while the remaining FHA loans (about 74 percent) would qualify forrnQM status with a safe harbor presumption with both the CFPB final rule and thatrnproposed by HUD.  </p

HUD,rnthrough this rulemaking, will no longer insure loans with points and fees abovernthe CFPB level for qualified mortgages, but expects that these loans will adaptrnto meet the points and fees limit. In addition, HUD classifies all Title I,rnSection 184 and Section 184A insured mortgages and guaranteed loans, which mostrnlikely would have been nonqualified mortgages under the CFPB final rule, asrnsafe harbor qualified mortgages.</p

HUD says lenders face lower costs ofrncompliance under HUD’s qualified mortgage rule than under the CFPB final rulernand therefore receive incentives to continue making these loans without havingrnto pass on their increased compliance costs to borrowers. While borrowersrnbenefit from not having to pay for the higher lender costs, they also face lessrnopportunity to challenge the lender with regard to ability to repay. HUDrnexpects that almost all borrowers will gain from the reduction in litigationrnand that the reduction of the interest rate will compensate for the loss of thernoption to more easily challenge a lender. As a result of the reclassificationrnof some HUD loans, the maximum expected impact of the proposed rule would be anrnannual reduction of lender legal costs by $41 million.

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