HUD Releases 'Qualified Mortgage' Definition
| Date Published | 12/16/2013 |
| Author | Marja Hoek-Smit |
| Theme | Retail Housing Finance |
| Country | United States |
HUD
RELEASES ‘QUALIFIED MORTGAGE’ DEFINITION
December
11, 2013
The U.S. Department of Housing and
Urban Development (HUD) released its final rule which defines a ‘Qualified
Mortgage (QM)’ that is insured, guaranteed or administered by HUD. The final
rule will be effective on January 10, 2014.
The Dodd–Frank Wall Street Reform
and Consumer Protection Act requires 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 underserved borrowers. HUD’s rule
builds off of the existing QM rule finalized by the Consumer Financial
Protection Bureau (CFPB) earlier this year.
In order to meet HUD’s QM definition,
mortgage loans must:
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 new limit on upfront points and fees
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.
The rule establishes two types of
Qualified Mortgages that have different protective features for consumers and
different legal consequences for lenders, depending on the relation of the
loan’s Annual Percentage Rate (APR) to the Average Prime Offer Rate (APOR), the
rate for the average borrower receiving a conventional mortgage. The two
categories of Qualified Mortgages are:
A Rebuttable Presumption Qualified
Mortgage will have an APR greater than APOR + 115 basis points (bps) + on-going Mortgage Insurance Premium
(MIP) rate. 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.
Safe Harbor Qualified Mortgages will be loans with APRs equal to or less than APOR + 115
bps + on-going MIP. These mortgages offer lenders 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 also adopts CFPB’s list of
transactions that are exempt from the ability-to-repay requirements. The final
rule aims to ensure the continuity of access to mortgage financing to
creditworthy, yet underserved borrowers while further strengthening protections
for FHA borrowers and taxpayers, alike.