HUD has issued a newly revised definition for Qualified Mortgage (QM) which will affect all Federal Housing Administration (FHA) loans moving forward. The new rule goes into effect January 10, 2014, and will apply to mortgages that are insured, guaranteed, or administered through HUD.
HUD is legally required to define a QM by the Ability-to-Repay criteria set out in the Truth-in-Lending Act (TILA), as mandated by the Dodd–Frank Wall Street Reform and Consumer Protection Act. HUD’s new rule builds on the existing QM rule finalized by the Consumer Financial Protection Bureau (CFPB) earlier this year.
HUD’s rule defines two types of legal QMs. Both types must meet the following criteria:
- Require periodic payments without risky features.
- Have terms not to exceed 30 years.
- Limit upfront points and fees to no more than 3 percent with adjustments to facilitate smaller loans (except for Title I, Title II Manufactured Housing, Section 184,Section 184A loans).
- Be insured or guaranteed by FHA or HUD.
Both types of HUD QMs will have protective features for consumers but different legal consequences for lenders. The main difference between the two is the relation of the loan’s annual percentage rate (APR) to the average prime
offer rate (APOR), which is the rate for the average borrower receiving a conventional mortgage.
HUD’s two categories of QMs are:
A Rebuttable Presumption Qualified Mortgage
These will have an APR APOR + 115 basis points (bps) + on-going Mortgage Insurance Premium (MIP) rate.
Safe Harbor Qualified Mortgages
These loans will have an APR APOR + 115 bps + on-going MIP. These mortgages offer lenders the greatest legal certainty that they are complying with the Ability-to-Repay standard.
Safe harbor QMs will also cover 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 regardless of the APR to APOR ratio. This is to avoid interfering with current lending practices until appropriate parameters can be determined.
In the HUD ruling, the agency also adopted CFPB’s list of transactions that are exempt from the Ability-to-Repay requirements, some of which include:
- Reverse mortgages
- Bridge loans with a term of 12 months or less
- Construction-to-permanent loans for 12 months or less for the construction phase
- Extension of credit by a housing finance agency
- Extension of credit by Community Development Financial Institutions (CDFIs)
HUD’s mortgage insurance and loan guarantee programs have played a historic mission to act as a stabilizing force during times of economic distress in the housing market.
The agency’s 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.