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Lending

HUD proposes QM definition

Lenders offered lower compliance costs

house money

The Department of Housing and Urban Development rolled out a proposal to define a qualified mortgage for home loans that will be insured, guaranteed or administered by the housing agency.

The proposed QM rule will be designed for single-family mortgages insured by the Federal Housing Administration, according to HUD.

"The proposed 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," HUD stated.

The proposed QM definition must align with the ability-to-repay rule set out in the Dodd-Frank Act and builds off the existing QM rule finalized by the Consumer Financial Protection Bureau earlier this year.

Through this lawmaking, HUD will no longer insure loans with fees above the CFPB level for QM, but expects such loans to adapt to meet the established limits.

Additionally, the standard must promote affordable mortgage financing options for qualified low-income borrowers.

To meet HUD’s QM definition, loans must require periodic payments, have terms not exceeding 30 years, limit upfront points and fees to more than 3% with adjustments to facilitate smaller loans and be insured or guaranteed by FHA or HUD.

HUD said lenders would face lower compliance costs under the QM rule than under the CFPB final rule — receiving incentives to continue making these loans without having to pass on their increased compliance to borrowers.

As a result of the reclassification of some HUD loans, the maximum expected impact of the proposed rule would be an annual decrease of legal costs by $41 million.

Currently, HUD does not insure, guarantee or administer mortgages with risky features such as long terms, interest-only payments or negative-amortization payments where the principal amount increases.

The new limit on upfront points and fees for all single-family loans is consistent with the private sector and conventional mortgages guaranteed by Fannie Mae and Freddie Mac to attain QM status, HUD pointed out.

Interestingly, the proposed rule establishes two categories of QM that have different protective features for consumers as well as different legal consequences for lenders.

A rebuttable presumption qualified mortgage will have an annual percentage rate greater than 115 basis points and an ongoing mortgage insurance premium.

Legally, lenders offering such loans are presumed to have determined that the borrower met the ability-to-repay standard. However, consumers can challenge that presumption by providing that they did not have sufficient income to pay the mortgage and their other expenses.

The safe harbor qualified mortgage will apply to loans with annual percentage rates equal to or less than 115 basis points with an ongoing mortgage insurance premium.

Lenders originating these loans have the greatest legal certainty that they are complying with the ability-to-repay standard. Additionally, consumers can still legally challenge their lender if they believe the loan does not meet the definition of a safe harbor mortgage, HUD stated.

Furthermore, HUD wants manufactured housing and home improvement loans, as well as Indian Home Loan Guarantee Program mortgages and Native Hawaiian Housing Loan Guarantee Program loans to be covered by the QM standard.

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