HUD Proposes Final Qualified Mortgage Definition

The Department of Housing and Urban Development (HUD) proposed a rule Monday to define a ‘Qualified Mortgage’ that is guaranteed by HUD and is now seeking public comment on the proposed rule.

HUD was required to propose a QM definition under the Dodd-Frank Act that is aligned with the Ability to Repay criteria outlined in the Truth in Lending Act (TILA). 

The proposed definition builds off of the existing QM rule that the Consumer Financial Protection Bureau (CFPB) finalized earlier this year and calls for mortgage loans to require periodic payments; have terms that don’t exceed 30 years; limit upfront points and fees to no more than 3% with adjustments to facilitate smaller loans (with certain exceptions); and be insured or guaranteed by FHA or HUD. 

HUD’s existing underwriting standards require lenders to assess borrowers’ ability to repay mortgage loans, and the agency already doesn’t insure mortgages with risky features, such as loans with terms longer than 30 years, interest-only payments, or negative-amortization payments where the principal amount increases. 

The new limit on upfront points and fees for all Title II FHA-insured single family mortgages is consistent with the private sector, says HUD, and with conventional mortgages guaranteed by Fannie Mae and Freddie Mac to attain qualified mortgage status under the CFPB’s final rule.

Two categories of qualified mortgages have been established under HUD’s proposed rule, with different protective features for consumers and legal consequences for lenders: a Rebuttable Presumption Qualified Mortgage and a Safe Harbor Qualified Mortgage.

Qualifying for either category depends on the relation of the annual percentage rate of the loan to the average prime offer rate.

Safe Harbor mortgages would be loans with APRs equal to or less than APOR plus 115 basis points plus on-going mortgage insurance premiums. Lenders who originate mortgages under this category have the greatest legal certainty that they’re complying with the Ability-to-Repay standard, but consumers can still legally challenge lenders if they believe the loan doesn’t meet the Safe Harbor definition. 

Rebuttable Presumption mortgages would be loans with an APR greater than APOR plus 115 basis points and on-going mortgage insurance premiums. While lenders that offer these loans are presumed to have determined a borrower’s ability to repay, consumers can challenge the presumption that they had sufficient income to pay the mortgage and their other living expenses. 

Access the proposed rule. Public comment must be submitted by Oct. 30, 2013. 

Written by Alyssa Gerace

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