The U.S. Department of Housing & Urban Development (HUD) proposed a rule to define a Qualified Mortgage (QM) that would be insured, guaranteed or administered by HUD, including single-family forward mortgages insured by the Federal Housing Administration (FHA). HUD is seeking the public’s comment on its proposed rule by Oct. 30th.
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 qualified lower income borrowers. HUD’s proposed definition also 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:
►Require periodic payments;
►Have terms not to exceed 30 years;
►Limit upfront points and fees to no more than three percent with adjustments to facilitate smaller loans (except for Title I, Section 184 and Section 184A loans); and
►Be insured or guaranteed by FHA or HUD.
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 for all Title II FHA-insured single family mortgages 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 proposed rule establishes two categories of Qualified Mortgages that have different protective features for consumers and different legal consequences for lenders. HUD’s proposed Qualified Mortgage categories are determined by the relation of the Annual Percentage Rate (APR) of the loan to the Average Prime Offer Rate (APOR). 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). 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 + 115bps + on-going MIP. Lenders originating these mortgages have 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 proposes that Title I insured mortgages (manufactured housing and home improvement loans), Section 184 mortgages (Indian Home Loan Guarantee Program), and Section 184A mortgages (Native Hawaiian Housing Loan Guarantee Program) be covered by this rule. The proposed rule designates loans within these programs as Safe Harbor Qualified Mortgages and does not require the three percent cap on upfront points/fees and APR to APOR ratio, so as not to interfere with current lending practices until appropriate parameters can be determined.