The U.S. Department of Housing and Urban Development (HUD) has introduced a qualified mortgage (QM) rule that aligns with the Consumer Financial Protection Bureau's (CFPB) ability-to-repay/QM rule going into effect Jan. 10.
That means certain mortgage loans underwritten by HUD and insured by the Federal Housing Administration (FHA) must adhere to the same ability-to-repay (ATR) rules specified in the Truth-in-Lending Act (TILA), as amended through the Dodd-Frank Act.
As per HUD's proposed QM definition, qualified mortgage loans must meet the following criteria:
- Require periodic payments;
- Have terms not to exceed 30 years;
- Limit upfront points and fees to no more than 3% 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.
The new rules would not apply to home improvement loans (Title I), Indian housing loans (Section 184) and Native Hawaiian housing loans (Section 184A) insured by the FHA, as these would already qualify as ‘safe harbor’ QMs and thus would not be subject to ATR/QM underwriting standards. The new rules also would not apply to reverse mortgage loans issued through the FHA's Home Equity Conversion Mortgage (reverse mortgage) program.
The rules will, however, apply to most loans insured under Title II of the National Housing Act, which comprise a majority of HUD loans. For these, HUD proposes two categories of QM, similar to the two categories created in the CFPB final rule – a safe harbor QM and a rebuttable presumption QM.
Which category a loan falls under would be determined by the relationship between the annual percentage rate (APR) and the average prime offer rate (APOR). Both categories would use the same formula for determining an APR: APOR + 115 basis points + on-going mortgage insurance premium (MIP). Rebuttable presumption QMs would have an APR greater than the product of that formula, while safe harbor QMs would have an APR that is lower.
HUD says the impact of the proposed rules, if approved as drafted, would be ‘relatively small.’ Once finalized, the agency would reclassify about 19% of Title II loans insured under the National Housing Act from rebuttable presumption to safe harbor status. About 7% of Title II loans would continue to not qualify as QMs based on the points and fees limit, while the remaining FHA loans (about 74%) would qualify for QM status with a safe harbor presumption with both the CFPB final rule and that proposed by HUD.
HUD claims lenders would face lower costs of compliance under its QM rule compared to that of the CFPB. Therefore, there is an incentive for them to continue making these loans without having to pass increased compliance costs onto borrowers. While borrowers benefit from not having to pay for the higher lender costs, they would have reduced opportunity to legally challenge the lender with regard to ability-to-repay.
HUD says the reduction of the interest rate will compensate for the reduced ability to challenge lenders. As a result of the reclassification of some HUD loans, lender legal costs are expected to decrease by as much as $41 million.
HUD is seeking the public comment on its proposed ATR/QM rule by Oct. 30. Normally, the agency would set a 60-day period for receiving comments, however, HUD has reduced the comment period to 30 days so that implementation of its new rules can coincide with those of the CFPB.
To read the full, proposed rule, click here.