HUD Releases 'Qualified Mortgage' Definition

Date Published 12/16/2013
Author Marja Hoek-Smit
Theme Retail Housing Finance
Country United States


December 11, 2013

The U.S. Department of Housing and Urban Development (HUD) released its final rule which defines a ‘Qualified Mortgage (QM)’ that is insured, guaranteed or administered by HUD. The final rule will be effective on January 10, 2014.

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 underserved borrowers. HUD’s rule 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 without risky features;
  • 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, Title II Manufactured Housing, Section 184,Section 184A loans and others as detailed below); 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 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 rule establishes two types of Qualified Mortgages that have different protective features for consumers and different legal consequences for lenders, depending on the relation of the loan’s Annual Percentage Rate (APR) to the Average Prime Offer Rate (APOR), the rate for the average borrower receiving a conventional mortgage. 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) rate. 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 + 115 bps + on-going MIP. These mortgages offer lenders 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 also adopts CFPB’s list of transactions that are exempt from the ability-to-repay requirements. The 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.

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