A new Qualified Mortgage definition has been proposed for residential loans that are insured by the Federal Housing Administration.
A proposed rule was announced Monday by the Department of Housing and Urban Development as required by the Dodd Frank Wall Street Reform and Consumer Protection Act.
Dodd-Frank requires that HUD propose a QM definition that is aligned with the Ability-to-Repay criteria set out in the Truth-in-Lending Act. It also must align with HUD’s mission to promote affordable home financing options for qualified borrowers with lower incomes.
HUD said that its proposal also builds on the existing QM rule that has already been finalized by the Consumer Financial Protection Bureau.
The proposed rule requires that QMs have periodic payments and maximum 30-year terms.
While there is a 3 percent limitation on points and fees, there are some adjustments to facilitate smaller loans — though no adjustments are allowed on Title I, Section 184 and Section 184A loans.
Only FHA- and HUD-insured loans can meet HUD’s QM definition.
HUD noted that it does not insure loans that fall outside the realm of its proposed QM definition.
“Moreover, HUD’s existing underwriting standards require lenders to assess a borrower’s ability to repay their mortgage debt,” HUD said. “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.”
One of two types of HUD QMs is the Rebuttable Presumption Qualified Mortgage. Loans in this category have an annual percentage rate that is in excess of 115 basis points more than the Average Prime Offer Rate and ongoing mortgage insurance premiums.
“Legally, lenders that offer these loans are presumed to have determined that the borrower met the Ability-to-Repay standard,” the notice stated. “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 are the second type of HUD QM. Loans in this category have APRs that don’t exceed the Average Prime Offer Rate by 115 but do have ongoing MIPs.
“Lenders originating these mortgages have the greatest legal certainty that they are complying with the Ability-to-Repay standard,” HUD explained. “Consumers can still legally challenge their lender if they believe the loan does not meet the definitions of a Safe Harbor Qualified Mortgage.”
HUD is proposing that Title I manufactured housing and home improvement loans as well as Section 184 Indian Home Loan Guarantee Program loans be covered by the proposed QM rule. However, safe harbor on these loans doesn’t require the 3 percent fee cap or APR limitation.
Public comments are being accepted on the proposal until Oct. 30.
