The Qualified Mortgage (QM) rule, also called the “Ability To Repay” rule, is the first-ever attempt at defining and establishing qualifying standards for borrowers applying for mortgage loans.
Under the far-reaching Dodd-Frank Wall Street Reform and Consumer Protection Act the QM rule is being implemented by the Consumer Financial Protection Bureau (CFPB).
QM loans get a full legal shield from the CFPB. The shield mandates that a judge would rule in lenders’ favor if the borrower contests a foreclosure on a QM.
The CFPB announced on Jan. 10, 2013, QM loans cap the debt-to-income (DTI) ratio at 43 percent. Also mortgage rates on these loans can’t be more than 150 basis points over the benchmark rates.
For the next seven year transition period, the DTI ratio of 43 percent can be exceeded if the loan is approved by Fannie, Freddie and FHA automatic underwriting systems.
Are any loan programs exempted from QM Rule?
Lenders will enjoy a safe harbor from litigation if they refinance borrowers from a hybrid adjustable rate mortgage (ARM), negative amortization loan or other toxic mortgage into a “standard mortgage” with fixed rates for at least five years, provided the new loan reduces the borrower’s monthly payments.
Also, the Home Affordable Refinance Program (HARP) is exempt from the QM rule. HARP loans can exceed the maximum DTI requirements.
Which loan programs don’t qualify for qualified mortgage status?
Interest-only loans and negative amortization loans don’t qualify for QM status.
Will the QM rule further tighten the lending standards?
While the CFPB wanted to prevent a contraction of credit, it also wants to provide the “greatest consumer protections ever devised,” CFPB director Richard Cordray said.
However, David Stevens, the chief executive of the Mortgage Bankers Association, said the debt-to-income requirements for jumbo mortgages could tighten standards for those loans, which have already become much harder to get.
“It will restrict credit on the margin over the current environment and that’s something we cannot afford,” Stevens said.
Does QM rule favor a certain category of lending institution?
Most qualified mortgages will have a 3 percent cap on the amount of fees and origination costs that lenders can charge. Mortgage brokers are concerned it could hurt their business model.
A 3 percent cap may not be much of a problem in high loan amount areas like most of California. However, in areas where loan sizes are small, 3 percent may not be enough to cover all origination fees, which can include loan points, processing fees, administration fees, underwriting fees, etc.
In addition, mortgage units run by real estate brokerages and home builders could be hit because any costs from affiliated services that they offer, say, title insurance or mortgage services, would count towards that 3 percent cap.
The CFPB is also seeking public comments on extending the QM exemptions to nonprofit groups and housing finance agencies that traditionally serve low- and moderate-income consumers.
Are QM rules permanent or can be changed later?
While any rule can be changed by Congressional mandate at a later date, it looks like this one is here to stay for decades.
When is the Qualified Mortgage rule effective?
The final QM Rule goes into effect on January 10, 2014.
An additional summary of the Qualified Mortgage rule is available from the National Association of Realtors.