‘Qualified mortgage’ is a term associated with changes to the requirements of Regulation Z – Truth in Lending Act (TILA). The Consumer Financial Protection Bureau (CFPB) amended Regulation Z to prohibit a creditor from making a higher-priced mortgage loan without regard to the consumer’s ability to repay the loan. The rule implements a requirement of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act), which generally requires creditors to make a reasonable, good faith determination of a consumer’s ability to repay any consumer credit transaction secured by a dwelling (excluding an open-end credit plan, timeshare plan, reverse mortgage, or temporary loan). The rule establishes certain protections from liability for the creditor under this requirement for “qualified mortgages.” A qualified residential mortgage loan, then, is one that has met the ability to repay requirements and certain mandatory product features described in Regulation Z for qualified mortgage compliance, including:
- The points and fees are less than or equal to 3% of the loan amount (for loan amounts less than $100k, higher percentage thresholds are allowed);
- The loan has no risky features like negative amortization, interest-only, or balloon loans; and
- The maximum loan term is less than or equal to 30 years.
Regulation Z recognizes three categories of qualified residential mortgage loans:
1. General definition category of qualified mortgages (QMs)
Any loan that meets the product feature requirements and has a debt-to-income ratio of 43% or less is a QM.
2. “GSE-eligible” category of QMs
Any loan that meets the product feature requirements and is eligible for purchase, guarantee, or insurance by a GSE, FHA, VA, or USDA is QM regardless of the debt-to-income ratio (this QM category applies for GSE loans as long as the GSEs are in FHFA conservatorship and for federal agency loans until an agency issues its own QM rules, or January 10, 2021, whichever occurs first).
3. Small creditor category of QMs
If the creditor has less than $2B in assets and originates 500 or fewer first mortgages per year, loans it makes and holds in portfolio are QMs as long as the creditor has considered and verified a borrower’s debt-to-income ratio (though no specific debt-to-income limit applies).
FHA QM Rule – The U.S. Department of Housing and Urban Development (HUD) issued a final rule in December 2013 defining qualified mortgages for FHA lending. The final rule became effective in January 2014. Following the announcement of the final rule, the Mortgage Bankers Association (MBA) provided a summary of the rule. An excerpt from the summary is provided here:
“The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) requires creditors to make residential mortgage loans only after a reasonable and good faith determination that the consumer has a reasonable ability to repay the loan and attendant expenses. Making a “qualified mortgage” is presumed to meet this requirement.
In this rule, HUD has defined all FHA-insured single family mortgages to be qualified mortgages, with the exception of reverse mortgages insured under HUD’s Home Equity Conversion Mortgage (HECM) program, other reverse mortgages, and some bridge and construction to perm loans. Loans under Title II and other FHA Loans are differentiated under the rule.
Like the CFPB rule, the HUD QM rule establishes two categories of QM loans for most FHA loans insured under Title II of the National Housing Act: loans that gain a safe harbor for compliance with the ability to repay requirement and loans that gain a rebuttable presumption for compliance.
- FHA safe harbor QMs are defined as FHA mortgages that meet the points and fees limit (explained below) of 3 percent and that have an annual percentage rate (APR) that does not exceed the Average Prime Offer Rate (APOR) for a comparable mortgage by more than the combined percentage of the annual mortgage insurance premium (MIP) and 1.15 percentage points.
- FHA rebuttable presumption QMs are defined as FHA mortgages that meet the points and fees limit (explained below) of 3 percent and that have an APR that exceeds the APOR for a comparable mortgage plus the percentage of annual mortgage insurance premium (MIP) and 1.15 percentage points.
This rule establishes new limits on points and fees for FHA loans. Like the CFPB rule, this rule limits the points and fees for a QM to three percent of the loan amount for mortgages $100,000 and above. The rule adopts the CFPB’s increases in the points and fees limit for loans under $100,000. Any changes made by the CFPB to the points and fees definition may be adopted by HUD through publication of a notice and after providing FHA-approved mortgagees appropriate implementation time.”