Qualified Mortgages (“QM”) provide a presumption of compliance with the Final Rule’s Ability to Repay requirements.
• The QM presumption of compliance consists of two standards:
• For higher-priced mortgage loans there is a Rebuttable
Presumption of compliance with ATR standards. The consumer can challenge the presumption of compliance, if it can be proven that the consumer did not have sufficient residual income at the time the loan was approved and consummated.
• Non higher-priced mortgage loans fall under a Safe Harbor that carries with it a conclusive designation of compliance with ATR.
There are 4 types of QMs:
• General QM;
• Temporary QM;
• Small Creditor QM; and
• Balloon-Payment QM. To be designated General QM status, a loan must meet the following criteria:
• Must not contain risky loan features;
• Must not have points and fees that exceed certain limits;
• Must be underwritten based on a fully amortizing schedule using the maximum rate permitted during the first five years;
• Lender must consider and verify the consumer’s income, assets, and debts; and
• DTI must not exceed 43%.
QM Points-and-Fees Calculation
• For a loan to qualify as QM, the points-and-fees may not exceed the thresholds outlined below:
• 3% of the total loan amount on loans greater than or equal to $100,000;
• $3,000 for loans greater than or equal to $60,000, but less than $100,000;
• 5% of the total loan amount for a loan greater than or equal to $20,000, but less than $60,000;
• $1,000 for a loan greater than or equal to $12,500, but less than $20,000; and
• 8% of the total loan amount for loans less than $12,500.
• When calculating the points-and-fees, lenders should use the same basic approach used for the calculation under HOEPA.
• Generally include amounts that are known at or before consummation, even if they are wrapped into the loan amount and paid later.
• Generally closing costs paid but recouped from the consumer over time through the rate are not counted in points-and-fees.
• The points-and-fees calculation is often completed and/or verified within an LOS or compliance check system. It is necessary to consult with the vendor to understand how the updates have been made to the system and ensure testing was done prior to the effective date.
• The points-and-fees is calculated by adding together amounts paid in connection with that transaction for six different categories:
• The finance charge;
• Mortgage loan originator compensation;
• Real-estate related fees;
• Premiums for credit insurance; credit property insurance; other life, accident, health or loss-of-income insurance where the creditor is the beneficiary; or debt cancellation or suspension coverage payments;
• Maximum prepayment penalty; and
• Prepayment penalty paid in a refinance.
The Finance Charge
• Generally the items included in the Finance Charge within QM will be the same as those included in the Finance Charge calculation under Section 1026.4(a) and (b) with the following exceptions:
• Interest or the time-price differential;
• Mortgage Insurance Premiums;
• Bona fide third party charges not retained by the creditor, loan originator, or an affiliate of either; and
• Bona fide discount points.
Real Estate Related Fees
• The following fees can be excluded, so long as (i) the charge is reasonable; (ii) the creditor receives no direct or indirect compensation from the charge; and (iii) the charge is not paid to an affiliate:
• Fees for title services;
• Fees for preparing loan documents;
• Notary and credit-report fees;
• Property inspection and appraisal fees; and
• Amounts paid into escrow or trustee accounts not otherwise included in the finance charge.
• Premiums for credit insurance; credit property insurance; debt cancellation or suspension coverage payments
• The premiums are to be included for insurance that is payable at or before consummation, even if the premiums can be rolled into the loan amount.
• Premiums for life, accident, health or loss-of-income insurance do not need to be included if the consumer is the sole beneficiary of the insurance. Maximum prepayment penalty
• Include the maximum prepayment penalty that can be charged. Prepayment penalty paid in a refinance
• When refinancing a loan, if you or an affiliate currently hold or service the loan, include any penalties charged to the consumer for prepaying their previous loan.
Points-and-Fees & MLO Compensation
• MLO Compensation paid directly or indirectly by a consumer or creditor to an MLO, other than an employee, is to be included in the points-and-fees cap.
• Compensation paid by a consumer to a mortgage broker that has already been included in points and fees under §1026.32(b)(1)(i) shall be excluded.
• Compensation paid by a mortgage broker to a loan originator that is an employee of the mortgage broker shall be excluded.
• Compensation paid by a creditor to a loan originator employed by the creditor is excluded from the points-and-fees calculation.
• Compensation paid by a lender to loan originators that are not employees of the lender is INCLUDED in the points-and-fees calculation.
• Real world impact to retail lenders will be limited.
• As the CFPB has acknowledged, the inclusion of MLO Compensation disproportionately affects Brokers and Wholesale Lenders.
• As a result, many Brokers and Wholesale Lenders will need to revise compensation tiers downward to ensure points-andfees fall within the limits.
• Brokers and lenders can select borrower-paid compensation models to help mitigate reductions in compensation structures while remaining compliant.
• Closed loan purchases (Correspondent Platforms) will need to ensure pre-purchase reviews are capable of detecting and confirming the Correspondents’ points-andfees calculations.
Temporary QM (‘TQM”)
• The Final Rule created a TQM status for loans that are eligible for purchase or guarantee by Fannie Mae or Freddie Mac (GSEs) or are eligible for insurance by certain federal agencies (Agencies).
• TQM will expire when (i) the GSEs exit conservatorship; (ii) the Agencies issue their own QM rule and they take effect; or (iii) January 10, 2021.
• Loans that obtain a TQM designation will retain the designation even after TQM expires.
• As with General QM, TQM will apply to mortgage loans with application dates on or after January 10, 2013.
• To receive TQM designation, a loan must (i) not contain any risky features; (ii) have a maximum loan term of 30 years; (iii) not contain points-and-fees exceeding the applicable cap; and (iv) must meet one of the following criteria:
• Eligible for sale to FNMA or FHLMC;
• Eligible for FHA insurance;
• Eligible to be guaranteed by the VA;
• Eligible to be guaranteed by USDA; and
• Eligible to be insured by the Rural Housing Service.
• On May 6, 2013, FNMA & FHMLC announced they would limit their future purchases to loans that either meet QM/TQM requirements or loans that are all together exempt from ATR requirements
• A loan need not be sold to a GSE or insured by an Agency to obtain TQM status, but need only demonstrate it was eligible to be sold or insured.
• A lender can satisfy the eligibility requirement by following one of these methods:
• Obtaining an “Approve/Eligible” recommendation from DU or “Accept and Eligible to Purchase” from LP;
• Following GSE or agency guidelines contained in official manuals;
• Following the criteria set forth in written agreements between the GSE/Agency and the lender; and/or
• Obtaining individual loan waivers from a GSE or Agency.
• To meet the TQM definition, the loan must be underwritten using the GSE or Agency Guidelines, including any relevant DTI limits.
• The DTI limits for TQM do not have to meet the 43% limit applicable to General QM loans.
• Since a lender need only demonstrate the loan is eligible for sale, insurance, or guarantee, the lender does not have to satisfy GSE or Agency standards that are unrelated to credit risk/underwriting of the loan, nor does the lender need to satisfy standards that apply after consummation of the loan.
TQM Compliance Considerations
• For loans not sold or insured by the GSEs/Agencies, lenders must consider how to document the loan’s eligibility.
• This may require development of new P&P, underwriting checklists closely mirroring GSE Guides, and strict testing of record retention systems.
• Closed Loan Purchasers face potential additional risks and may need to revisit pre-purchase underwriting procedures as well as contract reps & warrants.
• It is likely that the impact of QM will be relatively minimal at first due to the TQM exception.
• The most significant difference will be TQM’s 3% points-and-fees restriction, as opposed to the GSE’s current 5% standard.
Liability for Non-QM Loans Failing ATR Tests
•When a loan is originated without QM status or loses a designation, the lender must demonstrate compliance with the ATR requirements and a failure to do so carries liability.
• Borrower can bring a claim against the lender and recover a sum equal to all finance charges and fees paid by the borrower.
• Borrower has the potential to recover actual and statutory damages; court costs; and reasonable attorney’s fees.
• Statute of limitations on such claims is set to 3 years from the date of the violation; however, a borrower may claim a violation as a defense to foreclosure by recoupment or setoff regardless of the lapsed time.
Qualified Residential Mortgages (QRM) & QM
• Under Dodd-Frank financial institutions are required to retain some “skin in the game” when selling loans to investors, which was deemed to be 5% of the credit risk.
• Financial institutions will be exempt from this retention requirement for mortgages deemed a QRM.
• The federal regulatory agencies originally proposed to define QRM as a closed-end credit transaction that was not: (i) made to finance the initial construction of the home; (ii) a reverse mortgage; (iii) a temporary or “bridge” loan with a term of 12 months or less; or (iv) a timeshare plan.
• In the original proposal, QRM was limited to loans with the following characteristics:
• (i) 1st lien transaction with no subordinate liens; (ii) maximum term of 30 years; (iii) maximum front-end and back-end DTI of 28 and 36, respectively; (iv) maximum LTV of 80% for purchase and 75% for rate and term refinance and 70% for cash out refinances; (v) included a 20% down payment; and (iv) met credit history restrictions.
• In August, 2013, the federal agencies issues a new proposed rule that significantly altered the definition of QRM.
• The new proposal closely mirrors the CFPB’s definition and qualification standards for QM. The federal agencies increased the DTI max to mirror QM’s 43% and removed the LTV ratio requirements and credit history restriction requirement all together.
Final Thoughts & Considerations
• Should lenders chose to originate non-QM loans, a top consideration should be timing and whether the lender will be able to implement the more robust UW standards and loan review procedures to document ATR.
• It is critical to review the P&P from the vendors a lender is using in high risk areas, such as contract underwriting services.
• Non-QM loans will continue to be originated by lenders and it is likely a new non-QM secondary market will emerge throughout 2014.
• For lenders subject to CRA rating and requirements, it is important to consider how ATR and QM will potentially affect the CRA rating and discuss options on how to mitigate the negative impact.
• Keep in mind the QM designation provides a theoretical safe harbor or rebuttable presumption. While it is desirable to originate QM loans with a level of protection, in the real world a borrower’s attorney is likely to still allege that the loan is in fact not a QM.
• If a loan is stripped of its QM status then the lender would have to still establish that it has fulfilled the ATR requirements. As such, lenders may wish to consider augmenting the ATR procedures for QM loans as well, depending on the company’s risk level comfort.
• For Correspondent/Closed Loan Purchasers, it is important to ensure the pre-purchase review of loans is thorough enough to adequately test for QM status. A purchaser is always exposed to the possibility the seller is no longer existent, and a loan failing QM and then ATR exposes the holder to greater foreclosure prevention risks.
Contact us for more information. Email us or call us at (800)842-2910.