Today we are discussing the Qualified Mortgage (QM), including the proposed rule in keeping with the Ability to Repay (ATR) standards which will have an effect on the QM. You have to determine the appropriate points and fees due to strict limits if planning on originating a QM. Concurrently you must also understand finance charges for purposes of calculating the annual percentage rate (APR) to determine whether legal safe harbor or rebuttable presumption applies to this QM. The yardstick for a QM with legal safe harbor or one with rebuttable presumption is determined by whether or not the loan is considered a higher-priced mortgage loan (HPML). The future revisions to HPMLs will be discussed later on.
The general purpose of the ATR standards is presented as, "A creditor may not make a covered transaction unless the creditor makes a reasonable and good faith determination at or before consummation that the consumer will have a reasonable way ability to repay the transaction according to its terms."
Covered Transaction: (effective on January 10, 2014)- the ability to repay standards applies to all consumer credit transactions, secured by a dwelling and is subject to Regulation Z (TILA). There are exemptions for home equity lines of credit (HELOC) and timeshares.
Choices- if a covered transaction, you can originate a loan that is compliant with:
- Ability to Repay standards; or,
- A Qualified Mortgage with legal safe harbor (deemed compliant); or,
- A Qualified Mortgage with rebuttable presumption )presumed compliant); or,
- Other variances
Additional Variances to ATR- the following are also allowed variances from ATR standards.
- Refinancing a nonstandard mortgage into a standard mortgage by current holder or servicer acting on behalf of current holder
- Small Creditor (Balloon loans)- if you are a small creditor meeting the following criteria, balloon loans are allowable:
- 50% od first lien loans originated are in rural or underserved areas
- The creditor originated 500 or fewer first lien loans the prior year
- The creditor has less than 2 billion in assets
- The creditor must retain the loan for 3 years unless the loan is sold to another similar qualifying creditor meeting this criteria
- No negative amortization
- No interest only loans
- No balloon loans
- Total points and fees do not exceed a QM
- The loan term does not exceed 40 years
- Interest rate is fixed for at least the first 5 years and, proceeds used solely for: paying off the outstanding principal balance on the nonstandard mortgage; and to pay closing or settlement charges
- A covered transaction that is:
- An adjustable-rate mortgage, with an introductory fixed interest rate for a period of one year or longer;
- An interest only loan; or,
- A negative amortization loan
Ability to Repay Requirements: the following requirements are applicable under the ATR rules: Underwriting- underwriting must consider the following factors:
- Current or reasonably expected income or assets, excluding the value of the secured property
- If relying on current employment income- the current employment status (i.e. full-time, seasonal etc.)
- The qualifying monthly payment must be based on substantially equal, fully amortizing payments and the higher of fully indexed rate or introductory rate and must also include all the monthly payment for any simultaneous loans known. If the simultaneous loan is also a covered transaction the same criteria applies as on the subject loan regarding monthly payment. If the simultaneous loan is a HELOC, the periodic payment on the amount of credit to be drawn at or before the subject loan must be used.
- The monthly mortgage related obligations for qualifying purposes must include: real estate taxes; hazard insurance, flood insurance, mortgage guarantee insurance, and any other required insurance; homeowners' and condominium association dues; ground rent or leasehold payments; and special assessments
- Qualification ratios include all current debts, obligations, alimony and child support
- Qualification includes consideration of the debt-to-income ratio (DTI) or residual income guidelines (residual income guidelines may likely be based on VA loan residual income guidelines but are not yet defined in the rule)
- Credit history
Verification: the information in the loan file must be verified using: reasonably reliable third-party records; third-party records must provide reasonably reliable evidence of income or assets; a verbal verification of employment status is allowable if the creditor prepares a record of the information; and, there is no requirement to independently verify a debt shown on application that is not shown on the credit report, if the credit report is used for debt obligation verification.
Qualified Mortgage- the following requirements are necessary to comply with QM standards:
The only difference between originating a QM loan with legal safe harbor (deemed compliant) or a QM loan with rebuttable presumption (presumed compliant), is whether or not the loan is categorized as a higher-priced mortgage loan (HPML).
QM- Legal Safe Harbor
- Non Higher-Priced Mortgage Loan
QM- Rebuttable Presumption
- Higher-Priced Mortgage Loan (HPML)
The following terms apply to a QM:
- Regular substantially equal, periodic payments, except ARM or step-rate
- No negative amortization, interest only (or any deferred repayment), or balloon loans
- Max 30 year term
Maximum Points and Fees- the points and fees determinations are discussed in the earlier articles in this series and are based on the same calculations used for High Cost Mortgages:
3% -- $100,00 or more
$3,000 -- $60,000 to less than $100,000
5% -- $20,000 to less than $60,000
$1,000 -- $12,500 to less than $20,000
8% -- less than $12,500
- Note: the ATR/QM rule added additional fees for these purposes applicable to affiliates of the creditor and in addition loan originator compensation. There are industry associations, as well as a bill pending in congress to address the issues relative to loan originator compensation, specifically the fact that the manner in which the rule currently addresses this issue is that the loan originator compensation would be double-dipping if already included elsewhere (i.e., origination fee, etc.). You will want to seek out clarification of this requirement when we receive the final rule based on the concurrent proposed rule issued with this rule.