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What is a Qualified Mortgage rule?

Qualified Mortgage (QM) rule, also called Ability To Repay rule is part of implementing the Dodd-Frank act. QM rule implemented by Consumer Financial Protection Bureau (CFPB), is the first ever attempt at defining and establishing a basic standard for qualifying borrowers for mortgage loans. Loans that qualify as “Qualified Mortgage will get a full legal shield from the CFPB mandating that judges rule in lenders favor if the borrowers contest foreclosures. I also talked about it in a post I wrote on Oct 24. 2012.

On January 10, 2013, CFPB came out with the rule capping the debt-to-income ratio (DTI) at 43% for the loans to qualify for QM. Additionally, mortgage rates on these loans can’t exceed 150 basis points over the benchmark rates.

For the next seven year transition period, DTI ratio of 43% 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 ARM, Negative Amortization loan or other toxic mortgages into a “standard mortgage with fixed rates for at least five years that reduces the borrower’s monthly payments.

Also, Home Affordable Refinance Program (HARP) is exempt from QM rule – meaning they can exceed the maximum DTI requirements.

Which loan programs don’t qualify for qualified mortgage status?

Interest-only loans and Negative amortization loans can not qualify for QM status.

Will 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, he said

Does QM rule favor a certain category of lending institution?

Most qualified mortgages will have a 3% cap on the amount of fees and origination costs that lenders can charge. Mortgage brokers are concerned it could hurt their business model. 3% cap may not be much of a problem in high loan amount areas like most of California. But in places where loan sizes are small, 3% may not be enough to cover for all origination fees that may include loan points, processing fees, admin 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% 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 Congress mandate at a later date, looks like this one is here to stay for decades.

When does Qualified Mortgage rule become effective?

The final QM Rule goes into effect on January 10, 2014.