icon Lender's Guide to QM

United Guaranty's QM overview is provided as a quick reference for Ability-to-Pay, standards and requirements, and points and fees, with helpful links to resources about QM.

United Guaranty has prepared this summary of the Ability to Repay/Qualified Mortgage Rule as a quick overview of the lending requirements effective January 10, 2014.

Please keep in mind that this overview is not a substitute for the rule. Links to the published rule(s) are provided throughout the summary, and United Guaranty will update this overview as information becomes available.

Updated April 25, 2014.

Important Note: For applications received on or after January 10, 2014, Regulation Z generally prohibits a creditor from making a mortgage loan unless the creditor determines that the consumer will have the ability to repay the loan.

QM Overview

Background: Ability to Replay (ATR) Legislation

Background On Qualified Mortgages (QM)—It Began With Ability To Repay (ATR) Legislation

Until 2008, too many home mortgages were made to consumers without regard to the consumers’ ability to repay the loan, and default rates soared in the years that followed. The Federal Reserve System, Consumer Financial Protection Bureau (CFPB), and Dodd-Frank Wall Street Reform and Consumer Protection Act (DFA) have developed—or now include—measures to prevent this from happening again. A list of those measures follows:

  • In 2008, the Board of Governors of the Federal Reserve System adopted a rule under the Truth-in-Lending Act (Reg Z) that prohibits an institution from making “higher priced mortgage loans” 1 without assessing the borrower’s ability to repay the loan. Lenders have had to follow these requirements since October 2009.
  • In 2010, under the DFA, Congress adopted a similar—but not identical—Ability-to-Repay2 (ATR) requirement for all closed-end residential mortgage loans. Congress established a presumption of compliance with the ATR requirements for a certain category of mortgages called Qualified Mortgages3 (QMs).
  • In 2013, the CFPB adopted a rule that implements the ATR and QM provisions of the DFA.

Following is a high-level summary of the CFPB rule.

1 Part 1026 – TRUTH IN LENDING (REGULATION Z) TITLE 12 – Banks & Banking. CHAPTER X Bureau of Consumer Financial Protection – Subpart E – Special Rules for Certain Home Mortgage Transactions.

2 Public law 111-203, July 21, 2010 [H.R. 4173] 12 USC 5301 note. TITLE XIV – MORTGAGE REFORM AND ANTI-PREDATORY LENDING ACT Subtitle B – Minimum Standards For Mortgages Sec. 1411. Ability to Repay.

3 Public law 111-203, July 21, 2010 [H.R. 4173] 12 USC 5301 note. TITLE XIV – MORTGAGE REFORM AND ANTI-PREDATORY LENDING ACT Subtitle B – Minimum Standards for Mortgages Section 1412. SAFE HARBOR AND REBUTTABLE PRESUMPTION (b)(2)(A) DEFINITIONS.

ATR Standards & Requirements

Affected Loans—Must Meet ATR Standards

  1. The ATR requirements apply to closed-end consumer credit transactions secured by a 1- to 4-unit dwelling for which an application is received on or after January 10, 2014.
  2. The ATR requirements do not apply to HELOCS; loans with a term of 12 months or less; the construction phase of 12 months or less of a construction-to-permanent loan; loans secured by a time-share; or a reverse mortgage.
    1. All applicable loans must comply with ATR requirements with the following exemptions: Creditors designated by the U.S. Department of the Treasury as Community Development Financial Institutions and creditors designated by the U.S. Department of Housing and Urban Development as either a Community Housing Development Organization or a Downpayment Assistance Provider of Secondary Financing are exempt under certain conditions.
    2. The final rule also generally exempts creditors designated as nonprofit organizations under Section 501(c)(3) of the Internal Revenue Code of 1986 (26 U.S.C. 501(c)(3)) that extend credit no more than 200 times annually, provide credit only to low- to moderate-income consumers, and follow their own written procedures to determine that consumers have a reasonable ability to repay their loans.
    3. Credit made pursuant to programs administered by a housing finance agency (HFA) and for an extension of credit made pursuant to an Emergency Economic Stabilization Act program, such as extensions of credit made pursuant to a State Hardest Hit Fund program.

ATR Requirements

  1. The ATR requirements consist of eight minimum underwriting considerations [TILA Section 129C Section 1026.43(c)] and requirements for verifying the information used to underwrite the loan:
    1. Current or reasonably expected income or assets;
    2. Current employment status;
    3. The monthly payment on the covered transaction;
    4. The monthly payment on any simultaneous loan;
    5. The monthly payment for mortgage-related obligations;
    6. Current debt obligations;
    7. The monthly debt-to-income ratio, or residual income; and
    8. Credit history.
  2. A lender and any assignee can meet the ATR requirements (and receive a certain level of legal protection) by originating a QM.
  3. A lender can originate a loan that meets ATR requirements but DOES NOT meet QM requirements; however, the lender loses important protections in the event of legal action against the lender for alleged failure to consider the borrower’s ability to repay.
QM Categories

Our “Lender Guide to Qualified Mortgages: QM Requirements” provides detail about these categories.

  1. General QMs
    The final rule generally states that, for each covered transaction, a creditor must satisfy the statutory criteria (1) restricting certain product features; (2) limiting points and fees; (3) to consider and verify certain underwriting requirements, and (4) to confirm that total DTI is less than or equal to 43%.
  2. Temporary GSE, FHA, VA, USDA QMs
    1. In anticipation of creditors’ reluctance to make non-QM mortgages, the final rule provides for a second, temporary category of qualified mortgages that have more flexible underwriting requirements so long as they satisfy the underwriting requirements of—and are therefore eligible to be purchased, guaranteed or insured by—either (1) the GSEs, while they operate under Federal conservatorship or receivership; or (2) HUD-FHA, VA, or USDA.
    2. The provision will phase out over time as the various agencies issue their own QM rules and if GSE conservatorship ends, and in any event after seven years.
  3. Rural Balloon-Payment QMs
    1. Created for creditors that originate at least 50% of their first-lien mortgages in counties that are rural or underserved, have less than $2 billion in assets, and (along with affiliates), originate no more than 500 first-lien mortgages a year.
    2. The CFPB will designate a list of “rural” and “underserved” counties each year. For a list of counties, click here.
    3. Creditors must generally hold loans on their portfolios for three years in order to maintain their QM status.
  4. Small Creditor Portfolio QMs
    1. Created for creditors with no more than $2 billion in assets that (along with affiliates) originate no more than 500 first-lien mortgages covered under the ATR rules per year.
    2. Creditors must hold loans in portfolio for at least three years (subject to certain exceptions).
Lender Protection ("Safe Harbor")

Lender Protection (“Safe Harbor” and “Rebuttable Presumption”) that loan meets ATR Requirements because it is a QM-compliant transaction

  1. Liability for an ATR violation is intended to be substantial, and the rule subjects creditors and assignees to “enhanced” damages (actual damages, statutory damages in an individual or class action, court costs and attorney’s fees, plus special statutory damages equal to the sum of all finance charges and fees paid by the consumer; can also provide the borrower with a defense to foreclosure).
  2. When originating a qualified mortgage, the lender (and any assignee) is presumed to meet ATR requirements (and receive a certain level of legal protection).
  3. General and Agency QM Categories. You have maximum legal protection (“Safe Harbor”) when the loan meets QM requirements, and the APR is not more than 1.5% over the average prime offer rate(APOR). Note: if the APR is more than 1.5% over APOR, then you have less legal protection in the form of a Rebuttable Presumption.
  4. Small Creditor Balloon Loan or Small Creditor Portfolio Categories. You have maximum legal protection (“Safe Harbor”) when the loan meets QM requirements, and the APR is not more than 3.5% over the average prime offer rate (APOR).
    1. Because small creditors often have higher costs of funds, the final rule shifts the threshold separating (1) qualified mortgages that receive a safe harbor from (2) those that receive a rebuttable presumption of compliance with the ATR rules from 1.5% above the APOR on first-lien loans to 3.5% above the APOR.

More information about ATR and Points and Fees related to QM.

QM Requirements by Category

You have maximum legal protection (“Safe Harbor”) when the loan meets QM requirements. This chart lists requirements for originating Qualified Mortgage, based on the QM category. Additional requirements may apply.

QM REQUIREMENTS BY QM CATEGORY – Loan Applications Received on or after 1/10/2014
  Prior to QM General QM Temporary GSE, FHA, VA, USDA QM Balloon-Payment QM Small Creditor Portfolio QM
ATR Required only for High-Cost Transactions
  • All closed-end consumer credit transactions secured by a 1- to 4-unit dwelling
  • Excludes HELOCS; loans with a term of 12 months or less; the construction phase (of 12 months or less) of a construction-to-permanent loan; loans secured by a time-share; and reverse mortgages.
  • Exempts certain Community Development creditors and/or programs, generally excludes certain non-profit organization transactions and programs administered by an HFA and for an extension of credit pursuant to an Emergency Stabilization Act program.
Features None
  • No negative amortization
  • No interest-only
  • No balloon payments
  • No negative amortization
  • No interest-only
  • No negative amortization
  • No interest-only
  • No balloon payments
Terms None Maximum 30 years
  • Fully amortizing: maximum of 30 years
  • Balloon: maximum of 20 year amortization, minimum 5-year term
Maximum 30 years
Income & Assets Varied by Product Current or reasonably expected income and assets must be considered as well as current employment status. Per agency Current or reasonably expected income & assets must be considered as well as current employment status.
Qualifying Payment Greater of fully indexed or intro rate Maximum rate in first 5 years Per agency Maximum rate in first 5 years
DTI Varied by product At minimum, must consider the monthly payment on: Covered transaction; any simultaneous loan; mortgage-related obligations; current debt obligations
DTI Max None Maximum total DTI of 43% Per agency Maximum total DTI of 43%
Points & Fees n/a 3% for first-lien loan amounts equal to or greater than $100,0001, 2
Max APR3 n/a Maximum of 1.5% over APOR Maximum of 3.5% over APOR
Prepayment Penalties Generally prohibited except for certain fixed-rate QMs, in which the penalties satisfy certain restrictions and the creditor has offered the consumer an alternative loan without such penalties.
Document Retention The rule lengthens to three years the time creditors must retain records that provide evidence of compliance with the ATR and prepayment penalty provisions. It also prohibits evasion of the rule by structuring a closed-end extension of credit as an open-end plan.

Please note: This chart is not a substitute for the rule. Only the rule and its official interpretations can provide complete and definitive information regarding its requirements.

LEGAL DISCLAIMER: United Guaranty believes the information contained in this publication to be accurate as of January 10, 2014, however, this information is not intended to be legal advice and any person subject to these mortgage rules should seek advice from their legal counsel to assure proper compliance. United Guaranty is providing this information without any warranties, express or implied, and shall not be liable for any direct, indirect, incidental, punitive, or consequential damages due to any person’s reliance on the information.

1. Requirements are different for loan amounts less than $100,000.
2. Lender has maximum legal protection “Safe Harbor” when the loan meets QM requirements including Points & Fees and A.P.R.
3. If all QM requirements are met EXCEPT A.P.R. lender has less legal protection in the form of a Rebuttable Presumption.

Points & Fees

This summary addresses maximum points and fees as allowed under the QM rules. It also provides an overview of how United Guaranty products will be affected by the rules.

MAXIMUM POINTS AND FEES ALLOWED FOR QM COMPLIANCE

Code of Federal Regulations, Title 12 – Effective 1/10/2014 §1026.43(e)(3)(i) provides that a transaction is not a qualified mortgage unless the total points and fees payable in connection with the loan do not exceed:

  • For a loan amount greater than or equal to $100,000, 3% of the total loan amount;
  • For a loan amount greater than or equal to 60,000 but less than $100,000, $3,000;
  • For a loan amount greater than or equal to $20,000 but less than $60,000, 5% of the total loan amount;
  • For a loan amount greater than or equal to $12,500 but less than $20,000, $1,000 of the total loan amount;
  • For a loan amount of less than $12,500, 8% of the total loan amount.

The table that follows summarizes points and fees that are included and excluded, and provides a discussion of United Guaranty QMI products that are QM-friendly.

QM Points & Fees Summary

LEGAL DISCLAIMER: United Guaranty believes the information contained in this publication to be accurate as of January 10, 2014; however, this information is not intended to be legal advice and any person subject to these mortgage rules should seek advice from their legal counsel to assure proper compliance. United Guaranty is providing this information without any warranties, express or implied, and shall not be liable for any direct, indirect, incidental, punitive, or consequential damages due to any person’s reliance on the information.