This week, the United States Department of Housing and Urban Development (“HUD”) weighed in on its proposed version of a Federal Housing Administration (“FHA”) Qualified Mortgage (“QM”). Although the Consumer Financial Protection Bureau (“CFPB”) rules gave FHA-insured loans QM status on a temporary basis until 2021 (subject to certain conditions, discussed below), it looks like HUD wanted to get its version finalized by January 2014, when the CFPB’s QM rules take effect. As discussed more fully in this alert, HUD’s proposed QM Rule (the “HUD Proposed Rule”) would give QM status to all single family, forward FHA-insured loans. Title II insured loans, however, would be required to meet the CFPB’s 3% limit for points and fees. Moreover, the HUD Proposed Rule, like the CFPB Final Rule, would create a bifurcated scheme for QM protection. Title II loans whose APR at consummation exceed 1.15% above the average prime offer rate (“APOR”), plus the Mortgage Insurance Premium (“MIP”) amount, would only be eligible for a “rebuttable presumption” of compliance. In contrast, covered Title II loans that fall within this APR threshold would receive a safe harbor for QM compliance.
Background
The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) re-shaped residential mortgage origination by codifying a federal ability-to-repay requirement for forward, closed-end residential mortgages. Specifically, the Dodd-Frank Act created a new Section 129C of the federal Truth in Lending Act (“TILA”), which generally prohibits a creditor from making a forward, closed-end residential mortgage loan unless the creditor makes a reasonable, good faith determination that a consumer has the ability to repay a loan by its terms.[1] As discussed in detail in our previous client alert, a creditor may satisfy this ability-to-repay requirement in one of four ways: (a) by considering and verifying repayment ability in light of eight specified underwriting standards; (b) by originating a QM, which provides either a safe harbor or rebuttable presumption of compliance; (c) by refinancing a non-standard mortgage (essentially a non-traditional loan product) into a standard mortgage; or (d) by relying upon certain protections for small-portfolio creditors or non-profits.
While the Dodd-Frank Act sets out the basic parameters for the ability-to-repay rule and QM protections, it tasks four federal agencies with crafting their own QM definitions. The Federal Reserve Board was tasked with crafting a QM rule for the conventional mortgage market. (This authority was transferred to the CFPB on July 21, 2011). The Department of Housing and Urban Development (“HUD”), the Department of Veterans Affairs (“VA”), and the Department of Agriculture, Rural Housing Service (“RHS”), were tasked with crafting their own QM definitions for residential mortgage loans eligible for insurance or guarantee under applicable loan programs.[2]
On January 10, 2013, the CFPB issued its Final QM Rule (the “CFPB Final Rule”).[3] While the CFPB Final Rule lays out the CFPB’s QM criteria for the conventional mortgage market (the “Standard QM”), it also provides a “temporary” QM definition for loans eligible for FHA insurance (as well as for loans eligible for insurance, purchase, or guarantee by other federal agencies). [4] These temporary definitions (the “Temporary Agency QM”) remain in effect until January 10, 2021 (seven years after the effective date of the CFPB Final Rule), or until such time as the agencies implement their own QM definitions.
Pursuant to the CFPB Final Rule, a closed-end, forward residential mortgage loan that is eligible for FHA insurance or guarantee at consummation would be deemed a Temporary Agency QM without meeting the strict income verification, debt verification, or 43% DTI ratio otherwise included in the Standard QM definition. Nevertheless, a Temporary Agency QM must still incorporate certain features of the Standard QM definition. A Temporary Agency QM must be free of certain risky product features (like negative amortization, interest-only payments, or balloon payments); have a loan term that does not exceed 30 years; and be subject to the Standard QM’s 3% limitation on points and fees. As with Standard QMs, Temporary Agency QMs that fall within 1.5% of the APOR would be deemed to comply with the ability-to-repay requirement; in contrast, loans that exceed 1.5% of the APOR would be subject only to a rebuttable presumption of compliance.[5] In either event, a lender may be subject to a post-hoc claim by a borrower that the loan does not satisfy the QM test.
While the CFPB Final Rule gave HUD a seven-year pass to issue its own QM definition, HUD has decided to act before the CFPB Final Rule is implemented. (In contrast, loans eligible for insurance, purchase, or guarantee by Fannie Mae, Freddie Mac, VA, and RHS (as the case may be) will continue to be subject to the Temporary Agency QM definition). Thus, on September 30, 2013, HUD published its own proposed QM rule in the Federal Register.[6] HUD has cited the need to harmonize its own QM definition with the January 10, 2014 rule going into effect for the conventional market. In short, under the CFPB Final Rule, many FHA-insured loans would not fall within the CFPB’s QM safe harbor (because the MIP on FHA insured loans may cause many loans to fall outside of the 1.5% above APOR safe harbor).[7] In an attempt to expedite synchronization of the HUD QM definition with implementation of the CFPB Final Rule, HUD shortened the usual 60-day comment period to 30 days. As such, comments on this proposal are due by Wednesday, October 30, 2013.
There is a “There” There
Upon initial review of the HUD Proposed Rule, one may be inclined to identify with the famous Gertrude Stein quote, “There is no there there.” That is, the HUD Proposed Rule makes no changes to current program requirements, and grants all forward, single family FHA-insured loans automatic QM treatment. However, upon closer review, HUD’s Proposed Rule attaches certain conditions to QM treatment that may complicate matters for participating lenders.
First, under the HUD Proposed Rule, not all FHA loans are created equal. Loans insured pursuant to Title I (home improvement loans), Section 184 (Indian housing loans), and Section 184A (Native Hawaiian Housing loans) would be provided “safe harbor” QM protection, regardless of their points and fees and APR.[8] In contrast, all forward Title II loans (which constitute the vast majority of FHA-insured loans), would now be subject to the 3% points and fees limitation otherwise required of Standard QMs.[9] (HECMs, like reverse mortgages under the CFPB Final Rule, would not be subject to the HUD Proposed Rule). As explained in our previous client alert, this 3% points and fees limitation will present many pricing challenges for lenders, as items such as loan level price adjustments, and fees paid to mortgage brokers, among others, will be included within the 3% points and fees limit. Lenders that struggle to price loans within the 3% points and fees limit may necessarily be inclined to make up for costs through a higher interest rate. This, in turn, may back a loan out of “safe harbor” QM territory or may cause a loan to exceed federal and state high-cost loan limits.
Furthermore, the HUD Proposed Rule creates a bifurcated scheme for “safe harbor” and “rebuttable presumption” protection, analogous to that of the “Standard QM” of the CFPB Final Rule. However, HUD has deviated from the fixed, 1.5% above the APOR reference that is included in the CFPB Final Rule. Instead, HUD has defined two separate categories of QMs, both of which index the variable MIP in determining “safe harbor” status. HUD has proposed the following QM designations:
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Safe Harbor QM: Single family mortgages insured under Title II of NHA (with exception of reverse mortgages insured under Section 255) that: (a) meet the 3% points and fees test adopted by CFPB; and (b) have an annual percentage rate that does not exceed the APOR for a comparable mortgage, as of the date the interest rate is set, by more than the sum of the annual MIP and 1.15 percentage points for a first-lien mortgage.
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Rebuttable Presumption QM: Single family mortgage insured under Title II of NHA (with exception of reverse mortgages insured under Section 255) that: (a) meet the 3% points and fees test adopted by CFPB; and (b) have an annual percentage rate that exceeds the APOR for a comparable mortgage, as of the date the interest rate is set, by more than the sum of the annual MIP and 1.15 percentage points for a first-lien mortgage.[10]
A Couple of Considerations
In the preamble to the Proposed Rule, HUD explained its reasoning for using the fluctuating MIP as an index for safe harbor protection.
Because all FHA-insured mortgages include an MIP that may vary from time to time to address HUD’s financial soundness responsibilities, including the MIP as an element of the threshold that distinguishes safe harbor from rebuttable presumption allows the threshold to “float” in a manner that allows HUD to fulfill its responsibilities that would not be feasible if HUD adopted a threshold based only on the amount that APR exceeds APOR.[11]
What HUD has failed to consider is that lenders must develop software programs, policies, and procedures to reflect the dimensions of the QM definition. Allowing the “safe harbor” to fluctuate in relation to the MIP could result in room for lender error. In short, during the necessary “re-tooling” period (e.g. when the “safe harbor” reference changes in relation to an updated MIP), lenders might have originated loans that they thought were protected by the QM safe harbor, but that were instead subject only to the rebuttable presumption. Since the whole purpose of the QM definition is to provide lenders with a reliable mechanism by which to originate a protected class of loans, it may be preferable if HUD, like the CFPB, considers indexing its “safe harbor” against a fixed APR amount (while still taking account for the MIP).
There is another possible point of contention: The HUD Proposed Rule does not exempt streamlined refinancings from the QM Rule.[12] As HUD acknowledges in the HUD Proposed Rule, Section 129C of TILA grants HUD authority to exempt streamlined refinancings from the income verification requirements of the ability-to-repay rule, as long as the refinancings meet certain requirements (e.g. the consumer must not be more than 30 days past due; the loan must not increase the principal balance; points and fees do not exceed 3%; and the new interest rate on the refinanced loan is lower than the current rate).[13] Nevertheless, HUD suggests that including streamlined refinancings within its proposed QM requirements would meet similar objectives of a broader exemption, as HUD’s Proposed QM definition would still require streamlined refinancings to meet the 3% points and fees requirements and HUD requirements for FHA-streamlined refinancings.[14] Nevertheless, subjecting streamlined refinancings to the Proposed QM Rule may increase compliance burdens for lenders, and may impede the ability of lenders to refinance FHA loans.
While HUD’s 46-page offering may seem light in comparison to the CFPB’s 803-pager, the HUD Proposed Rule presents multiple challenges for lenders that might be mitigated through thoughtful commentary. We are available to assist companies in preparing those comments. Please contact us if we can be of assistance.
Notes:
[1] See 15 U.S.C. § 1639c.
[2] See id.
[3] See 78 Fed. Reg. 6408 (Jan. 30, 2013). This “Final” Rule was modified on May 29, 2013. See 78 Fed. Reg. 35430 (June 12, 2013). Collectively, we refer to the product of these two CFPB issuances as the “CFPB Final Rule.”
[4] The Temporary Agency QM definition applies to loans eligible at consummation for purchase, guaranty, or insurance (as applicable) by: (a) Fannie Mae or Freddie Mac, while operating under the conservatorship or receivership of the Federal Housing Finance Agency (“FHFA”); (b) any limited-life regulatory entity succeeding the charter of Fannie Made or Freddie Mac; or (c) FHA, Department of Veterans Affairs (“VA”), Department of Agriculture, or the Rural Housing Service. Although the Proposed Rule did not include this alternative, the Dodd-Frank Act requires those agencies (“Agencies”) to prescribe their own QM rules. See 12 C.F.R. § 1026.43(e)(4).
[5] See 12 C.F.R. § 1026.43(e)(4). See also id. §§ 1026.43(b)(4), 1026.43(e)(1)(i) and (ii). Note that the threshold for whether a subordinate-lien loan would fall within the “safe harbor” is based upon whether the loan falls within 3.5% of APOR.
[6] See 78 Fed. Reg. 59890 (Sept. 30, 2013). However, on that same date, HUD issued a release on its website, indicating that it was re-issuing the Proposed Rule in order to make a technical correction. As such, HUD will re-release this “corrected” version of the rule in the Federal Register.
[7] See Unpublished Proposed Rule, at 6.
[8] See id. at 5.
[9] See id. at 43 (to be codified at 24 C.F.R. § 203.19).
[10] See id.
[11] See id. at 22-23.
[12] See id. at 16.
[13] See id.
[14] See id.
