On December 11, 2013, the Department of Housing and Urban Development (HUD) released its final rule establishing the definition of a Qualified Mortgage for the single-family residential mortgage loans the Department insures, guarantees, or administers. While the Consumer Financial Protection Bureau (CFPB) proposed and finalized its rules regarding Qualified Mortgages and the Ability-to-Repay standard earlier this year, those regulations apply to the broader mortgage market. HUD’s rule applies specifically to loans insured under Title I and II of the National Housing Act, i.e. FHA loans. The rule goes into effect on January 10, 2014.
Across the country, lenders face one major question: how do I comply with this rule in such a short period? The good news is that the rule should make it easier for lenders to originate Qualified Mortgages, especially Safe Harbor Qualified Mortgages. This is due to the fact that HUD adjusted the APR to APOR relationship test to allow for a greater number of FHA loans to qualify as Safe Harbor Qualified Mortgages. HUD estimates that an additional 19% of FHA loans will qualify as Safe Harbor Qualified Mortgages under this rule as compared to the CFPB’s rule.
First, the points and fees calculation—the 3% rule—remains the same. HUD clarified that consultant and housing counselor fees under the 203k lending program are excluded from the points and fees calculation as long as the creditor, originator, or an affiliate of either does not retain a portion of the fee. Additionally, HUD-approved housing counseling fees are not included in the calculation because the counseling agencies are not permitted to be affiliated with a creditor or loan originator.
Second, all Title I loans (property improvement loans and manufactured home loans), Section 184 loans (Indian housing), and Section 184A loans (native Hawaiian housing loans) insured or guaranteed by HUD are designated as Safe Harbor Qualified Mortgages. In addition, FHA Title II manufactured housing loans are included in the exemption. The remaining loans, Title II loans—known as FHA loans—are where the rule has a real impact.
HUD’s Qualified Mortgage rule tracks the CFPB’s rule by adopting a two-tiered system. Loans that are insurable under Title II of the National Housing Act (FHA loans)—that meet the CFPB points and fees test and have an annual percentage rate (APR) not exceeding the average prime offer rate (APOR) by more than 1.15% plus the annual mortgage insurance premium (MIP)—qualify as Safe Harbor Qualified Mortgages. As an example, say you are doing an FHA loan with 90% LTV, the APR is 7%, the APOR is 5%, and the annual FHA MIP is .45%. You would add .45% to 1.15% yielding 1.6% (1.6%>1.5% under the CFPB rule). You would then compare the APOR (5%) to the APR (7%) and determine whether the APR exceeds the APOR by 1.6%. In this case, the APR exceeds the APOR by more than 1.6% so you would not have a Safe Harbor Qualified Mortgage. Under HUD’s Qualified Mortgage Rule, an FHA loan that has an APR exceeding the APOR by the calculated threshold is a Rebuttable Presumption Qualified Mortgage.
As you can see from the example, HUD’s definition of a Qualified Mortgage allows more FHA loans to receive the enhanced legal protection afforded by the Safe Harbor Qualified Mortgage. This is because the sum of the monthly MIP premium and 1.15% will typically yield a number greater than the CFPB’s 1.5% limit. Therefore, if your LOS system is already set for the CFPB Qualified Mortgage definition, you may not need to take additional steps to comply with HUD’s rule.
Finally, HUD clarified that when determining a borrower’s ability-to-repay that lenders should continue to consider FHA’s list of underwriting factors: income, credit and assets. HUD further stated that when considering a borrower’s ability to repay, the lender should do more than consider the CFPB list of Ability-to-Repay indicators. The lender should evaluate the credit, income, and assets in accordance with HUD’s underwriting requirements.
Cody Estep who is an attorney/compliance consultant for C3 Compliance Consultants Inc. (C3CC), an Offit Kurman Company (law firm) with offices in Baltimore/Washington, Baltimore City, Bethesda, and Tysons Corner, Maryland. For more information, e-mail: firstname.lastname@example.org.