FEDERAL NATIONAL MORTGAGE ASSOCIATION When explaining a lengthy and complex rulemaking process, it is tempting to look into the past and start at the beginning. However, for credit unions that simply want to understand the current boundaries of Qualified Mortgages (QMs), we should focus on the present.
In short, there are now several types of QMs from which credit unions may choose, each with its own parameters and requirements. In the future, though, all bets are off.
OLD QMs
The first QM is the one with which we are all familiar]—[the 43% debtto-income ratio (DTI) QM. While the
Accordingly, a closed-end residential mortgage loan will still constitute a QM when it has: A DTI that does not exceed 43%.
Underwriting in accordance with the regulation's Appendix Q.
Points and fees that do not exceed the threshold (generally 3%). No balloon payment or other nonstandard payment arrangements.
If the annual percentage rate (APR) does not exceed the average prime offer rate (APOR) for a comparable transaction by 1.5 percentage points, then the QM enjoys a “safe harbor” of compliance with the federal Ability to Repay Rule. If the loan's APR exceeds that threshold, the loan gets a rebuttable presumption of compliance with that rule.
Unless something changes, the old QM is available until
NEW QMs
A new QM category is also now available. For applications received on or after
As above, if the APR does not exceed the APOR by 1.5 percentage points, the QM enjoys a safe harbor of compliance with the rule; otherwise, the loan gets a rebuttable presumption of compliance.
Under this new QM, the loan still must meet the “old” QM restrictions against non-standard payment features and limits on points and fees. The lender must still consider DTI (or residual income), but the regulations do not impose a cap. The lender also must still consider the consumer's current or reasonably expected income or assets, debt obligations, alimony and child support.
While that “consider” requirement sounds familiar, the regulations specify that for new QMs, a lender must develop underwriting standards and maintain written policies and procedures for how it considers the required factors.
The lender also must, for each loan, retain documentation, like a worksheet
or automated underwriting system certification, showing how the lender considered the factors and applied its policies and procedures. The lender's policies and procedures must describe any available exceptions to the underwriting standards, and the lender must keep loan-level documentation of any exceptions on which it relies.
The lender also must verify those amounts using reasonably reliable third-party documentation. The lender is no longer stuck with the documentation requirements in Appendix Q, and instead may use any reasonable verification methods and criteria. While some lenders may welcome that flexibility, lenders also may rely on specified verification standards of
Accordingly, so long as loans stay under the 2.25 APR threshold, the new QM offers significant flexibility for credit unions to provide mortgage loans to their members. However, some work is required up front to ensure that product parameters, compensating factors and allowable exceptions are in writing, and loan-level documentation processes are in place.
AGENCY QMs
Credit unions also may still make agency QMs. The regulations continue to allow the FHA,
However,
SMALL CREDITOR PORTFOLIO QMs
A “small creditor” may continue to make QMs without regard to certain old or new QM requirements, so long as the creditor retains the loans in its portfolio.
A “small creditor” is, in somewhat simplified terms, a creditor that, along with its affiliates, extended no more than 2,000 first-lien, closedend residential mortgage loans during the preceding calendar year that were sold, assigned or otherwise transferred to, or committed to be acquired by, another person. In addition, the creditor and any lending affiliates must have total assets below a certain threshold. (For calendar year 2021, the asset threshold is
Although small portfolio creditors must continue to consider a consumer's current or reasonably expected income or assets, current debt obligations, alimony, child support and DTI or residual income, the creditors are not required to observe the 43% DTI cap or Appendix Q. Similarly, since
However, if the creditor sells, assigns
“or otherwise transfers the loan within three years, the loan generally will lose its QM status. In addition, those small portfolio For applications creditors that lend in a rural or underreceived on served area may continue to make balor after loon payment QMs under special regMarch 1, 2021, credit unions and ulatory provisions, without complying with the old DTI or new APR caps. other mortgage QMs IN THE FUTURE lenders can make While the
QMs without a ership) wanted to eliminate the old 43% DTI cap and QM (43% DTI/Appendix Q) by July without following Appendix Q, so 2021, the agency now believes doing so could exacerbate the economic effects of the Covid-19 pandemic. By long as the APR making the old QM available until does not exceed
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