Qualified Mortgages - What is the benefit?

Posted on February 15, 2023

By Becky Breland, Esq.

The Qualified Mortgage (QM) final rules were issued by the Consumer Financial Protection Bureau ten years ago.  Fast forward to 2023 after a few rule changes, is the benefit of offering a Qualified Mortgage worth it to creditors?  We believe so.

The Qualified Mortgage rules apply to most closed-end consumer credit transactions secured by a dwelling, including any real property attached to the dwelling.  Excluded from coverage are HELOCs, timeshare plans, reverse mortgages, short term temporary or bridge loans, short term construction phase loans, and vacant land loans. 

The benefit for a creditor to originate such a loan as a qualified mortgage is the presumption of compliance with Regulation Z’s Ability to Repay (ATR) provisions

There are two presumptions of compliance – a rebuttable presumption and a conclusive presumption. If the loan is a Higher-Priced Mortgage under Regulation Z, the presumption is rebuttable. But there is a carve out here, if the QM is a seasoned QM and if a higher priced mortgage, the presumption of compliance is conclusive. For all other QMs, the presumption of compliance is conclusive. A conclusive presumption of compliance is known as a safe harbor.  Financial institutions that take advantage of the safe harbor do not have to worry whether the borrower has the ability to repay the loan.

The ATR analysis can be burdensome to small and large creditors. The ATR Rules are found in Regulation Z, 12 CFR 1026.43(c). Under ATR, creditors must make a reasonable and good faith determination of the consumer’s ability to repay at or before consummation of a covered mortgage.

There are eight (8) factors that creditors must consider before consummation of a covered mortgage:

  • The consumer’s current or reasonably expected income or assets (other than the value of the dwelling and attached real property that secures the loan) that the consumer will rely on to repay the loan.
  • The consumer’s current employment status (if a creditor relies on employment income when assessing the consumer’s ability to repay).
  • The monthly mortgage payment for the loan that the creditor is underwriting.
  • The monthly payment on any simultaneous loans secured by the same dwelling.
  • Monthly mortgage-related obligations.
  • The consumer’s current debts, alimony, and child-support obligations.
  • The consumer’s monthly debt-to-income (DTI) ratio or residual income.
  • The consumer’s credit history.

Under the ATR rules, creditors must verify the information relied on when determining the consumer’s ability to repay (those 8 factors discussed) using reasonably reliable third-party records, which are records prepared by an appropriate person other than the consumer, the creditor, the mortgage broker or the creditor’s or mortgage broker’s agent.  The ATR rules provide detailed information on how to calculate payments, including payments for simultaneous loans, DTI and residual income.  Furthermore, the ATR rules provide details on verifying income, assets, employment status, mortgage-related obligations, debt obligations, child support, alimony,  simultaneous loans, and credit history. 

Alternatively, creditors can originate a mortgage that complies with the QM provisions and receive that presumption of compliance.  Rather than considering and verifying the 8 factors under the ATR rules, creditors can ensure the mortgage loan meets certain features with less ”consider and verify” requirements. For instance, under the General QM definition, a creditor need only consider and verify income or assets; debt, alimony, and child support; and DTI or residual income.  So instead of 8 factors, the creditor need only consider 3 of those factors along with ensuring that the mortgage loan meets the following conditions:

  • No negative amortization, interest-only, or balloon payments
  • Term no longer than 30 years
  • Points and fees limitation not exceeded

Furthermore, with a General QM, creditors must underwrite the payment using the maximum rate in the first 5 years as well as the monthly payment, DTI, employment status, and simultaneous loans.  Also, credit history may be considered during the underwriting phase.  Note that the phrase “included in underwriting,” does not require the creditor to consider and verify those factors separately, as with the ATR rule.

Because of the many “consider and verify” requirements to determine a borrower’s ability to repay, financial institutions may determine it is less burdensome and less potential for compliance violations to originate one of the several types of Qualified Mortgages. Regulatory Advisory Services (RAS) is presenting a webinar on March 9th discussing the various types of QMs available in 2023.  We encourage clients to join us for this webinar.  If you are not already a client, and you are interested in learning more about RAS and its services, please email regulatory.services@capco.com.

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