Generally, QMs must have regular periodic payments that are substantially equal, subject to interest-rate adjustments. There may not be negative amortization, deferral of principal, or balloon payments.
Points and fees may not be excessive and are limited depending on the loan amount:
All fee and loan amounts are indexed for inflation.
Terms for QMs can’t exceed 30 years, and underwriting must be based on the maximum interest rate during the first five years.
Decisions must be based on verified current or reasonably expected income or assets and current debt obligations, including alimony and child support. The member’s monthly debt-to-income ratio may not exceed 43%.
The rule provides a safe harbor for QMs that are not higher-priced. This means that if the loan is challenged by a defaulting borrower, the QM will be deemed to comply with the rule’s ATR requirements.
For QMs that are higher-priced, the rule provides a “presumption of compliance” that is a lesser degree of protection from liability than a “safe harbor.”
These loans will not be deemed to comply with the rule’s ATR requirements.
A “higher-priced” mortgage is a covered transaction with an annual percentage rate that exceeds the “average prime offer rate” for a comparable transaction by 1.5% or more for a first-lien loan, or by 3.5% or more for a subordinate-lien loan (Section 1026.35).
To rebut the presumption of compliance for a QM that is a higher-priced mortgage, it must be proven that, despite meeting the requirements for a QM, the creditor did not make a reasonable and good faith determination of the borrower’s repayment ability at the time of consummation.
This could be done by showing that the borrower’s income, debt obligations, alimony, child support, monthly mortgage payment (including taxes and property insurance on the loan), and any simultaneous loans would leave the borrower with insufficient residual income or assets with which to meet living expenses.
Government, GSE-eligible loans
The rule provides for a second, temporary category of QMs that have somewhat more flexible underwriting requirements.
Mortgages eligible to be purchased, guaranteed, or insured by certain government entities—the Department of Housing and Urban Development; the Department of Veterans Affairs; the Agriculture Department; and the Rural Housing Service; or by Fannie Mae or Freddie Mac as long as they remain in conservatorship—will be treated as QMs as long as they meet most general requirements for QM loans.
This temporary provision will phase out over time as the various federal agencies issue their own QM rules and if government-sponsored enterprise (GSE) conservatorship ends, and in any event aft er seven years.
These QM loans do not have to meet the 43% maximum debt-toincome ratio that applies to ordinary QMs.
►Small creditor QM loans. The May amendments to the original rule created a special category of QM loans that may be made by “small creditors.”
These are creditors that had total assets of $2 billion or less at the end of the prior calendar year, and together with all affiliates originated 500 or fewer covered transactions.
In order to receive QM status, these loans must meet all QM requirements other than the 43% debt-to-income ratio and without regard to the standards in Appendix Q.
►Rural balloon payment QMs. The final rule also treats certain balloon payment loans as QMs if they’re originated and held in portfolio by small creditors operating predominantly in rural or underserved areas.
Loans are eligible only if they have a term of at least five years and a fixed-interest rate, and meet certain basic underwriting standards.
Debt-to-income ratios must be considered but are not subject to the 43% general requirement.
Creditors are eligible to make rural balloon payment QMs only if they 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 any affiliates) originate no more than 500 first-lien mortgages per year.
Creditors generally must hold the loans in portfolio for three years in order to maintain their QM status.
►Record retention. A creditor must retain evidence of compliance with Section 1026.43 for three years after consummation.
Although a creditor isn’t required to retain actual paper copies of the documentation used in underwriting a loan, the creditor must be able to accurately reproduce such records.
If a creditor uses a consumer’s IRS Form W-2 to verify the borrower’s income, for example, it must be able to reproduce the IRS Form W-2 itself, and not merely the income information that was contained on the form.
MICHAEL McLAIN is CUNA’s assistant general counsel and senior compliance counsel.