Tuesday, January 21, 2014

Qualified Mortgage Rules: Will the Sky Fall?

The CFPB's regulations on qualified mortgages ("QM") have been in effective since 1/10/2014, but most covered transactions have yet to make through the origination/underwriting process.  In the next few weeks, more loans will proceed to closing in the post-QM, mortgage lending environment.  Before lenders and loan originators begin the last minute preparation to close their loans, I would like to share some of my first impressions on QM.

First, secondary market investors have very different interpretations on QM.  Based on my perusal of a large number of bulletins, guidelines, and updates issued by a handful of investors, it appears that investors interpret many aspects of QM very differently.  For example, while Regulation Z clearly states that non-owner occupied investment property is exempt from the QM requirements, some investors still require loans secured by investment properties to comply with QM rules.  Although most investors are poised to purchase QMs, some may only purchase certain loan products that fall under the safe harbor QMs.

Second, confusion seems abundant in a number of areas.  Some folks may still find it difficult to grasp the nuanced distinction between pre-paid finance charges (APR fees) and QM points and fees.  What is typically an APR fee, for example, contract processing fee, may not necessarily be included in the QM points and fees if the contract processor receiving the fee is not an affiliate of the lender/broker.  On the other hand, what is counted in the QM points and fees, for example, certain real estate-related charges (appraisal fee, credit report fee, title policy premiums) paid to an affiliate of the lender, are generally not APR fees.  It's essential for lenders and originators to identify the differences and connection between APR fees and QM points and fees.  In addition, the 3% threshold applies when the loan amount (note amount) equals to or is greater than $100,000.  In such cases, the total points and fees cannot exceed 3% of the total loan amount.  For the purpose of calculating the QM points and fees limit, the total loan amount, in most cases, is the amount financed as shown on the final TIL disclosure, not the note amount.

Third, lenders and investors alike seem to still struggle with how to apply seller credits.  Before QM, the same issue surfaced when lenders tried to comply with Fannie Mae's 5% points and fees limit.  Fannie Mae did clarify in its Announcement 09-24 that "points or fees are counted against the limitation regardless of the party paying the fee".  With respect to QM points and fees limit, the CFPB's guidance document and staff interpretation seem to indicate that seller credits/contributions can be used to offset pre-paid finance charges in 1026.32(b)(1) that are included in the QM points and fees.  However, if charges paid by the seller were for broker compensation, real estate-related fees (payable to the lender's affiliate), or credit insurance premiums, such charges should still be included in QM points and fees.

In the next few days, I will provide addition details on each of the above three topics.  Please check back for more.                             

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