Alert October 15, 2013

HUD Proposes Definition of Qualified Mortgage

Largely piggybacking off of the CFPB’s definition of qualified mortgage finalized in January 2013 (see January 10, 2013 Alert), HUD issued a proposed rule defining qualified mortgages.  The rule requires a loan to have regular periodic payments (i.e., no balloon payments), a maximum loan term of 30 years, a 3% cap on points and fees, and verification of the borrower’s ability to repay using documentation and the underwriting standards in the CFPB’s ability-to-repay rule.  HUD will not insure loans that do not meet these criteria. Similar to the CFPB’s ability-to-repay and qualified mortgage rules, the rule creates a safe harbor for loans that satisfy the definition of qualified mortgage and are not “higher-priced” as defined by the CFPB and a rebuttable presumption for loans that are higher priced, but otherwise meet the qualified mortgage standard.

While the rule excludes reverse mortgages from the qualified mortgage standard, Title I insured mortgages (i.e., manufactured housing and home improvement loans), Section 184 mortgages (i.e., Indian Home Loan Guarantee Program), and Section 184A mortgages (i.e., Native Hawaiian Housing Loan Guarantee Program) can be qualified mortgages. However, these latter three types of mortgage are not subject to the 3% cap on points and fees or the interest rate restrictions, and will be granted “safe harbor” status until HUD has an opportunity to fully examine the impact of restricting interest rates, points, and fees. Streamlined refinancing transactions, on the other hand, are fully subject to the new rule.

Comments must be received by October 30, 2013. HUD plans that the effective date of the rule will coincide with the CFPB’s ability-to-repay and qualified mortgage rules, on January 10, 2014.