Qualified mortgage (QM) rules have fluctuated over the years. Now that the October 1, 2022, mandatory compliance date is in effect, it’s time to make sure that your financial institution’s loan files reflect the hard work that lending personnel have put into complying with the new General QM Final Rule or other QM types assigned.
Auditors and examiners will likely review your consumer real estate mortgage loans to ensure that your financial institution’s written policies and procedures regarding QM status are being adhered to.
Your institution’s policies and procedures should be updated to clearly outline the factors required for determining the borrower’s ability to repay (ATR) the loan and the QM requirements related to underwriting standards (which should no longer refer to the requirements of Appendix Q of Regulation Z and the 43% debt-to-income [DTI] limitation required for a QM loan).
General QMs require written policies, procedures and documentation to reflect how income or assets, debt obligations, alimony, child support, and monthly DTI or residual income is considered in the ATR determination.
A safe harbor exists for the use of Fannie Mae, Freddie Mac, Veterans Affairs or U.S. Department of Housing and Urban Development handbooks for verification of reasonably expected income or assets. If used, the written policies and procedures should reflect this practice.
The written procedures should make it easy for an employee to understand where and how to document all information related to ATR and QM status.
Items that each consumer real estate loan should clearly document:
1. The type of QM that was considered by the institution
QM types include general, small creditor (SCQM) or small creditor balloon payment (SCBPQM). Alternatively, if the institution did not consider the loan a QM, it should be documented as such in the file, along with support for the ATR decision.
2. Evidence that the points and fees of the loan were within limits for the QM
The table below shows the current points and fees thresholds which apply to all QM types as of January 1, 2022 (these will adjust annually):
| Maximum points and fees allowed | Loan amount |
|---|---|
| 3% of total loan amount |
Equal to or greater than $114,847 |
| $3,445 |
Greater than or equal to $68,908 and less than $114,847 |
| 5% of total loan amount |
Greater than or equal to $22,969 and less than $68,908 |
| $1,148 |
Greater than or equal to $14,356 and less than $22,969 |
| 8% of total loan amount |
Less than $14,356 |
3. For general QM loans, evidence that the loan met the priced-based limitations, which requires that the APR did not exceed the average prime offer rate (APOR) by specified thresholds (as of the date the rate was set)
Loan files should clearly show that the maximum interest rate that may apply in the first five years was used for determining the APR for the term of the loan and used for this calculation. The table below shows the current price-based limits, as of January 1, 2022 (these thresholds will adjust annually):
| A loan meets the general QM loan definition if the APR does not exceed the APOR for a comparable transaction as of the date the interest rate is set by | Loan type: First-lien covered transactions with loan amounts |
|---|---|
| 2.25% or more |
Equal to or greater than $1114,847 |
| 3.5% or more |
Greater than or equal to $68,908 and less than $114,847 |
| 6.5% or more |
Less than $68,908 |
| 6.5% or more |
Less than $114,847 and secured by a manufactured home |
| A loan meets the general QM loan definition if the APR does not exceed the APOR for a comparable transaction as of the date the interest rate is set by |
Loan type: Subordinate-lien covered transactions with loan amounts |
|---|---|
| 3.5% or more |
Greater than or equal to $68,908 |
| 6.5% or more |
Less than $68,908 |
4. Evidence that the loan terms adhered to requirements of:
- Regular periodic payments.
- A 30-year-or-less loan term (an at least five-year term is required for a SCBPQM).
- No balloon payment (unless the balloon payment is considered a SCBPQM).
- No interest rate increases (unless the loan is considered a general QM or SCQM).
- No negative amortization.
- No deferment of principal.
5. Documentation supporting the items used by the creditor while underwriting the loan and making an ATR determination
The new “consider and verify” requirements for QMs should be easy to trace in the file. Often this documentation will be retained on an underwriting transmittal sheet or automated underwriting results summary. Items considered and verified should include the following, as applicable:
- Current or reasonably expected income or assets, other than the value of the dwelling that secures the loan (e.g., tax transcripts, tax returns, W-2s, payroll statements, 1099s, bank statements, brokerage statements, etc.)
- Current employment status (if income from employment is relied on in determining repayment ability). This is only required for ATR standards or secondary market requirements. Documentation could include a verbal or written verification of employment.
- The correct monthly loan payment for underwriting the loan (based on the greater of the current rate, fully indexed or introductory rate), as follows:
- General QM and SCQM payments should be based on the maximum interest rate in first five years after the first periodic payment.
- SCBPQM payments should be based on an amortization schedule of 30 years or less.
- Monthly mortgage-related obligations including taxes, insurance, private mortgage insurance and homeowner’s association dues (e.g., property tax records, insurance policies and condo association billing statements)
- Inclusion of the monthly payment on any simultaneous loan in underwriting, such as a home equity line of credit
- Current debt obligations, alimony and child support (e.g., a credit report, court documents, voluntary payment agreements, etc.)
- Overall monthly DTI ratio or residual income. Although the previously established 43% DTI ratio is no longer required for a general QM, each institution may set its own DTI or residual income thresholds.
- Because SCQM and SCBPQM are generally restricted from selling, assigning or transferring legal title within three years of consummation, documentation should support that.
Overall, thorough documentation will support your institution’s consideration of all relevant facts related to the borrower’s ATR and/or the QM status of a loan. Documenting the file allows not only your institution to understand the criteria applied to the loan, but also auditors, examiners and even the borrowers themselves. It helps everyone understand the standards followed by the institution for each specific loan — which could be questioned months or years after the loan originated.
How Wipfli can help
Financial institutions are likely to have questions about the impact of the QM rule changes. Wipfli professionals can help you confirm that your mortgage loan files are on track for proper compliance. Contact us to learn more about how our regulatory compliance services team can support your organization.
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