Non-Qualified Mortgages (Must Determine Ability-to-Repay)
Lender Underwriting
Requirements
Lender must determine consumer’s
• Current or reasonably-expected
income or assets, other than those
used to secure loan
• Current employment status if “income”
is used for determination
• Expected monthly payment on covered
transaction (using higher of intro or
fully-indexed rate and monthly fullyamortizing payments)
• Monthly payment on any simultaneous
loans
• Monthly payment of mortgagerelated obligations
• Current debt obligations, alimony and
child support
• Debt-to-income ratio or residual
income
• Credit history
Lender must
• Use third party records to verify all
information relied upon
• Retain evidence of compliance with the
requirements for 3 years
1
Mortgage Loan
Requirements
None
Legal Protection
• No automatic safe harbor or
presumption of compliance
• Borrower, upon default, can bring a
legal action against lender challenging
lender’s determination of borrower’s
ability to repay
• Potential penalties include
o Truth-in-Lending Act damages
o Legal and court fees
o Delayed foreclosure of the subject
property
Qualified Mortgages (Ability-to-Repay Determination Not Required)
2
Lender Underwriting
Requirements
Mortgage Loan
Requirements
Lender must
• Underwrite using maximum interest
rate applicable during first 5 years of
the loan, and payments that will repay
loan within the loan term
• Consider and verify consumer’s
reasonably-expected income or assets,
debt obligations, alimony, and child
support
• Confirm consumer’s debt-to-income
ratio does not exceed 43 percent per
requirements outlined in Appendix Q of
the ATR rule or, insure loan satisfies a
government sponsored enterprise
/federal agency test, in which the loan
is a QM if it is eligible for purchase or
guarantee by Fannie Mae, Freddie Mac
or another eligible federal government
entity or program
Mortgage loan must
• Provide for regular, periodic, and equal
payments that do not result in an
increased principal balance, allow
consumer to defer repayment of
principal, or result in balloon payment
loan (with some exceptions detailed on
page 4)
• Not exceed 30-year term
• Not have points and fees exceeding 3
percent of the total loan amount for
loans of $100,000 or more (the points
and fees caps are higher for smaller
loans)
Legal Protection
• Lenders receive Safe Harbor legal
protection for loans with annual
percentage rate (APR) less than 1.5
percentage points above average prime
offer rate (APOR)
• QM loans with higher APRs will only
receive a legal Presumption of
Compliance, which is a lesser legal
protection for the lender
Qualified Mortgage – Small Creditor Exception
“Small creditor” defined as a creditor with less than $2 billion in assets and that originates no more than 500
first-lien, closed-end mortgages per year
Lender Underwriting
Requirements
Lender must
• Underwrite using maximum interest
rate applicable during first 5 years of
the loan, and payments that will repay
the loan within the loan term
• Consider and verify consumer’s
reasonably-expected income or assets
and debt-to-income ratio
• Consider and verify the consumer’s
debt obligations, alimony, and child
support
NOTE: 43 percent debt-to-income
requirement per Appendix Q does NOT
apply
3
Mortgage Loan
Requirements
Mortgage loan must
• Provide for regular, periodic, and equal
payments that do not result in an
increased principle balance, allow
consumer to defer repayment of
principal or result in balloon payment
loan (with some exceptions detailed on
page 4)
• Not exceed 30-year term
• Not have points and fees exceeding 3
percent of the total loan amount for
loans of $100,000 or more (the points
and fees caps are higher for smaller
loans)
• Be held in portfolio for at least 3 years
Legal Protection
• Lenders receive Safe Harbor legal
protection for loan with annual
percentage rate (APR) less than 3.5
percentage points above the average
prime offer rate (APOR)
• Other QM loans with higher APRs
meeting the small creditor exception
will only receive a legal Presumption of
Compliance, which is a lesser legal
protection for the lender
Qualified Mortgage – Balloon Payment Loan
Lender Underwriting
Requirements
Loans are considered QM loans if ALL of
the following conditions are satisfied
• Originated and held in portfolio for at
least 3 years
• Originated by a lender with under $2
billion in assets
• Originated by a lender who, together
with its affiliates, originates no more
than 500 first-lien covered mortgages
per calendar year
• Originated by a lender providing more
than 50 percent of its first-lien
mortgages in areas considered rural or
underserved as defined by the CFPB
o “Small creditors “ that do not
operate predominantly in rural or
underserved areas can offer
balloon-payment QM loans until
January 10, 2016, if all other
requirements are satisfied
• Lender must follow all other QM basic
underwriting requirements detailed on
page 2
• Debt-to-income ratio must be
considered but is not subject to the 43
percent debt-to-income requirement
4
Mortgage Loan
Requirements
Balloon mortgage loans must
• Have a term of at least 5 years
• Have a fixed interest rate and periodic
payments (other than the balloon
payment) that would amortize the loan
over 30 years or less
• Be held in portfolio for at least 3 years
Legal Protection
• Lenders receive Safe Harbor legal
protection for loans with an annual
percentage rate (APR) less than 3.5
percentage points above the average
prime offer rate (APOR)
• Other QM balloon loans with higher
APRs will only receive a legal
Presumption of Compliance, which is a
lesser legal protection for the lender
Exemption from Ability-to-Repay Requirements for Refinancing NonStandard Mortgages into Standard Mortgages
Lender Underwriting
Requirements
Following conditions must be met
• Lender is current holder of the nonstandard mortgage
• The payments under the refinance will
not cause the principal balance to
increase
• Standard mortgage monthly payment
will be materially lower than the nonstandard mortgage payment (i.e., at
least 10 percent)
• Lender receives written application no
later than 2 months after the
nonstandard mortgage has recast
• Consumer did not make more than one
payment more than 30 days late during
the 12 months preceding application
receipt and no late payments within 6
months
• If the non-standard mortgage was
consummated on or after January 10,
2014, it must be in accordance with the
ability-to-repay requirements
5
Mortgage Loan
Requirements
Exemption applies to the following “nonstandard” mortgage loans being
refinanced into a “standard mortgage”
• ARM with an intro fixed interest rate for
1 year or longer
• Interest only loans
• Negative amortization loans
Standard mortgage means a covered
transaction with all of the following
• That has regular periodic payments
• For which the total points and fees do
not exceed 3 percent for loans greater
than $100,000 (the points and fees caps
are higher for smaller loans)
• That does not have a term greater than
40 years
• That has a fixed interest rate for at least
the first 5 years after consummation
• For which the proceeds from the loan
are used solely to pay off the
outstanding balance on the nonstandard mortgage and closing or
settlement charges
Legal Protection
N/A