Mortgage lenders, housing analysts, and consumer advocates have long awaited the definition of the qualified residential mortgage, or QRM. It’s one of two new mortgage rules mandated by the Dodd-Frank Act.
The other new rule (the similarly named qualified mortgage, or QM), was finalized by the Consumer Financial Protection Bureau in January 2013 and takes effect in January 2014.
As it turns out, the QRM definition is basically the same as the QM definition.
Last week, the Federal Deposit Insurance Corporation (FDIC) published a proposed version of the QRM rule. The latest proposal was drafted by six federal agencies including the FDIC, the Securities and Exchange Commission, and the Department of Housing and Urban Development (HUD).
The agencies are now seeking comments and feedback regarding the new rule. Instructions for submitting comments have been provided at the bottom of this page.
I spent the weekend perusing the 500-page proposal document with one overriding question. What is the definition of a qualified residential mortgage, or QRM? Here’s what I’ve learned:
QRM Definition Being Aligned with QM Rule
The federal agencies are planning to align the QRM definition with the previously published QM definition. (Why we need two nearly identical lending standards with different names, I have no idea. But that’s beside the point.) As stated in the proposal: “cross-referencing to the QM definition should facilitate compliance with QM…”
Elsewhere in the document, we have this:
“The agencies are proposing to broaden and simplify the scope of the QRM exemption from the original proposal and define ‘qualified residential mortgage’ to mean ‘qualified mortgage’ as defined in section 129C of the Truth in Lending Act (TILA).”
So the definition of a QRM loan is now the same as QM. Tax dollars at work.
But let’s be clear. The definitions of these two rules may be the same, or at least very similar. It’s the purpose and application of the rules that sets them apart.
- QM is designed to encourage the use of “safe” mortgages, for which lenders are rewarded in the form of legal protection from consumer lawsuits.
- QRM was created as an exception to the risk-retention rules that require lenders to retain at least 5% of the loans they sell into the secondary mortgage market.
In both cases, lenders have a powerful incentive to generate mortgages that meet these two definitions — legal protection in the first case, and a path around risk-retention in the second case. So you can bet these two rules, whatever they end up looking like, will define the mortgage landscape in the U.S.
It begs the question: what is a qualified mortgage, or QM? In short, it’s a loan with a statistically lower chance of default due to its characteristics and criteria. The QM rule prohibits risky loan features such as negative amortization, interest-only payments, and balloon payments. It also limits points and fees to 3% of the loan amount, and limits the borrower’s debt-to-income (DTI) ratio to 43%.
Credit Scores and Down Payments Not Part of QRM
Here’s a ray of light for borrowers. In its current form, the qualified residential mortgage definition does not have any credit score or down-payment requirements. Previous proposals included these requirements and drew harsh criticism from mortgage industry groups and consumer advocates alike. The agencies have since backed away from adding those criteria.
According to the latest proposal: “the agencies are not proposing to incorporate either an LTV ratio requirement [mandating a certain down payment] or standards related to a borrower’s credit history into the definition of QRM.”
The agencies feel that the documentation and income-verification standards built into the previously released QM rule, combined with the prohibition of risky loan features, is enough to reduce the risk of default – without having to implement down payment or credit-score requirements. This is a win for the mortgage industry and borrowers alike.
Bear in mind this is only the latest version of the qualified residential mortgage definition. While we have moved closer to having a finalized rule, additional changes could still be made after the agencies review comments and feedback. And speaking of comments…
Request for Comments
The agencies have requested feedback on the proposed rule. You can submit comments online or by email:
- Online: Go to http://www.regulations.gov. Enter “Docket ID OCC-2013-0010” in the search box and click “Search.” Click on “Comment Now” to submit public comments.
- By email: firstname.lastname@example.org