On this page, you’ll find the final definition of the Qualified Mortgage (QM) rule. This definition was issued by the Consumer Financial Protection Bureau (CFPB) on January 10, 2013. These rules do not take affect until January 2014.
The QM Rule at a Glance
A qualified mortgage is a home loan that meets certain standards set forth by the federal government. Lenders that generate such loans will be presumed to have also met the Ability-to-Repay rule mandated by the Dodd-Frank Act.
The qualified mortgage rule is designed to create safer loans by prohibiting or limiting certain high-risk products and features. You will find a list of those prohibited features below. Lenders that make QM loans will receive some degree of legal protection against borrower lawsuits, either in the form of a safe harbor or rebuttable presumption. All of this is explained below.
Full Definition of a Qualified Mortgage
The term ‘qualified mortgage’ was first used within the text of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which became federal law on July 21, 2010. The Dodd-Frank Act provided a general definition (essentially an outline) of the QM loan. The CFPB was then given the task of finalizing that definition, which they did in January 2013. Here are the key features of a qualified mortgage:
No Excessive Upfront Points and Fees
In this context, ‘points and fees’ are additional costs charged by the lender during mortgage application, processing and closing. The QM rule puts a limit on these additional charges, including those used to compensate mortgage brokers and loan officers.
Generally speaking, the points and fees paid by the borrower must not exceed 3% of the total amount borrowed, if the loan is to be considered a qualified mortgage.
Certain exceptions have been made for ‘bona fide discount points’ on prime loans. For details on these and other exceptions, refer to the “Official Documents” section below.
No Toxic Loan Features
In this context, a ‘toxic’ loan feature can refer to any high-risk feature that may have contributed to the mortgage and housing collapse of 2008. Such features are prohibited by the qualified mortgage rule. These features are outlined below.
- No interest-only loans. These are mortgage products where the borrower defers the repayment of principal and pays only the interest, usually for a certain period of time.
- No negative-amortization loans. These are loans where the principal amount borrowed increases over time, even while monthly payments are being made. This often happens as the result of the interest-only payments mentioned above.
- No terms beyond 30 years. In order to meet the definition of a qualified mortgage, the loan must have a repayment term of 30 years or less.
- No balloon loans. In most cases, balloon loans will be prohibited by the QM rules. But some exceptions have been made. Smaller lenders in ‘rural or underserved areas’ may still make such loans. Definition: A balloon mortgage is one that has a larger-than-normal payment at the end of the repayment term.
Limits on Debt-to-Income Ratios
In general, the qualified mortgage will be granted to borrowers with debt-to-income / DTI ratios no higher than 43%. As the name implies, the debt-to-income ratio compares the amount of money a person earns each month (gross monthly income) to the amount he or she spends on recurring debt obligations. This aspect of the QM rule is intended to prevent consumers from taking on mortgage loans they cannot realistically afford.
A temporary (after January 2014) exception will be granted for loans that are eligible to be sold or insured by Freddie Mac, Fannie Mae, FHA or the VA.
Legal Protections: Safe Harbor & Rebuttable Presumption
Lenders that generate QM-compliant mortgage loans will receive some degree of legal protection against borrower lawsuits. The level of protection they receive will depend on the type of loan they make. So, in essence, there are two types of qualified mortgages:
Safe Harbor — Of the two types of QM loans, this one gives lenders the highest level of legal protection. These are lower-priced loans with interest rates closer to the prime rate. They are typically granted to consumers with good credit histories (less risk). If the borrower ends up in default / foreclosure down the road, the lender would be considered to have legally satisfied the Ability-to-Repay rule. Thus, it would be harder for the borrower to sue the lender in court. However, borrowers can still challenge their lenders in court if they feel the loan falls short of the QM parameters outlined above.
Rebuttable Presumption — These are higher-priced loans that are typically granted to borrowers with lower credit scores. In this context, ‘higher-priced’ refers to a loan with an interest rate that is more than 1.5% higher than the current prime rate. Lenders who grant these types of mortgages will receive a type of legal protection known as rebuttable presumption, which offers less protection than the safe harbor explained above. If the borrower ends up in a foreclosure situation, he or she could still win an ability-to-repay lawsuit if they can prove “the creditor did not consider their living expenses after their mortgage and other debts.”
Below, we have compiled most of the official documents relating to the qualified mortgage (QM) rule, the Ability-to-Repay rule, and the forthcoming qualified residential mortgage (QRM). If we missed any important documentation, please let us know.
Most of these documents were prepared by the Consumer Financial Protection Bureau (CFPB), and can be found on their website: ConsumerFinance.gov.
CFPB Fact Sheet on the New Rules (PDF)
Produced by CFPB, this four-page document is a must-read for anyone seeking to understand the ability-to-repay and qualified mortgage rules. This concise document covers all of the key points. Think of this as a “highlights” document. For more details, see the documents listed below.
Summary of the Ability-to-Repay and Qualified Mortgage Rule (PDF)
This seven-page document offers some additional details on what can and cannot be considered a qualified mortgage. It also covers the underwriting factors lenders must consider when reviewing applicants, in order to meet the Ability-to-Repay requirements. It’s another must-read for lenders, loan officers, and other industry professionals.
Proposed Amendments to the Truth in Lending Act (PDF)
All of these new rules will be added to the Truth in Lending Act, a government regulation created in 1968. New regulations like these must first go through a proposal stage, before they can become law. This 165-page document explains the proposals for the new lending rules.
Final Rule, as Entered Into the Federal Register (PDF)
The Office of the Federal Register published the final rule on January 30, 2013. The length of this document is a bit overwhelming. But it does offer some excellent insight into how these rules came to be (including the various discussions, debates, etc.).
This is the basic definition of a qualified mortgage, as defined by the Consumer Financial Protection Bureau. We will update this page continuously as new details emerge, and as we continue to parse though the full text of this act. We welcome and encourage corrections, suggestions, and other forms of reader support.