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Update: 2015 was a notable year for the Qualified Mortgage rule. The Federal Deposit Insurance Corporation (FDIC) and five other agencies finally completed their definition of the related Qualified Residential Mortgage (QRM) rule, which relates to risk-retention requirements. The agencies have simply aligned QRM with the definition of QM. This change was entered into the Federal Register in December 2014 and takes effect one year from the entry, in December 2015. There are no down-payment requirements in either of the now-aligned rules.
On this page, you’ll find the final definition of the Qualified Mortgage (QM) rule, as of January 2015. This definition was first issued by the Consumer Financial Protection Bureau (CFPB) on January 10, 2013. The rule took effect on January 10, 2014. It has had little impact on the lending industry since then, according to a recent analysis.
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, as defined by CFPB, 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.
Full Definition of a Qualified Mortgage: Updated for 2015
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. The rule took effect in January 2014. Here are the key features of a qualified mortgage in 2015:
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, as defined by CFPB:
- 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.”
[box border=”full”]Note: Regardless of these protection clauses (safe harbor and rebuttable presumption), consumers can still legally challenge their lenders for breaking other federal consumer-protection laws. In other words, these protections do not preclude other types of lawsuits relating to mortgage loans.[/box]
This is the basic definition of a qualified mortgage, as defined by the Consumer Financial Protection Bureau (CFPB). We will update this page continuously as new details emerge. The last update occurred on or about January 1, 2015. We welcome and encourage corrections, suggestions, and other forms of reader support to improve this page.