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  • Jan 27, 2014
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What is QM?

The Dodd-Frank Act requires the Consumer Financial Protection Bureau (CFPB) to issue and implement regulations requiring creditors to assess a consumer’s ability to repay a residential mortgage and define “qualified mortgages” that presumptively comply with ability-to-repay(ATR) requirements

Effective January 10, 2014, The ATR / Qualified Mortgage rule requires a creditor to make a reasonable and good faith determination at or before loan closing that the consumer will have a reasonable ability to repay the loan according to its terms

QM / Ability-to-Repay Requirements:
Income, assets and debts must be documented and verified
A borrower’s monthly debt, including the mortgage, cannot be more than 43% of the borrower’s monthly pre-tax income
The qualifying payment must be based on the maximum possible rate in the first 5 years

QMs may not have the following risky loan features:
– An “interest-only” period
– Negative amortization
– Balloon payments
– Graduated payments
– Loan term greater than 30 years
– Points and fees greater than the following:

Does NOT include:

Realtor fees
Appraisal costs (unless third party affiliate)
Title costs (unless 3rd party affiliate)
Credit reports

Points and Fees included:

Fees paid to lender
Fees paid to lending affiliates
Mortgage Broker Compensation
Discount points (up to 2 discount points may be excluded if a test is performed to determine if the interest rate reduction is consistent with the discount points paid)

Citi Credit Policy Under QM

40 year term mortgages no longer offered
Interest Only Loans only offered through the High Net Worth Program
5-1 ARM 5-2-5 no longer offered; continue to offer 5-1 ARM 2-2-5
Maximum rate increase of 2% after 5-year fixed period
No more than 2% increase over the original note rate per adjustment period
No more than 5% increase over the original note rate over the life of the loan
HPML transactions will be limited to FHA/VA (non-streamline) and NACA/Bond Programs
Maximum DTI 43% for general QM and Agency QM loans the DTI must meet agency guidelines
The Fixed Rate Home Equity Loan must comply with QM requirements including maximum DTI of 43%
Temporary / partial term buy downs no longer allowed
Non-taxable income must use the borrower’s previous year tax rate for the gross up calculation. Non taxable must be grossed up if the borrower needs the additional income to qualify

QM Implications
Qualified Mortgage Loans are presumed to satisfy the ATR rule Non-Qualified Mortgage Loans must be in compliance with the ATR rule but still are considered Non-Qualified Mortgage Loans.

Non-QM loans include:

Negative amortization
No-doc loans
Balloon payment loan

New ATR Underwriting
The customer’s ability to repay must be verified through third party documents considering a minimum of eight underwriting factors:

Credit history
Current and expected income or assets
Employment status
Monthly debt to income ratio or residual income
Current debt obligations, alimony, and child support
The monthly payment for mortgage-related obligations
The monthly payment on the subject loan and
The monthly payment on any simultaneous loan

New Appraisal Rule

Borrowers for first-lien loans must to be provided with copies of all appraisals, as well as other written valuations, developed in connection with the application, whether or not the applicants request copies. If more than one appraisal or written valuation is received, the borrower will be sent all.
The copies must be provided promptly upon completion or 3 business days prior to consummation, whichever is earlier
The above requirement applies whether the credit is extended or denied, or the application is incomplete or withdrawn
Copies of the appraisal or other written valuation may be provided by mail or electronically subject to E-sign Act Requirements
A disclosure must be provided to the applicant no later than 3 business days after receiving the application notifying the applicant of their right to receive copies of all written appraisals developed in connection with their application

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