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Dechert LLP

APPENDIX A

QM Status Under the ATR Rules

The difference between a “QM Safe Harbor” loan and a “QM Rebuttable Presumption” loan is the rate of interest charged:

  • QM Safe Harbor loans have a rate that does not exceed the average prime offer rate (“APOR”) by 1.5% or more (or 3.5% or more on subordinate lien loans).  
  • QM Rebuttable Presumption loans have a rate that exceeds the APOR by 1.5% or more (or 3.5% or more on subordinate lien loans).

QM Safe Harbor Loans. There will be four ways that a loan can qualify as a QM Safe Harbor loan. 

Standard QMs. These loans must meet the following requirements:

  • Have regular periodic payments that are substantially equal, subject to interest rate adjustments;
  • Do not have negative amortization;
  • Do not defer principal;
  • Have no balloon payments;
  • Points and fees may not be excessive (those exceeding 3% of the total loan amount on a loan exceeding $100,000);
  • Term cannot exceed 30 years;
  • Must be underwritten based on the maximum interest rate during the first five years;
  • Must be based on verified current or reasonably expected income or assets and current debt obligations and child support; and
  • Monthly debt-to-income (“DTI”) ratio may not exceed 43% as calculated under the ATR Rule’s Appendix Q. 

Government Related QMs. Loans that are eligible to be purchased, guaranteed, or insured (as applicable) by certain government entities, including the Federal Housing Administration, or by Fannie Mae or Freddie Mac (as long as they remain in conservatorship) (“Government Related Loans”) will be treated as QM loans, provided that they: 

  • Have regular periodic payments that are substantially equal, subject to interest rate adjustments;
  • Do not have negative amortization;
  • Do not defer principal;
  • Have no balloon payments;
  • Do not have excessive points and fees; and
  • Have a term that does not exceed 30 years.  

Significantly, Government Related Loans do not have to meet the 43% maximum DTI ratio that applies to Standard QMs. A Government Related Loan does not actually have to be purchased, guaranteed or insured by a government agency or Fannie Mae or Freddie Mac. It simply must be eligible to be purchased, guaranteed or insured and meet the credit-related requirements. 

Small Creditor QMs. Loans made by small creditors – those that had total assets of $2 billion or less at that end of the prior calendar year, and together with all affiliates originated 500 or fewer first lien mortgages during the preceding calendar year – may qualify for QM status. Qualifying loans must meet all Standard QM loan requirements except for the 43% DTI requirement and without regard to the standards in Appendix Q. A qualifying loan will lose its QM status if it is held in portfolio for less than three years, subject to certain exceptions.

Small Rural and Underserved Area Balloon Loan QMs. Balloon loans made by small creditors that qualify as small rural or underserved area creditors may qualify for QM status. Qualified loans must meet certain standard QM requirements, but are not subject to the 43% maximum DTI ratio. A qualifying loan will lose its QM status if it is held in portfolio for less than three years, subject to certain exceptions. The QM balloon loan treatment will be available to all small creditors for loans made on or before January 10, 2016.

A creditor that makes a QM Safe Harbor loan will be deemed to have met the ATR Requirement. A borrower may, however, assert that the loan does not meet all of the requirements for a QM loan. If the borrower is successful on such a claim, the borrower will likely seek to challenge the compliance of the loan with the ATR requirement. As a practical matter, this may cause some creditors to conduct an ATR compliance process as back-up to a potential failure of loans to comply with QM requirements.  

QM Rebuttable Presumption Loans. A loan that falls into the rate category for a QM Rebuttable Presumption loan can qualify for QM status if the loan meets the requirements for any of the four QM categories described above for QM Safe Harbor loans. Assuming those requirements are met, the loan will be presumed to have complied with the ATR Requirement. As noted above, a borrower may challenge the QM status of loan and, if successful, the lender will likely face an ATR compliance challenge. Even if a Rebuttable Presumption loan meets the standard QM requirements, a borrower can still challenge the QM treatment of the loan by demonstrating that specified obligations of which the creditor was aware at the time of consummation of the loan, would leave the borrower with insufficient residual income or assets to meet living expenses (including recurring non-debt obligations known by the creditor at the time of consummation). If the borrower is successful in such a claim, the borrower will likely seek to challenge the compliance of the loan with the ATR Requirement.  

Non-QM ATR Loans. The ATR Rule treats non-QM loans very differently from QM loans. QM loans must fit within a particular template specified by the Bureau. In sharp contrast, the ATR Rules do not establish any specific requirements for non-QM loans, and a creditor is free to establish its own underwriting standards for non-QM loans. In making non-QM loans, however, a creditor must consider certain factors, including the following: 

  • Current or reasonably expected income or assets;
  • Monthly payment on the covered loan;
  • Monthly payment on a simultaneous loan secured by the same property;
  • Monthly payment for mortgage-related obligations;
  • Current debt obligations, alimony and child support; 
  • Monthly DTI ratio or residual income; and 
  • Credit history.

A borrower may seek to challenge a non-QM loan’s ATR Requirement compliance based on a challenge to the lender’s non-QM underwriting policy and/or the specific application of the policy to the borrower’s individual loan. In this regard, some borrowers may seek broad discovery as to the creditor’s non-QM underwriting standards.  

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