Are you familiar with a Qualified Mortgage (QM) and the new rules surrounding QMs beginning in early 2014? If not, you’re in the right place. Quicken Loans team members Shawn Krause, Executive Vice President of Government Relations and Amy Bishop, Deputy Corporate Counsel took the time to explain the new rules. If you’re interested in finding out about QM and how the new rules may impact you, take a look at the discussion I had with Shawn and Amy.
What Is a Qualified Mortgage?
Shawn: A Qualified Mortgage is a result of the Dodd-Frank Act passed in 2010. The QM rule essentially creates new categories of mortgages and imposes minimum underwriting standards for most home loans, which is referred to as the ability to repay requirement. To qualify for a QM loan, you must pass the points/fees test. It also removes exotic mortgages from the equation, meaning most lenders will not be offering no-documentation loans, interest only loans, negative amortization loans or balloon mortgages since these types of loans cannot be QM loans. That aspect of the law will not impact us, as we don’t mess with those products.
Amy: It’s a big change. It’s a 1,000-page rule that does several different things from a lender perspective such as negating certain loan products, meaning a full-documentation loan is necessary.
Why Are These New Rules Being Put into Place?
Amy: After the financial crisis, Congress came to save the day and passed the Dodd-Frank Act. It’s about 2,000 pages in direct response to the mortgage meltdown. The Consumer Financial Protection Bureau (CFPB) is the result, and along with that comes enacting certain rules to make sure what we went through never happens again.
When Do the Qualified Mortgage Rules Take Effect?
Shawn: The new rules go into effect on January 10, 2014.
How will the New Rules Impact Clients?
Amy: A QM has to meet loan parameters. The mortgage has to be 30 years or less, a fixed-rate or an adjustable rate mortgage and meet the points and fees test. What the points and fees test does is impose a maximum that lenders can charge clients for closing fees based on their loan amount.
Shawn: Overall, it’s going to consolidate the mortgage industry and leave people with fewer choices. The new rules could potentially hurt jumbo loans, as well as loan amounts of $150,000 and lower. Even with the tiered points and fees test for lower loan amounts, more loans may not pass the test and therefore more clients may potentially not be able to qualify.
How Is This Different from Anything that We’re Already Doing?
Amy: These are radical, brand new changes. For loans outside of QM, the underwriting requirements are probably going to become more stringent. Because of the increased regulatory scrutiny, many lenders are questioning if they will lend outside the new QM parameters. The rules surrounding what is considered a safe mortgage will be defined like never before.
How will the New Rules Affect Quicken Loans as a Lender?
Amy: We came through the financial crisis where many people offered a number of exotic mortgages. Because of that, foreclosure rates became sky-high and Congress said lenders didn’t do their job to underwrite appropriately to see if people could truly afford to pay their mortgages. Many defaulted. Because of that, Congress wanted all loans to meet an ability to repay standard to ensure clients can afford their mortgage payments. Luckily, we never dabbed in the exotics loan products, which is a factor in the overall outstanding health of our company.
How Are We Handling the Changes as a Business?
Amy: This is just one of seven rules that landed in our lap in January, which comes out to about 1,000 pages of rules. Business and IT are doing a lot of programming and we are making a lot of adjustments to account for these new rules.
Shawn: Quicken Loans is a process-oriented company, so we are moving forward with changes as we would with any other change that comes our way. Anytime there are regulation changes it can seem we can’t focus our resources on innovative things. Our team is dedicated to making this work, by utilizing the proper technology and compliance resources.
Now that you’ve heard about the new QM rules, what do you think? Do you have any questions? Let us know in the comments below!