VA Issues Interim Final Rule Defining Qualified Mortgages
By: Jonathan D. Jaffe, Eric Mitzenmacher
On May 9, the United States Department of Veterans Affairs (“VA”) issued an interim final rule defining which VA-guaranteed and VA-originated loans will have qualified mortgage (“QM”) status under the Truth-in-Lending Act’s (“TILA’s”) Ability to Repay (“ATR”) rule.
TILA’s ATR rule, issued by the Consumer Financial Protection Bureau (“CFPB”), provided temporary QM status to all loans “eligible to be guaranteed, except with regard to matters wholly unrelated to ability to repay, by the [VA]” as long as they: (i) provided for regular payments that were substantially equal except for the effect of an adjustable rate feature, and that did not have an interest-only, negative amortization, or balloon feature in most cases; (ii) had a loan term no longer than 30 years; and (iii) had “points and fees” not exceeding thresholds established by the ATR rule (3 percent of the total loan amount for loans of $100,000 or more).
Loans meeting the definition of a temporary VA-eligible QM were deemed to comply with the ATR rule, as “safeharbor QMs,” provided they were not “higher-priced covered transactions” (i.e. loans for which the annual percentage rate (“APR”) did not exceed the average prime offer rate (“APOR”) (as both terms are defined under Regulation Z) by 1.5 percentage points or more for a first lien or 3.5 percentage points or more for a subordinate lien). Otherwise, they were entitled to a rebuttable presumption of compliance.
Temporary QM status for VA-eligible loans was initially slated to run through 2021. The CFPB’s rule, however, contemplated that the VA would act to adopt permanent QM definitions prior to that point. Accordingly, the CFPB’s rule provided that temporary QM status would expire “on the effective date of a rule issued by [the VA] . . . to define a qualified mortgage.” As the VA’s new interim final rule became effective upon its publication in the Federal Register, the temporary QM status initially provided to certain VA-eligible loans is now replaced with the VA’s definition.
Under the VA’s rule, most VA-guaranteed and VA-originated loans will be safeharbor QMs. Those that are not safeharbor QMs will be “rebuttable presumption QMs.” Specifically:
(i) All purchase money loans that are guaranteed or insured by the VA will be safeharbor QMs;
(ii) Most refinances that are guaranteed or insured by the VA will be safeharbor QMs. Interest Rate Reduction Refinance Loans (“IRRRLs”), however, will only will be safeharbor QMs if the loan being refinanced was originated at least six months before the new loan’s closing date, the recoupment period for allowable fees and charges financed as part of the loan or paid at closing does not exceed 36 months, and the loan meets all other requirements of a VA-guaranteed IRRRL. Otherwise, IRRRLs will be rebuttable presumption QMs;
(iii) All loans that the VA makes directly to a borrower (including VA Direct Loans, Native American Direct Loans, and Vendee Loans) will be safeharbor QMs.
In addition to defining IRRRLs as QMs, the VA interim final rule exempts many IRRRLs from the enhanced income verification requirements of the CFPB’s ATR rule. The VA believes the exemption is necessary to avoid origination delays of two to four weeks on IRRRLs that would have a costly effect on veterans and potentially reduce the availability of the loans. The VA was unwilling to exempt all IRRRLs, however, due to concern that they could put veterans at risk of equity-stripping if misused. Therefore, IRRRLs are exempt from enhanced income verification requirements if: (i) the veteran is not 30 days or more past due on the loan being refinanced; (ii) the IRRRL does not increase the outstanding balance, except to the extent of fees and charges allowed by the VA; (iii) “points and fees” do not exceed 3 percent of the total new loan amount and comply with VA’s allowable fees and charges; (iv) the IRRRL reduces the interest rate for the new loan or replaces an adjustable rate loan with a fixed-rate loan; (v) the IRRRL is a fully amortizing loan that complies with VA regulations; (vi) the IRRRL does not have a balloon payment feature; and (vii) both the loan being refinanced and the new loan satisfy all other VA requirements. IRRRLs not meeting the above seven criteria will have to meet income verification requirements under VA regulations and the CFPB’s ATR rule.
Finally, the VA rule provides that an indemnification demand or resolution does not per se remove the QM status of the loan, even though it may result from facts that could allow a change to QM status.
As an interim final rule, the VA’s QM definition was issued with a request for comment regarding the ultimate final rule. Comments are due within 30 days of publication of the rule, and the VA has targeted 90 days as the time period within which it anticipates issuing a final rule.