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Also known as the qualifying mortgage rule, the QM rule is a standard rule applied to potential home buyers. Mortgage brokers must use this standard when asked to consider if a buyer is capable of repaying their mortgage.
Before we get into the specifics of the QM rule—a little history! The QM Rule is a small portion of regulation Z, which is contained within The Truth in Lending Act (TILA). TILA is a federal law that was enacted in 1968 to help protect consumers when they applied for credit extensions with lenders. TILA was implemented by the Federal Reserve Board through a series of regulations.
The Federal Trade Commission (FTC), enforces Regulations E, M, and Z. These same regulations are regulated by the Bureau of Consumer Financial Protection (CFPB), which was established in 2011 in response to the predatory lending practices that led to the 2008 housing bubble.
Some of the most important aspects of TILA are borrower information disclosures. Information such as a loan’s APR (annual percentage rates), general loan terms, and total costs the borrower will have to take on must be disclosed before extending credit.
The last time the Bureau of Consumer Financial Protection amended the QM rule was in 2013.
During its last amendment, the QM rule was defined as having two main criteria:
To see the final ruling made in 2013, you can find it on the Federal Register.
However, changes are coming to the QM rule. Back in December of 2020, the CFPB issued a final ruling that updated the current QM Rule. The new rule states that a new pricing threshold will replace the 43% debt-to-income limit. A price-based approach will give lenders relief for loans capped at 150 basis points (or 1.5%) above the prime rate. This means that mortgage brokers will have more discretion when it comes to lending money, because it will make lending guidelines more flexible and more secure.
With the new QM rule the QM Patch would be eliminated. The QM Patch is a loophole that has allowed borrowers with high debt to income ratios (above 43%) to buy homes for years.
Although the QM Rule was enacted by the CFPB to verify a borrower’s ability to repay their mortgage; Fannie Mae and Freddie Mac are not bound by this rule. This loophole is known as the QM Patch. because of it, Fannie Mae and Freddie Mac have an unfair advantage in the secondary market.
The QM patch gives Fannie Mae and Freddie Mac more flexible lending guidelines, making them more popular than other private mortgage lenders. This is because due to the QM Patch, Fannie and Freddie have been able to corner the market of less qualified home buyers.
The new QM rule would eliminate this advantage, allowing for other private mortgage lenders to compete with Fannie and Freddie, while improving the quality of home buying candidates. Once the new QM rule becomes active in 2022, it will allow more qualified buyers to buy homes, increasing the security and sustainability of housing in the US.
While the QM rule was set to expire in January 2021, it’s expiration has been delayed until October 2022. This ensures that Fannie Mae and Freddie Mac will get one more year of high mortgage profits; despite the GSEs already have an unfair advantage due to the QM patch. The rule delay also takes into consideration how difficult 2020 was financially for potential borrowers. Many may not be able to qualify for a home once the new rule is set in 2022, so it's better if they apply now, while the previous QM rule is still in place.
The year delay will serve as a sort of grace period before these big changes take place.
Sealing off the QM patch for good will decrease the number of home buyers. However, it will also simultaneously increase the quality of home buying candidates. With new housing starts kicking off across the country, this is a long-awaited next step to even the playing field. It will make lending more secure, so that we never have to worry about the threat of another housing bubble.
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