VA Issues QM, Safe Harbor Rules

The Veterans Administration has issued an interim final rule defining what constitutes a QM or qualified mortgage under VA loan rules.  The rule, which will be available for public comment until June 9, replaces a temporary rule issued by the Consumer Financial Protection Bureau in January. 

That rule essentially defined all closed-end residential mortgage loans as QMs if they were eligible for purchase or guarantee by FHA, the VA, USDA, or the government sponsored enterprises (GSEs) Fannie Mae and Freddie Mac.  That rule granted QM safe harbor even to loans that did not have the 43 percent debt-to-income ratio required of loans written by other lenders and was to be in effect until January 2021 or until each of the named agencies issued its own QM rule.

The interim VA rule, which became effective on May 9, defines a QM loan with safe harbor for VA purposes as all purchase money loans guaranteed or insured by the VA with the exception of certain interest rate reduction refinance loans (IRRRL)   The VA includes in this rule any loan made directly by VA to a borrower, loans made by a vendor to purchasers of VA properties acquired through foreclosure (REO), and direct Native American loans.

Under the interim rule all IRRRL loans are considered QM loans but not all are eligible for the safe harbor designation.  To receive safe harbor protection the loans must be originated to refinance a loan that has aged a minimum of 6 months and which has not been more than 30 days past due during the preceding six months.  The recoupment fee for all fees and charges financed as part of the loan or paid at closing may not exceed 36 months.  Even where an IRRRL does not meet safe harbor requirements the lender is still entitled to a rebuttable presumption that the loan met the ability-to-repay requirements.  The rule also excludes IRRRLs from the CFPB's income verification requirements if points and fees do not exceed 3% of the total loan amount where that loan amount exceeds 100,000.  

The VA noted that 95,000 of the loans that the VA guaranteed in 2013 exceeded the 43 percent DTI level and about 5,000 would have exceeded the APR limit to qualify for the QM safe harbor. The Department said it issued the interim final rule to ease concerns of veterans, lenders, and investors about the availability of and market for its loans.