On May 9, 2014, the Department of Veterans Affairs (the “VA”) issued an interim final rule defining  what constitutes a “qualified mortgage” (“QM”) for purposes of the loans it guarantees, insures, or  originates.1 The VA stated that, to quell persistent uncertainty among lenders regarding the  treatment of VA loans under the temporary QM definition established by the Consumer Financial  Protection Bureau (“CFPB”), it was adopting a rule designating all VA loans as QMs and all VA loans  other than a subset of VA streamlined refinancings as safe harbor QMs.

The following chart illustrates the QM status of VA loans:

Click here to view the table.

EFFECTIVE DATE

The VA’s rule took immediate effect upon publication on May 9, 2014, but the VA will accept  comments on potential amendments and clarifications until June 9, 2014. The VA stated that it would  exercise all reasonable efforts to publish a final rule addressing the comments in early August in  order to provide lenders with certainty.6

INCOME VERIFICATION FOR STREAMLINED REFINANCINGS (IRRRLS)

The VA explained that the purpose of its IRRRL streamlined refinancing program “is to place  veterans into a better financial position by (i) reducing their interest rate in effect lowering  their payment, (ii) reducing the term of the loan which would reduce the total of payments on the  loan, or (iii) reducing their concern for market fluctuations by converting a loan from an ARM to a  fixed rate.”7   IRRRLs can only be used to refinance VA guaranteed loans and to pay for closing costs. IRRRLs cannot be used as “cash  out” refinancings.8

Noting that the CFPB declined to exempt IRRRLs from the ability-to-repay requirement under its rule  due to consumer advocate concerns about serial refinancing and equity stripping, the VA subjected  refinancings of loans that had not been “seasoned” for at least 6 months to the rebuttable  presumption instead of the safe harbor.9 In addition, the VA established the following requirements  for IRRRLs that are exempt from income verification requirements:

  1. The veteran is not 30 days or more past due on the existing loan;
  2. The IRRRL would not increase the principal balance outstanding on the existing loan,  except to the extent of fees and charges allowed by VA;
  3. Total points and fees payable in connection with the IRRRL will not exceed 3% of the new  loan amount (in addition to meeting VA limitations on fees and charges); i
  4. The interest rate on the IRRRL will be lower than the interest rate on the existing loan,  unless the borrower is refinancing from an adjustable rate to a fixed-rate loan under VA  guidelines;
  5. The IRRRL will be subject to a payment schedule that will fully amortize the loan  consistent with VA regulations;
  6. The terms of the IRRRL will not result in a balloon payment; and
  7. Both the existing loan and the IRRRL satisfy all other VA requirements.10

INDEMNIFICATION DEMANDS

Like the CFPB and the Department of Housing and Urban Development (“HUD”) for loans insured by the  Federal Housing Administration (“FHA”), the VA stated that an indemnification demand or resolution  of a

demand “may result from facts that could allow a change to qualified mortgage status, but the  existence of an indemnification does not per se remove qualified mortgage status.”11

OTHER DIFFERENCES FROM CFPB TEMPORARY QM DEFINITION

Emphasizing its mission of serving veterans and its strong underwriting requirements and fee and  term limitations, the VA stated that, “[t]o the extent there are differences between CFPB’s  definition and VA’s, VA intends for its definition of qualified mortgage to loans guaranteed,  insured, or made by VA to preempt rules that may seem contrary to VA’s.” The VA specifically noted  that “[t]his would include those loans which would fit under VA’s definition, but not necessarily  under the CFPB definition (i.e., negative amortization, documentation requirements for IRRRLs,  minimum FICO score documentation, and . . . debt-to-income ratios).”12

Significantly, except as noted above for certain IRRRLs, it appears that VA loans are not subject  to the requirements in the CFPB’s rule generally limiting points and fees on QMs to 3% of the loan  amount. However, the VA imposes its own fee limitations.13

WHAT’S LEFT?

The VA’s rule follows the adoption of a QM rule for FHA loans by HUD in December 2013.14 The only  agency that has not thus far used its authority to adopt its own QM definition is the Department of  Agriculture. As a result, the CFPB’s temporary QM definition will continue to apply to loans  guaranteed by the Department of Agriculture or insured by the Rural Housing Service.15 Similarly,  the CFPB’s temporary QM definition will continue to apply to loans that are eligible to be  purchased or guaranteed by Fannie Mae, Freddie Mac, or any successor entity for as long as those entities remain under the  conservatorship or receivership of the Federal Housing Finance Authority or until January 10, 2021,  whichever is earlier.16 .16