Consequences of a Triggering "Higher-Priced" Status?
For lenders avoiding anything "higher-priced" but possibly considering the possibility, here's a summary of the consequences.
Some loans are considered "higher-priced." Do we allow this loan? Is it worth denying the loan outright or perhaps reducing the interest rate? Well that depends on the consequences of a loan being higher-priced.
HPML and QM Rules Both Apply
The term "higher-priced" applies both with the Higher-Priced Mortgage Loan Rules and also the Qualified Mortgage Rules. As we'll see, the test for what constitutes a higher-priced transaction is mostly the same, but with a special QM rule for small creditors.
**Note that QM has a broader scope than the HPML Rules because it will also apply to second homes. HPML Rules apply to all closed-end consumer credit secured by a principal dwelling. QM Rules apply to all close-end consumer credit secured by a dwelling.
"Higher-Priced:" QM versus HPML Tests
A loan may be higher-priced for HPML purposes but not for QM purposes.
HPML Test: A loan is higher-priced for the HPML rules when:
APR exceeds APOR by 3.5 points for subordinate lien loans
APR exceeds APOR by 2.5 points for jumbo loans
APR exceeds APOR by 1.5 points for all other loans
QM Test: The QM test for "higher-priced" is very close, but slightly different. Therein lies the confusion. A loan is higher-priced for QM Rule purposes when:
APR exceeds APOR by 3.5 points for Small Creditor Portfolio QMs APR exceeds APOR by 3.5 points for subordinate lien loans
APR exceeds APOR by 1.5 points for all other loans
Higher-Priced Consequences: HPML & QM
Now let's look at the different consequences of being higher-priced under first HPML Rules and then QM Rules.
1. HPML Consequences: The consequences of a loan being an HPML are not, in my humble opinion, as terrible as many make them out to be. There are basically three consequences:
First, mandatory escrow applies. So you'll need to escrow for hazard insurance and property taxes. No big deal, right? Second, a full appraisal is required - no skating by with an AVM and drive-by if this happens to be a small home equity loan that you're fast-tracking. But there are exceptions for loans that satisfy Qualified Mortgage requirements; mobile home loans; construction loans; and a few other less likely situations. Third, a second appraisal is required where the Seller is flipping the house higher price. More precisely, it is required where either
(a) Seller bought property within last 90 days and our Borrower is paying 10% more than Seller did; or (b) Seller bought property within last 91-180 days and our Borrower is paying 20% more than Seller did.
2. QM Consequences: The result of a loan being higher-priced for QM purposes works a little differently. A higher-priced transaction under QM loses the full "safe harbor" or complete presumption of compliance with the ability-to-repay requirements. So where a loan otherwise meets QM requirements, a loan that is higher-priced only receives a partial safe harbor.
With a full QM safe harbor, there is a non-rebuttable presumption of compliance. With the partial QM safe harbor, there is a rebuttable presumption of compliance. So any court or regulator assumes the lender is compliant, but the borrower has the ability to prove otherwise. While the QM Safe Harbor has not been tested in the courts, many are pessimistic about the value of the partial safe harbor. To speak plainly, it is my opinion the higher-priced QM is not much better than a non-QM, making it more important to avoid classification as higher-priced if possible. I would consider any higher-priced QM equivalent to a non-QM for risk purposes.
But note:
If the creditor is originating this as a Small Creditor Portfolio QM, it might still be safe under the QM test even if it is higher-priced for HPML purposes
If the creditor is originating this as a Non-QM, then it doesn't matter whether it is higher-priced for QM purposes - in either case we won't get the QM presumption of compliance.
Case Study
We lock a 30-year fixed rate loan with a 5.27 APR on March 17th. By checking the FFIEC APOR calculator (available here), I see that the APOR that applies is 3.72. That means the APOR exceeds the APR by 1.55.
If this were a subordinate lien, then we're well within tolerance on both HPML and QM higher-priced tests. But it's not; this is 1st lien transaction. It's also not a jumbo loan, which would give us more flexibility under the HMPL test (but not QM).
To me, this example comes down to what category of QM we're working with (if any). If this is a Small Creditor Portfolio QM (or a non-QM for that matter), I'm not worried about this being higher-priced under the HMPL test. It will not be higher- priced for QM purposes. We can manage the escrow and potential appraisal requirements.
But if this is a Regular QM or GSE QM (aka Temporary or Fannie/Freddie QM), then to me that tips the scale. In this case, we have a loan that is BARELY higher-priced for both HPML and QM purposes. We're only .05 points over! I would take a hard look at how we can lower the APR enough to bring this under the threshold and avoid both HPML and QM issues in one fell swoop.
In Other News:
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"There's a silly notion that failure's not an option at NASA. Failure is an option here. If things are not failing, you are not innovating enough."
- Elon Musk