5 minute read | December.14.2020
The Consumer Financial Protection Bureau last week released two final rules further defining what types of loans can be a “qualified mortgage loan” for purposes of the bureau’s Ability-to-Repay/Qualified Mortgage Rule (ATR/QM Rule). The General QM Final Rule substantially revamps the general rules defining what constitutes a General QM and removes the existing debt-to-income threshold over which a loan cannot be considered a General QM. The Seasoned QM Final Rule creates a new class of QM that allows certain rebuttable presumption QMs and non-QMs to achieve “safe harbor” QM status three years after origination provided the consumer has strong repayment history.
Importantly, the “GSE Patch,” which provides QM status to loans qualifying for sale to Fannie Mae or Freddie Mac, expires for applications submitted before July 1, 2021, at which point the General QM Rule will take effect (although compliance with both rules is permitted 60 days after publication in the Federal Register).
General QM definition
The bureau’s General QM Final Rule removes the existing requirement limiting QMs to a maximum 43% DTI ratio and replaces it with a price-based standard. Specifically, a mortgage qualifies for the QM safe harbor if it is a first-lien loan with an annual percentage rate that does not exceed the APOR for a comparable transaction by more than 150 basis points. Those with an APR above 150 basis points but not more than 225 basis points above the APOR for a comparable transaction qualify for rebuttable presumption QM status. The CFPB’s proposed rule had capped the rebuttable-presumption threshold at 200 basis points. The new General QM definition also includes a threshold of 350 basis points for subordinate-lien transactions and includes tiered higher thresholds for smaller loans and those secured by manufactured homes.
New General QM loans still must comply with the existing requirements limiting loan features, terms, points, and fees, mandating income and asset verification, and requiring underwriting based on existing payment calculation principles. Loans that meet the criteria for a QM issued by FHA, VA, USDA, and the Rural Housing Service will continue to be considered QMs.
Critically, the General QM Final Rule still requires a creditor to “consider” the consumer’s monthly DTI ratio or residual income (along with income or assets and debts, alimony, and child support), but the bureau expressly declined to provide clear guidance as to what DTI level it would consider non-compliant. Although the bureau has removed in its entirety Appendix Q, which set forth underwriting guidelines that, if followed, would offer lenders a safe harbor from ability-to-repay challenges, the bureau does provide a safe harbor for creditors using verification standards from Fannie Mae, Freddie Mac, FHA, VA, and USDA. Creditors may “mix and match” provisions from more than one of those standards but they also must maintain written policies and procedures for analyzing and documenting consumer income, debt, and DTI or residual income. Documenting verification has been one of the most difficult compliance aspects of the Ability-to-Repay Rule, and it will likely remain important for the creditor to document its policies and procedures, as well as its loan-level efforts to follow them (see, e.g., Elliott v. First Federal Community Bank of Bucyrus, 821 Fed.Appx. 406 (6th Cir. 2020)(not selected for publication in the Federal Reporter).
The final rule also adopts special criteria for determining the APR on loans with interest rates that may or will change within the first five years. For those loans, the creditor must determine the APR by treating the maximum interest rate that may apply during that five-year period as the interest rate for the full term of the loan. It may be difficult for adjustable-rate loans to meet the QM standards, which will continue to limit their availability for higher-risk categories of prime borrowers.
Seasoned QM definition
The bureau issued the second final rule to create a new category of “Seasoned QMs” for some loans that were either non-QM loans or were “rebuttable presumption” QMs at consummation. The bureau is creating this new category in the hope that “the increased compliance certainty and reduction in litigation risk associated with providing a conclusive presumption of compliance for Seasoned QMs will encourage creditors to lend to consumers whose loans may fall outside of the QM safe harbor at consummation but who nonetheless have the ability to repay.”
The new QM category will provide a safe harbor for loans that (1) are secured by a first lien, (2) have a fixed rate, with regular, substantially equal periodic payments that are fully amortizing and do not have any balloon payments; (3) have a loan term of 30 years or less; and (4) are not a “high cost” loan as defined in Regulation Z. They must also comply with the general limitations on prepayment penalties and points and fees for General QMs.
To achieve the safe harbor, the loan must have no more than two delinquencies of 30 or more days and no delinquencies of 60 or more days at the end of 36 months after the first payment, during which time they must have been held in portfolio by the originating creditor or first purchaser (it allows for a one-time transfer of a whole loan). Creditors may generally accept payments for less than the full periodic payment (including escrow) without treating them as a delinquency if the servicer does not treat them as delinquent pursuant to the Reg. X servicing rules, they are deficient by $50 or less, and there are three or less such deficient payments during the seasoning period. The final rule also allows for payments to be missed without penalty if related to an accommodation due to disaster or pandemic-related national emergency.
The many limits on this new private market category—in particular the limitation to fixed rate loans and the limits on subsequent sales—raise the question of whether this new category can become a useful tool for lenders to reach underserved categories of consumers who, for whatever reason, do not qualify for FHA, VA, or USDA loans.
The new category of QM applies to covered transactions for which creditors receive an application on or after the effective date of the revised rule, meaning no existing non-QM or rebuttable presumption QM loans already in a lender’s portfolio are eligible to become Seasoned QMs.
If you have any questions regarding these two final rules, please contact an Orrick attorney with whom you have worked in the past.