CFPB Proposes Changes to Qualified Mortgage Definition; Delays Expiration of “GSE Patch” Until Final Rule Becomes Effective

On June 22, the CFPB released two Notices of Proposed Rulemaking (NPRM) to address the January 2021 expiration of the so-called GSE Patch for the Qualified Mortgage (QM) Rule. The GSE Patch provided QM status to mortgage loans eligible for purchase by either of the GSEs even if the loans did not otherwise meet the criteria for a QM under the “General QM” standard provided they comply with the same loan-feature prohibitions and points-and-fees limits as General QM loans. Notably, the GSE Patch allows loans to exceed the 43 percent debt-to-income ratio limit required under the General QM standard and also does not require creditors to use Appendix Q to Regulation Z to calculate the consumer’s income and debt. 

In the first NPRM, the Bureau proposes to remove the General QM loan definition’s 43 percent DTI limit and replace it with a price-based threshold. In the second NPRM, the Bureau proposes to delay the expiration of the GSE Patch until the effective date of final amendments to the General QM definition in order to facilitate a smooth and orderly transition away from the GSE Patch definition of a Qualified Mortgage.

Under the proposed rulemaking, a loan would meet the General QM loan definition if the APR exceeds APOR for a comparable transaction by less than 200 basis points as of the date the interest rate is set. For variable rate loans, the operative APR is the maximum interest rate that may apply during the first five years. The proposal would provide higher thresholds for loans with smaller loan amounts and for subordinate-lien transactions. The proposed rule would also eliminate Appendix Q and clarify the requirements to consider and verify a consumer’s income, assets, debt obligations, alimony, and child support are in accordance with the more flexible standards set forth in the Ability to Repay Rule. The proposal would preserve the current 150 basis point APR/APOR threshold separating safe harbor from rebuttable presumption first-lien QMs and 350 basis points for subordinate-lien transactions.

Although the CFPB is proposing to remove the 43 percent DTI limit and adopt a price-based approach, the Bureau requests comment on certain alternative approaches that would retain a DTI limit but would raise it to between 45 and 48 percent and provide a more flexible set of standards for verifying debt and income in place of Appendix Q.

If you have any questions about the proposed changes or other related issues, please visit our Financial & Fintech Advisory practice page or contact an Orrick attorney with whom you have worked in the past.