Banking and Finance Law Daily CFPB issues final rules regarding Qualified Mortgage loans
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Friday, December 11, 2020

CFPB issues final rules regarding Qualified Mortgage loans

By Colleen M. Svelnis, J.D.

The CFPB has finalized two Qualified Mortgages rules for the Enterprises, creating a separate category of QMs, and replacing the debt-to-income ratio requirement for QMs.

The Consumer Financial Protection Bureau has finalized two rules affecting Qualified Mortgage loans. The first final rule creates a new category for QMs—Seasoned QMs—for first-lien, fixed-rate covered transactions that have met certain performance requirements. The Bureau also issued a second final rule, the General QM Final Rule, replacing the current requirement for General QM loans that the consumer’s debt-to-income ratio (DTI) not exceed 43 percent with a limit based on the loan’s pricing. According to the Bureau, in adopting a price-based approach to replace the specific DTI limit for General QM loans, the Bureau determined that a loan’s price is a strong indicator of a consumer’s ability to repay and is a more holistic and flexible measure of a consumer’s ability to repay than DTI alone. The final rules are effective 60 days after publication in the Federal Register.

DTI ratio replaced. The CFPB has issued a final rule amending the General QM loan definition in Regulation Z. Among other things, the final rule removes the General QM loan definition’s 43 percent DTI limit and replaces it with price-based thresholds. The Bureau replaced the DTI approach because it concluded that a loan’s price, as measured by comparing a loan’s annual percentage rate (APR) to the average prime offer rate (APOR) for a comparable transaction, is a strong indicator of a consumer’s ability to repay and a more holistic and flexible measure of a consumer’s ability to repay than DTI alone.

A loan would meet the General QM loan definition only if the APR exceeds APOR for a comparable transaction by less than two percentage points as of the date the interest rate is set. Although the rule removes the 43 percent DTI limit from the General QM loan definition, it does require that the creditor consider the consumer’s income or assets, debt obligations, and DTI ratio or residual income and verify the consumer’s current or reasonably expected income or assets and the consumer’s current debt obligations, alimony, and child support. The current threshold separating safe harbor from rebuttable presumption QMs would be preserved, under which a loan is a safe harbor QM if its APR exceeds APOR for a comparable transaction by less than 1.5 percentage points as of the date the interest rate is set.

Changes from proposal. After reviewing the comments received in response to its Proposed Rule (see Banking and Finance Law Daily, June 23, 2020), the Bureau made some changes intended to reduce uncertainty throughout the origination process. The final rule clarifies the operation of the rule’s effective date and mandatory compliance date, including clarifying that the effective date and mandatory compliance date are linked to the date the creditor received the consumer’s application. Additionally, for transactions subject to TRID, creditors determine the date the creditor received the consumer’s application, for purposes of the final rule’s effective date and mandatory compliance date, in accordance with the TRID definition of application in § 1026.2(a)(3)(ii). For transactions that are not subject to TRID, creditors can determine the date the creditor received the consumer’s application, for purposes of this final rule’s effective date and mandatory compliance date, in accordance with either § 1026.2(a)(3)(i) or (ii).

The final rule adopts a mandatory compliance date of July 1, 2021, with an optional early compliance period between the effective date 60 days after the publication in the Federal Register and July 1, 2021. The Bureau declined to adopt a longer implementation period because the Bureau concluded that a six-month period gives creditors and the secondary market enough time to prepare to comply with the amendments in the final rule.

Seasoned Mortgages. The CFPB also issued a final rule that modifies the rules surrounding Qualified Mortgages (QM) to include a new category of "seasoned" qualified mortgages. The Bureau is finalizing the rule largely unchanged from the proposal (see Banking and Finance Law Daily, Aug. 19, 2020). The Bureau’s stated primary objective with the Final Rule is to ensure access to responsible, affordable mortgage credit. To be considered a Seasoned QM, loans would have to be first-lien, fixed-rate covered transactions that have met certain performance requirements over a 36-month seasoning period. Covered transactions would also have to be held on the creditor’s portfolio during the seasoning period, comply with general restrictions on product features and points and fees and meet certain underwriting requirements.

Seasoned QMs would only be available for covered transactions that have no more than two 30-day delinquencies and no delinquencies of 60 or more days at the end of the seasoning period. Also, should there be a disaster or pandemic-related national emergency and as long as certain conditions are met, the final rule would not disqualify a loan from becoming a Seasoned QM for the failure to make full contractual payments if the consumer receives a temporary payment accommodation.

Changes in the final rule from the proposal include adding a new exception to the portfolio requirement that allows loans to be transferred once during the seasoning period, excluding high-cost mortgages as defined in 12 CFR 1026.32(a), and applying the same consider and verify requirements that will apply to General QM loans.

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