CFPB Finalizes Qualified Mortgage Changes
The Consumer Financial Protection Bureau (Bureau or CFPB) issued two final rules on December 10 with significant implications for the mortgage marketplace. Of the two final rules from the Bureau, one drastically simplifies the definition of a “qualified mortgage,” or “QM,” and the other provides an alternative pathway to QM safe harbor status for certain seasoned mortgage loans, which together may encourage innovation in the mortgage market and potentially help to bring certainty to secondary market participants.
Despite their technical-sounding features, these two rules together will affect a huge portion of mortgage originations in the United States and have the potential to offer meaningful regulatory relief for mortgage originators and securiti
zation participants—so long as the rules go into effect as written, are upheld, and/or not revised or rescinded by the incoming administration.
We previously reported on the Bureau’s proposals that were issued earlier this year with respect to these rulemakings: CFPB Proposes Substantial Amendments to Qualified Mortgage Definition, Addresses GSE Patch and CFPB Proposes New ‘Seasoned’ Qualified Mortgage Category.
General QM Final Rule
The Bureau’s first final rule, the General QM Final Rule, replaces the current requirement for general QM loans that the consumer’s debt-to-income ratio (DTI) not exceed 43% with a limit based on the loan’s pricing (General QM loans). 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.” Additionally, the rule reflects the Bureau’s decision that conditioning QM status on a specific DTI limit could impair access to responsible, affordable credit.
Under the General QM Final Rule, a loan receives a conclusive presumption that the consumer has the ability to repay if the annual percentage rate (APR) does not exceed the average prime offer rate (APOR) for a comparable transaction by 1.5 percentage points or more as of the date the interest rate is set. A loan receives a rebuttable presumption that the consumer has the ability to repay if the annual percentage rate exceeds the average prime offer rate for a comparable transaction by 1.5 percentage points or more but by less than 2.25 percentage points. In addition, the General QM Final Rule:
- provides higher pricing thresholds for loans with smaller loan amounts, for certain manufactured housing loans, and for subordinate-lien transactions;
- retains the General QM loan definition’s existing product-feature and underwriting requirements and limits on points and fees; and
- requires lenders to consider a consumer’s DTI ratio or residual income, income or assets other than the value of the dwelling, and debts, and removes appendix Q and provides more flexible options for creditors to verify the consumer’s income or assets other than the value of the dwelling and the consumer’s debts for QM loans.
Seasoned QM Final Rule
The Bureau’s second final rule, the Seasoned QM Final Rule, creates a new category of seasoned QMs for first-lien, fixed-rate covered transactions that have met certain performance requirements, are held in portfolio by the originating creditor or first purchaser for a 36-month period, comply with general restrictions on product features and points and fees, and meet certain underwriting requirements (Seasoned QM loans). To be eligible to become a Seasoned QM (and to thereby receive a presumption of compliance with the ability-to-repay (ATR) requirements), a loan must:
- be secured by a first lien;
- have a fixed rate, with regular, substantially equal periodic payments that are fully amortizing and with no balloon payments;
- have a loan term that does not exceed 30 years;
- ·not be a high-cost mortgage (as defined in 12 C.F.R. § 1026.32(a)); and
- have total points and fees that do not exceed specified limits.
As under the General QM Final Rule, the creditor must also consider the consumer’s DTI ratio or residual income, income or assets other than the value of the dwelling, and debts, and verify the consumer’s income or assets other than the value of the dwelling and the consumer’s debts.
The loan must also “season” by meeting certain performance requirements as of the end of the 36-month seasoning period. Specifically, the loan can have no more than two delinquencies of 30 or more days and no delinquencies of 60 or more days at the end of the seasoning period. The creditor or first purchaser also generally must hold the loan on portfolio until the end of the seasoning period.
Of particular importance, we note that the Seasoned QM Final Rule differs from the proposal in certain limited, but significant, respects, including by adding a new exception to the portfolio requirement that allows loans to be transferred once during the seasoning period, excluding high-cost mortgages, and applying the same consider and verify requirements that will apply to General QM loans. In the event of a transfer of a whole loan during the seasoning period (subject to the one transfer only requirement), the final rule requires the purchaser to hold the loan in portfolio after the transfer until the end of the seasoning period.
The General QM Final Rule and the Seasoned QM Final Rule will take effect 60 days after publication in the Federal Register. The General QM Final Rule will have a mandatory compliance date of July 1, 2021 (which is also the expiration of the Temporary GSE QM loan category—the GSE Patch—unless the GSEs exit conservatorship first). Between the General QM Final Rule’s effective date and mandatory compliance date, the Bureau is providing an optional early compliance period during which creditors will be able to use either the current General QM definition or the revised General QM definition. The Seasoned QM Final Rule will apply to covered transactions for which creditors receive an application on or after the effective date.
- Both final rules may encourage innovation in underwriting by allowing for new approaches to assessing repayment ability, including the use of technology as part of the underwriting process. Such innovations include certain new uses of cash flow data and analytics to underwrite mortgage applicants. This emerging technology has the potential to accurately assess consumers’ ability to repay using, for example, bank account data that can identify the source and frequency of recurring deposits and payments and identify remaining disposable income. Such innovation could potentially expand access to mortgage credit, particularly for applicants with non-traditional income and limited credit history.
- The removal of appendix Q may help alleviate investors’ and, at least derivatively, creditors’ preference for QM safe harbor loans, given the perceived lack of clarity in appendix Q and (what the Bureau even acknowledges to be) complexities associated with the current definitions of debt and income.
- The impact of the Seasoned QM proposal on the existing residential mortgage market will be muted, at least in the short term, since it does not apply to existing and older loans that have been performing for 36 months, but were originated prior to the effective date of the new rule. Rather, the Seasoned QM category will apply to covered transactions for which creditors receive an application on or after the effective date (which would be sometime in 2021, at the earliest). Accordingly, the earliest that any loans would receive the benefits of Seasoned QM status would be at least three years after the effective date. However, of particular importance we note that the Seasoned QM Final Rule does allow loans to be transferred once during the seasoning period, a limited, but significant, deviation from the originally proposed rule that as originally drafted had only applied to loans held in portfolio by the originating creditor. This revision may be of particular relevance to loan aggregators whose business model would provide for holding acquired loans on their balance sheets for the duration of the required seasoning period.
- Allowing an alternative pathway to a QM safe harbor – as the Seasoned QM purportedly is designed to do – may encourage creditors to lend to consumers with less traditional credit profiles and income sources at an affordable price based on an individualized determination of a consumer’s ability to repay (and potentially employ innovative methods of assessing financial information in doing so). For example, new technology allows creditors to assess financial information that may not be readily apparent through a traditional credit report, such as a consumer’s ability to consistently make on-time rent payments.
- The Seasoned QM Final Rule also may incentivize creditors to originate certain loans that may not otherwise have been made in the absence of potentially greater ATR compliance certainty. For example, the rule may clarify a creditor’s litigation risk and this could potentially help to bring certainty to secondary market participants that might otherwise be unable or unwilling to accept the litigation risk associated with assignee liability under both rebuttable presumption QM and non-QM loans.
- Industry participants should closely watch to see if there is any follow-on litigation challenging these rule makings, as well as if they are upheld by courts and any Congressional Review Act process, and/or not revised or rescinded by the new Administration.