On December 10, 2020, the CFPB issued two final rules amending the Qualified Mortgage (“QM”) rule, namely the “General QM Rule” and the “Seasoned QM Rule”. The new rules modify the General QM category, create a new category of Seasoned QM, and will cause the expiration of the Temporary GSE QM or GSE Patch category, as of July 1, 2021. The new rules will become effective on March 1, 2021, with the mandatory compliance date for the General QM Rule as of July 1, 2021. This note discusses key amendments made by the new rules in greater details.
Amendments to General QM
The new General QM Rule makes two important amendments to the General QM definition.
Substitution of Appendix Q with General Verification and Consideration Requirements
First, the new General QM Rule removes Appendix Q, and instead, requires the creditor to “verify” and “consider”, before consummation, the consumer’s current or reasonably expected income, assets (other than the value of the dwelling that secures the loan and any real property attached to that dwelling), debt obligations, alimony, child support and debt-to-income (“DTI”) or residual income in making its ability-to-repay (“ATR”) determination. To elucidate the requirements to “verify” and “consider”, it is important to consider the CFPB’s staff commentary to these requirements.
For example, the commentary explains that verifications must be made using reasonably reliable third-party records and reasonable methods and criteria. In that respect, the commentary also requires that income or assets must be verified in accordance with general ATR verification requirements. The new General QM Rule added commentary to the general ATR income or assets verification requirements, which states that in verifying income or assets based on review of third-party account records, if the creditor observes an inflow of funds into the consumer’s account and does not confirm that these funds are income or assets of the consumer, such income or assets will not be considered verified and thus cannot be used in determining ATR of General QM.
Importantly, however, the General QM commentary also provides a safe harbor for making verifications of income, assets, debt obligations, alimony and child support in accordance with certain standards for verifications stated in certain GSE or agency guidelines that are listed in the commentary. The list of these guidelines is specific, for example, “Chapters B3-3 through B3-6 of the Fannie Mae Single Family Selling Guide, published June 3, 2020”. The commentary clarifies that a creditor can comply with the verification requirements by “mixing and matching” verification standards from the various listed guidelines. The commentary also states that creditors would be entitled to the safe harbor if they comply with a revised version of the guidelines listed; although, it does require that the revised version and version listed in the staff commentary be “substantially similar”.
For consideration to be compliant, the commentary states that a creditor must maintain written policies and procedures for how it takes into account, pursuant to its underwriting standards, the verified income, asset and liability information, and DTI or residual income in making its ATR determination. It also states that a creditor must retain documentation showing how it took into account such information, including how it applied its policies and procedures, in order to meet the requirement to “consider” and thereby meet the requirements for General QM. The commentary provides that examples for such documentation include, an underwriter worksheet or a final automated underwriting system certification, in combination with the creditor’s applicable underwriting standards and any applicable exceptions described in its policies and procedures, that show how these required factors were taken into account in the creditor’s ATR determination.
Substitution of the DTI Requirement with Price-Based Limits
Second, the new General QM Rule replaces the 43% DTI requirement with a price-based limit, based on average prime offer rate (“APOR”) for a comparable transaction threshold over the loan annual percentage rate (“APR”). For example, to meet this General QM requirement, a first-lien covered transaction with loan amounts equal or greater than $110,260 must not exceed an APOR threshold of 2.25%. A subordinate-lien covered transaction with a loan amount greater than or equal to $66,156 must not exceed an APOR threshold of 3.5%. The General QM Rule also provides higher APOR thresholds for first and subordinate lien covered transaction with smaller loan amounts and for certain manufactured housing loans. The dollar limitation for loan amounts will be adjusted annually by publication of adjustment by the CFPB.
In calculating the APR, if the interest rate may adjust in the first five years of the loan, the creditor must use the maximum interest rate that may apply during that five-year period as the interest rate for the full term of the loan in determining the APR.
Effective Date – General QM Rule
The General QM Rule will become effective on March 1, 2021. However, creditors are not required to comply with the new requirements of the General QM Rule until July 1, 2021, when compliance becomes mandatory. As such, creditors must comply with the new General QM Rule requirements for covered loan application received on or after July 1, 2021.
For a given covered loan application received on or after March 1, 2021 but before July 1, 2021, creditors have the option to comply with either: (i) the new General QM Rule requirement, or (ii) with the current QM rules, including the Temporary GSE QM, which will remain available until the mandatory compliance date of July 1, 2021.
Expiration of the GSE Patch
As previously reported in October 2020, the CFPB extended the GSE Patch until the earlier of: (1) the mandatory compliance date of the General QM Rule; or (2) the date that the GSEs exit conservatorship. As it stated in GSE Patch extension rule, in the new General QM Rule the CFPB removed the GSE Patch provisions from the ATR/QM rule. Consistent with the GSE Patch extension rule, the GSE Patch will remain available for covered loan applications received before July 1, 2021.
The Seasoned QM Rule adds new category of Seasoned QM loans. Seasoned QM is available to any creditor, regardless of size. A mortgage loan can achieve Seasoned QM eligibility if, at the end of the seasoning period of 36 months, which begins on the date the first periodic payment is due after consummation, it meets the requirements in the Seasoned QM Rule.
For a loan to be eligible for a Seasoned QM status at the end of the seasoning period, it must generally meet all of the following requirements:
- The loan must be a first lien loan (a subordinate lien loan is not eligible for Seasoned QM status);
- The loan must be a fixed rate loan (an adjustable rate mortgage is not eligible for Seasoned QM status);
- The loan term must not exceed 30 years;
- The loan must be fully amortizing with regular and substantially equal periodic payments (balloon, interest-only or negative amortization loans are not eligible for Seasoned QM status);
- The loan must not be a TILA high-cost loan;
- The points and fees must meet the limits set in the ATR/QM Rule;
- The creditor must underwrite the loan:
- taking into account the monthly payment on the mortgage (based on max interest rate if it may adjust during the first five years); and
- by verifying and considering the consumer’s current or reasonably expected income, assets (other than the value of the dwelling that secures the loan and any real property attached to that dwelling), debt obligations, alimony, child support and DTI or residual income in making its ATR determination (as discussed above for General QM requirements to “verify” and “consider”);
- The loan payment history has no more than two 30 days or more delinquencies and no 60 days or more delinquencies by the end of the seasoning period; and
- The loan is not sold more than once during the seasoning period and must be held in portfolio (i.e. the loan cannot be securitized during the seasoning period).
The Seasoned QM Rule contains certain qualifications, conditions and exceptions to the general requirements above. Notably, a loan would not lose its eligibility for Seasoned QM status if the terms of the loan change during the seasoning period due to a “qualifying change”. A qualifying change is an agreement that meets the following:
- Entered into during or after a temporary payment accommodation in connection with a disaster or pandemic-related national emergency;
- It does not increase the amount of interest charged over the life of the loan;
- The servicer does not charge the consumer any fee in connection with the agreement; and
- Upon consumer’s acceptance of the agreement, the servicer waives all fees and penalties charged to the loan account during the temporary payment accommodation (g. late fees, stop payment fees, other charges).
The Seasoned QM Rule adds a safe harbor of compliance for Seasoned QM loans. Under that provision, a loan that meets the requirements for Seasoned QM status complies with the ATR requirement and receives a safe harbor regardless of whether the loan is a higher-priced loan under the QM Rule.
Effective Date – Seasoned QM Rule
The Seasoned QM Rule is effective on March 1, 2021 and will apply to covered loans for which a creditor receives an application on or after March 1, 2021.
The removal of the 43% DTI and increased flexibility with removal of Appendix Q, with respect to General QM, and the addition of the Seasoned QM category has the potential to broaden the scope of loans that can be eligible for safe harbor QM status. To take advantage of these potential opportunities, creditors and secondary market purchasers must amend their underwriting policies, procedures and documentations of underwriting considerations and verifications to ensure compliance with the amended requirements.
If you have any questions concerning compliance with these amendments to the QM Rule, please contact Solomon Maman.Download Related Document Download Related Document