The CFPB Issues Amendments to the Qualified Mortgage Rule

On December 10, 2020, the Consumer Financial Protection Bureau (CFPB) issued the General QM Final Rule and the Seasoned QM Final Rule that amend the requirements for qualified mortgages. The new rules aim to promote increased access to credit by providing more flexibility to creditors engaged in residential mortgage transactions. The elimination of the debt-to-income ratio cap, the GSE “Patch” and Appendix Q are welcome changes that have been long anticipated by industry and consumer groups alike.

 Background

The Ability-to-Repay and Qualified Mortgage (ATR/QM) Rule requires mortgage lenders to make a “reasonable and good faith determination, based on verified and documented information, that the consumer has a reasonable ability to repay before issuing a residential mortgage loan”[1]. Lenders and investors who fail to comply with this requirement can be held liable for damages under the federal Truth-In-Lending Act, presenting borrowers with a defense to foreclosure that dramatically increases both costs and complexity[2]. Since taking effect in 2014, the QM Rule’s 43 percent debt-to-income (DTI) ratio requirement and Appendix Q underwriting standard have resulted in a lopsided market where a staggering 96% of all mortgages have been in compliance with the QM definition[3]. For example, outstanding securities in the agency market (Fannie Mae, Freddie Mac and Ginnie Mae) totaled $6.47 trillion in 2018, whereas private-label securities of non-QM loans totaled less than one-tenth of that amount[4]. This chilly market for non-QM exists because Wall Street understands that the risks of potential litigation in the future over nonperforming non-QM loans makes them a risky proposition.

 The CFPB’s five-year assessment of the ATR/QM Rule acknowledges that it has disproportionately benefited the Government Sponsored Enterprises (GSEs) and has resulted in the general lack of a market for non-QM loans[5]. Recognizing that changes were needed, CFPB Director Kathleen L. Kraninger couched the issue of fixing the QM Rule in terms of “leveling the playing field” and “promoting more vigorous competition”[6] to bring capital markets back and promote economic fairness to the underserved.

 In response to the Bureau’s Advance Notice of Proposed Rulemaking (ANPR) issued in July 2019, 93 comment letters were received from interested parties ranging from minority housing advocacy groups including the NAACP Legal Defense Fund, the National Association of Hispanic Real Estate Professionals, the National Fair Housing Alliance, National Council of State Housing Agencies, a bipartisan coalition of United States Senators and other influential organizations to mortgage industry trade groups like the American Bankers Association and the Mortgage Bankers Association. Although there are some differences as to detail, there was broad consensus that many of the QM Rule limitations harm the nation’s minorities and are a barrier to a healthy private mortgage market. Some of their recommendations were incorporated into the final rules.

 General QM Final Rule

Among other things, the General QM Final Rule amends the existing Rule by eliminating the 43 percent DTI ratio limitation and the Appendix Q underwriting standard (Part 1026 of the Federal Regulations-Standards for Determining Monthly Debt and Income). These changes give creditors more flexibility to verify income, assets and debts, and eliminates the inherent advantage` held by the GSEs who currently need not comply with the DTI cap.

 Under the new Rule, creditors must consider the consumer’s DTI ratio, residual income or assets other than the value of the dwelling, and debts. They must also comply with the existing product restrictions and the three percent points and fees limitation. To achieve a conclusive legal presumption of a consumer’s repayment ability (a/k/a safe harbor), the annual percentage rate (APR) must not be greater than 1.5 percentage points above the average prime offer rate for a comparable transaction (APOR). To achieve a rebuttable presumption of a consumer’s ability to repay the loan, the APR cannot be greater than APOR plus 2.25 percent, which is 25 basis points lower than the current requirement. There are additional pricing thresholds for loans with smaller loan amounts, for some manufactured housing loans and for subordinate-lien transactions.

 The GSE “patch” – a category of QM that was created for loans that meet the standards of the GSEs but the DTI ratio exceeds 43 percent – has been rendered moot as a result of the amendments and will expire July 1, 2021 or sooner (if the GSEs exit conservatorship).

 In a press release dated December 10, Director Kraninger stated her belief that the final Rule’s “price-based approach strikes the best balance between assessing consumers’ ability to repay and promoting access to responsible, affordable mortgage credit.” The press release notes that this approach, which replaces the DTI limit from the existing Rule, is a strong indicator of a borrower’s repayment ability and provides for increased flexibility as a measurement of repayment ability than considering DTI alone.

 Seasoned QM Final Rule

A new category of Seasoned QMs has been created for first lien, fixed-rate covered transactions that essentially provides a new pathway to safe harbor status when a loan’s APR exceeds the limitations set forth in the General QM Final Rule. To qualify, a loan must be held in the creditor’s or first purchaser’s portfolio, comply with general restrictions on product features, points and fees and underwriting considerations, and have performed for a period of 36 months with no more than two delinquencies of 30 or more days and no delinquencies of 60 or more days.

Effective Date

The effective date of the General QM Final Rule and the Seasoned QM Final Rule will be 60 days after publication in the Federal Register. Although the mandatory compliance date for the new Rule will be July 1, 2021, the CFPB is providing for a transition period in which creditors may use either the current or revised General QM definitions. However, the Seasoned QM Final Rule will only apply to loans with application dates on or after the Rule’s effective date.

 For more information, contact Roger Fendelman at 636-399-0169 or roger@garrishorn.com.

[1] Ability-to-Repay and Qualified Mortgage Rule Assessment Report, Consumer Financial Protection Bureau, January 2019.

[2] Id.

[3] Carroll, Pete, "Expiration of the CFPB's Qualified Mortgage GSE Patch — Part 1," CoreLogic, July 11, 2019.

[4] Housing Finance at a Glance, A Monthly Chartbook, the Urban Institute, June 2018.

[5] Ability-to-Repay and Qualified Mortgage Rule Assessment Report, Consumer Financial Protection Bureau, January 2019.

[6] “Consumer Financial Protection Bureau Takes Steps to Address GSE Patch” press release from the Consumer Financial Protection Bureau, June 22, 2020.