CFPB Issues Final Mortgage Rules on General QM, Seasoned QM

The Consumer Financial Protection Bureau on Thursday issued final rules related to qualified mortgage loans. The Mortgage Bankers Association provided preliminary summaries of the final rules.

The CFPB said lenders are required under the law to determine that consumers have the ability to repay mortgage loans before lenders make those loans.  Loans that meet legal standards for QM loans are presumed to be loans for which consumers have such an ability to repay.

The first final rule, the General QM Final Rule (https://www.consumerfinance.gov/rules-policy/final-rules/qualified-mortgage-definition-under-truth-lending-act-regulation-z-general-qm-loan-definition/), replaces the current requirement for General QM loans that the consumer’s debt-to-income ratio not exceed 43 percent with a limit based on the loan’s pricing.  

In the second final rule issued (https://www.consumerfinance.gov/rules-policy/final-rules/qualified-mortgage-definition-under-truth-lending-act-regulation-z-seasoned-qm-loan-definition/), the Bureau creates a new category for QMs, Seasoned QMs.  

On Friday, Mortgage Bankers Association President and CEO Bob Broeksmit, CMB, released the following statement regarding the final General QM and Seasoned QM Rules:

“MBA applauds the Bureau for releasing the final General and Seasoned QM rules. The revisions to these rules will preserve and expand responsible access to affordable credit while retaining core consumer protections. In particular, these rules remove cumbersome requirements for non-traditional sources of income and expand consumers’ choices. MBA appreciates the Bureau’s effort to seek stakeholder input, and we look forward to continuing to work together on other issues aimed at protecting consumers.”

MBA has provided early summaries of both rules. “In both the General QM final rule and the Seasoned QM final rule, the Bureau adopted recommendations made in MBA comment letters,” said Justin Wiseman, MBA Associate Vice President and Managing Regulatory Counsel.

The MBA summary to the General QM final rule can be found here; the summary to the Seasoned QM final rule can be found here.

Another current category of mortgage loans that has been accorded QM status under the law are loans that meet the standards of the Government-Sponsored Enterprises.  Most mortgage loans are QMs pursuant to this provision, also known as “the Patch.”  However, the Patch will expire on the mandatory compliance date of the General QM Final Rule (July 1, 2021), or the date the GSEs exit conservatorship, whichever comes first.  The Bureau said issuance of its two new rules will “support a smooth and orderly transition away from the Patch and maintain access to responsible, affordable mortgage credit upon its expiration.”

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, 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 had the ability to repay if the annual percentage rate does not exceed the average prime offer rate 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 had 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.
• 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.

“Through this General QM Final Rule, we are working to create an appropriate, more flexible General QM loan definition,” said CFPB Director Kathleen L. Kraninger.  “Our 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 Bureau also is encouraging innovation in the mortgage origination market through the issuance of the Seasoned QM Final Rule. The 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.

To be eligible to become a Seasoned QM, a loan must be a first-lien, fixed-rate loan with no balloon payments and must meet certain other product restrictions.  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 at the end of the 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.

“This Seasoned QM Final Rule will ensure access to responsible, affordable credit in the mortgage market through responsible innovation,” Kraninger said.  “Allowing lenders the flexibility to respond to changes in the economy while still ensuring a consumer has the ability to repay will help many consumers achieve their dream of owning a home.”

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.  Between the General QM Final Rule’s effective date and mandatory compliance date, there will be 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.