The CFPB recently proposed a temporary extension of the qualified mortgage (QM) that is based on a loan being eligible for sale to Fannie Mae or Freddie Mac (often referred to as the “GSE Patch”). The CFPB also proposed to replace the strict 43% debt-to-income (DTI) ratio basis for the general QM with an approach tied to the loan’s annual percentage rate (APR) that would still require the consideration of the DTI ratio or residual income. Comments on the GSE patch temporary extension proposal and on the revised general QM proposal will be due 30 days and 60 days, respectively, after the proposals are published in the Federal Register.
The CFPB proposes to extend the current January 10, 2021, sunset date for the GSE Patch until the date that the final rule to replace the general QM becomes effective. The CFPB notes that it does not expect such final rule to be effective before April 1, 2021. The adoption and implementation of a final rule modifying the general QM by such date would require the CFPB to move at light speed. Currently, the GSE Patch also will sunset if Fannie Mae and Freddie Mac exit conservatorship of the Federal Housing Finance Agency. The CFPB does not propose to modify that aspect of the current rule. Thus, in the unlikely event that Fannie Mae and Freddie Mac exit conservatorship before the final rule becomes effective, there would be a period with no GSE Patch and no revised general QM being available.
With regard to the general QM, the proposal would eliminate the strict 43% DTI ratio cap and also Appendix Q, which is commonly viewed as being too limited for the appropriate consideration of the income and debt included in a DTI ratio analysis. The proposed general QM would require that a creditor consider and verify income or assets, debt obligations, alimony and child support, and consider DTI ratio or residual income. However, the proposal does set forth what DTI ratio or amount of residual income would be deemed acceptable. Additionally, the APR on the loan could not exceed average prime offer rate (APOR) for a comparable transaction by:
- For a first lien transaction with loan amount of $109,898 or more, 2 or more percentage points.
- For a first lien transaction with loan amount of $65,939 or more and less than $109,898, 3.5 or more percentage points.
- For a first lien transaction with loan amount of less than $65,939, 6.5 or more percentage points.
- For a junior lien transaction with a loan amount of $65,939 or more, 3.5 or more percentage points.
- For a junior lien transaction with a loan amount of less than $65,939, 6.5 or more percentage points.
All of the dollar amounts would be indexed for inflation. The dollar amounts are based on the original $100,000 and $60,000 amounts used for the points and fees calculation, and reflect the 2020 values after indexing for inflation.
The CFPB advises that it “is concerned about the potential that the price-based approach may permit some loans to receive QM status, even if creditors may have originated those loans without meaningfully considering the consumer’s financial capacity because they believe their risk of loss may be limited by factors like a rising housing price environment or the consumer’s existing equity in the home.” Based on the concern, the CFPB requests comment on:
- Whether the price-based approach sufficiently address the risk that loans with a DTI ratio that is so high or residual income that is so low that a consumer may lack the ability to repay nonetheless can obtain QM status.
- Whether the ability to repay rule should provide examples in which a creditor has not considered the required factors and, if so, what may be appropriate examples.
- Whether the ability to repay rule should provide that a creditor does not appropriately consider DTI ratio or residual income if a very high DTI ratio or low residual income indicates that the consumer lacks the ability to repay, but the creditor disregards this information and instead relies on the consumer’s expected or present equity in the dwelling, which might be identified through the consumer’s loan-to-value ratio.
- Whether the ability to repay rule should specify which compensating factors creditors may or may not rely on for purposes of determining the consumer’s ability to repay.
- The tradeoffs of addressing these ability to repay concerns with undermining the clarity of a loan’s QM status
- The impact of the COVID-19 pandemic on how creditors consider income or assets, debt obligations, alimony, child support, and monthly DTI ratio or residual income
The proposal would require that the verification of income and assets be performed in accordance with Regulation Z section 1026.43(c)(4), as modified by the proposal. The proposal would add a Commentary provision to address unidentified funds. A creditor would not meet the verification requirements if it observes an inflow of funds into the consumer’s account without confirming that the funds are income. An example of such a situation would be that a creditor would not meet the verification requirements when it observes an unidentified $5,000 deposit in the consumer’s account, but fails to take any measures to confirm or lacks any basis to conclude that the deposit represents the consumer’s personal income and not, for example, proceeds from the disbursement of a loan.
The CFPB proposes a safe harbor for the requirement that a creditor (1) verify current or reasonably expected income or assets using third-party records that provide the creditor with reasonably reliable evidence of the consumer’s income or assets and (2) verify current debt obligations, alimony and child support using third-party records that provide the creditor with reasonably reliable evidence of the consumer’s debt obligations, alimony and child support obligations. The safe harbor would be based on the creditor meeting standards in specified documents. Although the proposed rule does not identify specific documents, the CFPB notes in the preamble that such documents could potentially include relevant provisions from Fannie Mae’s Single Family Selling Guide, Freddie Mac’s Single-Family Seller/Servicer Guide, FHA’s Single Family Housing Policy Handbook, the Department of Veterans Affairs (VA) Lenders Handbook, and the Field Office Handbook for the Direct Single Family Housing Program and Handbook for the Single Family Guaranteed Loan Program of the U.S. Department of Agriculture (USDA).
The CFPB advises that it is “open to including stakeholder-developed verification standards among this list of” specified documents. The safe harbor would not be lost if a specified document is revised, provided that the revised document is substantially similar to the prior document. Additionally, a creditor could follow standards in more than one specified document, and mix and match standards from various specified documents. While the CFPB proposes the removal of Appendix Q as the basis for a creditor’s consideration of a consumer’s income and debts, it requests comment on whether it should retain and modify Appendix Q.
The CFPB requests comment on alternative approaches to replace the general QM—one that is based on DTI ratio and two hybrid approaches based on pricing and DTI ratio:
- The CFPB requests comment on an approach that increases the DTI limit to a specific threshold within a range of 45 to 48 percent and includes more flexible definitions of debt and income.
- The CFPB requests comment on a hybrid approach that imposes a DTI limit only for loans above a certain pricing threshold, to reduce the likelihood that the presumption of compliance with the ability to repay requirement would be provided to loans for which the consumer lacks ability to repay, while avoiding the potential burden and complexity of a DTI limit for many lower-priced loans. The CFPB provides the following example:
- For loans with rate spreads under 1 percentage point over APOR, the loan is a safe harbor QM regardless of the consumer’s DTI ratio;
- For loans with rate spreads at or above 1 but less than 1.5 percentage points over APOR, a loan is a safe harbor QM if the consumer’s DTI ratio does not exceed 50% and a rebuttable presumption QM if the consumer’s DTI is above 50%;
- For loans with rate spreads at or above 1.5 but less than 2 percentage points over APOR, a loan is a rebuttable presumption QM if the consumer’s DTI ratio does not exceed 50% and a non-QM if the DTI ratio is above 50%.
- The CFPB requests comment on a hybrid approach that imposes a DTI limit on all general QM loans, but would allow higher DTI ratios for loans below a set pricing threshold, and provides the following example: The rule could generally impose a DTI ratio limit of 47% but could permit a loan with a DTI ratio up to 50% to be eligible for QM status under the general QM loan definition if the APR is less than 2 percentage points over APOR.
Additionally, the CFPB advises that it is considering adding a seasoning approach to the ability to repay rule that would create an alternative pathway to QM safe harbor status for certain mortgages if the consumer has consistently made timely payments for a specified period of time. The CFPB “in the near future will issue a separate proposal that addresses adding such an approach . . . .”
The proposal would not alter APR thresholds that determine a safe harbor versus a rebuttable presumption QM, although it would create a special rule for certain loans. The special rule would apply to loans for which the interest rate may or will change during the first five years following the date on which the initial periodic payment is due. For such loans, the maximum interest rate that could apply during that five-year period must be used to calculate the APR for purposes of determining if the loan is safe harbor or rebuttable presumption QM.
The proposal would not change the points and fees limits, or the items that are included in points and fee. The proposal also would not alter the existing separate QMs for loans that are defined as a QM by FHA, VA or USDA.