As promised by the CFPB when it issued two Regulation Z ability to repay rule qualified mortgage (QM) loan proposals in June 2020, the CFPB recently issued a proposal to provide for a new seasoned QM loan. Comments will be due 30 days after the proposal is published in the Federal Register.
The CFPB proposes that the final rule implementing the seasoned QM loan would become effective on the same date as the final rule for the new general QM loan that it proposed in June, and would apply to loans for which the creditor receives the application on or after that date. Loans that meet the seasoned QM loan criteria would qualify for a safe harbor of compliance under the Regulation Z ability to repay rule, regardless of whether or not the loans are higher-priced mortgage loans. Under the ability to repay rule, loans that qualify as a QM loan based on one of the current QM loan categories set forth in the rule are entitled to only a rebuttable presumption of compliance with the rule if they are higher-priced mortgage loans.
The basic proposed requirements for loan to become a seasoned QM loan are:
- The loan is a fixed rate, first lien loan with a term of no more than 30 years (step rate loans would not be considered fixed rate loans).
- The loan provides for regular periodic payments that are substantially equal and will fully amortize the loan over its term, and the loan does not have an interest-only or negative amortization feature.
- The total points and fees do not exceed the applicable limit for a QM loan.
- The creditor in underwriting the loan takes into account the consumer’s monthly payment for mortgage-related obligations, and considers the consumer’s income or assets and debt, alimony and child support obligations, as well as the consumer’s monthly debt-to-income (DTI) ratio or residual income, and verifies the debt obligations and income.
- The creditor could not sell, assign or otherwise transfer the legal title to the loan before the end of the 36-month seasoning period (calculated from the due date of the first periodic payment), subject to exceptions for transfers required by supervisory action or in connection with a merger or entity acquisition.
- During the 36-month seasoning period the loan may have no more than two delinquencies of 30 or more days, and no delinquency of 60 or more days (if there is a delinquency of 30 or more days when the 36-month point is reached, the seasoning period is essentially extended as it would not end until there is no delinquency).
As noted, a loan that satisfies the requirements at the end of the 36-month seasoning period would become a seasoned QM loan entitled to the safe harbor of compliance. This would be the case for a loan that was a non-QM loan, a rebuttable presumption QM loan under another Regulation Z QM loan category, or even a safe harbor QM loan under another Regulation Z QM loan category. With regard to existing safe harbor QM loans, the CFPB commented that “a Seasoned QM definition would provide additional legal certainty by providing an alternative basis for a conclusive presumption of [ability to repay rule] compliance after the required seasoning period.”
With regard to the requirement that the creditor consider and verify the consumer’s debt, income, etc., compliance with the comparable requirement of any other Regulation Z QM loan category would be deemed to comply with the seasoned QM loan requirement. While the proposal would require the creditor to consider the consumer’s monthly DTI ratio or residual income, it does not set forth any standard for determining what is an appropriate DTI or sufficient residual income. Many lenders and investors avoid non-QM loans because the requirements to consider the consumer’s DTI ratio or residual income and other factors also do not set forth standards to determine acceptability or sufficiency. And in connection with the proposed general QM loan, industry members have expressed concern over the proposed requirement that the creditor consider the consumer’s monthly DTI ratio or residual income because the proposal does not set forth any standard for determining an acceptable DTI or sufficient residual income. Industry members will likely have similar concerns with the proposed seasoned QM loan requirement to consider the consumer’s monthly DTI ratio or residual income.
Under the seasoned QM loan proposal, a temporary payment accommodation provided to a consumer due to financial hardship caused directly or indirectly by a presidentially declared emergency or major disaster under the Robert T. Stafford Disaster Relief and Emergency Assistance Act, or a presidentially declared pandemic-related national emergency under the National Emergencies Act, would not be considered a delinquency, provided that during or at the end of the accommodation the consumer brings the loan current according to the original terms, or there is a qualifying change to the loan. To be a qualifying change: (1) the change would have to end any pre-existing delinquency on the loan when the change takes effect, (2) the amount of interest charged over the full term of the loan may not increase as a result of the change, (3) the servicer may not charge any fee in connection with the change, and (4) the servicer must waive all existing late charges, penalties, stop payment fees, or similar charges promptly upon the consumer’s acceptance of the change. If there is a temporary payment accommodation, the period of the accommodation would not count toward the 36-month seasoning period. The 36-month seasoning period requirement would need to be satisfied by the periods immediately before and after the accommodation period.
To address concerns that a creditor may attempt to take steps to help keep a loan current, (1) if a creditor escrows funds to help cover loan payments, funds taken from the escrow would not be considered in assessing whether a periodic payment has been made or is delinquent, and (2) funds paid on behalf of the consumer by the creditor, servicer, or assignee of the covered transaction (or any other person acting on their behalf) would not be considered in assessing whether a periodic payment has been made or is delinquent. A creditor would be permitted to ignore a partial payment for purposes of assessing delinquency if (1) the creditor chooses not to treat the payment as delinquent for purposes of any of the Regulation X servicing provisions, if applicable, (2) the payment is deficient by $50 or less, and (3) there are no more than three such deficient payments treated as not delinquent during the seasoning period.
The CFPB addressed why it has proposed that the seasoned QM loan apply only to loans for which the application is received on or after the effective date of the rule, and not also to existing loans, stating as follows:
“The Bureau believes that parties to existing loans at the time of the effective date may have significant reliance interests related to the QM status of those loans. In light of these possible reliance interests, the Bureau has opted not to apply the proposal to loans in existence prior to the effective date.” The CFPB also notes that there could be legal issues related to the application of rules governing mortgage origination to loans existing prior to the rule’s effective date.