The CFPB recently issued a final rule that amends the Regulation Z ability to repay/qualified mortgage rule by extending the sunset date for the qualified mortgage (QM) based on a loan meeting certain product requirements and being eligible for sale to Fannie Mae or Freddie Mac. The QM often is referred to as the “GSE Patch.” The final rule will be effective 60 days after publication in the Federal Register.
As previously reported, in June 2020 the CFPB issued two proposals—one to extend the January 10, 2021 sunset date for the GSE Patch and one to replace the current general QM based on a strict 43% debt-to-income (DTI) ratio with a general QM based on a loan pricing construct. The intent was to allow the mortgage industry to continue to rely on the GSE Patch, which is used for a significant number of originated mortgage loans, while the CFPB developed and implemented a new general QM. The current general QM is not viewed favorably by the mortgage industry because of the strict 43% DTI limit, and the need to follow the guidance in Appendix Q to Regulation Z. Appendix Q is commonly viewed as being too limited for the appropriate consideration of the income and debt included in a DTI ratio analysis.
An issue with the two proposals is that if adopted as proposed there would be a group of loans that could not qualify for the GSE Patch or the new general QM. The reason is that the GSE Patch would only apply to a mortgage loan consummated on or before the effective date of the final rule implementing the new general QM, and the new general QM would be available only for loan applications received by the creditor on or after the effective date of such rule. Thus, for an application taken before the effective date of such rule, but not consummated by the effective date, neither the GSE Patch nor the new general QM would be available. The CFPB addressed this issue in the final rule by providing that the GSE Patch is available for applications received by a creditor before the mandatory compliance date for the final rule implementing the new general QM.
The CFPB explains in the preamble to the final rule that it is using the term “mandatory compliance date” to refer to the date that current general QM will no longer be available, and does not mean to suggest that creditors must originate mortgages only under the new general QM. The CFPB also advises that it is using such term because it may decide to adopt “an optional early compliance period” that would permit creditors to begin to use the new general QM before the ability to use the current general QM ended on the mandatory compliance date. In the past, when amending Regulation Z the Federal Reserve Board often permitted creditors to implement the amendments on the effective date of the final rule, and required creditors to implement the amendments by a later mandatory compliance date. This approach provides flexibility that can improve operations and compliance. For example, after making adjustments to its loan origination system to comply with Regulation Z amendments, a creditor could test the system with a limited number of loans to assess if it was operating properly before implementing the changes on a company-wide basis.
With regard to the requirement that a creditor receive an application for a loan before the mandatory compliance date of the new general QM in order to rely on the GSE Patch, the final rule addresses what constitutes an “application.” For a loan subject to the TRID rule, the definition of “application” for TRID rule purposes applies. For TRID rule purposes, an “application” means the submission of the consumer’s name and income, the consumer’s social security number to obtain a credit report, the property address, an estimate of the property’s value, and the mortgage loan amount sought. For a loan that is not subject to the TRID rule, a creditor will have the option of using the TRID rule definition, or the general Regulation Z definition, of an “application.” The general definition is the submission of a consumer’s financial information for the purposes of obtaining an extension of credit.
The CFPB did not amend the ability to repay/QM rule provision under which the GSE Patch sunsets if Fannie Mae and Freddie Mac exit conservatorship of the Federal Housing Finance Agency. Thus, in the unlikely event that Fannie Mae and Freddie Mac exit conservatorship before the final rule implementing the new general QM becomes effective, there would be a period with no GSE Patch and no revised general QM being available.