The CFPB recently issued a final rule amending Regulation Z ability to repay rule/qualified mortgage (QM) requirements to replace the strict 43% debt-to-income (DTI) ratio basis for the general QM with an annual percentage rate (APR) limit, while still requiring the consideration of the DTI ratio or residual income. The CFPB also issued a final rule that adds a new seasoned loan QM. The CFPB issued an executive summary of the final rules as well as an unofficial redline of the changes to Regulation Z made by the final rules.
Each rule will become effective for applications received by creditors on or after the date that is 60 days following the date when the final rule is published in the Federal Register. Additionally, the existing general QM based on a 43% DTI ratio, and the GSE Patch, will no longer be available for applications received on or after July 1, 2021. During the period beginning when the new general QM rule becomes effective until June 30, 2021, creditors will have the option of continuing to use the GSE Patch or existing general QM, or using the new general QM. As previously reported, in October 2020 the CFPB extended the January 10, 2021 sunset date for the GSE Patch to provide for the implementation of the final new general QM rule.
The final rule for the new general QM requires that a creditor consider and verify income or assets, debt obligations, alimony and child support, and consider DTI ratio or residual income. The final rule also imposes the standard product terms and points and fees limitations for QM loans. The main change made by the final rule is that it replaces the 43% DTI ratio limit under the current general QM with a requirement that the APR on the loan may not exceed the average prime offer rate (APOR) for a comparable transaction by:
- For a first lien transaction with loan amount of $110,260 or more, 2.25 or more percentage points.
- For a first lien transaction with loan amount of $66,156 or more and less than $110,260, 3.5 or more percentage points.
- For a first lien transaction with loan amount of less than $66,156, 6.5 or more percentage points.
- For a first lien transaction secured by a manufactured home with loan amount of less than $110,260, 6.5 or more percentage points.
- For a junior lien transaction with a loan amount of $66,156 or more, 3.5 or more percentage points.
- For a junior lien transaction with a loan amount of less than $66,156, 6.5 or more percentage points.
All of the dollar amounts are 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 2021 values after indexing for inflation. For first lien transactions of $110,260 or more, the 2.25 percentage point amount is an increase over the proposed 2.0 percentage point amount.
For adjustable rate mortgage loans, the final rule includes a special requirement for the calculation of the APR for purposes of comparing the APR to the APOR. Rather than using the standard method for calculating the APR on an adjustable rate mortgage loan for disclosure purposes, the creditor will be required to calculate the APR based on the highest interest rate that can apply during the five year period from the due date of the first scheduled payment on the loan. The industry opposed this approach, and noted that the creditor is required to assess repayment ability based on the payment that results from the maximum interest rate that can apply during the same five year period.
To qualify for the safe harbor, which is a conclusive presumption of compliance with the ability to repay rule, the APR could not exceed the APOR for a comparable transaction by (1) 1.5 percentage points or more for a first lien transaction or (2) 3.5 percentage points or more for a junior lien transaction. For adjustable rate loans, the special requirement to calculate the APR for QM purposes also would apply to determine whether the safe harbor or rebuttable presumption applies.
Under the existing general QM based on a maximum 43% DTI ratio, if the APR exceeds the APOR by 1.5 or 3.5 or more percentage points, as applicable, the loan is eligible for a rebuttable presumption of compliance instead of a safe harbor. The new general QM rule effectively limits the APR that allows a loan to qualify for the rebuttable presumption. For example, with first lien loans of $110,260 or more that satisfy the other requirements of the new general QM rule, loans with APRs less than 1.5 percentage points over the APOR qualify for the safe harbor, loans with APRs of 1.5 percentage points to less than 2.25 percentage points above the APOR qualify for the rebuttable presumption of compliance, and loans with APRs of 2.25 or more percentage points above the APOR are not QM loans.
The final rule includes the proposed requirement that a creditor consider the consumer’s current or reasonably expected income or assets (other than the value of the security property), current debt obligations, alimony, and child support, and monthly DTI ratio or residual income. Also, as proposed, the final rule requires that the consideration of monthly DTI ratio or residual income be in accordance with section 1026.43(c)(7) of the ability to repay rule. The industry raised concern with this aspect of the proposal because that section addresses monthly DTI ratio and residual income requirements for a non-QM loan, and a Commentary provision for the section includes the following statement “an appropriate threshold for a consumer’s monthly debt-to-income ratio or monthly residual income is for the creditor to determine in making a reasonable and good faith determination of a consumer’s ability to repay.”
The industry noted that the requirement to consider monthly DTI ratio or residual income in accordance with section 1026.43(c)(7) appeared to impose a underwriting requirement without an objective standard regarding the adequacy of the DTI ratio or residual income, which would be contrary to the goal of a safe harbor. In the preamble to the final rule, the CFPB addresses this concern. The CFPB states that the requirement to follow section 1026.43(c)(7) is “only for purposes of calculating monthly DTI, residual income, and monthly payment on the covered loan” and that “[m]ore generally, the Bureau emphasizes that [the final rule] requires only that the creditor “consider” the specified factors. It does not permit a broader challenge that a loan is not a General QM because the creditor failed to make a reasonable and good-faith determination of the consumer’s ability to repay under § 1026.43(c)(1), as this would undermine the certainty of whether a loan is a General QM.”
The final rule also includes the proposed requirements that the creditor (1) verify the consumer’s current or reasonably expected income or assets (other than the value of the security property) using third-party records that provide reasonably reliable evidence of the consumer’s income or assets in accordance with section 1026.43(c)(4) of the ability to repay rule, and (2) verify the consumer’s debt obligations, alimony and child support using reasonably reliable third-party records in accordance with section 1026.43(c)(3) of the rule. The CFPB had proposed a safe harbor for the verification requirements that would be based on the creditor meeting standards in specified documents. Although the proposed rule did not identify specific documents, the CFPB noted in the preamble to the proposed rule 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 final rule includes the safe harbor, and references the verification standards in the following manuals:
- Chapters B3-3 through B3-6 of the Fannie Mae Single Family Selling Guide, published June 3, 2020;
- Sections 5102 through 5500 of the Freddie Mac Single-Family Seller/Servicer Guide, published June 10, 2020;
- Sections II.A.1 and II.A.4-5 of the FHA’s Single Family Housing Policy Handbook, issued October 24, 2019;
- Chapter 4 of the VA’s Lenders Handbook, revised February 22, 2019;
- Chapter 4 of the USDA’s Field Office Handbook for the Direct Single Family Housing Program, revised March 15, 2019; and
- Chapters 9 through 11 of the USDA’s Handbook for the Single Family Guaranteed Loan Program, revised March 19, 2020.
If a manual used by a creditor is revised, the safe harbor still applies as long as the revised manual is substantially similar. A creditor may use the verification standards in more than one of the manuals, such as by “mixing and matching” verification standards from the manuals.
As proposed, the final rule adds 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 is 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 final rule does not change the points and fees limits, or the items that are included in points and fees. The final rules also does not alter the existing separate QMs for loans that are defined as a QM by FHA, VA or USDA.
Seasoned Loan QM
As noted above, the seasoned loan QM rule becomes effective for applications received on or after the date that is 60 days following the date the final rule is published in the Federal Register. Only loans resulting from applications received by creditors on or after the effective date will be eligible to become seasoned QM loans.
Consistent with the proposed rule, under the final rule loans that meet the seasoned QM loan criteria will 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. Currently under the ability to repay rule, loans that qualify as a QM loan based on one of the 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 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 loan is not a high-cost loan under Regulation Z. This requirement was not in the proposed rule.
- The creditor in underwriting the loan complies with the requirements under the new general QM rule to consider the consumer’s income or assets, debt obligations, alimony, child support and monthly DTI ratio or residual income, and to verify the consumer’s income or assets and debt obligations, alimony and child support. The proposed rule would have allowed the creditor to follow the consider and verify requirements of any other Regulation Z QM loan category.
- Subject to exceptions for transfers required by supervisory action or in connection with a merger or entity acquisition, and an additional exception not included in the proposed rule (which is addressed below), the creditor may 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). The loan also could not at consummation be subject to a commitment to be acquired by another person, except for a transfer pursuant to the additional exception added to the final rule.
- 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 will become a seasoned QM loan entitled to the safe harbor of compliance. This will be the case for a loan that is 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 a loan that at the time is already a safe harbor QM loan, the CFPB commented that “a Seasoned QM definition will provide additional legal certainty by providing an alternative basis for a conclusive presumption of [ability to repay rule] compliance after the required seasoning period.”
The final rule includes an exception to the transfer restriction during the seasoning period that was not included in the proposed rule. A loan could be sold, assigned, or otherwise transferred once before the end of the seasoning period, but the loan could not be securitized as part of the sale, assignment or transfer, or at any other time, before the end of the seasoning period. The CFPB explains that a reason for adding the one time transfer exception is to support “a fundamental goal of . . . the Seasoned QM category . . . to encourage creditors to increase the origination of non-QM loans in a responsible manner.”
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 must 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. Although a seasoned QM loan must provide for substantially equal payments that fully amortize the loan, and must have a term of no more than 30 years, the final rule adds a clarification that a qualifying change could provide for a balloon payment or a lengthened loan term.
If there is a temporary payment accommodation, the period of the accommodation does not count toward the 36-month seasoning period. The 36-month seasoning period requirement must 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, the following funds are not considered in assessing whether a periodic payment is delinquent: (1) funds in escrow in connection with the loan, 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. A creditor will 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.