Pages

Topics

Friday, January 15, 2021

Ability to Repay and Qualified Mortgage Rule: “Seasoned QM”

QUESTION
As a Compliance Manager, I am charged with keeping our policies and procedures current. We are a small lender in the Midwest. 

Recently, I have read that the ATR/QM rule has changed. We have a policy for this rule, and our Quality Control firm provides a report of any issues. We also rely on our LOS to ensure compliance. 

However, I have read that there were some changes recently. I have not been able to find a good summary of the changes. I wonder if you would offer a summary. 

By the way, we are an avid reader of your FAQs. Thank you for providing this service to everyone.

My question: would you please provide a summary of the new ATR/QM rule? 

ANSWER
I am grateful that you read our FAQs. We have been publishing them for many years. They are one of several expressions of our commitment to the mortgage community. We appreciate your continuing interest in our articles.

I will summarize the update to the Ability to Repay and Qualified Mortgage Rule (“Rule”). Keep in mind that often “the devil is in the details.” So, navigating the Rule requires careful consideration of the applicable statute's many components. If you need assistance in drafting this policy document, we can help. We’ll get it done painlessly and at minimum cost! Contact Us Here.

A quick but relatively cursory summary is provided in the Final Rule published in the Federal Register on December 29, 2020.[i] The effective date is March 1, 2021. The mandatory compliance date is July 1, 2021. The CFPB is applying the mandatory compliance date to the date on which a creditor receives a consumer’s QM loan application. Starting on the effective date (viz., March 1, 2021) and until July 1, 2021, compliance with the General QM Final Rule is optional.

First, I will provide the Final Rule and Official Interpretation published in the Federal Register. Get ready for a whole lot of terms, phrases, lawyerly language, and even a new term (viz., “Seasoned QM”). Here it is:

“With certain exceptions, Regulation Z requires creditors to make a reasonable, good faith determination of a consumer's ability to repay any residential mortgage loan, and loans that meet Regulation Z's requirements for “qualified mortgages” (QMs) obtain certain protections from liability. Regulation Z contains several categories of QMs, including the General QM category and a temporary category (Temporary GSE QMs) of loans that are eligible for purchase or guarantee by government-sponsored enterprises (GSEs) while they are operating under the conservatorship or receivership of the Federal Housing Finance Agency (FHFA). The Bureau of Consumer Financial Protection (Bureau) is issuing this final rule to create a new category of QMs (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. The Bureau's primary objective with this final rule is to ensure access to responsible, affordable mortgage credit by adding a Seasoned QM definition to the existing QM definitions.”

To those of you who are not used to reading such texts, it can be an arduously annoying experience. Fortunately, I have spent a good part of my adult life immersed in these issuances. I guess I’m used to them. So, let me untangle the foregoing legalistic summary, provide a brief overview of the Rule, and hopefully thereby provide my own summary that is a bit less overtly fustian.

High Level Synopsis

The CFPB issued two final rules to amend the Ability-to-Repay/Qualified Mortgage (ATR/QM) Rule:

  • The General QM Final Rule replaces the existing 43 percent debt-to-income (DTI) ratio limit in the General QM definition with price-based thresholds and makes other changes to the ATR/QM Rule.
  •  The Seasoned QM Final Rule creates a new category of qualified mortgage, the Seasoned QM.

General QM Final Rule

The General QM Final Rule amends the General QM definition. Therefore, among other things, it replaces the existing 43 percent DTI limit with a price-based limit and removes Appendix Q as well as any requirements to use Appendix Q for General QM loans. However, the General QM Final Rule retains the Rule’s “consider and verify” requirements and clarifies how they apply under the revised General QM definition. The General QM Final Rule also retains the existing product-feature and underwriting requirements and limits on points and fees.

Price-Based Limit

A loan meets the revised General QM definition only if the Annual Percentage Rate (APR) exceeds the Average Prime Offer Rate (APOR) for a comparable transaction by less than the applicable threshold set forth in the General QM Final Rule as of the date the interest rate is set. Generally, this threshold is 2.25 percentage points.

But the General QM Final Rule provides higher thresholds for loans with smaller loan amounts, for certain manufactured housing loans, and for subordinate-lien transactions. The thresholds set forth in the General QM Final Rule are:

  • For a first-lien covered transaction with a loan amount greater than or equal to $110,2603, 2.25 percentage points
  • For a first-lien covered transaction with a loan amount greater than or equal to $66,156 but less than $110,260, 3.5 percentage points
  • For a first-lien covered transaction with a loan amount less than $66,156, 6.5 percentage points
  •  For a covered transaction secured by a manufactured home with a loan amount less than $110,260, 6.5 percentage points
  • For a covered transaction secured by a manufactured home with a loan amount equal to or greater than $110,260, 2.25 percentage points
  • For a subordinate-lien covered transaction with a loan amount greater than or equal to $66,156, 3.5 percentage points
  • For a subordinate-lien covered transaction with a loan amount less than $66,156, 6.5 percentage points

If a loan’s interest rate may or will change in the first five years after the date on which the first regular periodic payment will be due, the creditor must treat the highest interest rate that may apply during that five years as the loan’s interest rate for the entire loan term when determining the APR for purposes of these thresholds. Additional information on determining the APR, the APOR, and the applicable threshold is available in the General QM Final Rule.

“Consider and Verify” Requirements

The revised General QM definition retains the “consider and verify” requirements.

First, it requires that creditors consider the consumer’s current or reasonably expected income or assets (other than the dwelling's value that secures the loan and any real property attached to that dwelling), debt obligations, alimony, child support, and DTI ratio or residual income.

Second, it requires that creditors verify the consumer’s current or reasonably expected income or assets (other than the value of the dwelling that secures the loan and any real property attached to that dwelling), as well as the consumer’s debt obligations, alimony, and child support. A creditor must verify such amounts using reasonably reliable third-party records and reasonable methods and criteria. A creditor may only consider amounts that it has verified in accordance with the verification requirements.

However, the General QM Final Rule does not prescribe specifically how a creditor must consider the monthly DTI ratio or residual income, a particular monthly DTI ratio or residual income threshold, or specific methods of underwriting that a creditor must use (other than to require that verification methods and criteria must be reasonable). Furthermore, the General QM Final Rule provides some flexibility for a creditor to consider additional factors relevant to determining a consumer’s ability to repay a loan.

To prevent uncertainty that may result from Appendix Q’s removal, the General QM Final Rule clarifies the “consider and verify” requirements in the revised General QM definition. The General QM Final Rule includes a list of specific verification standards that the creditors may use to meet the revised General QM definition’s verify requirement. If a creditor satisfies the verification standards in one or more specified manuals, the creditor has a safe harbor for compliance with the verification requirement in the revised General QM definition.

Seasoned QM Final Rule

The Seasoned QM Final Rule creates a new category of QMs, the Seasoned QM. A residential mortgage loan is a Seasoned QM and receives a safe harbor from liability under the ATR/QM Rule if

(1) the loan satisfies certain product restrictions,

(2) does not exceed a points-and-fees limit,

(3) satisfies underwriting requirements, is

(4) held in portfolio until the end of the seasoning period (subject to certain enumerated exceptions), and

(5) meets certain performance standards at the end of the seasoning period.

A loan made by any creditor, regardless of size, is eligible to become a Seasoned QM if, at the end of the seasoning period, it meets the requirements in the Seasoned QM Final Rule. Loans that satisfy another QM definition at consummation also can be Seasoned QM loans, as long as the requirements for Seasoned QMs are met.