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.
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.
Product Restrictions and Points-and-Fees Limit
A loan has to meet the following product restrictions to be eligible to become a Seasoned QM:
- The loan is secured by a first lien. If a loan is a subordinate-lien loan, the loan is not eligible to be a Seasoned QM.
- The loan has a fixed rate. Adjustable-rate or step-rate mortgage loans are not eligible to be Seasoned QMs.
- The loan has regular, substantially equal, periodic payments that are fully amortizing, does not allow negative amortization, and does not have a balloon payment. A loan has fully amortizing payments if periodic payments of principal and interest will fully repay the loan over the loan term.
- The loan term does not exceed 30 years.
- The loan is not a high-cost mortgage as defined in Regulation Z[ii]
Additionally, the total points and
fees for the loan cannot exceed the limits specified in the ATR/QM Rule.
Generally, this means that the total points and fees cannot exceed 3 percent of
the loan amount.
These product restrictions do not
prohibit a qualifying change that is entered into during or after a temporary
payment accommodation in connection with a disaster or pandemic-related
national emergency, even if the qualifying change involves, for example, a
balloon payment or lengthened loan term. The Seasoned QM Final Rule sets forth
conditions that must be met for a change to be a qualifying change.
Underwriting and Portfolio Requirements
Now, let’s take up the requirements
relating to underwriting and portfolios. For a loan to be eligible to become a
Seasoned QM, the creditor must meet “consider and verify” requirements for the
loan as set forth in the Final Rule. In addition, to be eligible to be a
Seasoned QM, a loan must meet certain portfolio requirements.
Generally, a loan is eligible to be
a Seasoned QM only if, at consummation, the loan is not subject to a commitment
to be acquired by another person, and the creditor holds the loan in the portfolio
until the end of the seasoning period. However, the Seasoned QM Final Rule
provides exceptions to these portfolio requirements.
First, the Seasoned QM Final Rule
provides some exceptions that are similar to those that apply to small creditor
QMs under the ATR/QM Rule. For instance, it allows transfers pursuant to
certain supervisory sales and pursuant to certain mergers and acquisitions.
Second, the Seasoned QM Final Rule
allows for a single transfer during the seasoning period if the loan is not
securitized as part of the transfer or at any other time before the end of the
seasoning period. This exception may only be used one time. This means that if
a loan is to remain eligible to become a Seasoned QM, a purchaser that acquires
the loan pursuant to this exception may not subsequently transfer it to any
other entity, unless a different exception applies. Additionally, the loan may
not be securitized before the end of the seasoning period.
Performance Requirements
To become a Seasoned QM, a loan must
meet certain performance requirements at the end of the seasoning period.
Specifically, the loan can have no more than two delinquencies of 30 or more days
and no delinquencies of 60 or more days at the end of the seasoning period.
Seasoning Period
For a loan to be a Seasoned QM, it
must meet certain requirements during or at the end of a seasoning period.
Generally, the seasoning period is the 36-month period that begins on the date
on which the first periodic payment is due after consummation. The end of the
seasoning period occurs later in two situations.
First, if there is a delinquency of
30 days or more at the end of the final month of the seasoning period, the
seasoning period is extended until there is no delinquency.
Second, time spent in a temporary
payment accommodation extended in connection with a disaster or
pandemic-related national emergency does not count towards the seasoning period.
Additionally, the seasoning period can only resume after the temporary payment
accommodation if any delinquency is cured either pursuant to the loan’s
original terms or through a qualifying change.
Safe Harbor
The Seasoned QM Final Rule provides a safe harbor for Seasoned QMs, regardless of whether the loan is a higher-priced loan.
Chairman & Managing Director
[i] Qualified
Mortgage Definition Under the Truth in Lending Act (Regulation Z): Seasoned QM
Loan Definition, Bureau of Consumer Financial Protection, Final Rule;
Official Interpretation, 85 FR 86402, 12/29/20
[ii] 12 CFR
1026.32(a)
