CFPB Issues Final Rules Relating to General QMs and Seasoned QMs

On December 10, 2020, the CFPB published two final rules related to Qualified Mortgages (QMs) which: 1) amend the definition of a General QM by removing the 43% DTI threshold and replacing it with a price-based test (the “General QM Final Rule”); and 2) allow loans that meet certain criteria to season into safe harbor QM status (the “Seasoned QM Final Rule”). These Final Rules, together with the Final Rule issued in October that sunsets the GSE Patch on the mandatory effective date of the General QM Final Rule, are the culmination of the CFPB’s rulemaking efforts in the QM space and establish the new QM landscape moving forward.

Effective Dates of the Final Rules

The General QM Rule and Seasoned QM Final Rule take effect 60 days after publication in the Federal Register.¹ The Seasoned QM Final Rule applies to covered transactions for which the creditor receives an application on or after the effective date.² 

The CFPB is allowing for an “optional early compliance period” for the General QM Final Rule, meaning that creditors may begin complying with the new General QM requirements on the effective date, but are not required to comply until the mandatory effective date of July 1, 2021. This means that for covered transactions for which an application is received on or after the effective date, but prior to the mandatory effective date, a loan could be eligible for General QM status either by satisfying the existing requirements or the new requirements. For covered transactions for which an application is received on or after July 1, 2021, the loan would need to satisfy the new General QM definition to achieve General QM status.

The GSE Patch sunsets on the mandatory effective date of the General QM Final Rule, meaning it remains available for covered transactions for which a creditor receives an application before July 1, 2021 (unless the GSEs cease to operate under conservatorship before that date).

Some Key Differences Between the Proposed Rules and Final Rules

Both rules were largely finalized as proposed with a few key differences.

Under the General QM Final Rule, the pricing threshold is 2.25% (an increase from the 2% threshold that was originally proposed). The Final Rule adds a new pricing threshold specific to smaller loans secured by manufactured homes. As part of the “consider” requirements, a creditor must maintain written policies and procedures, and documentation of their application, around how it considers a consumer’s income or assets and debts.

One key difference in the Seasoned QM Final Rule versus the proposed rule is that a loan can meet the seasoned QM criteria even if it is sold once during the seasoning period, provided it is not securitized. In addition, the Seasoned QM Final Rule clarifies that a high-cost mortgage under HOEPA is not eligible for Seasoned QM status.

Summary of the General QM Final Rule

The General QM Final Rule removes the 43% DTI ratio limit and replaces it with a priced-based approach. In addition to stating that a price-based approach provides a more holistic measure of a consumer’s ability to repay than DTI alone, the CFPB also maintains that a bright-line pricing rule will provide more compliance certainty to creditors that a loan meets the General QM requirements. It also removes Appendix Q and clarifies the “consider and verify” requirements and their related commentary. It does not change the existing General QM product feature and points-and-fees requirements.

Under the new price-based approach, a loan is eligible for General QM status if its APR does not exceed the APOR for a comparable transaction as of the date the interest rate is set by the amounts set forth in the regulation. For first lien loans with a loan amount greater than or equal to $110,260, this threshold is 2.25%. It establishes higher pricing thresholds for lower loan amounts, subordinate lien loans, and manufactured housing loans.

The General QM Final Rule adopts a special rule for calculating APR for loans where the interest rate may or will change in the first five years (such as short-reset ARMs). For such loans, the creditor must treat the maximum interest rate that may apply during that five-year period as the interest rate for the full term of the loan for purposes of determining APR. This special rule applies in determining APR for purposes of the General QM pricing thresholds.

For General QM Loans only, this special test also applies for purposes of determining whether the loan is eligible for a safe harbor or rebuttable presumption. However, the General QM Final Rule does not change the existing spreads for safe harbor and rebuttable presumption loans; that is, a loan is a safe harbor QM if its APR exceeds APOR for a comparable transaction by less than 1.5% percentage points (or less than 3.5% for subordinate lien loans).

Consider & Verify Requirements

The General QM Final Rule removes Appendix Q, which was widely viewed as outdated and difficult to apply with respect to non-traditional income borrowers, and updates the “consider and verify” requirements and their commentary. A creditor must consider the consumer’s current or reasonably expected income or assets other than the value of the dwelling (including any real property attached to the dwelling) that secures the loan, debt obligations, alimony, child support, and monthly DTI ratio or residual income, using amounts determined under the applicable verification provisions.

A creditor must verify: 1) the consumer’s current or reasonably expected income or assets other than the value of the dwelling (including any real property attached to the dwelling) that secures the loan using third-party records that provide reasonably reliable evidence of a consumer’s income or assets, in accordance with § 1026.43(c)(4) (i.e., the ATR verification standards applicable to income and assets); and 2) current debt obligations, alimony, and child support using reasonably reliable third party records in accordance with § 1026.43(c)(3) (i.e., the general ATR verification standards).

The comments provide guidance in implementing the new “consider and verify” requirements. For example, a creditor must maintain written policies and procedures for how it takes into account, pursuant to its underwriting standards, income or assets, debt obligations, alimony, child support, and monthly DTI ratio or residual income in its ATR determination. In order to meet the “consider” requirements, and therefore the General QM requirements, the creditor must also retain documentation showing how it took into account income or assets, debt obligations, alimony, child support, monthly DTI or residual income in its ATR determination, including how it applied its policies and procedures. The Preamble to the General QM Final Rule explains that these documentation provisions require a creditor to retain documentation to show how it applied its written policies and procedures, and to the extent it deviated from them, to further retain documentation of how the creditor nonetheless took into account the required factors.

Although the Final Rule eliminates the 43% DTI ratio, a creditor must still consider DTI or residual income. However, the comments confirm that the new “consider” requirements do not prescribe specifically how a creditor must consider DTI or a particular monthly DTI with which the creditor must comply. In addition, the comments indicate that the “consider” requirements do not preclude a creditor from taking into account other factors that are relevant in determining a consumer’s ability to repay a loan.

With respect to the verification requirements, the CFPB notes in the Preamble its goal of ensuring that the verification requirement provides substantial flexibility for creditors to adopt innovative verification methods, such as the use of bank account data that identifies the source of deposits to determine personal income, while also specifying examples of compliant verification standards to provide greater certainty of a loan’s QM status. As noted in the comments, so long as the creditor complies with § 1026.43(c)(3) and (c)(4) (i.e., the existing ATR verification standards), the creditor is permitted to use any reasonable verification method.

However, the commentary also provides a safe harbor for creditors using the verification standards set forth in one or more manuals, which include certain specified chapters and sections of the following: 1) Fannie Mae Single Family Selling Guide; 2) Freddie Mac Single-Family Seller/Servicer Guide; and 3) certain specified FHA, VA and USDA Handbooks. Creditors may “mix and match” the verification standards in those manuals, and may use revised versions of the manuals provided such versions are “substantially similar” to those versions listed in the commentary.³ 

The General QM Final Rule provides clarification around the use of “financial institution records” to verify a consumer’s income by adding a new comment regarding unidentified funds. A creditor does not meet the verification requirements of § 1026.43(c)(4) if it observes an inflow of funds into the consumer’s account without confirming that the funds qualify as a consumer’s personal income. For example, a creditor would not meet the requirements of (c)(4) where it observes an unidentified $5,000 deposit into 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.⁴ 

Summary of the Seasoned QM Final Rule

Under the Seasoned QM Final Rule, a loan that was originated as a non-QM, or that was originated as a rebuttable presumption QM, can season into safe-harbor QM status if it meets certain performance and portfolio requirements over a 36-month seasoning period.⁵  The loan must also satisfy other requirements relating to product features, points and fees and underwriting requirements, including the same “consider and verify” requirements outlined above for General QMs. The CFPB notes in the Preamble that by requiring the same underwriting for Seasoned QMs as for General QMs, it is not substituting performance requirements applicable during a seasoning period for the underwriting requirements applicable at or before consummation.

Only covered transactions for which an application is received on or after the effective date of the Seasoned QM Final Rule are eligible for Seasoned QM status, meaning that loans currently in existence cannot become Seasoned QMs.

Product Features & Underwriting

To satisfy the product feature and underwriting requirements, the loan must:

• be a fixed rate loan with fully amortizing payments;
• have regular periodic payments that are substantially equal, with no negative amortization or balloon payment;
• have a term that does not exceed 30 years;
• satisfy the existing QM points and fees requirements (generally limited to 3%) and underwriting requirements that pertain to the monthly payment for mortgage-related obligations;
• comply with the same “consider and verify” requirements described above for General QMs, meaning a creditor must consider the consumer’s DTI ratio or residual income, income or assets other than the value of the dwelling and debts and verify such income or assets and debts; and
• not be a high-cost loan as defined under HOEPA.

The commentary confirms that ARMs and step-rate mortgages are not eligible for Seasoned QM status. While loans must be fully amortizing and may not have balloon payments, the comments indicate that this does not preclude a “qualifying change” (discussed below) that provides for a balloon payment or lengthened loan term.

Portfolio Requirements

To satisfy the portfolio requirements: 1) the loan may not be subject to a commitment to be acquired by another person at consummation (except as permitted under the third exception described below); and 2) legal title of the loan may not be sold, assigned, or otherwise transferred to another person before the end of the seasoning period (subject to the three exceptions discussed below).

The first two exceptions relate to sales, assignments and transfers pursuant to supervisory action and in connection with a merger or acquisition of the creditor. The third exception allows a loan to be sold, assigned or transferred once before the end of the seasoning period, provided that it is not securitized as part of such sale, assignment or transfer or at any other time before the end of the seasoning period. The Preamble provides an illustrative example that a covered transaction is considered to be securitized if it is transferred to an entity such as a securitization trust, and interests in the trust are held by investors, even if legal title to the covered transaction is retained by the securitization trust.

The commentary confirms that the single-transfer exception may be used only one time, whereas the exceptions for supervisory sales and mergers apply to both initial and subsequent sales, assignments and transfers. For example, say Creditor A originates a loan and subsequently sells it to Creditor B during the seasoning period (under the general sale exception). If Creditor B then sells the loan during the seasoning period, the loan would not be eligible for Seasoned QM status unless the sale by Creditor B falls under an exception for a sale pursuant to a supervisory action or an exception for a creditor merger or acquisition.

Seasoning Period

The seasoning period is a period of 36 months beginning on the date on which the first periodic payment is due after consummation. If there is a delinquency of 30 days or more at the end of the seasoning period, then the seasoning period ends when there is no delinquency.

Temporary payment accommodations (such as a trial loan modification plan, temporary payment forbearance program, or temporary repayment plan) extended in connection with a disaster or pandemic-related national emergency are not considered delinquencies, provided that during or at the end of this temporary payment period, there is a “qualifying change” (as discussed below) or the consumer cures the loan’s delinquency under its original terms. However, a temporary payment accommodation that results in a qualifying change (or the consumer curing the loan’s delinquency under its original terms) effectively pauses the seasoning period, meaning that it must be satisfied by the periods immediately before and after the accommodation period, which together must equal 36 months.

Performance Requirements

To meet the performance requirements, the loan must have no more than two delinquencies of 30 days or more and no delinquencies of 60 days or more at the end of the seasoning period. “Delinquency,” along with “30 days delinquent” and “60 days delinquent” are defined in the Final Rule and further addressed in the commentary.

However, a loan is not delinquent if: 1) the servicer chooses not to treat the payment as delinquent for any of the Regulation X servicing regulations; 2) the payment is deficient by $50 or less; and 3) there are no more than three such deficient payments treated as non-delinquent during the seasoning period.

To address concerns about potential “gaming” by creditors to minimize defaults during the seasoning period, payments from escrow and payments from a creditor, assignee or servicer, or a person acting on these parties’ behalf, are not considered in assessing delinquency (except for making up a deficiency of $50 or less).

In determining whether a delinquency has occurred, the creditor must generally look to the principal and interest payments established by the terms and payment schedule of the loan obligation at consummation. However, in the event that there has been a “qualifying change,” a creditor may consider the terms and payment schedule as modified by the qualifying change. For certain changes to the first payment date in the manufactured home context, a creditor may consider the modified payment schedule.

Qualifying Changes

As noted above, certain “qualifying changes” can result in pausing the seasoning period or permit a creditor to consider modified loan terms and payment schedule for purposes of determining delinquency.

A “qualifying change” means an agreement that meets certain conditions, which generally include the following: 1) the agreement is entered into during or after a temporary payment accommodation in connection with a disaster or pandemic-related national emergency⁶  and ends any pre-existing delinquency on the loan obligation upon taking effect; 2) the amount of interest charged over the full term of the loan does not increase as a result of the agreement; 3) the servicer does not charge any fee in connection with the agreement; and 4) promptly upon the consumer’s acceptance of the agreement, the servicer waives all late charges, penalties, stop payment fees or similar charges incurred during the temporary payment accommodation in connection with a disaster or pandemic related national emergency or incurred during the delinquency that led to the temporary payment accommodation.

An agreement that meets the above requirements is a qualifying change even if it is not in writing.

Takeaways

Both the General QM Final Rule and the Seasoned QM Final Rule are intended to further the CFPB’s stated goal of ensuring the availability of responsible, affordable mortgage credit. By replacing the General QM’s 43% DTI ratio limit with a price-based approach, and removing Appendix Q’s rigid verification requirements, loans that were previously eligible for QM status under the GSE Patch will still be eligible for QM status even once the GSE Patch expires on July 1, 2021. In addition, a bright-line pricing approach provides creditors with more compliance certainty that loans meet the QM requirements, thereby reducing ATR risk for both creditors and their assignees. Likewise, the CFPB believes that allowing a loan to “season” into QM status may also encourage access to credit through responsible innovation; creditors may opt to lend to consumers with less traditional credit profiles at an affordable price based on an individualized determination of a consumer’s ability-to-repay. Finally, the introduction of more flexible verification requirements is intended to allow for innovations in verification methods, while still allowing creditors a verification safe harbor should they seek more certainty.

 

¹ Each Final Rule is currently scheduled for publication in the Federal Register on 12/29/20, making their expected effective date late February 2021.

² For purposes of the Seasoned QM Final Rule and General QM Final Rule, for transactions subject to TRID, creditors may use the TRID definition of an application. For transactions not subject to TRID, creditors may use either the more general definition of application under Regulation Z or the TRID definition.

³ The Preamble states that the CFPB remains interested in reviewing verification standards developed by stakeholders for potential inclusion in the verification safe harbor, but since no self-regulatory agency (SRO) or related verification standards currently exist, it would be premature to include such standards in the safe harbor.

⁴ However, the CFPB explains in the Preamble that in underwriting a loan, creditors may seek to use transactions in electronic or paper financial records such as account statements to examine inflows and outflows from a consumer’s account. Accordingly, there may be cases where transaction data alone, or in combination with other information, is sufficient to determine that a deposit or other credit into a consumer’s account is personal income. This situation is distinguishable from the example in the new comment and, accordingly, the creditor could use this data in verifying the consumer’s income. 

⁵ Loans that meet another QM definition at consummation, such as a Small Creditor QMs, are also eligible to become Seasoned QMs.

⁶ A temporary payment accommodation in connection with a disaster or pandemic-related national emergency means temporary payment relief granted to a consumer due to financial hardship caused directly or indirectly by a residentially declared emergency or major disaster under the Robert T. Stafford Disaster Relief and Emergency Assistance Act (42 U.S.C. 5121 et seq.) or a presidentially declared pandemic-related national emergency under the National Emergencies Act (50 U.S.C. 1601 et seq.).