WASHINGTON—The Consumer Financial Protection Bureau has issued two final rules related to qualified mortgage (QM) loans. Consumer groups have responded by saying both rules will work to the “detriment” of homeowners.
The first final rule, the General QM Final Rule, replaces the current requirement for General QM loans that the consumer’s debt-to-income ratio (DTI) not exceed 43% with a limit based on the loan’s pricing. In the second final rule issued, the Bureau creates a new category for QMs, Seasoned QMs, the agency stated.
Another current category of mortgage loans that has been accorded QM status under the law are loans that meet the standards of the government sponsored enterprises (GSEs). The CFPB noted most mortgage loans are QMs pursuant to this provision, also known as “the Patch,” but the Patch will expire on the mandatory compliance date of the General QM Final Rule (July 1, 2021), or the date the GSEs exit conservatorship, whichever comes first.
“The Bureau’s issuance of its two new rules will support a smooth and orderly transition away from the Patch and maintain access to responsible, affordable mortgage credit upon its expiration,” the agency said.
‘Strong Indicator’
In adopting a price-based approach to replace the specific DTI limit for General QM loans, the Bureau said it determined a loan’s price is a strong indicator of a consumer’s ability to repay and is a more holistic and flexible measure of a consumer’s ability to repay than DTI alone. Additionally, conditioning QM status on a specific DTI limit could impair access to responsible, affordable credit, the CFPB stated.
Under the General QM Final Rule, a loan receives a conclusive presumption that the consumer had the ability to repay if the annual percentage rate does not exceed the average prime offer rate for a comparable transaction by 1.5 percentage points or more as of the date the interest rate is set. A loan receives a rebuttable presumption that the consumer had the ability to repay if the annual percentage rate exceeds the average prime offer rate for a comparable transaction by 1.5 percentage points or more but by less than 2.25 percentage points.
Components of Rule
In addition, according to the CFPB, the General QM Final Rule:
- Provides higher pricing thresholds for loans with smaller loan amounts, for certain manufactured housing loans, and for subordinate-lien transactions.
- Retains the General QM loan definition’s existing product-feature and underwriting requirements and limits on points and fees.
- Requires lenders to consider a consumer’s DTI ratio or residual income, income or assets other than the value of the dwelling, and debts and removes appendix Q and provides more flexible options for creditors to verify the consumer’s income or assets other than the value of the dwelling and the consumer’s debts for QM loans.
“Through this General QM Final Rule, we are working to create an appropriate, more flexible General QM loan definition,” said CFPB Director Kathleen L. Kraninger. “Our final rule’s price-based approach strikes the best balance between assessing consumers’ ability to repay and promoting access to responsible, affordable mortgage credit.”
Consumer Group Disagrees
But the National Consumer Law Center (NCLC) disagrees with the CFPB’s assessment of the new rule.
“Both the CFPB’s new approach to general Qualified Mortgages (QM), establishing ability to repay based on price rather than a borrower’s situation, and its new ‘seasoned QM’ rule, establishing ability to repay based on three years of loan payments, do not measure an individual borrower’s capacity to make payments. Homeowners with unaffordable loans sanctioned by the new rules will not be able to rely on the ability to repay rule to help prevent a foreclosure,” the NCLC said. “The Bureau failed to adequately consider reasonable alternatives to its general QM proposal, including extending the current approach of incorporating lending standards with compensating factors from Fannie Mae and Freddie Mac or a more holistic measurement of ability-to-pay based on a borrower’s household budget or cash flow. And the CFPB’s rulemaking exacerbates the vulnerability of borrowers with small, high-priced mortgage loans, largely made to borrowers who are lower-income and people of color.”
Seasoned QM Rule
For its part, the Bureau said it is also is encouraging innovation in the mortgage origination market through the issuance of the Seasoned QM Final Rule.
The rule creates a new category of 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, according to the CFPB.
To be eligible to become a Seasoned QM, a loan must be a first-lien, fixed-rate loan with no balloon payments and must meet certain other product restrictions. As under the General QM Final Rule, the creditor must also consider the consumer’s DTI ratio or residual income, income or assets other than the value of the dwelling, and debts and verify the consumer’s income or assets other than the value of the dwelling and the consumer’s debts, the CFPB said.
The loan must also “season” by meeting 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, the CFPB stated. The creditor or first purchaser also generally must hold the loan on portfolio until the end of the seasoning period.
“This Seasoned QM Final Rule will ensure access to responsible, affordable credit in the mortgage market through responsible innovation,” said Kraninger. “Allowing lenders the flexibility to respond to changes in the economy while still ensuring a consumer has the ability to repay will help many consumers achieve their dream of owning a home.”
‘More Foreclosures’
In response to the seasoned QM rule, the National Consumer Law Center issued a statement saying, “The Bureau’s ‘seasoned QM’ rule also gives lenders a free pass from liability where a borrower makes payments for three years even if the borrower can show the loan was unaffordable and the payment were made despite significant hardships. Many homeowners who receive unaffordable loans do make payments, often for several years, because trying to save their home is a top priority for families,” the consumer group said. “They often do so by taking on hardships that are detrimental to their families, including taking on additional work, borrowing money, going without medicine or enough food, and not paying utility bills. In preventing homeowners from challenging their unaffordable loans after three years of payments, the CFPB has exceeded its legal authority. The language of Dodd-Frank is directly contrary to the rule’s approach because it allows homeowners to defend against a foreclosure for the life of the loan, not just the first three years.
“Combined, the new CFPB rules likely will lead to more foreclosures while letting mortgage lenders off the hook for peddling loans that people cannot afford to pay over the long term,” the NCLC concluded.
When Rules Go Into Effect
The General QM Final Rule and the Seasoned QM Final Rule will take effect 60 days after publication in the Federal Register. The General QM Final Rule will have a mandatory compliance date of July 1, 2021. Between the General QM Final Rule’s effective date and mandatory compliance date, there will be an optional early compliance period during which creditors will be able to use either the current General QM definition or the revised General QM definition. The Seasoned QM Final Rule will apply to covered transactions for which creditors receive an application on or after the effective date, the CFPB said.
To read the General QM final rule, click here.
To read the Seasoned QM final rule, click here.