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The Consumer Financial Protection Bureau (CFPB or Bureau) on October 20 issued a final rule to extend the government-sponsored enterprises patch (GSE Patch), i.e., the “temporary qualified mortgage” exemption within the qualified mortgage/ability-to-repay rule.

This final rule resolves lingering uncertainty regarding the impending expiration of the GSE Patch, which was scheduled to expire on January 10, 2021 or when the GSEs (Fannie Mae and Freddie Mac) exit conservatorship, whichever comes first. Despite its technical-sounding features, this rule affects a huge portion of mortgage originations in the United States and has the potential to offer meaningful regulatory relief for mortgage originators and securitization participants.

Final Rule

The final rule largely follows the CFPB’s proposed rule on this topic, about which we previously reported. The Bureau has amended Regulation Z to replace the January 10, 2021 sunset date of the GSE Patch with a provision stating that the GSE Patch will be available only for covered transactions for which the creditor receives the consumer’s application before the mandatory compliance date of final amendments to the General QM loan definition in Regulation Z, which date is forthcoming. Thus, the Bureau’s approach as adopted aligns the GSE Patch extension sunset date with the proposed effective date of final amendments to the General QM loan definition based on the date the creditor received the consumer’s application and prevents a gap between the two definitions.  The Bureau is not extending the GSE Patch beyond the date creditors are required to transition from the current General QM loan definition to the revised General QM loan definition.

Takeaways

  • As the Bureau acknowledges, the mortgage market has evolved differently than the Bureau predicted when it issued the January 2013 ATR/QM rule. Contrary to the Bureau’s expectations in 2013, the market has not shifted away from Temporary GSE QM originations and the private market remains relatively small. Temporary GSE QM originations continue to represent “a large and persistent” share of originations in the conforming segment of the mortgage market, and a robust and sizable market to support non-QM lending has not emerged.
  • The Bureau’s assessment noted that, at least for loans intended for sale in the secondary market, creditors generally offer a Temporary GSE QM loan even when a General QM loan could be originated. Accordingly, the GSE Patch extension should help provide some certainty—at least for the next several months until final amendments to the General QM loan definition in Regulation Z are effected—to creditors and investors who have been concerned about the looming (and fast approaching) expiration of the GSE Patch.
  • Industry participants should closely follow the Bureau’s rulemaking process for the General QM loan definition and any follow-on litigation challenging the rulemaking, since the timing of that rulemaking will affect the expiration of the newly extended GSE Patch. The Bureau notes that in the unlikely event that such a rule is not finalized and the current General QM loan definition remains in place, the Bureau would revisit the Temporary GSE QM loan definition and take appropriate action. The Bureau states that it “does not intend to maintain indefinitely a presumption that loans eligible for purchase or guarantee by either of the GSEs have been originated with appropriate consideration of the consumer’s ability to repay.”
  • This final rule does not amend the provision stating that the Temporary GSE QM loan definition expires with respect to a GSE when that GSE exits conservatorship.
  • The final rule also does not affect the QM definitions that apply to Federal Housing Administration (FHA), US Department of Veterans Affairs (VA), US Department of Agriculture (USDA), or Rural Housing Service (RHS) loans.