The Consumer Financial Protection Bureau (CFPB or Bureau) issued a proposed rule on August 18 to create a new category of seasoned qualified mortgages (Seasoned QMs) that, if finalized as written, would carry significant implications for the residential mortgage marketplace.
This announcement was not unexpected, as the CFPB announced at the end of June that it was considering issuing such a proposed rule later this year. Unless the Bureau changes its approach in response to industry comments, the implications of the proposed rule, if enacted, may lie well in the future: as proposed, the first loans that meet the definition of Seasoned QMs will not exist until at least 2024.
The Dodd-Frank Act amended the Truth in Lending Act (TILA) to establish ability-to-repay (ATR) requirements for most residential mortgage loans. TILA identifies factors a creditor must consider in making a reasonable and good-faith assessment of a consumer’s ATR. TILA also defines a category of loans called qualified mortgages (QMs), which are presumed to comply with the ATR requirements.
In January 2013, the Bureau completed an ATR/QM rule that established a general QM standard (the General QM category) for loans where the consumer’s debt-to-income (DTI) ratio is 43% or less and the loan meets the other statutory QM requirements. With certain exceptions, Regulation Z (TILA’s implementing regulation) 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 QMs obtain certain protections from liability. Regulation Z contains several categories of QMs, including the General QM category and a temporary category (Temporary GSE QM loans) 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).
As drafted, only certain loans are eligible to become Seasoned QMs. Specifically, a covered transaction would have to meet the following criteria in order for a loan to be eligible to become a Seasoned QM:
Once originated, covered transactions would then generally have to be held in the originating lender’s portfolio for a 36-month seasoning period and meet certain underwriting requirements. The proposed rule generally defines this 36-month seasoning period as beginning on the date on which the first periodic payment is due after consummation. For a loan to be eligible to become a Seasoned QM, the proposed rule would also require that the creditor consider and verify the consumer’s debt-to-income ratio (DTI) or residual income at origination. Similar in several respects to the requirements established for certain portfolio loans originated by certain small creditors (Small Creditor QMs), the proposed rule would not specify a DTI limit, nor would it require the creditor to use appendix Q to Regulation Z in calculating and verifying debt and income. However, unlike Small Creditor QMs, Seasoned QMs would not be limited to small creditors.
Seasoned QMs would only be available for covered transactions that have no more than two 30-day delinquencies and no delinquencies of 60 or more days as of the end of the seasoning period. Funds taken from escrow in connection with the covered transaction and funds paid on behalf of the consumer by the creditor, servicer, or assignee of the covered transaction (or any other person acting on the consumer’s behalf) would not be considered in assessing whether a periodic payment has been made or is delinquent for purposes of the proposed rule. Creditors could, however, generally accept deficient payments within a payment tolerance of $50 on up to three occasions during the seasoning period without triggering a delinquency for purposes of the proposal.
Also, should there be a disaster or pandemic-related national emergency and as long as certain conditions are met, the proposed rule would not disqualify a loan from becoming a Seasoned QM as a result of the failure of the related consumer to make full contractual payments if, as a result of such disaster or emergency, the consumer receives a temporary payment accommodation. However, time spent in such a temporary accommodation would not count towards the 36-month seasoning period, and the seasoning period could only resume after the temporary accommodation if any delinquency is cured either pursuant to the loan’s original terms or through a qualifying change as defined in the proposed rule.
Under the proposed rule, a covered transaction would receive a safe harbor from ATR liability at the end of the 36-month seasoning period as a Seasoned QM if it satisfies such product restrictions, points-and-fees limits, and underwriting requirements, and if it meets such performance and portfolio requirements during the seasoning period.
According to the Bureau, the new Seasoned QM definition “could complement existing QM definitions and help ensure access to responsible, affordable mortgage credit upon the expiration of one of the existing QM definitions.” The Bureau states that it issued this proposed rule because “it seeks to encourage safe and responsible innovation in the mortgage origination market, including for certain loans that are not QMs or are only rebuttable presumption QMs under the existing QM categories.” The Bureau preliminarily concludes that it is appropriate to presume compliance with the ability-to-repay (ATR) requirements when such loans season in the manner set forth in the proposed rule. In large part, the proposed rule reflects the Bureau’s understanding that many borrowers who have the ability to repay, such as those with nontraditional credit profiles or income sources, may fall outside existing QM definitions.
This announcement follows two proposed rules from earlier this year regarding qualified mortgages. In the first proposed rule (the General QM Proposal), the Bureau proposed to amend the General QM category in Regulation Z to replace the 43% DTI limit with a price-based approach. In the second proposed rule (the Extension Proposal), the Bureau proposed to amend Regulation Z to extend the so-called “GSE Patch” in respect of Temporary GSE QM loans that is set to expire upon the effective date of a final rule regarding the proposed amendments to the General QM category in Regulation Z (as referenced above). The GSE Patch refers to a temporary category of QM loans that: (i) comply with the same loan-feature restrictions and points-and-fees limits as General QM category loans; and (ii) are eligible to be purchased or guaranteed by the GSEs while under the conservatorship of the FHFA. Unlike its application to the General QM category, Regulation Z does not prescribe a DTI limit for GSE Patch QM loans. We previously reported on these earlier proposals.
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