The Consumer Financial Protection Bureau (Bureau or CFPB) issued two final rules on December 10 with significant implications for the mortgage marketplace. Of the two final rules from the Bureau, one drastically simplifies the definition of a “qualified mortgage,” or “QM,” and the other provides an alternative pathway to QM safe harbor status for certain seasoned mortgage loans, which together may encourage innovation in the mortgage market and potentially help to bring certainty to secondary market participants.
Despite their technical-sounding features, these two rules together will affect a huge portion of mortgage originations in the United States and have the potential to offer meaningful regulatory relief for mortgage originators and securitization participants—so long as the rules go into effect as written, are upheld, and/or not revised or rescinded by the incoming administration.
We previously reported on the Bureau’s proposals that were issued earlier this year with respect to these rulemakings: CFPB Proposes Substantial Amendments to Qualified Mortgage Definition, Addresses GSE Patch and CFPB Proposes New ‘Seasoned’ Qualified Mortgage Category.
The Bureau’s 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 (General QM loans). In adopting a price-based approach to replace the specific DTI limit for General QM loans, the Bureau determined that 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, the rule reflects the Bureau’s decision that conditioning QM status on a specific DTI limit could impair access to responsible, affordable credit.
Under the General QM Final Rule, a loan receives a conclusive presumption that the consumer has the ability to repay if the annual percentage rate (APR) does not exceed the average prime offer rate (APOR) 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 has 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. In addition, the General QM Final Rule:
The Bureau’s second final rule, the Seasoned QM Final 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 (Seasoned QM loans). To be eligible to become a Seasoned QM (and to thereby receive a presumption of compliance with the ability-to-repay (ATR) requirements), a loan must:
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 loan must also “season” by meeting certain performance requirements as of the end of the 36-month 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 creditor or first purchaser also generally must hold the loan on portfolio until the end of the seasoning period.
Of particular importance, we note that the Seasoned QM Final Rule differs from the proposal in certain limited, but significant, respects, including by adding a new exception to the portfolio requirement that allows loans to be transferred once during the seasoning period, excluding high-cost mortgages, and applying the same consider and verify requirements that will apply to General QM loans. In the event of a transfer of a whole loan during the seasoning period (subject to the one transfer only requirement), the final rule requires the purchaser to hold the loan in portfolio after the transfer until the end of the seasoning period.
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 (which is also the expiration of the Temporary GSE QM loan category—the GSE Patch—unless the GSEs exit conservatorship first). Between the General QM Final Rule’s effective date and mandatory compliance date, the Bureau is providing 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.
If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:
Asa ("Geordie") Herald
David I. Monteiro