CFPB Amends Qualified Mortgage Rule, Part I: Shift from the Debt-to-Income Ratio
On December 10, 2020 the CFPB announced final rules amending the qualified mortgage (QM) rule. Specifically, the rules shift from a debt-to-income ratio (DTI) standard to a pricing-based standard for determining whether certain mortgages will be QMs and create a “seasoned” QM which will be addressed in a future blog post.
As a reminder, the Dodd-Frank Act and section 1026.43 of Regulation Z require credit unions to make a reasonable, good faith determination that a borrower has the ability to repay (ATR) any consumer credit transaction that is secured by a dwelling, with some exceptions such as for home equity lines of credit. This involves consideration of eight specific underwriting factors. If a loan meets certain criteria, it is a QM and is considered to be in compliance with the ATR requirements. Currently, there are four types of QMs in the regulation:
- General QM, where the debt-to-income ratio is capped at 43%;
- Small creditor portfolio QM;
- Small creditor balloon-payment QM; and
- Temporary QM, which must be eligible to be purchased by Fannie Mae or Freddie Mac (the GSE patch)
Several weeks ago, we blogged about the temporary extension of the GSE patch which was designed to be in effect until the amendments to the QM rule were finalized and went into effect. The changes to the general QM will be effective July 21, 2020. So what are some of these key changes?
Instead of using a DTI ratio cap for the general QM, calculated in accordance with Appendix Q to Regulation Z, the general QM will be determined using a price-based standard. Specifically, for most first-lien loans a general QM will be defined as a loan where the annual percentage rate (APR) does not exceed the average prime offer rate (APOR) by 1.5 percent at the time the interest rate is set. For subordinate liens, the APR cannot exceed the APOR by 3.5 percent. These loans are considered to be in compliance with the ATR rule. Much like the current rule, some loans priced higher than this threshold can be a QM but only receive a rebuttable presumption that the credit union complied with the ATR rule – meaning, the borrower could present evidence that the credit union did not properly consider their ability to repay the loan as a defense to foreclosure in the first three years of the loan. Most first lien loans can receive this rebuttable presumption if the APR exceeds the APR by over 1.5 percent but less than 2.25 percent.
The CFPB took the position that a loan’s price is a strong indicator of a consumer’s ATR and a more holistic and flexible measure than DTI alone. The bureau did acknowledge that “a loan’s price is not a direct measure of ATR” but sees this as an effective indirect measure of ATR given that pricing encompasses many factors.
Also similar to the current rule, there are higher thresholds for loans with smaller loan amounts and finalizes an additional higher-pricing threshold for smaller loans secured by a manufactured home. For example, first-lien covered transactions secured by a manufacture home with loan amounts less than $110,260, the APR may not exceed APOR by more than 6.5 percent.
The credit union must still consider a borrower’s DTI, but not at a particular threshold. The rule removes Appendix Q as proposed but allows utilizing standards like the Fannie Mae/Freddie Mac selling guides or the requirements of certain federal programs like the Federal Housing Administration as a safe harbor for making this determination. The rule did not change other factors for a loan to meet the QM standard, such as the limitation on features like balloon payments, negative amortization and a maximum amount for certain points and fees.
Effective Date. The rule is effective 60 days after publication in the Federal Register with a mandatory compliance deadline of July 1, 2021. The CFPB did adopt an early compliance option, where credit unions could follow the new standard in the window between the effective date of the rule and July 1, 2021. Currently, the rule is scheduled to published on December 29, 2020 which would make the effective date February 27, 2021.
NAFCU is working on a Final Regulation summary of both QM rules which will be available to members here.
Programming Note. NAFCU will be closed on Thursday and Friday in observance of Christmas. We hope you all have a safe and happy holiday, and we'll be back to blogging on Monday.