QM Policies and Procedures and Documentation Requirements
We have blogged about the Consumer Financial Protection Bureau’s (CFPB) new general qualified mortgage (QM) definition a couple of times. The new general QM definition replaced the 43% debt-to-income ratio (DTI) with a price-based framework that looks at the rate spread between the annual percentage rate and the average prime offer rate for consumer credit transactions secured by a dwelling covered by the rule (i.e., not HELOCs). As long as the spread falls within the acceptable thresholds identified in section 1026.43(e)(2)(vi) and the transaction satisfies all of the other requirements, including the restrictions on certain types of loan features and limits on points and fees, then the transaction can fit into the general QM definition set forth in section 1026.43(e)(2).
The new section 1026.43(e)(2)(v)(A) explains that the general QM definition requires credit unions to “[c]onsider[] the consumer's current or reasonably expected income or assets other than the value of the dwelling (including any real property attached to the dwelling) that secures the loan, debt obligations, alimony, child support, and monthly debt-to-income ratio or residual income, using the amounts determined from paragraph (e)(2)(v)(B) of this section.” Section 1026.43(e)(2)(v)(B) instructs credit unions about how to verify a consumer’s income, assets, and obligations. Because the new general QM definition eliminated former appendix Q, which provided prescriptive standards about how to calculate monthly debt and income for the 43% DTI limit in the old general QM definition, section 1026.43(e)(2)(v) was needed to fill that gap. It clarified what was needed to consider and verify that data under the new general QM definition.
The commentary to the new rule also addresses the consider and verify requirements and explains that the rule requires written policies and procedures regarding how a credit union accounts for an applicant's income, debt, and DTI or residual income and documents how it considered these particular factors. In the preamble to the final rule, the CFPB explains that “it is standard practice for creditors to maintain written policies and procedures, including underwriting standards, for considering debt, income, and DTI or residual income, and commenters representing creditors explained that their members already have underwriting procedures to take into account DTI in the ability-to-repay determination.” The preamble also notes that the “revised consider requirement should include a documentation component because, absent a documentation requirement, only the creditor would know how and whether it took into account the required factors in its ability-to-repay determination.”
Comment 43(e)(2)(v)(A)-1 provides examples about how to comply with the documentation requirement, including “an underwriter worksheet or a final automated underwriting system certification, in combination with the creditor's applicable underwriting standards and any applicable exceptions described in its policies and procedures, that shows how these required factors were taken into account in the creditor's ability-to-repay determination.” Failure to properly document the consider requirements is not a violation of the recordkeeping requirements in section 1026.25 of Regulation Z. Instead, failure to comply with the documentation requirement means that a covered transaction is not eligible to be a QM under the price-based general QM definition.