CFPB Announces New General QM Rule and Seasoned QM Rule

The CFPB announced a new General Qualified Mortgage rule December 10, 2020.  The final rule will be effective 60 days from when it is published in the Federal Register, though mandatory compliance will not be required until July 1, 2021.   The rule modifies the General Qualified Mortgage Definition at 12 C.F.R. 1026.43 and makes modifications to the requirements for a loan to meet the definition.  At the same time, the CFPB also announced a new Seasoned QM final rule, that creates a new category of QM based on the borrower’s payment history after the initial 36 months.

General QM Rule

The new General QM final rule retains the points and fees limitation and safe harbor rules, but replaces the 43% DTI ratio basis with a new limit based on the loan’s APR.  The rule removes Appendix Q underwriting standards though it retains the requirement that a creditor “consider and verify” a borrower’s income, assets, debt obligations, etc.

The DTI limitation has been replaced with a priced-based approach through comparison of the loan’s Annual Percentage Rate (APR) to the Average Prime Offer Rate (APOR). The rule applies a threshold of 2.25% above the relevant APOR for most loans, but provides for higher rates for smaller loan amounts, loans secured by manufactured housing or subordinate-lien transactions.

If a loan’s interest rate may or will change in the first five years after the date on which the first regular periodic payment will be due, the APR must be calculated using the highest interest rate that may apply in that five years as the loan’s interest rate.

Even though the inflexible 43% DTI rule was removed, the new general QM rule clarifies that in order to achieve the “consider and verify” requirements a creditor must:

• Take into account current or reasonably expected income, assets, debt obligations, etc., and monthly DTI ratio or residual income in its ability-to-repay determination;
• Maintain written policies and procedures for how it takes into account a consumer’s expected residual income, obligations, and DTI; and
• Retain documentation showing how it took into account a consumer’s expected residual income, obligations, and DTI, including how it applied its policies and procedures.

The rule does include a list of specified verification standards a creditor may use to satisfy the consider and verify requirements.

In addition to the points and fees limitation the revised definition retains, the rule also retains the definition for “higher-priced covered transaction”.  A loan which is not a higher-priced covered transaction is entitled to a safe harbor presumption of compliance with the ATR/QM rule.  A loan which otherwise meets all requirements of the ATR/QM rule, but which is a higher-priced covered transaction, is entitled to a rebuttable presumption of compliance with the ATR/QM rule. The final rule maintains the current limits of 1.5% (Safe Harbor) and 3.5% (Rebuttable Presumption) for first-lien loan amounts below and above the applicable conforming loan limit, respectively.

The Temporary QM Rule (aka, the GSE Patch), which we recently wrote about here, will no longer be effective as of the mandatory compliance date of the new General QM final rule.  After the mandatory compliance date, there will be no separate rule applicable to loans purchased by the GSEs, Fannie Mae and Freddie Mac.  These loans will be subject to the new General QM definition.  The CFPB recently extended the sunset date of the Temporary QM rule to coincide with the mandatory compliance date of the new General QM definition.

The HUD and VA QM rules are not affected by this change, nor are the rules applicable for small creditors and other special exceptions like Housing Finance Agency loans.

Seasoned QM Rule

In addition to the new General QM final rule, the CFPB also finalized and announced a new Seasoned QM final rule.  DocMagic previously posted about the proposed Seasoned QM Rule here.  The CFPB has now finalized that proposed rule. 

Unlike other QM rules, a Seasoned QM loan may only achieve QM status after consummation.  Seasoned QM loans must have a good payment history for 36 months with allowance for only two 30-day delinquencies and one 60-day delinquency.  In addition, a Seasoned QM loan must meet certain product restrictions:

• First-lien transaction.
• The loan has a fixed rate.
• The loan has regular, substantially equal periodic payments that are fully amortizing, does not allow negative amortization, and does not have a balloon payment. A loan has fully amortizing payments if periodic payments of principal and interest will fully repay the loan over the loan term.
• Maximum loan term of 30 years.
• The loan is not a high-cost mortgage as defined in Regulation Z, 12 CFR 1026.32(a).

Further, the standard QM points and fees limitations apply, as well as the general QM rule’s requirements for the creditor to consider and verify the borrower’s income, assets, debt obligations, etc. and DTI in its ability-to-repay determination.  The loan must remain in portfolio of the original lender for the full seasoning period of 36 months.   The rule does make allowance for certain “qualifying changes” such as temporary payment arrangements, etc. 

A Seasoned QM loan is entitled to a conclusive presumption of compliance with the Ability-to-Repay rule (i.e., “safe harbor QM”).  The Seasoned QM rule helps to eliminate some uncertainty creditors may have as to which QM rule they may rely on with certain transactions.

Stay tuned for additional information on updates to DocMagic’s systems, audits and tests to consider the new General QM Final Rule.    If you have any questions about the content of this article, please contact DocMagic’s Compliance Department.