Three Proposed Rules to Amend the CFPB’s Ability to Repay Rule

September 8, 2020 by Tom Hajda, Esq.

With certain exceptions, the Ability to Repay/Qualified Mortgage Rule (“Rule”) requires lenders to make a reasonable, good faith determination of a consumer’s ability to repay a residential mortgage loan and provides certain protections from liability for residential mortgage loans that meet the Rule’s requirements for “qualified mortgages” or “QMs.”

A lender that makes a QM loan is presumptively protected from liability under the Rule if the QM loan is “higher priced” but has a “safe harbor” from liability if the QM loan is not “higher priced.”

The current Rule establishes different categories of QMs, including the Temporary QM and the General QM.  

June 22, 2020 Proposals

What are the June 22 Proposals?

On June 22, 2020, the CFPB issued two Proposed Rules. These two Proposals would:

  • Amend the sunset date for a temporary category of QMs (“Temporary GSE QMs”), and
  • Amend the definition of a permanent category of QMs (“General QMs”).

Existing General QM Category

To fit within the Rules’ current General QM category, residential mortgage loans must:

  • Comply with the Rule’s existing prohibitions on certain loan features,
  • Comply with the Rule’s existing points-and-fees limits,
  • Comply with the Rule’s existing underwriting requirements,
  • Have a total monthly debt to total monthly income (DTI ratio) that does not exceed 43 percent, and
  • Be underwritten so that lenders calculate, consider, and verify debt and income for purposes of determining the consumer’s DTI ratio using the standards contained in Appendix Q of Regulation Z.

Existing Temporary GSE QM Category

In General

A second, temporary category of QMs consists of residential mortgage loans that:

  • Comply with the same loan-feature prohibitions and points-and-fees limits as General QM loans, and
  • Are eligible to be purchased or guaranteed by Fannie Mae or Freddie Mac, which are referred to as government sponsored enterprises (“GSEs”). 

No DTE or Appendix Q Requirements

A Temporary GSE QM does not:

  • Require a specific debt-to-income (“DTI”) limit, or
  • Require lenders to use Appendix Q to determine or verify a consumer’s income, debt, or DTI ratio.

Therefore, a loan can qualify as a Temporary GSE QM even if the consumer’s DTI ratio exceeds 43 percent, so long as the loan is eligible to be purchased or guaranteed by one or both of Fannie Mae or Freddie Mac.

Temporary GSE QM Expiration Date

The Temporary GSE QM category is set to expire on January 10, 2021 (i.e., the sunset date).

Proposal to Extend the Sunset Date for Temporary GSE QMs

  • The Proposal would extend the sunset date for the Temporary GSE QMs.  
  • The sunset date would be the same as the effective date of the final amendments to the General QM loan definition discussed below.   
  • The effective date to amend the General QM loan definition would not occur before April 1, 2021.

Proposal to Change the Definition of General QMs

In General

The Proposal would remove:

  • The 43 percent DTI ratio limit and replace it with a limit based on the loan’s pricing, and
  • Remove Appendix Q and any requirements to use Appendix Q to verify debt and income for General QM loans.

APR Requirements

A loan generally would meet the General QM loan definition only if the annual percentage rate (APR) exceeds the average prime offer rate (APOR) for a comparable transaction by less than two percentage points as of the date the interest rate is set.  The Proposal has higher thresholds for first-lien loans with loan amounts of less than $109,898 (indexed for inflation) and for subordinate-lien loans:

  • For a first-lien covered transaction with a loan amount greater than or equal to $65,939 (indexed for inflation) but less than $109,898 (indexed for inflation), the threshold would be 3.5 percentage points;
  • For a first-lien covered transaction with a loan amount less than $65,939 (indexed for inflation), the threshold would be 6.5 percentage points;
  • For a subordinate-lien covered transaction with a loan amount greater than or equal to $65,939 (indexed for inflation), the threshold would be 3.5 or more percentage points; and
  • For a subordinate-lien covered transaction with a loan amount less than $65,939 (indexed for inflation), the threshold would be 6.5 percentage points.

Features and Requirements

The Proposal:

  • Keeps the Rule’s existing product-features,
  • Keeps the Rule’s existing underwriting requirements,
  • Keeps the Rule’s existing limits on points and fees,
  • Requires lenders to:
  • Consider the consumer’s income, debt, and DTI ratio or residual income for General QM loans (and keep documents showing how the lender considered these factors); and
  • Consider and verify the consumer’s income, assets, debt obligations, alimony, and child support for a loan to meet the definition of a General QM (using the existing verification requirements).
  • The Proposal would provide a safe harbor for compliance with the verification requirement if a lender complies with verification standards in one or more specified versions of certain documents.
  • The CFPB has asked for comment on whether these documents should include the Fannie Mae Single Family Selling Guide, Freddie Mac Single-Family Seller/Servicer Guide, and governmental standards from the Federal Housing Administration, United States Department of Veterans Affairs, and the United States Department of Agriculture.

Alternative Approaches for Changing the Definition of General QMs

The CFPB has asked for comment on two alternative approaches to changing the definition of General QMs.

  • Alternative 1:  Keep the DTI ratio limit and increase it to a specific threshold between 45 percent and 48 percent; or
  • Alternative 2:  Use a combined approach involving both pricing and a DTI ratio limit, such as applying a DTI ratio limit to loans that are above specified rate spreads.

Under these two alternative approaches, a lender would not be required to consider or verify the DTI ratio using Appendix Q.

Safe Harbor and Rebuttable Presumption Stays the Same

The Proposal would not change the Rule’s current threshold separating safe harbor from rebuttable presumption QMs. Under that threshold, a loan is a safe harbor QM if its APR exceeds APOR for a comparable transaction by less than 1.5 percentage points as of the date the interest rate is set or by less than 3.5 percentage points for subordinate lien transactions. 

Government Insured and Guaranteed Loans

Neither of the above Proposals would affect QMs made under rules of the Federal Housing Administration, United States Department of Veterans Affairs, or the United States Department of Agriculture.

August 18, 2020 Proposal

Proposed New Category of Seasoned QM

Under this Proposal, a loan would be a “Seasoned QM” and provide a “safe harbor” from liability under the Rule if the loan:

  • Meets certain product restrictions,
  • Meets certain underwriting requirements,
  • Is held in portfolio until the end of a 36-month “Seasoning Period,” and
  • Meets certain performance standards at the end of the 36-month seasoning period.

A loan made by any lender, regardless of size, would be eligible to become a Seasoned QM if at the end of the seasoning period it meets the requirements in this Proposal.

Product Restrictions

A Seasoned QM must:

  • Be secured by a first lien,
  • Have a fixed rate,
  • Have regular, fully amortizing periodic payments that are substantially equal in amount (i.e., no negative amortization, interest-only payments, or balloon payments),
  • Have a loan term that is not greater than 30 years, and
  • Have total points and fees that do not exceed existing limits that currently apply to other QMs under the Rule.

Underwriting Requirements

Under the Proposal, a lender must:

  • Consider the consumer’s debt-to-income (DTI) ratio or residual income,
  • Verify the consumer’s debt obligations and income, and
  • Take into account the consumer’s monthly payment for mortgage-related obligations, including applicable taxes, insurance, and assessments.

However, the Proposal does not:

  • Have any specific DTI limits, or
  • Require a lender to use appendix Q when underwriting the loan.

36-Month Seasoning Period

  • A loan would only be eligible to be a Seasoned QM if the lender held the loan in portfolio until the end of the 36-month seasoning period.
  • The Seasoning Period begins on the date when the first payment is due after consummation.
  • If there is a delinquency of 30 days or more at the end of the final month of the Seasoning Period, the Seasoning Period would be extended until there is no delinquency.
  • The Proposal’s portfolio requirements are similar to those that apply to certain existing types of QMs under the Rule.

Performance Requirements at the End of the 36-Month Seasoning Period

Requirements

To be a Seasoned QM, a loan can have:

  • No more than 2 delinquencies of 30 or more days during the Seasoning Period, and
  • No delinquencies of 60 or more days during the seasoning period.

What is a Delinquency?

  • “Delinquency” means a consumer’s failure to make a payment (in one full payment or in two or more partial payments) sufficient to cover principal, interest, and, if applicable, escrow by the date the periodic payment is due under the terms of the loan contract.
  • Funds taken from escrow and funds paid on behalf of the consumer by the lender or servicer would not be considered when determining whether a payment has been made or is delinquent for purposes of the Proposal.  
  • Lenders generally would be permitted, however, to accept deficient payments within a payment tolerance of $50 on up to 3 occasions during the Seasoning Period without triggering a delinquency for purposes of meeting the proposed performance requirements.

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