Consumer Financial Protection Bureau Finalizes Ability to Repay and Qualified Mortgage Rules

The Bureau of Consumer Financial Protection (still the CFPB) has finalized long-coming rules around Ability to Repay (ATR) and Qualified Mortgages (QM) under Truth in Lending (Reg Z) requirements.

Qualified Mortgage Definition under the Truth in Lending Act (Regulation Z): General QM Loan Definition

In the first of two separate rules, the General QM Final Rule amends the General QM definition. Among other things, the final rule removes the General QM loan definition’s 43% debt-to-income (DTI) limit and replaces it with price-based thresholds. General QM loans reduce a lender’s liability under rebuttable presumptions but does not provide a safe harbor.

This is complex and involves loan amounts and loan pricing thresholds. There are final rules related to the original Homeowner and Equity Protection Act (HOEPA) that created rules for Higher Priced Mortgage Loans (HPML) regarding average prime offer rate (APOR) and Higher Cost Mortgage Loans (HPML) regarding points and fees. These have been reduced, but there are still special considerations for smaller loans and manufactured homes (think Small Servicer rules). These spreads have been reduced as well, but they are still more generous than for larger loans. There is also a lengthy final rule description for adjustable rate mortgages (ARM) – particularly for calculating APR for short reset ARMs (five years and under).

What’s the same? The General QM still requires a good faith effort to measure the consumer’s ability to pay outside of the value of the collateral and debts, and it requires verification of income.

The full text is here:

https://files.consumerfinance.gov/f/documents/cfpb_atr-qm-general-qm-final-rule_2020-12.pdf

Qualified Mortgage Definition under the Truth in Lending Act (Regulation Z): Seasoned QM Loan Definition

The second rule creates a new category of qualified mortgages under the Seasoned QM Final Rule. This rule is designed to replace the Agency GSE QM, and it provides a safe harbor for loans accepted or guaranteed for purchase by the GSEs (Fannie and Freddie) for first lien mortgages. These agencies are still in conservatorship, but that will sunset as some point, maybe sooner rather than later given the strength of the residential loan market. The rule will eventually entice other private concerns to enter the market and continue the CFPBs mission to ensure to ensure access to responsible, affordable credit for consumers with debt-to-income levels above 43%. Keep in mind, there are still APOR and points and fees considerations attached to these loans.

In a nutshell, first lien-covered loans that are not prohibited products (interest only, balloon, etc.) and have been held in portfolio for 36 months and are not HPML or HCML loans will attain Seasoned QM status. The loan must also meet ATR requirements under General QM status. There is a provision that allows for one transfer of ownership, but the loan must still meet the 36-month requirement for the new owner to achieve Seasoned status.

And, in our new normal, the regulations now consider natural disasters or emergencies (PANDEMIC). Accommodations made to a borrower as a result of, say COVID, will not affect a borrower’s delinquency, but the amount of time a loan is in an accommodation period will extend the 36-month seasoning term by the length of the accommodation.

Additionally, seasoning is available only for covered transactions that 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. Funds taken from escrow in connection with the covered transaction and funds paid on behalf of the consumer by the creditor, servicer, or assignee of the covered transaction (or any other person acting on their behalf) are not considered in assessing whether a periodic payment has been made or is delinquent for purposes of this final rule. Creditors can, however, generally accept deficient payments, within a payment tolerance of $50, on up to three occasions during the seasoning period without triggering a delinquency for purposes of this final rule.

See the text at:

https://files.consumerfinance.gov/f/documents/cfpb_atr-qm-seasoned-qm-final-rule_2020-12.pdf

So, like any government regulation, the final text gets lengthy and circular in an effort to consider all of the unintended consequences. As a result, these changes are both fairly simple, yet highly complex – go figure.

The rules were published on 10/26/2020, so they are effective 12/26/2020 – Happy New Year from the CFPB! The mandatory compliance date is July 1, 2021, or sooner if the GSEs exit conservatorship.

If you have any questions, please email me at bruce.rumbold@freedmaxick.com.