The Consumer Financial Protection Bureau (CFPB) has finalized two rules that will replace its Qualified Mortgage (QM) rule.
The first rule, the General QM Final Rule, replaces the current QM rule which requires that a consumer’s debt-to-income ratio (DTI) not exceed 43% with a limit based on the loan’s pricing.
The second rule creates a new category for QMs, Seasoned QMs.
In addition, the CFPB has opted to keep the GSE “Patch” in place until July 1, 2121, or until the GSEs are taken out of conservatorship, whichever comes first.
The bureau says the two new QM rules will help ensure a smooth and orderly transition away from the Patch and maintain access to responsible, affordable mortgage credit upon its expiration.
Under the General QM Final Rule, a loan receives a conclusive presumption that the consumer had the ability to repay if the annual percentage rate does not exceed the average prime offer rate for a comparable transaction by 1.5 percentage points or more as of the date the interest rate is set.
A loan receives a rebuttable presumption that the consumer had the ability to repay if the annual percentage rate exceeds the average prime offer rate for a comparable transaction by 1.5 percentage points or more but by less than 2.25 percentage points.
In addition, the General QM Final Rule:
- Provides higher pricing thresholds for loans with smaller loan amounts, for certain manufactured housing loans, and for subordinate-lien transactions;
- Retains the General QM loan definition’s existing product-feature and underwriting requirements and limits on points and fees; and
- Requires lenders to consider a consumer’s DTI ratio or residual income, income or assets other than the value of the dwelling, and debts and removes appendix Q and provides more flexible options for creditors to verify the consumer’s income or assets other than the value of the dwelling and the consumer’s debts for QM loans.
“Through this General QM Final Rule, we are working to create an appropriate, more flexible General QM loan definition,” says Kathleen L. Kraninger, director of the CFPB, in a statement “Our final rule’s price-based approach strikes the best balance between assessing consumers’ ability to repay and promoting access to responsible, affordable mortgage credit.”
The bureau also is encouraging innovation in the mortgage origination market through the issuance of the Seasoned QM Final Rule.
This is a new category of QMs for first-lien, fixed-rate covered transactions that have met certain performance requirements, are held in portfolio by the originating creditor or first purchaser for a 36-month period, comply with general restrictions on product features and points and fees, and meet certain underwriting requirements.
To be eligible to become a Seasoned QM, a loan must be a first-lien, fixed-rate loan with no balloon payments and must meet certain other product restrictions. As under the General QM Final Rule, the creditor must also consider the consumer’s DTI ratio or residual income, income or assets other than the value of the dwelling, and debts and verify the consumer’s income or assets other than the value of the dwelling and the consumer’s debts.
The loan must also “season” by meeting certain performance requirements at the end of the seasoning period. Specifically, the loan can 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. The creditor or first purchaser also generally must hold the loan on portfolio until the end of the seasoning period.
“This Seasoned QM Final Rule will ensure access to responsible, affordable credit in the mortgage market through responsible innovation,” Kraninger says. “Allowing lenders the flexibility to respond to changes in the economy while still ensuring a consumer has the ability to repay will help many consumers achieve their dream of owning a home.”
The General QM Final Rule and the Seasoned QM Final Rule will take effect 60 days after publication in the Federal Register.
The General QM Final Rule will have a mandatory compliance date of July 1, 2021.
Between the General QM Final Rule’s effective date and mandatory compliance date, there will be an optional early compliance period during which creditors will be able to use either the current General QM definition or the revised General QM definition. The Seasoned QM Final Rule will apply to covered transactions for which creditors receive an application on or after the effective date.
In a statement, Bob Broeksmit, CMB, CEO and president of the Mortgage Bankers Association, says “the revisions to these rules will preserve and expand responsible access to affordable credit while retaining core consumer protections.”
“In particular, these rules remove cumbersome requirements for non-traditional sources of income and expand consumers’ choices,” Broeksmit says. “MBA appreciates the bureau’s effort to seek stakeholder input, and we look forward to continuing to work together on other issues aimed at protecting consumers.”
Charlie Oppler, president of the National Association of Realtors, also commended the CFPB for “replacing the QM rule and its onerous 43 percent debt-to-income requirement while working to balance the best interests of consumers, American real estate and our nation’s economy.”
“As underwriting remains critical to the American Dream of homeownership, NAR believes this final rule must be flexible enough to serve all communities, including individuals with non-traditional income documentation,” Oppler says. “And with the pandemic straining the finances of so many, it is even more critical for this rule to intentionally consider and address the ongoing impact on housing access and affordability.”