Removing Barriers Blog

Consumer Financial Protection Bureau Issues Two Final Rules to Promote Access to Responsible, Affordable Mortgage Credit
Posted December 14, 2020 by CUNA Advocacy

The CFPB finalized its General Qualified Mortgage (QM) definition, and the new Seasoned QM regulations under the Truth in Lending Act (Regulation Z).  The changes made in these final rules were generally responsive to CUNA’s requests and credit unions will need to review these changes and make their processes and systems to meet the new QM requirements.

General QM

As requested by CUNA, the final General QM rule amends Regulation Z to, among other things, replace the 43% debt-to-income (DTI) requirements and Appendix Q DTI calculation requirements with a more streamlined price-based approach.  As expected, the new rule retains the same product-feature and underwriting requirements and limits on points and fees as the old definition, but replaces the DTI test for first lien QM loans with a price threshold that caps the annual percentage rate (APR) on these loans to an amount that does not exceed the average prime offer rate (APOR) for a comparable transaction by more than 2.25 percentage points as of the date the interest rate is set.  This spread is 0.25% higher than the 2% that the CFPB proposed initially, in recognition that “a 2.25-percentage-point pricing threshold strikes the best balance between ensuring consumers’ ability to repay and ensuring continued access to responsible, affordable mortgage credit.” 

In a separate rulemaking finalized in October, the CFPB extended the sunset date for the related Temporary GSE QMs until the “mandatory compliance date” for this new General QM definition.  This final General QM rule establishes that mandatory compliance date as July 1, 2021, meaning that lending pursuant to an application received from a member after July 1, 2021 must meet the new General QM requirements to qualify for the regulation’s liability protections.  Interestingly, applications received after the effective date of the regulation (60 days after publication in the Federal Register, estimated to be Friday, February 12, 2021) but before the July 1, 2021 mandatory compliance date can receive protections by meeting either the Temporary GSE QM or new General QM definitions.  The final rule incorporates higher QM thresholds for loans with smaller loan amounts and for subordinate-lien transactions, allowing, for example, General QM protections for first lien loans with up to a 6.5% spread if the loan is for an amount between $66,156 (indexed for inflation) and $110,260 (indexed for inflation).

No changes were made to the safe harbor thresholds, which provide safe harbor protections for QM loans that do not exceed an APOR for a comparable transaction by 1.5 percentage points or more as of the date the interest rate is set (or by 3.5 percentage points or more for subordinate lien transactions).

 

Seasoned QM

In addition to the changes made to the General QM definition the Bureau also finalized the creation of a new “Seasoned QM” category. The final rule defines Seasoned QMs as first-lien, fixed-rate covered transactions that meet certain performance requirements over a seasoning period of at least 36 months, are held in portfolio until the end of the seasoning period, comply with general restrictions on product features and points and fees, and meet certain underwriting requirements.

Specifically, a covered transaction must meet the following product restrictions to be eligible to become a Seasoned QM:

  • The loan is secured by a first lien;
  • The loan has a fixed rate, with regular, substantially equal periodic payments that are fully amortizing and no balloon payments;
  • The loan term does not exceed 30 years; and
  • The loan is not a high-cost mortgage as defined in § 1026.32(a).

The rule also requires that the creditor consider the consumer’s DTI ratio or residual income, income or assets other than the value of the dwelling and debts, and verify that information using the same “consider and verify” requirements established for General QMs in the General QM Final Rule.

Regarding the rule’s performance requirement, 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. 

This Seasoned QM rule will take effect 60 days after publication in the Federal Register, which aligns with the effective date for the General QM Final Rule.