A&B; Summary:

In an important final regulation with potentially far-reaching consequences for residential mortgage markets, the Consumer Financial Protection Bureau (“CFPB”) ends the “QM Patch” and significantly revises the criteria for what constitutes a qualified mortgage (“QM “) ready.

Notably, in this rule, published on December 10, 2020, the CFPB replaces the dreaded Annex Q and the strict debt-income underwriting threshold of 43% with a QM loan definition based on price. The rule takes effect on February 27, 2021, but its compliance is not mandatory before July 1, 2021. The QM patch will expire at the earliest between (i) July 1, 2021 or (ii) the date on which the GSEs exit. guardianship.

In a separate regulation, the CFPB promulgated new rules for “seasoned QM loans”. We will discuss these regulations in a separate article.

Background

CFPB Repayment Ability / Quality Management Regulations, promulgated under the Dodd-Frank Act, require a creditor to make a reasonable and good faith decision at or before consumption that a consumer will have. a reasonable ability to repay the loan in accordance with its terms. (The obligation applies to a consumer credit transaction secured by a home.)

The regulations currently provide:

• a “safe harbor” for compliance with the rules of repayment capacity to creditors or loan assignees who meet the definition of a QM and are not higher priced mortgages; and
• a “rebuttable presumption” of compliance with the rules of repayment capacity to creditors or assignees for higher priced mortgages.

A “higher priced mortgage” has an annual percentage rate (“APR”) above the average prime rate (“APOR”) by 1.5 percentage points or more for senior loans, or 3, 5 percentage points or more for subordinated loans. – senior loans.

The QM patch

In many cases, for a loan to achieve QM status, it must be underwritten according to the rigorous standards in Schedule Q, and the consumer’s debt-to-income ratio (“DTI”) must not exceed a hard limit of. 43%. However, CFPB regulations eliminate these special requirements if the loan is eligible for purchase by, among others, Fannie Mae and Freddie Mac. Therefore, a loan meets the QM Patch if it can be sold to one of the GSEs and meets certain other QM criteria. (These criteria include that the points do not exceed the three percent threshold, and the loan is fully amortized and has a term of no more than 30 years.)

The QM patch has significantly strengthened the presence of GSEs in the QM market, as GSEs actually support the underwriting of these loans. The regulation provided that this exemption would expire at the earliest between the end of the supervision of the GSEs in question, or January 10, 2021.

What the rule had not provided for was that the supervision of GSEs would continue for years after the date of entry into force of the CFPB regulation (January 10, 2014). Many have criticized the QM patch for improperly benefiting government-subsidized GSEs at the expense of participants in the private residential mortgage market, and have called for its elimination.

Final Rule Making: QM Patch Expiration

Notably, under the final rule, the QM patch expires permanently no earlier than (i) July 1, 2021 or (ii) the date on which the GSEs leave the trusteeship. The timing is tricky as Mark Calabria, director of the Federal Housing Finance Agency, the entity that oversees the guardianship of Fannie Mae and Freddie Mae, has indicated that he may seek to end the guardianship before President Trump leaves. its functions. In recent remarks, however, Treasury Secretary Steven Mnuchin has indicated that the end of trusteeship is not imminent.

Significantly, the expiration of the QM patch does not affect the definitions of QM that apply to loans from the Federal Housing Administration (FHA), US Department of Veterans Affairs (VA), US Department of Agriculture (USDA ) or the Rural Housing Service. In other words, loans eligible to be insured or guaranteed by these agencies can still constitute MQs if they meet the respective agency definitions of a MQ.

Annex Q and removal of 43% DTI requirement

Further, in this final rule, the CFPB eliminates the 43% DTI underwriting requirement from Annex Q and replaces them with a price-based definition of QM.

Under the rule, for first-tier transactions, a loan receives a conclusive presumption that the consumer had the capacity to repay (and therefore benefits from the presumption of “safe harbor” of QM compliance) if the APR does not. not exceed the TAPO for a comparable transaction. by 1.5 percentage points or more from the date on which the interest rate is fixed. A senior loan receives a “rebuttable presumption” that the consumer had the ability to repay if the APR exceeds the APR for a comparable transaction by 1.5 percentage points or more but less than 2.25 percentage points. The final rule provides for higher thresholds for lower loan amounts, for subordinate lien transactions, and for certain pre-fab housing loans.

In order to qualify for QM status, the loan must continue to meet legal requirements regarding the 3% point and fee limits, and must not contain negative amortization, a lump sum payment (except in the limited circumstances existing ), or a duration of more than 30 years.

Consider and Check Consumer income and assets

Instead of subscribing to Annex Q, the final rule requires that the obligee consider the consumer’s current or reasonably expected income or assets other than the value of the dwelling (including any real estate attached to the dwelling) that secures the loan, debts, alimony, child support and DTI ratio or the residual income. The final rule also requires that the obligee Check the consumer’s current or reasonably expected income or assets other than the value of the home (including any real estate attached to the home) that secures the consumer’s current loan and debts, alimony and child support.

Consider Requirement

In particular, in order to comply with the obligation to “consider” under the rule, the CFPB offers creditors the option of “considering” either the consumer’s monthly residual income. or DTI. The CFPB does not impose any DTI limits or residual income thresholds.

As a member of consider requirement, a creditor should maintain policies and procedures on how it takes into account the underwriting factors listed above, as well as maintain documentation showing how it took these factors into account in its determination of repayment capacity.

The CFPB states that “this documentation may include, for example, an underwriter’s worksheet or a final certification of the automated underwriting system, in combination with the creditor’s applicable underwriting standards and any applicable exceptions described in its policies and procedures, which shows how these required factors were taken into account in determining the creditor’s repayment capacity.

Check Requirement and “safe harbor”

With regard to the requirement to “verify”, the rule does not do not prescribing specific underwriting methods that a creditor must use, provided that the creditor uses third party records that provide reasonably reliable evidence of the consumer’s income or assets. Indeed, the rule allows the obligee to use any “reasonable verification method and criterion”.

Nonetheless, in a particularly important provision of the rule, the CFPB provides a ‘safe harbor’ to creditors by using the relevant provisions verification standards from Fannie Mae’s Single Family Selling Guide, Single Sellers / Family Services Guide to Freddie Mac of the FHA Single Family Housing Policy. Handbook, the VA Lender’s Handbook and the Field Office Handbook for the Direct Single-Family Housing Program and the Handbook for the USDA Secured Family Loan Program. In other words, the rule is that a creditor is deemed to have complied with this “verification” requirement if it complies with the verification standards in one or more of these agency manuals.

In effect, the rule allows the creditor to “mix and match” the audit standards from different agency manuals. In other words, the obligee is deemed to comply with the requirement to “verify” whether it complies with one or more of the auditing standards of the manuals listed above. Again, creditors are not required to verify income and debt to the standards specified by the CFPB.

Processing of certain five-year ARM loans

Under the rule, the CFPB creates a special provision for variable rate mortgages (ARMs) with initial fixed rate periods of five years or less. In these transactions, the interest rate may or will change within the first five years from the date on which the first regular periodic payment is due.

In order to determine whether these ARMs enjoy QM status, the creditor is required to determine the APR by treating the maximum interest rate that may apply during that five-year period as the interest rate for the entire term. of the loan. By way of illustration of the above, the rule provides:

For example, assume a variable rate mortgage with a loan term of 30 years and an initial reduced rate of 5.0% that is fixed for the first three years. Suppose the maximum interest rate for the first five years after the date on which the first regular periodic payment is due is 7.0%. In accordance with [ the rule], the creditor must determine the annual percentage rate based on an interest rate of 7.0% applied for the entire term of the 30-year loan.

Take away food

At first glance, the final rule appears to significantly alter the criteria for QM loans and appears to decrease the presence of GSEs in the QM market. By eliminating the QM patch, Schedule Q, and the strict 43% DTI threshold, the rule gives the creditor some flexibility in issuing QMs as long as they take out the loans using the specified “review” standards and “Verify”.

Ironically, the much-maligned Schedule Q offered a recognized measure of the certainty of compliance with QM’s underwriting rules if the creditor could adhere to its sometimes arbitrary standards. Additionally, for GSE compliant loans, as long as the loan could be purchased by Fannie Mae or Freddie Mac, and otherwise met product specifications and point / fee limits, the loan was automatically considered QM. .

Under the final rule, however, unless the creditor invokes the “safe harbor” to verify the consumer’s income, assets, debts, alimony, and alimony, the underwriting of the loan by the creditor to obtain QM status is inherently subjective, and therefore, at least initially, cannot enjoy the same recognition in the secondary market as a loan that had been taken out in Annex Q or had been the subject of of the QM patch under the existing rule. Therefore, as the rule is implemented, there will be a strong incentive for creditors to exercise the “safe harbor” by complying with auditing standards in one or more of the agency’s manuals. Maybe the revised rule do not decrease the presence of GSEs on the QM market as planned.

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