The Consumer Financial Protection Bureau (“CFPB”) issued two relatively welcome surprises yesterday. First, along with ditching a debt-to-income ratio (“DTI”) ceiling, the agency expanded its proposed general Qualified Mortgage (“QM”) to include loans up to 2.25 percentage points over the average prime offer rate. Mortgage lenders can opt in to the new QM as early as 60 days after the rule is published (so, likely by late February 2021), although compliance becomes mandatory July 1, 2021. Second, the CFPB will begin allowing loans to season into a QM after 36 months of timely payments, so long as the loan is not sold more than once (and is not securitized) during that time.

The CFPB otherwise recently issued a separate final rule, confirming once and for all that the GSE Patch – a temporary QM category for loans eligible for purchase by Fannie Mae or Freddie Mac – would expire on the mandatory compliance date of the agency’s rule revising the general QM definition. Since 2014, in general terms, a closed-end residential mortgage loan could only constitute a QM if the borrower’s DTI did not exceed 43%, or if the loan were GSE-eligible. As the GSE Patch’s expiration date (January 10, 2021) loomed, the CFPB promised to rethink the 43% DTI requirement and provide for a smooth and orderly transition to a post-Patch QM. In considering the public comments it received, the CFPB decided to loosen up on a couple of its proposals.

Specifically, the new general QM and its compliance protection will apply, under the final rule, to a covered transaction with the following characteristics:

  • The loan has an annual percentage rate (“APR”) that does not exceed the average prime offer rate (“APOR”) by 2.25 or more percentage points;
  • The loan meets the existing QM product feature and underwriting requirements and limits on points and fees;
  • The creditor has considered the consumer’s current or reasonably expected income or assets, debt obligations, alimony, child support, and DTI ratio or residual income; and
  • The creditor has verified the consumer’s current or reasonably expected income or assets, debt obligations, alimony, and child support.

The final rule removes the 43% DTI threshold and the troublesome Appendix Q. However, the rule retains the distinction between safe harbor and rebuttable presumption QMs, with the same 1.5 percentage point threshold.

The final rule provides creditors significant flexibility and room for innovation in considering and verifying the factors described above. However, the CFPB provides for a safe harbor if the creditor follows the verification standards in specified single-family underwriting manuals of Fannie Mae, Freddie Mac, the Federal Housing Administration, the Department of Veterans Affairs, or the Department of Agriculture. A creditor even may pick-and-choose among those agency standards. If an agency updates its standards from the versions in the final rule, a creditor still may rely on the updated standards so long as they are substantially similar. Determining what constitutes a “substantially similar” version may lead to future headaches. However, a creditor does not have to follow those safe harbor agency standards, so long as it complies with the rule’s obligation to verify the amounts on which it relies.

The CFPB had proposed to use an APR rate spread of 2.0 percentage points over APOR. However, the agency apparently looked closely at rate spread and delinquency data and determined that a 2.25 percentage point spread “strikes the best balance between ensuring consumers’ ability to repay and ensuring continued access to responsible, affordable mortgage credit.” The final rule provides different thresholds for relatively small loans and/or subordinate-lien loans.

The final rule maintains the proposed rule’s approach of not prescribing any particular underwriting standard. Under the final rule, a creditor must maintain written policies and procedures for how it takes into account, pursuant to its underwriting standards, income or assets, debt obligations, alimony, child support, and monthly DTI or residual income in its ability-to-repay determination. The creditor also must retain documentation showing how it considered those, including how it applied its policies and procedures. The rule’s commentary clarifies that the required documentation may consist of the creditor’s underwriting standards, plus an underwriter worksheet or a final automated underwriting system certification for each loan, along with any applicable exceptions.

As mentioned above, in addition to the expiration of the GSE Patch and the newly-revised general QM definition, the CFPB issued a final rule to allow for a loan to become a safe harbor QM after 36 months of timely payments. The CFPB had proposed that a loan could only become a so-called seasoned QM if the originating creditor held the loan in portfolio during that 36-month period. While timely payments for 36 months may indicate that the borrower had the ability to make the payments, that portfolio requirement would have restricted access to the seasoned QM category to a relatively narrow set of mortgage lenders.

However, the CFPB heeded the pleas of certain commenters by providing, in its final rule, that a loan may still become a seasoned QM if it is sold, assigned, or otherwise transferred once before the end of the seasoning period, provided the transaction is not securitized before the end of that period. That means that a loan’s status as a QM could change if the loan is subsequently resold or securitized. To emphasize the requirement that the creditor still must diligently underwrite the loans, the final rule requires that in order for a loan to become a seasoned QM, the creditor must have complied with the same consider and verify requirements that will apply to general QM loans as summarized above.

The final rule also provides that high-cost mortgages (otherwise known as HOEPA or Section 32 loans) cannot season into QM status, and thus can never achieve more than a rebuttable presumption of ability to repay. Otherwise, even if the loan is a higher-priced mortgage loan (but not a HOEPA loan), it can season into a safe harbor QM if it otherwise meets all the requirements.

As a reminder, the seasoned QM status is available only for a first-lien, fixed-rate mortgage loan that satisfies the product-feature requirements and limits on points and fees under the general QM loan definition. With certain exceptions, the loan must not have had more than two delinquencies of 30 or more days or any delinquencies of 60 or more days at the end of the seasoning period. While the servicer may choose not to treat a payment as delinquent if it is deficient by only $50 or less, the servicer generally may not do so more than three times during the seasoning period. The final rule contains significant criteria and certain exceptions for determining whether payments are timely. The rule will kick in for loans for which creditors receive an application on or after the rule’s effective date (which will be 60 days after publication in the Federal Register).

However, it appears that the QM status of a loan with points and fees that inadvertently exceed the limit (3% for most loans) cannot be salvaged. Currently, the CFPB’s regulations provide that if the creditor (or assignee) discovers after consummation that the total points and fees exceed 3%, the creditor/assignee may cure the loan’s QM status by paying the consumer the excess (plus interest) within 210 days after consummation (unless prior to that point the consumer had notified the creditor/assignee/servicer of the excess, or the consumer had become 60 days past due on the loan). The creditor or assignee also would have needed to have policies and procedures in place to review points and fees post-consummation. However, this points-and-fees cure provision is set to expire for loans consummated on or after January 10, 2021. The CFPB did not extend this provision in its final rules.

Mayer Brown intends to issue a full description of the CFPB’s final QM rules through a Mayer Brown Legal Update, as well as a discussion of the rules through our Global Financial Markets Initiative teleconference/podcast series.