The Consumer Financial Protection Bureau has issued final rules that change the requirements for qualified mortgage loans and create a new category of qualified mortgages.

Lenders by law must determine whether consumers have the ability to repay mortgage loans before making those loans, the CFPB said in a statement, and QM loans are presumed to be loans for which consumers have an ability to repay.

The first of two final rules issued Thursday, called the General QM Final Rule, changes ability-to-pay requirements by eliminating the current rule that the consumer’s debt-to-income ratio (DTI) cannot exceed 43 percent. The new limit will instead be based on the loan’s pricing, which itself reflects the consumer’s ability to repay.

The CFPB adopted a price-based approach to replace the specific DTI limit for General QM loans, according to the statement, because it determined that a loan’s price is “a strong indicator of a consumer’s ability to repay and is a more holistic and flexible measure of a consumer’s ability to repay than DTI alone.”

The CFPB added that using a specific DTI limit to determine QM status could impair access to responsible and affordable credit.

Under the new rule, the consumer’s ability to repay will be assumed 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.

If the annual percentage rate exceeds the average prime offer rate by 1.5 percentage points but by less than 2.25 percentage points, the loan will receive “a rebuttable presumption that the consumer could repay,” which does not provide a safe harbor from litigation.

The CFPB said the General QM Final Rule also:

  • 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.
  • 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,” CFPB Director Kathleen L. Kraninger said in the 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.”

In the second final rule, the CFPB created a new category for QMs: Seasoned QMs.

The new category of Seasoned QMs is 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, meet certain underwriting and product requirements, and have no balloon payments.

The loan must also “season” by meeting certain performance requirements at the end of the seasoning period.  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 said. “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 rules take effect 60 days after publication in the Federal Register and have a mandatory compliance date of July 1, 2021. Between those two dates, lenders can use either the current or revised general QM definition. The Seasoned QM Final Rule will apply to applications received on or after the effective date.

The American Bankers Association said on its website that the final rules aligned with its recommendations. The Mortgage Bankers Association supported the changes as well.

“In both the General QM final rule and the Seasoned QM final rule, the Bureau adopted recommendations made in MBA comment letters,” Justin Wiseman, MBA Associate vice president and managing regulatory counsel, said in a statement.

CFPB Finalizes Changes to Qualified Mortgage Rules

by Banker & Tradesman time to read: 3 min