CFPB Proposes QM Changes

In June of 2020, the CFPB proposed two new rules to adjust the current Qualified Mortgage rules. The CFPB states that their objective with these proposals is to facilitate a smooth and orderly transition away from the Temporary GSE QM loan definition (which is a temporary QM category set to expire on 1/10/2021 that basically qualifies a mortgage as a QM if it is eligible for purchase or guarantee by Fannie or Freddie) and to ensure access to responsible, affordable mortgage credit upon its expiration.

To explain the reason for this change further, the CFPB states that “a significant number of Temporary GSE QM loans would not qualify as General QM loans under the current regulations after the Temporary GSE QM loan definition expires. These loans would not qualify as General QM loans either because the consumer’s DTI ratio is above 43 percent or because the creditor’s method of documenting and verifying income or debt does not comply with appendix Q. Although alternative loan options, including some other types of QM loans, would still be available to many consumers who could not qualify for General QM loans, the Bureau’s analysis of available data indicates that many loans that are currently Temporary GSE QM loans would cost materially more for consumers and many would not be made at all.”

Proposal 1: Removing the 43% DTI Limit

In the first proposal, the CFPB plans to amend the General QM loan definition by removing the 43 percent DTI limit and replacing it with a price-based threshold. The CFPB stated that they are proposing a price-based General QM loan definition to replace the DTI-based approach because it preliminarily concludes that a loan’s price, as measured by comparing a loan’s annual percentage rate (APR) to the average prime offer rate (APOR) for a comparable transaction, 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.

According to the proposal, the CFPB explains that “a loan would meet the General QM loan definition in § 1026.43(e)(2) only if the APR exceeds APOR for a comparable transaction by less than two percentage points as of the date the interest rate is set. The proposal would provide higher thresholds for loans with smaller loan amounts and for subordinate-lien transactions. The proposal would retain the existing product-feature and underwriting requirements and limits on points and fees. Although the proposal would remove the 43 percent DTI limit from the General QM loan definition, the proposal would require that the creditor consider the consumer’s income or assets, debt obligations, and DTI ratio or residual income and verify the consumer’s current or reasonably expected income or assets other than the value of the dwelling (including any real property attached to the dwelling) that secures the loan and the consumer’s current debt obligations, alimony, and child support. The proposal would remove appendix Q. To prevent uncertainty that may result from appendix Q’s removal, the proposal would clarify the requirements to consider and verify a consumer’s income, assets, debt obligations, alimony, and child support. The proposal would preserve the current threshold separating safe harbor from rebuttable presumption QMs, under which a loan is a safe harbor QM if its APR exceeds APOR for a comparable transaction by less than 1.5 percentage points as of the date the interest rate is set (or by less than 3.5 percentage points for subordinate-lien transactions).”

Proposal 2: Extend the Temporary GSE QM Definition

In the second proposal, the CFPB plans to extend the Temporary GSE QM loan definition to expire upon the effective date of final amendments (in proposal 1 above) to the General QM loan definition in Regulation Z (or when the GSEs cease to operate under the conservatorship of the FHFA, if that happens earlier). The CFPB explains in the proposal that they do not “intend for this effective date to be prior to April 1, 2021. Thus, the Bureau does not intend for the Temporary GSE QM loan definition to expire prior to April 1, 2021. The Bureau is not proposing to amend the provision stating that the Temporary GSE QM loan category would expire if the GSEs exit conservatorship.”

The proposal to remove the 43% DTI limit for general QM’s can be found here.

The proposal to extend the Temporary GSE QM definition can be found here.

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