THE CURRENT STATE OF GENERAL QUALIFIED MORTGAGES AND ABILITY TO REPAY REQUIREMENTS UNDER REGULATION Z
July 21, 2021
Peter B. Idziak
Recently, we have received some inquiries seeking clarification concerning the current definition and underwriting requirements relating to “general” qualified mortgages and the ability to repay requirements in effect under Regulation Z. This memorandum provides a brief summary of the current regulatory framework as well as important secondary market considerations for lenders selling their loans.
The December 2020 General QM Final Rule and Subsequent Delay in the Date of Mandatory Compliance
In December 2020, the Consumer Financial Protection Bureau issued a final rule (the “General QM Final Rule” or the “Rule”), substantially amending the requirements a loan must meet to be considered a general qualified mortgage (“QM”) under the Ability-to-Repay/Qualified Mortgage Rule. Most notably, the General QM Rule removed the existing 43 percent debt-to-income ratio limit for general QMs and replaced it with a price-based limit. The Rule also removes Appendix Q as well as any requirement to use Appendix Q, instead substituting a more flexible “consider and verify” requirement as to a consumer’s assets, income, and liabilities.
The final rule became effective on March 1, 2021, and mandatory compliance was to be effective for applications received on or after July 1, 2021. However, on April 27, 2021, the CFPB issued a final rule extending the mandatory compliance date of the General QM Rule from July 1, 2021 to October 1, 2022
Therefore, under current CFPB rules, creditors may continue to originate general QMs that meet either the previous 43 percent debt-to-income-based definition or the new, price-based definition for all loans subject to the ATR/QM Rule with applications received prior to October 1, 2022.
However, requirements imposed by the Treasury Department on Fannie Mae and Freddie Mac under the Preferred Stock Purchase Agreements (“PSPAs”) currently require the GSEs to only purchase loans with application dates on or after July 1, 2021 that meet the new, price-based general QM definition. Several private investors have announced that they too will only purchase loans that meet the new, price-based general QM definition.
The result is that, although creditors may continue to originate general QM loans under the previous, DTI-based definition—and the loans will qualify for the QM rebuttable presumption/safe harbor provisions as applicable—such loans are no longer eligible for purchase by the GSEs and many investors.
The New Price-Based Definition for General QMs and Revised Consider and Verify Requirements
Under the previous definition of a general QM, a first lien transaction met the requirements to qualify as a general QM if the consumer’s DTI ratio does not exceed 43% and the creditor underwrites the loan using the standards contained in Appendix Q of Regulation Z.
Now, under the General QM Final Rule, a loan meets the revised, price-based definition if first-lien loan receives the “safe harbor” presumption if the APR does not exceed the average prime offer rate (“APOR”) for a comparable transaction by 1.5 percentage points or more. A first-lien loan receives the “rebuttable presumption” that the consumer had the ability to repay the loan if the APR exceeds the APOR for a comparable transaction by 1.5 percentage points or more, but less than 2.25 percentage points. The Rule provides higher thresholds for with smaller loan amounts (currently less than $110,260.00 for a first-lien transaction), subordinate-liens, and manufactured home loans. The loan must also meet the existing product-feature and limits on points and fees in the ATR/QM Rule.
The General QM Final Rule also removes Appendix Q and any requirement the creditor use Appendix Q for general QM loans. The Rule retains the requirement that a creditor consider and verify the consumer’s income, assets, and liabilities. However, the Rule no longer specifically requires how a creditor must consider the monthly DTI ratio or residual income, including the use of a particular monthly DTI ratio or residual income threshold.
Additionally, the Rule does not prescribe a specific method by which a creditor must verify assets, income, and liabilities, so long as the creditor uses third-party records and reasonable methods and criteria. Importantly, the Rule includes a list of specific standards that creditors may use to meet the revised verification requirement. These standards include relevant provisions in the Fannie Mae Single Family Selling Guide, the Freddie Mac Single-Family Seller/Servicer Guide, the FHA’s Single Family Housing Policy Handbook, the VA’s Lenders Handbook, and the USDA’s Field Office Handbook for the Direct Single Family Housing Program and Handbook for the Single Family Guaranteed Loan Program.
The CFPB Delays Mandatory Compliance with The General QM Rule until October 1, 2022
On April 27, 2021, the CFPB issued a final rule extending the mandatory compliance date of the General QM Rule from July 1, 2021 to October 1, 2022. Although this rule extended the mandatory compliance date for The General QM Final Rule, it did not delay the Rule’s March 1, 2021 effective date. The upshot is that, for applications received prior to October 1, 2022, a creditor may originate general QMs that meet either the original, DTI-based definition or the revised, price-based definition.
Notwithstanding the CFPB’s April 2021 Rule, Fannie Mae and Freddie Mac Will Only Purchase Loans with Applications on or After July 1, 2021 that Meet the Revised, Price-Based General QM Definition
In January 2021, the PSPAs between the Department of the Treasury and Fannie Mae and Freddie Mac were amended. Under the amended PSPAs, Fannie and Freddie may only purchase loans with application dates on or after July 1, 2021 that meet the revised price-based definition of a General QM. The July 1, 2021 date was intended to coincide with the original mandatory compliance date of The General QM Rule.
However, the CFPB’s subsequent April 2021 final rule extending the mandatory compliance date of the General QM Rule allows creditors to continue to originate general QM loans under the old, DTI-based definition for applications received prior to October 1, 2022.
Unfortunately, because Fannie and Freddie are bound by the January 2021 PSPA amendments, Fannie and Freddie lack the ability to alter their respective policies to continue to accept for purchase loans that meet the old, DTI-based QM definition. Fannie (LL-2021-09 and LL-2021-11) and Freddie Bulletin (2021-13 and 2021-19) have both issued guidance setting forth their respective requirements.
It would therefore appear that, absent further amendment of the PSPAs, these current policies will remain in place. As a result, for applications received on or after July 1, 2021, only loans that meet the new price-based General QM definition will be eligible for purchase by Fannie Mae and Freddie Mac. Several investors have announced that they too will only purchase loans that meet the revised General QM definition. Therefore, we recommend that lenders confirm specific investor policies regarding the continued purchase of loans that qualify as general QM loans only under the old, DTI-based definition.