Qualified Mortgages – General and Seasoned

The Consumer Financial Protection Bureau (CFPB) issued Final Rules redefining the definition of General Qualified Mortgages (QMs). The Final Rule changes the 43% debt to income (DTI) requirement and replaced it with price-based thresholds. Now, the loan meets the General QM definition if the APR does not exceed the average prime rate offer rate for a comparable transaction by 2.25 percentage points. There are higher thresholds for smaller amount loans. Consequently, Appendix Q would be removed from Regulation Z. With the General QM definition changes, the Temporary Government Sponsored Enterprises (GSEs) QM would no longer be in place starting from the earlier of the mandatory compliance date of the General QM rule or the date the GSEs cease to operate under conservatorship or receivership.

In addition to these changes, the Bureau added guidelines for Seasoned QMs, a new category of QMs. Seasoned QMs apply to first-lien, fixed-rate covered transactions that have met certain performance requirements over a 36-month seasoning period, are held in the portfolio until the end of the seasoning period, comply with general restrictions on product features, and points and fees, and meet certain underwriting requirements. The requirements to become a Seasoned QM are: (1)            the loan is secured by a first lien; (2) the loan has a fixed rate, with regular, substantially equal periodic payments that are fully amortizing and no balloon payments; (3) the loan term does not exceed 30 years, and (4) the loan is not a high-cost mortgage as defined in §1026.32(a).

These changes were made because the expiration of the Temporary GSE QM loan definition would significantly reduce the size of the QM market and make it more difficult for consumers to access responsible and affordable credit. These Temporary GSE QMs were created to stabilize the economy and the housing market after the financial crisis and were to be revisited five years after the Ability To Repay (ATR)/QM Rule’s effective date which is why these two new Final Rules have been issued. The mandatory compliance date for both of these new Final Rules is July 1, 2021. With this new final rule, the CFPB allows the bank more flexibility in determining the consumer’s assets and debt. The Bureau now requires banks to consider the consumer’s income or assets, debt obligations, and DTI ratio or residual income but allows much more flexibility in verifying these data points. However, the CFPB has also provided a safe harbor for the verification requirements.

As mentioned earlier, the removal of the rigid Appendix Q guidelines maybe a sigh of relief for many banks. Under the Final Rule’s new safe harbor requirements, the bank must maintain written policies and procedures for how it considers account income, debt, and DTI or residual income and document it considered these factors. Furthermore, a loan would be covered under the safe harbor for loans that are in compliance with the verification requirements in §1026.43(e)(2)(v)(B). This includes the standards that are detailed 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 Lender's Handbook, and the USDA’s Field Office Handbook for the Direct Single-Family Housing Program and Handbook for the Single Family Guaranteed Loan Program. Therefore, the bank would have some time to make any adjustments to their underwriting procedures to account for the changes of Appendix Q’s removal.