In anticipation of the "GSE patch" expiring, the Consumer Financial Protection Bureau ("CFPB") issued several final rules in 2020 to amend Regulation Z ("Reg. Z"). Concerns have existed that the expiration of the GSE patch would restrict consumer mortgage credit unless the CFPB created a permanent version of the GSE patch or revised the General Qualified Mortgage ("QM") definition. As outlined below, the CFPB has responded by adopting the latter approach.
Since 2014, the GSE patch has allowed certain mortgage loans eligible for purchase or guarantee by Fannie Mae and Freddie Mac ("GSEs") to qualify as QM loans despite not meeting all requirements of the General QM loan definition. This has been important because QM loans receive certain protections from legal liabilities associated with not complying with Reg. Z's Ability to Repay/Qualified Mortgage Rule. But the GSE patch was only designed as a temporary measure, and as such was scheduled to expire on January 10, 2021, or would expire for a respective GSE upon it exiting conservatorship.
On December 10, 2020, the CFPB issued the General QM Final Rule which replaces the 43 percent debt-to-income ("DTI") limit in the General QM loan definition with a price-based threshold that compares a loan's annual percentage rate to the average prime offer rate for a comparable loan. It appears the CFPB adopted this approach in part because its' research indicated that removing the DTI limit would help "facilitate a smooth and orderly transition" from the GSE patch. The General QM Final Rule outlines the price-based threshold approach and makes other changes to Reg. Z.
While still requiring a lender to consider and verify borrowers' income and liabilities, the General QM Final Rule also removes the Appendix Q verification standard and makes it so a lender can receive safe harbor for compliance with the QM verification requirement if it satisfies one or more of the third-party verification standards referenced by Reg. Z.
The CFPB also issued on December 10, 2020, the Seasoned QM Final Rule, which creates a "Seasoned QM" definition. Specifically, certain first-lien, fixed-rate residential mortgage loans become QM loans if, during a defined seasoning period, they meet specific payment performance criteria and are held in portfolio by the originating lender. The Seasoned QM Final Rule does contain some exceptions to the portfolio requirement, including a single transfer of the loan where it is not securitized as part of the transfer or before the end of the seasoning period. The seasoning period is generally 36 months.
Both final rules become effective on March 1, 2021. The General QM Final Rule, however, has a separate mandatory compliance date of July 1, 2021. Because the CFPB extended the GSE patch's January expiration date to coincide with the General QM Final Rule's mandatory compliance date, the GSE patch will remain available for loans where a lender receives the application before July 1, 2021. Lenders must, however, comply with the General QM Final Rule on loans where the application is received on or after July 1, 2021.
Lenders should carefully review the final rules to identify all the resulting changes and to determine how those changes will impact their current origination and compliance strategies.
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