I. INTRODUCTION
The Consumer Financial Protection Bureau (CFPB) has finalized its ability to repay (ATR) /qualified mortgage (QM) rule amending Regulation Z, which implements the Truth in Lending Act (TILA), to generally require creditors to “make a reasonable, good faith determination of a consumer’s ATR any consumer credit transaction secured by a dwelling.”
The rule establishes a 43 percent debt-to-income (DTI) ratio threshold for QMs. However, the final rule also creates a temporary category of QMs that has more flexible underwriting requirements. Under the final rule, lenders would be granted a legal safe harbor when they write a QM loan that is also a prime loan. The CFPB, however, chose to establish a rebuttable presumption of compliance for subprime QMs.
Lenders had until January 10, 2014, to comply with the amendments and the final rule. The final rule applies to transactions covered under the rule for which a bank receives an application on or after January 10, 2014.
II. Covered Loans
The CFPB ATR/QM rule applies to almost all closed-end consumer credit transactions secured by a dwelling, including any real property attached to the dwelling. This means loans made to consumers and secured by residential structures that contain one to four units, including condominiums and co-ops are covered. The ATR/QM rule is not limited to first liens or to loans on primary residences.
III. Excluded Loans
The final rule does not apply to open-end credit plans (home equity lines of credit, or HELOCs); time-share plans; reverse mortgages; temporary or bridge loans with terms of 12 months or less (with possible renewal); or a construction phase of 12 months or less (with possible renewal) of a construction-to-permanent loan.
IV. GENERAL ATR STANDARD
The CFPB’s ATR/QM rule permits lenders to choose whether to write a loan under the general ATR standard. In this case, a lender must collect and verify certain information, but there are no restrictions on loan product features. In the alternative, lenders seeking certain legal protections can choose to write a QM, a type of loan that does not include certain product features and meets other criteria set forth by the CFPB.
The ATR standard provides that the creditor shall not make a covered loan unless that creditor makes a reasonable and good faith determination at or before consummation that the consumer will have a reasonable ATR that loan according to its terms.
A. Underwriting
At a minimum, creditors generally must consider eight underwriting factors when making an ATR determination:
· current or reasonably expected income or assets (other than the value of the property that secures the loan) that the consumer will rely on to repay the loan;
· current employment status (if you rely on employment income when assessing the consumer’s ATR);
· the monthly mortgage payments on the covered transaction (calculated using the introductory or fully-indexed rate, whichever is higher, and monthly, fully amortizing payments that are substantially equal);
· the monthly payment on any simultaneous loans secured by the same property;
· the monthly payment for mortgage-related obligations (property taxes and insurance that you require the consumer to buy, and certain other costs related to the property such as homeowners association fees or ground rent);
· current debt obligations, alimony and child support;
· the monthly debt-to-income ratio or residual income, calculated using the total of all of the mortgage and non-mortgage obligations listed above, as a ratio of gross monthly income; and
· credit history.
Under the CFPB’s guidance, as long as a creditor complies with the rule, the creditor is permitted to use its own definitions and other underwriting criteria. However, a creditor must ensure that its underwriting criteria, as applied to the facts and circumstances of a particular extension of credit, result in a reasonable, good faith determination of a consumer’s ATR.
Some of the types of factors that may reflect that your ATR determination was reasonable and in good faith include:
· Underwriting standards: standards used to underwrite the transaction that have historically resulted in comparatively low rates of delinquency and default during adverse economic conditions.
· Payment history: the consumer paid on time for a significant time after origination or reset of an adjustable-rate mortgage.
Among the types of factors that may show that your ATR determination was not reasonable and in good faith:
· Underwriting standards: evidence that the underwriting standards used are not effective at determining consumers’ repayment ability was ignored.
· Inconsistency: underwriting standards were applied inconsistently or the underwriting standards used differed from those you used for similar loans without having a reasonable justification.
· Payment history: the consumer defaults early in the loan, or shortly after the loan resets, without having experienced a significant financial challenge or life-altering event.
The reasonableness and good faith of your determination of ATR depends on the facts and circumstances relevant to the particular loan. For example, a particular ATR determination may be reasonable and in good faith even though the consumer defaulted shortly after consummation if, for example, the consumer experienced a sudden and unexpected loss of income.
If the records you review indicate there will be a change in the consumers’ repayment ability after consummation (for example, they plan to retire and not obtain new employment, or they plan to transition from full-time to part-time work) you must consider that information. However, you may not make inquiries or verifications prohibited by Regulation B.
B. Verification of Information
The final rule provides that, in general, a creditor must verify the information relied upon in determining a consumer’s ATR using reasonably reliable third-party records. Such third-party verifications must be unique to the borrower. For example:
· In addition to a W-2 or payroll statement, you may verify income using tax returns, bank statements, receipts from check-cashing or funds-transfer services, benefits program documentation, or records from an employer. Copies of tax-return transcripts or payroll statements can be obtained directly from the consumer or from a service provider, and need not be obtained directly from a government agency or employer, as long as the records are reasonably reliable and specific to the individual consumer.
· If a consumer has more income than, in your reasonable and good-faith judgment, is needed to repay the loan, you do not have to verify the extra income. For example, if a consumer has both a full-time and a part-time job and you reasonably determine that income from the full-time job is enough for the consumer to be able to repay the loan, you do not have to verify income from the part-time job.
· You can document a consumer’s employment status by calling the employer and getting oral verification, as long as you maintain a record of the information you received on the call.
· You can use a credit report to verify a consumer’s debt obligations; you do not need to obtain individual statements for every debt.
· If a consumer does not have a credit history from a credit bureau, you can choose to verify credit history using documents that show nontraditional credit references, such as rental payment history or utility payments.
1. Reasonably Reliable Third-Party Records
The final rule provides a list of some of the types of reasonably reliable third-party records that a bank may choose to use and rely upon. Note, however, that this list is not all-inclusive:
· records from government organizations such as a tax authority or local government
· federal, state, or local government agency letters detailing the consumer’s income, benefits, or entitlements
· statements provided by a cooperative, condominium, or homeowners association
· a ground rent or lease agreement
· credit reports
· statements for student loans, auto loans, credit cards, or existing mortgages
· court orders for alimony or child support
· copies of the consumer’s federal or state tax returns
· W-2 forms or other IRS forms for reporting wages or tax withholding
· payroll statements
· military leave and earnings statements
· financial institution records, such as bank account statements or investment account statements reflecting the value of particular assets
· records from the consumer’s employer or a third party that obtained consumer specific income information from the employer
· check-cashing receipts
A creditor may also obtain records directly from the consumer, such as a payroll statement, if the records are reasonably reliable and specific to the consumer. The verification requirement only applies to information the lender relies upon to qualify the borrower.
C. Payment Calculation
To assess the monthly payment on the covered loan, the creditor must determine a payment amount based on the higher of the fully-indexed rate or introductory rate, and on monthly, fully amortizing payments that are substantially equal.
The final rule provides that for purposes of determining a consumer’s ATR a loan, a creditor must include consideration of any simultaneous loan that it knows or has reason to know will be made at or before consummation of the covered transaction.
D. DTI or Residual Income Calculation
Creditors are required to consider the DTI ratio or residual income the consumer will have after paying non-mortgage debt and mortgage-related obligations, as part of the ability-to-repay determination. A QM loan generally may not have a DTI ratio of more than 43 percent.
When calculating DTI, a creditor must consider the consumer’s total monthly debt obligations and total monthly income. Total monthly debt obligations include payments on the covered transaction, payments on simultaneous loans, mortgage-related obligations, debt obligations, alimony and child support. Total monthly income includes the consumer’s current or reasonably expected income, including any income from assets.
The bank may include earned income (wages, or salary); unearned income (interest and dividends); and other regular payments to the consumer such as alimony, child support or government benefits for purposes of calculating income for purposes of the debt-to-income ratio.
When calculating residual income, a creditor must consider the consumer’s remaining income after subtracting the consumer’s total monthly debt obligations from the consumer’s total monthly income.
1. Income-Assets-Employment-And Credit History
When you are evaluating the consumer’s employment history, credit history, and income or assets to determine ATR, you must verify only what is relied on to determine ATR.
If a consumer has a full-time job and a part-time job and uses only the income from the full-time job to pay the loan, you do not need to verify the income from the part-time job. If two or more consumers apply for a mortgage, you do not have to consider both incomes – unless both incomes are required to qualify for the loan and demonstrate ATR. The same principles apply to a consumer’s assets, too.
Income does not have to be full-time or salaried for it to be consider it in the ATR determination. A creditor can consider seasonal or bonus income, however, income relied on has to be verified using reasonably reliable third-party records.
Future income can count toward ATR if you verify it using reasonably reliable third-party records. Suppose you have a consumer who accepts a job in March, but will not start until he graduates from school in May. If the employer will confirm the job offer and salary in writing, you can consider the future expected income in your ATR determination.
2. Consumer-Supplied Income Documents
Sometimes you may have to rely on the consumers’ report of their own income. For example, a cattle rancher might give you an updated profit-and-loss statement for the current year to supplement his tax returns from prior years. These records are reasonably reliable third-party records to the extent that an appropriate third party has reviewed them. For example, if a third-party accountant prepared or reviewed the cattle rancher’s profit-and-loss statement, then you can use the statement to verify the rancher’s current income.
3. Types of Employment Information
You can consider and verify many types of employment to use in making your ATR determination, including:
· Full-time
· Part-time
· Seasonal
· Irregular
· Military
· Self-employment
Consider the characteristics of the consumer’s type of employment. A wheat farmer has a different income stream than a store clerk.
You can verify the consumer’s employment by calling the employer and obtaining oral verification, so long as you make a written record memorializing the verification.
4. Sources of Credit History Information
A credit report generally is considered a reasonably reliable third-party record for verification purposes.
While the rule requires that you examine credit history, it does not prescribe a particular type of credit history to consider or prescribe specifically how you should judge the information you receive. Your consideration of credit history must be reasonable in light of the facts and circumstances.
Credit history might include information about:
· Number and age of credit lines
· Payment history
· Judgments
· Collections
· Bankruptcies
· Nontraditional credit references such as rental payment history or utility payments
If you know, or have a reason to know, that the information on a consumer’s credit report is inaccurate, you can ignore it. For example, there might be a fraud alert or a dispute on the credit report, or the consumer may present other evidence that contradicts the credit report. In those cases, you may choose to disregard the inaccurate or disputed items.
If the consumer lists a debt obligation that does not show up on the credit report, you may accept the consumer’s statement about the existence and amount of the obligation without further verification.
V. Debt Considered in Determining ATR
In assessing a consumers ATR, four underwriting factors help to evaluate the consumer’s debt. A bank will need to determine the consumer’s total monthly payments for: (1) the loan being underwritten; (2) any simultaneous loans secured by the same property; (3) mortgage-related obligations – property taxes, insurance required by the creditor, fees owed to the condominium, cooperative, or homeowners association; ground rent or leasehold payments; and special assessments; and (4) current debt obligations, alimony and child support.
A. Confirming Debt Information
1. Calculating Payments on the Loan Being Underwritten
There are special rules that apply for meeting the ATR requirements. When calculating the monthly payment for qualification purposes, the creditor must use the fully indexed interest rate or the introductory interest rate whichever is higher. The creditor must then calculate monthly, fully amortizing payments that are substantially equal. This is not meant to prescribe required loan features that a creditor may offer; rather the final rule establishes requirements for the purposes of calculating a payment amount that will be used solely for qualification purposes.
B. Special Rules
There are special rules for balloon payment, interest-only, and negative amortization loans.
1. Balloon Payment Loans
· For balloon loans that are not higher-priced covered transactions, use the maximum payment scheduled during the first five years after the date on which the first regular periodic payment will be due.
· For balloon loans that are higher-priced covered transactions, use the maximum payment in the payment schedule, including any balloon payment.
· For purposes of the ATR requirements, a “higher-priced covered transaction” is one in which the annual percentage rate exceeds the average prime offer rate for a comparable transaction by 1.5 or more percentage points for a first-line covered transaction, or by 3.5 or more percentage points for a subordinate-lien covered transaction.
2. Interest-Only Loans
· Use the fully indexed rate or the introductory rate, whichever is greater, and
· Substantially equal, monthly payments of principal and interest that will repay the loan amount over the term of the loan remaining as of the date the loan is recast.
3. Negative Amortization Loans
· Use the fully indexed rate or any introductory rate, whichever is greater, and
· Substantially equal, monthly payments of principal and interest that will repay the maximum loan amount over the term of the loan remaining as of the date the loan is recast.
C. Calculating Payments For Simultaneous Loan Secured by the Same Property
If you know, or have reason to know, that there is going to be a simultaneous transaction around the time your transaction consummates, you need to consider the monthly payment on that transaction in accordance with the following requirements.
· For simultaneous transactions that are not HELOCs - the ATR assessment should include a monthly payment on the simultaneous loan that is calculated using the appropriate calculation method for adjustable-rate mortgages, interest-only loans, or other categories discussed above, depending on what type of simultaneous loan is made.
· For simultaneous transactions that are HELOCs - the ATR assessment should include a monthly payment on the simultaneous loan that is calculated based on the amount of credit to be drawn down at or before consummation of the main loan.
D. Mortgage Related Obligations
You can get records for the consumer’s mortgage-related obligations from many sources including:
· property taxes: government entities or the amount listed on the title report (if the source of the information was a local taxing authority);
· cooperative, condominium, or homeowners associations: a billing statement from the association;
· levies and assessments: statement from the assessing entity (for example, a water district bill);
· ground rent: the current ground rent agreement;
· lease payments: the existing lease agreement; and
· other records: can be reasonably reliable if they come from a third party.
E. Other Recurring Debts
The rule requires you to consider a consumer’s current debt obligations and any alimony or child support the consumer is required to pay.
Typical recurrent monthly debts include:
· Student loans;
· Auto loans;
· Revolving debt; and
· Existing mortgages not being paid off at or before consummation.
You can generally verify such obligations based on the consumer’s credit report or based on other items reported on the consumer’s application. Creditors have significant flexibility to consider current debt obligations in light of facts and circumstances, including that an obligation is likely to be paid off soon after consummation. Similarly, creditors should consider whether debt obligations in forbearance or deferral at the time of underwriting are likely to affect the consumer’s ATR after the expiration of the forbearance or deferral period.
VI. QUALIFIED MORTGAGES
A. Types of QMs
There are four types of QMs under the final rule. Two types, the General and Temporary QMs can be originated by all creditors. The other two types, small creditor and balloon-payment QMs, can only be originated by “small creditors.”
Some requirements are common across all four types of QM. These requirements include:
· a prohibition on negative amortization or interest-only payments;
· a prohibition on loan terms in excess of 30 years; and
· limitations on points and fees: the threshold is generally 3 percent of the loan balance, but larger amounts are allowed for loans under $100,000.
1. Amended General QM Definition
The General QM Final Rule amends the General QM definition. Among other things, it replaces the existing 43 percent DTI limit with a price-based limit and removes Appendix Q as well as any requirements to use Appendix Q for General QM loans. However, the General QM Final Rule retains the ATR/QM Rule’s consider and verify requirements and clarifies how they apply under the revised General QM definition. The General QM Final Rule also retains the existing product-feature and underwriting requirements and limits on points and fees.
2. Price-Based Limit
A loan meets the revised General QM definition only if the annual percentage rate (APR) exceeds the average prime offer rate (APOR) for a comparable transaction by less than the applicable threshold set forth in the General QM Final Rule as of the date the interest rate is set. Generally, this threshold is 2.25 percentage points. However, the General QM Final Rule provides higher thresholds for loans with smaller loan amounts, for certain manufactured housing loans, and for subordinate-lien transactions. The thresholds (which will be adjusted annually for inflation) set forth in the General QM Final Rule are:
• For a first-lien covered transaction with a loan amount greater than or equal to $110,260, 2.25 percentage points;
• For a first-lien covered transaction with a loan amount greater than or equal to $66,156 but less than $110,260, 3.5 percentage points;
• For a first-lien covered transaction with a loan amount less than $66,156, 6.5 percentage points;
• For a covered transaction secured by a manufactured home with a loan amount less than $110,260, 6.5 percentage points;
• For a covered transaction secured by a manufactured home with a loan amount equal to or greater than $110,260, 2.25 percentage points;
• For a subordinate-lien covered transaction with a loan amount greater than or equal to $66,156, 3.5 percentage points; and
• For a subordinate-lien covered transaction with a loan amount less than $66,156, 6.5 percentage points.
(Manufactured home means any residential structure as defined under regulations of the U.S. Department of Housing and Urban Development establishing manufactured home construction and safety standards. Modular or other factory-built homes that do not meet the HUD code standards are not manufactured homes for these purposes.)
If a loan’s interest rate may or will change in the first five years after the date on which the first regular periodic payment will be due, the creditor must treat the highest interest rate that may apply during that five years as the loan’s interest rate for the entire loan term when determining the APR for purposes of these thresholds.
3. Consider and Verify Requirements
However, the General QM Final Rule does not prescribe specifically how a creditor must consider the monthly DTI ratio or residual income, a particular monthly DTI ratio or residual income threshold, or specific methods of underwriting that a creditor must use (other than to require that verification methods and criteria must be reasonable). Furthermore, the General QM Final Rule provides flexibility for a creditor to take into account additional factors that are relevant in determining a consumer’s ability to repay the loan.
To prevent uncertainty that may result from Appendix Q’s removal, the General QM Final Rule clarifies the consider and verify requirements in the revised General QM definition. For example, the General QM Final Rule clarifies that to meet the requirement to consider, a creditor must:
• Take into account current or reasonably expected income or assets (other than the value of the dwelling that secures the loan and any real property attached to that dwelling), debt obligations, alimony, child support, and monthly DTI ratio or residual income in its ability-to-repay determination;
• Maintain written policies and procedures for how it takes into account income or assets, debt obligations, alimony, child support, and monthly DTI ratio or residual income in its ability-to-repay determination; and
• Retain documentation showing how it took into account income or assets, debt obligations, alimony, child support, and monthly DTI ratio or residual income in its ability-to-repay determination, including how it applied its policies and procedures. Examples of such documentation may include an underwriter worksheet or a final automated underwriting system certification, in combination with the creditor’s applicable underwriting standards and any applicable exceptions described in its policies and procedures, that shows how these required factors were taken into account in the creditor’s ability-to-repay determination. If a creditor does not satisfy this documentation requirement for a loan, that loan is not a General QM under the revised definition.
Additionally, the General QM Final Rule includes a list of specific verification standards that creditors may use to meet the revised General QM definition’s verify requirement. If a creditor satisfies the verification standards in one or more specified manuals, the creditor has a safe harbor for compliance with the verification requirement in the revised General QM definition. These standards include relevant provisions in specified versions of 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 General QM Final Rule sets forth the specific provisions and versions of these manuals that creditors must use to obtain a safe harbor, and notes a creditor also obtains a safe harbor if it complies with revised versions of the manuals listed in the General QM Final Rule, provided that the two versions are substantially similar. It clarifies that a creditor need only comply with requirements in the manuals for creditors to verify income, assets, debt obligations, alimony and child support using specified reasonably reliable third-party documents or to include or exclude particular inflows, property, and obligations as income, assets, debt obligations, alimony, and child support.
4. Other Provisions
5. Effective Date of the General QM Final Rule
The general QM final rule was originally effective on March 1, 2021, but had a mandatory compliance date of July 1, 2021.
NOTE: The CFPB further delayed the mandatory compliance date of the General QM Final Rule from July 1, 2021 to October 1, 2022. The old, DTI-based General QM definition; the new, priced-based General QM definition; and the GSE Patch (unless the GSE’s exit conservatorship prior to October 1, 2022) would all remain available as long as the lender received the consumer’s application prior to October 1, 2022.
D. Temporary QM
In its final rule, the CFPB noted that consumers can often afford a loan with a DTI ratio above 43 percent based on their particular circumstances and that such loans are better evaluated on an individual basis under the general ATR criteria rather than with a blanket presumption as set forth under the rule’s QM provisions. The final rule provides for a second, temporary category of QMs that have more flexible underwriting requirements.
E. Small Creditor QM
The final rule amendments provide flexibility intended to preserve borrowers’ access to credit from small creditors. Small creditors are defined in the final amendments as creditors with no more than $2 billion in assets (including the assets of the creditor’s mortgage originating affiliates, effective January 1, 2016) that, along with affiliates, originate no more than 2,000 first-lien mortgages covered under the ATR rules per year, and which have made at least one covered loan in a “rural” or “underserved” area. Effective January 1, 2016, loans held in portfolio by the creditor and its affiliates are excluded from the loan origination limit for small-creditor status.
Small creditor QMs generally lose their QM status if sold or otherwise transferred less than three years after consummation. The final rule amendments adopt a proposed QM category for certain loans originated and held in portfolio for at least three years — subject to certain limited exceptions — by small creditors. The loans must meet the general restrictions on QMs with regard to loan features and points and fees, and creditors must evaluate consumers’ DTI ratio or residual income. However, the loans are not subject to a specific DTI ratio as they would be under the general QM definition.
The QM small creditor portfolio category includes only loans held in portfolio by small creditors. Therefore, if a creditor agreed prior to consummation to sell a loan, that loan would not be a QM under the proposed definition. The rule also provides an exception that allows forward commitments to sell to a creditor that also meets the limits on asset size and number of first-lien covered transactions.
The CFPB’s final rule amendments also permit small creditors to charge a higher annual percentage rate for first-lien QMs in the QM small creditor portfolio category and still benefit from the conclusive presumption of compliance set forth under the safe harbor.
A loan has to meet the following product restrictions to be eligible to become a Seasoned QM:
· The loan is secured by a first lien. If a loan is a subordinate-lien loan, the loan is not eligible to be a Seasoned QM.
Additionally, the total points and fees for the loan cannot exceed the limits specified in the ATR/QM Rule. Generally, this means that the total points and fees cannot exceed 3 percent of the loan amount.
First, the Seasoned QM Final Rule provides some exceptions that are similar to those that apply to Small Creditor QMs under the ATR/QM Rule. For example, it allows transfers pursuant to certain supervisory sales and pursuant to certain mergers and acquisitions.
Second, the Seasoned QM Final Rule allows for a single transfer during the seasoning period if the loan is not securitized as part of the transfer or at any other time before the end of the seasoning period. This exception may only be used one time. This means that if a loan is to remain eligible to become a Seasoned QM, a purchaser that acquires the loan pursuant to this exception may not subsequently transfer it to any other entity, unless a different exception applies. Additionally, the loan may not be securitized before the end of the seasoning period.
4. Performance Requirements
The Seasoned QM Final Rule defines delinquency as the failure to make a periodic payment (in one full payment or in two or more partial payments) sufficient to cover principal, interest, and escrow (if applicable) for a given billing cycle by the date the periodic payment is due under the terms of the legal obligation. The failure to pay other amounts, such as late fees, does not constitute a delinquency for purposes of the performance requirements. Additionally, if there is a qualifying change during or after a temporary payment accommodation in connection with a disaster or pandemic-related national emergency, the principal and interest used to determine whether a periodic payment is delinquent are the principal and interest amounts as modified by the qualifying change.
When determining whether a scheduled periodic payment is delinquent for this purpose, the due date is the date the payment is due under the terms of the legal obligation, without regard to whether the consumer is afforded a period after the due date to pay before the servicer assesses a late fee. However, if the first payment due date in the legal obligation at consummation is modified due to reasons related to the timing of delivery, set up, or availability for occupancy of the dwelling securing the loan, the modified first payment due date shall be considered when determining if the periodic payment is delinquent.
A periodic payment is 30 days delinquent when it is not paid before the due date of the following scheduled periodic payment. A periodic payment is 60 days delinquent if the consumer is more than 30 days delinquent on the first of two sequential periodic payments and does not make both sequential payments before the due date of the next scheduled periodic payment after the two sequential periodic payments. Thus, a monthly, bi-weekly, or quarterly periodic payment would be 30 days delinquent when the periodic payment is not paid by the due date of the following monthly, bi-weekly, or quarterly payment due date. The Seasoned QM Final Rule also provides an example of how to determine if a periodic payment is 60 days delinquent.
Funds taken from escrow and funds paid on behalf of the consumer by the creditor, servicer, or assignee of the loan (or any other person acting on their behalf) are not considered in assessing whether a periodic payment has been made or is delinquent for purposes of the Seasoned QM Final Rule’s performance requirements. Creditors can, however, generally accept deficient payments, within a payment tolerance of $50, on up to three occasions during the seasoning period without triggering a delinquency for purposes of these performance requirements. This exception to the definition of delinquency in the Seasoned QM Final Rule only applies, however, if the creditor does not treat the payment as delinquent for purposes of the mortgage servicing provisions in subpart C of Regulation X.
5. Seasoning Period
In order for a loan to be a Seasoned QM, it must meet certain requirements during or at the end of a seasoning period. Generally, the seasoning period is the 36-month period that begins on the date on which the first periodic payment is due after consummation. The end of the seasoning period occurs later in two situations.
First, if there is a delinquency of 30 days or more at the end of the final month of the seasoning period, the seasoning period is extended until there is no delinquency.
Second, time spent in a temporary payment accommodation extended in connection with a disaster or pandemic-related national emergency does not count towards the seasoning period. Additionally, the seasoning period can only resume after the temporary payment accommodation if any delinquency is cured either pursuant to the loan’s original terms or through a qualifying change.
6. Safe Harbor
The Seasoned QM Final Rule provides a safe harbor for Seasoned QMs, regardless of whether the loan is a higher-priced loan.
7. Effective Date
The Seasoned QM Final Rule is effective on March 1, 2021. Its revisions to the ATR/QM Rule apply to covered transactions for which a creditor receives an application on or after the effective date, although because of the 36-month seasoning period, the seasoned QM Final Rule did not have any immediate impact.
G. Balloon Payment Transition QM
Subject to limited exceptions, the loan in question must be retained for at least three years unless sold to another qualifying creditor. The loan must conform to the other general QM requirements mentioned earlier, for instance, the ban on negative amortization and the limitation on points and fees. The loan must provide for substantially equal scheduled payments with a maximum 30-year amortization period. The interest rate may not increase. The rule also sets the minimum loan term for balloon-payment QMs at five years.
For purposes of this exception, a “nonstandard mortgage” is a loan that has one or more of these features:
· an adjustable-rate mortgage loan with an introductory fixed rate for a period of one year or longer;
· regular periodic payments that do not cause the principal balance to increase, do not allow the consumer to defer payments of principal, or result in a balloon payment;
· the term does not exceed 40 years;
· The creditor originating the standard mortgage is the current holder or servicer of the non-standard mortgage;
· The monthly payment for the standard mortgage is “materially lower” than the monthly payment for the non-standard mortgage (not defined in final rule, but comments state that it will depend on the facts, but that in all cases, a 10 percent reduction will be deemed “materially lower.”)
· The application must come in no later than two months after the non-standard mortgage has recast;
A loan cannot be a QM if the points and fees paid by the consumer exceed certain thresholds set forth in the final rule. The rule provides certain exclusions for “bona fide discount points.”
The dollar amounts are subject to annual adjustment for inflation which will be published by the CFPB.
The rule provides that fees included in the points and fees cap are those that are “known at or before” consummation, not simply those points and fees that are payable at that time.
A. Points and Fees Exclusions
To calculate points and fees, add together the amounts paid in connection with the transaction for the six categories of charges listed below:
1. Finance Charge
In general, include all items included in the finance charge, however, the following types and amounts of charges may be excluded, even if they normally would be included in the finance charge:
a. Interest or the time-price differential
b. Mortgage insurance premiums
i. Federal or state-government sponsored mortgage insurance premiums
ii. Private mortgage insurance premiums
The rule creates a limited exclusion for private mortgage insurance (PMI) premiums and charges that are payable at or before consummation. In this instance, the PMI premium or charge payable at or before consummation is excluded up to the amount that equals the amount that would have been paid for an FHA loan, provided that two conditions are satisfied.
· The premium or charge is refundable on a pro rata basis; and
· The refund is automatically issued upon satisfaction of the mortgage.
Under the rule, a bona fide discount point is 1 percent of the loan amount that reduces the interest rate based on a calculation that is “consistent with established industry practices for determining the amount of reduction in the interest rate” for the amount of discount points paid. Guidance provided by Fannie and Freddie may be relied upon to determine what constitutes a sufficient reduction in rate in exchange for a discount point.
Once a creditor determines that a discount point is bona fide, it must determine whether and how much of the point may be excluded from points and fees. Up to 2 bona fide discount points may be excluded if the undiscounted rate does not exceed the average prime offer rate by more than 1 percentage point. Up to one bona fide discount point may be excluded if the undiscounted rate does not exceed the APOR by more than 2 percentage points.
2. Loan Originator Compensation
The final rule requires compensation paid directly or indirectly by a consumer or creditor to a loan originator other than an employee of a creditor or of a mortgage broker to be included in the calculation of points and fees. Compensation that is attributable to the transaction, must be included to the extent that such compensation is known as of the date the interest rate for the transaction is set.
The final rule amendments exclude from points and fees loan originator compensation paid by a consumer to a mortgage broker when that payment has already been counted toward the points and fees threshold as part of the finance charge. The final rule also excludes from points and fees compensation paid by a mortgage broker to an employee of the mortgage broker because that compensation is already included in points and fees as loan originator compensation paid by the consumer or the creditor to the mortgage broker.
3. Real Estate Related Fees
All real estate-related fees described in section 1026.4(c)(7) must be included in the calculation of points and fees unless:
• The creditor receives no direct or indirect compensation in connection with the charge; and
• The charge is not paid to an affiliate of the creditor.
4. Premiums for Credit Insurance; Credit Property Insurance; Other Life, Accident, Health or Loss-Of-Income Insurance Where the Creditor is a Beneficiary; or Debt Cancellation or Suspension Coverage Payments
Premiums for these types of insurance that are payable at or before consummation are required to be included in the points and fees calculation even if such premiums are rolled into the loan amount, if permitted by law. Premiums paid after consummation (e.g., monthly premiums) do not need to be included.
5. Maximum Prepayment Penalty
If a loan has a prepayment penalty, the maximum repayment penalty that can be charged or collected on the loan must be included in points and fees. For purposes of the final rule, a “prepayment penalty” is defined as a charge imposed for paying all or part of the principle before the date on which it is due. However, the rule provides some important exceptions, such as the prepayment penalty does not include a waived, bona fide third-party charge that the creditor imposes if the consumer prepays in full sooner than 36 months after consummation.
Also excluded from the definition of prepayment penalty is interest charged consistent with the monthly interest accrual amortization method on FHA loans consummated before January 21, 2015. In addition, prepayment penalties do not include:
· Fees imposed for preparing documents when a loan is paid in full if such fees are imposed whether or not the loan is prepaid (e.g., payoff statement, reconveyance document, lien release document); and
· Guarantee fees.
6. Prepayment Penalty Paid in a Refinance
Prepayment penalties incurred by the consumer must be included in the calculation of points and fees if the consumer refinances the existing mortgage loan with either (a) the current holder of the existing loan; (b) a servicer acting on behalf of the current holder; or (c) an affiliate of either.
1. Mechanism
b. Maintain and follow Policies and Procedures: The creditor or assignee must maintain and follow policies and procedures for
The maximum time that the creditor or assignee will have to make the compensation payment is 210 days after consummation. However, the creditor or assignee may have less time because, for the cure to be effective, the payment also must be made prior to the occurrence of any of the following events:
· The consumer becoming 60 days past due on the legal obligation. “Past due” in this context means the failure to make a periodic payment (in one full payment or in two or more partial payments) sufficient to cover principal, interest, and, if applicable, escrow under the terms of the legal obligation. Other amounts, such as any late fees, are not considered for this purpose. The comments provide the following example of what constitutes “past due;”
• The consumer is 30 days past due if the consumer fails to make a payment (sufficient to cover the scheduled January 1, 2016 periodic payment of principal, interest, and, if applicable, escrow) on or before February 1, 2016.
• The consumer is 60 days past due if the consumer then also fails to make a payment (sufficient to cover the scheduled January 1, 2016 periodic payment of principal, interest, and, if applicable, escrow) on or before March 1, 2016.
• The consumer is not 60 days past due if the consumer makes a payment (sufficient to cover the scheduled January 1, 2016 periodic payment of principal, interest, and, if applicable, escrow) on or before March 1, 2016.
Note, as the example reflects, that a periodic payment is 30 days past due when it is not paid on or before the due date of the following scheduled periodic payment and is 60 days past due when, after already becoming 30 days past due, it is not paid on or before the due date of the next scheduled periodic payment. In addition, the creditor or assignee may treat a received payment as applying to the oldest outstanding periodic payment.
3. Method and Effective Date of Payment
The payment to the consumer always may be made “by check.” Alternatively, it may be made by any other means agreeable to the consumer. If payment is made by check, the check must be either delivered or placed in the mail to the consumer within 210 days after consummation. Presumably, then, a creditor also will comply with the timing requirement if the check is placed in the mail – even if not delivered –before any of the other events listed above.
4. Credit for Payments to Cure Tolerance Violations
To clarify the relationship between the cure provisions for tolerance violations and the new cure for points and fees, the Final Rule provides that the amount paid to the consumer under the points-and-fees cure mechanism described above “may be offset by the amount paid to the consumer” to cure tolerance violations, to the extent that the amount paid to cure the tolerance violation is applied to fees or charges that fit within the “points and fees” definition. For example, assume a creditor would have to pay $500 to cure a points-and-fees overage, and $300 to cure a tolerance violation. Further assume that of the $300 tolerance overage, $150 constituted points and fees. Once the creditor reimburses the consumer with $300 to cure the tolerance violation, the creditor can cure the points-and-fees overage by paying only an additional $350 since the $150 in points and fees for the tolerance violation is offset against the amount required to be paid for the “points-and-fees” violation. Note that while a creditor is required to cure a tolerance violation, the creditor is not obligated to cure a point-and-fees overage. However, if the loan loses its status as a qualified mortgage, the creditor loses the greater protection provided under the ATR/QM rule.
C. HUD QM Rule
While the Department of Housing and Urban Development is authorized to adopt the CFPB changes to points-and-fees, it has elected not to do so for the following reasons:
First, the CFPB’s cure provision requires that the cured loan meet CFPB’s qualified mortgage definition in order to qualify for the cure, but HUD has codified its own definition, which differs. Second, if HUD permitted a FHA lender to return funds to a borrower or pay down the principal balance for a single family mortgage insured under Title II, the amount returned could result in a violation of the statutorily required borrower minimum cash investment of 3.5 percent or other FHA requirements relating to interested party contributions and the calculation of the maximum insured mortgage value. In addition, unlike the general market, the points and fees limit for Title II mortgages is a requirement for insurability of the mortgage by FHA. As an insurer of the mortgage, it is imperative that FHA ensure all eligibility requirements are met prior to insurance endorsement.
The Dodd-Frank Act amended the Truth in Lending Act to add additional penalties for noncompliance with the requirements of the ATR/QM rule. The penalties include:
The Federal Housing Finance Agency (FHFA) has directed government sponsored enterprises Fannie Mae and Freddie Mac to limit their future mortgage acquisitions to loans that meet the requirements for a QM, including those that meet the CFPB’s special or temporary QM definition, and loans that are exempt from the Dodd-Frank Act ATR requirements.
Fannie Mae and Freddie Mac will continue to purchase loans that meet the underwriting and delivery eligibility requirements stated in their respective selling guides. This includes loans that are processed through their automated underwriting systems and loans with a debt-to-income ratio of greater than 43 percent. Loans with a debt-to-income ratio of more than 43 percent are not eligible for protection as QMs under the final rule unless they are eligible for purchase by Fannie Mae and Freddie Mac under the special or temporary QM definition.
XIII. ADDITIONAL REVISIONS PROPOSED