On December 10, 2020, the CFPB released two separate final rules: the first, redefining the General Qualified Mortgage requirements (General QM Rule); and the second, establishing requirements for a new Seasoned QM loan (Seasoned QM Rule). Both rules will become effective 60 days after they are published in the Federal Register, expected shortly. Another recent final rule provides that the so-called “Temporary GSE Patch QM” will expire on the mandatory effective date of the General QM Rule which is July 1, 2021, or the date the GSEs exit conservatorship, if earlier than July 1.
The major features of the General QM Rule are the elimination and replacement of the requirement that for a General QM, the borrower’s debt-to-income ratio must not exceed 43% based on Appendix Q. The General QM Rule replaces the DTI and Appendix Q requirements with requirements based on the pricing of the loan. Under these requirements, a loan may qualify as a “Safe Harbor QM” if (among other things) its APR is less than 1.5 percentage points above the APOR at the time the interest rate for the loan is set (3.5 percentage points or more for second-lien loans). A loan may qualify as a “Rebuttable Presumption QM” if (among other things) its APR is at 1.5 percentage points but less than 2.25 percentage points above the APOR at the time the interest rate is set. A loan with an APR exceeding the APOR by 2.25 percentage points or more cannot meet the definition of a general QM, unless it has a smaller loan amount subject to higher caps.
General QMs still must meet the current restrictions against certain loan features common to most other QM types (such as no negative amortization and or no loan terms exceeding 30 years) and have points and fees no greater than the 3% cap (with higher caps for certain smaller loans). Additionally, lenders are still required to “consider and verify” a borrower’s income, assets, debts, and liabilities when originating a general QM.
With the removal of Appendix Q and the 43% debt-to-income ratio limit, however, the CFPB has added substantial official commentary describing how lenders can consider and verify this information. Importantly, the new rule permits lenders to utilize certain underwriting criteria from one or more of the Fannie Mae Single Family Selling Guide, the Freddie Mac Single-Family Seller/Servicer Guide, FHA’s Single Family Housing Policy Handbook, VA’s Lenders Handbook, the USDA’s Field Office Handbook for the Direct Single Family Housing Program, and/or the USDA’s Handbook for the Single Family Guaranteed Loan Program. Lenders are not required to utilize only one such handbook, and may “mix and match” from various underwriting criteria in these handbooks.
Although the new General QM Rule will become effective 60 days after it is published in the Federal Register (the Publication Date), lenders who receive loan applications on or after the Publication Date but before July 1, 2021, can use either the General QM loan requirements in effect before the Publication Date (including the Temporary GSE Patch), or the new General QM Rule requirements. The new General QM Rule requirements are mandatory for applications received on or after July 1, 2021.
Under the new Seasoned QM Rule, a loan must be “seasoned” to qualify as a QM and receive retroactive Safe Harbor QM status. This requires that the loan be held in portfolio (either by the originating lender or by the first entity to whom the loan is sold) for a period of 36 months from the date the first payment is due; the loan generally may only be transferred once during this period. The loan may not be securitized during the seasoning period and, during this period, there can be no more than two delinquencies of 30 or more days, and no delinquencies of 60 or more days.
Notably, the Seasoned QM Rule provides that during a period of disaster or epidemic (such as the COVID-19 epidemic), the seasoning period is effectively suspended for the length of any temporary payment accommodation period (such as under the CARES Act loan forbearance provisions). Assuming that there is a qualifying change in the loan, or the delinquency is cured, during this temporary payment accommodation period, then the seasoning period consists of (i) the period from the date of the first payment due on the loan until the beginning of the temporary payment accommodation period, and (ii) from the end of the temporary payment accommodation period forward, until a total time of 36 months is reached.
Finally, Seasoned QMs must meet the current restrictions against certain loan features (negative amortization, greater than a 30 year term, etc.) and the points and fees restrictions. Additionally, a Seasoned QM also must be a fixed-rate, first-lien loan. The loan’s APR, however, may exceed the APOR on the date the interest rate is set by 1.5 or more percentage points (although a high-cost mortgage as defined in Regulation Z is not eligible to be a seasoned QM loan).
In addition to the changes to the General QM and the new Seasoned QM established under these two rules, other types of QMs including FHA, VA, RHS, Smaller Creditor and Smaller Institution QMs remain available to lenders.