Alston & Bird Consumer Finance Blog

Consumer Financial Protection Bureau (CFPB)

CFPB Brings Action Against Connecticut Mortgage Lender

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The number of enforcement actions by the Consumer Financial Protection Bureau (CFPB) more than doubled from 2019 to 2020. The CFPB made clear that cracking down on deceptive and unfair acts and practices under the Consumer Financial Protection Act of 2010 (CFPA) remains a core focus, with 11 of the 15 complaints it filed last year alleging such violations.

Earlier this month, the CFPB filed another lawsuit alleging unfair and deceptive acts or practices in violation of the CFPA. At the dawn of a new year and a new Administration, this litigation may be the proverbial canary in the coalmine for others in the financial services industry. As the case proceeds and briefing is filed, the tone and focus of the new Administration may be brought to light.

In a Client Advisory, our Financial Services Litigation Team examines the latest effort by the CFPB to crack down on deceptive and unfair acts and practices.

CFPB Issues Statement Encouraging Work with LEP Consumers

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A&B ABstract:  On January 13, 2021, the Consumer Financial Protection Bureau (“CFPB”) issued a Statement encouraging financial institutions to expand access to financial products and services for consumers with limited English proficiency (“LEP”). The CFPB considers a consumer to have LEP if the person has a limited ability to read, write, speak, or understand English.

The Statement

The Statement provides guidance to financial institutions for providing access to credit in languages other than English while remaining compliant with the Equal Credit Opportunity Act (“ECOA”), the Dodd-Frank Act prohibition on unfair or deceptive acts and practices (“UDAPs”), and other applicable laws. The CFPB issued the Statement following a request for information (“RFI”) on ECOA, in which the CFPB sought information from the industry that would enable it “to understand the challenges specific to serving LEP consumers. The industry comments received in response to the RFI, which expressed uncertainty with how best to meet the needs of LEP consumers, prompted the CFPB to issue the Statement as guidance for financial institutions that recognize the importance of providing financial products and services to LEP consumers but are cautious of running afoul of statutes and regulations. As such, the Statement outlines the following compliance principles and guidelines that encourage financial institutions to expand access to products and services for LEP consumers: (1) promoting access to financial products for all consumers; (2) facilitating compliance by providing clear rules of the road; and (3) educating and empower consumers to make better informed financial decisions.

Guiding principles for serving LEP consumers

The CFPB encourages financial institutions to better serve LEP consumers by applying the following principles and guidelines:

  • Pilot programs. Financial institutions may use phased approaches for rolling out LEP-consumer-focused products and services, to serve LEP consumers incrementally while managing risks and taking steps to ensure compliance with applicable laws.
  • Compliance approaches. Financial institutions may consider developing a variety of compliance approaches related to the provision of products and services to LEP consumers. These approaches may depend on the size, complexity, and risk profile of an institution. Ultimately, differences in financial institutions, and the ways they choose to serve LEP consumers, may require different compliance solutions.
  • Disclosures to mitigate risk. Financial institutions may mitigate certain compliance risks by providing LEP consumers with clear and timely disclosures in non-English languages describing the extent and limits of any language services provided throughout the product lifecycle. In those disclosures, financial institutions may provide information about the level of non-English language support as well as communication channels through which LEP consumers can obtain additional information and ask questions.
  • Special-purpose credit programs. Financial institutions may wish to consider extending credit pursuant to a special-purpose credit program (“SPCP”) that complies with ECOA and Regulation B, to increase access to credit for certain underserved LEP consumers. As discussed in the CFPB’s recent Advisory Opinion on SPCPs, financial institutions may consider a prohibited basis characteristic such as race or national origin in certain circumstances to help meet the credit needs of underserved communities. Of course, financial institutions may responsibly serve LEP consumers without the use of SPCPs.

Guidelines for developing compliance solutions when serving LEP consumers

The CFPB lays out the following key considerations and compliance management system (“CMS”) guidelines to mitigate ECOA, UDAAP, and other legal risks when making threshold determinations and other decisions related to serving LEP consumers.

Key Considerations

Key considerations include:

    • Language selection. In determining whether to provide non-English language services to LEP consumers and in which language(s), financial institutions may consider documented and verifiable information, such as the stated language preferences of its current customers or U.S. Census Bureau demographic or language data. While a nationwide institution might focus on serving Spanish-speaking consumers, a regional institution might choose to align its language services with local demographics.
    • Product and service selection. In making product and service selections, financial institutions may consider a variety of factors, including the extent to which LEP consumers use particular products, including any existing customer data on what services LEP consumers use most frequently, as well as the availability of non-English language services. Further, in determining when in the product lifecycle to offer these services,  financial institutions should consider those activities and communications, whether verbal or written, that significantly impact consumers (i.e., convey essential information about credit terms and conditions or about borrower obligations and rights, including those related to delinquency and default servicing, loss mitigation, and debt collection). Finally, in making product and service selections, financial institutions should review relevant policies, procedures, and practices for features that may pose heightened risk of unlawful discrimination, including distinctions in product offerings or terms related to prohibited bases or proxies for prohibited bases.
    • Language preference collection and tracking. Financial institutions may choose to collect and track customer language preferences (such as requesting an applicant’s language preference on a loan application form), provided that such information is not used to exclude LEP consumers or in any other way that violates applicable law.  Financial institutions that choose to collect and track this information should monitor how the information is used by the institution to ensure compliance with applicable law.
    • Translated documents. Certain federal and state laws required financial institutions to provide consumers with translated documents. Where the translation of documents is not already legally mandated, financial institutions may assess whether and to what extent to provide translated documents to consumers, with particular attention to those documents that significantly impact consumers. However, financial institutions that choose to provide translated documents to LEP consumers must ensure the accuracy of such translations.
CMS Guidelines

The Statement also addresses CMS guidelines, whether LEP-specific or integrated into the financial institution’s broader fair lending, UDAAP, and/or consumer compliance program, including with respect to:

    • Documentation of decisions. Financial institutions providing products and services in non-English languages should document decisions related to the selection of languages, products, and services. This documentation may include anything that the financial institution considers in making the decision, including operational limitations; cost estimates; or any other information that would allow a regulator to understand the decision-making process.
    • Monitoring. Financial institutions should assess the quality of customer assistance provided in non-English languages, including by assessing whether personnel receive the same training, convey the same information, and have the same authority as other customer service personnel. In addition, financial institutions should consider monitoring or conducting regular fair lending and UDAAP-related assessments to assess whether any populations are missing or excluded, and whether marketing materials and disclosures are designed to ensure accurate understanding by LEP consumers.
    • Fair lending testing. Financial institutions should conduct regular statistical analysis of loan-level data to determine the existence of any potential disparities on a prohibited basis in underwriting, pricing, or other aspects of the credit transaction.
    • Third-party vendor oversight. Financial institutions that contract with service providers to underwrite or price products to LEP consumers should implement a service provider oversight program to ensure that such products do not violate fair lending, UDAP, and other applicable laws.

Takeaways

Given the above, the Statement provides helpful guidelines to financial institutions who are considering expanding their products and services to LEP consumers yet are struggling with balancing the various legal requirements and practical considerations. Yet, as the CFPB recently clarified in a final rule, such supervisory guidance does not have the force and effect of law and cannot form the basis of an enforcement action or issue supervisory criticism. Indeed, the Statement itself notes that it does not mandate any particular approach to serving LEP consumers and should not be interpreted to relieve institutions from their obligation to comply with applicable laws. Still, the CFPB notes that supervisory guidance, such as this Statement, carries more weight than its Compliance Aids, which the CFPB uses merely for providing “practical suggestions” to compliance professionals, industry stakeholders, and the public on existing rules and statutes.

CFPB, NCUA Sign MOU Regarding Cooperation

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The Consumer Financial Protection Bureau (CFPB) and the National Credit Union Administration (NCUA) have signed a Memorandum of Understanding (MOU) to facilitate and improve coordination between the agencies. The CFPB and NCUA have overlapping supervision authority over credit unions with over $10 billion in assets. Both agencies will engage in semi-annual “strategy planning sessions” to align on and coordinate examinations. The MOU will facilitate information sharing between the agencies, including electronic sharing of Examination Reports and training activities and content.

The MOU follows many other MOUs between regulators, which have been in place for years, and reflects the same commitment to information sharing. The CFPB’s press release noted that the “MOU will permit both agencies to share information related to . . . potential enforcement actions.” Coordination on enforcement matters between the agencies could mark a notable turn in the enforcement landscape for credit unions.

CFPB Issues “Seasoned Qualified Mortgage” Rule

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A&B ABstract:  On December 10, 2020, the Consumer Financial Protection Bureau (CFPB) issued an innovative final rulemaking that creates a pathway to “safe harbor” Qualified Mortgage (QM) status for performing non-QM and “rebuttable presumption” QM loans that meet certain performance criteria portfolio requirements over a seasoning period of at least 36 months and that satisfy certain product restrictions, points and fees limits, and underwriting requirements prior to consummation.

The CFPB promulgated this “Seasoned QM” rulemaking simultaneously with the rule that terminates the “QM Patch” and amends the general QM rules (as discussed in our December 28 post).

The “Seasoned QM” rule is effective with respect to applications received on or after March 1, 2021.

Background

Under the revised general QM rule, for first-lien transactions, a loan receives a conclusive presumption that the consumer had the ability to repay (and hence receives the “safe harbor” presumption of QM compliance) if the APR does not exceed the APOR for a comparable transaction by 1.5 percentage points or more as of the date the interest rate is set.

A first-lien loan receives a “rebuttable presumption” that the consumer had the ability to repay if the APR exceeds the APOR for a comparable transaction by 1.5 percentage points or more but by less than 2.25 percentage points.  The revised general QM rule provides for higher thresholds for loans with smaller loan amounts, for subordinate-lien transactions, and for certain manufactured housing loans.  Loans with higher APRs than the thresholds noted above are designated as non-QMs.

In order to qualify for QM status, the loan must meet the statutory requirements regarding the three percent points and fees limits, and must not contain negative amortization, a balloon payment (except in the existing limited circumstances), or a term exceeding 30 years.

Pathway to Safe Harbor QM Status

 In the “Seasoned QM” rule, a non-QM loan or “rebuttable presumption” QM receives a safe harbor from ATR liability at the end of a seasoning period of at least 36 months as a “Seasoned QM” if it satisfies certain product restrictions, points-and-fees limits, and underwriting requirements, and the loan meets the designated performance and portfolio requirements during the seasoning period.  The CFPB’s stated purpose of the rule is to “enhance access to affordable mortgage credit”, and to incentivize “the origination of non-QM and ‘rebuttable presumption’ QM loans that a creditor expects to demonstrate a sustained and timely payment history.”

Criteria for a “Seasoned QM”

In order to become eligible to become a “Seasoned QM”, and hence, receive a safe harbor from ATR liability at the end of the 36- month seasoning period, the loan must meet the following criteria:

  • The loan is secured by a first lien;
  • The loan has a fixed rate, with regular, substantially equal periodic payments that are fully amortizing and no balloon payments;
  • The loan term does not exceed 30 years;
  • The loan is not subject to the Home Ownership and Equity Protection Act;
  • The loan’s points and fees do not exceed the three percent threshold or the other specified applicable limit;
  • creditor must consider the consumer’s DTI ratio or residual income, income or assets, other than the value of the dwelling, and debts, and verify the consumer’s income or assets, other than the value of the dwelling, and the consumer’s debts, using the same consider and verify requirements established for general QMs in the general QM rule;
  • subject to limited exceptions, the creditor must hold the loan for the entire 36- month seasoning period; and
  • the loan must meet certain performance criteria, namely, there must have no more than two delinquencies of 30 or more days and no delinquencies of 60 or more days at the end of the seasoning period.

The seasoning, portfolio and performance criteria are further discussed below.

Seasoning Criteria

The CFPB defines the seasoning period as a period of 36 months beginning on the date on which the first periodic payment is due after consummation except that if there is a delinquency of 30 days or more at the end of the 36th month of the seasoning period, the seasoning period continues until there is this delinquency ends.

Further, the seasoning period is tolled (and hence, does not include) any period during which the consumer is in a “temporary payment accommodation” extended in connection with a disaster or pandemic-related national emergency as long as certain conditions are met.  The rule clarifies that the seasoning period can only resume after the temporary accommodation if any delinquency is cured either pursuant to the loan’s original terms or through a “qualifying change”.

The rule defines a “qualifying change” as an agreement entered into during or after a temporary payment accommodation extended in connection with a disaster or pandemic-related national emergency that ends any preexisting delinquency and meets certain other conditions such as not increasing the amount of interest charged over the full term of the loan as a result of the agreement or imposing fees on the consumer.

Portfolio Retention

 The rule requires the creditor that originates the loan to hold it in its portfolio for the entire 36-month period seasoning period unless one of the limited exceptions applies.  Notably, the rule permits the creditor to sell or assign a single loan as long as the assignee retains the loan for the remainder of the seasoning period and the loan is not securitized. The two other exceptions to the portfolio include (i) sales or assignments of loans during a merger involving the creditor and another party and (ii) transfers of ownership pursuant to certain supervisory sales such as a conservatorship or bankruptcy.

Loan Performance

 To be an eligible as a “Seasoned QM”, the loan must have no more than two delinquencies of 30 or more days and no delinquencies of 60 or more days at the end of the 36- month seasoning period.  Under the rule:

“Delinquency 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 escrow (if applicable) for a given billing cycle by the date the periodic payment is due under the terms of the legal obligation. Other amounts, such as any late fees, are not considered for this purpose.

 (1) A periodic payment is 30 days delinquent when it is not paid before the due date of the following scheduled periodic payment.

 (2) A periodic payment is 60 days delinquent if the consumer is more than 30 days delinquent on the first of two sequential scheduled periodic payments and does not make both sequential scheduled periodic payments before the due date of the next scheduled periodic payment after the two sequential scheduled periodic payments.”

 Further, notably, except for purposes of making up nominal deficiency amounts (i.e., $50 or less) no more than three times during the seasoning period, payments from the following sources may not be considered in assessing “delinquencies”:

(i) funds in escrow in connection with the loan; or

(ii) Funds paid on behalf of the consumer by the creditor, servicer, or assignee.

The CFPB has indicated that payments made from escrow accounts established in connection with the loan or from third parties on the consumer’s behalf should not be considered in assessing performance for seasoning purposes because, for example, a creditor could escrow funds from the loan proceeds to cover payments during the seasoning period even if the loan payments were not actually affordable for the consumer on an ongoing basis.  The CFPB reasons that if a creditor needs to take funds from an escrow account or from a third party to cover an outstanding periodic payment, the payment from the escrow or third party raises doubt about the consumer’s ability to make the periodic payment.

GSE and Insurers Warranty Framework

In devising the performance framework for the 36-month seasoning period, the CFPB looked to the existing standards of the GSEs and certain mortgage insurers.  The CFPB observed that each GSE generally provides creditors relief from its enforcement with respect to certain representations and warranties a creditor must make to the GSE regarding its underwriting of a loan after the first 36 monthly payments if the borrower had no more than two 30-day delinquencies and no delinquencies of 60 days or more.

Similarly, the CFPB noted that the master policies of mortgage insurers generally provide that the mortgage insurer will not issue a rescission with respect to certain representations and warranties made by the originating lender if the borrower had no more than two 30-day delinquencies in the 36 months following the borrower’s first payment, among other requirements.

Takeaways

The CFPB believes that the creation of a special “Seasoned QM” is warranted because, in its view, many loans made to creditworthy consumers that do not fall within the existing QM loan definitions at consummation may be able to demonstrate through sustained loan performance compliance with the ATR requirements.  In considering the GSEs’ warranty frameworks, the CFPB noted that in most, albeit not all, instances, a default after 36 months of loan performance is usually not attributed to deficient loan underwriting, but rather to a change in the consumer’s circumstances that the creditor could not have reasonably anticipated prior to consummation.

Further, the statute of limitations period for an affirmative private right of action for damages for an ATR violation is generally three years from the date of the violation.  Consequently, a consumer would not be prevented from bringing an ATR claim during the contemplated seasoning period.

Nevertheless, conferring safe harbor QM status on a loan that was originated as a non-QM or a “rebuttable presumption” QM after the requisite seasoning period would curtail the consumer’s ability to invoke an ATR violation as a defense to foreclosure or assert civil damages as a recoupment claim after 36 months unless the seasoning period is extended.  Therefore, the CFPB contends that the special “Seasoned QM” category will incentivize the origination of non-QM loans that otherwise may not be made –or made at a significantly higher price–due to perceived litigation, civil liability exposure or other defense to foreclosure risks, even if a creditor has confidence that it can originate the loan in compliance with the ATR requirements.

Not surprisingly, while the residential mortgage industry strongly supported the rulemaking, consumer advocacy groups generally opposed not only significant aspects of the rule, but also the concept of a “Seasoned QM” notwithstanding the many concessions that the CFPB made to them.  Although the rule has limited applicability given its many requirements, it is uncertain whether a new CFPB Director appointed in the Biden Administration will retain the rule in its present form.

CFPB Retires the “QM Patch” and Revises QM Rules

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Money

A&B ABstract:

In a significant final rulemaking with potentially far-reaching consequences for the residential mortgage markets, the Consumer Financial Protection Bureau (“CFPB”) is terminating the “QM Patch” and significantly revising the criteria for what constitutes a qualified mortgage (“QM”) loan.

Notably, in this rule, issued on December 10, 2020, the CFPB replaces the dreaded Appendix Q and strict 43% debt-to-income underwriting threshold with a priced-based QM loan definition.  The rule takes effect on February 27, 2021, but compliance with it is not mandatory until July 1, 2021.  The QM Patch will expire on the earlier of (i) July 1, 2021 or (ii) the date that the GSEs exit conservatorship.

In a separate rulemaking, the CFPB promulgated new rules for “seasoned QM loans”.  We will discuss that rulemaking in a separate post.

Background

The CFPB’s ability-to-repay/QM regulations, promulgated pursuant to the Dodd-Frank Act, require a creditor to make a reasonable, good-faith determination at or before consummation that a consumer will have a reasonable ability to repay the loan according to its terms.  (The obligation applies to a consumer credit transaction secured by a dwelling.)

The regulations currently provide:

  • a “safe harbor” for compliance with the ability-to-repay rules to creditors or assignees of loans that satisfy the definition of a QM and are not higher-priced mortgage loans; and
  • a “rebuttable presumption” of compliance with the ability-to-repay rules to creditors or assignees for higher-priced mortgage loans.

A “higher-priced mortgage loan” has an annual percentage rate (“APR”) exceeding the average prime offer rate (“APOR”) by 1.5 or more percentage points for first-lien loans, or by 3.5 or more percentage points for subordinate-lien loans.

The QM Patch

In many instances, in order for a loan to achieve QM status, it must be underwritten in accordance with exacting standards of Appendix Q, and the consumer’s debt-to-income (“DTI”) ratio may not exceed a 43% hard limit.  However, the CFPB regulations eliminate these particular requirements if the loan is eligible for purchase by, among others, Fannie Mae and Freddie Mac.  Consequently, a loan satisfies the QM Patch if it can be sold to one of the GSEs and meets certain other QM criteria.  (Such criteria include that the points do not exceed the three percent threshold, and the loan is fully amortizing and doesn’t have a term exceeding 30 years.)

The QM Patch has significantly enhanced the presence of the GSEs in the QM market, as the GSEs are in effect backstopping the underwriting of these loans.  The regulations scheduled this exemption to expire upon the earlier of the termination of the conservatorship of the particular GSEs, or January 10, 2021.

What the rule did not anticipate is that the conservatorship of the GSEs would continue years after the effective date of the CFPB regulations (January 10, 2014). Many have criticized the QM Patch for unduly advantaging the government subsidized GSEs at the expense of the private residential mortgage market participants, and have clamored for its elimination.

The Final Rulemaking: QM Patch Expiration

 Notably, under the final rule, the QM Patch permanently sunsets on the earlier of (i) July 1, 2021 or (ii) the date that the GSEs exit conservatorship.  The timing is tricky because Mark Calabria, the Director of the Federal Housing Finance Agency, the entity that supervises the conservatorships of Fannie Mae and Freddie Mae, has indicated that he might seek to terminate the conservatorships prior to President Trump’s departure from office.  In recent remarks, however, Treasury Secretary Steven Mnuchin has indicated that termination of the conservatorships is not imminent.

Significantly, the expiration of the QM Patch does not affect the QM definitions that apply to Federal Housing Administration (FHA), US Department of Veterans Affairs (VA), US Department of Agriculture (USDA) or Rural Housing Service loans.  In other words, loans eligible to be insured or guaranteed by these agencies may still constitute QMs if they meet the agencies’ respective definitions of a QM.

Appendix Q and 43% DTI Requirement Removal

Further, in this final rule, the CFPB eliminates the Appendix Q 43 percent DTI underwriting requirements and replaces them with a priced-based QM definition.

Under the rule, for first-lien transactions, a loan receives a conclusive presumption that the consumer had the ability to repay (and hence receives the “safe harbor” presumption of QM compliance) if the APR does not exceed the APOR for a comparable transaction by 1.5 percentage points or more as of the date the interest rate is set. A first-lien loan receives a “rebuttable presumption” that the consumer had the ability to repay if the APR exceeds the APOR for a comparable transaction by 1.5 percentage points or more but by less than 2.25 percentage points.  The final rule provides for higher thresholds for loans with smaller loan amounts, for subordinate-lien transactions, and for certain manufactured housing loans.

In order to qualify for QM status, the loan must continue to meet the statutory requirements regarding the 3% points and fees limits, and must not contain  negative amortization, a balloon payment (except in the existing limited circumstances), or a term exceeding 30 years.     

Consider and Verify Consumer Income and Assets

In lieu of underwriting to Appendix Q, the final rule requires that the creditor consider the consumer’s current or reasonably expected income or assets other than the value of the dwelling (including any real property attached to the dwelling) that secures the loan, debt obligations, alimony, child support, and DTI ratio or residual income.  The final rule also requires the creditor to verify the consumer’s current or reasonably expected income or assets other than the value of the dwelling (including any real property attached to the dwelling) that secures the loan and the consumer’s current debt obligations, alimony, and child support.   

Consider Requirement

In particular, in order to comply with the requirement to “consider” under the rule, the CFPB provides creditors the option to “consider” either the consumer’s monthly residual income or DTI.  The CFPB imposes no bright line DTI limits or residual income thresholds.

As part of the consider requirement, a creditor must maintain policies and procedures for how it takes into account the underwriting factors enumerated above, as well as retain documentation showing how it took these factors into account in its ability to repay determination.

The CFPB indicates that this “this documentation may include, for example, 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.”

Verify Requirement and “Safe Harbor”

With respect to the “verify” requirement, the rule does not prescribe specific methods of underwriting that a creditor must use, as long as the creditor uses third-party records that provide reasonably reliable evidence of the consumer’s income or assets.  Indeed, the rule permits the creditor to use any “reasonable verification method and criteria”.

Nevertheless, in an especially significant provision of the rule, the CFPB provides a “safe harbor” to creditors using verification standards from relevant provisions from  Fannie Mae’s Single Family Selling Guide, Freddie Mac’s Single-Family Seller/Servicer Guide, FHA’s Single Family Housing Policy Handbook, the VA’s Lenders Handbook, and the Field Office Handbook for the Direct Single Family Housing Program and Handbook for the Single Family Guaranteed Loan Program of the USDA.  In other words, under the rule, a creditor is deemed to have complied with this “verify” requirement if it complies with the verification standards in one or more of these agency manuals.

In fact, the rule permits the creditor to “mix and match” verification standards from different agency manuals.  Stated another way, the creditor is deemed to comply with the “verify” requirement if it complies with one of more of the verification standards of the manuals listed above.  Again, creditors are not required to verify income and debt according to the standards the CFPB specifies.

Treatment of Certain Five-Year ARM Loans

Under the rule, the CFPB creates a special provision for adjustable rate mortgages (ARMs) with initial fixed-rate periods of five years or less.  In these transactions, the interest rate may or will change within the first five years after the date on which the first regular periodic payment will be due.

For purposes of determining whether these ARMs are accorded QM status, the creditor is required to ascertain the APR by treating the maximum interest rate that may apply during that five-year period as the interest rate for the full term of the loan.  As an illustration of the foregoing, the rule provides:

For example, assume an adjustable-rate mortgage with a loan term of 30 years and an initial discounted rate of 5.0 percent that is fixed for the first three years. Assume that the maximum interest rate during the first five years after the date on which the first regular periodic payment will be due is 7.0 percent. Pursuant to [ the rule], the creditor must determine the annual percentage rate based on an interest rate of 7.0 percent applied for the full 30-year loan term.

Takeaways   

On its face, the final rule appears to significantly alter the criteria for QM loans and seemingly diminishes the presence of the GSEs in in the QM market.  In eliminating the QM Patch, Appendix Q and the hard 43% DTI threshold, the rule gives a creditor certain flexibility in originating QMs as long as it underwrites the loans using the specified “consider” and “verify” standards.

Ironically, the much-maligned Appendix Q provided a recognized measure of certainty of compliance with the QM underwriting rules if the creditor could adhere it its sometimes-arbitrary standards.  Further, for GSE-conforming loans, as long as the loan was eligible to be purchased by Fannie Mae or Freddie Mac, and otherwise met the product feature and point/fee limits, the loan was automatically deemed QM.

Under the final rule, however, unless the creditor avails itself of the “safe harbor” for verifying the consumer’s income, assets, debt obligations, alimony and child support, the creditor’s underwriting of the loan to achieve QM status is inherently subjective , and hence, at least initially may not be accorded the same recognition in the secondary market as a loan that had been underwritten to Appendix Q or had been subject to the QM Patch under the existing rule.  Consequently, as the rule is implemented, creditors will be strongly incentivized to avail themselves of the “safe harbor” by complying with the verification standards of one or more of the agency manuals.  Perhaps the revised rule will not diminish the presence of the GSEs in the QM market as anticipated.