Alston & Bird Consumer Finance Blog

Mortgage Loans

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.

CSBS Proposes Prudential Standards for Servicers

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A&B Abstract: The Conference of State Bank Supervisors (“CSBS”) proposed regulatory prudential standards (the “Standards”) to develop a consistent regulatory structure of nonbank mortgage servicers.  Comments on all aspects of the Standards are encouraged by December 31, 2020.

Background:

Since the financial crisis, the rapid growth of mortgage bank mortgage servicers has led regulators to call for the enhanced oversight of such entities.  The Financial Stability Oversight Council (charged under the Dodd-Frank Act with identifying risk to the stability of the U.S. markets) recommended in its 2014 and 2019 annual reports that state regulators work collaboratively to develop prudential and corporate governance standards. Earlier this year, the Federal Housing Finance Agency (FHFA) proposed new financial eligibility requirement for nonbank servicers doing business with Fannie Mae and Freddie Mac.

In 2015, state regulators working through the Mortgage Servicing Rights Task Force proposed baseline and enhanced prudential regulatory standards (including capital and net worth requirements) for nonbank mortgage servicers.  Although those standards were not finalized, several states – including Maryland, Oregon and Washington –imposed new net worth requirements for nonbank servicers.

The CSBS’s newly released  proposed standards update the 2015 proposal “to reflect a changed nonbank mortgage market, continued significant growth and complexity and an evolved understanding of state regulators concerning the need for supervisory standards.” The stated goals of the Standards are to: (i) provide better protections for borrowers, investors, and other stakeholders in the occurrence of a stress event, which could result in borrower harm; (ii) enhance regulatory oversight and market discipline; and (iii) improve transparency, accountability, risk management, and corporate governance standards.

Baseline Prudential Standards vs. Enhanced Prudential Standards:

The Standards include proposed baseline prudential standards (“Baseline Standards”) and enhanced prudential standards (“Enhanced Standards”).  The Standards apply to state-licensed nonbank mortgage servicers and investors, including MSR investors, originator servicers, monoline servicers, subservicers and owners of whole loans.  The Standards are not intended to apply to servicers solely owning and conducting reverse mortgage servicing and they -have limited applicability to entities that only perform subservicing for others.

The Baseline Standards, as proposed, will cover eight areas:

  • Capital
  • Liquidity
  • Risk management
  • Data standards and integrity
  • Data protection (including cyber risk)
  • Corporate governance
  • Servicing transfer requirements
  • Change of control requirements

Notably, CSBS and state regulators intend to align supervisory approaches wherever possible, and the proposed standards are intended to do so with the calculations for capital and liquidity under FHFA eligibility requirements but apply the calculations to the entire owned servicing portfolio, including whole loans. To prevent double counting of MRS, the Baseline Standard’s capital and liquidity requirements differentiates “owned” servicing and servicing for others

The Enhanced Standards, as proposed, cover four areas:

  • Capital
  • Liquidity
  • Stress testing and
  • Living will/recovery and resolution planning

The Enhanced Standards are intended to apply to  Complex Servicers,  companies servicing whole loans plus mortgage servicing rights (“MSR(s)”) totaling the lesser of $100 billion or representing at least 2.5% total market share based on Mortgage Call Report quarterly data of licensed nonbank owned whole loans and MSRs. State regulators may determine that specific servicers, including subservicers only, that do not meet the definition of Complex Servicers are subject to the Enhanced Standards based on their unique risk profile, growth, market importance, or financial condition of the institution.

Request for Feedback:

While the CSBS is seeing comments on all aspects of the Standards, they specifically seek feedback on the following questions:

 General
  • Is the need for state prudential standards sufficiently established?
  • Do any of the standards threaten the viability of a servicer or a specific subsector within the industry?
  • What is a reasonable transition period to implement the standards?
  • Are there specific standards that would require additional time to implement?
  • What effect will the enhanced standards have on the warehouse and advance facility borrowing contracts/capacity of large servicers?
Coverage
  • Is a scaled approach appropriate where all servicers are subject to Baseline Standards and Complex Servicers only subject to Enhanced Standards?
  • Nonbank servicer coverage in the proposal is intentionally unspecific. What should be the appropriate coverage triggers? Should reverse mortgage servicers be included in scope?
Capital and Liquidity
  • Are the capital and liquidity aspects of the proposal alignment with existing and future FHFA Seller/Servicer requirements the right approach?
  • Should there be an alternative net worth calculation method?
  • State supervisors hold jurisdiction over a nonbank servicer’s entire portfolio. Should the FHFA calculations to all owned servicing the appropriate approach?
  • Do you agree with the Standard’s definition for the two types of liquidity needs (servicing liquidity for the direct performance of servicing and operating liquidity for general operations of the organization)?
  • Do you agree that allowable assets for liquidity should align with FHFA’s 2019 Servicer Eligibility 2.0 Proposal?
  • Do the risk management standards appropriately capture the risks faced by nonbank mortgage servicers?
Corporate Governance
  • Should all covered servicers be expected to establish a risk management program under a board of directors scaled to the complexity of the organization?
  • Is it appropriate for the data standards to incorporate the CFPB’s Mortgage Servicing Rules Standards or is there a different alternative that should be considered?
  • Are the data protection standards appropriate for the data risks inherent in nonbank mortgage servicers?
  • Are the Ginnie Mae audit standards the appropriate standards for corporate governance under the Standards?
  • Should all covered nonbank mortgage servicers be required to have a full financial statement audit conducted by an independent certified public accountant?
  • Is it appropriate for the servicing transfer requirements to rely on existing CFPB and FHFA transfer requirements?
  • For change of ownership and contract, do the Standards reflect the correct number of days for notification (30 business days) and appropriate ownership percent trigger (10% or more)?

Takeaways:

Some have called for the imposition of federal capital and liquidity standards.  The states, on the other hand, believe that they should be the primary prudential regulator over nonbank mortgage servicers and have developed the Standards to comprehensively cover safety and soundness and consumer protection concerns. While the Standards are very detailed in some areas, they are vague in others such as coverage and implementation.  Consistent implementation, interpretation, and enforcement of the standards will be imperative for the state’s to achieve their objectives.

Maryland Issues Executive Order Restricting Foreclosure Actions and Prohibiting Evictions During COVID-19 Emergency

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A&B ABstract: Maryland’s Governor has issued an Executive Order providing that until the COVID-19 state of emergency is terminated: (1) foreclosure sales will only be valid if the servicer had notified the borrower of their rights to request a forbearance, and (2) residential and commercial evictions are prohibited if the tenant can show they suffered a “Substantial Loss of Income.” Similar to Section 4022 of the CARES Act, this Executive Order grants borrowers a right to request a forbearance if they are experiencing a financial hardship due, directly or indirectly, to the COVID-19 emergency. Additionally, until January 4, 2021, the Maryland Commissioner of Financial Regulation must discontinue acceptance of Notices of Intent to Foreclose, which effectively prohibits new foreclosure initiations until that date. Moreover, effective January 4, 2021 and until the COVID-19 state of emergency is terminated, Notices of Foreclosure will only be accepted if the lender or servicer certifies that they notified the borrower of their right to request a forbearance.

 

On October 16, 2020, the Governor of Maryland issued an Executive Order (No. 20-10-16-01), which amends and restates a previous Executive Order providing certain relief to tenants and homeowners impacted by the COVID-19 pandemic. This Executive order imposes restrictions on servicers’ ability to conduct foreclosure proceedings, and prohibits evictions where the tenant can show a “substantial loss of income,” during the COVID-19 state of emergency.

Restrictions on Residential Foreclosures

The Executive Order provides that “until the state of emergency is terminated and the catastrophic health emergency is rescinded,” foreclosures sales of “Residential Property” (defined as “real property improved by four or fewer single family dwelling units that are designed principally and are intended for human habitation”) under Maryland’s Real Property law will not be considered a valid transfer of title in the property unless certain requirements are met, depending on the type of loan secured by the property:

  • With respect to a property securing a Federal Mortgage Loan:
    1. at least 30 days prior to sending a notice of intent to foreclose to a borrower, the servicer must send a written notice to the borrower stating the borrower’s right to request a forbearance on the loan under Section 4022(b) of the CARES Act; and
    2. the servicer must comply with all of its obligations with respect to the loan owed to the borrower under the CARES Act or otherwise imposed by the federal government or a government sponsored enterprise.
  • With respect to a property securing a Non-Federal Mortgage Loan:
    1. the servicer must have notified the borrower, in writing, that if the borrower is experiencing a financial hardship due, directly or indirectly, to the COVID-19 emergency, the borrower may request a forbearance on the loan, regardless of delinquency status, for a period up to 180 days, which may be extended for an additional period up to 180 days at the request of the borrower;
    2. if the borrower did request a forbearance on the loan, the servicer must have provided such forbearance without requiring the borrower to provide additional documentation other than the borrower’s attestation to a financial hardship caused by COVID-19, and without requiring any additional fees, penalties, or interest; and
    3. during the forbearance period, the servicer must not have accrued on the borrower’s account any fees, penalties, or interest beyond the amounts scheduled or calculated as if the borrower made all contractual payments on time and in full under the terms of the loan.

Notably, as discussed in the next section, these requirements appear applicable only to foreclosure proceedings already in progress prior to January 4, 2021 (because the Executive Order effectively prohibits the initiation of new foreclosure actions until that date), and to those initiated between January 4, 2021 and the termination of the COVID-19 state of emergency.

Directives to the Maryland Commissioner of Financial Regulation

The Executive Order also directs Maryland’s Commissioner of Financial Regulation to alter certain practices regarding its processing of residential foreclosures.

Specifically, as of the date of the Executive Order, and until January 4, 2021, the Commissioner is directed to suspend the operation of the Commissioner’s Notice of Intent to Foreclose Electronic System, and to discontinue acceptance of Notices of Intent to Foreclose. This effectively imposes a moratorium on the initiation of new foreclosure actions. Under Section 7-105.1(c) of the Real Property Article of the Maryland Code, as the first step in the foreclosure process, a Notice of Intent to Foreclose is required to be sent to the borrower at least 45 days before an action to foreclose a mortgage can be filed, and a copy of that notice must be submitted to the Commissioner within 5 business days thereafter via the Commissioner’s Notice of Intent to Foreclose Electronic System. (COMAR 09.03.12.02(E)). Citing the Executive Order, the Notice of Intent to Foreclose Electronic System website currently states that “no new [Notice of Intent] submissions will be accepted until January 4, 2021.” As such, this directive effectively prohibits the initiation of new foreclosure proceedings until December 28, 2020 (the earliest date a Notice of Intent can be mailed to the borrower and then submitted to the Commissioner within 5 business days).

Moreover, the Executive Order provides that effective January 4, 2021, and until the state of emergency is terminated and the catastrophic health emergency is rescinded, when a servicer submits to the Commissioner the Notice of Foreclosure required under Section 7-105.2(b) of the Real Property Article of the Maryland Code, the Commissioner must obtain a “certification” from the servicer or secured party that the servicer complied with the Executive Order’s requirement that the borrower be informed of their right to request a forbearance, as discussed above.

Prohibition on Residential and Commercial Evictions

The Executive Order provides that until the state of emergency is terminated and the catastrophic health emergency is rescinded, Maryland courts shall not effect any evictions by giving any judgment for possession or repossession on residential, commercial, or industrial real property, if the tenant can demonstrate to the court, through documentation or other objectively verifiable means, that the tenant suffered a “Substantial Loss of Income.”

The Executive Order defines “Substantial Loss of Income” as follows:

  1. with respect to an individual, a substantial loss of income resulting from COVID-19 or the related proclamation of a state of emergency and catastrophic health emergency, including, without limitation, due to job loss, reduction in compensated hours of work, closure of place of employment, or the need to miss work to care for a home-bound school-age child; and
  2. with respect to an entity, a substantial loss of income resulting from COVID-19 or the related proclamation of a state of emergency and catastrophic health emergency, including, without limitation, due to lost or reduced business, required closure, or temporary or permanent loss of employees.

This prohibition applies to evictions for failure to pay rent under Section 8-401 of the Real Property Article of the Maryland Code, as well as evictions based on a tenant’s breach of the lease under Section 8-402.1 of the Real Property Article of the Maryland Code.

Takeaways

Notably, the forbearances that servicers are required to offer with respect to non-federally backed loans under this Executive Order present forbearance terms and conditions that substantially parallel those offered for federally backed loans under the CARES Act. It is possible that other states will follow suit with Maryland and create similar state mandates effectively applying to non-federally backed mortgages the forbearance rights available for federally backed mortgages under the CARES Act, in addition to state-mandated foreclosure restrictions. We will continue to monitor for such state requirements.

FHFA Expands Mortgage Translations Online Clearinghouse

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A&B ABstract:  The Federal Housing Finance Agency has expanded the number of languages for which it provides translated documents as part of its Mortgage Translations clearinghouse.

On September 30, the Federal Housing Finance Agency (“FHFA”) announced that it has added Korean, Tagalog, and Vietnamese language resources to its Mortgage Translations clearinghouse.  The update represents the first since October 2019, when the FHFA added Mandarin Chinese documents to the clearinghouse (which also includes Spanish translations).

The FHFA first launched Mortgage Translations two years ago.  According to the 2018 announcement, the FHFA intends the site to provide “a centralized source of industry-standard resources to assist lenders, servicers, housing counselors, and other real estate professionals in serving borrowers with limited English proficiency (LEP). “  In its most recent expansion, the FHFA also added to the clearinghouse industry resources relating to oral interpretation services, including for languages for which translated documents are not available.

Takeaway:

The final anticipated expansion of the Mortgage Translations site gives servicers access to needed resources to assist LEP consumers.

A&B to Host CFPB Servicing Enforcement Webinar on October 6

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On October 6, Alston & Bird will host “CFPB: Current Enforcement Measures Related to Mortgage Servicing,” a webinar that will explore why there has been a discernible uptick in enforcement activity and how Director Kraninger’s continued focus on these activities affect Mortgage Servicing activities.

The panelists will provide perspective on the dynamics of the CFPB’s Supervision, Enforcement and Fair Lending Division (SEFL) and factors used to weigh supervision vs. enforcement. The CFPB indicates the finalized Collection Rule will be issued toward the end of the month, and our goal is to assist the industry in understanding and preparation.

Hear how servicers are impacted by CFPB enforcement:

  • “Clear Rules of the Road”
  • Discernable Uptick in Enforcement Activity
  • Director Kraninger’s Initiatives
  • Knowledge is Power: Understanding CFPB’s Supervision, Enforcement and Fair Lending Division (SEFL).

Please RSVP here.  For additional questions, contact Megan Belliveau at megan.belliveau@alston.com or 202.239.3134.