What happens when a proposed qualified mortgage is later discovered to have points and fees in excess of the statutory threshold? The answer lies in a cure provision scheduled to sunset on January 21, 2021.
CFPB Rules Permit Qualified Mortgage “Cures”
What happens to an originator or assignee of a “qualified mortgage” who discovers after the loan has been consummated that the points and fees charged in connection with the transaction exceed the permitted 3% threshold? Such a change not only jeopardizes the QM status of the loan, but also prevents the mortgage from being considered a “qualified residential mortgage” (and, therefore, from being exempt from risk retention requirements) if it is intended to be securitized. Is the loan irrevocably relegated to non-QM and non-QRM status? Under certain circumstances, the answer is “no”.
A little-known provision in the CFPB’s qualified mortgage/ability-to-repay rules provides a “cure” for loans consummated before January 10, 2021. When the creditor or assignee determines after consummation that the transaction’s total points and fees exceed the applicable limit (in most situations, 3% of the total loan amount), the creditor or assignee may “cure” the error and preserve and the QM status of the loan.
The “cure” is available if the following conditions are met:
- Within 210 days of consummation, the creditor or assignee refunds the excess fees to the borrower;
- The loan otherwise complies with the other QM requirements;
- The loan is not 60 days past due;
- The borrower has not instituted an action in connection with the loan or apprised the creditor, assignee or servicer that the points and fees exceed the applicable threshold; and
- The creditor or assignee, as applicable, maintains and follows policies and procedures for post-consummation review of the points and fees charged to borrowers.
The Take Away
This “cure” provision is a valuable tool for creditors and their assignees and may be used under the circumstances described above to salvage the QM and QRM status of a mortgage loan. However, this limited “cure” provision does not remedy other errors that could jeopardize the loan’s QM status, such as failure to adhere to Appendix Q underwriting standards.
In order to take advantage of this cure provision, it is imperative that creditors and their assignees develop post-closing quality control mechanisms to ensure that the points and fees charged in connection with loans intended to be QMs do not exceed the prescribed thresholds. Note, however, that unless extended, this cure mechanism sunsets on January 21, 2021.