A&B ABstract: The CFPB must finalize its proposed QM delay rule in April, likely leaving no room for delay.
Background on ATR/QM and the Delay Rule
On March 3, 2021, the Bureau of Consumer Financial Protection (CFPB) released a notice of proposed rulemaking (NPRM) to delay the mandatory compliance date of the General Qualified Mortgage (QM) final rule from July 1, 2021 to October 1, 2022 (the Delay Rule).
As explained in the CFPB’s proposal, the Ability-to-Repay/Qualified Mortgage Rule (ATR/QM Rule) requires a creditor to make a reasonable, good faith determination of a consumer’s ability to repay a residential mortgage loan according to its terms. Loans that meet the ATR/QM Rule’s requirements for qualified mortgages (QMs) obtain certain protections from liability. The ATR/QM Rule defines several categories of QMs.
One QM category defined in the ATR/QM Rule is the General QM category. General QM loans must comply with the ATR/QM Rule’s prohibitions on certain loan features, its points-and-fees limits, and its underwriting requirements. Under the original ATR/QM Rule, the ratio of the consumer’s total monthly debt to total monthly income (DTI ratio) could not exceed 43 percent.
General QM Final Rule
In December 2020, the CFPB issued the General QM Final Rule, which among other changes replaced the General QM loan definition’s DTI limit with a limit based on loan pricing. The General QM Final Rule took effect on March 1, 2021, and it provides a mandatory compliance date of July 1, 2021.
In 2013, the CFPB created a second, supposedly temporary category of QMs for mortgages that (1) comply with the same loan-feature prohibitions and points-and-fees limits as General QMs and (2) are eligible to be purchased or guaranteed by Fannie Mae or Freddie Mac (collectively, the GSEs) while under the conservatorship of the Federal Housing Finance Agency (FHFA). These loans are referred to as Temporary GSE QM loans, and the provision that created this loan category is commonly known as the GSE Patch. Unlike for General QM loans, the ATR/QM rule did not prescribe a DTI limit for Temporary GSE QM loans. Thus, a loan can qualify as a Temporary GSE QM loan even if the consumer’s DTI ratio exceeds 43 percent, as long as the loan is eligible to be purchased or guaranteed by either of the GSEs. Under the original ATR/QM Rule, the Temporary GSE QM loan definition would expire with respect to each GSE when that GSE exits conservatorship or on January 10, 2021, whichever comes first.
Patch Extension Rule
In October 2020, the CFPB issued a final rule (the Patch Extension Rule) to replace the January 10, 2021 sunset date of the Temporary GSE QM loan definition with a provision stating that the Temporary GSE QM loan definition will be available only for covered transactions for which the creditor receives the consumer’s application before the mandatory compliance date of the General QM Final Rule. Therefore, under the CFPB’s current proposal, the Temporary GSE QM loan definition would expire upon the earlier of October 1, 2022 (rather than on the current mandatory compliance date of July 1, 2021) or the date the applicable GSE exits Federal conservatorship.
Public comments on the CFPB’s proposed Delay Rule are due on or before April 5, 2021. The CFPB proposes that a final rule based on its proposal be effective “60 days after publication in the Federal Register.” Also, the CFPB “anticipates that this would make the final rule effective before the current July 1, 2021 mandatory compliance date.”
Working backwards from the July 1, 2021 mandatory compliance date, the very last day the final rule could become effective is June 30, 2021. To be effective by that date, the Bureau must publish its final rule in the Federal Register by no later than April 30, 2021.
There is typically a delay between an agency’s public announcement of a final rule and the publication of that final rule in the Federal Register. The length of the delay varies based upon the amount of time required to process an agency’s submission, which mostly depends upon the page number length of the submission, and also on the overall volume of materials submitted by all Federal Departments and agencies for processing at a particular time. (For example, although the CFPB announced General QM Final Rule on December 10, 2020, it was not published in the Federal Register until December 29, 2020. And although the CFPB announced the Patch Extension Rule on October 20, 2020, it was not published until October 26, 2020.)
Considering the page length and subject matter similarities between the Patch Extension Rule and the Delay Rule, anticipating a minimum six-day delay between announcing the Final Delay Rule and publication of the rule in the Federal Register appears reasonable. Based on this estimate, the CFPB must announce a final Delay Rule by no later than Friday, April 23.
The time period between the close of the April 5 comment period for the proposed Delay Rule and the day by which the CFPB must submit the text of the final Delay Rule to the Federal Register for processing is quite narrow. In fact, the CFPB has provided itself no more than about fourteen business days within which to perform several important and often time-consuming tasks, including:
- analyzing the public comments, data and research received in response to its proposal;
- determining whether to revise its proposal in light of relevant points raised by the comments,
- drafting substantive responses to significant comments;
- completing the internal divisional clearance process;
- drafting the text of the final rule; and
- securing approval of the Acting Director to issue the final rule.
Performing all of these tasks within the CFPB’s self-established timetable and in a manner consistent with the requirements of the Administrative Procedure Act (APA) will be difficult. For one thing, the time constraints suggest that the CFPB may begin drafting its final rule before the comment period closes, which may potentially raise questions about whether comments are given their due consideration and whether the CFPB maintains an open mind throughout the rulemaking process. For another thing, the CFPB likely cannot extend the comment period for its proposed rule; even a two-week extension would likely make it impossible for the CFPB to finalize a rule with an effective date occurring before July 1. This means that the CFPB likely must deny any extension request it receives, no matter what reason is provided in support of the request.
The availability of the GSE Patch and the continued ability of mortgage originators to make Temporary GSE QM loans depends upon the CFPB’s ability to finalize its proposed Delay Rule in short order. The timetable involved presents significant challenges for the CFPB, as noted above. The CFPB’s success or failure in that endeavor, and by extension the survival or demise of the GSE patch, will no doubt be received differently in different quarters, given the size of the mortgage market and the varied interests involved. This post simply notes that the CFPB is trying to thread a very small needle with its proposed Delay Rule.