If there is one constant in compliance, it is change. Whenever a regulatory rule becomes final, lenders are forced to make policy, procedural, and sometimes even entire system changes. Training is implemented and growing pains ensue as we all attempt to strike a balance between the old, familiar way of doing things, and the new. And just when the confusion tapers off and the new becomes normal, history repeats itself and the rules of the game change once again.
Here at Temenos Compliance, we not only assist compliance folks in navigating existing rules, we also prepare them for potential changes by arming them with information about rules under development. This gives our customers the edge necessary to successfully transition their institutions to the new normal when the time comes. To that end, let us take a moment to talk about the potential for some upcoming changes to the “once-new” Qualified Mortgage rules.
Back in 2014, the Ability to Repay and Qualified Mortgage Standards Final Rule became effective. Though there have been a few tweaks along the way, the regulation essentially established four types of Qualified Mortgages (QMs): The General QM, the Temporary GSE (Government Sponsored Entity) QM, the Small Creditor QM, and the Balloon Payment QM.
The General QM definition restricts the borrower’s debt-to-income (DTI) ratio to 43%, using the standards outlined in Appendix Q of Regulation Z. The other three types of QMs do not include this limitation, with the Temporary GSE QM allowing for the DTI and underwriting criteria to be set by the GSEs, and the other two simply requiring the lender to verify and consider DTI, but not necessarily setting a strict numerical limit on the ratio and not requiring adherence to Appendix Q.
The Temporary GSE QM is a type of QM that consists of mortgages that comply with the same loan feature prohibitions and points-and-fees limits as the General QM, but also are eligible for purchase or guarantee by the GSEs. Currently, the Temporary GSE QM is set to expire on January 10, 2021 or when the GSEs exit conservatorship, whichever comes first. Despite expectations that existed when the Temporary GSE QM category was created, this type of QM has continued to represent a significant share of the QMs being originated that would not be otherwise qualify as a General QM due to the DTI limitation. This has generated considerable concern about the uncertain path forward given the looming expiration date. In response, the CFPB published two related proposed rules on July 10, 2020.
The first proposed rule seeks to modify the General QM definition by eliminating the 43% DTI restriction and replacing it with a price-based threshold. The Bureau believes this type of approach will provide a more flexible, yet reliable measure of a consumer’s repayment ability and maintain access to affordable credit in the marketplace. Under this new rule, a loan would still meet the General QM definition even if the DTI exceeded 43% so long as the Annual Percentage Rate (APR) is less than two percentage points above the average prime offer rate ( APOR) for a comparable transaction. Higher thresholds would exist for smaller loans and for subordinate-lien transactions. In addition, the rule would remove Appendix Q and clarify standards that should be used to consider and verify a consumer’s income, assets, debt obligations, alimony, and child support. The rule would maintain the existing thresholds that determine whether a specific QM is higher priced.
The second proposed rule seeks to extend the sunset date of the Temporary GSE QM to the effective date of the final amendments to the General QM loan definition. If both the General QM Proposal and the Extension Proposal are implemented, the General QM definition will switch to the price-based threshold on the same day the Temporary GSE QM expires, leaving us with only three categories of QMs: the General QM, the Small Creditor QM, and the Balloon Payment QM.
But, where one door closes, another opens! On August 18, 2020, the Bureau also issued a third proposed rule which creates a new type of QM – the Seasoned QM. The overall requirements for a Seasoned QM would be first lien, fixed rate loans that comply with the same general product feature prohibitions and points-and-fees limitations. The loans would be required to have a 36-month seasoning period in the creditor’s portfolio, having no more than two thirty-day delinquencies, and no delinquencies of sixty days or more. Disaster and pandemic related payment arrangements would not disqualify the loan, so long as the borrower is performing as agreed. However, time spent under a temporary payment accommodation would not count towards the 36-month seasoning period, which could resume after the temporary accommodation period has ended, so long as certain conditions are met.
All three rules are currently in their comment period, so now is the time to speak up if you want to weigh in. Stay tuned to our Regulatory Calendar for future updates as these proposed rules move through the process of potentially becoming our new normal.