On August 18, 2020, the Consumer Financial Protection Bureau (CFPB) issued a proposed rule to create a new category of loans known as “seasoned” qualified mortgages (Seasoned QMs). This new category of qualified mortgages would require loans to meet certain performance requirements over a 36-month seasoning period, after which the seasoned QM loan would be entitled to the safe harbor of compliance with the ability-to-repay (ATR) requirements for residential mortgage loan origination under the Truth in Lending Act (TILA), as amended by the Dodd-Frank Act. The CFPB stated that it was issuing this proposal because it “preliminarily concludes that many loans made to creditworthy consumers that do not fall within existing safe harbor QM loan definitions at consummation may be able to demonstrate through sustained loan performance compliance with the ATR requirements.”
The current 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 rule’s requirements for QMs obtain certain protections from liability. Under the new proposal, a covered transaction would receive safe harbor from ATR liability at the end of a 36-month seasoning period and qualify as a Seasoned QM if the loan satisfies the following criteria:
- The loan is a fixed-rate covered transaction.
- The loan is secured by a first-lien.
- The loan term is no more than 30 years.
- The loan provides for regular periodic payments that are substantially equal and will fully amortize the loan over its term, and the loan does not have an interest-only or negative amortization feature.
- The loan’s total points and fees do not exceed the applicable limit for a QM loan.
- The creditor at origination must consider the consumer’s monthly payment for mortgage-related obligations, and the consumer’s income or assets and debt, alimony and child support obligations, as well as the consumer’s monthly debt-to-income (DTI) ratio or residual income. The creditor must also verify the consumer’s debt obligations and income. The creditor would not have to meet any specified DTI limit and would not have to follow Appendix Q of Regulation Z.
- The loan must be held in the originating creditor’s portfolio during the 36-month seasoning period (calculated from the due date of the first periodic payment), subject to certain exceptions for transfers required by supervisory action or in connection with a merger or entity acquisition.
- During the 36-month seasoning period, the loan can have no more than two 30-day delinquencies, and no delinquency of 60 or more days. If there is a 30-day or more delinquency at the end of the seasoning period, the seasoning period is not considered ended until the delinquency is cured.
- If there has been a disaster or pandemic-related national emergency and the consumer receives a temporary payment accommodation and the payment accommodation requirements are fulfilled, the payment accommodation would not disqualify the loan from obtaining Seasoned QM status.
The CFPB’s Seasoned QM proposal acknowledges COVID-19’s significant impact on the U.S. economy, including business closures and millions of unemployed workers. The CFPB notes that the pandemic has affected mortgage markets and has resulted in a contraction of mortgage credit availability for many consumers, including those that would have been dependent on the non-QM market for financing. The CFPB also notes that several non-QM creditors – which largely depend on the ability to sell loans in the secondary market to fund new loans – have recently begun to resume originations, but with a tighter credit box.
“Today’s proposal continues the Bureau’s work to encourage safe and responsible innovation in the mortgage origination market,” CFPB Director Kathy Kraninger said in a press release. “Our goal through our very deliberative rulemaking process is to protect, promote and preserve the financial well-being of American consumers while at the same time offering access to responsible, affordable mortgage credit.”
This announcement follows two proposed rules the CFPB announced in June 2020 concerning qualified mortgages. The first June 2020 Notice of Proposed Rulemaking (NPRM) proposes to amend the General QM definition in Regulation Z to replace the debt-to-income limit with a price-based approach. The second June 2020 NPRM proposes to amend Regulation Z to extend a temporary QM definition known as the Government-Sponsored Enterprise Patch to expire upon the effective date of the final rule proposed in the first June 2020 NPRM. The Seasoned QM Rule would take effect on that same date.
Comments on the proposed Seasoned QM Rule will be due 30 days after the proposal is published in the Federal Register. Director Kraninger has emphasized the importance of receiving public comment from stakeholders in response to these NPRMs, especially on possible standards to help the Bureau identify verification safe harbors for inclusion in final rules.