January 15, 2021

Beyond the Patch: CFPB Finalizes Ability-to-Repay/Qualified Mortgage

5 min

The Consumer Financial Protection Bureau (CFPB or the Bureau) finalized amendments to the Ability-to-Repay/Qualified Mortgage (ATR/QM) rules that alter the criteria for a loan to be considered a QM and move past the so-called GSE Patch. The final rules were published in the Federal Register on December 29, 2020. Starting July 1, 2021, creditors will be required to comply with the new general QM rules and criteria established by the Bureau.

General QM Final Rule

The General QM Final Rule replaces the General QM 43% DTI ratio limit with an APR limitation. Under the Final Rule, APR on the loan may not exceed the average prime offer rate (APOR) for a comparable transaction by certain, set percentages. These include:

Loan Amount (indexed for inflation)
APR Cap Above APOR
First Lien $110,260 or more 2.25% or more
First Lien $66,156 - $110,259.99 3.5% or more
First Lien $66,155.99 or less 6.5% or more
First Lien (secured by a manufactured home) $110,259.99 or less 6.5% or more
Second Lien $66,156 or more 3.5% or more
Second Lien $66,155.99 or less 6.5% or more

The Final Rule does not affect all parts of the existing ATR/QM Rule. To qualify, loans must be fixed rate, fully amortizing and with regular periodic and substantially equal monthly payments. For an adjustable-rate loan or a step-rate mortgage, the loan must fully amortize, must allow for deferment of principal loan amount repayment (with certain exceptions), and must not include a balloon payment, except in compliance with Regulation Z. The maximum term of a QM loan is still 30 years, and the Final Rule does not update the points and fees requirements and limitations. Furthermore, the Final Rule does not change the framework for FHA-, VA- or USDA-defined QMs.

Credits must still, as proposed, consider the consumer's current or reasonably expected income or assets (other than the value of the security property), current debt obligations, alimony, and child support, and monthly DTI ratio or residual income.

Creditors are also required to (1) consider and verify the consumer's current or reasonably expected income or assets (other than the value of the security property) using third-party records that provide reasonably reliable evidence of the consumer's income or assets in accordance with section 1026.43(c)(4) of the Ability to Repay Rule, and (2) consider and verify the consumer's debt obligations, alimony, and child support using reasonably reliable third-party records. This requirement to "consider and verify" underwriting information replaced the former Appendix Q underwriting standards.

The finalized verification safe harbors apply if the verification method used by the creditor adheres to (or are substantially similar to) the following standards:

  • Chapters B3-3 through B3-6 of the Fannie Mae Single Family Selling Guide, published June 3, 2020;
  • Sections 5102 through 5500 of the Freddie Mac Single-Family Seller/Servicer Guide, published June 10, 2020;
  • Sections II.A.1 and II.A.4-5 of the FHA's Single Family Housing Policy Handbook, issued October 24, 2019;
  • Chapter 4 of the VA's Lenders Handbook, revised February 22, 2019;
  • Chapter 4 of the USDA's Field Office Handbook for the Direct Single Family Housing Program, revised March 15, 2019; and
  • Chapters 9 through 11 of the USDA's Handbook for the Single Family Guaranteed Loan Program, revised March 19, 2020.
Seasoned QM Loan Final rule

According to the preamble to the Seasoned QM Loan Final Rule, seasoned QMs will provide an "alternative basis for a conclusive presumption" of the consumer's ability to repay the loan, and thus additional legal certainty regarding the loan's status and liability of the creditor and its assignees (as well as the rights of the consumer). The CFPB notes in the Final Rule that "a fundamental goal of . . . the Seasoned QM category . . . to encourage creditors to increase the origination of non-QM loans in a responsible manner." The Seasoned QM Final Rule provides a safe harbor for Seasoned QMs, regardless of whether the loan is a higher-priced loan.

To be eligible for Seasoned QM status, a loan must meet the following requirements:

Product Restrictions:

  • The loan is secured by a first lien. If a loan is a subordinate-lien loan, the loan is not eligible to be a Seasoned QM.
  • The loan has a fixed rate. Adjustable-rate or step-rate mortgage loans are not eligible to be Seasoned QMs.
  • The loan has regular, substantially equal periodic payments that are fully amortizing, does not allow negative amortization, and does not have a balloon payment. A loan has fully amortizing payments if periodic payments of principal and interest will fully repay the loan over the loan term.
  • The loan term does not exceed 30 years.
  • The loan is not a high-cost mortgage as defined in Regulation Z, 12 CFR 1026.32(a).

Portfolio Requirements:

  • With certain exceptions, at consummation, the loan is not subject to a commitment to be acquired by another person, and the creditor holds the loan in portfolio until the end of the seasoning period.

Performance Requirements:

  • With certain exceptions, the loan can have no more than two delinquencies of 30 or more days and no delinquencies of 60 or more days at the end of the seasoning period.

Seasoning Period:

  • The seasoning period runs for 36 months, beginning on the date on which the first periodic payment is due after consummation. Delinquencies of 30 days or more, or temporary payment accommodations, extend the termination of the seasoning period.
Effective Dates and Compliance Dates

The Final Rules will become effective on March 1, 2020 (the date 60 days after publication in the Federal Register). For the General QM Rule, the mandatory compliance date is July 1, 2021. This means that the existing general QM based on a 43% DTI ratio, and the GSE Patch, cease to be operative for applications received on or after July 1, 2021. Until the General QM Final Rule mandatory compliance date, creditors will have the option of continuing to use the GSE Patch and the existing general QM, or using the General QM Final Rule.