The Consumer Financial Protection Bureau (CFPB) recently proposed certain amendments to the General Qualified Mortgage (QM) definition in Regulation Z and issued a filing rule extending the expiration of the Government-Sponsored Enterprise (GSE) Patch as a “temporary qualified mortgage” until the mandatory compliance date of the final amendments to the General QM loan definition.
By way of background, the Dodd-Frank Act amended the Truth in Lending Act (TILA) to establish ability-to-repay (ATR) requirements for most residential mortgage loans. TILA specifies the factors a creditor must consider in making a reasonable and good-faith assessment of a consumer’s ATR. TILA also defines qualified mortgages as a category of loans that are presumed to comply with the ATR requirements. Regulation Z, TILA’s implementing regulation, requires creditors to make a reasonable good-faith determination of a consumer’s ability to repay any residential mortgage loan, and loans that meet Regulation Z’s requirements for QMs must obtain certain protections from liability.
The CFPB created an ATR/QM rule that established a General QM standard for loans where the consumer’s debt-to-income (DTI) ratio is 43 percent or less, and the loan meets the other statutory QM requirements. The ATR/QM rule created the GSE Patch as a temporary QM definition that also provides QM status to certain mortgage loans eligible for purchase or guarantee by either of the GSEs. The GSE Patch was scheduled to expire in January 2021 or when the GSEs (Fannie Mae and Freddie Mac) exit conservatorship, whichever came first.
In its proposed rule, the CFPB seeks to amend the General QM definition in Regulation Z to replace the 43 percent DTI limit with a price-based approach. The CFPB states that it is proposing a price-based approach because it “preliminarily concludes that a loan’s price, as measured by comparing a loan’s annual percentage rate to the average prime offer rate for a comparable transaction, is a strong indicator and more holistic and flexible measure of a consumer’s ability to repay than DTI alone.”
On October 20th, the CFPB issued a final rule amending Regulation Z to extend the GSE Patch until the mandatory compliance date of final amendments to the General QM loan definition in order to facilitate a smooth transition away from the GSE Patch. The CFPB took this action “to ensure that responsible, affordable credit remains available to consumers who may be affected if the GSE Patch expires.”
We can expect a final ruling on the CFPB’s proposed amendments to the General QM definition within the next year. Note that any final rule that becomes effective may vary significantly from the proposed rule based on comments submitted from industry participants.