One adds an additional category to the General Qualified Mortgage (QM) rule, while the other creates a new QM category for seasoned mortgages. The industry has been awaiting this announcement, because once they take effect, the new rules will replace the current widely-used ‘temporary’ General QM category for loans that are underwritten to be eligible for sale to Fannie Mae and Freddie Mae, often called the GSE Patch. The two rules will apply to loan applications received on or after March 1, 2021. The existing GSE Patch will continue to be available for applications received through June 30, 2021, and after expiration of the GSE Patch, compliance with the revised General QM rule will be mandatory for applications received on or after July 1, 2021.
This is perhaps the more important rule of the two, because it is intended to replace the current GSE Patch without disrupting current loan origination volume or availability to consumers, while simultaneously maintaining the goal of requiring lenders to make a reasonable determination on a case-by-case basis that borrowers will be able to repay loans made.
The current GSE Patch requires the following terms, in addition to eligibility for sale to Fannie Mae or Freddie Mac: thirty-year term or less, repaid in substantially equal payments, with no negative amortization, no borrower-elected deferment of principal or balloon due at the end of the loan term, and maximum of 3% points and fees (for a loan amount of $100,000 or more). The CFPB notes that a large number of loans are currently originated under the GSE Patch that would not qualify under the current General QM requirements, often because they have a debt-to-income (DTI) ratio greater than 43%, or may not meet the underwriting requirements of Appendix Q.
The revised General QM rule still requires substantially equal payments, no borrower-elected deferment of principal or balloon payment, thirty-year term or less, and 3% points and fees for a loan amount of $100,000 or greater. The new rule replaces the maximum 43% DTI limitation with a loan pricing calculation. To meet the new General QM rule, a loan’s annual percentage rate (APR) may not exceed its average prime offer rate (APOR) by more than 2.25% (for first-lien loans of $110,260 or more, updated annually according to the change in Consumer Price Index). For an adjustable-rate loan, the maximum potential APR during the first five years of the loan would be used to compare against its APOR. Note that the cutoff for safe harbor ATR status (meaning a conclusive presumption of compliance) remains 1.5% (APR versus APOR). As a result, General QM loans under the revised rule with an APR versus APOR greater than 1.5% but less than 2.25% will only have a rebuttable presumption of compliance with the ATR requirement.
The new General QM rule also replaces the relatively inflexible Appendix Q requirements with more flexible ‘consider and verify’ requirements for income, assets and debts. While there are no hard limits like the former 43% DTI limitation, the new rule refers to agency underwriting standards for potential documentation and analysis standards. Finally, the new General QM rule preserves the QM status of loans that meet FHA and VA QM definitions for loans that those agencies insure or guarantee.
The CFPB notes that the revised General QM rule should maintain credit availability for loans (that are currently originated under the GSE Patch) with DTI over 43% and loans with DTI of 43% or less where the lender is not able to meet the prior Appendix Q underwriting requirements.
The current General QM rule and GSE Patch will be available for applications received through June 30, 2021. In other words, during the period from March 1, 2021, when the new General QM rule becomes effective, and June 30, 2021, lenders will be able to choose to meet either QM status. As a side note, please remember that investors may have overlay requirements that may limit this flexibility.
In an effort to expand availability of credit, the CFPB has created a new QM category called ‘seasoned’ QM, that will receive safe-harbor status if all the category requirements are met. A seasoned QM loan must be a first-lien, fully-amortizing, fixed-rate loan that meets other QM requirements, such as a repayment schedule of regular, substantially equal payments, a term of thirty years or less, meeting the points and fees limitation (generally 3% for loans of $100,000 or more). As with other QM categories, lenders must still ‘consider and verify’ the borrower’s debt-to-income ratio, income, assets and debts in underwriting the loan.
A seasoned QM loan may not be a TILA high-cost/Section 32 loan, although it can be a ATR higher-priced loan, meaning that its annual percentage rate may be more than 1.5% higher than the average prime offer rate for a comparable transaction. General QM loans cannot be higher-priced mortgages under this definition, so there are potentially transactions that could reach safe-harbor QM status as seasoned QM loans that would not have been eligible as General QM loans.
In exchange for this less-restrictive requirement, seasoned QM loans must be serviced in portfolio by the originating lender for 36 months, beginning on the date the first payment is due. The loan may be transferred once during this seasoning period, as long as it is not securitized by either lender.
If the loan is current at the end of this seasoning period, it will have safe-harbor QM status. Borrower may not be more than 30 days delinquent more than twice, and may not be 60 days delinquent at all during this period. The lender may apply payments that are short no more than $50 as a full payment, and may not apply funds from escrow accounts or from any other party to make payments due.
Payments due during a forbearance period, such as during the current COVID pandemic, will toll the 36-month period, although it resumes once the borrower and lender agree to a reinstatement that ends the delinquency, doesn’t increase the interest rate, and where the lender waives any late fees, charges or other penalties, or fee to process the reinstatement.
Time will tell whether lenders will be willing to make loans that do not meet QM requirements at closing, and will not (and potentially may never) reach that status for over three years afterwards.