Proposed QM Lending Changes

By: Greggory B. Oberg, Esq.

Last week, CFPB released the long awaited Notice of Proposed Rulemaking (NPRM) covering the Ability to Repay rule’s Qualified Mortgage (QM) protections. There’s a lot to unpack here, and opinions are sure to vary across the industry depending on the role you play in the mortgage market. But there will be plenty of time to dive into minutia as we continue to read and discuss the NPRM. For now, let’s take a look at the first couple sections of the document, including a general overview of the proposal.

Background

As implemented in 2013 and subsequently amended, the Ability to Repay rule, promulgated pursuant to Dodd-Frank, was intended to “assure that consumers are offered and receive residential mortgage loans on terms that reasonably reflect their ability to repay the loan[.]”

Along with this requirement imposed on lenders to verify the ability to repay (ATR), broad lender protections were implemented, which trigger depending on the steps a lender makes to ensure that an originated loan meets one or more “qualified mortgage” definitions.

Briefly, there are currently two categories: a “General QM” and the “QM Patch.” Under a “General QM”, the loan features are limited and a lender must utilize Appendix Q to TILA to verify income and calculate a DTI ratio. Where the ratio calculated by Appendix Q does not exceed 43%, the loan is eligible for a General QM Safe Harbor or a rebuttable presumption of compliance, depending on the HOEPA status of the loan.

Secondarily, a loan may otherwise obtain QM status if it is eligible (whether or not purchased) for purchase by a GSE. This was intended as a temporary “patch” as the GSEs left conservatorship and the market recovered from our most recent economic crisis, with an original sunset date of 1/10/2021 by regulation.

What’s New

Broadly, the changes are as follows:

• Replace DTI Threshold with a Price-Based Threshold on “General QM”;

• Extend the QM Patch until the General QM definitions are implemented; and

• Remove Appendix Q guidance and replace with additional info on consideration of income, assets, and other items currently addressed by Appendix Q to Part 1026

Price Based Threshold

Under current regulation, General QM status is somewhat of a multi-step process. Ensure that no prohibited terms (balloons, non-amortizing features, etc.) are present; calculate DTI with Appx Q, then determine whether you obtain a rebuttable presumption or a safe harbor based on the HOEPA/HPML status, generally.

Under the NPRM, the DTI threshold is not quite eliminated, but it certainly is not a dispositive factor in QM status anymore. If the NPRM becomes final, lenders will apply a price-based threshold, wherein any loan otherwise meeting QM definitions (again, excluding DTI) would be given safe harbor protections if the APR does not exceed the APOR for a comparable transaction by more than 1.5%. Further, if the transactions APR exceeds the APOR by >1.5% but not more than 2%, a rebuttable presumption is found.

This figure will be larger on second-lien transactions, and for some lower loan amount transactions.

QM Patch Extended

Briefly, the QM Patch will persist past the January 2021 sunset date, and will now expire as of the effective date of a Final Rule implementing General QM changes outlined herein. There is a separate proposal concurrently issued for the patch, addressing in greater detail the impact of the QM Patch on markets.

Largely a subject for a bigger blog on another day, the QM Patch is massive force within the residential mortgage market, both for primary and secondary transactions. Better economic minds than I will certainly debate the business and investment opportunities here, but for our purposes I’m satisfied to say that a large percentage of the secondary market transactions in residential mortgages.

As the NPRM explains, this is due to the simple fact that GSE underwriting guidelines provide for a more robust, frequently updated model for determining credit than Appendix Q may offer to lenders.

Removal of Appendix Q

As the Bureau points out, Appendix Q largely exists for the purposes of prescribing a consistent method for DTI calculation. With the DTI figure being de-emphasized in favor of the price-based threshold, the Bureau (rightly) believes the need for Appendix Q has been outlived.

That doesn’t mean we will be left out in the cold for determining income, as there will be additional guidance coming with the anticipated final rule.