Dear Boards of Directors and Chief Executive Officers:
On December 29, 2020, the Consumer Financial Protection Bureau published in the Federal Register two final rules amending the Ability-to-Repay/Qualified Mortgage Rule (ATR/QM Rule) in Regulation Z.1 These final rules are:
- General QM Final Rule (opens new window):2 Replaces the existing 43 percent debt-to-income (DTI) ratio limit with price-based thresholds.
- Seasoned QM Final Rule (opens new window):3 Creates a new category of qualified mortgage.
Both final rules are effective on March 1, 2021. For the General QM Final Rule, the mandatory compliance date is July 1, 2021.
Credit unions should read the provisions of the CFPB General QM Final Rule and the CFPB Seasoned QM Final Rule to determine their effects on operations. The CFPB provides a compliance guide (opens new window) and other resources (opens new window).
With some exceptions, Regulation Z requires lenders to make a reasonable, good faith determination of a consumer’s ability to repay any residential mortgage loan. Loans that meet Regulation Z requirements for qualified mortgages (QMs) obtain certain protections from liability. Regulation Z contains several categories of QMs, including the General QM category.
Note: Although this document contains citations to the specific regulatory sections amended, the final rule’s amendments become effective on their effective date, March 1, 2021, even if the changes made do not appear in the Code of Federal Regulations until a later date. In the meantime, you can find the specific changes made in the final rules published in the Federal Register, which are enclosed and linked above.
General QM Final Rule Amendment (amends 12 CFR 1026.43)
Among other things, the amendment:
- Removes the existing 43 percent DTI ratio limit and replaces it with a price-based limit.
- Removes Appendix Q, as well as any requirement to use it for General QM loans.
- Retains the requirement to consider and verify the debt and income used to calculate a borrower’s DTI ratio or residual income.
- Retains the existing product-feature and underwriting requirements, and limits on points and fees.
Price-Based Limit (amends 12 CFR 1026.43(e)(2)(vi)). To qualify as a General QM loan, the annual percentage rate (APR) may not exceed the average prime offer rate (APOR) for a comparable transaction by more than the applicable threshold set forth in the final rule, as of the date the interest rate is set.4
The applicable thresholds are:
|Lien Position||Loan Amount5||Threshold|
|First||Greater than or equal to $110,260||2.25%|
|First||Greater than or equal to $66,156 but less than $110,260||3.5%|
|First||Less than $66,156||6.5%|
|Subordinate||Greater than or equal to $66,156||3.5%|
|Subordinate||Less than $66,156||6.5%|
In addition, the final rule adopts separate pricing thresholds for loans secured by a manufactured home.6 For a first-lien covered transaction secured by a manufactured home with a loan amount less than $110,260, the threshold is 6.5 percentage points. For a first-lien covered transaction secured by a manufactured home with a loan amount greater than or equal to $110,260, the threshold is 2.25 percentage points.
If the loan interest rate may or will change in the first five years after the date on which the first regular periodic payment will be due, a lender must treat the highest interest rate that may apply during that five years as the loan’s interest rate for the entire loan term when determining the APR for purposes of the applicable threshold.
Consider and Verify Requirements (amends 12 CFR 1026.43(e), (f)):
- Lenders must consider the borrower’s current or reasonably expected income and assets (other than the value of the dwelling), debt obligations, alimony, child support, and monthly DTI ratio or residual income in its ability to repay (ATR) determination.
- Lenders must verify the borrower’s income and debt consistent with the current general ATR standard, using reasonably reliable third-party records and reasonable methods and criteria.
- Lenders must maintain written policies and procedures for evaluating ATR factors and retain documentation for each loan showing how it considered these factors.
Seasoned QM Final Rule (adds 12 CFR 1026.43(e)(7))
The final rule creates a new category of QMs, the Seasoned QM. The rule provides a safe harbor for such loans from ATR liability at the end of a 36-month seasoning period if the residential mortgage loan meets specified product restrictions and points-and-fees limits, and satisfies underwriting requirements, as well as performance and portfolio standards during the seasoning period.
To be eligible for the Seasoned QM treatment, a covered transaction must:
- Be secured by a first lien;
- Have a fixed rate, with fully amortizing payments and no balloon payment;
- Have a term that does not exceed 30 years;
- Keep total points and fees within specified limits; and
- Not be a high-cost mortgage as defined in Regulation Z.7
Lenders must consider the borrower’s DTI ratio or residual income, and verify the borrower’s income, assets (other than the value of the dwelling) and debts, using reasonably reliable third-party records and reasonable methods and criteria.
Generally, a loan can be a Seasoned QM only if, at consummation, the loan is not subject to a commitment to be acquired by another person, and the lender holds the loan in portfolio until the end of the seasoning period. The final rule provides exceptions to these portfolio requirements.
Performance Requirements (amends 12 CFR 1026.43(e)(7)(ii)), (e)(7)(iv)(A)(3)(ii)):
- Loan can have no more than two delinquencies8 of 30 or more days and no delinquencies of 60 or more days at the end of the seasoning period.9 Certain exclusions are available when assessing whether a periodic payment has been made or is delinquent for purposes of the performance requirements.
- Lender may accept deficient payments, within a payment tolerance of $50, on up to three occasions during the seasoning period without triggering a delinquency.
If you have questions about the information in this Regulatory Alert, please contact the NCUA’s Office of Consumer Financial Protection at 703.518.1140 or ComplianceMail@ncua.gov. You can also contact your NCUA regional office or your state supervisory authority.
Rodney E. Hood
2 85 FR 86308 (Dec. 29, 2020).
3 85 FR 86402 (Dec. 29, 2020).
5 Loan amounts are indexed annually for inflation. This chart contains the 2021 loan amounts.
6 Manufactured home means any residential structure as defined under regulations of the U.S. Department of Housing and Urban Development establishing manufactured home construction and safety standards (24 CFR 3280.2). Modular or other factory-built homes that do not meet the HUD code standards are not manufactured homes for this purpose.
7 12 CFR 1026.32(a).
8 Generally, a delinquency means the borrower’s failure to make a periodic payment (in one full payment or in two or more partial payments) sufficient to cover principal, interest, and escrow (if applicable) for a given billing cycle by the date the periodic payment is due under the terms of the legal obligation.
9 The seasoning period is 36 months beginning on the date on which the first periodic payment is due after consummation. However, if there is a delinquency of 30 days or more at the end of the final month of the seasoning period, the seasoning period is extended until there is no delinquency.