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Question:

Can you explain the recent amendments to the ATR/QM Rule?

Answer:

There are two separate and distinct amendments to the Regulation Z ability to repay (“ATR”) / qualified mortgage (“QM”) requirements. Both rules become effective for applications taken on or after March 1, 2021, but the new General QM requirements need not be used by creditors until applications received on or after July 1, 2021. The current “Temporary Patch QM” will expire on the mandatory effective date of the new General QM requirements (applications received on or after July 1, 2021). Thus, between March 1, 2021 and July 1, 2021, creditors may use either the current Temporary Patch QM or the new General QM requirements as further detailed below.

1) Revised General Qualified Mortgage Requirements

• Eliminates the requirement that a borrower’s debt-to-income (“DTI”) ratio cannot exceed 43% and eliminates Appendix Q.
• Replaces the eliminated DTI requirement with new pricing requirements:
  • For first lien loans, a loan would still be a Safe Harbor QM (despite the borrower’s DTI ratio) if the APR is less than 1.5 percentage points above the APOR at the time the interest rate is set.
  • For second lien loans, a loan would still be a Safe Harbor QM (despite the borrower’s DTI ratio) if the APR is less than 3.5 percentage points above the APOR at the time the interest rate is set.
  • For first lien loans, a loan will still be a Rebuttable Presumption QM (despite the borrower’s DTI ratio) if the APR is less than 2.25 percentage points above the APOR at the time the interest rate is set.
  • A first lien loan with a APR exceeding the APOR by 2.25 percentage points or more cannot meet the definition of a General QM (with the exception of a loan with a small loan amount which has higher caps as set forth below).
  • Provides higher pricing thresholds for loans with smaller loan amounts, for certain manufactured housing loans and for subordinate-lien transactions.
  • For adjustable rate mortgages, creditors are required to calculate the APR based on the highest rate of interest that can apply during the five (5) years after the first payment date. This differs from the APR calculation currently used for disclosure purposes.
  • Effectively loans which exceed a certain APR will not fit within the QM requirements.
• All other current requirements remain unchanged (no risky loan features, terms do not exceed 30 years, 3% max points and fees, verify ATR with income, assets, debts, DTI and liabilities, etc.).
• The rule details the manner in which lenders should consider and verify the income, assets, debts, DTI ratio, residual income and liabilities of applicants. The new General QM rule provides flexibility to creditors to take into account additional factors that are relevant in determining a consumer’s ability to repay.
• The rule includes a list of specific verification standards that creditors may use to meet the revised General QM definition’s verify requirement. If a creditor satisfies the verification standards in the then current Freddie, Fannie, FHA, VA and the USDA manuals, the creditor has a safe harbor for compliance with the verification requirement in the revised General QM definition. A creditor need only comply with requirements in the manuals for creditors to verify income, assets, debt obligations, alimony and child support using specified reasonably reliable third party documents or to include or exclude particular inflows, property, and obligations as income, assets, debt obligations, alimony, and child support.

2) New Seasoned Qualified Mortgage (only for loan applications taken on or after March 1, 2021)

• Permits a loan to acquire QM status and receive Safe Harbor status following its origination if it meets with the precise requirements (among the following):
  • Loan must be held in portfolio or transferred only once in the 36-month period following the first payment date (“Seasoning Period”).
  • Loan may NOT be securitized during the Seasoning Period.
  • Loan can be a higher priced mortgage loan (“HPML”).
  • Loan may not be a HOEPA high-cost loan.
  • Loan may not be down 30 more than twice and may not be down 60 at all during the Seasoning Period.
  • Loan must be a fixed rate first lien loan.
  • In connection with the loan, lenders must consider the income, assets, debts, DTI, residual income and liabilities of applicants, including using the underwriting guidelines of Freddie, Fannie, FHA, VA and the USDA for verification standards (see above).
  • All other current requirements remain unchanged (no risky loan features, terms do not exceed 30 years, 3% max points and fees).
• The Seasoned QM Rule contains a provision whereby the Seasoning Period is effectively suspended due to a financial hardship caused by a disaster or pandemic, such as COVID-19. There needs to be a presidentially declared emergency, major disaster or pandemic. Many other requirements apply to this exception.

Please note on January 20, 2021, President Biden’s Chief of Staff issued a memorandum to the heads of executive departments and agencies setting forth terms related to a regulatory freeze.  The regulatory freeze requires Acting Director of the CFPB to consider whether to postpone the effective dates of the above rules until March 22, 2021 in order to engage in a review of any questions of fact, law, and policy raised by the rules.