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CFPB finalizes rules on qualifying mortgages

Bureau is replacing 43% DTI with more flexible standards, adding new category of qualified mortgage

The Consumer Financial Protection Bureau on Thursday issued its final rulings on qualifying mortgages, claiming the new rules will support a “smooth and orderly transition” away from the “QM Patch, and also expand access to credit.

One of the two rules the bureau implemented finalizes a June decision to establish a pricing threshold that effectively replaces the current debt-to-income limit of 43%, which some lenders and investors have called too restrictive. In place of the DTI, the “General QM Final Rule” gives lenders relief for loans capped at 150 basis points above the prime rate, the CFPB said.

Earlier this year, the bureau signaled that the change was coming, saying it had concluded 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 more “holistic and flexible” measure of a consumer’s ability to repay than DTI alone.

“Through this General QM Final Rule, we are working to create an appropriate, more flexible General QM loan definition,” CFPB Director Kathy Kraninger said in a news release on Thursday. “Our final rule’s price-based approach strikes the best balance between assessing consumers’ ability to repay and promoting access to responsible, affordable mortgage credit.”

Many lenders have been able to circumvent the 43% DTI limit because the rule doesn’t apply to mortgages backed by Fannie Mae and Freddie Mac. The GSE Patch, as it’s known, is set to expire on July 1 (or if Fannie and Freddie exit conservatorship, prior to that date). It gave automatic QM status to loans approved by the GSE’s underwriting platforms, even loans that exceeded the 43% DTI threshold.

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“Under the General QM Final Rule, a loan receives a conclusive presumption that the consumer had the ability to repay if the annual percentage rate does not exceed the average prime offer rate for a comparable transaction by 1.5 percentage points or more as of the date the interest rate is set,” the bureau said in a statement Thursday. “A loan receives a rebuttable presumption that the consumer had the ability to repay if the annual percentage rate exceeds the average prime offer rate for a comparable transaction by 1.5 percentage points or more but by less than 2.25 percentage points.”

In addition, the General QM Final Rule provides higher pricing thresholds for loans with smaller amounts, certain manufactured housing loans, and subordinate-lien transactions; retains the General QM loan definition’s existing product-feature and underwriting requirements and limits on points and fees; requires lenders to consider a consumer’s DTI ratio or residual income, income or assets other than the value of the dwelling, and provides more “flexible options” for creditors to verify the consumer’s income or assets beyond the value of the property and the customer’s debts.

The CFPB also finalized its guidelines on “Seasoned QMs,” a new category of qualified mortgages that would require loans to meet certain performance requirements over a 36-month seasoning period.

To be eligible to become a Seasoned QM, a loan must be a first-lien, fixed-rate loan with no balloon payments and must meet certain other product restrictions. Similar to the General QM Final Rule, the creditor must also consider the consumer’s DTI ratio and additional assets, income and debt.

Specifically, the loan can have no more than two delinquencies of 30 or more days and no delinquencies of 60 or more days at the end of the seasoning period. The creditor or first purchaser also generally must hold the loan on portfolio until the end of the seasoning period.

“This Seasoned QM Final Rule will ensure access to responsible, affordable credit in the mortgage market through responsible innovation,” said CFPB Director Kraninger. “Allowing lenders the flexibility to respond to changes in the economy while still ensuring a consumer has the ability to repay will help many consumers achieve their dream of owning a home.”

The General QM Final Rule and the Seasoned QM Final Rule will take effect 60 days after publication in the Federal Register, with a mandatory compliance date of July 1, 2021. There will be an optional early compliance period during which creditors will be able to use either the current General QM definition or the revised General QM definition, the bureau said.

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