On December 29, 2020, the Consumer Financial Protection Bureau (CFPB) published the final rule amending Regulation Z requirements for Repayment Capacity / Qualified Mortgage (QM) (New Rule). Rule Z requires lenders to make a reasonable and fair assessment of a consumer’s ability to repay their mortgage. Loans that meet the requirements of Regulation Z are entitled to some liability protection.
The new rule took effect on March 1, 2021, and applications for consumer loans were submitted on or after July 1, 2021, subject to mandatory compliance. The new rule replaces the strict debt-to-income ratio (DTI) analysis of 43% with a cost-of-credit analysis tied to an annual percentage rate (APR), modifies lenders’ review and verify obligations, and creates a new MC class. In addition, effective July 1, 2021, the new rule will completely cancel the existing GSE patch.
DTI Elimination for Qualified Mortgages
Under the previous version of Rule Z, in order to satisfy the Maturity Rule for General QM, the lender had to ensure that the consumer’s DTI was below 43% in accordance with the standards listed in Appendix Q of Regulation Z. The new rule removes the 43% DTI standard in favor of a price-based standard, although the lender is still required to treat the applicant’s DTI as part of the new “review and review” rules discussed below.
To be considered a general QM under the new rule, the annual interest rate on a loan must not exceed the average principal offering rate (APOR) for a comparable transaction by more than the following thresholds.:
For the first collateralized transaction, when the loan amount is greater than or equal to $ 110,260.00, the threshold is 2.25 percentage points.
For the first collateralized transaction, when the loan amount is $ 66,156.00 or more and less than $ 110,260.00, the threshold is 3.5 percentage points or more.
For the first collateralized transaction, when the loan amount is less than $ 66,156.00, the threshold is 6.5 percentage points or more.
The new rule defines alternative thresholds for loans secured by industrial houses and for subordinated loans.
The new rule also provides for a calculation that lenders must use to determine the appropriate annual interest rate on an adjustable rate mortgage (ARM) when comparing the annual interest rate of a loan to APOR for the purposes of the overall quality management analysis above. For a loan for which the interest rate may or will change during the first five years, the applicable annual interest rate is based on the maximum interest rate that can be applied during that five-year period. This rate is then used as the interest rate for the entire loan term. According to the CFPB, this provision applies primarily to short-reset ARM. and is designed to reduce the risks of solvency associated with the possibility of a payment shock when adjusting these loans.
Despite these changes in determining whether a loan meets the General CC definition, the New Rule retained the existing threshold for General CCs that meet the safe haven criteria (protection from liability through a strong presumption that the lender complies with Rule Z of Repayment Capacity). loan underwriting standard). The loan is still considered a safe haven for QM as long as its annual interest rate does not exceed the APOR for a comparable transaction by more than 1.5 percentage points (3.5 percentage points for loans with subordinated collateral) at the date of the interest rate setting.
Unlike a safe haven, a rebuttable presumption of conformity provides lenders with weaker protection from legal action by borrowers. To rebut the presumption of conformity, the borrower must prove that the lender failed to make a reasonable and good faith determination of the consumer’s ability to repay the debt at the time of the loan. To meet rebuttable assumptions, the annual interest rate may exceed 1.5 percentage points, but must remain below the 2.25 percentage point threshold.
Review and Verify Requirements
In line with the move to cost-benefit analysis, the new rule removes Appendix Q, which was previously used by lenders to determine the consumer DTI. However, the New Rule does not completely abolish DTI consideration. Instead, it places a burden on creditors in two separate requirements: (1) account for “consumer income or assets, debt obligations, alimony, alimony, and monthly DTI or residual income” and (2) verify this information using reasonably reliable third-party records.
Lenders must maintain written policies and procedures for managing the review processes and retain documents detailing how they dealt with the above factors in the lending process for each TQM. Retained documents for each loan should show how the lender took the necessary factors into account in his solvency analysis, as well as how he applied the related policies and procedures. The rationale behind written policies and procedures, and the required retention of records, is to allow any third party to verify that the lender has indeed taken into account the necessary factors and provided sufficient underwriting rigor.
The new rule clarifies how the verification component works in a new comment, which explains that a lender will not qualify for verification if it detects an unidentified USD 5,000 deposit in a consumer’s account, but does not take appropriate steps to confirm that the deposit was personal. income, not loan proceeds. Finally, there is a safe haven for a verification requirement if the lender meets the verification standards in the current version of the following publications:
Fannie Mae’s Single Family Sales Guide
Freddie Mac’s Guide to the Sales / Service Personnel for One Family
FHA Single Family Housing Policy Handbook
VA Lenders Directory
USDA Field Office Direct Housing Program Guide and USDA Single Family Guaranteed Loan Program Guide
Lenders may mix and match the verification standards from these guidelines, and future versions of these publications will be subject to safe harbor verification, provided the revised version is substantially the same.
Experienced qualified mortgage
Concurrently with the revised definition of total QM, the CFPB created a new category of QM called “Accompanied Qualified Mortgages” to encourage responsible innovation in the mortgage market. Under the new category, the loan will receive a safe haven from commitments to repay the loan at the end of a minimum three-year waiting period, subject to certain requirements. Loan applications received on or after March 31, 2021 will be eligible for Experienced Quality Management status after a three-year waiting period. To become an experienced quality management manager, a loan must:
Be secured by the first lien;
Have a fixed rate with regular, almost equal periodic payments that are fully amortized and do not require additional payments;
The maturity date must not exceed 30 years;
Not be a high value mortgage as defined in Rule Z § 1026.32 (a); as well as
Receive points and commissions within the specified limits.
An experienced QM also complies with the “review and verify” requirements as specified for General QM. While it is generally required that the loan remain in the lender’s portfolio during the waiting period, some exceptions to this requirement apply.
There are also performance thresholds that apply to borrowers. At the end of the waiting period, loans cannot have more than two delinquencies of 30 days or more, and cannot have any of 60 days or more. The rule allows up to three incomplete payments (within the $ 50 tolerance) during the maturity period, and temporary payment terms will not necessarily prevent an otherwise qualified loan from turning into an Experienced QM.
The CFPB has amended Regulation Z to keep pace with the changing mortgage market and keep consumers access to affordable mortgages while ensuring their ability to repay. As the market evolved, the bureau was concerned that the 43% DTI threshold would limit QM availability and lead to limited access to available credit, especially given the impending expiration of the temporary GSE. According to the CFPB, the changes described above address the changing needs of lenders and consumers and “provide the best balance between ensuring consumers’ ability to make payments and ensuring access to responsible and affordable mortgages.”
Keely Gogul also contributed to this article.
 Qualified Definition of a Mortgage Under the Credit Act (Rule Z): General Definition of QM Loan, 85 Fed. Reg. 86308 (Dec 29, 2020) (codified at 12 CFR pt. 1026).
 These loan amounts are based on original bases of $ 100,000.00 and $ 60,000.00 used to calculate points and fee limits elsewhere in the rule. (See §1026.43 (e) (3) (i)). Under the new rule, these amounts will be “adjusted annually on January 1 for the CPI-N annual percentage change reported on June 1 of the previous year.” Identifier… at 86366.