qualified mortgage safe harbor

In 2014, the QRM agencies issued a final rule adopting the risk retention requirements. See Assessment Report, supra note 47, at 118, 147, 150. One coalition of consumer advocate groups noted that the timing of default often reflects broader economic conditions, given the procyclical nature of the mortgage market. Additional Criteria, Generally. Fannie Mae, Amended and Restated GSE Rescission Relief Principles for Implementation of Master Policy Requirement #28 (Rescission Relief/Incontestability) (Sept. 10, 2018), https://singlefamily.fanniemae.com/media/16331/display. Because the affordability of a given mortgage will vary from consumer to consumer based upon a range of factors, there is no single recognized metric, or set of metrics, that can directly measure whether the terms of mortgage loans are within consumers' ability to repay. Consumer advocate groups and an organization representing State regulators further asked the Bureau to provide an extension to the comment period of up to an additional 60 days. Similar to the GSEs' representation and warranty framework, the Bureau concludes that payments made from escrow accounts established in connection with the loan should not be considered in assessing performance for seasoning purposes because a creditor could escrow funds from the loan proceeds to cover payments during the seasoning period even if the loan payments were not actually affordable for the consumer on an ongoing basis. The Bureau declines to adopt a final rule without any portfolio requirement, as a number of industry commenters urged the Bureau to do. Depository institutions and credit unions that are also creditors making covered loans (depository creditors) with $10 billion or less in total assets are expected to benefit from this final rule. These estimates likely overestimate the fraction of non-QM loans that would be originated under Baseline 2.Start Printed Page 86448, Table 3Share of Loans Under Baseline 2 That Were Open and Had Not Entered Foreclosure After Three Years and Meet Performance Criteria. These commenters asserted that the analysis in part VII of the proposal demonstrated that a meaningful percentage of loans suffer a disqualifying event after three years and that the proposal's three-year seasoning period is arbitrary. Based on its Assessment Report, external feedback to the Bureau, and the comments, the Bureau has concluded that many secondary market investors are unable or unwilling to accept the litigation risk associated with assignee liability particularly with respect to non-QM loans, which has in turn contributed to the relative scarcity of non-QM loans. [133] Prot., Agencies Provide Additional Information to Encourage Financial Institutions to Work with Borrowers Affected by COVID-19 (Mar. Thus, the analysis estimates the maximum number of loans under each baseline that would become Seasoned QMs if the loans met the performance and portfolio requirements. PDF CFPB Regulations Establish a Broad Qualified Mortgage Definition These concerns are addressed in greater detail in part VIII below. Register documents. The Basics of a Qualified Mortgage | SoFi The Assessment Report noted that the Temporary GSE QM loan definition may be inhibiting the growth of the non-QM market. at 10-11, 117, 131-47. Three industry commenters supported the proposal but suggested that its impact on access to credit may be marginal. As discussed in the proposal, to the extent that there is ambiguity as to whether a given loan is eligible for a QM safe harbor through other QM definitions, a Seasoned QM definition will provide additional legal certainty by providing an alternative basis for a conclusive presumption of ATR compliance after the required seasoning period. The other ways relate to points and fees and prepayment penalties. Thus, a safe harbor may also allow creditors to provide consumers additional or more affordable access to credit by reducing their expected total litigation costs. In light of these considerations, the Bureau concludes that extending Seasoned QMs a safe harbor strikes the best balance between consumer protection and ensuring continued access to responsible, affordable credit. In the proposal the Bureau also requested comment on whether the final rule should cross-reference the consider and verify requirements for General QMs on which the General QM Proposal had requested comment. [74] 12 U.S.C. These tools are designed to help you understand the official document The Bureau declines to adopt the two-tiered approach that some commenters suggested that would provide only rebuttable presumption status to Seasoned QMs originated as non-QM loans. For example, if a consumer has a modified payment that is much lower than the original contractual payment amount, the consumer might be able to make the modified payments even though the contractual terms at consummation were not affordable. The January 2013 Final Rule became effective on January 10, 2014, and the Bureau has amended it several times since January 2013. first violation penalty fee will increase to $30 and the adjusted dollar amount for the safe harbor for a subsequent violation penalty fee will increase to $41. Under 1026.18(s)(7)(iii), the term fixed-rate mortgage means a transaction secured by real property or a dwelling that is not an adjustable-rate mortgage or a step-rate mortgage. Section 1026.43(b)(11) provides a definition of recast. This reflects the fact that not only are there significantly more non-QM loans under Baseline 2 than under Baseline 1 but also that the additional non-QM loans have relatively stronger credit characteristics at consummation. As suggested by these commenters, the Bureau is revising proposed comment 43(e)(7)(i)(A)-2 to clarify that the general Seasoned QM criteria set out in 1026.43(e)(7)(i)(A) do not prohibit a qualifying change that is entered into during or after a temporary payment accommodation in connection with a disaster or pandemic-related national emergency, even if the qualifying change involves a balloon payment or lengthened loan term. For the reasons described below, the Bureau adopts 1026.43(e)(7)(i)(B) as proposed, except that the criteria relating to prohibited product features, points-and-fees cap, and requirements to consider and verify certain consumer Start Printed Page 86424information are established by direct cross-reference to the relevant General QM requirements in 1026.43(e)(2), as amended by the General QM Final Rule. A loan is eligible to season under the performance requirements in 1026.43(e)(7)(ii) only if it has 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. For the reasons set forth above, the Bureau amends Regulation Z, 12 CFR part 1026, as set forth below: 1. Generally, the statute of limitations for a private action for damages for a violation of the ATR requirement is three years after the date on which the violation occurs. 1. [46] By withholding the presumption during the first three years of a loan, the final rule ensures that consumers are afforded greater consumer protections by being able to assert their rights without being forced to first default on their loan. 12 CFR 1026.34(a)(4) (exempting temporary or bridge loans with terms of twelve months or less from this requirement). In addition, because 1026.43(e)(7)(i)(B) incorporates the requirements of 1026.43(e)(2)(iv), the underwriting for the loan must use a payment schedule that fully amortizes the loan over the loan term and takes into account the monthly payment for mortgage-related obligations. The analysis below should be understood with this background in mind. QuickCert is a national nonprofit agency founded in April 2007 with headquarters in Tulsa, OK. We serve clients in all 50 states - excluding North Carolina - but, including Puerto Rico. Instead, to comply with the revised General QM consider requirements, a creditor is required to take into account income, assets, debt obligations, alimony, child support, and monthly DTI ratio or residual income in its ATR determination. [23] S&P Global Ratings, Non-QM's Meteoric Rise is Leading the Private-Label RMBS Comeback (Sept. 20, 2019), https://www.spglobal.com/ratings/en/research/articles/190920-non-qm-s-meteoric-rise-is-leading-the-private-label-rmbs-comeback-11159125. The Bureau concludes that the approach to small periodic payment deficiencies in 1026.43(e)(iv)(A)(3) will result in less burden for financial institutions seeking to avail themselves of the Seasoned QM definition, in the event that their servicing systems and practices already make allowances for treating a payment as not delinquent when the payment is deficient by a small amount. Many creditors, particularly non-banks, rely on borrowed funds to make loans and then sell these loans in order to originate additional new loans. These commenters generally expressed concerns over the evidentiary support for the proposed Seasoned QM definition, the Bureau's legal authority, the concept that demonstrated loan performance over an extended period of time can warrant a conclusive presumption of compliance with the ATR/QM Rule, and the impact on minority borrowers. Examples provided of borrowers with non-traditional income include those with income sources that are not reported on W-2 forms who have difficulty qualifying under standard underwriting guidelines due to variable amount and timing of their income, such as gig economy workers, seasonal employees, and self-employed borrowers. Safe Harbor Qualified Mortgage Definition | Law Insider The results are shown in Figure 1 below. Fannie Mae's Selling Guide states that loans subject to non-disaster related payment accommodations may be eligible [for representation and warranty enforcement relief] on the basis of a quality control review of the loan file if certain other requirements are met. [98] [137] They stated that consumers can resort to extraordinary measures to stay current on mortgage payments to stay in their homes, such as foregoing spending on necessities; drawing down retirement accounts; borrowing money from family and friends; going without food, medicine, or utilities; or taking on other types of debt (such as credit card debt). Differences in total market size estimates between NMDB data and HMDA data are attributable to differences in coverage and data construction methodology. 177. These loans would benefit from this final rule by obtaining safe harbor QM status if they meet the performance and portfolio requirements of the seasoning period, and not otherwise. The Bureau is issuing this final rule to create a new category of QMs because it seeks to encourage safe and responsible innovation in the mortgage origination market, including for certain loans that are not QMs or are rebuttable presumption QMs under the existing QM categories. the Bureau will submit a report containing this rule and other required information to the U.S. Senate, the U.S. House of Representatives, and the Comptroller General of the United States prior to the rule's published effective date. These factors are the consumer's credit history, current and expected income, current obligations, DTI ratio or residual income after paying non-mortgage debt and mortgage-related obligations, employment status, and other financial resources other than equity in the dwelling or real property that secures the repayment of the loan. Adopting this change suggested by commenters is unlikely to significantly impact the affordability of a loan that enters into a qualifying change for two reasons. 85. The Bureau's primary objective with this final rule is to ensure access to responsible, affordable mortgage credit by adding a Seasoned QM definition to the existing QM definitions. The numbers of loans designated for private-label securitization from 2011 through 2015 that met the criteria described above (i.e., non-HOEPA, first-lien, fixed-rate loans that did not have features that would make them ineligible to be QMs) were as follows: 9,700, 17,500, 25,720, 22,900, and 16,800. The type of transfers that 1026.43(e)(7)(iii)(B)(3) permits commonly occur before or around the due date for the first periodic payment. 173. Though mortgage insurers and the GSEs make allowances for temporary payment accommodations related to certain disasters, they do not extend these allowances to disaster-related delinquencies absent a temporary payment accommodation. The Bureau recognizes that there is some risk that a consumer can lack an ability to repay at loan consummation yet manage to make timely payments for the seasoning period defined in 1026.43(e)(7)(iv)(C) of this final rule. [24] The first baseline (Baseline 1) takes into account that the Bureau's final rule amending the General QM loan definition is adopted. The Ability-to-Repay/Qualied Mortgage Rule (ATR/QM Rule) is a rule specied by TILA/Regulation Z,and recently revised by the Consumer Financial Protection Bureau (CFPB). Similarly, the master policies of mortgage insurers generally provide that the mortgage insurer will not issue a rescission with respect to certain representations and warranties the originating lender made if the consumer had no more than two 30-day delinquencies in the 36 months following the consumer's first payment, among other requirements. The first group is all fixed-rate, higher-priced covered transactions that meet the proposed General QM loan definition but are not Small Creditor QM loans or loans entitled to a presumption of compliance under the EGRRCPA QM definition. Section 1026.43(e)(7)(iv)(C)(2) further explains that, under these circumstances, the seasoning period consists of the period from the date on which the first periodic payment was due after origination of the covered transaction to the beginning of the temporary payment accommodation and an additional period immediately after the temporary payment accommodation ends, which together must equal at least 36 months. 138. Finally, in the proposal the Bureau preliminarily concluded that, in combination with the other Seasoned QM requirements in proposed 1026.43(e)(7), the proposed portfolio requirement would provide an added layer of assurance that the Seasoned QM definition would encourage responsible non-QM lending and creditors would not make unaffordable loans. [53] An industry commenter noted that the proposed definition of delinquency refers to 30 and 60-day delinquency periods and asked the Bureau to modify proposed 1026.43(e)(7)(iv)(A) to account for non-monthly payments schedules (e.g., bi-weekly or quarterly payment schedules). The CARES Act mandated a 60-day foreclosure moratorium for such mortgages, which has since been extended by the agencies until the end of 2020 or January 31, 2021 in the case of the GSEs. The Bureau is adopting 1026.43(e)(7)(iv)(C) largely as proposed. Ability-To-Repay and Qualified Mortgage Requirements from the - NCUA Temporary payment accommodations are typically documented (for example, in servicing notes). Specifically, it provides that evidence that a creditor's ATR determination was reasonable and in good faith may include the fact that the consumer demonstrated actual ability to repay the loan by making timely payments, without modification or accommodation, for a significant period of time after consummation. As the Bureau noted in the proposal, some servicers elect or may be required to treat consumers as having made a timely payment even if the payment is a small amount less than the full periodic payment. A two-tiered approach would allow non-QM loans to season into rebuttable presumption QM loans, and loans that are originated as QMs under other QM categories to season into safe harbor QM loans, after meeting the requirements for seasoning. The Dodd-Frank Act defines the term consumer financial protection function to include all authority to prescribe rules or issue orders or guidelines pursuant to any Federal consumer financial law, including performing appropriate functions to promulgate and review such rules, orders, and guidelines.[84] 1026.43 Minimum standards for transactions secured by a dwelling. First, a greater share of potentially seasonable loans became delinquent within 36 months, and thus a smaller share of potentially seasonable loans met the performance criteria of this final rule. With the revisions made by the General QM Final Rule to the General QM loan definition, as adopted in the Seasoned QM definition, for purposes of determining the consumer's monthly DTI or residual income, the consumer's monthly payment on the covered transaction is calculated in accordance with 1026.43(e)(2)(iv). that cannot be reasonably anticipated from the consumer's application or the records used to determine repayment ability is not relevant to determining a creditor's compliance with the rule. As such, the Bureau determines that periods of temporary payment accommodation attributable to financial hardship related to a disaster or pandemic-related national emergency should not jeopardize the possibility of the loan seasoning into a QM if the consumer brings the loan current or enters into a qualifying change. Assessment Report, supra note 47, at 117. Some industry commenters noted that similar analyses of alternatives in the Seasoned QM Proposal showed only minor differences in the estimated fraction of seasonable loans that meet the performance criteria under two, three, or four 30-day delinquencies. Table 6 reports the difference in the share of foreclosures among loans that would have qualified for Seasoned QM status under this final rule with the share of foreclosures among loans that would have been originated as safe harbor QM loans under Baseline 1. Bureau of Consumer Fin. Some consumer advocate commenters expressed concern about the potential effects of this final rule given that minority homeowners historically have had higher-priced mortgage products relative to White consumers with similar credit characteristics. In a separate final rule released simultaneously with this final rule, the Bureau is amending the General QM loan definition to, among other things, replace the existing General QM loan definition that includes the 43 percent DTI limit with a price-based General QM loan definition (General QM Final Rule). In light of this change, this final rule makes a related change to proposed 1026.43(e)(7)(iii)(A) to provide that 1026.43(e)(7)(iii)(B)(3) is an exception to the general prohibition against subjecting the covered transaction, at consummation, to a commitment to be acquired by another person to become a Seasoned QM under 1026.43(e)(7). The commenter noted that the definition of qualified residential mortgage (QRM) used by other Federal regulatory agencies to exempt securities from Dodd-Frank Act section 941 risk retention requirements is limited by the Bureau's definition of QM. Third, one needs to estimate how many new consumers would obtain mortgage loans and which loans they would obtain. These practices, which extend to a significant portion of covered transactions, suggest that the GSEs and mortgage insurers have concluded, based on their experience, that payment accommodations resulting from disasters are not likely to be attributed to underwriting.[169]. In the Seasoned QM Proposal, the Bureau preliminarily concluded that, in conjunction with the QM statutory and other requirements in proposed 1026.43(e)(7), a loan's satisfaction of portfolio and seasoning requirements provides sufficient grounds for supporting a conclusive presumption that the creditor made a reasonable determination that the consumer had the ability to repay, in compliance with the ATR requirements. 68. [83], The Bureau is issuing this final rule pursuant to its authority under TILA and the Dodd-Frank Act. 63. A few commenters addressed particular aspects of the Seasoned QM criteria that the Bureau proposed to adopt by cross-reference to other QM requirements. The Bureau concluded that to reflect the expected value of these litigation costs, the costs of non-QM loans would increase by 10 basis points or $212 for a $210,000 loan. Rather, these commenters maintained that defaults in those cases are more likely to be caused by unexpected life events or other factors, such as general economic trends, rather than a creditor's poor underwriting or failure to make an ATR determination at consummation. In developing the proposal, the Bureau evaluated the practices of market participants, such as mortgage insurers and the GSEs, with respect to penalties and other remedies for deficiencies in underwriting practices. Section 1026.43(e)(2) sets out the general criteria for meeting the definition of a QM and provides exceptions for QMs covered by requirements set out in other specific paragraphs in 1026.43(e). As noted in the discussion of comments received on the proposed portfolio requirement, two industry commenters suggested the Bureau permit a one-time sale of the covered transaction to another purchaser as long as the owner or purchaser holds the covered transaction in its portfolio for the requisite 36-month seasoning period and does not securitize the covered transaction. Comment 43-2 also clarifies that, for transactions that are not subject to TRID, creditors can determine the date the creditor received the consumer's application, for purposes of the General QM Final Rule's effective date and mandatory compliance date, in accordance with either 1026.2(a)(3)(i) or (ii). The creditor considers the consumer's DTI ratio or residual income, income or assets other than the value of the dwelling, and debts and verifies the consumer's income or assets other than the value of the dwelling and the consumer's debts.[138]. Applied here, for consumers that choose to pursue high APR loans without safe harbor QM status at origination, borrowing may be cheaper or more widely available relative to either baseline. The Bureau cannot reliably measure the full expansionary effect of this final rule on loan originations. The Bureau has decided that referring to these two statutes is necessary to provide sufficient certainty for financial institutions to ascertain what events can lead to financial hardships that result in temporary payment accommodations qualifying to be excluded from the seasoning period. 103. One QM category is the General QM category. The loans the Bureau evaluated had fixed interest rates, were first-lien transactions, were not high-cost mortgages subject to HOEPA, and did not have any features that disqualified them from being QMs. (2) A periodic payment is 60 days delinquent if the consumer is more than 30 days delinquent on the first of two sequential scheduled periodic payments and does not make both sequential scheduled periodic payments before the due date of the next scheduled periodic payment after the two sequential scheduled periodic payments. For example, under this final rule, among loans that were open for at least three years, the Bureau estimates that with a performance standard of no more than two 30-day delinquencies, 0.47 of a percentage point more Seasoned QMs would enter foreclosure proceedings than would loans that had safe harbor status from consummation. Some research center commenters suggested graduated or step approaches. 857 (1996). 1125 (1975). 5. Allowing an exclusion from the seasoning period for delinquencies related to certain disasters or emergencies without tying the exclusion to a temporary payment accommodation may introduce uncertainty as to whether a loan qualifies to season. The Bureau concludes that providing a safe harbor for seasoned loans is necessary and proper to facilitate compliance with and to effectuate the purposes of section 129C and TILA, including to assure that consumers are offered and receive residential mortgage loans on terms that reasonably reflect their ability to repay the loans. The Bureau concludes that not making payments because of financial hardship experienced as a result of a disaster or pandemic-related national emergency is not likely to be indicative of the consumer's inability to afford the loan at consummation. Proposed 1026.43(e)(7)(iv)(C)(2) also stated that, if the seasoning period is paused due to a temporary payment accommodation defined in proposed 1026.43(e)(7)(iv)(D), a loan must undergo a qualifying change[167] Figure 2 serves as a reminder that, over time, the effects of this final rule will depend on trends in interest rates. The Bureau also is subject to certain additional procedures under the RFA involving the convening of a panel to consult with small business representatives before proposing a rule for which an IRFA is required.[194]. [59], The COVID-19 pandemic has had a significant effect on the U.S. economy. Register, and does not replace the official print version or the official [97] Given this possibility for increases in payment amounts in later years, therefore, timely payments during the seasoning period are not as strong of an indicator on an ARM as they are on a fixed-rate mortgage of the consumer's ability to repay at the time of consummation. 60. The comments addressed a variety of topics, including the General QM loan definition, appendix Q, and the Temporary GSE QM loan definition. Numerous industry commenters supported the Bureau's proposal to create a pathway to a QM safe harbor for loans that demonstrate a satisfactory performance history, subject to certain product feature restrictions and underwriting requirements. The exceptions contained in 1026.43(e)(7)(iii)(B)(1) and (2) apply not only to an initial sale, assignment, or other transfer by the originating creditor but to subsequent sales, assignments, and other transfers as well. Proposed 1026.43(e)(7)(iii) set forth certain proposed portfolio requirements for a covered transaction to be a Seasoned QM. Rather, the Bureau concludes that a sustained period of successful payments, combined with underwriting requirements and product restrictions, supports presuming that the creditor complied with ATR requirements at consummation and made loans that warrant QM status. 168. The proposal noted that the prospect that at consummation a consumer may lack the ability to repay a loan yet still make timely payments for three years, as well as the potential benefits that a Seasoned QM definition might offer in terms of fostering access to responsible, affordable mortgage credit, would tend to vary depending on the loan characteristics. Several industry commenters urged the Bureau to increase the number of permissible 30-day delinquencies to three or four, asserting that such increase would accommodate consumers who need additional flexibility due to the COVID-19 pandemic's negative economic impacts. Higher-priced covered transactions. [143] However, in the event of a material and uncurable defect, purchasers can and do exercise remedies requiring the seller to repurchase the loan, rather than assume the liability of a non-compliant loan or retain a defective loan in portfolio that they anticipate will perform worse than expected. Industry commenters agreed that providing safe harbor QM status to loans that season would incentivize responsible non-QM lending, while maintaining market stability. Section 101 of the EGRRCPA amended TILA to provide protection from liability for insured depository institutions and insured credit unions with assets below $10 billion with respect to certain ATR requirements regarding residential mortgage loans. The National Emergencies Act, which has been in place for more than 40 years, was invoked to declare a national emergency due to the COVID-19 pandemic. The Bureau also recognizes that the prospect of a safe harbor three years after origination will provide a stronger incentive to originate loans that will be non-QM for at least the first three years than the prospect of a rebuttable presumption three years after origination. Both industry and consumer advocate commenters raised concerns about specific aspects of the definition that are discussed in the section-in-section analyses of 1026.43(e)(7)(iv)(A)(1), (2), and (4) below.
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