General QM Final Rule Throws Out DTI, Replaces It with APOR

home loans

Before closing out 2020, the Consumer Financial Protection Bureau (CFPB) managed to issue two final rules related to qualified mortgage (QM) loans.

The first relates to General QM loans, which previously required that a borrower’s debt-to-income ratio (DTI) not exceed 43 percent unless it met the underwriting guidelines of Fannie Mae and Freddie Mac.

This was known as the GSE patch, and was set to expire either by January 10th, 2021, or when the GSEs exited conservatorship, whichever came first.

As you probably know, they did not exit conservatorship, so it appears the CFPB quickly pushed through the final rule.

How the General QM Final Rule Works

Going forward, the hard DTI limit for QM loans will be removed from the rule and replaced with a limit on the underlying loan’s pricing, relative to the average prime offer rate (APOR).

Simply put, loans will now be categorized as QMs based on the combination of interest rate and lender fees, as opposed to the borrower’s DTI ratio.

However, mortgage lenders will still be required to consider a borrower’s DTI ratio or residual income and assets to meet ability to pay requirements.

This new rule will take effect 60 days after its publication in the Federal Register, and there will be a mandatory compliance date of July 1st, 2021.

At that time, mortgage loans will receive a conclusive presumption (safe harbor) that the consumer had the ability to repay if the APR does not exceed the average prime offer rate (APOR) for a comparable transaction by 1.5 percentage points or more as of the date the interest rate is set.

Meanwhile, mortgage loans will only receive the less favorable rebuttable presumption if the APR exceeds the APOR for a comparable transaction by 1.5 percentage points or more but by less than 2.25 percentage points.

The idea here is borrowers are protected from overpriced loans, and lenders are still required to ensure they have the ability to repay their mortgages.

Additionally, the final rule provides higher pricing thresholds for smaller loan amounts, certain manufactured housing loans, and for subordinate-lien (second mortgage) transactions.

It also retains the General QM loan definition’s product-feature and underwriting requirements with regard to limits on points and fees.

And while lenders will still be required to “consider a consumer’s DTI ratio or residual income, income or assets other than the value of the dwelling, and debts,” it effectively removes the very rigid appendix Q.

Banks and lenders will instead have “more flexible options for creditors to verify the consumer’s income or assets other than the value of the dwelling and the consumer’s debts for QM loans.”

The second final rule pertains to Seasoned QMs, which had been proposed earlier and is now a done deal.

These mortgages, which must be held in portfolio by the originating creditor or first purchaser for a 36-month period, will also enjoy QM status if certain conditions are met.

They must be first-lien, fixed-rate loans with no balloon payments that meet certain other product restrictions, and have no more than two delinquencies of 30+ days and no delinquencies of 60+ days at the end of the seasoning period.

While the Seasoned QM rule may not be very impactful, given the lengthy required holding period, the final rule regarding General QMs and the expiration of the GSE patch should give lenders more clarity going forward.

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