The Consumer Finance Protection Bureau (CFPB) has proposed a new category of Qualified Mortgage known as a “seasoned QM.”
As the name suggests, the underlying home loan must be seasoned for a period of time before it receives the benefits of being defined as a Qualified Mortgage.
The bureau is accepting comments regarding the proposal, which must be received on or before September 28th, 2020.
They said their primary objective “is to ensure access to responsible, affordable mortgage credit by adding a Seasoned QM definition to the existing QM definitions.”
Let’s learn about this new type of QM loan.
Seasoned QM Must Be Held in Portfolio for 36 Months
Perhaps the biggest takeaway from this new QM proposal is the fact that the mortgage needs to be held in portfolio for three years, or 36 months.
The 36 months begin on the date on which the first periodic payment is due after loan consummation.
At that point, if certain other conditions are met, the lender can enjoy the benefits of a safe harbor from ATR liability.
While there still are a lot of conditions tied to this new iteration of a QM, like with other QM loans, the requirements are looser than for standard QMs.
They actually align with the provisions set forth for certain portfolio loans originated by certain small creditors (Small Creditor QM definition).
For example, under the proposal there would not be a specific DTI limit, which has been a sticking point lately and a subject of the GSE patch.
But the mortgage lender would still need to consider the consumer’s DTI ratio or residual income, and verify the consumer’s monthly debt obligations.
Additionally, the proposed rule wouldn’t require the creditor to use appendix Q to Regulation Z when calculating and verifying the borrower’s debt and income.
Taken together, this would make it a lot easier for non-QM lenders to originate these types of loans while eventually being afforded the protection of QM status.
However, as noted, there is still a list of general requirements that must be met in order for the loan to be designated a Seasoned QM.
Seasoned QM Loan Requirements
- Must be a first-lien mortgage
- With a fixed interest rate
- Fully amortized payment (no interest-only)
- Loan term to not exceed 30 years
- Total points and fees cannot exceed specified limits
Aside from these basic requirements, there are also certain performance requirements that must be met at the end of the seasoning period.
This has to do with payment history while the loan is being held in portfolio during the seasoning period.
Specifically, the loan could have no more than two 30+ day delinquencies and no 60+ day delinquencies at the end of the seasoning period.
However, loan servicers could “accept deficient payments within a payment tolerance of $50 on up to three occasions” during the 36-month seasoning period without it triggering a delinquency.
And there are certain allowances if any payment disruptions are connected to a natural disaster or a pandemic- related national emergency.
Now this begs the question; would mortgage lenders be willing to keep these loans for a full 36 months just to avoid appendix Q and DTI limits, especially if the loans also need to stay current?
One must also consider how loan an otherwise non-QM loan is actually kept – are the borrowers taking out these types of loans keeping them for 5+ years or just a couple years until they can get a traditional home loan?