On August 18, 2020, the CFPB issued a notice of proposed regulations which would establish a new category of “seasoned qualified mortgages” (seasoned QMs) “to encourage innovation and help ensure access to affordable and responsible mortgage credit”. This new QM category would grant QM status to certain mortgages held in a lender’s portfolio for a “dry-up period” of at least three years. Loans must meet certain performance requirements during this period, as well as restrictions on product characteristics and underwriting requirements.
According to the CFPB, it creates this new category of QM loan because, in addition to meeting certain product criteria, “the satisfaction of a loan to portfolio and seasonality requirements, provides sufficient grounds to support a conclusive presumption that the creditor made a reasonable decision that the consumer had the repayment capacity (ATR). In recent years, CFPB rules and federal legislation have established new categories of quality management for loans held in portfolios of small institutions that do not meet general quality management requirements. This proposal would extend this treatment to loans held in portfolios by other institutions.
Under the proposal, the “seasoning period” would generally be defined as “a period of 36 months beginning on the date on which the first periodic payment is due after consumption.[.]To meet the performance requirements of the proposal, the loan must have no more than two arrears of 30 days or more and no arrears of 60 days or more at the end of the seasoning period. Further, a default would be defined as “the failure to make a periodic payment (in one full payment or in two or more partial payments) sufficient to cover principal, interest and, if applicable, escrow. on the due date of the periodic payment. under the legal obligation.
The product characteristics that a loan should satisfy include: (1) the loan is secured by a first lien; (2) the loan has a fixed rate, with fully amortized payments and no interest only, lump sum payments or negative amortization; (3) the term of the loan does not exceed 30 years; and (4) the total points and fees do not exceed the specified limits (ie, usually three percent of the loan amount).
When underwriting, a creditor should also consider the consumer’s DTI ratio or residual income and verify the consumer’s debts and income for a loan to be eligible. However, the loan would not be subject to any specific QM DTI ratio limit (e.g. 43%) and the lender would not be required to use Schedule Q of Regulation Z to calculate consumer debt and income.
In addition, the loan must not be subject to a commitment to be acquired by another person for consumption, and legal title to the loan generally cannot be sold, assigned or otherwise transferred to another person before the end of the supply period.
Notably, the proposal provides that a loan could acquire seasoned QM status even though it is a higher priced covered transaction, which is a first mortgage with an annual percentage rate that exceeds the rate. average prime for a comparable transaction on the date of the date on which the interest rate is set by a specified number of percentage points. Under the current ATR rule, higher priced mortgages are only entitled to a rebuttable presumption of compliance with the rule, even if they would otherwise qualify as a QM loan.
Additionally, failure to make full mortgage payments during temporary forbearance during a natural disaster or pandemic (such as COVID-19) would not prevent a loan from being granted Seasoned QM status. However, the time spent in such temporary accommodation would not be taken into account in the 36-month waiting period, and the waiting period could only resume after the temporary payment accommodation if the consumer remedies the default. of the loan on its original terms or if there is an eligible change (for example, entering into a repayment plan). For example, the seasoning period would include the period before the start of the accommodation and an additional period immediately after the end of the accommodation, the total sum of which must be at least 36 months.
The proposal states that a final rule of seasoned MQ would come into effect on the same day as a final rule amending the definition of general MQ, six months after the publication of the definition of general MQ in the federal registry. WBK has already reported on the proposed definition of general quality management here. The new QM category would apply to covered transactions for which creditors receive a request from the date of entry into force of the revised rule. Therefore, no current non-QM loan that might otherwise meet the definition of a Seasoned QM would be eligible to become a Seasoned QM under the proposal.
Comments on the Seasoned QM proposal are due 30 days after the proposal is posted in the Federal Register. WBK looks forward to assisting commentators.