July 27, 2021

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Mortgage News

CFPB pushes compliance date for qualified mortgage definition to 2022

The Consumer Financial Protection Bureau officially announced an earlier proposal on Tuesday Postpone full adoption of the new qualifying mortgage repayment rule by October 2022, citing the need to maximize access to credit for borrowers.

The term “qualified mortgage” indicates that a loan meets the legal requirements of the repayment rule, a provision of the Dodd-Frank Act that requires lenders to evaluate a borrower’s income, assets, employment status, liabilities, and credit need history and debt to income ratio to determine that the borrower can repay the loan.

For example, the original QM rule stipulates that loans must maintain a debt-to-income ratio of no more than 43% in order to indicate repayment ability. However, mortgages backed by Fannie Mae and Freddie Mac are exempt from this requirement under a 2014 Temporary Provision, commonly referred to as the “QM Patch”, which will expire after multiple renewals when the new QM rule comes into effect.

The new definition, which primarily eliminates the debt-to-income ratio of a maximum of 43% and certain income requirements, has been partially expanded to minimize changes to the underwriting of state-funded companies in connection with the expiry of the QM patch. Instead of setting the debt-income limit and other requirements in the old definition, the new QM rule requires that lenders use standards that contain a new standard on which they are based the price of the loan.

The 15-month delay in the mandatory application of the new QM rule could make it easier for mortgage companies to sell loans in the QM category either to the GSEs or to the private market over a longer period of time.

The new QM rule gives the GSEs a lot of flexibility, but there are a few rare exceptions. The small market for short-term, variable rate, fixed rate mortgages that last, for example, five years or less will not meet the new definition of QM.

“So many consumers have been hard hit by the pandemic and economic downturn, and we want to make sure that responsible and affordable mortgages remain available,” said Dave Uejio, acting director of the CFPB, in a press release.

According to the new and the old QM definition, several consumer protection provisions still apply in the repayment rule, both of which are still available on a voluntary basis.

For example, there is still the requirement that the annual percentage must not exceed 150 basis points above the main annual offer rate for QM Safe Harbor status. Safe Harbor status provides the greatest assurance that a loan will meet repayment requirements.

Additionally, QM loans still prohibit the type of features that created repayment problems during the real estate crash of the Great Recession, such as: B. underwriting without documentation, negative amortization or pure interest structures.

“The new rule does not replace any of the safe product features that are enshrined in law,” said Meg Burns, executive vice president of the Housing Policy Council.

The revised QM also includes new consumer protection regulations, including a maximum annual percentage of 225 basis points above the average maximum offer rate for other QM loans outside the safe haven. All mortgage borrowers must still demonstrate the ability to repay, regardless of whether they have QM status or not.