August 5, 2021

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Consumer Mortgages: Why the CFPB’s QM Rule Compliance Delay Isn’t Quite What It Seems | Manatt, Phelps & Phillips, LLP

How already proposed in MarchThe Consumer Financial Protection Bureau (CFPB or Bureau) has now formally postponed the mandatory compliance date for the new QM rule (General Qualified Mortgage) to October 1, 2022 with effect from June 30th. With this, the CFPB assures that the move will take place, improving credit opportunities for under-banks and those still suffering from the effects of the COVID-19 pandemic. This may seem so, but we explain below why it has not yet had the desired effect that has been identified and why it may serve a completely different agenda.

What happened

On April 26, 2021, the CFPB issued a last rule Delayed until October 1, 2022, the compliance date for the final general QM rule that redefines which residential mortgages qualify as this critical residential investment grade mortgage. As a stated reason for the move, the Bureau recommended “helping to ensure access to responsible, affordable mortgage credit and maintaining the flexibility of consumers affected by the COVID-19 pandemic and its economic impact”. The CFPB also stated that it plans to “evaluate the changes to the general QM final rule to the general QM credit definition and to examine at a later date whether further rules should be introduced to address other aspects of the general QM credit definition to reconsider “.

As a backdrop, the Dodd-Frank Act changed the Truth About Lending Act (TILA) to include repaymentability (ATR) requirements related to taking out most residential mortgage loans. The applicable TILA regulations create a safe harbor presumption for ATR for certain loans that meet the definition of a “qualifying mortgage”.

The CFPB has also created additional framework conditions with its own Repayable / Qualified Mortgage Rule (ATR / QM Rule), which requires a creditor to reasonably assess, in good faith, a consumer’s ability to repay a residential mortgage loan in accordance with their terms. Loans that meet the requirements of the ATR / QM rule for qualified mortgages receive a certain amount of liability protection. The ATR / QM rule defines several categories of QMs.

A critical QM category of loans is the “General QM” loan. General QMs are those that comply with the prohibitions of the ATR / QM rule for certain loan characteristics, point and fee limits and subscription requirements. According to the original ATR / QM rule, the ratio of the consumer’s total monthly debt to total monthly income (DTI or DTI ratio) for a loan must not exceed 43 percent in order to comply with the general QM loan definition (original, DTI-based general QM loan ) to meet definition).

In December 2020, the Presidium issued the general QM final rule that amended Regulation Z by replacing the original DTI-based general QM credit definition with a limit based on credit pricing and making other changes to the general QM credit definition (revised, price-based general QM credit definition).

A second critical category of loans are those that fall under the so-called GSE patch (Government-Sponsored Enterprise). This is a temporary category of QMs that is formally defined as “temporary GSE-QM credits” and includes credits that (1) comply with the same prohibitions on credit characteristics and point and fee restrictions as general QMs and (2) are eligible for purchase or guaranteed by either the Federal National Mortgage Association (Fannie Mae) or the Federal Home Loan Mortgage Corporation (Freddie Mac) – these are the GSEs.

In October 2020, the CFPB issued the Last rule about patch expansionThis means that the GSE patch is only available for covered transactions for which the creditor receives the consumer’s request before the mandatory compliance date of the General QM Final Rule. In practice, the GSE patch would have expired on July 1, 2021. According to this final regulation, the GSE patch will now expire on October 1, 2022 or on the date on which the current GSE leaves the Federal Conservatory (which is probably still an option under the Biden administration).

This delay is controversial. Members of both industry and consumer groups opposed the move as unnecessary and indeed counterproductive.

Why it matters

Without further action, the delay will be problematic for QM lenders. Earlier this year, Fannie Mae and Freddie Mac updated their uniform Preferred Stock Purchase Agreements (PSPAs). As part of these amendments, Fannie and Freddie provided, among other things, that they would buy solely those mortgages that fall under the new general QM rule.

In short, with respect to loans that have arisen and qualified under either the original general QM rule or the GSE patch QM rule, Fannie and Freddie took the position that originators would continue on or after July 1, 2021 Loans could be granted according to the original rule General QM rule, but they would no longer be bought by the GSEs.

Additionally, the move has had a more drastic impact on GSE Patch QM credits as their QM status was entirely dependent on their eligibility to purchase from Fannie and Freddie. For the CFPB delay to take effect, Fannie and Freddie must also change the PSPAs to the CFPB’s October 1, 2022 date.

Of course, Fannie and Freddie are only part of the story. It remains a strong and rebuilding market for non-agency mortgage-backed securities (MBS). As the CFPB notes, non-agency MBS are generally viewed by investors as riskier than agency MBS. As a result of this and other market forces associated with the pandemic, non-agency and non-QM mortgage lending declined significantly in the first few months of the pandemic, with almost all such transactions occurring in Q1 2020 Lending largely stopped in March or April 2020. This market has now resumed and is pretty dramatic in many ways.

Given the widespread availability of low interest rates on non-QM mortgages, the CFPB may feel that there is no need to redefine general QM credits in a way that greatly expands the scope of QM to include credits traditionally outside of the safe harbor. As the Presidium states in its final rule: “Since many of these loans, which were classified as non-QM loans in the past, may qualify for QM status according to the revised, price-based general QM loan definition, it is unclear how quickly the market for non-QM credits is credits that are outside of the existing QM definitions will develop. “However, the CFPB also notes that“ this rule creation does not reconsider the revised, price-based definition of the general QM loan that was adopted in the general QM final rule. ”Instead, this final rule concludes that, given the sustained disruptive effects of the pandemic would be appropriate to allow greater flexibility of creditors and expanded availability of responsible, affordable credit options for some ailing consumers by also giving QM status to the credits they derive from the original, DTI-based general QM credit definition and possibly under the [GSE Patch] Definition by October 1, 2022. “

Given all these circumstances, is the CFPB obscuring the real reasons for the delay and does the Bureau intend to reconsider the new model? During Mulvaney and Kraninger’s years on the Presidium, the CFPB sometimes delayed action, mostly to make fundamental changes to the previous rulemaking that ran counter to the goals of new leadership. Something similar could be speculated here. As the Bureau itself notes, it will use the delay time to evaluate the new rule and possibly issue rules that would reconsider all or part of it. Stay tuned.