This is the Special Focus section of the September 2020 edition of Compliance Journal, click here to view the entire edition.
The Bureau of Consumer Financial Protection (CFPB) has proposed the creation of a new category of qualified mortgages (QM) named Seasoned QM.
As a general matter, the Ability-to-Repay/Qualified Mortgage Rule (ATR Rule) requires a creditor to make a reasonable, good faith determination of a consumer’s ability to repay a residential mortgage loan according to its terms. Loans that meet the ATR Rule requirements for QMs obtain certain protections from liability. CFPB stated it created the Seasoned QM category to complement existing QM definitions and to help ensure access to responsible, affordable mortgage credit—especially given the upcoming sunset of the temporary GSE QM category. CFPB also stated it seeks to encourage safe and responsible innovation in the mortgage origination market, including for certain loans that are not QMs or are only rebuttable presumption QMs under existing QM categories.
Under the proposed rule, a covered transaction would receive a safe harbor from ATR liability at the end of a 36-month seasoning period as a Seasoned QM if it satisfies certain product restrictions, points-and-fees limits, and underwriting requirements. The following is an overview of the restrictions and requirements of the proposed Seasoned QM.
Product Restrictions and Underwriting Requirements
A covered transaction must meet the following product restrictions to be eligible to become a Seasoned QM:
- The loan is secured by a first lien;
- The loan has a fixed rate, with fully amortizing payments, and no balloon payment;
- The loan term does not exceed 30 years; and
- The total points and fees do not exceed 3 percent of the loan amount.
For a loan to be eligible to become a Seasoned QM, the proposal requires that the bank consider the consumer’s debt-to-income (DTI) ratio or residual income and verify the consumer’s debt obligations and income. Similar to the existing Small Creditor QM category, the proposal does not specify a DTI limit. Additionally, the bank is not required to use Appendix Q to Regulation Z in calculating and verifying debt and income. The proposed commentary provides that a loan that complies with the consider and verify requirements of any other QM definition is deemed to comply with the consider and verify requirements of the Seasoned QM.
The proposed rule also sets forth a portfolio requirement for the new category. To be a Seasoned QM, the covered transaction cannot be subject, at consummation, to a commitment to be acquired by another person; and, legal title to the covered transaction cannot be sold, assigned, or otherwise transferred to another person before the end of the seasoning period. The proposal provides for two exemptions from this portfolio requirement in that the covered transaction may be sold, assigned, or otherwise transferred to another person pursuant to a capital restoration plan or prompt correction action, other action or instruction from a person acting as conservator, receiver, or bankruptcy trustee, or an order of the bank’s state or federal regulator. The covered transaction may also be sold, assigned, or otherwise transferred pursuant to a merger or acquisition of the bank with another person.
The exemptions to the portfolio requirement apply not only to an initial sale, assignment, or other transfer by the originating creditor, but to subsequent sales, assignments, and other transfers as well. For example, assume Bank A originates a covered transaction that is not a QM at origination. Six months after consummation, the covered transaction is transferred to Bank B pursuant to merger of the two banks. The transfer does not violate the portfolio requirements of the proposed rule because the transfer is as a result of a merger. If Bank B sells the covered transaction before the end of the seasoning period, the covered transaction is not eligible to season into a QM under the Seasoned QM rules unless the sale falls within one of the two listed exemptions.
As outlined, a covered transaction sold pursuant to a capital restoration plan under a prompt corrective action before the end of the seasoning period does not violate the proposed rule’s portfolio requirements. However, if the bank simply chose to sell the same covered transaction as one way to comply with general regulatory capital requirements in the absence of supervisory action or agreement, then the covered transaction cannot become a QM as a Seasoned QM, though it could qualify under another definition of QM.
The “seasoning period” means a period of 36 months beginning on the date on which the first periodic payment is due after consummation of the covered transaction, except that if there is a delinquency of 30-days or more at the end of the 36th month of the seasoning period, the seasoning period does not end until there is no delinquency. The seasoning period also does not include any period during which the consumer is in a temporary payment accommodation extended in connection with a disaster or pandemic-related national emergency, provided that during or at the end of the temporary payment accommodation there is a qualifying change or the customer cures the loan’s delinquency under its original terms.
If during or at the end of the temporary payment accommodation in connection with a disaster or pandemic-related national emergency there is a qualifying change or the consumer cures the loan’s delinquency under its original terms, the seasoning period consists of the period from the date on which the first periodic payment was due after consummation of the covered transaction to the beginning of the temporary payment accommodation and an additional period immediately after the temporary payment accommodation ends, which together must equal at least 36 months.
The proposed rule defines a “qualifying change” to mean an agreement that: (a) is entered into during or after a temporary payment accommodation in connection with a disaster or pandemic-related national emergency and must end any pre-existing delinquency on the loan obligation when the agreement takes effect; (b) the amount of interest charged over the full term of the loan does not increase as a result of the agreement; (c) there is no fee charged in connection with the agreement; and (d) all existing late fees, penalties, stop payment fees, or similar charges are promptly waived upon the consumer’s acceptance of the agreement.
A “temporary payment accommodation in connection with a disaster or pandemic-related national emergency” is defined to mean temporary payment relief granted to a consumer due to financial hardship caused directly or indirectly by a presidentially declared emergency or major disaster under the Robert T. Stafford Disaster Relief and Emergency Assistance Act or a presidentially declared pandemic-related national emergency under the National Emergencies Act. Examples of temporary payment accommodations in connection with a disaster or pandemic-related national emergency include, but are not limited to, a trial loan modification plan, a temporary payment forbearance program, or a temporary repayment plan.
Consumer Payment Performance Requirements
The proposed rule also requires certain payment performances by the consumer. To be a Seasoned QM, the covered transaction must have no more than two delinquencies of 30 or more days and no delinquencies of 60 or more days at the end of the seasoning period. “Delinquency” is defined in the proposed rule to mean 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 by the date the periodic payment is due under the terms of the legal obligation. Other amounts, such as any late fees, are not considered for this purpose. The “due date” is the date the payment is due under the terms of the legal obligation, without regard to whether the consumer is afforded a period after the due date to pay before being accessed a late fee.
Further, a periodic payment is 30 days delinquent when it is not paid before the due date of the following scheduled periodic payment. A periodic payment is 60 days delinquent if the consumer is more than 30 days delinquent on the first of two sequential scheduled periodic payments and does not make both sequential scheduled payments before the due date of the next scheduled periodic payment after the two sequential scheduled periodic payments. For example, assume a loan is consummated on October 15, 2022, that the consumer’s periodic payment is due on the 1st of each month, and that the consumer timely made the first periodic payment due on December 1, 2022. For purposes of determining delinquency under the proposed rule, the consumer is 30 days delinquent if the consumer fails to make a payment (sufficient to cover the scheduled January 1, 2023 periodic payment of principal, interest, and, if applicable, escrow) before February 1, 2023. The consumer is 60 days delinquent if the consumer then fails to make two payments (sufficient to cover the scheduled January 1, 2023 and February 1, 2023 periodic payments of principal, interest, and, if applicable, escrow) before March 1, 2023.
For any given billing cycle for which a consumer’s payment is less than the periodic payment due, a consumer is not delinquent as defined in the proposed rule if: (a) the servicer chooses not to treat the payment as delinquent for purposes of RESPA, Regulation X, if applicable; (b) the payment is deficient by $50 or less; and (c) there are not more than three such deficient payments treated as not delinquent during the seasoning period.
CFPB has proposed the creation of a Seasoned QM category as means to complement existing QM definitions and to help ensure access to responsible, affordable mortgage credit. A covered transaction would receive a safe harbor from ATR liability at the end of a 36-month seasoning period as a Seasoned QM if it satisfies certain product restrictions, points-and-fees limits, and underwriting requirements as outlined above.
CFPB has proposed that a final rule relating to the proposal would take effect on the same date as a final rule to amend the General QM definition. Comments regarding the proposed Seasoned QM category were initially due September 28, 2020; however, CFPB has
since extended the comment period until October 1, 2020. WBA plans to file comments in general support of the proposal while offering several recommendations of change for CFPB to consider. Click here to view the proposal.