Consumer Mortgages: Why the CFPB’s QM Rule Compliance Delay Isn’t Quite What It Seems

Financial Services Law

As proposed back in March, the Consumer Financial Protection Bureau (CFPB or Bureau) has now formally delayed the mandatory compliance date for the new general qualified mortgage (QM) rule to October 1, 2022, effective June 30. In doing so, the CFPB asserts that the move will enhance credit opportunities for the underbanked and those still suffering from the effects of the COVID-19 pandemic. While that may arguably appear so, we explain below why it won’t as yet have the identified desired effect, and may be serving an entirely different agenda.

What Happened

On April 26, 2021, the CFPB issued a final rule delaying until October 1, 2022, the compliance date for the final general QM rule that redefines which residential mortgages qualify as this all-important investment grade of residential mortgage. As its stated reason for the move, the Bureau advised that it would “help ensure access to responsible, affordable mortgage credit and to preserve flexibility for consumers affected by the COVID-19 pandemic and its economic effects.” Likewise, the CFPB indicated it plans “to evaluate the General QM Final Rule’s amendments to the General QM loan definition and will consider at a later date whether to initiate another rulemaking to reconsider other aspects of the General QM loan definition.”

As background, the Dodd-Frank Act amended the Truth in Lending Act (TILA) to establish, among other things, ability-to-repay (ATR) requirements in connection with the origination of most residential mortgage loans. The applicable TILA provisions create a safe-harbor presumption on ATR for certain loans that meet the definition of a “qualified mortgage.”

The CFPB has likewise added further framework through its Ability-to-Repay/Qualified Mortgage Rule (ATR/QM Rule), which 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/QM Rule’s requirements for qualified mortgages obtain certain protections from liability. The ATR/QM Rule defines several categories of QMs.

One critical QM category of loans is the “General QM” loan. General QMs are those that comply with the ATR/QM Rule’s prohibitions on certain loan features, points and fees limits, and underwriting requirements. Under the original ATR/QM Rule, the ratio of the consumer’s total monthly debt to total monthly income (DTI or DTI ratio) could not exceed 43 percent for a loan to meet the General QM loan definition (original, DTI-based General QM loan definition).

In December 2020, the Bureau issued the General QM Final Rule, which amended Regulation Z by replacing the original, DTI-based General QM loan definition with a limit based on loan pricing and by making other changes to the General QM loan definition (revised, price-based General QM loan definition).

A second critical category of loans are those that qualify under the so-called GSE (Government-Sponsored Enterprise) Patch. This is a temporary category of QMs, formally defined as “Temporary GSE QM loans,” which comprises loans that (1) comply with the same loan-feature prohibitions and points and fees limits as General QMs and (2) are eligible to be purchased or guaranteed by either the Federal National Mortgage Association (Fannie Mae) or the Federal Home Loan Mortgage Corporation (Freddie Mac)—that is, the GSEs.

In October 2020, the CFPB issued the Patch Extension Final Rule, stating that the GSE Patch will be available only for covered transactions for which the creditor receives the consumer’s application before the mandatory compliance date of the General QM Final Rule. In practical effect, the GSE Patch would have expired on July 1, 2021. Now, under this final rule, the GSE Patch will expire on the earlier of October 1, 2022, or the date the applicable GSE exits federal conservatorship (which arguably remains a possibility even under the Biden administration).

This delay is a controversial one. Members of both industry and consumer groups opposed the move as unnecessary and, in fact, counterproductive.

Why It Matters

For QM lenders, the delay will be problematic without further action. At the beginning of this year, Fannie Mae and Freddie Mac updated their uniform Preferred Stock Purchase Agreements (PSPAs). Under those amendments, Fannie and Freddie provided, among other things, that they would purchase solely those mortgages that qualify under the new General QM rule.

In short, with respect to loans that originate and qualify under either the original General QM rule or the GSE Patch QM rule, Fannie and Freddie took the position that, on or after July 1, 2021, originators could continue to make loans under the original General QM rule, but they would no longer be purchased by the GSEs.

Further, the move has a more drastic impact on GSE Patch QM loans because their QM status depended entirely on their eligibility for purchase by Fannie and Freddie. Thus, in order for the CFPB’s delay to be effective, Fannie and Freddie must likewise amend the PSPAs to the October 1, 2022 date provided by the CFPB.

Of course, Fannie and Freddie are only part of the story. There remains a strong and rebuilding market for non-agency mortgage-backed securities (MBS). As the CFPB notes, however, non-agency MBS are generally perceived by investors as riskier than agency MBS. As a result of this and other market forces related to the pandemic, the origination of non-agency and non-QM mortgage credit significantly contracted during the early months of the pandemic, with nearly all such transactions occurring in the first quarter of 2020. In fact, non-QM lenders largely ceased making loans by March or April 2020. That market has now resumed and, in many ways, quite dramatically.

Given the wide availability of low interest rates for non-QM mortgages, the CFPB may believe there is no need to redefine General QM loans in a manner that greatly expands the QM scope to include loans that traditionally fell outside the safe harbor. As the Bureau notes in its Final Rule, “Because many of these loans that were historically considered non-QM may qualify for QM status under the revised, price-based General QM loan definition, it is unclear how quickly the market for non-QM loans that fall outside of existing QM definitions will develop.” That said, the CFPB also notes that “this rulemaking does not reconsider the revised, price-based General QM loan definition that was adopted in the General QM Final Rule.” Instead, “this final rule concludes that it would be appropriate in light of the continuing disruptive effects of the pandemic to help facilitate greater creditor flexibility and expanded availability of responsible, affordable credit options for some struggling consumers by also providing QM status to loans originated under the original, DTI-based General QM loan definition and, potentially, under the [GSE Patch] definition until October 1, 2022.”

Given all of the above, is the CFPB obscuring the real reasons for the delay, and does the Bureau intend to revisit the new model? During the Mulvaney and Kraninger years at the Bureau, the CFPB sometimes delayed action primarily to make cardinal changes in prior rulemaking that appeared contrary to the objectives of new leadership. Much the same could be speculated upon here. As even the Bureau notes, it will use the delay period to evaluate the new rule and may issue rulemaking that would reconsider all or portions thereof. Stay tuned.

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