The Consumer Financial Protection Bureau on Tuesday officially moved ahead with an earlier proposal to
The term “qualified mortgage” is an indication that a loan satisfies the legal mandates of the ability-to-repay rule, a regulation within the Dodd-Frank Act that requires lenders to assess a borrower’s income, assets, employment status, liabilities, credit history, and the debt-to-income ratio in order to establish that the borrower can repay the loan.
For example, the original QM rule requires loans to maintain a debt-to-income ratio of no more than 43% to indicate an ability to repay. But mortgages backed by Fannie Mae and Freddie Mac are exempt from that requirement under a temporary 2014 provision commonly referred to as the “QM patch,” which, after multiple extensions, will expire when the new QM rule takes effect.
The new definition, which most notably removes that maximum 43% debt-to-income ratio and certain income requirements, was expanded in part to minimize changes to the government-sponsored enterprises’ underwriting related to the expiration of the QM patch. Instead of imposing the debt-to-income limit and other requirements in the old definition, the new QM rule requires lenders to use standards that include a new one based on
The 15-month delay in mandating use of the new QM rule could make mortgage companies more comfortable selling loans in the QM category to either the GSEs or the private market for a longer period of time.
The new QM rule retains a lot of flexibility for the GSEs, but there are some rare exceptions. The small market for short reset adjustable-rate mortgages with a fixed rate period that lasts for five years or less, for example, will not meet the new QM definition.
“So many consumers have been hit hard by the pandemic and the economic downturn, and we want to ensure that responsible, affordable mortgages remain available,” Dave Uejio, the CFPB's acting director, said in a press release.
Several consumer protections in the ability-to-repay rule still apply under both the new and old QM definitions, both of which remain available for voluntary use.
For example, there’s still a requirement that the annual percentage rate can’t exceed 150 basis points over the annual prime offer rate for QM Safe Harbor status. Safe Harbor status offers the most assurance that a loan meets ability-to-repay requirements.
In addition, QM loans still forbid the kind of features that gave rise to ability-to-repay issues during the Great Recession’s housing crash, such as no-documentation underwriting, negative amortization or interest only structures.
"The new rule does not replace any of the safe product features, which are embedded in the law," said Meg Burns, executive vice president of the Housing Policy Council.
There also are new consumer protections in the revised QM including a 225-basis-point maximum annual percentage rate over average prime offer rate limit for other QM loans outside the safe harbor. All mortgage borrowers must still demonstrate an ability to repay, whether or not they have QM status.
