Compliance Alert: Temporary Qualified Mortgage for Government-Sponsored Enterprise Loans Effectively Ended in July
A recent development affects the Consumer Financial Protection Bureau’s (Bureau) extension of the temporary qualified mortgage (QM) status for loans eligible for purchase or guarantee by a government-sponsored enterprise (GSE) while under conservatorship (QM Patch).
In 2013, when the Bureau issued a final rule1 under Regulation Z to implement the ability-to-repay (ATR) and QM requirements of the Dodd‒Frank Act, it created a temporary QM definition to facilitate transition to the new rule and to avoid disrupting the mortgage market’s recovery from the 2008 financial crisis.2 The Bureau defined the temporary QM, which is also known as the GSE or QM Patch, to include any mortgage eligible to be purchased or guaranteed by the GSEs while under conservatorship and meeting certain other statutory QM requirements.3 As many lenders have experience selling mortgages to the GSEs using their Desktop Underwriter and Loan Prospector origination software, the QM Patch helped to ease the transition to Regulation Z’s ATR requirements.
The Bureau scheduled the QM Patch to sunset on January 10, 2021, the date by which the Bureau originally expected residential lenders seeking QM status for their loans would use the General QM definition.4 But the Bureau found through its statutorily required assessment of the ATR/QM rule5 that lenders still relied heavily on the QM Patch, in part because lenders found Appendix Q opaque.6 The Bureau also noted in its assessment that, unlike the QM Patch, the General QM definition has the 43 percent DTI limit and expressed concern that it would be more difficult for certain creditworthy borrowers with DTI ratios greater than 43 percent to obtain mortgages once the QM Patch expired, which has no DTI limit.
To address these concerns, the Bureau amended its General QM definition to eliminate the Appendix Q and 43 percent DTI requirements.7 The Bureau replaced the 43 percent DTI limit with a priced-based approach: For most first‑lien mortgage loans with loan amounts of $110,260 or more (indexed for inflation), the annual percentage rate cannot exceed the average prime offer rate by 225 basis points or more.8 Higher price thresholds exist for certain manufactured housing loans, subordinate-lien loans and loans in smaller amounts.
The final rule also replaces the Appendix Q requirement for verifying debts and income with a more flexible approach, including a safe harbor for lenders that use certain verification standards of the GSEs or certain federal agency lenders.9
This final rule became effective on March 1, 2021, and originally carried a July 1, 2021, mandatory compliance date. However, on April 30, 2021, the Bureau extended the mandatory compliance date for the General QM to October 1, 2022, citing the effect of the pandemic and other concerns. This also extended the sunset date for the Patch QM by 15 months from July 1 to October 1, 2022, because the sunset date was tethered to the mandatory compliance date of the amended General QM.
In spring 2021, the GSEs issued new guidance to address the requirements of their recently amended Senior Preferred Stock Purchase Agreements (PSPAs) with the U.S. Department of the Treasury, which they originally entered into in 2008 in exchange for financial support during the financial crisis. This guidance explains the policies the GSEs would implement to comply with the amended PSPAs, which specify that the GSEs may only purchase loans that meet the revised criteria of the Bureau’s General QM rule that became effective on March 1, 2021, with a July 1, 2021 compliance date. Accordingly, the guidance provides that QM Patch loans must have application dates on or before June 30, 2021, and be purchased or securitized on or before August 31, 2021.10 The guidance also explained that for single-closing construction-to-permanent loans, the application date must be on or before June 30, 2021, and the purchase or securitization date must be on or before February 28, 2022.
This new GSE guidance effectively ended the QM Patch on July 1, 2021, despite the Bureau’s actions to extend its availability to October 1, 2022. The Bureau acknowledged this development in its April 30, 2021, final rule, stating “[t]he Bureau recognizes that the practical availability of the Temporary GSE QM loan definition may be affected by policies or agreements created by parties other than the Bureau, such as the … PSPAs, which include restrictions on GSE purchases that rely on the Temporary GSE QM loan definition after July 1, 2021.”11 However, the Bureau also recently spoke to this issue in its most recent unified agenda (Spring 2021 Unified Agenda), stating that loans eligible under the QM Patch would continue to have QM status regardless of the purchase requirements set by the GSEs.
ENDNOTES
1 See 78 Federal Register 6408 (January 30, 2013).
2 See 78 Federal Register at 6533-34.
3 See §1026.43(e)(4) (2020 annual edition of C.F.R.).
4 See 78 Federal Register at 6506.
5Under §1022(d) of the Dodd‒Frank Act, the Bureau is required to issue reports assessing the effectiveness of its significant rules no later than five years after their effective date. On January 10, 2019, the Bureau issued the Ability-to-Repay and Qualified Mortgage Rule Assessment Report (ATR/QM Report).
6 See ATR/QM Report at 190-94.
7 See 85 Federal Register 86308 (December 29, 2020).
8 APOR, which is defined in §1026.35(a)(2), is a benchmark of the average annual percentage rate currently offered to consumers for mortgage transactions with low-risk pricing characteristics. The Bureau publishes tables with recent APORs
9 See Comment 43(e)(2)(v)(B)-3.
10 See Fannie Mae Lender Letter 2021-11 and Freddie Mac Bulletin 2021-19.
11 See 86 Federal Register at 22844, 22851 (April 30, 2021).