The Consumer Financial Protection Bureau (CFPB) recently issued a proposed rule to create a new category of Seasoned Qualified Mortgages (QMs). The proposal seeks to “encourage safe and responsible innovation in the mortgage origination market” by allowing an alternative pathway to the qualified mortgage safe harbor.
By way of background, the Dodd-Frank Act amended the Truth in Lending Act (TILA) to establish ability-to-repay (ATR) requirements for most residential mortgage loans. TILA specifies the factors a creditor must consider in making a reasonable and good-faith assessment of a consumer’s ATR. TILA also defines qualified mortgages as a category of loans that are presumed to comply with the ATR requirements. Regulation Z, TILA’s implementing regulation, requires creditors to make a reasonable good-faith determination of a consumer’s ability to repay any residential mortgage loan, and loans that meet Regulation Z’s requirements for QMs must obtain certain protections from liability.
Under the CFPB’s new proposal, only certain loans are eligible to become Seasoned QMs. Specifically, in order for a loan to be eligible to become a Seasoned QM,
- The loan must be secured by a first lien;
- The loan must have 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 specified limits.
After origination, the loan would then have to be held in the originating lender’s portfolio for a 36-month seasoning period and meet certain underwriting requirements. Seasoned QMs would only be available for loans that have no more than two 30-day delinquencies and no delinquencies of 60 or more days as of the end of the seasoning period.
Under the proposed rule, a loan would receive a safe harbor from ATR liability as a Seasoned QM at the end of the 36-month seasoning period if it satisfies such product restrictions, points-and-fees limits, and underwriting requirements, and if it meets such performance and portfolio requirements during the seasoning period.
The proposed rule may encourage creditors to lend to consumers with less traditional credit profiles and income sources at an affordable price based on a determination of the consumer’s ability to repay their mortgage.
We can expect a final ruling within the next year. Note that any final rule that becomes effective may vary significantly from the proposed rule, based on comments submitted from industry participants.