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1 1 (February 16, 2021)

handle is hein.crs/govecgd0001 and id is 1 raw text is: C ss at Seseatch $ rv 6 February 16, 2021 The Qualified Mortgage (QM) Rule and Recent Revisions Background Prior to the 2008 financial cris is, mortgage underwriting standards were relaxed such that the ability of borrowers to repay their loans became linked to the favorable financial conditions that existed at the time of origination. Following a rise in interest rates and a decline in underlying collateral values (house prices), these less favorable market conditions generated mortgage delinquencies and defaults. The 2010 Dodd-FrankWall Street Reformand Consumer Protection Act (P.L.111-203) soughtto address this in part by including an ability-to-repay (ATR) requirement. On January 30,2013, the Cons umer Financial Protection Bureau (CFPB) finalized a rule implementing the ATR. The initial version of the ATRrule became effective on January 10, 2014. A revised ATRrule, discussedin the last section of this In Focus, was published on December 29, 2020. The ATRrequires a lender to make a reasonable good faith determination oftheconsumer's ability torepaytheloan according to its terms. Before making a residential mortgage loan to a consumer, a lender must consider and verify with documentation eight underwriting criteria for the borrower: (1) current orreasonably expected income or as sets; (2) current employment status; (3) monthly payments of principal and intereston theprimary mortgage lien; (4) monthly payment on any junior mortgage lien; (5) monthly payment for mortg age-related obligations (e.g., property taxes,homeowner association fees); (6) any additional debt (e.g., automobile, credit card, education) obligations; (7) monthly debt-to-income (DTI) ratio or residual income; and (8) credit history. The ATRrule provides multiple ways for a loan originator to comply for legal purposes, one of which is by originating a generalqualjfiedmortgage (QM). A general QM must meet certain product-feature and underwriting requirements: * The mortgage must fully amortize, meaning that the borrower's payments mustbe applied towardpaying down a portion of the principal loan balance over time. A general QM cannot have a balloon or large principal payment due at the end of the loan. Furthermore, a generalQM loan cannot negatively amortize, meaning that its princip allo an balance cannot increase over time. * Fora safe harborgeneralQM loan, the difference between the annualpercentagerate (APR) and the average prime offer rate (APOR) must not exceed 1.5 percentagepoints for a first lien and 3.5 percentage points for ajuniorlien. The APRincludes boththe annual interest cost and upfront fees spread over the life of the mortgageandexpressed as apercentage. The APORis a weekly average of the market rates and points (upfront fees) found in the Primary Mortgage Market Survey conductedby Freddie Mac. The legal protection providedby a safe harborgeneralQM means that a borrower would not be able to assert thatthe originator (and any subsequent secondary-market purchaser) failed to comply with any of the required underwriting criteria. * For a rebuttable presumption general QM, the difference between APR and APOR for first-lien mortgages may exceed 1.5 percentage points, but it is limited to 2.25 percentage points under therevised final rule. Under a rebuttable presumption, a borrower can argue that the lender violated the ATRrule if the information presented to the lender during the loan application and origination processes would have indicated that the borrower's residual income was insufficient to meet living expenses after paying the mortgage and other debts. Revisiting the 43% DTI Requirement Limiting the borrower's DTIto 43% was originally one of the underwriting requirements for a loan to receive s afe harbor QM status. Mortgages with DTIs exceeding 43% still receive QM status if they meet the eligibility requirements to be insured or guaranteed by the Federal Housing Adminis tration (FHA), U.S. Department of Veterans Affairs (VA), or U.S. Department of Agriculture (USDA). Mortgages with DTIs exceeding 43% could also qualify under another QM category, the Temporary GSE QM (or QM patch). The Temporary GSE QM had initially granted safe harbor QM status to mortgages eligible for purchase by Fannie Mae or Freddie Mac, two government- sponsored enterprises (GSEs), untilJanuary 10,2021. In January 2019, the CFPB released an assessment report of the ATR and QM rule, reaching conclusions similar to those reportedby some private-sectorresearchers. The CFPB found that many originators limited their offerings to mostly QM loans, and the DTIcap of 43% may have restricted credit access. For example, the CFPB reported that the approval rates for non-QM high-DTI applicants declined across all credit tiers and income groupings since the QM rule tookeffect. Existing mortgage borrowers who had demonstrated the ability to repay their loans-but with DTIs exceeding 43%-experienced reductions in credit access when attempting to refinance. Thesefindings are consistent with lenders' preference for safe harbor legal protection. The CFPB also reported that originators perceive AppendixQ-the list of required guidelines to verify borrowers' incomes and debt obligations for mortgages with DTIs above 43% or ineligible for sale to the GSEs or for federal mortgage insurance-to be unclear and tps ://crs reps

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