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1 [1] (January 23, 2020)

handle is hein.crs/govbgzw0001 and id is 1 raw text is: FF. ' riE -E-.$r h ,q. i January 23, 2020 The Qualified Mortgage (QM) Rule and the QM Patch On January 30, 2013, the Consumer Financial Protection Bureau (CFPB) released a final rule implementing the ability-to-repay (ATR) requirement of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act; P.L. 111-203). For residential mortgage originations, the Dodd-Frank Act includes in the ATR requirement that lenders consider and verify with documentation eight underwriting criteria for the borrower: (1) current or reasonably expected income or assets; (2) current employment status; (3) monthly payments of principal and interest on the primary mortgage lien; (4) monthly payment on any junior mortgage lien; (5) monthly payment for mortgage-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 ratio or residual income; and (8) credit history. The rule became effective on January 10, 2014. The final ATR rule provides multiple ways for a loan originator to comply, one of which is by originating a qualified mortgage (QM). A mortgage loan that receives QM status must meet certain product-feature and underwriting requirements: * The mortgage must fully amortize, meaning that the borrower's payments must be applied toward paying down a portion of the principal loan balance over time. A QM generally cannot have a balloon or large principal payment due at the end of the loan. Furthermore, a QM loan cannot negatively amortize, meaning that the principal loan balance may not increase over time. * The borrower's debt-to-income (DTI) ratio must not exceed 43%. The DTI is defined as total monthly (housing and nonhousing) expenses divided by gross monthly income. Monthly housing expenses include principal, interest, taxes, insurance, and homeowner association fees. Monthly nonhousing expenses include other consumer loan payments and other regularly scheduled obligations (e.g., child care, utility bills). When both housing and nonhousing expenses are included, this computation is specifically referred to as the back-end DTI ratio. * For a QM loan, the difference between the annual percentage rate (APR) and the average prime offer rate (APOR) must be less than 1.5% for a first lien and 3.5% for a junior lien. The APR includes both the annual interest cost and upfront fees spread over the life of the mortgage and expressed as a percentage; the APOR is a weekly average of the market rates and points (upfront fees) found in the Primary Mortgage Market Survey conducted by Freddie Mac. If a loan satisfies the requirements for QM status, the lender receives a presumption of ATR compliance for legal purposes. Specifically, QM loans provide safe harbor legal protection, meaning that a borrower would not be able to assert that the originator (and any subsequent secondary- market purchaser) failed to comply with any of the required underwriting criteria. Q-,, - , ..,,,, ,,,M Exe pton an Q',M Patch ,,, If a loan's DTI exceeds 43%, it may still receive QM status if guaranteed by the Federal Housing Administration, U.S. Department of Veterans Affairs, or U.S. Department of Agriculture. Rather than limit DTIs to 43% for the mortgages they guarantee, these federal agencies adopted their own QM definitions that still exclude product features they consider would impede repayment from borrowers they predominantly serve. The CFPB's QMpatch created an exemption from the 43% DTI cap for mortgages eligible for purchase by the government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac. Hence, the GSEs may purchase loans with DTIs exceeding 43% and still receive QM status. The QM patch was put into effect for seven years (until January 10, 2021) or until the GSEs exit conservatorship, whichever occurs sooner. As the private-label securitizations market has declined over several years, the federal agencies that guarantee residential mortgage loans have increased in importance. The GSE's QM patch has also increased in importance, accounting for approximately 16% of 2018 total mortgage originations. One reason might be related to the legal protections linked to QM loan originations. Many originators have limited themselves to making only QM loans to avoid exposure to potential liability and litigation risks. Originators that continue to offer non-QM loans reportedly charge higher rates to offset potential legal and compliance risks. In January 2019, the CFPB released an assessment report of the ATR and QM rule, which reached conclusions similar to those reported by private-sector researchers. Among numerous findings, 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 took effect, possibly as a result of lenders' wanting to avoid litigation risks. In addition, the CFPB found that borrowers applying for loans eligible for purchase or guarantee by one of the GSEs or federal agencies were less affected by the QM rule. The CFPB also found that the GSEs may have loosened their underwriting requirements for high-DTI borrowers. gognpo ' -pmm ggmm g , q 's a X 11LULKWALiN,

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