[Federal Register Volume 85, Number 133 (Friday, July 10, 2020)]
[Proposed Rules]
[Pages 41716-41778]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-13739]
[[Page 41715]]
Vol. 85
Friday,
No. 133
July 10, 2020
Part III
Bureau of Consumer Financial Protection
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12 CFR Part 1026
Qualified Mortgage Definition Under the Truth in Lending Act
(Regulation Z): General QM Loan Definition; Proposed Rule
Federal Register / Vol. 85 , No. 133 / Friday, July 10, 2020 /
Proposed Rules
[[Page 41716]]
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BUREAU OF CONSUMER FINANCIAL PROTECTION
12 CFR Part 1026
[Docket No. CFPB-2020-0020]
RIN 3170-AA98
Qualified Mortgage Definition Under the Truth in Lending Act
(Regulation Z): General QM Loan Definition
AGENCY: Bureau of Consumer Financial Protection.
ACTION: Proposed rule with request for public comment.
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SUMMARY: With certain exceptions, Regulation Z 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 ``qualified mortgages'' (QMs) obtain certain
protections from liability. One category of QMs is the General QM loan
category. For General QM loans, the ratio of the consumer's total
monthly debt to total monthly income (DTI ratio) must not exceed 43
percent. In this notice of proposed rulemaking, the Bureau proposes
certain amendments to the General QM loan definition in Regulation Z.
Among other things, the Bureau proposes to remove the General QM loan
definition's 43 percent DTI limit and replace it with a price-based
threshold. Another category of QMs is loans that are eligible for
purchase or guarantee by either the Federal National Mortgage
Association (Fannie Mae) or the Federal Home Loan Mortgage Corporation
(Freddie Mac) (government-sponsored enterprises, or GSEs), while
operating under the conservatorship or receivership of the Federal
Housing Finance Agency (FHFA). The GSEs are currently under Federal
conservatorship. The Bureau established this category of QMs (Temporary
GSE QM loans) as a temporary measure that is set to expire no later
than January 10, 2021 or when the GSEs exit conservatorship. In a
separate proposal released simultaneously with this proposal, the
Bureau proposes to extend the Temporary GSE QM loan definition to
expire upon the effective date of final amendments to the General QM
loan definition in Regulation Z (or when the GSEs cease to operate
under the conservatorship of the FHFA, if that happens earlier). In
this present proposed rule, the Bureau proposes the amendments to the
General QM loan definition that are referenced in that separate
proposal. The Bureau's objective with these proposals is to facilitate
a smooth and orderly transition away from the Temporary GSE QM loan
definition and to ensure access to responsible, affordable mortgage
credit upon its expiration.
DATES: Comments must be received on or before September 8, 2020.
ADDRESSES: You may submit comments, identified by Docket No. CFPB-2020-
0020 or RIN 3170-AA98, by any of the following methods:
Federal eRulemaking Portal: https://www.regulations.gov.
Follow the instructions for submitting comments.
Email: [email protected]. Include Docket
No. CFPB-2020-0020 or RIN 3170-AA98 in the subject line of the message.
Mail/Hand Delivery/Courier: Comment Intake--General QM
Amendments, Bureau of Consumer Financial Protection, 1700 G Street NW,
Washington, DC 20552. Please note that due to circumstances associated
with the COVID-19 pandemic, the Bureau discourages the submission of
comments by mail, hand delivery, or courier.
Instructions: The Bureau encourages the early submission of
comments. All submissions should include the agency name and docket
number or Regulatory Information Number (RIN) for this rulemaking.
Because paper mail in the Washington, DC area and at the Bureau is
subject to delay, and in light of difficulties associated with mail and
hand deliveries during the COVID-19 pandemic, commenters are encouraged
to submit comments electronically. In general, all comments received
will be posted without change to https://www.regulations.gov. In
addition, once the Bureau's headquarters reopens, comments will be
available for public inspection and copying at 1700 G Street NW,
Washington, DC 20552, on official business days between the hours of 10
a.m. and 5 p.m. Eastern Time. At that time, you can make an appointment
to inspect the documents by telephoning 202-435-9169.
All comments, including attachments and other supporting materials,
will become part of the public record and subject to public disclosure.
Proprietary information or sensitive personal information, such as
account numbers or Social Security numbers, or names of other
individuals, should not be included. Comments will not be edited to
remove any identifying or contact information.
FOR FURTHER INFORMATION CONTACT: Benjamin Cady or Waeiz Syed, Counsels,
or Sarita Frattaroli, David Friend, Joan Kayagil, Mark Morelli, Amanda
Quester, Alexa Reimelt, Marta Tanenhaus, Priscilla Walton-Fein, or
Steven Wrone, Senior Counsels, Office of Regulations, at 202-435-7700.
If you require this document in an alternative electronic format,
please contact [email protected].
SUPPLEMENTARY INFORMATION:
I. Summary of the Proposed Rule
The Ability-to-Repay/Qualified Mortgage Rule (ATR/QM Rule or Rule)
requires a creditor to make a reasonable, good faith determination of a
consumer's ability to repay a residential mortgage loan according to
its terms. Loans that meet the Rule's requirements for qualified
mortgages (QMs) obtain certain protections from liability. The Rule
defines several categories of QMs.
One QM category defined in the Rule is the General QM loan
category. General QM loans must comply with the Rule's prohibitions on
certain loan features, its points-and-fees limits, and its underwriting
requirements. For General QM loans, the ratio of the consumer's total
monthly debt to total monthly income (DTI) ratio must not exceed 43
percent. The Rule requires that creditors must calculate, consider, and
verify debt and income for purposes of determining the consumer's DTI
ratio using the standards contained in appendix Q of Regulation Z.
A second, temporary category of QM loans defined in the Rule
consists of mortgages that (1) comply with the same loan-feature
prohibitions and points-and-fees limits as General QM loans and (2) are
eligible to be purchased or guaranteed by the GSEs while under the
conservatorship of the FHFA. This proposal refers to these loans as
Temporary GSE QM loans, and the provision that created this loan
category is commonly known as the GSE Patch. Unlike for General QM
loans, the Rule does not prescribe a DTI limit for Temporary GSE QM
loans. Thus, a loan can qualify as a Temporary GSE QM loan even if the
consumer's DTI ratio exceeds 43 percent, so long as the loan is
eligible to be purchased or guaranteed by either of the GSEs. In
addition, for Temporary GSE QM loans, the Rule does not require
creditors to use appendix Q to determine the consumer's income, debt,
or DTI ratio.
Under the Rule, the Temporary GSE QM loan definition expires with
respect to each GSE when that GSE exits conservatorship or on January
10, 2021, whichever comes first. The GSEs are currently in
conservatorship. Despite the Bureau's expectations when the Rule was
published in 2013, Temporary GSE QM loan originations continue to
represent a large and persistent share of the residential mortgage loan
market. A significant number of Temporary GSE
[[Page 41717]]
QM loans would not qualify as General QM loans under the current
regulations after the Temporary GSE QM loan definition expires. These
loans would not qualify as General QM loans either because the
consumer's DTI ratio is above 43 percent or because the creditor's
method of documenting and verifying income or debt does not comply with
appendix Q. Although alternative loan options, including some other
types of QM loans, would still be available to many consumers who could
not qualify for General QM loans, the Bureau's analysis of available
data indicates that many loans that are currently Temporary GSE QM
loans would cost materially more for consumers and many would not be
made at all.
In a separate proposal (Extension Proposal) released simultaneously
with this proposal, the Bureau proposes to extend the Temporary GSE QM
loan definition to expire upon the effective date of final amendments
to the General QM loan definition or when the GSEs exit
conservatorship, whichever comes first. In this proposal, the Bureau
proposes the amendments to the General QM loan definition that are
referenced in the Extension Proposal.
The Bureau is issuing this proposal to amend the General QM loan
definition because it is concerned that retaining the existing General
QM loan definition with the 43 percent DTI limit after the Temporary
GSE QM loan definition expires would significantly reduce the size of
QM and could significantly reduce access to responsible, affordable
credit. The Bureau is proposing a price-based General QM loan
definition to replace the DTI-based approach because it preliminarily
concludes that a loan's price, as measured by comparing a loan's annual
percentage rate (APR) to the average prime offer rate (APOR) for a
comparable transaction, is a strong indicator of a consumer's ability
to repay and is a more holistic and flexible measure of a consumer's
ability to repay than DTI alone.
Under the proposal, a loan would meet the General QM loan
definition in Sec. 1026.43(e)(2) only if the APR exceeds APOR for a
comparable transaction by less than two percentage points as of the
date the interest rate is set. The proposal would provide higher
thresholds for loans with smaller loan amounts and for subordinate-lien
transactions. The proposal would retain the existing product-feature
and underwriting requirements and limits on points and fees. Although
the proposal would remove the 43 percent DTI limit from the General QM
loan definition, the proposal would require that the creditor consider
the consumer's income or assets, debt obligations, and DTI ratio or
residual income and verify the consumer's current or reasonably
expected income or assets other than the value of the dwelling
(including any real property attached to the dwelling) that secures the
loan and the consumer's current debt obligations, alimony, and child
support. The proposal would remove appendix Q. To prevent uncertainty
that may result from appendix Q's removal, the proposal would clarify
the requirements to consider and verify a consumer's income, assets,
debt obligations, alimony, and child support. The proposal would
preserve the current threshold separating safe harbor from rebuttable
presumption QMs, under which a loan is a safe harbor QM if its APR
exceeds APOR for a comparable transaction by less than 1.5 percentage
points as of the date the interest rate is set (or by less than 3.5
percentage points for subordinate-lien transactions).
The Bureau is proposing a price-based approach to replace the
specific DTI limit because it is concerned that imposing a DTI limit as
a condition for QM status under the General QM loan definition may be
overly burdensome and complex in practice and may unduly restrict
access to credit because it provides an incomplete picture of the
consumer's financial capacity. In particular, the Bureau is concerned
that conditioning QM status on a specific DTI limit may impair access
to responsible, affordable credit for some consumers for whom it might
be appropriate to presume ability to repay for their loans at
consummation. For the reasons set forth below, the Bureau preliminarily
concludes that a price-based General QM loan definition is appropriate
because a loan's price, as measured by comparing a loan's APR to APOR
for a comparable transaction, is a strong indicator of a consumer's
ability to repay and is a more holistic and flexible measure of a
consumer's ability to repay than DTI alone.
In addition, although the Bureau is proposing to remove the 43
percent DTI limit and adopt a price-based approach for the General QM
loan definition, the Bureau requests comment on certain alternative
approaches that would retain a DTI limit but would raise it above the
current limit of 43 percent and provide a more flexible set of
standards for verifying debt and income in place of appendix Q.
The Bureau proposes that the effective date of a final rule
relating to this proposal would be six months after publication in the
Federal Register. The revised regulations would apply to covered
transactions for which creditors receive an application on or after
this effective date. The Bureau tentatively determines that a six-month
period between Federal Register publication of a final rule and the
final rule's effective date would give creditors enough time to bring
their systems into compliance with the revised regulations. The Bureau
does not intend to issue a final rule amending the General QM loan
definition early enough for it to take effect before April 1, 2021. The
Bureau requests comment on this proposed effective date. The Bureau
specifically seeks comment on whether there is a day of the week or
time of month that would most facilitate implementation of the proposed
changes.
II. Background
A. Dodd-Frank Act Amendments to the Truth in Lending Act
The Dodd-Frank Wall Street Reform and Consumer Protection Act
(Dodd-Frank Act) amended the Truth in Lending Act (TILA) to establish,
among other things, ability-to-repay (ATR) requirements in connection
with the origination of most residential mortgage loans.\1\ The
amendments were intended ``to assure that consumers are offered and
receive residential mortgage loans on terms that reasonably reflect
their ability to repay the loans and that are understandable and not
unfair, deceptive or abusive.'' \2\ As amended, TILA prohibits a
creditor from making a residential mortgage loan unless the creditor
makes a reasonable and good faith determination based on verified and
documented information that the consumer has a reasonable ability to
repay the loan.\3\
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\1\ Dodd-Frank Wall Street Reform and Consumer Protection Act,
Public Law 111-203, sections 1411-12, 1414, 124 Stat. 1376 (2010);
15 U.S.C. 1639c.
\2\ 15 U.S.C. 1639b(a)(2).
\3\ 15 U.S.C. 1639c(a)(1). TILA section 103 defines
``residential mortgage loan'' to mean, with some exceptions
including open-end credit plans, ``any consumer credit transaction
that is secured by a mortgage, deed of trust, or other equivalent
consensual security interest on a dwelling or on residential real
property that includes a dwelling.'' 15 U.S.C. 1602(dd)(5). TILA
section 129C also exempts certain residential mortgage loans from
the ATR requirements. See, e.g., 15 U.S.C. 1639c(a)(8) (exempting
reverse mortgages and temporary or bridge loans with a term of 12
months or less).
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TILA identifies the factors a creditor must consider in making a
reasonable and good faith assessment of a consumer's ability to repay.
These factors are the consumer's credit history, current and expected
income, current obligations, DTI ratio or residual income after paying
non-mortgage debt and mortgage-related obligations, employment status,
and other financial
[[Page 41718]]
resources other than equity in the dwelling or real property that
secures repayment of the loan.\4\ A creditor, however, may not be
certain whether its ATR determination is reasonable in a particular
case, and it risks liability if a court or an agency, including the
Bureau, later concludes that the ATR determination was not reasonable.
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\4\ 15 U.S.C. 1639c(a)(3).
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TILA addresses this uncertainty by defining a category of loans--
called QMs--for which a creditor ``may presume that the loan has met''
the ATR requirements.\5\ The statute generally defines a QM to mean any
residential mortgage loan for which:
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\5\ 15 U.S.C. 1639c(b)(1).
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There is no negative amortization, interest-only payments,
or balloon payments;
The loan term does not exceed 30 years;
The total points and fees generally do not exceed 3
percent of the loan amount;
The income and assets relied upon for repayment are
verified and documented;
The underwriting uses a monthly payment based on the
maximum rate during the first five years, uses a payment schedule that
fully amortizes the loan over the loan term, and takes into account all
mortgage-related obligations; and
The loan complies with any guidelines or regulations
established by the Bureau relating to the ratio of total monthly debt
to monthly income or alternative measures of ability to pay regular
expenses after payment of total monthly debt.\6\
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\6\ 15 U.S.C. 1639c(b)(2)(A).
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B. The Ability-to-Repay/Qualified Mortgage Rule
In January 2013, the Bureau issued a final rule amending Regulation
Z to implement TILA's ATR requirements (January 2013 Final Rule).\7\
The January 2013 Final Rule became effective on January 10, 2014, and
the Bureau amended it several times through 2016.\8\ This proposal
refers to the January 2013 Final Rule and later amendments to it
collectively as the Ability-to-Repay/Qualified Mortgage Rule, the ATR/
QM Rule, or the Rule. The ATR/QM Rule implements the statutory ATR
provisions discussed above and defines several categories of QM
loans.\9\
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\7\ 78 FR 6408 (Jan. 30, 2013).
\8\ See 78 FR 35429 (June 12, 2013); 78 FR 44686 (July 24,
2013); 78 FR 60382 (Oct. 1, 2013); 79 FR 65300 (Nov. 3, 2014); 80 FR
59944 (Oct. 2, 2015); 81 FR 16074 (Mar. 25, 2016).
\9\ 12 CFR 1026.43(c), (e).
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1. General QM Loans
One category of QM loans defined by the Rule consists of ``General
QM loans.'' \10\ A loan is a General QM loan if:
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\10\ The QM definition is related to the definition of Qualified
Residential Mortgage (QRM). Section 15G of the Securities Exchange
Act of 1934, added by section 941(b) of the Dodd-Frank Act,
generally requires the securitizer of asset-backed securities (ABS)
to retain not less than five percent of the credit risk of the
assets collateralizing the ABS. 15 U.S.C. 78o-11. Six Federal
agencies (not including the Bureau) are tasked with implementing
this requirement. Those agencies are the Board of Governors of the
Federal Reserve System (Board), the Office of the Comptroller of the
Currency (OCC), the Federal Deposit Insurance Corporation (FDIC),
the Securities and Exchange Commission, the FHFA, and the U.S.
Department of Housing and Urban Development (HUD) (collectively, the
QRM agencies). Section 15G of the Securities Exchange Act of 1934
provides that the credit risk retention requirements shall not apply
to an issuance of ABS if all of the assets that collateralize the
ABS are QRMs. See 15 U.S.C. 78o-11(c)(1)(C)(iii), (4)(A) and (B).
Section 15G requires the QRM agencies to jointly define what
constitutes a QRM, taking into consideration underwriting and
product features that historical loan performance data indicate
result in a lower risk of default. See 15 U.S.C. 78o-11(e)(4).
Section 15G also provides that the definition of a QRM shall be ``no
broader than'' the definition of a ``qualified mortgage,'' as the
term is defined under TILA section 129C(b)(2), as amended by the
Dodd-Frank Act, and regulations adopted thereunder. 15 U.S.C. 78o-
11(e)(4)(C). In 2014, the QRM agencies issued a final rule adopting
the risk retention requirements. 79 FR 77601 (Dec. 24, 2014). The
final rule aligns the QRM definition with the QM definition defined
by the Bureau in the ATR/QM Rule, effectively exempting securities
comprised of loans that meet the QM definition from the risk
retention requirement. The final rule also requires the agencies to
review the definition of QRM no later than four years after the
effective date of the final risk retention rules. In 2019, the QRM
agencies initiated a review of certain provisions of the risk
retention rule, including the QRM definition. 84 FR 70073 (Dec. 20,
2019). Among other things, the review allows the QRM agencies to
consider the QRM definition in light of any changes to the QM
definition adopted by the Bureau.
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The loan does not have negative-amortization, interest-
only, or balloon-payment features, a term that exceeds 30 years, or
points and fees that exceed specified limits; \11\
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\11\ 12 CFR 1026.43(e)(2)(i)-(iii).
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The creditor underwrites the loan based on a fully
amortizing schedule using the maximum rate permitted during the first
five years; \12\
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\12\ 12 CFR 1026.43(e)(2)(iv).
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The creditor considers and verifies the consumer's income
and debt obligations in accordance with appendix Q; \13\ and
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\13\ 12 CFR 1026.43(e)(2)(v).
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The consumer's DTI ratio is no more than 43 percent,
determined in accordance with appendix Q.\14\
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\14\ 12 CFR 1026.43(e)(2)(vi).
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Appendix Q contains standards for calculating and verifying debt
and income for purposes of determining whether a mortgage satisfies the
43 percent DTI limit for General QM loans. The standards in appendix Q
were adapted from guidelines maintained by the Federal Housing
Administration (FHA) of HUD when the January 2013 Final Rule was
issued.\15\ Appendix Q addresses how to determine a consumer's
employment-related income (e.g., income from wages, commissions, and
retirement plans); non-employment related income (e.g., income from
alimony and child support payments, investments, and property rentals);
and liabilities, including recurring and contingent liabilities and
projected obligations.\16\
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\15\ 78 FR 6408, 6527-28 (Jan. 30, 2013) (noting that appendix Q
incorporates, with certain modifications, the definitions and
standards in HUD Handbook 4155.1, Mortgage Credit Analysis for
Mortgage Insurance on One-to-Four-Unit Mortgage Loans).
\16\ 12 CFR 1026, appendix Q.
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2. Temporary GSE QM Loans
A second, temporary category of QM loans defined by the Rule,
Temporary GSE QM loans, consists of mortgages that (1) comply with the
Rule's prohibitions on certain loan features, its underwriting
requirements, and its limitations on points and fees; \17\ and (2) are
eligible to be purchased or guaranteed by either GSE while under the
conservatorship of the FHFA.\18\ Unlike for General QM loans,
Regulation Z does not prescribe a DTI limit for Temporary GSE QM loans.
Thus, a loan can qualify as a Temporary GSE QM loan even if the DTI
ratio exceeds 43 percent, as long as the DTI ratio meets the applicable
GSE's DTI requirements and other underwriting criteria. In addition,
income and debt for such loans, and DTI ratios, generally are verified
and calculated using GSE standards, rather than appendix Q. The
Temporary GSE QM loan category--also known as the GSE Patch--is
scheduled to expire with respect to each GSE when that GSE exits
conservatorship or on January 10, 2021, whichever comes first.\19\
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\17\ 12 CFR 1026.43(e)(2)(i) through (iii).
\18\ 12 CFR 1026.43(e)(4).
\19\ 12 CFR 1026.43(e)(4)(iii)(B). The ATR/QM Rule created
several additional categories of QM loans. The first additional
category consisted of mortgages eligible to be insured or guaranteed
(as applicable) by HUD (FHA loans), the U.S. Department of Veterans
Affairs (VA loans), the U.S. Department of Agriculture (USDA loans),
and the Rural Housing Service (RHS loans). 12 CFR
1026.43(e)(4)(ii)(B)-(E). This temporary category of QM loans no
longer exists because the relevant Federal agencies have since
issued their own QM rules. See, e.g., 24 CFR 203.19 (HUD rule).
Other categories of QM loans provide more flexible standards for
certain loans originated by certain small creditors. 12 CFR
1026.43(e)(5), (f); cf. 12 CFR 1026.43(e)(6) (applicable only to
covered transactions for which the application was received before
April 1, 2016).
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[[Page 41719]]
In the January 2013 Final Rule, the Bureau explained why it created
the Temporary GSE QM loan category. The Bureau observed that it did not
believe that a 43 percent DTI ratio ``represents the outer boundary of
responsible lending'' and acknowledged that historically, and even
after the financial crisis, over 20 percent of mortgages exceeded that
threshold.\20\ The Bureau believed, however, that, as DTI ratios
increase, ``the general ability-to-repay procedures, rather than the
qualified mortgage framework, is better suited for consideration of all
relevant factors that go to a consumer's ability to repay a mortgage
loan'' and that ``[o]ver the long term . . . there will be a robust and
sizable market for prudent loans beyond the 43 percent threshold even
without the benefit of the presumption of compliance that applies to
qualified mortgages.'' \21\
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\20\ 78 FR 6408, 6527 (Jan. 30, 2013).
\21\ Id. at 6527-28.
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At the same time, the Bureau noted that the mortgage market was
especially fragile following the financial crisis, and GSE-eligible
loans and federally insured or guaranteed loans made up a significant
majority of the market.\22\ The Bureau believed that it was appropriate
to consider for a period of time that GSE-eligible loans were
originated with an appropriate assessment of the consumer's ability to
repay and therefore warranted being treated as QMs.\23\ The Bureau
believed in 2013 that this temporary category of QM loans would, in the
near term, help to ensure access to responsible, affordable credit for
consumers with DTI ratios above 43 percent, as well as facilitate
compliance by creditors by promoting the use of widely recognized,
federally related underwriting standards.\24\
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\22\ Id. at 6533-34.
\23\ Id. at 6534.
\24\ Id. at 6533.
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In making the Temporary GSE QM loan definition temporary, the
Bureau sought to ``provide an adequate period for economic, market, and
regulatory conditions to stabilize'' and ``a reasonable transition
period to the general qualified mortgage definition.'' \25\ The Bureau
believed that the Temporary GSE QM loan definition would benefit
consumers by preserving access to credit while the mortgage industry
adjusted to the ATR/QM Rule.\26\ The Bureau also explained that it
structured the Temporary GSE QM loan definition to cover loans eligible
to be purchased or guaranteed by either of the GSEs--regardless of
whether the loans are actually purchased or guaranteed--to leave room
for non-GSE private investors to return to the market and secure the
same legal protections as the GSEs.\27\ The Bureau believed that, as
the market recovered, the GSEs and the Federal agencies would be able
to reduce their market presence, the percentage of Temporary GSE QM
loans would decrease, and the market would shift toward General QM
loans and non-QM loans above a 43 percent DTI ratio.\28\ The Bureau's
view was that a shift towards non-QM loans could be supported by the
non-GSE private market--i.e., by institutions holding such loans in
portfolio, selling them in whole, or securitizing them in a rejuvenated
private-label securities (PLS) market. The Bureau noted that, pursuant
to its statutory obligations under the Dodd-Frank Act, it would assess
the impact of the ATR/QM Rule five years after the Rule's effective
date, and the assessment would provide an opportunity to analyze the
Temporary GSE QM loan definition.\29\
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\25\ Id. at 6534.
\26\ Id. at 6536.
\27\ Id. at 6534.
\28\ Id.
\29\ Id.
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3. Presumption of Compliance for QM Loans
In the January 2013 Final Rule, the Bureau considered whether QM
loans should receive a conclusive presumption (i.e., a safe harbor) or
a rebuttable presumption of compliance with the ATR requirements. The
Bureau concluded that the statute is ambiguous as to whether a creditor
originating a QM loan receives a safe harbor or a rebuttable
presumption that it has complied with the ATR requirements.\30\ The
Bureau noted that its analysis of the statutory construction and policy
implications demonstrated that there are sound reasons for adopting
either interpretation.\31\ The Bureau concluded that the statutory
language does not mandate either interpretation and that the
presumptions should be tailored to promote the policy goals of the
statute.\32\ The Bureau ultimately interpreted the statute to provide
for a rebuttable presumption of compliance with the ATR requirements
but used its adjustment authority to establish a conclusive presumption
of compliance for loans that are not ``higher priced.'' \33\
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\30\ Id. at 6511.
\31\ Id. at 6507.
\32\ Id. at 6511.
\33\ Id. at 6514.
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Under the Rule, a creditor that makes a QM loan is protected from
liability presumptively or conclusively, depending on whether the loan
is ``higher priced.'' The Rule generally defines a ``higher-priced''
loan to mean a first-lien mortgage with an APR that exceeded APOR for a
comparable transaction as of the date the interest rate was set by 1.5
or more percentage points; or a subordinate-lien mortgage with an APR
that exceeded APOR for a comparable transaction as of the date the
interest rate was set by 3.5 or more percentage points.\34\ A creditor
that makes a QM loan that is not ``higher priced'' is entitled to a
conclusive presumption that it has complied with the Rule--i.e., the
creditor receives a safe harbor from liability.\35\ A creditor that
makes a loan that meets the standards for a QM loan but is ``higher
priced'' is entitled to a rebuttable presumption that it has complied
with the Rule.\36\
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\34\ 12 CFR 1026.43(b)(4).
\35\ 12 CFR 1026.43(e)(1)(i).
\36\ 12 CFR 1026.43(e)(1)(ii).
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The Bureau explained in the January 2013 Final Rule why it was
adopting different presumptions of compliance based on the pricing of
QMs.\37\ The Bureau noted that the line it was drawing is one that has
long been recognized as a rule of thumb to separate prime loans from
subprime loans.\38\ The Bureau noted that loan pricing is calibrated to
the risk of the loan and that the historical performance of prime and
subprime loans indicates greater risk for subprime loans.\39\ The
Bureau also noted that consumers taking out subprime loans tend to be
less sophisticated and have fewer options and that the most abuses
prior to the financial crisis occurred in the subprime market.\40\ The
Bureau concluded that these factors warrant imposing heightened
standards for higher-priced loans.\41\ For prime loans, however, the
Bureau found that lower rates are indicative of ability to repay and
noted that prime loans have performed significantly better than
subprime loans.\42\ The Bureau concluded that if a loan met the product
and underwriting requirements for QM and was not a higher-priced loan,
there are sufficient grounds for concluding that the creditor satisfied
the ATR requirements.\43\ The Bureau noted that the conclusive
presumption may reduce uncertainty and litigation risk and may promote
enhanced competition in the prime
[[Page 41720]]
market.\44\ The Bureau also noted that the litigation risk for
rebuttable presumption QMs likely would be quite modest and would have
a limited impact on access to credit.\45\
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\37\ 78 FR 6408 at 6506, 6510-14.
\38\ Id. at 6408.
\39\ Id. at 6511.
\40\ Id.
\41\ Id.
\42\ Id.
\43\ Id.
\44\ Id.
\45\ Id. at 6511-12.
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The Bureau also noted in the January 2013 Final Rule that
policymakers have long relied on pricing to determine which loans
should be subject to additional regulatory requirements.\46\ That
history of reliance on pricing continues to provide support for a
price-based approach to the General QM loan definition. For example, in
1994 Congress amended TILA by enacting the Home Ownership and Equity
Protection Act (HOEPA) as part of the Riegle Community Development and
Regulatory Improvement Act of 1994.\47\ HOEPA was enacted as an
amendment to TILA to address abusive practices in refinancing and home-
equity mortgage loans with high interest rates or high fees.\48\ The
statute applied generally to closed-end mortgage credit but excluded
purchase money mortgage loans and reverse mortgages. Coverage was
triggered if a loan's APR exceeded comparable Treasury securities by
specified thresholds for particular loan types, or if points and fees
exceeded eight percent of the total loan amount or a dollar
threshold.\49\ For high-cost loans meeting either of those thresholds,
HOEPA required creditors to provide special pre-closing disclosures,
restricted prepayment penalties and certain other loan terms, and
regulated various creditor practices, such as extending credit without
regard to a consumer's ability to repay the loan. HOEPA also created
special substantive protections for high-cost mortgages, such as
prohibiting a creditor from engaging in a pattern or practice of
extending a high-cost mortgage to a consumer based on the consumer's
collateral without regard to the consumer's repayment ability,
including the consumer's current and expected income, current
obligations, and employment.\50\ The Board implemented the HOEPA
amendments at Sec. Sec. 226.31, 226.32, and 226.33 \51\ of Regulation
Z.\52\
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\46\ Id. at 6413-14, 6510-11.
\47\ Riegle Community Development and Regulatory Improvement
Act, Public Law 103-325, 108 Stat. 2160 (1994).
\48\ As originally enacted, HOEPA defined a class of ``high-cost
mortgages,'' which were generally closed-end home-equity loans
(excluding home-purchase loans) with APRs or total points and fees
exceeding prescribed thresholds. Mortgages covered by HOEPA have
been referred to as ``HOEPA loans,'' ``Section 32 loans,'' or
``high-cost mortgages.''
\49\ The Dodd-Frank Act adjusted the baseline for the APR
comparison, lowered the points-and-fees threshold, and added a
prepayment trigger.
\50\ TILA section 129(h); 15 U.S.C. 1639(h). In addition to the
disclosures and limitations specified in the statute, HOEPA expanded
the Board's rulemaking authority, among other things, to prohibit
acts or practices the Board found to be unfair and deceptive in
connection with mortgage loans.
\51\ Subsequently renumbered as sections 1026.31, 1026.32, and
1026.33 of Regulation Z.
\52\ See 60 FR 15463 (Mar. 24, 1995).
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In 2001, the Board issued rules expanding HOEPA's protections to
more loans by revising the APR threshold for first-lien mortgage loans
and revising the ATR provisions to provide for a presumption of a
violation of the rule if the creditor engages in a pattern or practice
of making high-cost mortgages without verifying and documenting the
consumer's repayment ability.
In 2008, the Board exercised its authority under HOEPA to extend
certain consumer protections concerning a consumer's ability to repay
and prepayment penalties to a new category of ``higher-priced mortgage
loans'' (HPMLs) \53\ with APRs that are lower than those prescribed for
high-cost loans but that nevertheless exceed the APOR by prescribed
amounts. This new category of loans was designed to include subprime
credit, including subprime purchase money mortgage loans. Specifically,
the Board exercised its authority to revise HOEPA's restrictions on
high-cost loans based on a conclusion that the revisions were necessary
to prevent unfair and deceptive acts or practices in connection with
mortgage loans.\54\ The Board concluded that a prohibition on making
individual loans without regard for repayment ability was necessary to
ensure a remedy for consumers who are given unaffordable loans and to
deter irresponsible lending, which injures individual consumers. The
2008 HOEPA Final Rule provided a presumption of compliance with the
higher-priced mortgage ability-to-repay requirements if the creditor
follows certain procedures regarding underwriting the loan payment,
assessing the DTI ratio or residual income, and limiting the features
of the loan, in addition to following certain procedures mandated for
all creditors.\55\ However, the 2008 HOEPA Final Rule made clear that
even if the creditor follows the required and optional criteria, the
creditor obtained a presumption (not a safe harbor) of compliance with
the repayment ability requirement. The consumer therefore could still
rebut or overcome that presumption by showing that, despite following
the required and optional procedures, the creditor nonetheless
disregarded the consumer's ability the loan.
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\53\ Under the Board's 2008 HOEPA Final Rule, a higher-priced
mortgage loan is a consumer credit transaction secured by the
consumer's principal dwelling with an APR that exceeds APOR for a
comparable transaction, as of the date the interest rate is set, by
1.5 or more percentage points for loans secured by a first lien on
the dwelling, or by 3.5 or more percentage points for loans secured
by a subordinate lien on the dwelling. 73 FR 44522 (July 30, 2008)
(2008 HOEPA Final Rule). The definition of a ``higher-priced
mortgage loan'' includes practically all ``high-cost mortgages''
because the latter transactions are determined by higher loan
pricing threshold tests. See 12 CFR 226.35(a)(1).
\54\ 73 FR 44522 (July 30, 2008).
\55\ See 12 CFR 1026.34(a)(4)(iii), (iv).
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C. The Bureau's Assessment of the Ability-to-Repay/Qualified Mortgage
Rule
Section 1022(d) of the Dodd-Frank Act requires the Bureau to assess
each of its significant rules and orders and to publish a report of
each assessment within five years of the effective date of the rule or
order.\56\ In June 2017, the Bureau published a request for information
in connection with its assessment of the ATR/QM Rule (Assessment
RFI).\57\ These comments are summarized in general terms in part III
below.
---------------------------------------------------------------------------
\56\ 12 U.S.C. 5512(d).
\57\ 82 FR 25246 (June 1, 2017).
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In January 2019, the Bureau published its ATR/QM Rule Assessment
Report.\58\ The Report included findings about the effects of the ATR/
QM Rule on the mortgage market generally, as well as specific findings
about Temporary GSE QM loan originations.
---------------------------------------------------------------------------
\58\ See generally Bureau of Consumer Fin. Prot., Ability to
Repay and Qualified Mortgage Assessment Report (Jan. 2019)
(Assessment Report), https://files.consumerfinance.gov/f/documents/cfpb_ability-to-repay-qualified-mortgage_assessment-report.pdf.
---------------------------------------------------------------------------
The Report found that loans with higher DTI levels have been
associated with higher levels of ``early delinquency'' (i.e.,
delinquency within two years of origination), which can serve as a
proxy for measuring consumer repayment ability at consummation across a
wide pool of loans.\59\ The Report also found that the Rule did not
eliminate access to credit for high-DTI consumers--i.e., consumers with
DTI ratios above 43 percent--who qualify for loans eligible for
purchase or guarantee by either of the GSEs, that is, Temporary GSE QM
loans.\60\ On the other hand, based on application-level data obtained
from nine large lenders, the Report found that the Rule eliminated
between 63 and 70 percent of high-DTI home purchase
[[Page 41721]]
loans that were not Temporary GSE QM loans.\61\
---------------------------------------------------------------------------
\59\ See, e.g., id. at 83-84, 100-05.
\60\ See, e.g., id. at 10, 194-96.
\61\ See, e.g., id. at 10-11, 117, 131-47.
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One main finding about Temporary GSE QM loans was that such loans
continued to represent a ``large and persistent'' share of originations
in the conforming segment of the mortgage market.\62\ As discussed, the
GSEs' share of the conventional, conforming purchase-mortgage market
was large before the ATR/QM Rule, and the Assessment found a small
increase in that share since the Rule's effective date, reaching 71
percent in 2017.\63\ The Assessment Report noted that, at least for
loans intended for sale in the secondary market, creditors generally
offer a Temporary GSE QM loan even when a General QM loan could be
originated.\64\
---------------------------------------------------------------------------
\62\ Id. at 188. Because the Temporary GSE QM loan definition
generally affects only loans that conform to the GSEs' guidelines,
the Assessment Report's discussion of the Temporary GSE QM loan
definition focused on the conforming segment of the market, not on
non-conforming (e.g., jumbo) loans.
\63\ Id. at 191.
\64\ Id. at 192.
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The continued prevalence of Temporary GSE QM loan originations is
contrary to the Bureau's expectation at the time it issued the ATR/QM
Rule in 2013.\65\ The Assessment Report discussed several possible
reasons for the continued prevalence of Temporary GSE QM loan
originations. The Report first highlighted commenters' concerns with
the perceived lack of clarity in appendix Q and found that such
concerns ``may have contributed to investors'--and at least
derivatively, creditors'--preference'' for Temporary GSE QM loans
instead of originating loans under the General QM loan definition.\66\
In addition, the Bureau has not revised appendix Q since 2013, while
other standards for calculating and verifying debt and income have been
updated more frequently.\67\ ANPR commenters also expressed concern
with appendix Q and stated that the Temporary GSE QM loan definition
has benefited creditors and consumers by enabling creditors to
originate QMs without having to use appendix Q.
---------------------------------------------------------------------------
\65\ Id. at 13, 190, 238.
\66\ Id. at 193.
\67\ Id. at 193-94.
---------------------------------------------------------------------------
The Assessment Report noted that a second possible reason for the
continued prevalence of Temporary GSE QM loans is that the GSEs were
able to accommodate the demand for mortgages above the General QM loan
definition's DTI limit of 43 percent as the DTI ratio distribution in
the market shifted upward.\68\ According to the Assessment Report, in
the years since the ATR/QM Rule took effect, house prices have
increased and consumers hold more mortgage and other debt (including
student loan debt), all of which have caused the DTI ratio distribution
to shift upward.\69\ The Assessment Report noted that the share of GSE
home purchase loans with DTI ratios above 43 percent has increased
since the ATR/QM Rule took effect in 2014.\70\ The available data
suggest that such high-DTI lending has declined in the non-GSE market
relative to the GSE market.\71\ The non-GSE market has constricted even
with respect to highly qualified consumers; those with higher incomes
and higher credit scores are representing a greater share of
denials.\72\
---------------------------------------------------------------------------
\68\ Id. at 194.
\69\ Id.
\70\ Id. at 194-95.
\71\ Id. at 119-20.
\72\ Id. at 153.
---------------------------------------------------------------------------
The Assessment Report found that a third possible reason for the
persistence of Temporary GSE QM loans is the structure of the secondary
market.\73\ If creditors adhere to the GSEs' guidelines, they gain
access to a robust, highly liquid secondary market.\74\ In contrast,
while private market securitizations have grown somewhat in recent
years, their volume is still a fraction of their pre-crisis levels.\75\
There were less than $20 billion in new origination PLS issuances in
2017, compared with $1 trillion in 2005,\76\ and only 21 percent of new
origination PLS issuances in 2017 were non-QM issuances.\77\ To the
extent that private securitizations have occurred since the ATR/QM Rule
took effect in 2014, the majority of new origination PLS issuances have
consisted of prime jumbo loans made to consumers with strong credit
characteristics, and these securities have a low share of non-QM
loans.\78\ The Assessment Report notes that the Temporary GSE QM loan
definition may itself be inhibiting the growth of the non-QM
market.\79\ However, the Report also notes that it is possible that
this market might not exist even with a narrower Temporary GSE QM loan
definition, if consumers were unwilling to pay the premium charged to
cover the potential litigation risk associated with non-QMs, which do
not have a presumption of compliance with the ATR requirements, or if
creditors were unwilling or lack the funding to make the loans.\80\
---------------------------------------------------------------------------
\73\ Id. at 196.
\74\ Id.
\75\ Id.
\76\ Id.
\77\ Id. at 197.
\78\ Id. at 196.
\79\ Id. at 205.
\80\ Id.
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The Bureau expects that each of these features of the mortgage
market that concentrate lending within the Temporary GSE QM loan
definition will largely persist through the current January 10, 2021
sunset date.
D. Effects of the COVID-19 Pandemic on Mortgage Markets
The COVID-19 pandemic has had a significant effect on the U.S.
economy. Economic activity has contracted, some businesses have
partially or completely closed, and millions of workers have become
unemployed. The pandemic has also affected mortgage markets and has
resulted in a contraction of mortgage credit availability for many
consumers, including those that would be dependent on the non-QM market
for financing. The pandemic's impact on both the secondary market for
new originations and on the servicing of existing mortgages has
contributed to this contraction, as described below.
1. Secondary Market Impacts and Implications for Mortgage Origination
Markets
The economic disruptions associated with the COVID-19 pandemic have
restricted the flow of credit in the U.S. economy, including the
mortgage market. During periods of economic distress, many investors
seek to purchase safer instruments and as tensions and uncertainty rose
in mid-March of 2020, investors moved rapidly towards cash and
government securities.\81\ Indeed, the yield on the 10-year Treasury
note, which moves in the opposite direction as the note's price,
declined while mortgage rates increased between February 2020 and March
2020.\82\ This widening spread was exacerbated by a large supply of
mortgage-backed securities (MBS) entering the market, as investors in
MBS sold large portfolios of agency MBS.\83\ As a result, in March of
2020, the lack of investor demand to purchase mortgages made it
difficult for creditors to originate loans, as many creditors rely on
the ability to profitably sell loans in
[[Page 41722]]
the secondary market to generate the liquidity to originate new loans.
This resulted in mortgages becoming more expensive for both homebuyers
and homeowners looking to refinance.
---------------------------------------------------------------------------
\81\ The Quarterly CARES Act Report to Congress: Hearing Before
the S. Comm. on Banking, Housing, and Urban Affairs, 116th Cong. 2-3
(2020) (statement of Jerome H. Powell, Chairman, Board of Governors
of the Federal Reserve System).
\82\ Laurie Goodman et al., Urban Institute, Housing Finance at
a Glance, Monthly Chartbook, (Mar. 26, 2020), https://www.urban.org/research/publication/housing-finance-glance-monthly-chartbook-march-2020.
\83\ Agency MBS are backed by loans guaranteed by Fannie Mae,
Freddie Mac, and the Government National Mortgage Association
(Ginnie Mae).
---------------------------------------------------------------------------
On March 15, 2020, the Board announced that it would increase its
holdings of agency MBS by at least $200 billion.\84\ On March 23, 2020,
the Board announced that it would remove this limit and purchase agency
MBS ``in the amounts needed to support smooth market functioning and
effective transmission of monetary policy to broader financial
conditions and the economy.'' \85\ The Board took these actions to
stabilize the secondary market and support the continued flow of
mortgage credit. With these purchases, market conditions have improved
substantially, and the Board has since slowed its pace of
purchases.\86\ This has helped to stabilize mortgage rates, resulting
in a decline in mortgage rates since the Board's intervention.
---------------------------------------------------------------------------
\84\ Press Release, Bd. of Governors of the Fed. Reserve Sys.,
Federal Reserve issues FOMC statement (Mar. 15, 2020), https://www.federalreserve.gov/newsevents/pressreleases/monetary20200315a.htm.
\85\ Press Release, Bd. of Governors of the Fed. Reserve Sys.,
Federal Reserve announces extensive new measures to support the
economy (Mar. 23, 2020), https://www.federalreserve.gov/newsevents/pressreleases/monetary20200323b.htm.
\86\ The Quarterly CARES Act Report to Congress: Hearing Before
the S. Comm. on Banking, Housing, and Urban Affairs, 116th Cong. 3
(2020) (statement of Jerome H. Powell, Chairman, Board of Governors
of the Federal Reserve System).
---------------------------------------------------------------------------
Non-agency MBS \87\ are generally perceived by investors as riskier
than agency MBS, and non-QM lending has declined as a result. Issuance
of non-agency MBS declined by 8.2 percent in the first quarter of 2020,
with nearly all the transactions completed in January and February,
before the COVID-19 pandemic began to affect the economy
significantly.\88\ Nearly all major non-QM creditors ceased making
loans in March and April. In May of 2020, issuers of non-agency MBS
began to test the market with deals collateralized by non-QM loans
largely originated prior to the crisis. Moreover, several non-QM
creditors--which largely depend on the ability to sell loans in the
secondary market in order to fund new loans--have begun to resume
originations, albeit with a tighter credit box.\89\ Prime jumbo
financing dropped nearly 22 percent in the first quarter of 2020. Banks
increased interest rates and narrowed the product offering to consumers
with pristine credit profiles, as these loans must be held on portfolio
when the secondary market for non-agency MBS contracts.\90\
---------------------------------------------------------------------------
\87\ Non-agency MBS are not backed by loans guaranteed by Fannie
Mae, Freddie Mac or the Ginnie Mae. This includes securities
collateralized by non-QM loans.
\88\ Brandon Ivey, Non-Agency MBS Issuance Slowed in First
Quarter (2020), https://www.insidemortgagefinance.com/articles/217623-non-agency-mbs-issuance-slowed-in-first-quarter.
\89\ Brandon Ivey, Non-Agency Mortgage Securitization Opening Up
After Pause (2020), https://www.insidemortgagefinance.com/articles/218034-non-agency-mortgage-securitization-opening-up-after-pause.
\90\ Brandon Ivey, Jumbo Originations Drop Nearly 22% in First
Quarter (2020) https://www.insidemortgagefinance.com/articles/218028-jumbo-originations-drop-nearly-22-in-first-quarter.
---------------------------------------------------------------------------
2. Servicing Market Impacts and Implications for Origination Markets
Anticipating that a number of homeowners would struggle to pay
their mortgages due to the pandemic and related economic impacts,
Congress passed and the President signed the Coronavirus Aid, Relief,
and Economic Security Act (the CARES Act) in March 2020. The CARES Act
provides additional protections for borrowers whose mortgages are
purchased or securitized by a GSE and certain federally-backed
mortgages.\91\ The CARES Act mandates a 60-day foreclosure moratorium
for such mortgages. The CARES Act also allows borrowers to request up
to 180 days of forbearance due to a COVID-19-related financial
hardship, with an option to extend the forbearance period for an
additional 180 days.
---------------------------------------------------------------------------
\91\ Coronavirus Aid, Relief, and Economic Security Act, Public
Law 116-136 (2020). (Includes loans backed by HUD, the U.S.
Department of the Agriculture, the U.S. Department of Veterans
Affairs (VA), Fannie Mae, and Freddie Mac).
---------------------------------------------------------------------------
Following the passage of the CARES Act, some mortgage servicers
remain obligated to make some principal and interest payments to
investors in GSE and Ginnie Mae securities, even if consumers are not
making payments.\92\ Servicers also remain obligated to make escrowed
real estate tax and insurance payments to local taxing authorities and
insurance companies. Significant liquidity is needed to fulfill
servicer obligations to security holders. While servicers are required
to hold liquid reserves to cover anticipated advances, significantly
higher-than-expected forbearance rates over an extended period of time
may lead to liquidity shortages particularly among many non-bank
servicers. According to a weekly survey from the Mortgage Bankers
Association, from March 2, 2020 to June 7, 2020, the total number of
loans in forbearance grew from 0.25 percent to 8.55 percent, with
Ginnie Mae loans having the largest growth from 0.19 percent to 11.83
percent.\93\
---------------------------------------------------------------------------
\92\ The GSEs typically repurchase loans out of the trust after
they fall 120 days delinquent, after which the servicer is no longer
required to advance principal and interest, but Ginnie Mae requires
servicers to advance principal and interest until the default is
resolved. On April 21, 2020, the FHFA confirmed that servicers of
GSE loans will only be required to advance four months of mortgage
payments, regardless of whether the GSEs repurchase the loans from
the trust after 120 days of delinquency.
\93\ Press Release, Mortgage Banker Association, Share of
Mortgage Loans in Forbearance Increases to 8.55%, (June 15, 2020),
https://www.mba.org/2020-press-releases/june/share-of-mortgage-loans-in-forbearance-increases-to-855.
---------------------------------------------------------------------------
To address the anticipated liquidity shortage, on April 10, 2020,
Ginnie Mae released guidance on a Pass-Through Assistance Program
whereby Ginnie Mae will provide financial assistance at a fixed
interest rate to servicers facing a principal and interest shortfall as
a last resort. On April 7, 2020, Ginnie Mae also announced approval of
a servicing advance financing facility, whereby mortgage servicing
rights are securitized and sold to private investors. This change may
alleviate some of the liquidity pressures that may cause a servicer to
draw on the Pass-Through Assistance Program.
Because many mortgage servicers also originate the loans they
service, many creditors have responded to the risk of elevated
forbearances and higher-than-expected monthly advances by imposing
additional underwriting standards for new originations. These new
underwriting standards include more stringent requirements for non-QM,
jumbo, and government loans.\94\ For example, one major bank announced
on April 13, 2020, that it would require prospective home purchasers to
have a minimum 700 FICO score and 20 percent down payment. By lending
only to consumers with high credit scores, lower DTI ratios, or
significant liquid reserves, creditors are managing their risk by
reducing the likelihood that a newly-originated loan will require a
forbearance plan.
---------------------------------------------------------------------------
\94\ Maria Volkova, FHA/VA Lenders Raise Credit Score
Requirements (2020), https://www.insidemortgagefinance.com/articles/217636-fhava-lenders-raise-fico-credit-score-requirements.
---------------------------------------------------------------------------
Moreover, several large warehouse providers--i.e., creditors that
provide financing to mortgage originators and servicers--have
restricted the ability of non-banks to fund loans on their warehouse
line by prohibiting the funding of loans to consumers with lower credit
scores. These types of restrictions mitigate the warehouse lender's
exposure in the event a non-bank fails or is unable to sell the loan
prior to the consumer requesting a forbearance.\95\
---------------------------------------------------------------------------
\95\ On April 22, 2020, the FHFA announced the GSEs would be
permitted to purchase certain loans whereby the borrower requested a
forbearance prior to the sale of the loan for a limited period of
time and at a higher cost.
---------------------------------------------------------------------------
[[Page 41723]]
As of mid-June, historically low interest rates combined with a
leveling off in forbearance rates have resulted in an increase in
refinance activity that has been primarily concentrated in the agency
sector, helping to mitigate some of the servicing liquidity concerns.
However, it is unclear how quickly non-banks will return to the non-QM
market even after the mortgage market in general recovers.
III. The Rulemaking Process
The Bureau has solicited and received substantial public and
stakeholder input on issues related to this proposed rule. In addition
to the Bureau's discussions with and communications from industry
stakeholders, consumer advocates, other Federal agencies,\96\ and
members of Congress, the Bureau issued requests for information (RFIs)
in 2017 and 2018 and in July 2019 issued an advance notice of proposed
rulemaking regarding the ATR/QM Rule (ANPR). The input from these RFIs
and from the ANPR is briefly summarized below.
---------------------------------------------------------------------------
\96\ The Bureau has consulted with agencies including the FHFA,
the Board, FHA, the FDIC, the OCC, the Federal Trade Commission, the
National Credit Union Administration, and the Department of the
Treasury.
---------------------------------------------------------------------------
A. The Requests for Information
In June 2017, the Bureau published a request for information in
connection with the Assessment Report (Assessment RFI).\97\ In response
to the Assessment RFI, the Bureau received approximately 480 comments
from creditors, industry groups, consumer advocacy groups, and
individuals.\98\ The comments addressed a variety of topics, including
the General QM loan definition and the 43 percent DTI limit; perceived
problems with, and potential changes and alternatives to, appendix Q;
and how the Bureau should address the expiration of the Temporary GSE
QM loan definition. The comments expressed a range of ideas for
addressing the expiration of the Temporary GSE QM loan definition, from
making the definition permanent, to applying the definition to other
mortgage products, to extending it for various periods of time, or some
combination of those suggestions. Other comments stated that the
Temporary GSE QM loan definition should be eliminated or permitted to
expire.
---------------------------------------------------------------------------
\97\ 82 FR 25246 (June 1, 2017).
\98\ See Assessment Report, supra note 58, appendix B
(summarizing comments received in response to the Assessment RFI).
---------------------------------------------------------------------------
Beginning in January 2018, the Bureau issued a general call for
evidence seeking comment on its enforcement, supervision, rulemaking,
market monitoring, and financial education activities.\99\ As part of
the call for evidence, the Bureau published requests for information
relating to, among other things, the Bureau's rulemaking process,\100\
the Bureau's adopted regulations and new rulemaking authorities,\101\
and the Bureau's inherited regulations and inherited rulemaking
authorities.\102\ In response to the call for evidence, the Bureau
received comments on the ATR/QM Rule from stakeholders, including
consumer advocacy groups and industry groups. The comments addressed a
variety of topics, including the General QM loan definition, appendix
Q, and the Temporary GSE QM loan definition. The comments also raised
concerns about, among other things, the risks of allowing the Temporary
GSE QM loan definition to expire without any changes to the General QM
loan definition or appendix Q. The concerns raised in these comments
were similar to those raised in response to the Assessment RFI,
discussed above.
---------------------------------------------------------------------------
\99\ See Bureau of Consumer Fin. Prot., Call for Evidence,
https://www.consumerfinance.gov/policy-compliance/notice-opportunities-comment/archive-closed/call-for-evidence (last updated
Apr. 17, 2018).
\100\ 83 FR 10437 (Mar. 9, 2018).
\101\ 83 FR 12286 (Mar. 21, 2018).
\102\ 83 FR 12881 (Mar. 26, 2018).
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B. The Advance Notice of Proposed Rulemaking
On July 25, 2019, the Bureau issued an advance notice of proposed
rulemaking regarding the ATR/QM Rule (ANPR). The ANPR stated the
Bureau's tentative plans to allow the Temporary GSE QM loan definition
to expire in January 2021 or after a short extension, if necessary, to
facilitate a smooth and orderly transition away from the Temporary GSE
QM loan definition. The Bureau also stated that it was considering
whether to propose revisions to the General QM loan definition in light
of the potential expiration of the Temporary GSE QM loan definition and
requested comments on several topics related to the General QM loan
definition. These topics included: (1) Whether and how the Bureau
should revise the DTI limit in the General QM loan definition; (2)
whether the Bureau should supplement or replace the DTI limit with
another method for directly measuring a consumer's personal finances;
(3) whether the Bureau should revise appendix Q or replace it with
other standards for calculating and verifying a consumer's debt and
income; and (4) whether, instead of a DTI limit, the Bureau should
adopt standards that do not directly measure a consumer's personal
finances.\103\ The Bureau requested comment on how much time industry
would need to change its practices in response to any changes the
Bureau makes to the General QM loan definition.\104\ The Bureau
received 85 comments on the ANPR from businesses in the mortgage
industry (including creditors), consumer advocacy groups, elected
officials, individuals, and research centers.
---------------------------------------------------------------------------
\103\ 84 FR 37155, 37155, 37160-62 (July 31, 2019).
\104\ The Bureau stated that if the amount of time industry
would need to change its practices in response to the rule depends
on how the Bureau revises the General QM loan definition, the Bureau
requested time estimates based on alternative possible definitions.
---------------------------------------------------------------------------
1. Direct Measures of a Consumer's Personal Finances
Commenters largely supported moving away from using the 43 percent
DTI limit as a stand-alone General QM underwriting criterion. While a
few commenters supported maintaining the current General QM loan
definition's 43 percent DTI limit as a stand-alone criterion along with
clarifying revisions to appendix Q, the large majority of commenters--
representing the mortgage industry, consumer advocacy groups, and
research centers--supported either eliminating a DTI limit, replacing
it with other methods of measuring a consumer's ability to repay, such
as cash flow underwriting or residual income, or supplementing it with
additional compensating factors. These commenters asserted that, as a
stand-alone factor, DTI has limited predictiveness of a consumer's
ability to repay and has an adverse impact on responsible access to
credit for low-to-moderate income and minority homeowners.
Many commenters suggested the Bureau consider replacing DTI with an
alternative measure of a consumer's ability to repay, such as residual
income or cash flow underwriting. While some commenters indicated these
alternative measures are more accurate predictors of ability to repay,
others suggested the Bureau conduct additional studies of these
alternative measures and the effectiveness of existing standards, such
as the VA's residual income test.
Other commenters suggested the Bureau promulgate a General QM loan
definition that allows certain compensating factors to supplement a
specific DTI limit. Under this approach, the rule would set a specific
DTI limit (e.g., 43 percent) but would permit loans with higher DTI
ratios to be originated as QMs if the creditor determined that
[[Page 41724]]
certain compensating factors were present. Commenters identified
several potential compensating factors, including cash reserves or past
payment performance history. Advocates for this approach pointed to the
GSEs' underwriting standards, which permit loans with DTI ratios
between 43 and 50 percent if compensating factors are present, as
evidence that higher DTI loans with appropriate consideration of
compensating factors can result in affordable loans. Some of the
commenters suggested the current General QM loan definition's 43
percent DTI limit could be responsibly increased. Some commenters
recommended that the Bureau incorporate compensating factors into the
General QM loan definition but also adopt an overall DTI limit above
which loans could not be originated as General QMs, regardless of any
compensating factors. Under this approach, similar to the GSEs' current
underwriting standards, creditors could originate loans under the
General QM loan definition with DTI ratios under a certain threshold
(e.g., 43 percent) without compensating factors, could originate loans
under the General QM loan definition with DTI ratios between that
threshold and a higher threshold (e.g., 50 percent) if the creditor
identifies certain compensating factors, but could not originate loans
under the General QM loan definition with DTI ratios above the higher
threshold.
The Bureau also solicited comment on whether the rule should retain
appendix Q as the standard for calculating and verifying debt and
income if the rule retains a direct measure of a consumer's personal
finances for General QM. Nearly all commenters agreed that appendix Q
in its existing form is insufficient--specifically, that the
requirements lack clarity in certain areas, which leaves creditors
uncertain of the QM status of their loans. Commenters also criticized
appendix Q for being overly prescriptive and outdated in other areas
and therefore lacking the flexibility to adapt to changing market
conditions. Proponents of eliminating the DTI limit entirely stated
that appendix Q could be eliminated without replacement and that the
Bureau could instead publish supervisory guidance or best practices to
assist creditors in satisfying the ATR requirements. Other commenters
suggested that the rule supplement appendix Q or replace it with
reasonable alternatives that allow for more flexibility, such as the
GSE or FHA standards for verifying income and debt. Although most
commenters advocated for elimination of appendix Q, the commenters that
advocated for retaining appendix Q generally suggested the Bureau
should revise appendix Q to modernize the standards and ease industry
compliance.
2. Alternatives to Direct Measures of a Consumer's Personal Finances
Many commenters argued that there are alternatives that are more
predictive of loan performance and a consumer's ability to repay than
stand-alone direct measures of a consumer's personal finances such as
DTI or residual income. Most commenters noting these alternatives
advocated for eliminating the DTI limit entirely and suggested that
loan product features and loan pricing should serve as the primary
factors that determine a loan's QM status. Commenters that opposed
incorporating alternatives to direct measures of a consumer's personal
finances into the General QM loan definition generally argued that a
creditor's ATR determination is separate and distinct from a creditor's
decision on whether to originate a loan. For example, they argued that
because creditors consider factors unrelated to ability to repay in
determining their cumulative loss exposure--such as the amount of
equity in a property--creditors can originate loans that may not be
affordable for consumers in the long-term. Commenters cited asset-based
lending prior to the crisis, when some creditors originated
unaffordable loans with the intention of refinancing the loan prior to
default or otherwise believed they were protected from loss in the
event of default due to the consumer's equity in the property.
Commenters critical of price-based approaches to the General QM loan
definition also stated that loan pricing includes a wide variety of
factors unrelated to credit quality, such as the value of the mortgage
servicing rights. These commenters also raised concerns about the pro-
cyclical nature of loan pricing. They argued that mortgage interest
rate spreads tend to contract during economic expansions, such that a
price-based approach to the General QM loan definition could grant QM
status to loans that exceed consumers' ability to repay and increase
housing prices. In contrast, they claimed that mortgage interest rate
spreads tend to expand during economic contractions, inhibiting access
to credit. Commenters critical of price-based approaches also raised
concerns that these approaches are vulnerable to lender manipulation.
Most commenters that advocated for removing the DTI limit entirely
from the General QM loan definition suggested the existing General QM
protections are sufficient--including the prohibited product features,
the points-and-fees cap, and the ATR requirements to consider and
verify a consumer's debt, income or assets, DTI, or residual income.
They argued that the rule should continue to rely on the interest rate
spread between the APR and the APOR to distinguish those QM loans
eligible for a safe harbor from those eligible for a rebuttable
presumption of compliance. Proponents of this approach argued that
creditors use a wide variety of factors in the lending decision and
consumers with higher-risk lending attributes receive higher interest
rates to compensate creditors and investors for the added risk.
Accordingly, these commenters argued that the APR spread above the
benchmark APOR is more predictive of the general creditworthiness of a
loan and a consumer's ability to repay than stand-alone measures such
as DTI. While some commenters suggested that the rule should retain the
existing price threshold separating safe harbor QM loans from
rebuttable presumption QM loans, which is 1.5 percentage points above
APOR for most loans, others suggested that it would be appropriate to
increase the threshold. Other commenters suggested there could be an
additional pricing threshold, above which loans would be designated as
non-QM.
Commenters also provided input on the distinction between a safe
harbor presumption of compliance and a rebuttable presumption of
compliance with the ATR requirements. While commenters offered
different views about whether 1.5 percentage points over APOR is
appropriate for distinguishing between safe harbor and rebuttable
presumption QMs, or if it should be increased, most commenters
advocated for maintaining a safe harbor. However, several consumer
advocacy groups suggested all QM loans should be subject to a
rebuttable presumption of compliance. Several commenters noted that the
1.5 percentage point over APOR threshold would disproportionately
prevent smaller loans and loans for manufactured housing from being
originated as QMs. They noted that creditors typically charge more to
recover fixed costs on small loans than on larger loans with equivalent
risk attributes.
Some commenters advocated for an approach whereby the QM
determination would be based primarily on the likelihood of default or
loss given default as determined by an underwriting model. One
commenter recommended that QM status be
[[Page 41725]]
determined by expected default rates in stressed economic conditions,
given certain origination characteristics. Other commenters suggested a
Bureau-approved automated underwriting model could determine a loan's
QM status. Proponents of these approaches argued that an underwriting
model would reflect a more holistic consideration of relevant factors
but remove the risk that creditors misprice or underprice loans due to
competitive pressures. While many commenters acknowledged the
operational complexity associated with the Bureau developing and
maintaining an automated underwriting model, they argued that this
approach would provide creditors with the certainty of a loan's QM
status while most accurately assessing the consumer's ability to
sustain the mortgage payment.
Commenters also argued that consumer performance over an extended
period should be considered sufficient evidence that the creditor
adequately assessed a consumer's ability to repay at origination. They
recommended that a loan that is originated as a non-QM or rebuttable
presumption QM loan should be eligible to ``season'' into a QM safe
harbor loan if the consumer makes timely payments for a pre-determined
length of time. Commenters pointed to the GSE representation and
warranty framework as precedent for this concept and argued that a
creditor's legal exposure to the ATR requirement should also sunset
accordingly. However, several commenters opposed allowing loans to
season into QMs. They argued that a period of successful repayment is
insufficient to presume conclusively that the creditor reasonably
determined ability to repay at origination, that creditors would engage
in gaming to minimize defaults during the seasoning period, and that
seasoning would inappropriately prevent consumers from raising lack of
ability to repay as a defense to foreclosure.
The Bureau is considering adding a seasoning approach to the ATR/QM
Rule. A seasoning approach would create an alternative pathway to QM
safe harbor status for certain mortgages if the consumer has
consistently made timely payments for a specified period of time. The
Bureau in the near future will issue a separate proposal that addresses
adding such an approach to the ATR/QM Rule.
3. Other Temporary GSE QM Loan Issues
As discussed in the ANPR, absent any changes, the Temporary GSE QM
loan definition will remain in effect until January 10, 2021 or the
date the GSEs exit conservatorship, whichever occurs first. The Bureau
sought comment on whether a short extension would be necessary to
minimize market disruption and to potentially facilitate an orderly
transition to a new General QM loan definition. While some industry and
consumer advocates commented that the Temporary GSE QM loan definition
should be made permanent, many commenters supported its expiration
following a short extension to revise the General QM loan definition.
Industry commenters stated that the length of time to implement a new
General QM loan definition would largely be determined by the scale and
complexity of the revisions to the General QM loan definition.
Commenters supporting the price-based approach indicated that a
relatively short implementation period likely would be necessary, given
the approach would largely be a simplification of the existing General
QM construct. Other commenters suggested linking the date of the
Temporary GSE QM loan definition expiration to a period following the
publication date of the final General QM rule, such as one year. As
noted above, the Bureau is issuing a separate NPRM to address the
timing of the expiration of the Temporary GSE QM Loan definition.
IV. Legal Authority
The Bureau is proposing to amend Regulation Z pursuant to its
authority under TILA and the Dodd-Frank Act. Section 1061 of the Dodd-
Frank Act transferred to the Bureau the ``consumer financial protection
functions'' previously vested in certain other Federal agencies,
including the Board. The Dodd-Frank Act defines the term ``consumer
financial protection function'' to include ``all authority to prescribe
rules or issue orders or guidelines pursuant to any Federal consumer
financial law, including performing appropriate functions to promulgate
and review such rules, orders, and guidelines.'' \105\ Title X of the
Dodd-Frank Act (including section 1061), along with TILA and certain
subtitles and provisions of title XIV of the Dodd-Frank Act, are
Federal consumer financial laws.\106\
---------------------------------------------------------------------------
\105\ 12 U.S.C. 5581(a)(1)(A).
\106\ Dodd-Frank Act section 1002(14), 12 U.S.C. 5481(14)
(defining ``Federal consumer financial law'' to include the
``enumerated consumer laws'' and the provisions of title X of the
Dodd-Frank Act), Dodd-Frank Act section 1002(12)(O), 12 U.S.C.
5481(12)(O) (defining ``enumerated consumer laws'' to include TILA).
---------------------------------------------------------------------------
A. TILA
TILA section 105(a). Section 105(a) of TILA directs the Bureau to
prescribe regulations to carry out the purposes of TILA and states that
such regulations may contain such additional requirements,
classifications, differentiations, or other provisions and may further
provide for such adjustments and exceptions for all or any class of
transactions that the Bureau judges are necessary or proper to
effectuate the purposes of TILA, to prevent circumvention or evasion
thereof, or to facilitate compliance therewith.\107\ A purpose of TILA
is ``to assure a meaningful disclosure of credit terms so that the
consumer will be able to compare more readily the various credit terms
available to him and avoid the uninformed use of credit.'' \108\
Additionally, a purpose of TILA sections 129B and 129C is to assure
that consumers are offered and receive residential mortgage loans on
terms that reasonably reflect their ability to repay the loans and that
are understandable and not unfair, deceptive, or abusive.\109\ As
discussed in the section-by-section analysis below, the Bureau is
proposing to issue certain provisions of this proposed rule pursuant to
its rulemaking, adjustment, and exception authority under TILA section
105(a).
---------------------------------------------------------------------------
\107\ 15 U.S.C. 1604(a).
\108\ 15 U.S.C. 1601(a).
\109\ 15 U.S.C. 1639b(a)(2).
---------------------------------------------------------------------------
TILA section 129C(b)(2)(A). TILA section 129C(b)(2)(A)(vi) provides
the Bureau with authority to establish guidelines or regulations
relating to ratios of total monthly debt to monthly income or
alternative measures of ability to pay regular expenses after payment
of total monthly debt, taking into account the income levels of the
borrower and such other factors as the Bureau may determine relevant
and consistent with the purposes described in TILA section
129C(b)(3)(B)(i).\110\ As discussed in the section-by-section analysis
below, the Bureau is proposing to issue certain provisions of this
proposed rule pursuant to its authority under TILA section
129C(b)(2)(A)(vi).
---------------------------------------------------------------------------
\110\ 15 U.S.C. 1639c(b)(2)(A).
---------------------------------------------------------------------------
TILA section 129C(b)(3)A), (B)(i). TILA section 129C(b)(3)(B)(i)
authorizes the Bureau to prescribe regulations that revise, add to, or
subtract from the criteria that define a QM upon a finding that such
regulations are necessary or proper to ensure that responsible,
affordable mortgage credit remains available to consumers in a manner
consistent with the purposes of TILA section 129C; or are necessary and
appropriate to effectuate the purposes of
[[Page 41726]]
TILA sections 129B and 129C, to prevent circumvention or evasion
thereof, or to facilitate compliance with such sections.\111\ In
addition, TILA section 129C(b)(3)(A) directs the Bureau to prescribe
regulations to carry out the purposes of section 129C.\112\ As
discussed in the section-by-section analysis below, the Bureau is
proposing to issue certain provisions of this proposed rule pursuant to
its authority under TILA section 129C(b)(3)(B)(i).
---------------------------------------------------------------------------
\111\ 15 U.S.C. 1639c(b)(3)(B)(i).
\112\ 15 U.S.C. 1639c(b)(3)(A).
---------------------------------------------------------------------------
B. Dodd-Frank Act
Dodd-Frank Act section 1022(b). Section 1022(b)(1) of the Dodd-
Frank Act authorizes the Bureau to prescribe rules to enable the Bureau
to administer and carry out the purposes and objectives of the Federal
consumer financial laws, and to prevent evasions thereof.\113\ TILA and
title X of the Dodd-Frank Act are Federal consumer financial laws.
Accordingly, the Bureau is proposing to exercise its authority under
Dodd-Frank Act section 1022(b) to prescribe rules that carry out the
purposes and objectives of TILA and title X and prevent evasion of
those laws.
---------------------------------------------------------------------------
\113\ 12 U.S.C. 5512(b)(1).
---------------------------------------------------------------------------
V. Why the Bureau Is Issuing This Proposal
The Bureau is issuing this proposal to amend the General QM loan
definition because it is concerned that retaining the existing General
QM loan definition with the 43 percent DTI limit after the Temporary
GSE QM loan definition expires would significantly reduce the size of
QM and could significantly reduce access to responsible, affordable
credit. The Bureau is proposing a price-based General QM loan
definition to replace the DTI-based approach because it preliminarily
concludes that a loan's price, as measured by comparing a loan's APR to
APOR for a comparable transaction, is a strong indicator of a
consumer's ability to repay and is a more holistic and flexible measure
of a consumer's ability to repay than DTI alone.
Under the proposal, a loan would meet the General QM loan
definition in Sec. 1026.43(e)(2) only if the APR exceeds APOR for a
comparable transaction by less than two percentage points as of the
date the interest rate is set. The proposal would provide higher
thresholds for loans with smaller loan amounts and for subordinate-lien
transactions. The proposal would retain the existing product-feature
and underwriting requirements and limits on points and fees. Although
the proposal would remove the 43 percent DTI limit from the General QM
loan definition, the proposal would require that the creditor consider
and verify the consumer's current or reasonably expected income or
assets other than the value of the dwelling (including any real
property attached to the dwelling) that secures the loan and the
consumer's current debt obligations, alimony, and child support. The
proposal would remove appendix Q. To prevent uncertainty that may
result from appendix Q's removal, the proposal would clarify the
requirements to consider and verify a consumer's income, assets, debt
obligations, alimony, and child support. The proposal would preserve
the current threshold separating safe harbor from rebuttable
presumption QMs, under which a loan is a safe harbor QM if its APR
exceeds APOR for a comparable transaction by less than 1.5 percentage
points as of the date the interest rate is set (or by less than 3.5
percentage points for subordinate-lien transactions).
The Bureau is proposing a price-based approach to replace the
specific DTI limit because it is concerned that imposing a DTI limit as
a condition for QM status under the General QM loan definition may be
overly burdensome and complex in practice and may unduly restrict
access to credit because it provides an incomplete picture of the
consumer's financial capacity. In particular, the Bureau is concerned
that conditioning QM status on a specific DTI limit may impair access
to credit for some consumers for whom it might be appropriate to
presume ability to repay for their loans at consummation. For the
reasons set forth below, the Bureau preliminarily concludes that a
price-based General QM loan definition is appropriate because a loan's
price, as measured by comparing a loan's APR to APOR for a comparable
transaction, is a strong indicator of a consumer's ability to repay and
is a more holistic and flexible measure of a consumer's ability to
repay than DTI alone.
A. Overview of the General QM Loan Definition DTI Limit
As discussed above, TILA section 129C(b)(2) defines QM by limiting
certain loan terms and features. The statute generally prohibits a QM
from permitting an increase of the principal balance on the loan
(negative amortization), interest-only payments, most balloon payments,
a term greater than 30 years, and points and fees that exceed a
specified threshold. In addition, the statute incorporates limited
underwriting criteria that overlap with some elements of the general
ATR standard, including prohibiting ``no-doc'' loans where the creditor
does not verify income or assets. TILA does not require DTI ratios to
be included in the definition of a QM. Rather, the statute authorizes,
but does not require, the Bureau to establish additional criteria
relating to monthly DTI ratios, or alternative measures of ability to
pay regular expenses after payment of total monthly debt, taking into
account the income levels of the consumer and other factors the Bureau
determines relevant and consistent with the purposes described in TILA
section 129C(b)(3)(B)(i).
The Board's 2011 ATR/QM Proposal. In the 2011 ATR/QM Proposal, the
Board proposed two alternative approaches to the General QM loan
definition to implement the statutory QM requirements.\114\ The
proposed alternatives differed in the extent to which, in addition to
the statutory QM requirements, they included factors from the ATR
standard, including consideration of the consumer's monthly DTI ratio.
---------------------------------------------------------------------------
\114\ 76 FR 27390, 27453 (May 11, 2011).
---------------------------------------------------------------------------
Alternative 1 under the Board's proposal would have included only
the statutory QM requirements and would not have incorporated the
consumer's DTI ratio, residual income, or other factors from the
general ATR standard.\115\ Among the reasons the Board cited in support
of proposed Alternative 1 was a concern that DTI ratios (and residual
income) are not objective and would not provide certainty that a loan
is in fact a QM.\116\ The Board also cited data showing that a
consumer's DTI ratio generally does not have a significant predictive
power of loan performance, once the effects of credit history, loan
type, and loan-to-value (LTV) ratio are considered.\117\ The Board was
also concerned that the benefit of including DTI ratio (or residual
income) requirements in the definition of QM may not outweigh the risk
of reduced credit availability for certain consumers who may not meet
widely accepted DTI ratio standards but may have other compensating
factors, such as sufficient residual income or other resources, to be
able to reasonably afford the mortgage.\118\ Proposed Alternative 1
would have provided creditors with a safe harbor to establish
compliance with the ATR requirements.
---------------------------------------------------------------------------
\115\ Id. at 27453.
\116\ Id. at 27454.
\117\ Id.
\118\ Id.
---------------------------------------------------------------------------
Proposed Alternative 2 would have included the statutory QM
requirements
[[Page 41727]]
and additional factors from the general ATR standard, including a
requirement to consider and verify the consumer's DTI ratio or residual
income.\119\ The Board expressed concern that, absent a DTI ratio or
residual income requirement, a creditor could originate a QM without
considering the effect of the new loan payment on the consumer's
overall financial picture.\120\ The Board did not propose a specific
limit for the DTI ratio in the QM definition as part of Alternative
2.\121\ The Board cited several reasons for not proposing a specific
DTI limit. First, the Board was concerned that setting a specific DTI
ratio threshold could limit credit availability without providing
adequate off-setting benefits.\122\ Second, outreach conducted by the
Board revealed a range of underwriting guidelines for DTI ratios based
on product type, whether creditors used manual or automated
underwriting, and special considerations for high- and low-income
consumers.\123\ The Board was concerned that setting a specific limit
would require addressing the operational issues related to the
calculation of the DTI ratio, including defining debt and income.\124\
The Board was also concerned that a specific limit would require
tolerance provisions to account for mistakes made in calculating the
DTI ratio.\125\ At the same time, the Board recognized that creditors
and consumers may benefit from a higher degree of certainty surrounding
the QM definition.\126\ Therefore, the Board solicited comment on
whether and how it should prescribe a specific limit for the DTI ratio
or residual income for the QM definition.\127\ The Board's Alternative
2 would have provided a rebuttable presumption of compliance with the
ATR requirements.
---------------------------------------------------------------------------
\119\ Id.
\120\ Id. at 27455.
\121\ Id. at 27460.
\122\ Id.
\123\ Id. at 27461.
\124\ Id.
\125\ Id.
\126\ Id.
\127\ Id.
---------------------------------------------------------------------------
The Bureau's January 2013 Final Rule. The Bureau's January 2013
Final Rule included the statutory QM factors and additional factors
from the general ATR standard in the General QM loan definition in
Sec. 1026.43(e)(2). However, instead of incorporating the approach to
DTI from the ATR standard, which requires a creditor to consider the
consumer's DTI ratio or residual income, the Bureau prescribed for the
General QM loan definition a specific DTI limit of 43 percent in Sec.
1026.43(e)(2)(vi). In adopting this approach, the Bureau explained that
it believed the QM criteria should include a standard for evaluating
the consumer's ability to repay, in addition to the product feature
restrictions and other requirements that are specified in TILA.\128\
The Bureau stated that the TILA ATR/QM provisions are fundamentally
about assuring that the mortgage loan that consumers receive is
affordable, and that the protection from liability afforded to QMs
would not be reasonable if the creditor made the loan without
considering and verifying certain core aspects of the consumer's
financial picture.\129\
---------------------------------------------------------------------------
\128\ 78 FR 6408, 6516 (Jan. 30, 2013).
\129\ Id. at 6516.
---------------------------------------------------------------------------
With respect to DTI, the Bureau noted that DTI ratios are widely
used for evaluating a consumer's ability to repay over time because, as
the available data showed, DTI ratio correlates with loan performance
as measured by delinquency rate.\130\ The January 2013 Final Rule noted
that, at a basic level, the lower the DTI ratio, the greater the
consumer's ability to pay back a mortgage loan.\131\ The Bureau
believed this relationship between the DTI ratio and the consumer's
ability to repay applied both under conditions as they exist at
consummation, as well as under future changed circumstances, such as
increases in payments for adjustable-rate mortgages (ARMs), future
reductions in income, and unanticipated expenses and new debts.\132\
The Bureau's findings regarding DTI ratios relied primarily on analysis
of the FHFA's Historical Loan Performance (HLP) dataset, data provided
by FHA, and data provided by commenters.\133\ The Bureau believed these
data indicated that DTI ratios correlate with loan performance, as
measured by delinquency rate (where delinquency is defined as being
over 60 days late), in any credit cycle.\134\ Within a typical range of
DTI ratios creditors use in underwriting (e.g., under 32 percent DTI to
46 percent DTI), the Bureau noted that generally, there is a gradual
increase in delinquency with higher DTI ratio.\135\ The Bureau also
noted that DTI ratios are widely used as an important part of the
underwriting processes for both governmental programs and private
lenders.\136\
---------------------------------------------------------------------------
\130\ Id. at 6526-27.
\131\ Id. at 6526.
\132\ Id. at 6526-27.
\133\ Id. at 6527.
\134\ Id.
\135\ Id. (citing 77 FR 33120, 33122-23 (June 5, 2012) (Table 2:
Ever 60+ Delinquency Rates, summarizing the HLP dataset by volume of
loans and percentage that were ever 60 days or more delinquent,
tabulated by the total DTI on the loans and year of origination)).
\136\ Id.
---------------------------------------------------------------------------
To provide certainty for creditors regarding the loan's QM status,
the January 2013 Final Rule contained a specific DTI limit of 43
percent as part of the General QM loan definition. The Bureau stated
that a specific DTI limit also provides certainty to assignees and
investors in the secondary market, which the Bureau believed would help
reduce concerns regarding legal risk and promote credit
availability.\137\ The Bureau noted that numerous commenters had
highlighted the value of providing objective requirements determined
based on information contained in loan files.\138\ To that end, the
Bureau provided definitions of debt and income for purposes of the
General QM loan definition in appendix Q, to address concerns that
creditors may not have adequate certainty about whether a particular
loan satisfies the requirements of the General QM loan definition.\139\
---------------------------------------------------------------------------
\137\ Id.
\138\ Id.
\139\ Id.
---------------------------------------------------------------------------
The Bureau selected 43 percent as the DTI limit for the General QM
loan definition because, based on analysis of data available at the
time and comments, the Bureau believed that the 43 percent limit would
advance TILA's goals of creditors not extending credit that consumers
cannot repay while still preserving consumers' access to credit.\140\
The Bureau acknowledged that there is no specific threshold that
separates affordable from unaffordable mortgages; rather, there is a
gradual increase in delinquency rates as DTI ratios increase.\141\
Additionally, the Bureau noted that a 43 percent DTI ratio was within
the range used by many creditors, generally comported with industry
standards and practices for prudent underwriting, and was the threshold
used by FHA as its general boundary at the time the Bureau issued the
January 2013 Final Rule.\142\ The Bureau noted concerns about setting a
higher DTI limit, including concerns that it could allow QM status for
mortgages for which there is not a sound reason to presume that the
creditor had a reasonable belief in the consumer's ability to
repay.\143\ The Bureau was especially concerned about this in the
context of QMs that receive a safe harbor from the ATR
requirements.\144\
[[Page 41728]]
The Bureau was also concerned that a higher DTI limit would result in a
QM boundary that substantially covered the entire mortgage market. If
that were the case, creditors might be unwilling to make non-QM loans,
and the Bureau was concerned that the QM rule would define the limit of
credit availability.\145\ The Bureau also suggested that a higher DTI
limit might require a corresponding weakening of the strength of the
presumption of compliance, which the Bureau believed would largely
defeat the point of adopting a higher DTI limit.\146\
---------------------------------------------------------------------------
\140\ Id.
\141\ Id.
\142\ Id.
\143\ Id. at 6528.
\144\ Id.
\145\ Id.
\146\ Id.
---------------------------------------------------------------------------
Despite the Bureau's inclusion of a specific DTI limit in the
General QM loan definition, the Bureau also acknowledged concerns about
the requirement. The Bureau acknowledged that the Board, in issuing the
2011 ATR/QM Proposal, found that DTI ratios may not have significant
predictive power, once the effects of credit history, loan type, and
LTV ratio are considered.\147\ Similarly, the Bureau noted that some
commenters responding to the 2011 ATR/QM Proposal suggested that the
Bureau should include compensating factors in addition to a specific
DTI ratio threshold due to concerns about restricting access to
credit.\148\ The Bureau acknowledged that a standard that takes into
account multiple factors may produce more accurate ability-to-repay
determinations, at least in specific cases, but was concerned that
incorporating a multi-factor test or compensating factors into the QM
definition would undermine the certainty for creditors and the
secondary market of whether loans were eligible for QM status.\149\ The
Bureau also acknowledged arguments that residual income--generally
defined as the monthly income that remains after a consumer pays all
personal debts and obligations, including the prospective mortgage--may
be a better measure of repayment ability.\150\ However, the Bureau
noted that it lacked sufficient data to mandate a bright-line rule
based on residual income.\151\ The Bureau anticipated further study of
the issue as part of the five-year assessment of the rule.\152\
---------------------------------------------------------------------------
\147\ Id. at 6527.
\148\ Id.
\149\ Id.
\150\ Id. at 6528.
\151\ Id.
\152\ Id.
---------------------------------------------------------------------------
The Bureau acknowledged in the January 2013 Final Rule that the 43
percent DTI limit in the General QM loan definition could restrict
access to credit given market conditions at the time the rule was
issued. Among other things, the Bureau expressed concern that, as the
mortgage market recovered from the financial crisis, there would be a
limited non-QM market, which, in conjunction with the 43 percent DTI
limit, could impair access to credit for consumers with DTI ratios over
43 percent.\153\ To preserve access to credit for such consumers while
the market recovered, the Bureau adopted the Temporary GSE QM loan
definition, which did not include a specific DTI limit. As discussed
below, the Temporary GSE QM loan definition continues to play a
significant role in ensuring access to credit for consumers.
---------------------------------------------------------------------------
\153\ Id. at 6533.
---------------------------------------------------------------------------
B. Considerations Related to the General QM Loan Definition DTI Limit
The Bureau's own experience and the feedback it has received from
stakeholders since issuing the January 2013 Final Rule suggest that
imposing a DTI limit as a condition for QM status under the General QM
loan definition may be overly burdensome and complex in practice and
may unduly restrict access to credit because it provides an incomplete
picture of the consumer's financial capacity. While the Bureau
acknowledges that DTI ratios generally correlate with loan performance,
as the Bureau found in the January 2013 Final Rule and as shown in
recent Bureau analysis described below, the Bureau also notes that a
consumer's DTI ratio is only one way to measure financial capacity and
is not a holistic measure of the consumer's ability to repay.
In particular, the Bureau is concerned that imposing a DTI limit as
a condition for QM status under the General QM loan definition may deny
QM status for loans to some consumers for whom it might be appropriate
to presume ability to repay at consummation, and that denying QM status
to such loans risks denying consumers access to responsible, affordable
credit. Numerous stakeholders, including commenters responding to the
ANPR, have argued that the current approach to DTI ratios as part of
the General QM loan definition is not appropriate because it creates
problems for some consumers' ability to access credit when their DTI
ratio is above a bright-line threshold. These access to credit concerns
are especially acute for lower-income and minority consumers.
The Bureau acknowledges that the current approach to DTI ratios
under the General QM loan definition may also stifle innovation in
underwriting because it focuses on a single metric, with strict
verification rules. The current approach to DTI ratios under the
General QM loan definition may constrain new approaches to assessing
repayment ability, including the use of technology as part of the
underwriting process. Such innovations include certain new uses of cash
flow data and analytics to underwrite mortgage applicants. This
emerging technology has the potential to accurately assess consumers'
ability to repay using, for example, bank account data that can
identify the source and frequency of recurring deposits and payments
and identify remaining disposable income. Identifying the remaining
disposable income could be a method of assessing the consumer's
residual income and could potentially satisfy a requirement to consider
either DTI or residual income, absent a specific DTI limit. This
innovation could potentially expand access to responsible, affordable
mortgage credit, particularly for applicants with non-traditional
income and limited credit history. The potential negative effect of the
rule on innovation in underwriting may be heightened while the market
is largely concentrated in the QM lending space and may limit access to
credit for some consumers with DTI ratios above 43 percent.
The Bureau's 2019 ATR/QM Assessment Report highlights the tradeoffs
of conditioning the General QM loan definition on a DTI limit. The
Assessment Report included specific findings about the General QM loan
definition's DTI limit, including certain findings related to DTI
ratios as probative of a consumer's ability to repay. The Assessment
Report found that loans with higher DTI ratios have been associated
with higher levels of ``early delinquency'' (i.e., delinquency within
two years of origination), which, as explained below, may serve as a
proxy for measuring whether a consumer had a reasonable ability to
repay at the time the loan was consummated.\154\ For example, the
Assessment Report notes that for all periods and samples studied, a
positive relationship between DTI ratios and early delinquency is
present and economically meaningful.\155\ The Assessment Report states
that higher DTI ratios independently increase expected early
delinquency, regardless of other underwriting criteria.\156\
---------------------------------------------------------------------------
\154\ See Assessment Report, supra note 58, at 83-84, 100-05.
\155\ Assessment Report at 104-05.
\156\ Id. at 105.
---------------------------------------------------------------------------
At the same time, findings from the Assessment Report indicate that
the specific 43 percent DTI limit in the
[[Page 41729]]
current rule has restricted access to credit, particularly in the
absence of a robust non-QM market. The report found that, for high-DTI
consumers--i.e., consumers with DTI ratios above 43 percent--who
qualify for loans eligible for purchase or guarantee by the GSEs, the
Rule has not decreased access to credit.\157\ However, the Assessment
Report attributes the fact that the 43 percent DTI limit has not
reduced access to credit for such consumers to the existence of the
Temporary GSE QM loan definition. The findings in the Assessment Report
indicate that there would be some reduction in access to credit for
high-DTI consumers when the Temporary GSE QM loan definition expires,
absent changes to the General QM loan definition. For example, based on
application-level data obtained from nine large lenders, the Assessment
Report found that the January 2013 Final Rule eliminated between 63 and
70 percent of non-GSE eligible, high-DTI home purchase loans.\158\ The
Bureau is concerned about a similar effect for loans with DTI ratios
above 43 percent when the Temporary GSE QM loan definition expires. The
Bureau acknowledges that the Assessment Report's finding, without other
information, does not prove or disprove the effectiveness of the DTI
limit in achieving the purposes of the January 2013 Final Rule in
ensuring consumers' ability to repay the loan. If the denied applicants
in fact lacked the ability to repay, then the reduction in approval
rates is an appropriate consequence of the Rule. However, if the denied
applicants did have the ability to repay, then these data suggest an
unintended consequence of the Rule. This possibility is supported by
the fact that other findings in the Assessment Report suggest that
applicants for high-DTI ratio, non-GSE eligible loans are being denied,
even though other compensating factors indicate that some of them may
have the ability to repay their loans.\159\
---------------------------------------------------------------------------
\157\ See, e.g., id. at 10, 194-96.
\158\ See, e.g., id. at 10-11, 117, 131-47.
\159\ See, e.g., Assessment Report supra note 58, at 150, 153,
Table 20. Table 20 illustrates how the pool of denied non-GSE
eligible high-DTI applicants has changed between 2013 and 2014.
After the introduction of the Rule, the pool of denied applicants
contains more consumers with higher incomes, higher FICO scores, and
higher down payments.
---------------------------------------------------------------------------
The current state of the non-QM market heightens the access to
credit concerns related to the specific 43 percent DTI limit,
particularly if such conditions persist after the expiration of the
Temporary GSE QM loan definition. The Bureau stated in the January 2013
Final Rule that it believed mortgages that could be responsibly
originated with DTI ratios that exceed 43 percent, which historically
includes over 20 percent of mortgages, would be made under the general
ATR standard.\160\ However, the Assessment Report found that a robust
market for non-QM loans above the 43 percent DTI limit has not
materialized as the Bureau had predicted. Therefore, there is limited
capacity in the non-QM market to provide access to credit after the
expiration of the Temporary GSE QM loan definition.\161\ As described
above, the non-QM market has been further reduced by the recent
economic disruptions associated with the COVID-19 pandemic, with most
mortgage credit now available in the QM lending space. The Bureau
acknowledges that the slow development of the non-QM market, and the
recent economic disruptions associated with the COVID-19 pandemic that
may significantly hinder its development in the near term, may further
reduce access to credit outside the QM space.
---------------------------------------------------------------------------
\160\ 78 FR 6408, 6527 (Jan. 30, 2013).
\161\ Assessment Report, supra note 58, at 198.
---------------------------------------------------------------------------
The Bureau also has particular concerns about the effects of the
appendix Q definitions of debt and income on access to credit. The
Bureau intended for appendix Q to provide creditors with certainty
about the DTI ratio calculation to foster compliance with the General
QM loan definition. However, based on extensive stakeholder feedback
and its own experience, the Bureau recognizes that appendix Q's
definitions of debt and income are rigid and difficult to apply and do
not provide the level of compliance certainty that the Bureau
anticipated. Stakeholders have reported that these concerns are
particularly acute for transactions involving self-employed consumers,
consumers with part-time employment, and consumers with irregular or
unusual income streams. The standards in appendix Q could negatively
impact access to credit for these consumers, particularly after
expiration of the Temporary GSE QM loan definition. The Assessment
Report also noted concerns with the perceived lack of clarity in
appendix Q and found that such concerns ``may have contributed to
investors'--and at least derivatively, creditors'--preference'' for
Temporary GSE QM loans.\162\ Appendix Q, unlike other standards for
calculating and verifying debt and income, has not been revised since
2013.\163\ The current definitions of debt and income in appendix Q
have proven to be complex in practice, and, as discussed below, the
Bureau has concerns about other potential approaches to defining debt
and income in connection with conditioning QM status on a specific DTI
limit.
---------------------------------------------------------------------------
\162\ Id. at 193.
\163\ Id. at 193-94.
---------------------------------------------------------------------------
At the time of the January 2013 Final Rule, the Bureau sought to
provide a period for economic, market, and regulatory conditions to
stabilize and for a reasonable transition period to the General QM loan
definition and non-QM loans above a 43 percent DTI ratio. However,
contrary to the Bureau's expectations, lending largely has remained in
the Temporary GSE QM loan space, and a robust and sizable market to
support non-QM lending has not yet emerged.\164\ As noted above, the
Bureau acknowledges that the recent economic disruptions associated
with the COVID-19 pandemic may further hinder development of the non-QM
market, at least in the near term. The Bureau expects that a
significant number of Temporary GSE QM loans would not qualify as
General QM loans under the current rule after the Temporary GSE QM loan
definition expires, either because they have DTI ratios above 43
percent or because their method of documenting and verifying income or
debt is incompatible with appendix Q. Although alternative loan options
would still be available to many consumers after expiration of the
Temporary GSE QM loan definition, the Bureau anticipates that, with
respect to loans that are currently Temporary GSE QM loans and would
not otherwise qualify as General QM loans under the current definition,
some would cost materially more for consumers and some would not be
made at all.
---------------------------------------------------------------------------
\164\ Id. at 198.
---------------------------------------------------------------------------
Specifically, the Bureau's Dodd-Frank Act 1022(b) Analysis, below,
estimates that, as a result of the General QM loan definition's 43
percent DTI limit, approximately 957,000 loans--16 percent of all
closed-end first-lien residential mortgage originations in 2018--would
be affected by the expiration of the Temporary GSE QM loan
definition.\165\ An additional, smaller number of loans that currently
qualify as Temporary GSE QM loans may not fall within the General QM
loan definition after expiration of the Temporary GSE QM loan
definition because the method used for verifying income or debt would
not comply with
[[Page 41730]]
appendix Q.\166\ The Temporary GSE QM loan definition is currently set
to expire upon the earlier of January 10, 2021 or when GSE
conservatorship ends, and the Bureau believes that many loans currently
originated under the Temporary GSE QM loan definition may cost
materially more or may not be made at all, absent changes to the
General QM loan definition. After the Temporary GSE QM loan definition
expires, the Bureau expects that many consumers with DTI ratios above
43 percent who would have received a Temporary GSE QM loan would
instead obtain FHA-insured loans since FHA currently insures loans with
DTI ratios up to 57 percent.\167\ The number of loans that move to FHA
would depend on FHA's willingness and ability to insure such loans,
whether FHA continues to treat all loans that it insures as QMs under
its own QM rule, and how many loans that would have been originated as
Temporary GSE QM loans with DTI ratios above 43 percent exceed FHA's
loan-amount limit.\168\ For example, the Bureau estimates that, in
2018, 11 percent of Temporary GSE QM loans with DTI ratios above 43
percent exceeded FHA's loan-amount limit.\169\ Thus, the Bureau
considers that at most 89 percent of loans that would have been
Temporary GSE QM loans with DTI ratios above 43 percent could move to
FHA.\170\ The Bureau expects that loans that are originated as FHA
loans instead of under the Temporary GSE QM loan definition generally
would cost materially more for many consumers.\171\ The Bureau expects
that some consumers offered FHA loans may choose not to take out a
mortgage because of these higher costs.
---------------------------------------------------------------------------
\165\ Dodd-Frank Act section 1022(b) (analysis cites the
Bureau's prior estimate of affected loans in the ANPR); see 84 FR
37155, 37159 (July 31, 2019).
\166\ Id. at 37159 n.58.
\167\ In fiscal year 2019, approximately 57 percent of FHA-
insured purchase mortgages had a DTI ratio above 43 percent. U.S.
Dep't of Hous. & Urban Dev., Annual Report to Congress Regarding the
Financial Status of the FHA Mutual Mortgage Insurance Fund, Fiscal
Year 2019, at 33 using data from App. B Tabl. B9 (Nov. 14, 2018),
https://www.hud.gov/sites/dfiles/Housing/documents/2019FHAAnnualReportMMIFund.pdf.
\168\ 84 FR 37155, 37159 (July 31, 2019).
\169\ Id. In 2018, FHA's county-level maximum loan limits ranged
from $294,515 to $679,650 in the continental United States. See U.S.
Dep't of Hous. & Urban Dev., FHA Mortgage Limits, https://entp.hud.gov/idapp/html/hicostlook.cfm (last visited June 21, 2020).
\170\ 84 FR 37155, 37159 (July 31, 2019).
\171\ Interest rates and insurance premiums on FHA loans
generally feature less risk-based pricing than conventional loans,
charging more similar rates and premiums to all consumers. As a
result, they are likely to cost more than conventional loans for
consumers with stronger credit scores and larger down payments.
Consistent with this pricing differential, consumers with higher
credit scores and larger down payments chose FHA loans relatively
rarely in 2018 HMDA data on mortgage originations. See Bureau of
Consumer Fin. Prot., Introducing New and Revised Data Points in
HMDA, August 2019, https://files.consumerfinance.gov/f/documents/cfpb_new-revised-data-points-in-hmda_report.pdf.
---------------------------------------------------------------------------
It is also possible that some consumers with DTI ratios above 43
percent would be able to obtain loans in the private market.\172\ The
ANPR noted that the number of loans absorbed by the private market
would likely depend, in part, on whether actors in the private market
are willing to assume the legal or credit risk associated with
funding--as non-QM loans or small-creditor portfolio QM loans--loans
that would have been Temporary GSE QM loans (with DTI ratios above 43
percent) \173\ and, if so, whether actors in the private market would
offer more competitive pricing or terms.\174\ For example, the Bureau
estimates that 55 percent of loans that would have been Temporary GSE
QM loans (with DTI ratios above 43 percent) in 2018 had credit scores
at or above 680 and LTV ratios at or below 80 percent--credit
characteristics traditionally considered attractive to actors in the
private market.\175\ The ANPR also noted that there are certain built-
in costs to FHA loans--namely, mortgage insurance premiums--which could
be a basis for competition, and that depository institutions in recent
years have shied away from originating and servicing FHA loans due to
the obligations and risks associated with such loans.\176\ At the same
time, the Assessment Report found there has been limited momentum
toward a greater role for private market non-QM loans. It is uncertain
how great this role will be in the future,\177\ particularly in the
short term due to the economic effects of the COVID-19 pandemic.
Finally, the ANPR noted that some consumers with DTI ratios above 43
percent who would have sought Temporary GSE QM loans may adapt to
changing options and make different choices, such as adjusting their
borrowing to result in a lower DTI ratio.\178\ However, some consumers
who would have sought Temporary GSE QM loans (with DTI ratios above 43
percent) may not obtain loans at all.\179\ For example, based on
application-level data obtained from nine large lenders, the Assessment
Report found that the January 2013 Final Rule eliminated between 63 and
70 percent of non-GSE eligible, high-DTI home purchase loans.\180\
---------------------------------------------------------------------------
\172\ 84 FR 37155, 37159 (July 31, 2019).
\173\ See 12 CFR 1026.43(e)(5) (extending QM status to certain
portfolio loans originated by certain small creditors). In addition,
section 101 of the Economic Growth, Regulatory Relief, and Consumer
Protection Act, Public Law 115-174, 132 Stat. 1296 (2018), amended
TILA to add a safe harbor for small creditor portfolio loans. See 15
U.S.C. 1639c(b)(2)(F).
\174\ 84 FR 37155, 37159 (July 31, 2019).
\175\ Id.
\176\ Id.
\177\ Id.
\178\ Id.
\179\ Id.
\180\ See Assessment Report supra note 58, at 10-11, 117, 131-
47.
---------------------------------------------------------------------------
In the separate Extension Proposal, the Bureau is proposing to
replace the January 10, 2021 sunset date with a provision that would
amend the Temporary GSE QM loan definition so that it would expire upon
the earlier of the effective date of final amendments to the General QM
loan definition, or when GSE conservatorship ends.\181\ The Bureau is
issuing that separate proposal to ensure that responsible, affordable
credit remains available to consumers who may be affected if the
Temporary GSE QM loan definition expires before amendments to the
General QM loan definition take effect.
---------------------------------------------------------------------------
\181\ As the Bureau notes in the separate Extension Proposal,
the Bureau does not intend for the effective date of final
amendments to the General QM loan definition to be prior to April 1,
2021. Thus, the Bureau does not intend for the Temporary GSE QM loan
definition to expire prior to April 1, 2021.
---------------------------------------------------------------------------
C. Why the Bureau Is Proposing a Price-Based QM Definition To Replace
the General QM Loan Definition DTI Limit
Given the significant issues associated with the 43 percent DTI
limit, the Bureau is proposing to remove that requirement from the
General QM loan definition in Sec. 1026.43(e)(2)(vi) and replace it
with a requirement based on the price of the loan. Specifically, in
addition to the statutory product features and underwriting
restrictions that apply under the current rule, a loan would meet the
General QM loan definition only if the APR exceeds APOR for a
comparable transaction by less than two percentage points as of the
date the interest rate is set. The proposal would provide higher
thresholds for loans with smaller loan amounts and for subordinate-lien
transactions. Although the proposal would remove the 43 percent DTI
limit from the General QM loan definition, it would require that the
creditor: (1) Consider the consumer's income or assets, debt
obligations, alimony, and child support, and monthly DTI ratio or
residual income, and (2) verify the consumer's current or reasonably
expected income or assets other than the value of the dwelling
(including any real property attached to the dwelling) that secures the
loan and the consumer's current debt obligations, alimony, and child
support. The proposal would remove appendix Q but would clarify the
requirements to consider and verify a consumer's
[[Page 41731]]
income, assets, debt obligations, alimony, and child support, to help
prevent compliance uncertainty that could otherwise result from the
removal of appendix Q. Consistent with the current rule, the proposal
would preserve the current threshold separating safe harbor from
rebuttable presumption QMs, under which a loan is a safe harbor QM if
its APR exceeds APOR for a comparable transaction by less than 1.5
percentage points as of the date the interest rate is set.\182\
---------------------------------------------------------------------------
\182\ The current rule provides a higher safe harbor threshold
of 3.5 percentage points over APOR for small creditor portfolio QMs
and balloon-payment QMs made by certain small creditors pursuant to
Sec. 1026.43(e)(5), (e)(6) and (f). See Sec. 1026.43(b)(4). This
proposal would not alter those thresholds.
---------------------------------------------------------------------------
The Bureau acknowledges there is significant debate over whether
loan pricing, a consumer's DTI ratio, or another direct or indirect
measure of a consumer's personal finances is a better predictor of loan
performance, particularly when analyzed across various points in the
economic cycle.\183\ Some commenters responding to the ANPR advocated
for retaining a DTI requirement as part of the General QM loan
definition, arguing that it is a strong indicator of a consumer's
ability to repay. Other commenters suggested a range of options to
replace the current DTI requirement in the General QM loan definition,
including by prescribing a residual income test; allowing compensating
factors (such as LTV ratios and credit scores) in conjunction with a
DTI ratio; and defining QM by reference to widely used underwriting
standards. In seeking comments on this proposal, the Bureau is not
determining whether DTI ratios, a loan's price, or some other measure
is the best predictor of loan performance. As discussed below, analysis
provided by stakeholders and the Bureau's own analysis show that
pricing is strongly correlated with loan performance, based on early
delinquency rates, across a variety of loans and economic conditions.
However, the Bureau acknowledges that DTI is also predictive of loan
performance and that other direct and indirect measures of consumer
finances may also be predictive of loan performance. The Bureau does
not make a finding here on whether or to what extent one measure
clearly outperforms others in predicting loan performance. Rather, the
Bureau has weighed several policy considerations in selecting an
approach for the proposal based on the purposes of the ATR/QM
provisions of TILA.
---------------------------------------------------------------------------
\183\ See, e.g., Norbert Michel, The Best Housing Finance Reform
Options for the Trump Administration, Forbes (July 15, 2019),
https://www.forbes.com/sites/norbertmichel/2019/07/15/the-best-housing-finance-reform-options-for-the-trump-administration/#4f5640de7d3f; Eric Kaplan et al., Milken Institute, A Blueprint for
Administrative Reform of the Housing Finance System, at 17 (Jan.
2019), https://assets1b.milkeninstitute.org/assets/Publication/Viewpoint/PDF/Blueprint-Admin-Reform-HF-System-1.7.2019-v2.pdf
(suggesting that the Bureau both (1) expand the 43 percent DTI limit
to 45 percent to move market share of higher-DTI loans from the GSEs
and FHA to the non-agency market, and (2) establish a residual
income test to protect against the risk of higher DTI loans); Morris
Davis et al., A Quarter Century of Mortgage Risk (FHFA, Working
Paper 19-02, 2019), https://www.fhfa.gov/PolicyProgramsResearch/Research/Pages/wp1902.aspx (examining various loan characteristics
and a summary measure of risk--the stressed default rate--for
predictiveness of loan performance).
---------------------------------------------------------------------------
In particular, the Bureau has balanced considerations related to
ensuring consumers' ability to repay and maintaining access to credit
in deciding to seek comment on replacing the current 43 percent DTI
limit with a price-based approach. The Bureau continues to view the
statute as fundamentally about assuring that consumers receive mortgage
credit that they are able to repay. However, the Bureau is also
concerned about maintaining access to responsible, affordable mortgage
credit. The Bureau is concerned that the current General QM loan
definition, with a 43 percent DTI limit, would result in a significant
reduction in the scope of QM and could reduce access to responsible,
affordable mortgage credit after the Temporary GSE QM loan definition
expires. The lack of a robust non-QM market enhances those concerns.
Although the Bureau noted in the January 2013 Final Rule that it
expected access to credit outside of the QM lending space to develop
over time, the Assessment Report found that a robust and sizable market
to support non-QM lending has not emerged since the Rule took
effect.\184\ The Bureau also acknowledges that the non-QM market has
been further reduced by the recent economic disruptions associated with
the COVID-19 pandemic, with most mortgage credit now available in the
QM lending space. Although it remains possible that, over time, a
substantial market for non-QM loans will emerge, that market has
developed slowly, and the recent economic disruptions associated with
the COVID-19 pandemic may significantly hinder its development, at
least in the near term.
---------------------------------------------------------------------------
\184\ Assessment Report, supra note 58, at 198.
---------------------------------------------------------------------------
With respect to ability to repay, the Bureau has focused on
analysis of early delinquency rates to evaluate whether a loan's price,
as measured by the spread of APR over APOR (herein referred to as the
loan's rate spread), may be an appropriate measure of whether a loan
should be presumed to comply with the ATR provisions. Because the
affordability of a given mortgage will vary from consumer to consumer
based upon a range of factors, there is no single recognized metric, or
set of metrics, that can directly measure whether the terms of mortgage
loans are reasonably within consumers' ability to repay.\185\ As such,
consistent with the Bureau's prior analyses in the Assessment Report,
the Bureau uses early distress as a proxy for the lack of the
consumer's ability to repay at consummation across a wide pool of
loans. Consistent with the Assessment Report, for the analyses of early
delinquency rates below, the Bureau measures early distress as whether
a consumer was ever 60 or more days past due within the first 2 years
after origination (referred to herein as the early delinquency
rate).\186\ The Bureau's analysis focuses on early delinquency rates to
capture consumers' difficulties in making payments soon after
consummation of the loan (i.e., within the first 2 years), even if
these delinquencies do not lead to consumers potentially losing their
homes (i.e., 60 or more days past due, as opposed to 90 or more days or
in foreclosure), as early difficulties in making payments indicates
higher likelihood that the consumer may have lacked ability to repay at
consummation. As in the Assessment Report, the Bureau assumes that the
average early delinquency rate across a wide pool of mortgages--whether
safe harbor QM, rebuttable presumption QM, or non-QM--is probative of
whether such loans are reasonably within consumers' repayment ability,
and that the dependence of these early delinquency rates on the
defining characteristics of such loans is probative of how those
characteristics may influence repayment ability. The Bureau
acknowledges that alternative measures of delinquency, including those
used in analyses submitted as comments on the ANPR, may also be
probative of repayment ability.
---------------------------------------------------------------------------
\185\ Id. at 83.
\186\ Id.
---------------------------------------------------------------------------
The Bureau has reviewed the available evidence to assess whether
rate spreads can distinguish loans that are likely to have low early
delinquency rates--and thus may be presumed to reasonably reflect the
consumer's ability to repay--from loans that are likely to have higher
rates of delinquency--for which it would not be appropriate to presume
the consumer's ability to repay. The Bureau's own analysis and recent
[[Page 41732]]
analyses published in response to the Bureau's ANPR and RFIs provide
strong evidence of increasing early delinquency rates with higher rate
spreads across a range of datasets, time periods, loan types, measures
of rate spread, and measures of delinquency. The Bureau's delinquency
analysis uses data from the National Mortgage Database (NMDB),\187\
including a matched sample of NMDB and HMDA loans.\188\ As described
below, analysis of these datasets shows that early delinquency rates
rise with rate spread.
---------------------------------------------------------------------------
\187\ See Bureau of Consumer Fin. Prot., Sources and Uses of
Data at the Bureau of Consumer Financial Protection, at 55-56 (Sept.
2018), https://www.consumerfinance.gov/documents/6850/bcfp_sources-uses-of-data.pdf. (The NMDB, jointly developed by the FHFA and the
Bureau, provides de-identified loan characteristics and performance
information for a five percent sample of all mortgage originations
from 1998 to the present, supplemented by de-identified loan and
borrower characteristics from Federal administrative sources and
credit reporting data.)
\188\ HMDA was originally enacted by Congress in 1975 and is
implemented by Regulation C, 12 CFR part 1003. See Bureau of
Consumer Fin. Prot., Mortgage data (HMDA), https://www.consumerfinance.gov/data-research/hmda/. HMDA requires many
financial institutions to maintain, report, and publicly disclose
loan-level information about mortgages. These data are housed here
to help show whether lenders are serving the housing needs of their
communities; they give public officials information that helps them
make decisions and policies; and they shed light on lending patterns
that could be discriminatory. The public data are modified to
protect applicant and borrower privacy.
---------------------------------------------------------------------------
Table 1 shows early delinquency rates for 2002-2008 first-lien
purchase originations in the NMDB, with loans categorized according to
their approximate rate spread. The Bureau analyzed 2002 through 2008
origination years because the relatively fixed private mortgage
insurance (PMI) pricing during these years allows for reliable
approximation of this important component of rate spreads.\189\ The
sample is restricted to loans without product features that would make
them non-QM under the current rule. Table 1 shows that early
delinquency rates increase consistently with rate spreads, from a low
of 2 percent among loans with rate spreads below or near zero, up to 14
percent for loans with rate spreads of 2.25 percentage points or more
over APOR.\190\ The Bureau notes that this sample includes loans
originated during the peak of the housing boom and delinquencies that
occurred during the ensuing recession, contributing to the high overall
levels of early delinquency.
---------------------------------------------------------------------------
\189\ See Neil Bhutta and Benjamin J. Keys, Eyes Wide Shut? The
Moral Hazard of Mortgage Insurers during the Housing Boom, NBER
Working Paper No. 24844, https://www.nber.org/papers/w24844.pdf.
APOR is approximated with weekly Freddie Mac Primary Mortgage Market
Survey (PMMS) data, retrieved from Fed. Reserve Bank of St. Louis,
Fed. Reserve Econ. Data,; https://fred.stlouisfed.org/, March 4,
2020. Each loan's APR is approximated by the sum of the interest
rate in the NMDB data and an assumed PMI payment of 0.32, 0.52, or
0.78 percentage points for loans with LTVs above 80 but at or below
85, above 85 but at or below 90, and above 90, respectively. These
PMI are based on standard industry rates during this time period.
The 30-year Fixed Rate PMMS average is used for fixed-rate loans
with terms over 15 years, and 15-year Fixed Rate PMMS is used for
loans with terms of 15 years or less. The 5/1-year Adjustable-Rate
PMMS average is used (for available years) for ARMs with a first
interest rate reset occurring 5 or more years after origination,
while the 1-year adjustable-rate PMMS average is used for all other
ARMs.
\190\ Loans with rate spreads of 2.25 percentage points or more
are grouped in Tables 1 and 5 to ensure sufficient sample size for
reliable analysis of the 2002-2008 data. This grouping ensures that
all cells shown in Table 5 contain at least 500 loans.
Table 1--2002-2008 Originations, Early Delinquency Rate by Rate Spread
------------------------------------------------------------------------
Early
Rate spread (interest rate + PMI approximation-- delinquency rate
PMMS\191\) in percentage points (percent)
------------------------------------------------------------------------
< 0.................................................. 2
0-0.24............................................... 2
0.25-0.49............................................ 4
0.50-0.74............................................ 5
0.75-0.99............................................ 6
1.00-1.24............................................ 8
1.25-1.49............................................ 10
1.50-1.74............................................ 12
1.75-1.99............................................ 13
2.00-2.24............................................ 14
2.25 and above....................................... 14
------------------------------------------------------------------------
Analysis of additional data, as reflected in Table 2, also shows
early delinquency rates rising with rate spread. Table 2 shows early
delinquency statistics for 2018 NMDB first-lien purchase originations
that have been matched to 2018 HMDA data, enabling the Bureau to use
actual rate spreads over APOR rather than approximated rate spreads in
its analysis.\192\ As with the data reflected in Table 1, loans with
product features that would make them non-QM under the current rule are
excluded from Table 2. However, only delinquencies occurring through
December 2019 are observed in Table 2, meaning most loans are not
observed for a full two years after origination. This more recent
sample provides insight into early delinquency rates under post-crisis
lending standards, and for an origination cohort that had not undergone
(as of December 2019) a large economic downturn. The 2018 data are
divided into wider bins (as compared to Table 1) to ensure enough loans
per bin. As with Table 1, Table 2 shows that early delinquency rates
increase consistently with rate spreads, from a low of 0.2 percent for
loans with rate spreads near APOR or below APOR, up to 4.2 percent for
loans with rate spreads of 2 percentage points or more over APOR.\193\
---------------------------------------------------------------------------
\191\ Freddie Mac's PMMS is the source of data underlying APOR
rate for most mortgages. See supra note 189 for additional details.
\192\ Where possible, the FHFA provided an anonymized match of
HMDA loan identifiers for 2018 NMDB originations, allowing the
Bureau to analyze more detailed HMDA loan characteristics (e.g.,
rate spread over APOR) for approximately half of 2018 NMDB
originations.
\193\ Loans with rate spreads of 2 percentage points or more are
grouped in Tables 2 and 6 to ensure sufficient sample size for
reliable analysis of the 2018 data. This grouping ensures that all
cells shown in Table 6 contain at least 500 loans.
Table 2--2018 Originations, Early Delinquency Rate by Rate Spread
------------------------------------------------------------------------
Early delinquency
Rate spread over APOR in percentage points rate (as of Dec.
2019) (percent)
------------------------------------------------------------------------
< 0.................................................. 0.2
0-0.49............................................... 0.2
0.50-0.99............................................ 0.6
1.00-1.49............................................ 1.7
1.50-1.99............................................ 2.7
2.00 and above....................................... 4.2
------------------------------------------------------------------------
Given the specific DTI limit under the current rule, the Bureau
also analyzed the relationship between DTI ratios and early delinquency
for the same samples of loans in Tables 3 and 4. The Bureau's analyses
show that early delinquency rates increase consistently with DTI ratio
in both samples. In the 2002-2008 sample, early delinquency rates
increase from a low of 3 percent among loans with DTI ratios at or
below 25 percent, up to 9 percent for loans with DTI ratios between 61
and 70 percent.\194\ In the 2018 sample, early delinquency rates
increase from 0.4 percent among loans with DTI ratios at or below 25
percent, up to 0.9 percent among loans with DTI ratios between 44 and
50.\195\ The difference in early delinquency rates between loans with
the highest and lowest DTI ratios is smaller than the difference in
early delinquency rates between the highest and lowest rate spreads
during both periods. For these samples and bins of rate spread and DTI
ratios, this pattern is consistent with a stronger correlation between
rate spread and early delinquency than between DTI ratios and early
delinquency.
---------------------------------------------------------------------------
\194\ Fewer than 0.7 percent of loans have reported DTI ratios
over 70 percent in the 2002-2008 data. These loans are excluded from
Tables 3 and 5 due to reliability concerns and to ensure that all
cells shown in Table 5 contain at least 500 loans.
\195\ Fewer than 0.5 percent of loans have reported DTI ratios
over 50 percent in the 2018 data. These loans are excluded from
Tables 4 and 6 due to reliability concerns and to ensure that all
cells shown in Table 6 contain at least 500 loans.
[[Page 41733]]
Table 3--2002-2008 Originations, Early Delinquency Rate by DTI Ratio
(percentage)
------------------------------------------------------------------------
Early
DTI delinquency rate
------------------------------------------------------------------------
0-20................................................. 3
21-25................................................ 3
26-30................................................ 4
31-35................................................ 5
36-40................................................ 6
41-43................................................ 6
44-45................................................ 7
46-48................................................ 7
49-50................................................ 8
51-60................................................ 8
61-70................................................ 9
------------------------------------------------------------------------
Table 4--2018 Originations, Early Delinquency Rate by DTI
------------------------------------------------------------------------
Early
delinquency rate
DTI (as of Dec. 2019)
(percent)
------------------------------------------------------------------------
0-25................................................. 0.4
26-35................................................ 0.5
36-43................................................ 0.7
44-48................................................ 0.9
49-50................................................ 0.9
------------------------------------------------------------------------
To further analyze the strengths of DTI ratios and pricing in
predicting early delinquency rates, Tables 5 and 6 show the early
delinquency rates of these same samples categorized according to both
their DTI ratios and their rate spreads. Table 5 shows early
delinquency rates for 2002-2008 first-lien purchase originations in the
NMDB, with loans categorized according to both their DTI ratio and
their approximate rate spread. For loans within a given DTI ratio
range, those with higher rate spreads consistently had higher early
delinquency rates. Loans with low rate spreads had relatively low early
delinquency rates even at high DTI ratio levels, as seen in the 2
percent early delinquency rate for loans priced below APOR but with DTI
ratios of 46 to 48 percent, 51 to 60 percent, and 61 to 70 percent.
However, the highest early delinquency rates occurred for loans with
high rate spreads and high DTI ratios, reaching 26 percent for loans
priced 2 to 2.24 percentage points above APOR with DTI ratios of 61 to
70 percent. Across DTI bins, loans priced 2 percentage points or more
above APOR had early delinquency much higher than loans priced below
APOR.
Table 5--2002-2008 Originations, Early Delinquency Rate by Rate Spread and DTI Ratio
--------------------------------------------------------------------------------------------------------------------------------------------------------
DTI 0- DTI 21- DTI 26- DTI 31- DTI 36- DTI 41- DTI 44- DTI 46- DTI 49- DTI 51- DTI 61-
Rate spread (interest rate + PMI approx.--PMMS) in 20 (%) 25 (%) 30 (%) 35 (%) 40 (%) 43 (%) 45 (%) 48 (%) 50 (%) 60 (%) 70 (%)
percentage points
--------------------------------------------------------------------------------------------------------------------------------------------------------
<0................................................... 2 1 1 2 2 2 2 2 3 2 2
0-0.24............................................... 2 2 2 2 2 3 3 3 3 3 3
0.25-0.49............................................ 3 3 3 3 4 5 4 5 5 5 5
0.50-0.74............................................ 4 4 4 4 5 6 6 6 7 7 7
0.75-0.99............................................ 4 5 5 6 6 7 7 7 8 8 10
1.00-1.24............................................ 6 6 6 7 7 9 9 9 10 11 13
1.25-1.49............................................ 6 7 8 8 10 11 12 12 12 14 15
1.50-1.74............................................ 7 8 9 10 13 13 15 14 16 15 20
1.75-1.99............................................ 7 8 10 12 14 15 16 16 16 18 22
2.00-2.24............................................ 6 10 10 12 15 15 17 19 18 20 26
2.25 and above....................................... 7 9 10 13 15 16 16 18 19 20 25
--------------------------------------------------------------------------------------------------------------------------------------------------------
Similarly, Table 6 shows average early delinquency statistics, with
loans categorized according to both DTI and rate spread, for the sample
of 2018 NMDB first-lien purchase originations that have been matched to
2018 HMDA data.\196\ For Table 6, the higher early delinquency rate for
loans with higher rate spreads over APOR matches the pattern shown in
the data from Table 5. Overall early delinquency rates are
substantially lower, reflecting the importance of economic conditions
in the likelihood of delinquency for any given consumer. However, the
2018 loans priced 2 percentage points or more above APOR also had early
delinquency rates much higher than loans priced below APOR.
---------------------------------------------------------------------------
\196\ As in Tables 2 and 4, above, the 2018 data are divided
into larger bins to ensure enough loans per bin. Loans with a DTI
ratio greater than 50 percent are excluded, as well as loans with a
DTI ratio at or below 25 percent and rate spreads of 1.5 percentage
points and above, because these bins contained fewer than 500 loans
in the matched 2018 NMDB-HMDA sample.
Table 6--2018 Originations, Early Delinquency Rate by Rate Spread and DTI Ratio
----------------------------------------------------------------------------------------------------------------
DTI 0-25 DTI 26-35 DTI 36-43 DTI 44-50
Rate spread over APOR in percentage points (%) (%) (%) (%)
----------------------------------------------------------------------------------------------------------------
< 0......................................................... 0.1 0.1 0.2 0.3
0-0.49...................................................... 0.2 0.1 0.3 0.3
0.50-0.99................................................... 0.1 0.4 0.8 0.8
1.00-1.49................................................... 1.0 1.4 1.5 2.3
1.50-1.99................................................... ........... 3.2 2.5 2.3
2.00 and above.............................................. ........... 4.4 3.9 4.2
----------------------------------------------------------------------------------------------------------------
The Bureau notes that the high relative risk of early delinquency
for higher-priced loans holds across samples, demonstrating that rate
spreads distinguish early delinquency risk under a range of economic
conditions and creditor practices. Analyses published in response to
the Bureau's ANPR and RFIs are consistent
[[Page 41734]]
with the Bureau's analysis showing that early delinquency rates rise
consistently with rate spread. For example, CoreLogic analyzes a set of
2018 HMDA conventional mortgage originations merged to loan performance
data collected from mortgage servicers.\197\ The CoreLogic analysis
finds: (1) The lowest delinquency rates among loans with rate spreads
that are below APOR, and (2) increased early delinquency rates for each
sequentially higher bin of rate spreads up to two percentage points. In
assessing the CoreLogic analysis, the Bureau notes that loans priced at
or above two percentage points over APOR in the 2018 HMDA data are
relatively rare and are disproportionately made for manufactured
housing and smaller loan amounts and therefore may not be well
represented in mortgage servicing datasets. However, these loans also
have relatively high rates of delinquency.\198\ CoreLogic finds a
similar, but more variable, positive relationship between rate spreads
over APOR and delinquency in earlier cohorts (2010-2017) of merged
HMDA-CoreLogic originations, a period in which rate spreads were only
reported for loans priced at least 1.5 percentage points over
APOR.\199\
---------------------------------------------------------------------------
\197\ See Archana Pradhan & Pete Carroll, Expiration of the
CFPB's Qualified Mortgage (QM) GSE Patch--Part V, LogicCore Insights
Blog, (Jan. 13, 2020), https://www.corelogic.com/blog/2020/1/expiration-of-the-cfpbs-qualified-mortgage-qm-gse-patch-part-v.aspx.
Delinquency was measured as of October 2019, so loans do not have
two full years of payment history.
\198\ The Bureau analyzes the performance and pricing for
smaller loans in the section-by-section analysis for Sec.
1026.43(e)(2)(vi).
\199\ See Archana Pradhan & Pete Carroll, Expiration of the
CFPB's Qualified Mortgage (QM) GSE Patch--Part IV, LogicCore
Insights Blog, (Jan. 11, 2020), https://www.corelogic.com/blog/2020/1/expiration-of-the-cfpbs-qualified-mortgage-qm-gse-patch-part-iv.aspx. Delinquency measured as of October 2019.
---------------------------------------------------------------------------
Further, using loan performance data from Black Knight, analyses by
the Urban Institute show a comparable positive relationship between
rate spreads--measured there as the note rate over Freddie Mac's
Primary Mortgage Market Survey--and delinquency.\200\ The analysis
finds that the relationship holds across a range of loan types
(conventional loans held in portfolio, in GSE securitizations, and in
private securitizations; FHA loans; VA loans) and years (1995-2018).
Additional analyses by the Urban Institute show the same positive
relationship between rate spread and loan performance in Fannie Mae
loan-level performance data.\201\
---------------------------------------------------------------------------
\200\ See Karan Kaul & Laurie Goodman, Urban Inst., Updated:
What, If Anything, Should Replace QM GSE Patch, (Oct. 2020), at 9,
https://www.urban.org/sites/default/files/publication/99268/2018_10_30_qualified_mortgage_rule_update_finalized_4.pdf.
\201\ See Karan Kaul et al., Urban Inst., Comment Letter to the
Consumer Financial Protection Bureau on the Qualified Mortgage Rule,
(Sept. 2019), at 9-10, https://www.urban.org/sites/default/files/publication/101048/comment_letter_to_the_consumer_financial_protection_bureau_0.pdf.
---------------------------------------------------------------------------
Collectively, this evidence suggests that higher rate spreads--
including the specific measure of APR over APOR--are strongly
correlated with early delinquency rates. Given that early delinquency
captures consumers' difficulty making required payments, these rate
spreads provide a proxy measure for whether the terms of mortgage loans
reasonably reflect consumers' ability to repay at the time of
origination. The Bureau acknowledges that a test that combines rate
spread and DTI may better predict early delinquency rates than either
metric on its own. However, any rule with a specific DTI limit would
need to provide standards for calculating the income that may be
counted and the debt that must be counted so that creditors and
investors can ensure with reasonable certainty that they have
accurately calculated DTI within the specific DTI limit. As noted above
and discussed further below, the current definitions of debt and income
in appendix Q have proven to be complex in practice and may unduly
restrict access to credit. The Bureau has concerns about whether other
potential approaches could define debt and income with sufficient
clarify while at the same time providing flexibility to accommodate new
approaches to verification and underwriting. As noted in part V.E
below, the Bureau is requesting comment on whether the rule should
retain a specific DTI limit and, if so, whether the Bureau's proposed
approach to verification of income and debt in Sec. 1026.43(e)(2)(v)
would provide a workable method for defining debt and income for a
specific DTI limit. Part V.E below requests comment on whether certain
aspects of proposed Sec. 1026.43(e)(2)(v) could be applied to a
General QM loan definition that includes a specific DTI limit.
In addition to strongly correlating with loan performance, the
Bureau tentatively concludes that a price-based QM definition, rather
than conditioning QM status on a specific DTI limit, is a more holistic
and flexible measure of a consumer's ability to repay. Mortgage
underwriting, and by extension, a loan's price, generally includes
consideration of a consumer's DTI. However, loan pricing also includes
assessment of additional factors, including LTV ratios, credit scores,
and cash reserves, that might compensate for a higher DTI ratio and
that might also be probative of a consumer's ability to repay. One of
the primary criticisms of the current 43 percent DTI ratio is that it
is too limited in assessing a consumer's finances and, as such, may
unduly restrict access to credit for some consumers for whom it might
be appropriate to presume ability to repay at consummation. Therefore,
a potential benefit of a price-based QM definition is that a mortgage
loan's price reflects credit risk based on many factors, including DTI
ratios, and may be a more holistic measure of ability to repay than DTI
ratios alone. Further, there is inherent flexibility for creditors in a
rate-spread-based QM definition, which could facilitate innovation in
underwriting, including emerging research into alternative mechanisms
to assess a consumer's ability to repay, such as cash flow
underwriting. Although the Bureau is proposing to remove the 43 percent
DTI limit in Sec. 1026.43(e)(2)(vi), the Bureau continues to believe
that DTI is an important factor for creditors to consider in evaluating
consumers' ability to repay. As discussed further in the section-by-
section analysis of Sec. 1026.43(e)(2)(v), below, the Bureau is
proposing to require creditors to consider a consumer's DTI ratio or
residual income to satisfy the General QM loan definition.
The Bureau also notes that there is significant precedent for using
the price of a mortgage loan to determine whether to apply additional
consumer protections, in recognition of the lower risk generally posed
by lower-priced mortgages. A price-based General QM loan definition
would be consistent with these existing provisions that provide greater
protections to consumers with more expensive loans. For example, TILA
and Regulation Z use a loan's APR in comparison to APOR and as one
trigger for heightened consumer protections for certain ``high-cost
mortgages'' pursuant to HOEPA.\202\ Loans that meet HOEPA's high-cost
trigger are subject to special disclosure requirements and restrictions
on loan terms, and consumers with high-cost mortgages have enhanced
remedies for violations of the law. Further, in 2008, the Board
exercised its authority under HOEPA to require certain consumer
protections concerning a consumer's ability to repay, prepayment
penalties,
---------------------------------------------------------------------------
\202\ See TILA section 103(aa)(i); Regulation Z Sec.
1026.32(a)(1)(i). TILA and Regulation Z also provide a separate
price-based coverage trigger based on the points and fees charged on
a loan. See TILA section 130(aa)(ii); Regulation Z Sec.
1026.32(a)(1)(ii).
---------------------------------------------------------------------------
[[Page 41735]]
and escrow accounts for taxes and insurance for a category of ``higher-
priced mortgage loans,'' which have APR spreads lower than those
prescribed for high-cost mortgages but that nevertheless exceed APOR by
a specified threshold.\203\ Although the ATR/QM Rule replaced the
ability-to-repay requirements promulgated pursuant to HOEPA and the
Board's 2008 rule,\204\ higher-priced mortgage loans remain subject to
additional requirements related to escrow accounts for taxes and
homeowners insurance and to appraisal requirements.\205\ The ATR/QM
Rule itself provides additional protection to QMs that are higher-
priced covered transactions, as defined in Sec. 1026.43(b)(4), in the
form of a rebuttable presumption of compliance with the ATR provisions,
instead of a conclusive safe harbor.
---------------------------------------------------------------------------
\203\ 73 FR 44522 (July 30, 2008).
\204\ The Board's 2008 rule was superseded by the January 2013
Final Rule, which imposed ability to repay requirements on a broader
range of closed-end consumer credit transactions secured by a
dwelling. See generally 78 FR 6407 (Jan. 30, 2013).
\205\ See Sec. 1026.35(b) and (c).
---------------------------------------------------------------------------
Finally, the Bureau preliminarily concludes that a price-based
General QM loan definition would provide compliance certainty to
creditors, since creditors would be able to readily determine whether a
loan is a General QM loan. Creditors have experience with APR
calculations due to the existing price-based regulatory requirements
described above, and for various other disclosure and compliance
reasons under Regulation Z. Creditors also have experience determining
the appropriate APOR for use in calculating rate spreads. As such, the
Bureau believes this approach would provide certainty to creditors
regarding a loan's status as a QM.\206\
---------------------------------------------------------------------------
\206\ The Bureau understands from feedback that creditors are
concerned about errors in DTI calculations and have previously
requested that the Bureau permit a cure of DTI overages that are
discovered after consummation. See 79 FR 25730, 25743-45 (May 6,
2014) (requesting comment on potential cure or correction provisions
for DTI overages).
---------------------------------------------------------------------------
Although the proposal would require creditors to consider the
consumer's income, debt, and DTI ratio or residual income, the proposal
would not provide a specific DTI limit. For the reasons discussed below
in the section-by-section analysis of Sec. 1026.43(e)(2)(v)(A), the
Bureau preliminarily concludes that it is appropriate to remove current
appendix Q and instead provide creditors additional flexibility for
defining ``debt'' and ``income.'' Therefore, the Bureau is not
proposing to provide a single, specific set of standards equivalent to
appendix Q for what must be counted as debt and what may be counted as
income for purposes of proposed Sec. 1026.43(e)(2)(v)(A). For purposes
of this proposed requirement, income and debt would be determined in
accordance with proposed Sec. 1026.43(e)(2)(v)(B), which requires the
creditor to verify the consumer's current or reasonably expected income
or assets other than the value of the dwelling (including any real
property attached to the dwelling) that secures the loan, and the
consumer's current debt obligations, alimony, and child support. The
proposed rule would provide a safe harbor to creditors using
verification standards the Bureau specifies. This could potentially
include relevant provisions from Fannie Mae's Single Family Selling
Guide, Freddie Mac's Single-Family Seller/Servicer Guide, FHA's Single
Family Housing Policy Handbook, the VA's Lenders Handbook, and the
Field Office Handbook for the Direct Single Family Housing Program and
Handbook for the Single Family Guaranteed Loan Program of the U.S.
Department of Agriculture (USDA), current as of the proposal's public
release. However, under the proposal, creditors would not be required
to verify income and debt according to the standards the Bureau
specifies. Rather, the proposed rule would also provide creditors with
the flexibility to develop other methods of compliance with the
verification requirements.
Under the proposal, a loan would meet the General QM loan
definition in Sec. 1026.43(e)(2) only if the APR exceeds APOR for a
comparable transaction by less than two percentage points as of the
date the interest rate is set. As described below in the section-by-
section analysis of Sec. 1026.43(e)(2)(vi), the Bureau tentatively
concludes that this threshold would strike an appropriate balance
between ensuring that loans receiving QM status may be presumed to
comply with the ATR provisions and ensuring that access to responsible,
affordable mortgage credit remains available to consumers. For these
same reasons, the Bureau is proposing higher thresholds for smaller
loans and subordinate-lien transactions, as the Bureau is concerned
that loans with lower loan amounts may be priced higher than larger
loans, even when the consumers have similar credit characteristics and
a similar ability to repay. For all loans, regardless of loan size, the
Bureau is not proposing to alter the current threshold separating safe
harbor from rebuttable presumption QMs in Sec. 1026.43(b)(4), under
which a loan is a safe harbor QM if its APR exceeds APOR for a
comparable transaction by less than 1.5 percentage points as of the
date the interest rate is set. As such, loans that otherwise meet the
General QM loan definition and for which the APR exceeds APOR by 1.5 or
more percentage points (but by less than 2 percentage points) as of the
date the interest rate is set would receive a rebuttable presumption of
compliance with the ATR provisions. This approach is discussed further,
below.
Finally, the Bureau notes its analysis of the potential effects on
access to credit of a price-based approach to defining a General QM
loan. As indicated by the various combinations in Table 7 below, 2018
HMDA data show that under the current rule--including the Temporary GSE
QM loan definition, the General QM loan definition with a 43 percent
DTI limit, and the Small Creditor QM loan definition in Sec.
1026.43(e)(5)--90.6 percent of conventional purchase loans were safe
harbor QM loans and 95.8 percent were safe harbor QM or rebuttable
presumption QM loans. Under the proposed General QM rate spread
thresholds of 1.5 (safe harbor) and 2 (rebuttable presumption)
percentage points over APOR, which are described further, below, 91.6
percent of conventional purchase loans would have been safe harbor QM
loans and 96.1 percent would have been safe harbor QM or rebuttable
presumption QM loans.\207\ Based on these 2018 data, rate spread
thresholds of 1-2 percentage points over APOR for safe harbor QM loans
would have covered 83.3 to 94.1 percent of the conventional purchase
market (as safe harbor QM loans), while rate spread thresholds of 1.5-
2.5 percentage points over APOR for rebuttable presumption QM loans
would have covered 94.3 to 96.8 percent of the conventional purchase
market (as safe harbor and rebuttable presumption QM loans).
---------------------------------------------------------------------------
\207\ All estimates in Table 7 include loans that meet the Small
Creditor QM loan definition in Sec. 1026.43(e)(5). In particular,
loans originated by small creditors that meet the criteria in Sec.
1026.43(e)(5) are safe harbor QM loans if priced below 3.5
percentage points over APOR or are rebuttable presumption QM loans
if priced 3.5 percentage points or more over APOR.
[[Page 41736]]
Table 7--Share of 2018 Conventional First-Lien Purchase Loans Within
Various Price-Based Safe Harbor (SH) QM and Rebuttable Presumption (RP)
QM Definitions (HMDA Data)
------------------------------------------------------------------------
Safe harbor QM QM overall
(share of (share of
Approach conventional conventional
purchase market) purchase market)
------------------------------------------------------------------------
Temporary GSE QM + DTI 43......... 90.6 95.8
Proposal (SH 1.50, RP 2.00)....... 91.6 96.1
SH 0.75, RP 1.50.................. 74.6 94.3
SH 1.00, RP 1.50.................. 83.3 94.3
SH 1.25, RP 1.75.................. 88.4 95.3
SH 1.35, RP 2.00.................. 89.8 96.1
SH 1.40, RP 2.00.................. 90.5 96.1
SH 1.75, RP 2.25.................. 93.1 96.6
SH 2.00, RP 2.50.................. 94.1 96.8
------------------------------------------------------------------------
Despite the expected benefits of a price-based General QM loan
definition, the Bureau acknowledges concerns about the approach. First,
while the Bureau believes a loan's price may be a more holistic and
flexible measure of a consumer's ability to repay than DTI alone, the
Bureau recognizes that there is a distinction between credit risk,
which largely determines pricing relative to the prime rate, and a
particular consumer's ability to repay, which is one component of
credit risk. Pricing is based on creditors' expected net revenues
(i.e., whether a creditor will earn interest payments and recover the
outstanding principal balance in the event of default). While a
consumer's ability to afford loan payments is an important component of
pricing, the loan's price will reflect additional factors related to
the loan that may not in all cases be probative of the consumer's
repayment ability. As noted above, the proposal includes a requirement
to consider the consumer's DTI ratio or residual income as part of the
General QM loan definition, and to verify the debt and income used to
calculate DTI or residual income, because the Bureau believes these are
important factors in assessing a consumer's ability to repay. These
requirements are discussed further below and in the section-by-section
analysis of Sec. 1026.43(e)(2)(v).
The Bureau also acknowledges that factors unrelated to the
individual loan can influence its price. Institutional factors, such as
the competing policy considerations inherent in setting guarantee fees
on GSE loans, can influence mortgage pricing independently of credit
risk or ability to repay and would have some effect on which loans
would be priced under the proposed General QM loan pricing threshold.
The price-based approach also shifts the QM determination from a DTI
calculation, which is relatively consistent across creditors and over
time, to one which is more variable. An identical loan to a consumer
with the same risk profile might satisfy the requirements of the
General QM loan definition at one point in time but not at another
since APOR will change over time. The Bureau also anticipates that a
price-based approach would incentivize some creditors to price some
loans just below the threshold so that the loans will receive the
presumption of compliance that comes with QM status. While the Bureau
acknowledges these criticisms of a price-based approach, the Bureau's
delinquency analyses and the analyses by external parties discussed
above provide evidence that rate spreads are correlated with
delinquency.
Finally, the Bureau is aware of concerns about the sensitivity of a
price-based QM definition to macroeconomic cycles. In particular, the
Bureau is aware of concerns that the price-based approach would be a
dynamic, trailing indicator of risk and could be pro-cyclical. For
example, during periods of economic expansion, increasing house prices
and strong demand from consumers with weaker credit characteristics
often lead to greater availability of credit, as secondary market
investors expect minimal losses, regardless of whether the consumer
defaults, due to increasing collateral values. This may result in an
underpricing of credit risk. To the extent that occurs, rate spreads
over APOR would compress and additional higher-priced, higher-risk
loans would fit within the proposed General QM loan definition.
Further, during periods of economic downturn, investors' demand for
mortgage credit may fall as they seek safer investments to limit losses
in the event of a broader economic decline. This may result in
creditors reducing the availability of mortgage credit to riskier
borrowers, through credit overlays and price increases, to protect
against the risk that creditors may be unable to sell the loans
profitably in the secondary markets, or even sell the loans at all.
While APOR would also increase during periods of economic stress and
low secondary market liquidity, consumers with riskier credit
characteristics may see disproportionate pricing increases relative to
the increases in a more normal economic environment. These effects
would likely make price-based QM standards pro-cyclical, with a more
expansive QM market when the economy is expanding, and a more
restrictive QM market when credit is tight. As a result, a rate spread-
based QM threshold would likely be less effective in limiting risky
loans during periods of strong housing price growth or encouraging safe
loans during periods of weak housing price growth. The Bureau is
particularly concerned about these potential effects given the recent
economic disruptions associated with the COVID-19 pandemic. As
described in part V.E below, the Bureau is requesting comment on an
alternative, DTI-based approach. Unlike a price-based approach, a DTI-
based approach would be counter-cyclical, because of the positive
correlation between interest rates and DTI ratios. The alternative
proposal is discussed in detail in part V.E.
As noted above, stakeholders have suggested a range of options to
replace the 43 percent DTI limit in the General QM loan definition. The
Bureau has considered these options in developing this proposed rule
but is not providing specific proposals for these alternatives because
the Bureau has preliminarily concluded that the price-based approach in
proposed Sec. 1026.43(e)(2) would best achieve the statutory goals of
ensuring consumers' ability to repay and maintaining access to
responsible, affordable, mortgage credit. For example, some
stakeholders have suggested that the Bureau rely only on the statutory
QM loan restrictions (i.e.,
[[Page 41737]]
prohibitions on certain loan features, requirements for underwriting,
and a limitation on points and fees) to define a General QM loan. The
Bureau is not proposing this approach because it is concerned that such
an approach, which would define a General QM loan without either a
direct or indirect measure of the consumer's finances, may not
adequately ensure that consumers have a reasonable ability to repay
their loans according to the loan terms.
Other stakeholders have suggested that the Bureau retain DTI as
part of the General QM loan definition, but with modifications to the
current rule. Some stakeholders have advocated for increasing the DTI
limit to some other percentage to address concerns that the 43 percent
DTI limit is too restrictive and may exclude consumers for whom it
might be appropriate to presume ability to repay for their loans at
consummation. Another stakeholder suggested a hybrid approach that
would eliminate the DTI limit only for loans below a set pricing
threshold, such that less expensive loans could obtain General QM loan
status by meeting the statutory QM factors and more expensive loans
could be General QM loans only if the consumer's DTI ratio is below a
set threshold. This stakeholder suggests that more expensive loans pose
greater risks to consumers, so it is critical to include a DTI limit
for such loans. The Bureau recognizes these concerns and, as explained
in part V.E, below, is requesting comment on whether an alternative
approach that adopts a higher DTI limit or a hybrid approach that
combines pricing and a DTI limit, along with a more flexible standard
for defining debt and income, could provide a superior alternative to
the price-based approach. In particular, the Bureau is requesting
comment on whether such an approach would adequately balance
considerations related to ensuring consumers' ability to repay and
maintaining access to credit, which are described above.
Other stakeholders have advocated for granting QM status to loans
with DTI ratios above a prescribed limit if certain compensating
factors are present, such as credit score, LTV ratio, and cash
reserves. Similarly, another stakeholder suggested the Bureau define
General QM loans by reference to a multi-factor approach that combines
DTI ratio, LTV ratio, and credit score. The Bureau is concerned about
the complexity of these approaches. In particular, these approaches
would present the same challenges with defining debt and income
described above and would also require the Bureau to define
compensating factors and set applicable thresholds for those factors.
The Bureau is concerned that incorporating compensating factors into
the General QM loan definition would not provide creditors adequate
certainty about whether a loan satisfies the requirements of the
General QM loan definition, given that it would be difficult to create
a bright-line rule that incorporates a range of compensating factors.
Further, the Bureau is concerned that a rule that incorporates only a
few compensating factors might cause the market to over-emphasize those
factors over others that might be equally predictive of a consumer's
ability to repay, potentially stifling innovation and limiting access
to credit. The Bureau has decided not to propose an approach that would
combine a specific DTI limit with compensating factors.
The Bureau also acknowledges that some stakeholders have requested
that the Bureau make the Temporary GSE QM loan definition permanent.
The Bureau is not proposing this alternative because it is concerned
that there is not a basis to presume for an indefinite period that
loans eligible to be purchased or guaranteed by the GSEs--whether or
not the GSEs are under conservatorship--have been originated with
appropriate consideration of consumers' ability to repay. Making the
Temporary GSE QM loan definition permanent could stifle innovation and
the development of competitive private-sector approaches to
underwriting. The Bureau is also concerned that, as long as the
Temporary GSE QM loan definition continues in effect, the non-GSE
private market is less likely to rebound, and that the existence of the
Temporary GSE QM loan definition may be contributing to the continuing
limited non-GSE private market.
The Bureau requests comment on all aspects of the proposal to
remove the General QM loan definition's specific DTI limit in Sec.
1026.43(e)(2)(vi) and replace it with a with a price-based threshold.
In particular, the Bureau requests comment, including data or other
analysis, on whether pricing is predictive of loan performance and
whether the Bureau should consider other requirements, in addition to a
price-based threshold, as part of the General QM loan definition. The
Bureau also requests comment on whether and to what extent the private
market would provide access to credit by originating responsible,
affordable mortgages that would no longer receive QM status when the
Temporary GSE QM loan definition expires, including loans with DTI
ratios above 43 percent. In addition, in light of the concerns about
the sensitivity of a price-based QM definition to macroeconomic cycles,
the Bureau requests comment on whether it should consider adjusting the
pricing thresholds in emergency situations and, if so, how the Bureau
should do so. The Bureau also requests comment on how revisions to the
General QM loan definition can support innovations in underwriting that
would facilitate access to credit, while ensuring that loans granted QM
status are those that should be presumed to comply with the ATR
provisions.
As noted, the Bureau is proposing to require a creditor to consider
a consumer's monthly DTI ratio or residual income, which the Bureau
believes would help ensure that QMs remain within a consumer's ability
to repay without the need to set a specific DTI limit. However, as
discussed in more detail in part V.E below, the Bureau also
specifically requests comment on whether, instead of or in addition to
a price-based threshold, the rule should retain a DTI limit as part of
the General QM loan definition or to determine which loans receive a
safe harbor or a rebuttable presumption of compliance.
D. The QM Presumption of Compliance Under a Price-Based QM Definition
The Bureau is not proposing to alter the approach in the current
ATR/QM Rule of providing a conclusive presumption of compliance (i.e.,
a safe harbor) to loans that meet the General QM loan requirements in
Sec. 1026.43(e)(2) and for which the APR exceeds APOR for a comparable
transaction by less than 1.5 percentage points as of the date the
interest rate is set. Loans that meet the General QM loan requirements
in Sec. 1026.43(e)(2), including the pricing thresholds in Sec.
1026.43(e)(2)(vi), and for which the APR exceeds APOR for a comparable
transaction by 1.5 percentage points or more as of the date the
interest rate is set would receive a rebuttable presumption of
compliance. Therefore, a loan that otherwise meets the General QM loan
definition would receive a rebuttable presumption of compliance with
the ATR provisions if the APR exceeds APOR between 1.5 percentage
points and less than 2 percentage points as of the interest rate is
set. The proposal would provide a rebuttable presumption of compliance
up to a higher pricing threshold for smaller loans, depending on the
loan amount, and for subordinate-lien transactions, as described
further in the section-by-section analysis of Sec. 1026.43(e)(2)(vi).
[[Page 41738]]
Under the ATR/QM Rule, a creditor that makes a QM loan receives
either a rebuttable or conclusive presumption of compliance with the
ATR provisions, depending on whether the loan is a higher-priced
covered transaction. The Rule generally defines higher-priced covered
transaction in Sec. 1026.43(b)(4) to mean a first-lien mortgage with
an APR that exceeds APOR for a comparable transaction as of the date
the interest rate is set by 1.5 or more percentage points; or a
subordinate-lien transaction with an APR that exceeds APOR for a
comparable transaction as of the date the interest rate is set by 3.5
or more percentage points.\208\ The Rule provides in Sec.
1026.43(e)(1)(i) that a creditor that makes a QM loan that is not a
higher-priced covered transaction is entitled to a safe harbor from
liability under the ATR provisions. Under Sec. 1026.43(e)(1)(ii), a
creditor that makes a QM loan that is a higher-priced covered
transaction is entitled to a rebuttable presumption that the creditor
has complied with the ATR provisions.
---------------------------------------------------------------------------
\208\ Section 1026.43(b)(4) also provides that a first-lien
covered transaction that is a QM under Sec. 1026.43(e)(5), (e)(6),
or Sec. 1026.43(f) is ``higher priced'' if its APR is 3.5
percentage points or more above APOR.
---------------------------------------------------------------------------
In developing the approach to the presumptions of compliance for
QMs in the January 2013 Final Rule, the Bureau first considered whether
the statute prescribes if QM loans receive a conclusive or rebuttable
presumption of compliance with the ATR provisions. As discussed above,
TILA section 129C(b) provides that loans that meet certain requirements
are ``qualified mortgages'' and that creditors making QMs ``may
presume'' that such loans have met the ATR requirements. However, the
statute does not specify whether the presumption of compliance means
that the creditor receives a conclusive presumption or a rebuttable
presumption of compliance with the ATR provisions. The Bureau noted
that its analysis of the statutory construction and policy implications
demonstrates that there are sound reasons for adopting either
interpretation.\209\ The Bureau concluded that the statutory language
is ambiguous and does not mandate either interpretation and that the
presumptions should be tailored to promote the policy goals of the
statute.\210\ The Bureau interpreted the statute to provide for a
rebuttable presumption of compliance with the ATR provisions but used
its adjustment and exception authority to establish a conclusive
presumption of compliance for loans that are not ``higher-priced
covered transactions.'' \211\
---------------------------------------------------------------------------
\209\ 78 FR 6408, 6507 (Jan. 30, 2013).
\210\ Id. at 6511.
\211\ Id. at 6514.
---------------------------------------------------------------------------
In the January 2013 Final Rule, the Bureau identified several
reasons why loans that are not higher-priced loans (generally prime
loans) should receive a safe harbor. The Bureau noted that the fact
that a consumer receives a prime rate is itself indicative of the
absence of any indicia that would warrant a loan level price
adjustment, and thus is suggestive of the consumer's ability to
repay.\212\ The Bureau noted that prime rate loans have performed
significantly better historically than subprime loans and that the
prime segment of the market has been subject to fewer abuses.\213\ The
Bureau noted that the QM requirements will ensure that the loans do not
contain certain risky product features and are underwritten with
careful attention to consumers' DTI ratios.\214\ The Bureau also noted
that a safe harbor provides greater legal certainty for creditors and
secondary market participants and may promote enhanced competition and
expand access to credit.\215\ The Bureau determined that if a loan met
the product and underwriting requirements for QM and was not a higher-
priced covered transaction, there are sufficient grounds for concluding
that the creditor satisfied the ATR provisions.\216\
---------------------------------------------------------------------------
\212\ Id. at 6511.
\213\ Id.
\214\ Id.
\215\ Id.
\216\ Id.
---------------------------------------------------------------------------
The Bureau in the January 2013 Final Rule pointed to factors to
support its decision to adopt a rebuttable presumption for QMs that are
higher-priced covered transactions. The Bureau noted that QM
requirements, including the restrictions on product features and the 43
percent DTI limit, would help prevent the return of the lax lending
practices prevalent in the years before the financial crisis, but that
it is not possible to define by a bright-line rule a class of mortgages
for which each consumer will have ability to repay, particularly for
subprime loans.\217\ The Bureau noted that subprime pricing is often
the result of loan level price adjustments established by the secondary
market and calibrated to default risk.\218\ The Bureau also noted that
consumers in the subprime market tend to be less sophisticated and have
fewer options and thus are more susceptible to predatory lending
practices.\219\ The Bureau noted that subprime loans have performed
considerably worse than prime loans.\220\ The Bureau therefore
concluded that QMs that are higher-priced covered transactions would
receive a rebuttable presumption of compliance with the ATR provisions.
The Bureau recognized that this approach could modestly increase the
litigation risk for subprime QMs but did not expect that imposing a
rebuttable presumption for higher-priced QMs would have a significant
impact on access to credit.\221\
---------------------------------------------------------------------------
\217\ Id.
\218\ Id.
\219\ Id.
\220\ Id.
\221\ Id. at 6511-13.
---------------------------------------------------------------------------
The Bureau is not proposing to alter this general approach to the
presumption of compliance. Specifically, the Bureau is not proposing to
amend the approach under the current rule, in which General QM loans
that are higher-priced covered transactions (up to the pricing
thresholds set out in proposed Sec. 1026.43(e)(2)(vi)) receive a
rebuttable presumption of compliance with the ATR requirements and
General QM loans that are not higher-priced covered transactions
receive a safe harbor. As discussed above, the Bureau has preliminarily
concluded that pricing is strongly correlated with loan performance and
that pricing thresholds should be included in the General QM loan
definition in Sec. 1026.43(e)(2). The Bureau preliminarily concludes
that for prime loans, the pricing, in conjunction with the revised QM
requirements in proposed Sec. 1026.43(e)(2), provides sufficient
grounds for supporting a conclusive presumption that the creditor
complied with the ATR requirements. The Bureau recognizes that the
January 2013 Final Rule relied in part on the 43 percent DTI limit to
support its conclusion that a safe harbor is appropriate for QMs that
are not higher-priced covered transactions. However, the Bureau
believes that a specific DTI limit may not be necessary to support a
decision to preserve the conclusive presumption, provided that the
pricing threshold identified for the conclusive presumption is
sufficiently low. As noted above, pricing is strongly correlated with
loan performance, and the specific 43 percent DTI limit has been
problematic, both because of the difficulties of calculating DTI with
appendix Q and because, while DTI ratios in general may also be
correlated with loan performance, the bright-line 43 percent threshold
may unduly restrict access to credit for some consumers for whom it
might be appropriate to presume ability to repay at consummation.
Further, under the proposed price-based approach, creditors would be
required to consider
[[Page 41739]]
DTI or residual income for a loan to satisfy the requirements of the
General QM loan definition. Moreover, the other factors noted above
appear to continue supporting a safe harbor for prime QMs, including
the better performance of prime loans compared to subprime loans, and
the potential benefits of greater competition and access to credit from
the greater certainty and reduced litigation risk arising from a safe
harbor.
The Bureau is not proposing to alter the current safe harbor
thresholds for General QM loans under Sec. 1026.43(e)(2). Under
current Sec. 1026.43(b)(4) and (e)(1)(i), a first-lien transaction
that is a General QM loan under Sec. 1026.43(e)(2) receives a safe
harbor from liability under the ATR provisions if a loan's APR exceeds
APOR for a comparable transaction by less than 1.5 percentage points as
of the date the interest rate is set. Current paragraphs (b)(4) and
(e)(1)(i) of Sec. 1026.43 provide a separate safe harbor threshold of
3.5 percentage points for subordinate-lien transactions. The Bureau is
also not proposing to amend that threshold.\222\
---------------------------------------------------------------------------
\222\ As noted above, the Bureau is not proposing to alter the
higher threshold of 3.5 percentage points over APOR for small
creditor portfolio QMs and balloon-payment QMs made by certain small
creditors pursuant to Sec. 1026.43(e)(5), (e)(6) and (f). See Sec.
1026.43(b)(4).
---------------------------------------------------------------------------
As explained above, the Bureau's January 2013 Final Rule generally
viewed loans with APRs that did not exceed APOR by more than 1.5
percentage points (and 3.5 percentage points for subordinate-lien
transactions) to be prime loans which, if the loan satisfies the
criteria to be a QM, may be conclusively presumed to comply with the
ATR provisions. In support of providing a conclusive presumption of
compliance to prime loans, the Bureau cited the absence of loan level
price adjustments for those loans (which the Bureau viewed as
indicative of the consumer's ability to repay), the historical
performance of prime rate loans compared to subprime loans, and
historically fewer abusive practices in the prime market.\223\ With
respect to the specific thresholds chosen to separate safe harbor from
rebuttable presumption QM loans, the Bureau in the January 2013 Final
Rule noted that the line it was drawing had long been recognized as a
rule of thumb to separate prime loans from subprime loans.\224\ The 1.5
percentage point above APOR threshold is the same as that used in the
Board's 2008 HOEPA Final Rule, described above, which was amended by
the Board's 2011 Jumbo Loans Escrows Final Rule to include a separate
threshold for jumbo loans for purposes of certain escrows
requirements.\225\ Subsequently, the Dodd-Frank Act adopted these same
thresholds in TILA section 129C(a)(6)(D)(ii)(II), which provides that a
creditor making a balloon-payment loan with an APR at or above certain
thresholds must determine ability to repay using the contract's
repayment schedule.\226\ The Bureau concluded that a 1.5 percentage
point threshold for first-lien QMs and 3.5 percentage point threshold
for subordinate-lien QMs balanced competing consumer protection and
access to credit considerations.\227\ The Bureau also concluded that it
was not appropriate to extend the safe harbor to first-lien loans above
those thresholds because that approach would provide insufficient
protection to consumers in loans with higher interest rates who may
require greater protection than consumers in prime rate loans.\228\
---------------------------------------------------------------------------
\223\ 78 FR 6408, 6511 (Jan. 30, 2013).
\224\ Id. at 6408.
\225\ Id. at 6451; see also 76 FR 11319 (Mar. 2, 2011) (2011
Jumbo Loans Escrows Final Rule).
\226\ 78 FR 6408, 6451 (Jan. 30, 2013).
\227\ Id. at 6514.
\228\ Id.
---------------------------------------------------------------------------
For the reasons set forth below, the Bureau is not proposing to
alter the safe harbor threshold of 1.5 percentage points for first-lien
General QM loans under the price-based approach in proposed Sec.
1026.43(e)(2). The Bureau tentatively concludes that the current safe
harbor threshold of 1.5 percentage points for first liens is
appropriate to restrict safe harbor QMs to lower-priced, generally less
risky, loans while ensuring that responsible, affordable credit remains
available to consumers. The Bureau generally believes these same
considerations support not changing the current safe harbor threshold
of 3.5 percentage points for subordinate-lien transactions, which
generally perform better and have stronger credit characteristics than
first-lien transactions. The Bureau's proposal to address subordinate-
lien transactions is discussed further below in the section-by-section
analysis of Sec. 1026.43(e)(2)(vi).
As explained above, the Bureau uses early delinquency rates as a
proxy for measuring whether a consumer had ability to repay at the time
the mortgage loan was originated. Here, the Bureau analyzed early
delinquency rates in considering whether it should propose to revise
the threshold for first-lien safe harbor General QM loans under the
proposed price-based approach; that is, which first-lien General QM
loans should be conclusively presumed to comply with the ATR provisions
in the absence of a specific DTI limit. As noted above, the January
2013 Final Rule relied in part on the 43 percent DTI limit to support
its conclusion that a safe harbor is appropriate for QMs that are not
higher-priced covered transactions. Under the proposal to replace the
current 43 percent DTI limit with a price-based approach, some loans
with DTI ratios above 43 percent will receive safe harbor QM status.
The Bureau compared projected early delinquency rates under the
General QM loan definition with and without a 43 percent DTI limit
under a range of potential rate-spread based safe harbor thresholds.
Under the current 43 percent DTI limit for first-lien General QM loans,
Table 5 (2002-2008), above, indicates early delinquency rates for loans
with rate spreads just below 1.5 percentage points increase with DTI,
from 6 percent for loans with a DTI ratio of 20 percent or below to 11
percent for loans with DTI ratios from 41 to 43 percent. For loans with
rate spreads just below 1.5 percentage points and DTI ratios above 43
percent, Table 5 indicates early delinquency rates between 12 percent
(for loans with 44 to 45 percent DTI ratios) and 15 percent (for loans
with DTI ratios of 61 to 70 percent). The loans at that rate spread
with DTI ratios above 43 percent in Table 5 are loans that are not QMs
under the current General QM loan definition in Sec. 1026.43(e)(2)
because of the 43 percent DTI limit, but that would be QMs under the
proposed General QM loan definition in Sec. 1026.43(e)(2) in the
absence of the 43 percent DTI limit. Therefore, the loans that would be
newly granted safe harbor status under the proposed price-based
approach at a safe harbor threshold of 1.5 percentage points are likely
to have a somewhat higher early delinquency rate than those just at or
below 43 percent DTI ratios, 12 to 15 percent versus 11 percent. The
comparable early delinquency rates for 2018 loans from Table 6 also
show a slightly higher early delinquency rate for DTI ratios above 43
percent compared to loans with DTI ratios of 36 to 43 percent: 2.3
percent versus 1.5 percent.
The Bureau acknowledges that removing the 43 percent DTI limit
while retaining a 1.5 percentage point safe harbor threshold would lead
to somewhat higher-risk loans obtaining safe harbor QM status relative
to loans within the current General QM loan definition. However, Bureau
analysis shows the early delinquency rate for this set of loans is on
par with loans that have received safe harbor QM status under the
Temporary GSE QM loan definition. Restricting the sample of 2018 NMDB-
HMDA matched first-lien
[[Page 41740]]
conventional purchase originations to only those purchased and
guaranteed by the GSEs, loans with DTI ratios above 43 and rate spreads
between 1 and 1.49 percentage points had an early delinquency rate of
2.4 percent.\229\ Consequently, the Bureau does not believe that the
price-based alternative would result in substantially higher
delinquency rates than the standard included in the current rule.
---------------------------------------------------------------------------
\229\ This comparison uses 2018 data on GSE originations because
such loans were originated while the Temporary GSE QM loan
definition was in effect and the GSEs were in conservatorship. GSE
loans from the 2002 to 2008 period were originated under a different
regulatory regime and with different underwriting practices (e.g.,
GSE loans more commonly had DTI ratios over 50 percent during the
2002 to 2008 period), and thus may not be directly comparable to
loans made under the Temporary GSE QM loan definition.
---------------------------------------------------------------------------
The Bureau also considered continued access to responsible,
affordable mortgage credit in deciding not to propose revisions to the
current 1.5 percentage point safe harbor threshold. The Bureau is
concerned that a safe harbor threshold lower than 1.5 percentage points
could reduce access to credit, as some loans that are General QM loans
under current Sec. 1026.43(e)(2) and receive a safe harbor would
instead receive a rebuttable presumption of compliance under proposed
Sec. 1026.43(e)(2). HMDA data analyzed by the Bureau in the Assessment
Report suggest that the safe harbor threshold of 1.5 percentage points
has not constrained lenders, as the share of originations above the
threshold remained steady after the implementation of the ATR/QM
Rule.\230\ However, the Report noted that these results are likely
explained by the fact that, since the Board's issuance of a rule in
2008, an ability-to-repay requirement has applied to a category of
mortgage loans that is substantially the same as rebuttable presumption
QMs under the January 2013 Final Rule.\231\ The Bureau is concerned
about the potential effects on access to credit if the threshold is
lowered, as loans that are newly subject to the rebuttable presumption
rather than the safe harbor may cost materially more to consumers. For
example, the Bureau is concerned that some loans that would have been
originated as conventional mortgages may instead be originated as FHA
loans, which the Bureau expects would cost materially more for many
consumers. The Bureau expects that a safe harbor threshold of 1.5
percentage points over APOR for first liens under a price-based General
QM loan definition would not have an adverse effect on access to
credit. In particular, the Bureau estimates that the size of the safe
harbor QM market would be comparable to the size of that market with
the Temporary GSE QM loan definition in place and may expand slightly
under the proposed amendments to the General QM loan definition in
Sec. 1026.43(e)(2), if the rule retains the current safe harbor
threshold.\232\
---------------------------------------------------------------------------
\230\ Assessment Report, supra note 58, section 5.5, at 187.
\231\ Id. at 182. The Assessment Report explained that because
of their nearly identical definitions, higher-priced mortgage loans
(HPMLs) may serve as a proxy for higher-priced covered transactions
under the ATR/QM Rule in analysis of HMDA data.
\232\ The Bureau estimates that 90.9 percent of conventional
purchase loans in 2018 HMDA data fell within safe harbor QM status
under the current rule with the Temporary GSE QM loan definition.
The Bureau estimates that under the proposed changes to the General
QM loan definition in Sec. 1026.43(e)(2), 91.9 percent of those
conventional purchase loans would have had safe harbor QM status if
the current safe harbor threshold of 1.5 percentage points remains
in place. Therefore, the Bureau expects that the proposed changes
would result in a comparable, or somewhat increased, portion of the
QM share of the market that would be protected by the safe harbor.
---------------------------------------------------------------------------
As discussed above and in the January 2013 Final Rule, TILA does
not plainly mandate either a safe harbor or a rebuttable presumption
approach to a QM presumption of compliance.\233\ With respect to
General QM prime loans (General QM loans with an APR that does not
exceed APOR by 1.5 or more percentage points for first liens), the
Bureau preliminarily concludes that it is appropriate to use its
adjustment authority under TILA section 105(a) to retain a conclusive
presumption (i.e., a safe harbor). The Bureau preliminarily concludes
that this approach would balance the competing consumer protection and
access to credit considerations described above. The Bureau
acknowledges that, under the price-based approach in proposed Sec.
1026.43(e)(2), General QM loans would not be limited to those with DTI
ratios that do not exceed 43 percent, as is the case under the current
rule. However, the Bureau preliminarily concludes that it remains
appropriate to provide a safe harbor to these loans. The Bureau has
recognized that receipt of a prime rate is suggestive of a consumer's
ability to repay.\234\ Further, the Bureau notes that proposed Sec.
1026.43(e)(2)(v) would impose new requirements for the creditor to
consider the consumer's income, debt, and monthly debt-to-income ratio
or residual income to satisfy the General QM loan definition, thus
retaining a requirement that the creditor consider key aspects of the
consumer's financial capacity. The Bureau is not proposing to extend
the safe harbor to higher-priced loans because the Bureau preliminarily
concludes that such an approach would provide insufficient protection
to consumers in loans with higher interest rates who may require
greater protection than consumers in prime rate loans. The Bureau
preliminarily concludes that providing a safe harbor for prime loans is
necessary and proper to facilitate compliance with and to effectuate
the purposes of section 129C and TILA, including to assure that
consumers are offered and receive residential mortgage loans on terms
that reasonably reflect their ability to repay the loans.
---------------------------------------------------------------------------
\233\ 78 FR 6408, 6513 (Jan. 30, 2013).
\234\ Id. at 6511.
---------------------------------------------------------------------------
The Bureau requests comment on whether the rule should retain the
current thresholds separating safe harbor from rebuttable presumption
General QM loans and specifically requests feedback on whether the
Bureau should adopt higher or lower safe harbor thresholds. The Bureau
encourages commenters to suggest specific rate spread thresholds for
the safe harbor. In particular, the Bureau requests comment on whether
it may be appropriate to set the safe harbor threshold for first-lien
transactions lower than 1.5 percentage points over APOR in light of the
comparatively lower delinquency rates associated with high-DTI loans at
lower rate spreads, as reflected in Tables 5 and 6.
The Bureau acknowledges that adopting a threshold below 1.5
percentage points over APOR could have some negative impact on access
to credit, as some loans that are General QM loans under current Sec.
1026.43(e)(2) and receive a safe harbor would instead receive a
rebuttable presumption of compliance under proposed Sec.
1026.43(e)(2). The Bureau similarly requests comment on whether it may
be appropriate to set the safe harbor threshold for first liens higher
than 1.5 percentage points over APOR. The Bureau acknowledges that some
commenters to the ANPR suggested that the current safe harbor threshold
is too low and may have an adverse impact on access to credit,
including for minority consumers. At the same time, the Bureau notes
its concern about higher early delinquency rates at higher safe harbor
thresholds and is concerned that such an approach might result in safe
harbors for loans for which it would not be appropriate to presume
conclusively that consumers have a reasonable ability to repay their
loans according to the loan terms. The Bureau requests comment on
whether a safe harbor threshold of 2 percentage points over APOR would
balance considerations regarding access to credit and ability to repay.
For commenters that recommend a safe harbor threshold higher than 1.5
[[Page 41741]]
percentage points over APOR (such as a 2-percentage point threshold),
the Bureau requests comment on an appropriate threshold to separate QM
loans from non-QM loans. As discussed in the section-by-section
analysis of Sec. 1026.43(e)(2)(vi), below, the Bureau is proposing
that loans with rate spreads between 1.5 and less than 2 percentage
points over APOR receive a rebuttable presumption of compliance with
the ATR provisions, and that loans with rate spreads of 2 percentage
points over APOR or higher would not meet the General QM loan
definition. Commenters are encouraged to provide data or other material
to support their recommendations, as well as suggestions for commentary
that would assist in understanding the application of the thresholds.
With respect to General QM loans that are higher-priced covered
transactions the Bureau preliminarily concludes that such loans should
receive a rebuttable presumption of compliance with the ATR
requirements. Such loans would have to satisfy the revised QM
requirements of Sec. 1026.43(e)(2), and so would be prevented from
including risky features and would be priced only moderately above
prime loans. Accordingly, the Bureau preliminarily concludes that a
rebuttable presumption of compliance is warranted for such loans. This
approach may strike an appropriate balance between the access to credit
benefits that arise from providing a greater degree of certainty that
such loans comply with the ATR requirements and the consumer
protections that stem from permitting consumers the opportunity to
rebut the presumption of compliance.
The Bureau is not proposing to revise Sec. 1026.43(e)(1)(ii)(B),
which defines the grounds on which the presumption of compliance that
applies to higher-priced QMs can be rebutted. Section
1026.43(e)(1)(ii)(B) provides that a consumer may rebut the presumption
by showing that, at the time the loan was originated, the consumer's
income and debt obligations left insufficient residual income or assets
to meet living expenses. The analysis considers the consumer's monthly
payments on the loan, mortgage-related obligations, and any
simultaneous loans of which the creditor was aware, as well as any
recurring, material living expenses of which the creditor was aware.
The Bureau stated in the January 2013 Final Rule that this standard
was sufficiently broad to provide consumers a reasonable opportunity to
demonstrate that the creditor did not have a good faith and reasonable
belief in the consumer's repayment ability, despite meeting the
prerequisites of a QM. At the same time, the Bureau stated that it
believed the standard was sufficiently clear to provide certainty to
creditors, investors, and regulators about the standards by which the
presumption can successfully be challenged in cases where creditors
have correctly followed the QM requirements. The Bureau also noted that
the standard was consistent with the standard in the 2008 HOEPA Final
Rule.\235\ Commentary to that rule provides, as an example of how its
presumption may be rebutted, that the consumer could show ``a very high
debt-to-income ratio and a very limited residual income . . . depending
on all of the facts and circumstances.'' \236\ The Bureau noted that,
under the definition of QM that the Bureau was adopting, the creditor
was generally not entitled to a presumption if the consumer's DTI ratio
was ``very high.'' The Bureau stated that, as a result, the Bureau was
focusing the standard for rebutting the presumption in the January 2013
Final Rule on whether, despite meeting a DTI test, the consumer
nonetheless had insufficient residual income to cover the consumer's
living expenses.\237\
---------------------------------------------------------------------------
\235\ Id. at 6512.
\236\ See Regulation Z comment 34(a)(4)(iii)-1.
\237\ 78 FR 6408, 6511-12 (Jan. 30, 2013). The Bureau in the
January 2013 Final Rule stated that it interpreted TILA section
129C(b)(1) to create a rebuttable presumption of compliance, but
exercised its adjustment authority under TILA section 105(a) to
limit the ability to rebut the presumption because the Bureau found
that an open-ended rebuttable presumption would unduly restrict
access to credit without a corresponding benefit to consumers. Id.
at 6514.
---------------------------------------------------------------------------
The Bureau is not proposing to change the standard for rebutting
the presumption of compliance because it believes the existing standard
continues to balance the consumer protection and access to credit
considerations described above appropriately. For example, the Bureau
is not amending the presumption of compliance to provide that the
consumer may use the DTI ratio to rebut the presumption of compliance
by establishing that the DTI ratio is very high, or by establishing
that the DTI ratio is very high and that the residual income is not
sufficient. First, the Bureau tentatively determines that permitting
the consumer to rebut the presumption by establishing that the DTI
ratio is very high is not necessary because the existing rebuttal
standard already incorporates an examination of the consumer's actual
income and debt obligations (i.e., the components of the DTI ratio) by
providing the consumer the option to show that the consumer's residual
income--which is calculated using the same components--was insufficient
at consummation. Accordingly, the Bureau anticipates that the addition
of DTI ratio to the rebuttal standard would not add probative value
beyond the current residual income test in Sec. 1026.43(e)(1)(ii)(B).
Second, the Bureau anticipates that the addition of DTI ratio as a
ground to rebut the presumption of compliance would undermine
compliance certainty to creditors and the secondary market without
providing any clear benefit to consumers. The Bureau tentatively
determines that the rebuttable presumption standard would continue to
be sufficiently broad to provide consumers a reasonable opportunity to
demonstrate that the creditor did not have a good faith and reasonable
belief in the consumer's repayment ability, despite meeting the
prerequisites of a QM. The Bureau requests comment on its tentative
determination not to amend the grounds on which the presumption of
compliance can be rebutted. The Bureau also requests comment on whether
to amend the grounds on which the presumption of compliance can be
rebutted, such as where the consumer has a very high DTI and low
residual income. To the extent commenters suggest that the Bureau
should amend the grounds on which to rebut the presumption to add
instances of a consumer having very high DTI, the Bureau requests
comment on whether and how to define ``very high DTI.''
The Bureau requests comment on all aspects of the proposed approach
for the presumption of compliance. In particular, the Bureau requests
comment, including data or other analysis, on whether a safe harbor for
QMs that are not higher priced is appropriate and, if so, on whether
other requirements should be imposed for such QMs to receive a safe
harbor.
E. Alternative to the Proposed Price-Based QM Definition: Retaining a
DTI Limit
Although the Bureau is proposing to remove the 43 percent DTI limit
and adopt a price-based approach for the General QM loan definition,
the Bureau requests comment on an alternative approach that retains a
DTI limit, but raises it above the current limit of 43 percent and
provides a more flexible set of standards for verifying debt and income
in place of appendix Q.
As discussed above, the Bureau is proposing to remove the 43
percent DTI limit because it is concerned that, after the expiration of
the Temporary GSE QM loan definition, the 43 percent DTI limit would
result in a significant reduction in the size of QM and potentially
could result in a significant reduction in access to credit. The
[[Page 41742]]
Bureau proposes to move away from a DTI-based approach because it is
concerned that imposing a DTI limit as a condition for QM status under
the General QM loan definition may be overly burdensome and complex in
practice and may unduly restrict access to credit because it provides
an incomplete picture of the consumer's financial capacity. The Bureau
is proposing to remove appendix Q because its definitions of debt and
income are rigid and difficult to apply and do not provide the level of
compliance certainty that the Bureau anticipated at the time of the
January 2013 Final Rule. As noted above, the Bureau is proposing a
price-based General QM loan definition because it preliminarily
concludes that a loan's price, as measured by comparing a loan's APR to
APOR for a comparable transaction, is a strong indicator of a
consumer's ability to repay and is a more holistic and flexible measure
of a consumer's ability to repay than DTI alone.
At the same time, the Bureau acknowledges concerns about a price-
based approach, as described in part V, above. In particular, the
Bureau acknowledges the sensitivity of a price-based QM definition to
macroeconomic cycles, including concerns that the price-based approach
could be pro-cyclical, with a more expansive QM market when the economy
is expanding, and a more restrictive QM market when credit is tight.
The Bureau is especially concerned about these potential effects given
the recent economic disruptions associated with the COVID-19 pandemic.
If the QM market were to contract, the Bureau would be concerned about
a reduction in access to credit because of the modest amount of non-QM
lending identified in the Bureau's Assessment Report, which the Bureau
understands has declined further in recent months. The Bureau also
acknowledges that a small share of loans that satisfy the current
General QM loan definition would lose QM status under the proposed
price-based approach due to the loan's rate spread exceeding the
applicable threshold.
For these reasons, the Bureau requests comment on whether an
approach that increases the DTI limit to a specific threshold within a
range of 45 to 48 percent and that includes more flexible definitions
of debt and income would be a superior alternative to a price-based
approach.\238\ As discussed above, the January 2013 Final Rule
incorporated DTI as part of the General QM loan definition because the
Bureau believed the QM criteria should include a standard for
evaluating the consumer's ability to repay, in addition to the product-
feature restrictions and other requirements that are specified in TILA.
The Bureau has acknowledged that DTI is predictive of loan performance,
and some commenters responding to the ANPR advocated for retaining a
DTI limit as part of the General QM loan definition, arguing that it is
a strong indicator of a consumer's ability to repay. The Bureau adopted
a specific DTI limit as part of the General QM loan definition to
provide certainty to creditors that a loan is in fact a QM.\239\ The
Bureau also provided a specific DTI limit to give certainty to
assignees and investors in the secondary market, because the Bureau
believed such certainty would help reduce possible concerns regarding
risk of liability and promote credit availability.\240\ Numerous
commenters on the 2011 Proposed Rule and comments submitted subsequent
to publication of the January 2013 Final Rule have highlighted the
value of providing objective requirements that creditors can identify
and apply based on information contained in loan files. Unlike a price-
based approach, a DTI-based approach would be counter-cyclical, because
of the positive correlation between interest rates and DTI ratios.
Consumers' monthly payments on their debts--the numerator in DTI--will
be higher when interest rates and home prices are high, leading to a
more restrictive QM market. By contrast, DTI ratios will be lower when
interest rates and home prices are lower, leading to a more expansive
QM market.
---------------------------------------------------------------------------
\238\ The Bureau acknowledges that some loans currently
originated as Temporary GSE QM loans have higher DTI ratios.
However, the Bureau is concerned about adopting a DTI limit above a
range of 45 to 48 percent without a requirement to consider
compensating factors. The Bureau is concerned about the complexity
of approaches to the General QM loan definition that incorporate
compensating factors, as explained in part V.C, above.
\239\ 78 FR 6408 at 6526-27.
\240\ Id.
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The Bureau is proposing to remove the 43 percent DTI limit and
appendix Q, based in substantial part on concerns about access to
credit and the challenges associated with using appendix Q to define
income and debt, and to adopt a price-based approach for the General QM
loan definition. However, the Bureau requests comment on whether an
alternative approach that adopts a higher DTI limit and a more flexible
standard for defining debt and income could mitigate these concerns and
provide a superior alternative to the price-based approach. In
particular, the Bureau requests comment on whether such an approach
would adequately balance considerations related to ensuring consumers'
ability to repay and maintaining access to credit.
As described above, the Bureau uses early delinquency (measured by
whether a consumer was ever 60 or more days past due within the first 2
years after origination) as a proxy for the likelihood of a lack of
consumer ability to repay at consummation across a wide pool of loans.
The Bureau's analyzed the relationship between DTI ratios and early
delinquency, using data on first-lien conventional purchase
originations from the NMDB, including a matched sample of NMDB and HMDA
loans. That analysis, as shown in Tables 3 and 4 above, shows that
early delinquency rates increase consistently with DTI ratio. This
relationship is like the pattern shown in the Bureau's analysis of
early delinquency rates by rate spread. For 2002-2008 originations, as
shown in Table 3, there was a 7 percent early delinquency rate for
loans with DTI ratios between 44 and 48 percent. For the sample of 2018
originations in the NMDB matched to HMDA data, as shown in Table 4,
there was a 0.9 percent early delinquency rate for loans with DTI
ratios between 44 and 50 percent.
Tables 5 and 6 show the early delinquency rates of these same
samples categorized according to both their DTI and their rate spreads.
Table 5, which shows early delinquency rates for the 2002-2008 data,
shows early delinquency rates as high as 19 percent for loans with DTI
ratios between 46 and 48 percent that are priced between 2 and 2.24
percentage points over APOR. This approximates the loans with the
highest DTI and pricing that would be QMs under this alternative. For
comparison, as discussed in the section-by-section analysis of Sec.
1026.43(e)(2)(vi), the highest early delinquency rates for loans within
the current General QM loan definition is 16 percent (DTI ratios of 41
to 43 percent and priced 2 percentage points or more over APOR) and the
highest early delinquency rates for loans within the General QM loan
definition under the proposed price-based approach is 22 percent (DTI
ratios of 61 to 70 percent priced between 1.75 and 1.99 percentage
points over APOR).
Table 6, which shows early delinquency rates for the 2018 sample,
allows a similar comparison for 2018 originations. Table 6 shows early
delinquency rates of 4.2 percent for loans with DTI ratios between 44
and 50 percent that are priced 2 percentage points or more above APOR.
However,
[[Page 41743]]
the highest early delinquency rates for loans within the current
General QM loan definition or the alternative is 4.4 percent (DTI
ratios of 26 to 35 percent and priced 2 percentage points or more over
APOR). The highest early delinquency rates for loans within the General
QM loan definition under the proposed price-based approach is 3.2
percent (DTI ratios of 26 to 35 percent priced between 1.5 and 1.99
percentage points over APOR).
The Bureau has also analyzed the potential effects of a DTI-based
approach on the size of QM and potentially on access to credit. As
indicated in Table 8 below, 2018 HMDA data show that with the Temporary
GSE QM loan definition and the General QM loan definition with a 43
percent DTI limit, 90.6 percent of conventional purchase loans were
safe harbor QM loans and 95.8 percent were safe harbor QM or rebuttable
presumption QM loans. If, instead, the Temporary GSE QM loan definition
were not in place along with the General QM loan definition (with the
43 percent DTI limit), and assuming no change in consumer or creditor
behavior from the 2018 HMDA data, then only 69.3 percent of loans would
have been safe harbor QM loans and 73.6 percent of loans would have
been safe harbor QM loans or rebuttable presumption QM loans. Raising
the DTI limit above 43 percent would increase the size of the QM market
and, as a result, potentially increase access to credit relative to the
General QM loan definition with a DTI limit of 43 percent. The
magnitude of the increase in the size of the QM market and potential
increase in access to credit depends on the selected DTI limit. A DTI
limit in the range of 45 to 48 percent would likely result in a QM
market that is larger than one with a DTI limit of 43 percent but
smaller than the status quo (i.e., Temporary GSE QM loan definition and
DTI limit of 43 percent). However, the Bureau expects that consumers
and creditors would respond to changes in the General QM loan
definition, potentially allowing additional loans to be made as safe
harbor QM loans or rebuttable presumption QM loans.
Table 8--Share of 2018 Conventional Purchase Loans Within Various Safe
Harbor QM and Rebuttable Presumption QM Definitions
[HMDA data]
------------------------------------------------------------------------
Safe harbor QM QM overall
(share of (share of
Approach conventional conventional
market) market)
------------------------------------------------------------------------
Temporary GSE QM + DTI 43......... 90.6 95.8
Proposal (Pricing at 2.0)......... 91.6 96.1
DTI limit 43...................... 69.3 73.6
DTI limit 45...................... 76.1 80.9
DTI limit 46...................... 78.8 83.8
DTI limit 47...................... 81.4 86.6
DTI limit 48...................... 84.1 89.4
DTI limit 49...................... 87.0 92.4
DTI limit 50...................... 90.8 96.4
------------------------------------------------------------------------
The Bureau seeks comment on whether to retain a specific DTI limit
for the General QM loan definition, rather than or in addition to the
proposed price-based approach. The Bureau specifically seeks comment on
a specific DTI limit between 45 and 48 percent. The Bureau seeks
comment and data on whether increasing the DTI limit to a specific
percentage between 45 and 48 percent would be a superior alternative to
the proposed price-based approach, and, if so, on what specific DTI
percentage the Bureau should include in the General QM loan definition.
The Bureau seeks comment and data as to how specific DTI percentages
would be expected to affect access to credit and would be expected to
affect the risk that the General QM loan definition would include loans
for which the Bureau should not presume that the consumers who receive
them have the ability to repay. The Bureau also requests comment on
whether increasing the DTI limit to a specific percentage between 45 to
48 percent would better balance the goals of ensuring access to
responsible, affordable credit and ensuring that QMs are limited to
loans for which the Bureau should presume that consumers have the
ability to repay. The Bureau also requests comment on the macroeconomic
effects of a DTI-based approach as well as whether and how the Bureau
should weigh such effects in amending the General QM loan definition.
In addition, the Bureau requests comment on whether, if the Bureau
adopts a higher specific DTI limit as part of the General QM loan
definition, the Bureau should retain the price-based threshold of 1.5
percentage points over APOR to separate safe harbor QM loans from
rebuttable presumption QM loans for first-lien transactions.
The Bureau also requests comment on whether to adopt a hybrid
approach in which a combination of a DTI limit and a price-based
threshold would be used in the General QM loan definition. One such
approach could impose a DTI limit only for loans above a certain
pricing threshold, to reduce the likelihood that the presumption of
compliance with the ATR requirement would be provided to loans for
which the consumer lacks ability to repay, while avoiding the potential
burden and complexity of a DTI limit for many lower-priced loans. The
Bureau estimates that 81 percent of conventional purchase loans have
rate spreads below 1 percentage point and no product features
restricted under the General QM loan definition. For example, the rule
could impose a DTI limit of 50 percent for loans with rate spreads at
or above 1 percentage point. Using 2018 HMDA data, the Bureau estimates
that 91.5 percent of conventional purchase loans would be safe harbor
QM loans under this approach, and 96 percent would be QM loans. A
similar approach might impose a DTI limit above a certain pricing
threshold and also tailor the presumption of compliance with the ATR
requirement based on DTI. For example, the rule could provide that (1)
for loans with rate spreads under 1 percentage point, the loan is a
safe harbor QM regardless of the consumer's DTI ratio; (2) for loans
with rate spreads at or above 1 but less than 1.5 percentage points, a
loan is a safe harbor QM if the consumer's DTI ratio does not
[[Page 41744]]
exceed 50 percent and a rebuttable presumption QM if the consumer's DTI
is above 50 percent; and (3) if the rate spread is at or above 1.5 but
less than 2 percentage points, loans would be rebuttable presumption QM
if the consumer's DTI ratio does not exceed 50 percent and non-QM if
the DTI ratio is above 50 percent. Using 2018 HMDA data, the Bureau
estimates that 91.5 percent of conventional purchase loans would be
safe harbor QM loans under this approach, and 96.1 percent would be QM
loans. The Bureau requests comment on whether a DTI limit of up to 50
percent would be appropriate under these hybrid approaches that
incorporate pricing into the General QM loan definition given that the
pricing threshold would generally limit the additional risk factors
beyond the higher DTI ratio.
Another hybrid approach would impose a DTI limit on all General QM
loans but would allow higher DTI ratios for loans below a set pricing
threshold. For example, the rule could generally impose a DTI limit of
47 percent but could permit a loan with a DTI ratio up to 50 percent to
be eligible for QM status under the General QM loan definition if the
APR is less than 2 percentage points over APOR. This approach might
limit the likelihood of providing QM status to loans for which the
consumer lacks ability to repay, but also would permit some lower-
priced loans with higher DTI ratios to achieve QM status. Using 2018
HDMA data, the Bureau estimates that 90.8 percent of conventional
purchase loans would be safe harbor QM loans under this approach, and
96.2 percent would be QM loans. The Bureau requests comment on whether
these hybrid approaches or a different hybrid approach would better
address concerns about access to credit and ensuring that the General
QM criteria support a presumption that consumers have the ability to
repay their loans.
With respect to the Bureau's concerns about appendix Q, the Bureau
requests comment on an alternative method of defining debt and income
the Bureau believes could replace appendix Q in conjunction with a
specific DTI limit. As noted, the Bureau is concerned that the appendix
Q definitions of debt and income are rigid and difficult to apply and
do not provide the level of compliance certainty that the Bureau
anticipated at the time of the January 2013 Final Rule. Further, under
the current rule, some loans that would otherwise have DTI ratios below
43 percent do not satisfy the General QM loan definition because their
method of documenting and verifying income or debt is incompatible with
appendix Q. In particular, the Bureau requests comment on whether the
approach in proposed Sec. 1026.43(e)(2)(v) could be applied with a
General QM loan definition that includes a specific DTI limit. As
discussed in more detail in the section-by-section discussion of Sec.
1026.43(e)(2)(v), proposed Sec. 1026.43(e)(2)(v)(A) would require
creditors to consider income or assets, debt obligations, alimony,
child support, and DTI or residual income for their ability-to-repay
determination. Proposed Sec. 1026.43(e)(2)(v)(B) and the associated
commentary explain how creditors must verify and count the consumer's
current or reasonably expected income or assets other than the value of
the dwelling (including any real property attached to the dwelling)
that secures the loan and the consumer's current debt obligations,
alimony, and child support, relying on the standards set forth in the
ATR requirements in Sec. 1026.43(c). Proposed Sec.
1026.43(e)(2)(v)(B) would further provide creditors a safe harbor with
standards the Bureau may specify for verifying debt and income. This
could potentially include relevant provisions from the Fannie Mae
Single Family Selling Guide, the Freddie Mac Single-Family Seller/
Servicer Guide, FHA's Single Family Housing Policy Handbook, the VA's
Lenders Handbook, and USDA's Field Office Handbook for the Direct
Single Family Housing Program and Handbook for the Single Family
Guaranteed Loan Program, current as of this proposal's public release.
The Bureau also is seeking comments on potentially adding to the safe
harbor other standards that external stakeholders develop.
The Bureau requests comment on whether the alternative method of
defining debt and income in proposed Sec. 1026.43(e)(2)(v)(B) could
replace appendix Q in conjunction with a specific DTI limit. As noted
above, the Bureau is concerned that this approach that combines a
general standard with safe harbors may not be appropriate for a
specific DTI limit. The Bureau requests comment on whether the approach
in proposed Sec. 1026.43(e)(2)(v)(B) would address the problems
associated with appendix Q and would provide an alternative method of
defining debt and income that would be workable with a specific DTI
limit. The Bureau seeks comment on whether allowing creditors to use
standards the Bureau may specify to verify debt and income--as would be
permitted under proposed Sec. 1026.43(e)(2)(v)(B)--as well as
potentially other standards external stakeholders develop and the
Bureau adopts would provide adequate clarity and flexibility while also
ensuring that DTI calculations across creditors and consumers are
sufficiently consistent to provide meaningful comparison of a
consumer's calculated DTI to any DTI ratio threshold specified in the
rule.
The Bureau also requests comment on what changes, if any, would be
needed to proposed Sec. 1026.43(e)(2)(v)(B) to accommodate a specific
DTI limit. For example, the Bureau requests comment on whether
creditors that comply with guidelines that have been revised but are
substantially similar to the guides specified above should receive a
safe harbor, as the Bureau has proposed. The Bureau also seeks comment
on its proposal to allow creditors to ``mix and match'' verification
standards, including whether the Bureau should instead limit or
prohibit such ``mixing and matching'' under an approach that
incorporates a specific DTI limit. The Bureau requests comment on
whether these aspects of the approach in proposed Sec.
1026.43(e)(2)(v)(B), if used in conjunction with a specific DTI limit,
would provide sufficient certainty to creditors, investors, and
assignees regarding a loan's QM status and whether it would result in
potentially inconsistent application of the rule.
VI. Section-by-Section Analysis
1026.43 Minimum Standards for Transactions Secured by a Dwelling
43(b) Definitions
43(b)(4)
Section 1026.43(b)(4) provides the definition of a higher-priced
covered transaction. It provides that a covered transaction is a
higher-priced covered transaction if the APR exceeds APOR for a
comparable transaction as of the date the interest rate is set by the
applicable rate spread specified in the Rule. For purposes of General
QM loans under Sec. 1026.43(e)(2), the applicable rate spreads are 1.5
or more percentage points for a first-lien covered transaction and 3.5
or more percentage points for a subordinate-lien covered transaction.
Pursuant to Sec. 1026.43(e)(1), a loan that satisfies the requirements
of a qualified mortgage and is a higher-priced covered transaction
under Sec. 1026.43(b)(4) is eligible for a rebuttable presumption of
compliance with the ATR requirements. A qualified mortgage that is not
a higher-priced covered transaction is eligible for a conclusive
presumption of compliance with the ATR requirements.
The Bureau is proposing to revise Sec. 1026.43(b)(4) to create a
special rule
[[Page 41745]]
for purposes of determining whether certain types of General QM loans
under Sec. 1026.43(e)(2) are higher-priced covered transactions. This
special rule would apply to loans for which the interest rate may or
will change within the first five years after the date on which the
first regular periodic payment will be due. For such loans, the
creditor would be required to determine the APR, for purposes of
determining whether a QM under Sec. 1026.43(e)(2) is a higher-priced
covered transaction, by treating the maximum interest rate that may
apply during that five-year period as the interest rate for the full
term of the loan.
An identical special rule also would apply to loans for which the
interest rate may or will change under proposed Sec.
1026.43(e)(2)(vi), which would revise the definition of a General QM
loan under Sec. 1026.43(e)(2) to implement the price-based approach
described in part V. The section-by-section analysis of proposed Sec.
1026.43(e)(2)(vi) explains the Bureau's reasoning for proposing these
rules. The special rules in the proposed revisions to Sec.
1026.43(b)(4) and in proposed Sec. 1026.43(e)(2)(vi) would not modify
other provisions in Regulation Z for determining the APR for other
purposes, such as the disclosures addressed in or subject to the
commentary to Sec. 1026.17(c)(1).
Proposed comment 43(b)(4)-4 explains that provisions in subpart C,
including commentary to Sec. 1026.17(c)(1), address how to determine
the APR disclosures for closed-end credit transactions and that
provisions in Sec. 1026.32(a)(3) address how to determine the APR to
determine coverage under Sec. 1026.32(a)(1)(i). It further explains
that proposed Sec. 1026.43(b)(4) requires, only for purposes of a QM
under paragraph (e)(2), a different determination of the APR for
purposes of paragraph (b)(4) for a loan for which the interest rate may
or will change within the first five years after the date on which the
first regular periodic payment will be due. It also cross-references
proposed comment 43(e)(2)(vi)-4 for how to determine the APR of such a
loan for purposes of Sec. 1026.43(b)(4) and (e)(2)(vi).
As discussed above in part IV, TILA section 105(a), directs the
Bureau to prescribe regulations to carry out the purposes of TILA, and
provides that such regulations may contain additional requirements,
classifications, differentiations, or other provisions, and may provide
for such adjustments and exceptions for all or any class of
transactions that the Bureau judges are necessary or proper to
effectuate the purposes of TILA, to prevent circumvention or evasion
thereof, or to facilitate compliance therewith. In particular, it is
the purpose of TILA section 129C, as amended by the Dodd-Frank Act, to
assure that consumers are offered and receive residential mortgage
loans on terms that reasonably reflect their ability to repay the loans
and that are understandable.
As also discussed above in part IV, TILA section 129C(b)(3)(B)(i)
authorizes the Bureau to prescribe regulations that revise, add to, or
subtract from the criteria that define a QM upon a finding that such
regulations are necessary or proper to ensure that responsible,
affordable mortgage credit remains available to consumers in a manner
consistent with the purposes of section 129C, necessary and appropriate
to effectuate the purposes of section 129C and section 129B, to prevent
circumvention or evasion thereof, or to facilitate compliance with such
section.
The Bureau is proposing the special rule in Sec. 1026.43(b)(4)
regarding the APR determination of certain loans for which the interest
rate may or will change pursuant to its authority under TILA section
105(a) to make such adjustments and exceptions as are necessary and
proper to effectuate the purposes of TILA, including that consumers are
offered and receive residential mortgage loans on terms that reasonably
reflect their ability to repay the loans. The Bureau believes that
these proposed provisions may ensure that safe harbor QM status would
not be accorded to certain loans for which the interest rate may or
will change that pose a heightened risk of becoming unaffordable
relatively soon after consummation. The Bureau is also proposing these
provisions pursuant to its authority under TILA section
129C(b)(3)(B)(i) to revise and add to the statutory language. The
Bureau believes that the proposed APR determination provisions in Sec.
1026.43(b)(4) may ensure that responsible, affordable mortgage credit
remains available to consumers in a manner consistent with the purpose
of TILA section 129C, referenced above, as well as effectuate that
purpose.
The Bureau requests comment on all aspects of the proposed special
rule that would be required in proposed Sec. 1026.43(b)(4) to
determine the APR for certain loans for which the interest rate may or
will change. See the section-by-section analysis of proposed Sec.
1026.43(e)(2)(vi) for specific data requests and additional
solicitation of comments.
43(c) Repayment Ability
43(c)(4) Verification of Income or Assets
TILA section 129C(a)(4) states that a creditor making a residential
mortgage loan shall verify amounts of income or assets that such
creditor relies on to determine repayment ability, including expected
income or assets, by reviewing the consumer's Internal Revenue Service
(IRS) Form W-2, tax returns, payroll receipts, financial institution
records, or other third-party documents that provide reasonably
reliable evidence of the consumer's income or assets. In the January
2013 Final Rule, the Bureau implemented this requirement in Sec.
1026.43(c)(4), which states that a creditor must verify the amounts of
income or assets that the creditor relies on under Sec.
1026.43(c)(2)(i) to determine a consumer's ability to repay a covered
transaction using third-party records that provide reasonably reliable
evidence of the consumer's income or assets. Section 1026.43(c)(4)
further states that a creditor may verify the consumer's income using a
tax-return transcript issued by the IRS and lists several examples of
other records the creditor may use to verify the consumer's income or
assets, including, among others, financial institution records.
Additionally, Sec. 1026.43(e)(2)(v)(A) provides that a General QM loan
is a covered transaction for which the creditor considers and verifies
at or before consummation the consumer's current or reasonably expected
income or assets other than the value of the dwelling (including any
real property attached to the dwelling) that secures the loan in
accordance with Sec. 1026.43(c)(4), as well as Sec. 1026.43(c)(2)(i)
and appendix Q.
The Bureau is not proposing to change the text of Sec.
1026.43(c)(4). The Bureau is proposing to add comment 43(c)(4)-4, which
would clarify that a creditor does not meet the requirements of Sec.
1026.43(c)(4) if it observes an inflow of funds into the consumer's
account without confirming that the funds are income. The proposed
comment would also state that, for example, a creditor would not meet
the requirements of Sec. 1026.43(c)(4) where it observes an
unidentified $5,000 deposit in the consumer's account but fails to take
any measures to confirm or lacks any basis to conclude that the deposit
represents the consumer's personal income and not, for example,
proceeds from the disbursement of a loan. (As described below in the
section-by-section analysis of proposed Sec. 1026.43(e)(2)(v), below,
the Bureau is also proposing to amend
[[Page 41746]]
the verification requirements in the General QM loan definition.)
The Bureau is proposing to include this clarification as part of
its effort to avoid potential compliance uncertainty that could arise
from the removal of appendix Q and from the resulting greater reliance
on regulation text and commentary to define a creditor's obligations to
consider and verify a consumer's income, assets, debt obligations,
alimony, and child support. (Other proposed revisions related to this
effort are described below with respect to Sec. 1026.43(e)(2)(v).) The
Bureau understands, based on outreach and on its experience supervising
creditors, that this clarification could be useful to creditors because
the Rule includes ``financial institution records'' as one of the
examples of records that a creditor may use to verify a consumer's
income or assets. As part of their underwriting process, creditors may
seek to use transactions in electronic or paper financial records such
as consumer account statements to examine inflows and outflows from
consumers' accounts. In many cases, there may be sufficient basis in
transaction data alone, or in combination with other information, to
determine that a deposit or other credit to a consumer's account
represents income, such that a creditor's use of the data in an
underwriting process is distinguishable from the example in the
proposed comment. The Bureau's preliminary view is that this
clarification would help creditors understand their verification
requirements under the General QM loan definition, given that proposed
comment 43(e)(2)(v)(B)-1 would explain that a creditor must verify the
consumer's current or reasonably expected income or assets in
accordance with Sec. 1026.43(c)(4) and its commentary.\241\
---------------------------------------------------------------------------
\241\ See the section-by-section analysis for proposed Sec.
1026.43(e)(2)(v)(B).
---------------------------------------------------------------------------
The Bureau requests comment on this proposed new comment. The
Bureau also requests comment on whether additional clarifications may
be helpful with respect to cash flow underwriting and verifying whether
inflows are income under the Rule.
43(e) Qualified Mortgages
43(e)(2) Qualified Mortgage Defined--General
43(e)(2)(v)
As discussed above in part V, the Bureau is proposing to remove the
specific DTI limit in Sec. 1026.43(e)(2)(vi). Furthermore, as
discussed below in this section-by-section analysis of proposed Sec.
1026.43(e)(2)(v), the Bureau is proposing to require that creditors
consider the consumer's DTI ratio or residual income and to remove the
appendix Q requirements from Sec. 1026.43(e)(2)(v). The Bureau
tentatively concludes that these proposed amendments necessitate
additional revisions to clarify a creditor's obligation to consider and
verify certain information under the General QM loan definition.
Consequently, the Bureau is proposing to amend the consider and verify
requirements in Sec. 1026.43(e)(2)(v) and its associated commentary.
TILA section 129C contains several requirements that creditors
consider and verify various types of information. In the statute's
general ATR provisions, TILA section 129C(a)(1) requires that a
creditor make a reasonable and good faith determination, based on
``verified and documented information,'' that a consumer has a
reasonable ability to repay the loan. TILA section 129C(a)(3) states
that a creditor's ATR determination shall include ``consideration'' of
the consumer's credit history, current income, expected income the
consumer is reasonably assured of receiving, current obligations, DTI
ratio or the residual income the consumer will have after paying non-
mortgage debt and mortgage-related obligations, employment status, and
other financial resources other than the consumer's equity in the
dwelling or real property that secures repayment of the loan. TILA
section 129C(a)(4) states that a creditor making a residential mortgage
loan shall verify amounts of income or assets that such creditor relies
on to determine repayment ability, including expected income or assets,
by reviewing the consumer's IRS Form W-2, tax returns, payroll
receipts, financial institution records, or other third-party documents
that provide reasonably reliable evidence of the consumer's income or
assets. Finally, in the statutory QM definition, TILA section
129C(b)(2)(A)(iii) provides that, for a loan to be a QM, the income and
financial resources relied on to qualify the obligors on the loan must
be ``verified and documented.''
In the January 2013 Final Rule, the Bureau implemented the
requirements to consider and verify various factors for the general ATR
standard in Sec. 1026.43(c)(2), (c)(3), (c)(4), and (c)(7). Section
1026.43(c)(2) states that--except as provided in certain other
provisions (including the General QM loan definition)--a creditor must
consider several specified factors in making its ATR determination.
These factors include, among others, the consumer's current or
reasonably expected income or assets, other than the value of the
dwelling, including any real property attached to the dwelling, that
secures the loan (under Sec. 1026.43(c)(2)(i)); the consumer's current
debt obligations, alimony, and child support (Sec. 1026.43(c)(2)(vi));
and the consumer's monthly DTI ratio or residual income in accordance
with Sec. 1026.43(c)(7). Section 1026.43(c)(3) requires a creditor to
verify the information the creditor relies on in determining a
consumer's repayment ability using reasonably reliable third-party
records, with a few specified exceptions. Section 1026.43(c)(3) further
states that a creditor must verify a consumer's income and assets that
the creditor relies on in accordance with Sec. 1026.43(c)(4). Section
1026.43(c)(4) requires that a creditor verify the amounts of income or
assets that the creditor relies on to determine a consumer's ability to
repay a covered transaction using third-party records that provide
reasonably reliable evidence of the consumer's income or assets. It
also provides examples of records the creditor may use to verify the
consumer's income or assets.
As noted in part V, the January 2013 Final Rule incorporated some
aspects of the general ATR standards into the General QM loan
definition, including the requirement to consider and verify income or
assets and debt obligations, alimony, and child support. Section
1026.43(e)(2)(v) states that a General QM loan is a covered transaction
for which the creditor considers and verifies at or before
consummation: (A) The consumer's current or reasonably expected income
or assets other than the value of the dwelling (including any real
property attached to the dwelling) that secures the loan, in accordance
with appendix Q, Sec. 1026.43(c)(2)(i), and (c)(4); and (B) the
consumer's current debt obligations, alimony, and child support in
accordance with appendix Q, Sec. 1026.43(c)(2)(vi) and (c)(3). The
Bureau used its adjustment and exception authority under TILA section
129C(b)(3)(B)(i) to require creditors to consider and verify the
consumer's debt obligations, alimony, and child support pursuant to the
General QM loan definition.
The Bureau proposes to revise Sec. 1026.43(e)(2)(v) to separate
and clarify the requirements to consider and verify certain
information. Proposed Sec. 1026.43(e)(2)(v)(A) would contain the
``consider'' requirements, and proposed Sec. 1026.43(e)(2)(v)(B) would
contain the ``verify'' requirements. Specifically, proposed Sec.
1026.43(e)(2)(v) would state that a General QM loan is a covered
[[Page 41747]]
transaction for which the creditor: (A) Considers the consumer's income
or assets, debt obligations, alimony, child support, and monthly DTI
ratio or residual income, using the amounts determined from Sec.
1026.43(e)(2)(v)(B); and (B) verifies the consumer's current or
reasonably expected income or assets other than the value of the
dwelling (including any real property attached to the dwelling) that
secures the loan using third-party records that provide reasonably
reliable evidence of the consumer's income or assets, in accordance
with Sec. 1026.43(c)(4), and the consumer's current debt obligations,
alimony, and child support using reasonably reliable third-party
records in accordance with Sec. 1026.43(c)(3). The regulatory text
would also state that, for purposes of Sec. 1026.43(e)(2)(v)(A), the
consumer's monthly DTI ratio or residual income is determined in
accordance with Sec. 1026.43(c)(7), except that the consumer's monthly
payment on the covered transaction, including the monthly payment for
mortgage-related obligations, is calculated in accordance with Sec.
1026.43(e)(2)(iv).
As noted above, the Bureau is proposing to remove the specific 43
percent DTI limit in Sec. 1026.43(e)(2)(vi) and the appendix Q
requirement in Sec. 1026.43(e)(2)(v). Given that these proposed
amendments would change how a creditor would satisfy the General QM
loan definition, the Bureau is proposing to amend the consider and
verify requirements in Sec. 1026.43(e)(2)(v). Under the Bureau's
proposal, the General QM loan definition would no longer include a
specific DTI limit in Sec. 1026.43(e)(2)(vi), but a creditor would be
required to consider DTI or residual income, debt obligations, alimony,
child support, and income or assets under Sec. 1026.43(e)(2)(v). The
Bureau tentatively concludes that providing additional explanation of
the proposed requirement to consider this information may ease
compliance uncertainty. To meet the consider requirement in Sec.
1026.43(e)(2)(v)(A), the proposal would require the creditor to use the
amounts determined according to Sec. 1026.43(e)(2)(v)(B). For example,
if the creditor relied on assets in its ability-to-repay determination,
the creditor could consider current and reasonably expected assets
other than the value of the dwelling (including any real property
attached to the dwelling) that secures the loan as calculated under
1026.43(e)(2)(v)(B). The Bureau tentatively concludes that providing
additional explanation of the proposed requirement to consider income
or assets, debt obligations, alimony, child support, and DTI or
residual income may ease compliance uncertainty.
The Bureau is proposing to remove appendix Q and the requirement to
use appendix Q from the rule. The Bureau's principal reason for
adopting appendix Q in 2013 was to provide clear and specific standards
for calculating a consumer's debt, income, and DTI ratio for purposes
of comparison with the 43 percent DTI limit and to provide certainty
about whether a loan meets the requirements for being a General QM
loan. As discussed in more detail below, appendix Q has not provided
clear and specific standards, and the Bureau is proposing to remove the
43 percent DTI limit. Accordingly, the Bureau preliminarily concludes
that appendix Q, and the requirement to use appendix Q to calculate DTI
for purposes of the General QM loan definition, should be removed from
the Rule. However, appendix Q currently serves the additional function
of specifying what a creditor must do to comply with the requirements
of Sec. 1026.43(e)(2)(v) to consider and verify a consumer's income,
assets, debt obligations, alimony, and child support. The Bureau is
concerned that the rule would create significant compliance uncertainty
if it merely removed appendix Q without clarifying how a creditor can
evaluate various types of income, assets, and debt.
The Bureau's objective in proposing to clarify the Sec.
1026.43(e)(2)(v) requirements to consider a consumer's income, assets,
debt obligations, alimony, and child support is to ensure that a loan
for which a creditor disregards these factors cannot obtain QM status,
while ensuring that creditors and investors can readily determine if a
loan is a QM. The Bureau's primary objective in clarifying the
requirement to verify a consumer's income, assets, debt obligations,
alimony, and child support is to provide reasonable assurance that only
income and assets that exist or will exist are part of a creditor's ATR
determination and that none of the consumer's debt obligations,
alimony, and child support are excluded from consideration. The Bureau
also aims to ensure that the verification requirement provides
substantial flexibility for creditors to adopt innovative verification
methods, such as the use of bank account data that identifies the
source of deposits to determine personal income, while also specifying
examples of compliant verification standards to provide greater
certainty that a loan has QM status.
As described above, proposed Sec. 1026.43(e)(2)(v)(B) would
provide that creditors must verify income, assets, debt obligations,
alimony, and child support in accordance with the general ATR
verification provisions. Specifically, Sec. 1026.43(e)(2)(v)(B)(1)
requires a creditor to verify the consumer's current or reasonably
expected income or assets (including any real property attached to the
value of the dwelling) that secures the loan in accordance with Sec.
1026.43(c)(4), which states that a creditor must verify such amounts
using third-party records that provide reasonably reliable evidence of
the consumer's income or assets. Section 1026.43(e)(2)(v)(B)(2)
requires a creditor to verify the consumer's current debt obligations,
alimony, and child support in accordance with Sec. 1026.43(c)(3),
which states that a creditor must verify such amounts using reasonably
reliable third-party records. So long as a creditor complies with the
provisions of Sec. 1026.43(c)(3) with respect to debt obligations,
alimony, and child support and Sec. 1026.43(c)(4) with respect to
income and assets, the creditor is permitted to use any reasonable
verification methods and criteria. By incorporating Sec. 1026.43(c)(3)
and (c)(4) in Sec. 1026.43(e)(2)(v)(B), the Bureau seeks to maintain
in the General QM loan verification requirements the flexibility
inherent to these ATR provisions. At the same time, the Bureau seeks to
provide greater certainty to creditors regarding the General QM loan
verification requirements by explaining that a creditor complies with
Sec. 1026.43(e)(2)(v)(B) if it complies with any one of certain
verification standards the Bureau would specify.
The Bureau also proposes revisions to the commentary for Sec.
1026.43(e)(2)(v). The Bureau proposes to remove comments 43(e)(2)(v)-2
and -3. In general, these comments currently clarify that creditors
must consider and verify any income as well as any debt or liability
specified in appendix Q and that, while other income and debt may be
considered and verified, such income and debt would not be included in
the DTI ratio determination required by Sec. 1026.43(e)(2)(vi). The
Bureau preliminarily concludes that these comments would no longer be
needed in light of the proposed revisions to Sec. 1026.43(e)(2)(v).
The first sentence of each of these two comments merely restates
language in the regulatory text. The second sentence would no longer be
needed because the Bureau is proposing to remove references to appendix
Q in Sec. 1026.43(e)(2)(v). And the third sentence would no longer be
needed because the Bureau is proposing
[[Page 41748]]
to remove the DTI limit in Sec. 1026.43(e)(2)(vi).
43(e)(2)(v)(A)
As explained above, the Bureau proposes to revise Sec.
1026.43(e)(2)(v), which currently includes the requirement to consider
and verify the consumer's reasonably expected income or assets, debt
obligations, alimony, and child support, as part of the QM definition.
The Bureau is proposing to separate the consider and verify
requirements in Sec. 1026.43(e)(2)(v) into Sec. 1026.43(e)(2)(v)(A)
for the ``consider'' requirements and Sec. 1026.43(e)(2)(v)(B) for the
``verify'' requirements. The Bureau proposes to revise Sec.
1026.43(e)(2)(v)(A) to provide that a General QM loan is a covered
transaction for which the creditor, at or before consummation,
considers the consumer's income or assets, debt obligations, alimony,
child support, and monthly DTI ratio or residual income, using the
amounts determined from proposed Sec. 1026.43(e)(2)(v)(B).
For purposes of Sec. 1026.43(e)(2)(v)(A), the Bureau proposes to
prescribe the same method for the creditor to calculate the consumer's
monthly payment that is currently prescribed in Sec.
1026.43(e)(2)(vi), in which the consumer's monthly DTI ratio is
determined using the consumer's monthly payment on the covered
transaction and any simultaneous loan that the creditor knows or has
reason to know will be made. The Bureau is proposing to eliminate
appendix Q and the DTI limit in Sec. 1026.43(e)(2)(vi). To make clear
that any DTI calculation must incorporate alimony and child support--
which is currently facilitated through appendix Q--the Bureau is
proposing to cross-reference the Sec. 1026.43(c)(7) requirements. In
order to maintain the monthly DTI ratio calculation method from Sec.
1026.43(e)(2)(vi)(B), the Bureau is proposing to move the text
prescribing the calculation method from Sec. 1026.43(e)(2)(vi)(B) to
Sec. 1026.43(e)(2)(v)(A). The Bureau is proposing to expand the Sec.
1026.43(c)(7) cross-reference and the monthly payment calculation
method to residual income given that the proposal allows creditors the
option of considering residual income in lieu of DTI. The Bureau
tentatively concludes that the reference to simultaneous loans is not
necessary because the cross-reference to Sec. 1026.43(c)(7) would
require creditors to consider simultaneous loans.
Proposed Sec. 1026.43(e)(2)(v)(A) would revise existing Sec.
1026.43(e)(2)(v) by requiring a creditor to consider DTI or residual
income in addition to income or assets, debt obligations, alimony, and
child support, as determined under proposed Sec. 1026.43(e)(2)(v)(B).
The Bureau tentatively concludes that the amounts considered under
Sec. 1026.43(e)(2)(v)(A) should be consistent with the amounts
verified according to Sec. 1026.43(e)(2)(v)(B). For example, if the
creditor relies on assets in its ability-to-repay determination and
seeks to comply with the consider requirement under Sec.
1026.43(e)(2)(v)(A), the creditor could consider current and reasonably
expected assets other than the value of the dwelling (including any
real property attached to the dwelling) that secures the loan as
calculated under 1026.43(e)(2)(v)(B).
The Bureau is proposing the revision to add DTI to ensure that,
although the Bureau is proposing to eliminate the DTI limit in Sec.
1026.43(e)(2)(vi), creditors still must consider DTI (or residual
income, as discussed below) as part of the General QM loan definition.
The Bureau continues to believe that DTI is an important factor in
assessing a consumer's ability to repay. Comments responding to the
2019 ANPR indicate that creditors generally use DTI as part of their
underwriting process. These comments indicate that requiring as part of
the General QM loan definition that creditors consider DTI when
determining a consumer's ability to repay--even if the QM definition no
longer includes a specific DTI limit--would be consistent with current
market practices. In a final rule issued in June 2013 (June 2013 Final
Rule), the Bureau created an exception from the DTI limit requirement
for small creditors that hold QMs on portfolio.\242\ The Bureau
determined that, even though the DTI limit was not appropriate for a
small creditor that holds loans on their portfolio, DTI (or residual
income) was still a fundamental part of the creditor's ATR
determination.\243\ The Bureau tentatively concludes that requiring
creditors to consider DTI as part of the QM definition is necessary and
appropriate to ensure that consumers are offered and receive
residential mortgage loans on terms that reasonably reflect their
ability to repay the loan.
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\242\ 78 FR 35430 (June 12, 2013).
\243\ Id. at 35487 (``The Bureau continues to believe that
consideration of debt-to-income ratio or residual income is
fundamental to any determination of ability to repay. A consumer is
able to repay a loan if he or she has sufficient funds to pay his or
her other obligations and expenses and still make the payments
required by the terms of the loan. Arithmetically comparing the
funds to which a consumer has recourse with the amount of those
funds the consumer has already committed to spend or is committing
to spend in the future is necessary to determine whether sufficient
funds exist.'').
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Proposed Sec. 1026.43(e)(2)(v)(A) would require creditors to
consider either a consumer's monthly residual income or DTI. The
January 2013 Final Rule adopted a bright-line DTI limit for the General
QM loan definition under Sec. 1026.43(e)(2)(vi), but the Bureau
concluded that it did not have enough information to establish a
bright-line residual income limit as an alternative to the DTI
limit.\244\ In comparison, TILA and the January 2013 Final Rule allow
creditors to consider either residual income or DTI as part of the
general ATR requirements in Sec. 1026.43(c)(2)(vii), and the June 2013
Final Rule allows small creditors originating QM loans pursuant to
Sec. 1026.43(e)(5) to consider DTI or residual income. Given the
Bureau's proposal to eliminate the bright-line DTI limit in Sec.
1026.43(e)(2)(vi), comments from stakeholders discussed in the January
2013 Final Rule regarding the value of residual income in determining
ability to repay,\245\ and the Bureau's determination in the June 2013
Final Rule that residual income can be a valuable measure of ability to
repay, the Bureau tentatively concludes that allowing creditors the
option to consider (but not requiring them to consider) residual income
in lieu of DTI would allow space for creditor flexibility and
innovation and is necessary and proper to preserve access to
responsible, affordable mortgage credit.
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\244\ 78 FR 6408, 6528 (Jan. 30, 2013) (``Unfortunately,
however, the Bureau lacks sufficient data, among other
considerations, to mandate a bright-line rule based on residual
income at this time.'').
\245\ Id. at 6527 (``Another consumer group commenter argued
that residual income should be incorporated into the definition of
QM. Several commenters suggested that the Bureau use the general
residual income standards of the VA as a model for a residual income
test, and one of these commenters recommended that the Bureau
coordinate with FHFA to evaluate the experiences of the GSEs in
using residual income in determining a consumer's ability to
repay.''); id. at 6528 (``Finally, the Bureau acknowledges arguments
that residual income may be a better measure of repayment ability in
the long run. A consumer with a relatively low household income may
not be able to afford a 43 percent debt-to-income ratio because the
remaining income, in absolute dollar terms, is too small to enable
the consumer to cover his or her living expenses. Conversely, a
consumer with a relatively high household income may be able to
afford a higher debt ratio and still live comfortably on what is
left over.'').
---------------------------------------------------------------------------
The Bureau is proposing the requirement that the creditor consider
the consumer's debt obligations, alimony, child support, income or
assets, and monthly DTI or residual income under Sec. 1026.43(e)(2)(A)
pursuant to its adjustment and
[[Page 41749]]
exception authority under TILA section 129C(b)(3)(B)(i). The Bureau
preliminarily finds that this addition to the General QM loan criteria
is necessary and proper to ensure that responsible, affordable mortgage
credit remains available to consumers in a manner that is consistent
with the purposes of TILA section 129C and necessary and appropriate to
effectuate the purposes of TILA section 129C, which includes assuring
that consumers are offered and receive residential mortgage loans on
terms that reasonably reflect their ability to repay the loan. The
Bureau also incorporates this requirement pursuant to its authority
under TILA section 105(a) to issue regulations that, among other
things, contain such additional requirements, other provisions, or that
provide for such adjustments for all or any class of transactions, that
in the Bureau's judgment are necessary or proper to effectuate the
purposes of TILA, which include the above purpose of section 129C. The
Bureau preliminarily finds that including consideration of DTI or
residual income in the General QM loan criteria is necessary and proper
to fulfill the purpose of assuring that consumers are offered and
receive residential mortgage loans on terms that reasonably reflect
their ability to repay the loan. The Bureau also believes that Sec.
1026.43(e)(2)(A) is authorized by TILA section 129C(b)(2)(A)(vi), which
permits, but does not require, the Bureau to adopt guidelines or
regulations relating to debt-to-income ratios or alternative measures
of ability to pay regular expenses after payment of total monthly debt.
The Bureau is proposing to revise Sec. 1026.43(e)(2)(v)(A) to
incorporate the monthly payment calculation method from current Sec.
1026.43(e)(2)(vi)(B). In order to preserve the incorporation of alimony
and child support in this calculation--which currently is facilitated
by appendix Q--the Bureau is proposing to cross-reference the
requirement in Sec. 1026.43(c)(7). The cross-reference also
incorporates simultaneous loans. Additionally, given the proposal to
allow creditors to consider residual income in lieu of monthly DTI, the
Bureau is proposing to apply this calculation requirement to residual
income. This proposed revision would ensure that the mortgage payment
and the payment on any simultaneous loans are included in a manner
consistent with Sec. 1026.43(e)(2)(iv) both when a creditor considers
DTI or residual income. The Bureau tentatively concludes that requiring
this pre-existing calculation method for DTI and residual income is
appropriate because it would assist creditors in complying with the
consider requirement and would assist in enforcement of the rule
because it would encourage consistency in DTI and residual income
calculations.
To clarify the proposed requirements in Sec. 1026.43(e)(2)(v)(A),
the Bureau proposes to add comments 43(e)(2)(v)(A)-1 to -3. The Bureau
proposes these new comments because they may be appropriate to ensure
that the rule's requirement to consider the consumer's debt
obligations, alimony, child support, income or assets, and DTI ratio or
residual income is clear and detailed enough to provide creditors with
sufficient certainty about whether a loan satisfies the General QM loan
definition. Under the proposal, the General QM loan definition would no
longer include a specific DTI limit in Sec. 1026.43(e)(2)(vi) and
would require instead that creditors consider DTI or residual income,
along with debt and income. By requiring calculation of DTI and
comparing that calculation to a DTI limit, the existing DTI limit
provides creditors with a bright-line rule demonstrating how to
consider the consumer's income or assets, debt, and DTI when making its
ATR determination. Without providing additional explanation of the
proposed requirement to consider DTI or residual income, along with
debt and income, eliminating the DTI limit could create compliance
uncertainty that could leave some creditors reluctant to originate QM
loans to consumers and could allow other creditors to originate risky
loans without considering DTI or residual income and still receive QM
status. In addition, without additional explanation, it may be
difficult to enforce the requirement to consider income or assets, debt
obligations, alimony, child support, and monthly DTI or residual
income. Several ANPR commenters requested that the Bureau maintain the
``consider'' requirement in the General QM loan definition and clarify
this requirement. Accordingly, the Bureau tentatively concludes that it
is appropriate to provide additional explanation for the consider
requirement in Sec. 1026.43(e)(2)(v) in proposed comments
43(e)(2)(v)(A)-1 to -3.
Proposed comment 43(e)(2)(v)(A)-1 would explain that, in order to
comply with the requirement in Sec. 1026.43(e)(2)(v)(A) to consider
income or assets, debt obligations, alimony, child support, and DTI
ratio or residual income, a creditor must take into account income or
assets, debt obligations, alimony, child support, and monthly DTI ratio
or residual income in its ATR determination. In making this
determination, creditors must use the amounts determined under the
requirement to verify the consumer's current or reasonably expected
income or assets and the consumer's current debt obligations, alimony,
and child support in Sec. 1026.43(e)(2)(v)(B). The proposed comment
would further explain that, according to requirements in Sec.
1026.25(a) to retain records showing compliance with the Rule, a
creditor must retain documentation showing how it took into account
these factors in its ATR determination. By citing the record retention
requirement, this comment would clarify that to comply with Sec.
1026.43(e)(2)(v)(A) and obtain QM status, a creditor must document how
the required factors were taken into account in the creditor's ATR
determination. If a creditor ignores the required factors of income or
assets, debt obligations, alimony, child support, and DTI or residual
income--or otherwise did not take them into account as part of its ATR
determination--the loan would not be eligible for QM status. While
creditors must take these factors into account and retain documentation
of how they did so, the Bureau emphasizes that creditors would have
great latitude in how they took these factors into account and that
they would be able to document how they did so in a simple and non-
burdensome manner, such as a creditor documenting that it followed its
standard procedures for considering these factors in connection with a
specific loan. As an example of the type of documents that a creditor
might use to show that income or assets, debt obligations, alimony,
child support, and DTI or residual income were taken into account, the
proposed comment cites an underwriter worksheet or a final automated
underwriting system certification, alone or in combination with the
creditor's applicable underwriting standards, that shows how these
required factors were taken into account in the creditor's ability-to-
repay determination.
To reinforce that the QM definition no longer would include a
specific DTI limit, proposed comment 43(e)(2)(v)(A)-2 explains that
creditors have flexibility in how they consider these factors and that
the proposed rule does not prescribe a specific monthly DTI or residual
income threshold. To assist creditors, the Bureau is proposing two
examples of how to comply with the requirement to consider DTI.
Proposed comment 43(e)(2)(v)(A)-2 provides an example in which a
creditor considers
[[Page 41750]]
monthly DTI or residual income by establishing monthly DTI or residual
income thresholds for its own underwriting standards and documenting
how those thresholds were applied to determine the consumer's ability
to repay. Given that some creditors use several thresholds that depend
on any relevant compensating factors, the Bureau is also proposing a
second example. The second example in the comment would provide that a
creditor may also consider DTI or residual income by establishing
monthly DTI or residual income thresholds and exceptions to those
thresholds based on other compensating factors, and documenting
application of the thresholds along with any applicable exceptions. The
Bureau tentatively concludes that both examples are consistent with
current market practices and therefore providing these examples would
clarify a loan's QM status without imposing a significant burden on the
market.
The Bureau is aware that some creditors look to factors in addition
to income or assets, debt obligations, alimony, child support, and DTI
or residual income in determining a consumer's ability to repay. For
example, the Bureau is aware that some creditors may look to net cash
flow into a consumer's deposit account as a method of residual income
analysis. As the Bureau understands it, a net cash flow calculation
typically consists of residual income, further reduced by consumer
expenditures other than those already subtracted from income in
calculating the consumer's residual income. Accordingly, the result of
a net cash flow calculation may be useful in to assessing the adequacy
of a particular consumer's residual income.
Proposed comment 43(e)(2)(v)(A)-3 would explain that the
requirement in Sec. 1026.43(e)(2)(v)(A) to consider income or assets,
debt obligations, alimony, child support, and monthly DTI or residual
income does not preclude the creditor from taking into account
additional factors that are relevant in making its ability-to-repay
determination. The proposed comment further provides that creditors may
look to comment 43(c)(7)-3 for guidance on considering additional
factors in determining the consumer's ATR. Comment 43(c)(7)-3 explains
that creditors may consider additional factors when determining a
consumer's ability to repay and provides an example of looking to
consumer assets other than the value of the dwelling, such as a savings
account.
The Bureau seeks comment on proposed Sec. 1026.43(e)(2)(v)(A) and
the related commentary. The Bureau specifically seeks comment on
whether the proposed commentary provides sufficient clarity as to what
creditors must do to comply with the requirement to consider income or
assets, debt obligations, alimony, child support, and DTI or residual
income, and whether it creates impediments to consideration of other
factors or data in making an ATR determination. The Bureau also seeks
comment on whether it should retain the monthly payment calculation
method for DTI, which it is proposing to move from Sec.
1026.43(e)(2)(vi)(B) to proposed Sec. 1026.43(e)(2)(v)(A).
The Bureau is proposing revisions to Sec. 1026.43(e)(2)(v)(A) and
related commentary as part of the proposal to eliminate the specific
DTI limit. In amending the General QM loan definition under Sec.
1026.43(e)(2), Bureau is concerned about balancing various factors,
including the need for clarity regarding QM status and for flexibility
as market underwriting practices evolve, while also trying to ensure
that creditors making loans that receive QM status have considered the
consumers' financial capacity and thus should receive a presumption of
compliance with the ATR requirements. In particular, the Bureau is
concerned about the potential that the price-based approach may permit
some loans to receive QM status, even if creditors may have originated
those loans without meaningfully considering the consumer's financial
capacity because they believe their risk of loss may be limited by
factors like a rising housing price environment or the consumer's
existing equity in the home. As discussed in the January 2013 Final
Rule, the Bureau is aware of concerns about creditors relying on
factors related to the value of the dwelling, like LTV ratio, and how
such reliance may have contributed to the mortgage crisis.\246\ Given
these concerns, the Bureau also seeks comment on whether proposed Sec.
1026.43(e)(2)(v)(A) and its associated commentary sufficiently address
the risk that loans with a DTI that is so high or residual income that
is so low that a consumer may lack ability to repay can obtain QM
status. In particular, the Bureau seeks comment on whether the Rule
should provide examples in which a creditor has not considered the
required factors and, if so, what may be appropriate examples. The
Bureau also requests comment on whether the Rule should provide that a
creditor does not appropriately consider DTI or residual income if a
very high DTI ratio or low residual income indicates that the consumer
lacks ability to repay but the creditor disregards this information and
instead relies on the consumer's expected or present equity in the
dwelling, such as might be identified through the consumer's LTV ratio.
The Bureau also requests comment on whether the Rule should specify
which compensating factors creditors may or may not rely on for
purposes of determining the consumer's ability to repay. The Bureau
also seeks comment on the tradeoffs of addressing these ability-to-
repay concerns with undermining the clarity of a loan's QM status. The
Bureau also seeks comment on the impact of the COVID-19 pandemic on how
creditors consider income or assets, debt obligations, alimony, child
support, and monthly DTI ratio or residual income.
---------------------------------------------------------------------------
\246\ See id. at 6561 (Jan. 30, 2013) (``In some cases, lenders
and borrowers entered into loan contracts on the misplaced belief
that the home's value would provide sufficient protection. These
cases included subprime borrowers who were offered loans because the
lender believed that the house value either at the time of
origination or in the near future could cover any default. Some of
these borrowers were also counting on increased housing values and a
future opportunity to refinance; others likely understood less about
the transaction and were at an informational disadvantage relative
to the lender.''); id. at 6564 (``During those periods there were
likely some lenders, as evidenced by the existence of no-income, no-
asset (NINA) loans, that used underwriting systems that did not look
at or verify income, debts, or assets, but rather relied primarily
on credit score and LTV.''); id. at 6559 (``If the lender is assured
(or believes he is assured) of recovering the value of the loan by
gaining possession of the asset, the lender may not pay sufficient
attention to the ability of the borrower to repay the loan or to the
impact of default on third parties. For very low LTV mortgages,
i.e., those where the value of the property more than covers the
value of the loan, the lender may not care at all if the borrower
can afford the payments. Even for higher LTV mortgages, if prices
are rising sharply, borrowers with even limited equity in the home
may be able to gain financing since lenders can expect a profitable
sale or refinancing of the property as long as prices continue to
rise. . . . In all these cases, the common problem is the failure of
the originator or creditor to internalize particular costs, often
magnified by information failures and systematic biases that lead to
underestimation of the risks involved. The first such costs are
simply the pecuniary costs from a defaulted loan--if the loan
originator or the creditor does not bear the ultimate credit risk,
he or she will not invest sufficiently in verifying the consumer's
ability to repay.'').
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43(e)(2)(v)(B)
For the reasons discussed below, the Bureau proposes to revise
Sec. 1026.43(e)(2)(v)(B) to provide that a General QM loan is a
covered transaction for which the creditor, at or before consummation,
verifies the consumer's current or reasonably expected income or assets
other than the value of the dwelling (including any real property
attached to the dwelling) that secures the loan using third-party
[[Page 41751]]
records that provide reasonably reliable evidence of the consumer's
income or assets, in accordance with Sec. 1026.43(c)(4) and verifies
the consumer's current debt obligations, alimony, and child support
using reasonably reliable third-party records in accordance with Sec.
1026.43(c)(3).
To clarify this requirement, the Bureau proposes to add comments
43(e)(2)(v)(B)-1 through -3. Proposed comment 43(e)(2)(v)(B)-1 would
explain that Sec. 1026.43(e)(2)(v)(B) does not prescribe specific
methods of underwriting that creditors must use. It would provide that
Sec. 1026.43(e)(2)(v)(B)(1) requires a creditor to verify the
consumer's current or reasonably expected income or assets (including
any real property attached to the value of the dwelling) that secures
the loan in accordance with Sec. 1026.43(c)(4), which states that a
creditor must verify such amounts using third-party records that
provide reasonably reliable evidence of the consumer's income or
assets. The proposed comment would provide further that Sec.
1026.43(e)(2)(v)(B)(2) requires a creditor to verify the consumer's
current debt obligations, alimony, and child support in accordance with
Sec. 1026.43(c)(3), which states that a creditor must verify such
amounts using reasonably reliable third-party records. Proposed comment
43(e)(2)(v)(B)-1 would then clarify that, so long as a creditor
complies with the provisions of Sec. 1026.43(c)(3) with respect to
debt obligations, alimony, and child support and Sec. 1026.43(c)(4)
with respect to income and assets, the creditor is permitted to use any
reasonable verification methods and criteria.
Proposed comment 43(e)(2)(v)(B)-2 would clarify that ``current and
reasonably expected income or assets other than the value of the
dwelling (including any real property attached to the dwelling) that
secures the loan'' is determined in accordance with Sec.
1026.43(c)(2)(i) and its commentary and that ``current debt
obligations, alimony, and child support'' has the same meaning as under
Sec. 1026.43(c)(2)(vi) and its commentary. The proposed comment would
further clarify that Sec. 1026.43(c)(2)(i) and (vi) and the associated
commentary apply to a creditor's determination with respect to what
inflows and property it may classify and count as income or assets and
what obligations it must classify and count as debt obligations,
alimony, and child support, pursuant to its compliance with Sec.
1026.43(e)(2)(v)(B).
The Bureau notes that proposed comments 43(e)(2)(v)(B)-1 and -2
would enable creditors to take into account the effects of public
emergencies that affect consumers' incomes when verifying a particular
consumer's income. These proposed comments would clarify that Sec.
1026.43(e)(2)(v)(B) does not prescribe precisely how creditors must
verify the consumer's income or assets, debt obligations, alimony, and
child support--merely that they must do so using third-party records
that are reasonably reliable. As such, creditors would have the
flexibility to adjust their verification methods in the event of an
emergency, such as the COVID-19 pandemic, that affects consumer
incomes.
Proposed comment 43(e)(2)(v)(B)-3.i would explain further that a
creditor also complies with Sec. 1026.43(e)(2)(v)(B) if it satisfies
one of the specific verification standards the Bureau would set forth
in the rule. These standards may include relevant provisions in
specified versions of the Fannie Mae Single Family Selling Guide,\247\
the Freddie Mac Single-Family Seller/Servicer Guide,\248\ the FHA's
Single Family Housing Policy Handbook,\249\ the VA's Lenders
Handbook,\250\ and the USDA's Field Office Handbook for the Direct
Single Family Housing Program \251\ and the Handbook for the Single
Family Guaranteed Loan Program, current as of the date of this
proposal's public release.\252\ The Bureau seeks comment on whether
these or other verification standards should be incorporated into
proposed comment 43(e)(2)(v)(B)-3.i.
---------------------------------------------------------------------------
\247\ Fed. Nat'l Mortgage Assoc., Single Family Selling Guide
(2020), https://selling-guide.fanniemae.com/.
\248\ Fed. Home Loan Mort. Corp., The Single-Family Seller/
Servicer Guide (2020), https://guide.freddiemac.com/app/guide/.
\249\ U.S. Dep't of Hous. & Urban Dev., Single Family Housing
Policy Handbook 4000.1 (2019), https://www.hud.gov/program_offices/housing/sfh/handbook_4000-1.
\250\ U.S. Dept. of Veterans Affairs, Lenders Handbook-VA
Pamphlet 26-7 (2019), https://www.benefits.va.gov/WARMS/pam26_7.asp.
\251\ U.S. Dep't of Agric. Rural Hous. Serv., Direct Single
Family Housing Loans and Grants-Field Office Handbook HB-1-3550
(2019), https://www.rd.usda.gov/resources/directives/handbooks#hb13555.
\252\ U.S. Dep't of Agric. Rural Hous. Serv., Guaranteed Loan
Program Technical Handbook HB-1-3555 (2020), https://www.rd.usda.gov/resources/directives/handbooks#hb13555.
---------------------------------------------------------------------------
Proposed comment 43(e)(2)(v)(B)-3.ii would clarify that a creditor
complies with Sec. 1026.43(e)(2)(v)(B) if it complies with
requirements in the standards listed in comment 43(e)(2)(v)(B)-3 for
creditors to verify income or assets, debt obligations, alimony and
child support using specified guides or to include or exclude
particular inflows, property, and obligations as income, assets, debt
obligations, alimony, and child support. For example, such requirements
would include a specified standard's definition of the term ``self-
employment income,'' description of when the creditor may use self-
employment income as qualifying income for a mortgage, and explanation
of how the creditor must document self-employment income.
Proposed comment 43(e)(2)(v)(B)-3.iii would clarify that, for
purposes of compliance with Sec. 1026.43(e)(2)(v)(B), a creditor need
not comply with requirements in the standards listed in comment
43(e)(2)(v)(B)-3.i other than those that require creditors to verify
income, assets, debt obligations, alimony, and child support using
specified documents or to classify particular inflows, property, and
obligations as income, assets, debt obligations, alimony, and child
support. For example, a standard the Bureau would specify may include
information on the use of DTI ratios. Because such information is not a
requirement to verify income, assets, debt obligations, alimony and
child support using specified documents or to classify particular
inflows, property, and obligations as income, assets, debt obligations,
alimony, and child support, a creditor would need not comply with this
requirement to be eligible to receive a safe harbor as described in
comment 43(e)(2)(v)(B)-3.i.
Proposed comment 43(e)(2)(v)(B)-3.iv would clarify that a creditor
also complies with Sec. 1026.43(e)(2)(v)(B) if it complies with
revised versions of standards that the Bureau would specify in comment
43(e)(2)(v)(B)-3, provided that the two versions are substantially
similar. This provision is intended to allow creditors to use new
versions of standards without the Bureau needing to amend the
commentary unless the new versions of the standards deviate in
important respects from the older versions of the standards.
Finally, proposed comment 43(e)(2)(v)(B)-3.v would clarify that a
creditor complies with Sec. 1026.43(e)(2)(v)(B) if it complies with
the verification requirements in one or more of the standards the
Bureau would specify in comment 43(e)(2)(v)(B)-3.i. The proposed
comment would provide further that a creditor may, but need not, comply
with Sec. 1026.43(e)(2)(v)(B) by complying with the verification
requirements from more than one standard (in other words, by ``mixing
and matching'' verification requirements). For example, if a creditor
complies with the requirements in one of the standards the Bureau would
[[Page 41752]]
specify for when the creditor may use ``self-employment income,'' and
also complies with the requirements in a different standard the Bureau
would specify regarding certain vested assets, the creditor complies
with Sec. 1026.43(e)(2)(v)(B) and receives a safe harbor as described
in comment 43(e)(2)(v)(B)-3.i with respect to those determinations. A
creditor that chooses to comply with the verification requirements from
more than one standard need not satisfy all of the verification
requirements in each of the standards it uses.
The Bureau proposes these revisions because it preliminarily
concludes that they may help ensure that the Rule's verification
requirements are clear and detailed enough to provide creditors with
sufficient certainty about whether a loan satisfies the General QM loan
definition. Without such certainty, creditors may be less likely to
provide General QM loans to consumers, reducing the availability of
responsible, affordable mortgage credit to consumers. The Bureau also
seeks to ensure that the Rule's verification requirements are flexible
enough to adapt to emerging issues with respect to the treatment of
certain types of debt or income, advancing the provision of
responsible, affordable credit to consumers.
To further these objectives, the Bureau is proposing to remove the
requirement that creditors verify the consumer's income or assets, debt
obligations, alimony, and child support in accordance with appendix Q
and to add commentary clarifying that a creditor complies with Sec.
1026.43(e)(2)(v)(B) if it complies with verification standards the
Bureau would specify. The Bureau encourages stakeholders to develop
additional verification standards that the Bureau could incorporate
into the safe harbor set forth in proposed comment 43(e)(2)(v)(B)-3.
Stakeholder standards also could incorporate, in whole or in part, any
standards that the Bureau specifies as providing a safe harbor,
including mixing and matching these standards. The Bureau thus welcomes
the submission of stakeholder-developed verification standards and
would review any such standards for potential inclusion in the safe
harbor.
In the January 2013 Final Rule, the Bureau adopted the requirement
that creditors verify the consumer's income or assets, debt
obligations, alimony, and child support in accordance with appendix Q.
The Bureau believed this requirement would provide certainty to
creditors as to whether a loan meets the General QM loan definition and
would not deter creditors from providing QMs to consumers.\253\
However, appendix Q has not achieved this goal. The Assessment Report
highlighted three concerns with appendix Q. First, the Report stated
that appendix Q lacks the high degree of specific detail that is
provided by, for example, Fannie Mae's Seller Guide and Freddie Mac's
Seller/Servicer Guide.\254\ Second, the Report noted that there is a
perceived lack of clarity in appendix Q. As the Report noted,
commenters on the Assessment RFI stated that appendix Q ``is ambiguous
and leads to uncertainty'' and is ``confusing and unworkable,'' and
that ``additional guidance . . . is needed.'' \255\ Third, the Report
noted that appendix Q has been static since its adoption, while the
GSEs regularly update and adjust their guidelines in response to, among
other things, emerging issues with respect to the treatment of certain
types of debt or income.\256\ The Assessment Report found that such
concerns ``may have contributed to investors'--and at least
derivatively, creditors'--preference'' for Temporary GSE QM loans
instead of originating loans under the General QM loan definition.\257\
Commenters responding to the ANPR also raised similar concerns, but
some commenters also recommended maintaining appendix Q as an option
for compliance.
---------------------------------------------------------------------------
\253\ 78 FR 6408, 6523 (Jan. 30, 2013).
\254\ See Assessment Report, supra note 58, at 193.
\255\ Id.
\256\ Id. at 193-94.
\257\ Id. at 193.
---------------------------------------------------------------------------
As described above in part III, the ANPR solicited comment on
whether the rule should retain appendix Q as the standard for
calculating and verifying debt and income.\258\ Nearly all commenters
agreed that appendix Q in its existing form is insufficient--
specifically, that the requirements lacked clarity in certain areas,
particularly with respect to the application of the standards to
consumers who are self-employed or otherwise have non-traditional
income. These commenters stated that this lack of clarity leaves
creditors uncertain of the QM status of some loans. Commenters also
criticized appendix Q for being overly prescriptive and outdated in
other areas and therefore lacking the flexibility to adapt to changing
market conditions. Commenters suggested that the Bureau supplement
appendix Q or replace it with reasonable alternatives that allow for
more flexibility, such as a general reasonability standard for
verifying income and debt or verification standards issued by the GSEs,
FHA, USDA, or VA. Commenters also stated that appendix Q hampers
innovation because it is incompatible with practices such as digital
underwriting. Although most commenters advocated for elimination of
appendix Q, the commenters that advocated for retaining appendix Q
generally suggested the Bureau should revise appendix Q to modernize
the standards and ease industry compliance.
---------------------------------------------------------------------------
\258\ Specifically, the Bureau sought comment on whether the
rule should retain appendix Q as the standard for verification if
the rule retains a direct measure of a consumer's personal finances
for General QM. Even though the Bureau is proposing to remove the
DTI ratio requirement, the question about retention of appendix Q
remains relevant because the proposal would require creditors to
verify income, assets, debt obligations, alimony, and child support.
---------------------------------------------------------------------------
The Bureau tentatively determines that, due to the well-founded and
consistent concerns described above, appendix Q does not provide
sufficient compliance certainty to creditors and does not provide
flexibility to adapt to emerging issues with respect to the treatment
of certain types of debt or income categories. The Bureau recognizes
that some findings in the Assessment Report suggest that the issues
raised by creditors with respect to appendix Q do not appear to have
had a substantial impact for certain loans. For example, although
creditors have stated that it may be difficult to comply with certain
appendix Q requirements for self-employed borrowers, the Assessment
Report noted that application data indicated that the approval rates
for non-high DTI, non-GSE eligible self-employed borrowers have
decreased by only two percentage points since the January 2013 Final
Rule became effective.\259\ The Bureau tentatively concludes, however,
that this limited decrease in approvals for such applications does not
undermine creditors' concerns that appendix Q's definitions of debt and
income are rigid and difficult to apply and do not provide the level of
compliance certainty that the Bureau anticipated in the January 2013
Final Rule. Additionally, the Assessment Report showed that about 40
percent of respondents to a lender survey indicated that they ``often''
or ``sometimes'' originate non-QM loans where the borrower could not
provide documentation required by appendix Q. The Bureau concluded that
these results left open the possibility that appendix Q requirements
may have had an impact on access to credit.\260\
---------------------------------------------------------------------------
\259\ See Assessment Report, supra note 58, at 11.
\260\ See id. at 155.
---------------------------------------------------------------------------
The Bureau thus proposes to remove the appendix Q requirements from
[[Page 41753]]
Sec. 1026.43(e)(2)(v), and to remove appendix Q from Regulation Z
entirely. The Bureau proposes to remove appendix Q entirely in light of
concerns from creditors and investors that its perceived inflexibility,
ambiguity, and static nature result in standards that are both
confusing and outdated. The Bureau understands it would be time- and
resource-intensive to revise appendix Q in a manner that would resolve
these concerns. The Bureau tentatively concludes that a more efficient
and practicable solution is to propose to remove appendix Q entirely.
As described above, the proposal would instead provide that
creditors must verify income, assets, debt obligations, alimony, and
child support in accordance with the general ATR verification
provisions. The proposal would also provide a safe harbor for
compliance with Sec. 1026.43(e)(2)(v)(B) if a creditor complies with
verification requirements in standards the Bureau would specify in
comment 43(e)(2)(v)(B)-3. Because the Bureau believes that the general
ATR verification provisions and external standards the Bureau would
specify would provide a workable approach, and because the Bureau
preliminarily agrees that the existing concerns with appendix Q
discussed above have merit, the Bureau is not proposing to retain
appendix Q as an option for creditors to comply with the requirements
of Sec. 1026.43(e)(2)(v) to consider and verify a consumer's income,
assets, debt obligations, alimony, and child support. As proposed
comment 43(e)(2)(v)(B)-1 makes clear, creditors would still be required
to verify the consumer's income or assets in accordance with Sec.
1026.43(c)(4) and its commentary and verify the consumer's current debt
obligations, alimony, and child support in accordance with Sec.
1026.43(c)(3) and its commentary.
As noted above, the proposal would also provide a safe harbor for
compliance with Sec. 1026.43(e)(2)(v)(B) where a creditor complies
with verification requirements in standards the Bureau specifies. These
may include relevant provisions from Fannie Mae's Single Family Selling
Guide, Freddie Mac's Single-Family Seller/Servicer Guide, FHA's Single
Family Housing Policy Handbook, the VA's Lenders Handbook, and the
USDA's Field Office Handbook for the Direct Single Family Housing
Program as well as its Handbook for the Single Family Guaranteed Loan
Program, current as of this proposal's public release. All of these
verification standards are available to the public for free
online.\261\ As discussed above, the Bureau is also open to including
stakeholder-developed verification standards among this list of guides
such that a creditor's compliance with such verification standards
would provide conclusive evidence of compliance with Sec.
1026.43(e)(2)(v)(B).
---------------------------------------------------------------------------
\261\ The current versions of the guides (as of June 17, 2020)
are available on the respective Federal agency and GSE websites. The
current versions of the Federal agency guides noted above will be
posted with the proposed rule on https://www.regulations.gov. In the
event that the GSEs replace the current versions of the guides noted
above with new versions of the guides on their websites during the
comment period, the version current as of June 17, 2020 of Fannie
Mae's Single Family Selling Guide will be available at http://www.allregs.com/tpl/public/fnma_freesiteconv_tll.aspx, and the
version current as of June 17, 2020 of Freddie Mac's Single-Family
Seller/Servicer Guide will be available at https://www.allregs.com/tpl/public/fhlmc_freesite_tll.aspx.
---------------------------------------------------------------------------
The Bureau tentatively determines, based on extensive public
feedback and its own experience and review, that external standards
appear reasonable and would provide creditors with substantially
greater certainty about whether many loans satisfy the General QM loan
definition--particularly with respect to verifying income for self-
employed consumers, consumers with part-time employment, and consumers
with irregular or unusual income streams. The Bureau tentatively
determines that these types of income would be addressed more fully by
certain external standards than by appendix Q. The Bureau tentatively
determines that, as a result, this proposal would increase access to
responsible, affordable credit for consumers.
The Bureau emphasizes that a creditor would not be required to
comply with any of the verification requirements in the standards the
Bureau would specify in comment 43(e)(2)(v)(B)-3.i in order to comply
with Sec. 1026.43(e)(2)(v)(B). Rather, the Bureau is proposing to
clarify that compliance with these standards constitutes compliance
with the verification requirements of Sec. 1026.43(c)(3) and (c)(4)
and their commentary, which generally require creditors to verify
income, assets, debt obligations, alimony, and child support using
reasonably reliable third-party records. The Bureau tentatively
determines that this would help address the concerns of many creditors
and commenters that appendix Q has not facilitated adequate compliance
certainty.
The Bureau also tentatively determines that the proposal would
provide creditors with the flexibility to develop other methods of
compliance with the verification requirements of Sec.
1026.43(e)(2)(v)(B), consistent with Sec. 1026.43(c)(3) and (c)(4) and
their commentary, an option that the Bureau intends to address the
concerns of creditors and commenters that found appendix Q to be too
rigid or prescriptive. As explained in proposed comment 43(e)(2)(v)(B)-
1, Sec. 1026.43(e)(2)(v)(B) does not prescribe specific methods of
underwriting, and so long as a creditor complies with Sec.
1026.43(c)(3) and (c)(4), the creditor is permitted to use any
reasonable verification methods and criteria. Furthermore, as proposed
comment 43(e)(2)(v)(B)-3.v would clarify, creditors would have the
flexibility to ``mix and match'' the verification requirements in the
standards the Bureau would specify in comment 43(e)(2)(v)(B)-3.i, and
receive a safe harbor with respect to verification that is made
consistent with those standards.
The Bureau also proposes to explain in proposed comment
43(e)(2)(v)(B)-3.iv that a creditor complies with Sec.
1026.43(e)(2)(v)(B) if it complies with revised versions of the
standards the Bureau would specify in comment 43(e)(2)(v)(B)-3.i,
provided that the two versions are substantially similar. Many of the
standards that the Bureau could specify in comment 43(e)(2)(V)(B)-3.i,
such as GSE and Federal agency standards, are regularly updated in
response to emerging issues with respect to the treatment of certain
types of debt or income. This proposed comment would explain that the
safe harbor described in comment 43(e)(2)(v)(B)-3.i applies not only to
verification requirements in the specific versions of the standards
listed, but also revised versions of these standards, as long as the
revised version is substantially similar.
The Bureau is aware, based on comments received on the ANPR, that
some creditors would prefer that compliance with any future version of
the standards the Bureau specifies, rather than just the versions of
those standards the Bureau would specify in comment 43(e)(2)(v)(B)-3.i
(as well as any substantially similar version, under proposed comment
43(e)(2)(v)(B)-3.iv), be automatically deemed to constitute compliance
with the verification requirements of Sec. 1026.43(c)(3) and (c)(4).
However, such an approach would mean that any future revisions to those
standards by the third parties that issue them could cause significant
changes in the creditor obligations and consumer protections under the
Rule without review by the Bureau. For this reason, the Bureau is not
proposing such an approach.
[[Page 41754]]
As in the January 2013 Final Rule, the Bureau is proposing to
incorporate the requirement that the creditor verify the consumer's
current debt obligations, alimony, and child support into the
definition of a General QM loan in Sec. 1026.43(e)(2) pursuant to its
authority under TILA section 129C(b)(3)(B)(i). The Bureau is also
proposing the revisions to the commentary to Sec.
1026.43(e)(2)(v)(B)--including the clarification that a creditor
complies with the General QM loan verification requirement where it
complies with certain verification standards issued by third parties
that the Bureau would specify--pursuant to its authority under TILA
section 129C(b)(3)(B)(i). The Bureau tentatively finds that these
provisions would be necessary and proper to ensure that responsible,
affordable mortgage credit remains available to consumers in a manner
that is consistent with the purposes of TILA section 129C and necessary
and appropriate to effectuate the purposes of TILA section 129C, which
includes assuring that consumers are offered and receive residential
mortgage loans on terms that reasonably reflect their ability to repay
the loan.
The Bureau also proposes these provisions pursuant to its authority
under TILA section 105(a) to issue regulations that, among other
things, contain such additional requirements, other provisions, or that
provide for such adjustments for all or any class of transactions, that
in the Bureau's judgment are necessary or proper to effectuate the
purposes of TILA, which include the above purpose of section 129C,
among other things. The Bureau tentatively finds that these provisions
would be necessary and proper to achieve this purpose. In particular,
the Bureau tentatively finds that incorporating the requirement that a
creditor verify a consumer's current debt obligations, alimony, and
child support into the General QM loan criteria--as well as clarifying
that a creditor complies with the General QM verification requirement
where it complies with certain verification standards issued by third
parties that the Bureau would specify--would ensure that creditors
verify whether a consumer has the ability to repay a General QM loan.
Finally, the Bureau concludes that these regulatory amendments are
authorized by TILA section 129C(b)(2)(A)(vi), which permits, but does
not require, the Bureau to adopt guidelines or regulations relating to
debt-to-income ratios or alternative measures of ability to pay regular
expenses after payment of total monthly debt.
The Bureau seeks comment on proposed Sec. 1026.43(e)(2)(v)(B) and
related commentary, including on whether it should retain appendix Q as
an option for complying with the Rule's verification standards. In
addition, the Bureau requests comment on whether proposed Sec.
1026.43(e)(2)(v)(B) and related commentary would facilitate or create
obstacles to verification of income, assets, debt obligations, alimony,
and child support through automated analysis of electronic transaction
data from consumer account records. The Bureau also requests comment on
whether the Rule should include a safe harbor for compliance with
certain verification standards, as the Bureau proposes in proposed
comment 43(e)(2)(v)(B)-3, and, if so, what verification standards the
Bureau should specify for the safe harbor. The Bureau also requests
comment about the advantages and disadvantages of the verification
requirements in each possible standard the Bureau could specify for the
safe harbor, including: (1) Chapters B3-3 through B3-6 of the Fannie
Mae Single Family Selling Guide, published June 3, 2020; (2) sections
5102 through 5500 of the Freddie Mac Single-Family Seller/Servicer
Guide, published June 10, 2020; (3) sections II.A.1 and II.A.4-5 of the
FHA's Single Family Housing Policy Handbook, issued October 24, 2019;
(4) chapter 4 of the VA's Lenders Handbook, revised February 22, 2019;
(5) chapter 4 of the USDA's Field Office Handbook for the Direct Single
Family Housing Program, revised March 15, 2019; and (6) chapters 9
through 11 of the USDA's Handbook for the Single Family Guaranteed Loan
Program, revised March 19, 2020. In addition, the Bureau requests
comment on whether creditors that comply with standards that have been
revised but are substantially similar should receive a safe harbor, as
the Bureau proposes. The Bureau further seeks comment on whether the
Rule should include examples of revisions that might qualify as
substantially similar, and if so, what types of examples would provide
helpful clarification to creditors and other stakeholders. For example,
the Bureau seeks comment on whether it would be helpful to clarify that
a revision might qualify as substantially similar where it is a
clarification, explanation, logical extension, or application of a pre-
existing proposition in the standard. The Bureau also seeks comment on
its proposal to allow creditors to ``mix and match'' requirements from
verification standards, including whether examples of such ``mixing and
matching'' would be helpful and whether the Bureau should instead limit
or prohibit such ``mixing and matching,'' and why.
Finally, the Bureau requests comment on whether the Bureau should
specify in the safe harbor existing stakeholder standards or standards
that stakeholders develop that define debt and income. The Bureau seeks
comment on whether the potential inclusion or non-inclusion of Federal
agency or GSE verification standards in the safe harbor in the future
would further encourage stakeholders to develop such standards.
43(e)(2)(vi)
TILA section 129C(b)(2)(vi) states that the term ``qualified
mortgage'' includes any mortgage loan that complies with any guidelines
or regulations established by the Bureau relating to ratios of total
monthly debt to monthly income or alternative measure of ability to pay
regular expenses after payment of total monthly debt, taking into
account the income levels of the consumer and such other factors as the
Bureau may determine relevant and consistent with the purposes
described in TILA section 129C(b)(3)(B)(i). TILA section
129C(b)(3)(B)(i) authorizes the Bureau to revise, add to, or subtract
from the criteria that define a QM upon a finding that the changes are
necessary or proper to ensure that responsible, affordable mortgage
credit remains available to consumers in a manner consistent with the
purposes of TILA section 129C, necessary and appropriate to effectuate
the purposes of TILA sections 129C and 129B, to prevent circumvention
or evasion thereof, or to facilitate compliance with TILA sections 129C
and 129B. Current Sec. 1026.43(e)(2)(vi) implements TILA section
129C(b)(2)(vi), consistent with TILA section 129C(b)(3)(B)(i), and
provides that, as a condition to be a General QM loan under Sec.
1026.43(e)(2), the consumer's total monthly DTI ratio may not exceed 43
percent. Section 1026.43(e)(2)(vi) further provides that the consumer's
total monthly DTI ratio is generally determined in accordance with
appendix Q.
For the reasons described in part V above, the Bureau is proposing
to remove the 43 percent DTI limit in current Sec. 1026.43(e)(2)(vi)
and replace it with a price-based approach. The proposal also would
require a creditor to consider and verify the consumer's debt, income,
and monthly DTI ratio or residual income. Specifically, the Bureau
proposes to remove the text of current Sec. 1026.43(e)(2)(vi) and to
[[Page 41755]]
provide instead that, to be a General QM loan under Sec.
1026.43(e)(2), the APR may not exceed APOR for a comparable transaction
as of the date the interest rate is set by the amounts specified in
Sec. 1026.43(e)(2)(vi)(A) through (E).\262\ Proposed Sec.
1026.43(e)(2)(vi)(A) through (E) would provide specific rate spread
thresholds for purposes of Sec. 1026.43(e)(2), including higher
thresholds for small loan amounts and subordinate-lien transactions.
Proposed Sec. 1026.43(e)(2)(vi)(A) would provide that for a first-lien
covered transaction with a loan amount greater than or equal to
$109,898 (indexed for inflation), the APR may not exceed APOR for a
comparable transaction as of the date the interest rate is set by two
or more percentage points. Proposed Sec. 1026.43(e)(2)(vi)(B) and (C)
would provide higher thresholds for smaller first-lien covered
transactions. Proposed Sec. 1026.43(e)(2)(vi)(D) and (E) would provide
higher thresholds for subordinate-lien covered transactions. Loans
priced at or above the thresholds in proposed Sec.
1026.43(e)(2)(vi)(A) through (E) would not be eligible for QM status
under Sec. 1026.43(e)(2). The proposal would also provide that the
loan amounts specified in Sec. 1026.43(e)(2)(vi)(A) through (E) be
adjusted annually for inflation based on changes in the Consumer Price
Index for All Urban Consumers (CPI-U).
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\262\ As explained above in the section-by-section discussion of
Sec. 1026.43(e)(2)(v)(A), the Bureau is proposing to move to Sec.
1026.43(e)(2)(v)(A) the provisions in existing Sec.
1026.43(e)(2)(vi)(B), which specify that the consumer's monthly DTI
ratio is determined using the consumer's monthly payment on the
covered transaction and any simultaneous loan that the creditor
knows or has reason to know will be made.
---------------------------------------------------------------------------
Proposed Sec. 1026.43(e)(2)(vi) would also provide a special rule
for determining the APR for purposes of determining a loan's status as
a General QM loan under Sec. 1026.43(e)(2) for certain ARMs and other
loans for which the interest rate may or will change in the first five
years of the loan. Specifically, proposed Sec. 1026.43(e)(2)(vi) would
provide that, for purposes of Sec. 1026.43(e)(2)(vi), the creditor
must determine the APR for a loan for which the interest rate may or
will change within the first five years after the date on which the
first regular periodic payment will be due by treating the maximum
interest rate that may apply during that five-year period as the
interest rate for the full term of the loan.
The Bureau is proposing these revisions to Sec. 1026.43(e)(2)(vi)
for the reasons set forth above in part V. As explained above, the
Bureau is proposing to remove the 43 percent DTI limit in current Sec.
1026.43(e)(2)(vi) and replace it with a price-based approach because
the Bureau is concerned that retaining the existing General QM loan
definition with the 43 percent DTI limit after the expiration of
Temporary GSE QM loan definition expires would significantly reduce the
size of QM and could significantly reduce access to responsible,
affordable credit. The Bureau is proposing a price-based approach to
replace the specific DTI limit approach because it is concerned that
imposing a DTI limit as a condition for QM status under the General QM
loan definition may be overly burdensome and complex in practice and
may unduly restrict access to credit because it provides an incomplete
picture of the consumer's financial capacity. The Bureau preliminarily
concludes that a price-based General QM loan definition is appropriate
because a loan's price, as measured by comparing a loan's APR to APOR
for a comparable transaction, is a strong indicator of a consumer's
ability to repay and is a more holistic and flexible measure of a
consumer's ability to repay than DTI alone.
The Bureau also proposes to remove current comment 43(e)(2)(vi)-1,
which relates to the calculation of monthly payments on a covered
transaction and for simultaneous loans for purposes of calculating the
consumer's DTI ratio under current Sec. 1026.43(e)(2)(vi). The Bureau
believes this comment would be unnecessary under the proposal to move
the text of current Sec. 1026.43(e)(2)(vi) and revise it to remove the
references to appendix Q. The Bureau proposes to replace current
comment 43(e)(2)(vi)-1 with a cross-reference to comments 43(b)(4)-1
through -3 for guidance on determining APOR for a comparable
transaction as of the date the interest rate is set. The Bureau also
proposes new comment 43(e)(2)(vi)-2, which provides that a creditor
must determine the applicable rate spread threshold based on the face
amount of the note, which is the ``loan amount'' as defined in Sec.
1026.43(b)(5). In addition, the Bureau proposes comment 43(e)(2)(vi)-3
in which it will publish the annually adjusted loan amounts to reflect
changes in the CPI-U. The Bureau also proposes new comment
43(e)(2)(vi)-4, which explains the proposed special rule that, for
purposes of Sec. 1026.43(e)(2)(vi), the creditor must determine the
APR for a loan for which the interest rate may or will change within
the first five years after the date on which the first regular periodic
payment will be due by treating the maximum interest rate that may
apply during that five-year period as the interest rate for the full
term of the loan. The guidance provided in proposed comment
43(e)(2)(vi)-4 is discussed further, below.
The Bureau proposes to adopt a price-based approach to defining
General QM loans in Sec. 1026.43(e)(2)(vi) pursuant to its authority
under TILA section 129C(b)(3)(B)(i). The Bureau preliminarily concludes
that a price-based approach to the General QM loan definition is
necessary and proper to ensure that responsible, affordable mortgage
credit remains available to consumers in a manner that is consistent
with the purposes of TILA section 129C and is necessary and appropriate
to effectuate the purposes of TILA section 129C, which includes
assuring that consumers are offered and receive residential mortgage
loans on terms that reasonably reflect their ability to repay the loan.
As noted above, the Bureau is concerned that, when the Temporary GSE QM
loan definition expires, there would be a significant reduction in
access to credit if the Bureau retained the existing General QM loan
definition with the 43 percent DTI limit. The Bureau preliminarily
concludes that a price-based General QM loan definition is appropriate
because a loan's price, as measured by comparing a loan's APR to APOR
for a comparable transaction, is a strong indicator of a consumer's
ability to repay. Further, the Bureau preliminarily concludes that a
price-based approach is a more holistic and flexible measure of a
consumer's ability to repay than DTI ratios alone, and therefore would
better promote access to credit by providing QM status to consumers
with DTI ratios above 43 percent for whom it may be appropriate to
presume ability to repay. As such, the Bureau preliminarily concludes
that a price-based approach to the General QM loan definition would
both ensure that responsible, affordable mortgage credit remains
available to consumers and assure that consumers are offered and
receive residential mortgage loans on terms that reasonably reflect
their ability to repay the loan. For these same reasons, the Bureau
also proposes to adopt a price-based requirement in Sec.
1026.43(e)(2)(vi) pursuant to its authority under TILA section 105(a)
to issue regulations that, among other things, contain such additional
requirements or other provisions, or that provide for such adjustments
for all or any class of transactions, that in the Bureau's
[[Page 41756]]
judgment are necessary or proper to effectuate the purposes of TILA,
which include the above purpose of section 129C, among other things.
The Bureau preliminarily concludes that the price-based addition to the
QM criteria is necessary and proper to achieve this purpose, for the
reasons described above. Finally, the Bureau preliminarily concludes a
price-based approach is authorized by TILA section 129C(b)(2)(A)(vi),
which permits, but does not require, the Bureau to adopt guidelines or
regulations relating to DTI ratios or alternative measures of ability
to pay regular expenses after payment of total monthly debt.
The General QM Loan Pricing Thresholds
Proposed Sec. 1026.43(e)(2)(vi)(A) would establish the pricing
threshold for most General QM loans. Specifically, proposed Sec.
1026.43(e)(2)(vi)(A) would provide that, for a first-lien covered
transaction with a loan amount greater than or equal to $109,898
(indexed for inflation), the APR may not exceed APOR for a comparable
transaction as of the date the interest rate is set by two or more
percentage points. Loans that are priced at or above the two-percentage
point threshold would not be eligible for QM status under Sec.
1026.43(e)(2), except that, as discussed below, the proposal provides
higher thresholds for loans with smaller loan amounts and for
subordinate-lien transactions. As discussed above, for all loans, the
proposal preserves the current thresholds in Sec. 1026.43(e)(1)(i)
that separate safe harbor from rebuttable presumption QMs, so that a
loan that otherwise meets the General QM loan definition is a safe
harbor QM if its APR exceeds APOR for a comparable transaction as of
the date the interest rate was set by less than 1.5 percentage points
for first-lien transactions, or 3.5 percentage points for subordinate-
lien transactions. Under the proposal, all other QM loans would
continue to be considered rebuttable presumption QMs under Sec.
1026.43(e)(1)(ii).
In considering pricing thresholds for the General QM loan
definition, the Bureau has placed particular emphasis on balancing
considerations related to ensuring consumers' ability to repay with
maintaining access to responsible, affordable mortgage credit. The
Bureau tentatively concludes that, in general, a two-percentage-point-
over-APOR threshold would strike the appropriate balance between these
two objectives.
As explained above, the Bureau uses early delinquency rates as a
proxy for measuring whether a consumer had a reasonable ability to
repay at the time the loan was consummated. Here, the Bureau analyzed
early delinquency rates in considering the pricing thresholds at which
a loan should be presumed to comply with the ATR provisions. The Bureau
analyzed NMDB and HMDA data to assess early delinquency rates for
first-lien purchase originations, using both DTI and rate spread. The
data are summarized in Tables 1 through 6, above. Tables 5 and 6 show
the early delinquency rates for samples of loans categorized by both
their DTI and their rate spread.
Table 5 shows early delinquency rates for 2002-2008 first-lien
purchase originations in the NMDB. The 2002-2008 time period
corresponds to a market environment that, in general, demonstrates
looser, higher-risk credit conditions.\263\ The Bureau's analyses found
direct correlations between rate spreads and early delinquency rates
across all DTI ranges reviewed. Loans with low rate spreads had
relatively low early delinquency rates even at high DTI levels. The
highest early delinquency rates corresponded to loans with both high
rate spreads and high DTI ratios. For loans with DTI ratios of 41 to 43
percent--the category in Table 5 that includes the current DTI limit of
43 percent--the early delinquency rates reached 16 percent at rate
spreads including and above 2.25 percentage points over APOR. At rate
spreads inclusive of 1.75 through 1.99 percentage points over APOR--the
category that is just below the proposed two-percentage-point rate
spread threshold--the early delinquency rate reached 22 percent for DTI
ratios of 61 to 70 percent. At DTI ratios of 41 to 43 percent and rate
spreads inclusive of 1.75 through 1.99 percentage points over APOR, the
early delinquency rate is 15 percent.
---------------------------------------------------------------------------
\263\ Characteristics of a high-risk credit market include very
high unemployment and falling home prices.
---------------------------------------------------------------------------
Table 6 shows average delinquency statistics for 2018 NMDB first-
lien purchase originations that have been matched to 2018 HMDA data. In
contrast to Table 5, the time period in Table 6 corresponds to a market
environment that, in general, demonstrates tighter, lower-risk credit
conditions.\264\ In the 2018 data in Table 6, early delinquency rates
also increased as rate spreads increased across each range of DTI
ratios analyzed, although the overall performance of loans in the Table
6 dataset was significantly better than those represented in Table 5.
For loans with DTI ratios of 36 to 43 percent--the category in Table 6
that includes the current DTI limit of 43 percent--early delinquency
rates reached 3.9 percent (at rate spreads of at least 2 percentage
points). The highest early delinquency rate associated with the
proposed rate spread threshold (less than 2 percentage points over
APOR) is 3.2 percent and corresponds to loans with the DTI ratios of 26
to 35 percent. At the same rate spread threshold, the early delinquency
rate for the loans with the highest DTI ratios is 2.3 percent.\265\
---------------------------------------------------------------------------
\264\ Characteristics of a low-risk credit market include very
low unemployment and rising home prices. As noted above, this more
recent sample of data provides insight into early delinquency rates
under post-crisis lending standards for a dataset of loans that had
not undergone an economic downturn.
\265\ The apparent anomalies in the progression of the early
delinquency rates across DTI ratios at the higher rate spread
categories in Table 6 is likely because there are relatively few
loans in the 2018 data with the indicated combinations of higher
rate spreads and lower DTI ratios and some creditors require that
consumers demonstrate more compensating factors on higher DTI loans.
---------------------------------------------------------------------------
Although in Tables 5 and 6 delinquency rates rise with rate spread,
there is no clear point at which delinquency rates accelerate.
Comparisons between a high-risk credit market (Table 5) and a low-risk
credit market (Table 6) show substantial expansion of early delinquency
rates during an economic downturn across all rate spreads and DTI
ratios. Data show that, for example, prime loans that experience a 0.2
percent early delinquency rate in a low-risk market might experience a
2 percent early delinquency rate in a higher-risk market, while
subprime loans with a 4.2 percent early delinquency rate in a low-risk
market might experience a 19 percent early delinquency rate in a
higher-risk market.
As discussed above, other analyses reviewed by the Bureau also show
a strong positive correlation of delinquency rates with interest rate
spreads.\266\ Collectively, this evidence suggests that higher rate
spreads--including the specific measure of APR over APOR--are strongly
correlated with future early delinquency rates. The Bureau expects
that, for loans just below the respective thresholds, a pricing
threshold of two percentage points over APOR would generally result in
similar or somewhat higher early delinquency rates relative to the
current DTI limit of 43 percent. However, Bureau analysis shows the
early delinquency rate for this set of loans is on par with loans that
have received QM status under the Temporary GSE QM loan definition.
Restricting the sample of 2018 NMDB-
[[Page 41757]]
HMDA matched first-lien conventional purchase originations to only
those purchased and guaranteed by the GSEs, loans with rate spreads at
or above 2 percentage points had an early delinquency rate of 4.2
percent, higher than the maximum early delinquency rates observed for
loans with rate spreads below 2 percentage points in either Table 2
(2.7 percent) or Table 6 (3.2 percent).\267\ Consequently, the Bureau
does not believe that the price-based approach would result in
substantially higher delinquency rates than the standard included in
the current rule. Although some commenters on the ANPR recommended rate
spread thresholds as high as 2.5 percentage points over APOR, the
Bureau is not proposing a higher General QM threshold for most loans
because of concerns that such loans would have high predicted
delinquency rates, which appears inconsistent with the goal of assuring
that consumers of loans that receive QM status and the resulting
presumption of compliance with the ATR requirements do, in fact, have
ability to repay.
---------------------------------------------------------------------------
\266\ See discussion of data and analyses provided by CoreLogic
and the Urban Institute, in part V, above.
\267\ This comparison uses 2018 data on GSE originations because
such loans were originated while the Temporary GSE QM loan
definition was in effect and the GSEs were in conservatorship. GSE
loans from the 2002 to 2008 period were originated under a different
regulatory regime and with different underwriting practices (e.g.,
GSE loans more commonly had DTI ratios over 50 percent during the
2002 to 2008 period), and thus may not be directly comparable to
loans made under the Temporary GSE QM loan definition.
---------------------------------------------------------------------------
The Bureau has used 2018 HMDA data to estimate that 95.8 percent of
conventional purchase loans currently meet the criteria to be defined
as QMs, including under the Temporary GSE QM loan definition. The
Bureau also uses 2018 HMDA data to project that the proposed two-
percentage-point-over-APOR threshold would result in a 96.1 percent
market share for QMs with an adjustment for small loans, as discussed
below.\268\ Creditors may also respond to such a threshold by lowering
pricing on some loans near the threshold, further increasing the QM
market share. Therefore, using the size of the QM market as an
indicator of access to credit, the Bureau expects that a pricing
threshold of two percentage points over APOR, in combination with the
proposed adjustments for small loans, would result in an expansion of
access to credit as compared to the current rule including the
Temporary GSE QM loan definition, particularly as creditors are likely
to adjust pricing in response to the rule, allowing additional loans to
obtain QM status.\269\ Further, the proposal would result in a
substantial expansion of access to credit as compared to the current
rule without the Temporary GSE QM loan definition, under which only an
estimated 73.6 percent of conventional purchase loans would be QMs.
---------------------------------------------------------------------------
\268\ The Bureau estimates that alternative QM pricing
thresholds of 1.5, 1.75, 2.25, and 2.5 percentage points over APOR
would result in QM market shares of 94.3, 95.3, 96.6, and 96.8
percent, respectively.
\269\ The Bureau acknowledges, however, that some loans that do
not meet the current General QM loan definition, but that would be
General QMs under the proposed price-based approach, would have been
made under other QM definitions (e.g., FHA, small-creditor QM).
---------------------------------------------------------------------------
The Bureau is concerned that rate spread thresholds lower than two
percentage points over APOR could result in a significant reduction in
access to credit when the Temporary GSE QM definition expires. This is
especially true given the modest amount of non-QM lending identified in
the Bureau's Assessment Report, and the recent sharp reduction in that
lending in recent months. The Bureau is also concerned that a rate
spread threshold higher than two percentage points over APOR would
define a QM boundary that substantially covers the entire mortgage
market, except for loans with statutorily prohibited features,
including loans for which the early delinquency rate suggests the
consumer may not have had a reasonable ability to repay at
consummation.
The Bureau preliminarily concludes that, for most first-lien
covered transactions, a threshold of two percentage points over APOR is
an appropriate criterion to include in the definition of General QM in
Sec. 1026.43(e)(2)(vi). This proposed threshold would appropriately
balance the certainty provided to the market from ensuring that loans
afforded QM status may be presumed to comply with the ATR provisions,
with assurances that access to responsible, affordable mortgage credit
remains available to consumers.
The Bureau requests comment on whether the final rule should
establish in Sec. 1026.43(e)(2)(vi)(A) a different rate spread
threshold and, if so, what the threshold should be. The Bureau requests
comment on whether the General QM rate spread threshold should be
higher than 2 percentage points over APOR. For commenters suggesting a
higher rate spread threshold, the Bureau requests commenters provide
data or other analysis that would support providing QM status to such
loans, which the Bureau expects would have higher risk profiles. The
Bureau also requests comment on whether the General QM rate spread
threshold should be set lower than 2 percentage points over APOR. For
commenters suggesting a lower rate spread threshold, the Bureau
requests commenters provide data or other analysis that would show that
adopting a lower threshold would not have adverse effects on access to
credit. All commenters are encouraged to include data or other analysis
to support their recommendations for a particular threshold, including
the proposed two-percentage-point-over-APOR threshold. The Bureau also
seeks comments on whether creditors may be expected to change lending
practices in response to the addition of any rate spread threshold in
the definition of General QM (for example, by lowering interest rates
to fit within rate spread thresholds), and how that would affect the
size of the QM market. In addition, in light of the concerns about the
sensitivity of a price-based QM definition to macroeconomic cycles, the
Bureau requests comment on whether the Bureau should consider adjusting
the pricing thresholds in emergency situations and, if so, how the
Bureau should do so.
Thresholds for Smaller Loans and Subordinate-Lien Transactions
Proposed Sec. 1026.43(e)(2)(vi)(B) and (C) would establish higher
pricing thresholds for smaller loans, and loans priced at or above the
proposed thresholds would not be eligible for QM status under Sec.
1026.43(e)(2). Specifically, proposed Sec. 1026.43(e)(2)(vi)(B) would
provide that, for first-lien covered transactions with loan amounts
greater than or equal to $65,939 but less than $109,898,\270\ the
threshold would be 3.5 percentage points over APOR. Proposed Sec.
1026.43(e)(2)(vi)(C) would provide that, for first-lien covered
transactions with loan amounts less than $65,939, the threshold would
be 6.5 percentage points over APOR.
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\270\ The Bureau is proposing $65,939, rather than a threshold
such as $60,000 or $65,000, and $109,898, rather than a threshold
such as $100,000 or $110,000, because the proposed thresholds align
with certain thresholds for the limits on points and fees, as
updated for inflation, in Sec. 1026.43(e)(3)(i) and the associated
commentary. The Bureau will update these loan amounts if the
corresponding dollar amounts for Sec. 1026.43(e)(3)(i) and the
associated commentary are updated before this final rule becomes
effective, in order to ensure that the loan amounts for this
provision and Sec. 1026.43(e)(3) remain synchronized.
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Proposed Sec. 1026.43(e)(2)(vi)(D) and (E) would establish higher
thresholds for subordinate-lien transactions, with different thresholds
depending on the size of the transaction. Subordinate-lien transactions
priced at or above the proposed thresholds would not be
[[Page 41758]]
eligible for QM status under Sec. 1026.43(e)(2). Specifically,
proposed Sec. 1026.43(e)(2)(vi)(D) would provide that, for
subordinate-lien covered transactions with loan amounts greater than or
equal to $65,939, the threshold would be 3.5 percentage points over
APOR. Proposed Sec. 1026.43(e)(2)(vi)(E) would provide that, for
subordinate-lien covered transactions with loan amounts less than
$65,939, the threshold would be 6.5 percentage points over APOR.
The proposal would also provide that the loan amounts specified in
Sec. 1026.43(e)(2)(vi)(A) through (E) be adjusted annually for
inflation based on changes in CPI-U. Specifically, the Bureau would
adjust the loan amounts in Sec. 1026.43(e)(2)(vi) annually on January
1 by the annual percentage change in the CPI-U that was reported on the
preceding June 1. The Bureau would publish adjustments in new comment
43(e)(2)(vi)-3 after the June figures become available each year.
The Bureau is proposing higher thresholds for smaller loans because
it is concerned that loans with smaller loan amounts are typically
priced higher than loans with larger loan amounts, even though a
consumer with a smaller loan may have similar credit characteristics
and ability to repay. Many of the creditors' costs for a transaction
may be the same or similar, regardless of the loan amount. For
creditors to recover their costs for smaller loans, they may have to
charge higher interest rates or higher points and fees as a percentage
of the loan amounts than they would for comparable larger loans. As a
result, smaller loans may have higher APRs than larger loans to
consumers with similar credit characteristics and who may have a
similar ability to repay. As discussed below, the Bureau's analysis
indicates that consumers who take out smaller loans with APRs within
higher thresholds may have similar credit characteristics as consumers
who take out larger loans. The Bureau's analysis also indicates that
smaller loans with APRs within higher thresholds may have comparable
levels of early delinquencies as larger loans within lower thresholds.
However, as explained further below, the Bureau's analysis of
delinquency levels for smaller loans, compared to larger loans, does
not appear to indicate a threshold at which delinquency levels
significantly accelerate.
The Bureau is concerned that adopting the same threshold of two
percentage points above APOR for all loans could disproportionately
prevent smaller loans from being originated as General QM loans. In
particular, the Bureau's analysis indicates that without higher
thresholds for smaller loans, loans for manufactured housing and loans
to minority consumers could disproportionately be excluded from being
originated as General QM loans. The Bureau's analysis of 2018 HMDA data
found that 57.9 percent of manufactured housing loans are priced two
percentage points or more over APOR. The Bureau's analysis also found
that 5.1 percent of site-built loans to minority consumers are priced
two percentage points or more over APOR, but 3.5 percent of site-built
loans to non-Hispanic white consumers are priced two percentage points
or more over APOR. While some loans may be originated under other QM
definitions or as non-QM loans, those loans may be meaningfully more
expensive, and some loans may not be originated at all. As discussed in
part V, the non-QM market has been slow to develop, and the negative
impact on the non-QM market from the disruptions caused by the COVID-19
pandemic raises further concerns about the capacity of the non-QM
market to provide consumers with access to credit through such loans.
The Bureau also notes that, in the Dodd-Frank Act, Congress
provided for additional pricing flexibility for creditors making
smaller loans, allowing smaller loans to include higher points and fees
while still meeting the QM definition. TILA section 129C(b)(2)(A)(vi)
defines a QM as a loan for which, among other things, the total points
and fees payable in connection with the loan do not exceed 3 percent of
the total loan amount. However, TILA section 129C(b)(2)(D) requires the
Bureau to prescribe rules adjusting the points-and-fees limits for
smaller loans. In the January 2013 Final Rule, the Bureau implemented
this requirement in Sec. 1026.43(e)(3), adopting higher points-and-
fees thresholds for different tiers of loan amounts less than or equal
to $100,000, adjusted for inflation. The Bureau's preliminary
conclusion that creditors originating smaller loans typically impose
higher points and fees or higher interest rates to recover their costs,
regardless of the consumer's creditworthiness, and that higher
thresholds for smaller loans in Sec. 1026.43(e)(2)(vi) may, therefore,
be appropriate, is consistent with the statutory directive to adopt
higher points-and-fees thresholds for smaller loans.
To develop the proposed thresholds for smaller loans in Sec.
1026.43(e)(2)(vi)(B) and (C), the Bureau analyzed evidence related to
credit characteristics and loan performance for first-lien purchase
transactions at various rate spreads and loan amounts (adjusted for
inflation) using HMDA and NMDB data, as shown in Table 9.\271\
---------------------------------------------------------------------------
\271\ See Bureau of Labor and Statistics, Historical Consumer
Price Index for All Urban Consumers (CPI-U), https://www.bls.gov/cpi/tables/supplemental-files/historical-cpi-u-202004.pdf. (Using
the CPI-U price index, nominal loan amounts are inflated to June
2019 dollars from the price level in June of the year prior to
origination. This effectively categorizes loans according to the
inflation-adjusted thresholds for smaller loans that would have been
in effect on the origination date.)
Table 9--Loan Characteristics and Performance for Different Sizes of First-Lien Transactions at Various Rate Spreads
--------------------------------------------------------------------------------------------------------------------------------------------------------
Percent Percent
observed 60+ observed 60+
Rate spread range Mean credit days days
Loan size group (percentage points over Mean CLTV, Mean DTI, 2018 score, 2018 delinquent delinquent
APOR) 2018 HMDA HMDA HMDA within first within first
2 years, 2002- 2 years, 2018
2008 NMDB NMDB
--------------------------------------------------------------------------------------------------------------------------------------------------------
Under $65,939............................. 1.5-2.0..................... 81.9 32.3 717 6.1% 2.8%
Under $65,939............................. 1.5-2.5..................... 82.2 32.3 714 6.1% 2.3%
Under $65,939............................. 1.5-3.0..................... 82.1 32.2 714 6.2% 2.3%
Under $65,939............................. 1.5-3.5..................... 81.9 32.1 715 6.2% 2.5%
Under $65,939............................. 1.5-4.0..................... 81.7 32.3 714 6.3% 2.5%
[[Page 41759]]
Under $65,939............................. 1.5-4.5..................... 81.7 32.5 710 6.4% 2.6%
Under $65,939............................. 1.5-5.0..................... 81.7 32.6 706 6.4% 2.5%
Under $65,939............................. 1.5-5.5..................... 81.6 32.7 699 6.5% 2.4%
Under $65,939............................. 1.5-6.0..................... 81.7 32.9 694 6.5% 2.5%
Under $65,939............................. 1.5-6.5..................... 81.9 33.1 685 6.5% 3.4%
Under $65,939............................. 1.5 and above............... 82.0 33.3 676 6.6% 4.1%
$65,939 to $109,897....................... 1.5-2.0..................... 89.9 35.5 704 11.1% 3.4%
$65,939 to $109,897....................... 1.5-2.5..................... 90.1 35.4 702 12.2% 4.2%
$65,939 to $109,897....................... 1.5-3.0..................... 90.0 35.5 702 12.9% 4.2%
$65,939 to $109,897....................... 1.5-3.5..................... 89.7 35.5 703 13.0% 4.3%
$65,939 to $109,897....................... 1.5-4.0..................... 89.4 35.6 703 13.1% 4.0%
$65,939 to $109,897....................... 1.5-4.5..................... 89.3 35.7 701 13.2% 4.2%
$65,939 to $109,897....................... 1.5-5.0..................... 89.1 35.8 699 13.3% 4.1%
$65,939 to $109,897....................... 1.5-5.5..................... 89.1 35.9 696 13.4% 4.0%
$65,939 to $109,897....................... 1.5-6.0..................... 89.2 36.0 692 13.4% 4.2%
$65,939 to $109,897....................... 1.5-6.5..................... 89.3 36.1 684 13.4% 4.5%
$65,939 to $109,897....................... 1.5 and above............... 89.3 36.1 684 13.7% 4.5%
$109,898 and above........................ 1.5-2.0 (for comparison).... 92.7 39.4 698 14.9% 2.5%
--------------------------------------------------------------------------------------------------------------------------------------------------------
The Bureau's analysis indicates that consumers with smaller loans
with APRs within higher potential thresholds, such as 6.5 or 3.5
percentage points above APOR, have similar credit characteristics as
consumers with larger loans between 1.5 and 2 percentage points above
APOR.\272\ More specifically, the Bureau analyzed 2018 HMDA data on
first-lien conventional purchase loans and found that loans below
$65,939 that are priced between 1.5 and 6.5 percentage points above
APOR have a mean DTI ratio of 33.1 percent, a mean combined LTV ratio
of 81.9 percent, and a mean credit score of 685. Loans equal to or
greater than $65,939 but less than $109,898 that are priced between 1.5
and 3.5 percentage points above APOR have a mean DTI ratio of 35.5
percent, a mean combined LTV of 89.7 percent, and a mean credit score
of 703. Loans equal to or greater than $109,898 that are priced between
1.5 and 2 percentage points above APOR have a mean DTI ratio of 39.4
percent, a mean combined LTV of 92.7 percent, and a mean credit score
of 698. These all suggest that the credit characteristics, and
potentially the ability to repay, of consumers taking out smaller loans
with higher APRs, may be at least comparable to those of consumers
taking out larger loans with lower APRs.
---------------------------------------------------------------------------
\272\ Portfolio loans made by small creditors, as defined in
Sec. 1026.35(b)(2)(iii)(B) and (C), are excluded, as such loans are
likely Small Creditor QMs pursuant to Sec. 1026.43(e)(5) regardless
of pricing.
---------------------------------------------------------------------------
With respect to early delinquencies, the evidence summarized in
Table 9 generally provides support for higher thresholds for smaller
loans. Loans less than $65,939 had lower delinquency rates than loans
between $65,939 and $109,897 across all rate spread ranges and had
delinquency rates lower than or comparable to larger loans (equal to or
greater than $109,898) priced between 1.5 and 2 percentage points above
APOR. Loans between $65,939 and $109,897 had lower delinquency rates
than larger loans between 2002 and 2008, but higher delinquency rates
for 2018 loans.
More specifically, the Bureau analyzed NMDB data from 2002 through
2008 on first-lien conventional purchase loans and found that loans
below $65,939 that were priced between 1.5 and 6.5 percentage points
above APOR had an early delinquency rate of 6.5 percent. Loans equal to
or greater than $65,939 but less than $109,898 that were priced between
1.5 and 3.5 percentage points above APOR had an early delinquency rate
of 13 percent. Loans equal to or greater than $109,898 that were priced
between 1.5 and 2 percentage points above APOR had an early delinquency
rate of 14.9 percent. These rates suggest that the historical loan
performance of smaller loans with higher APRs may be comparable, if not
better, than larger loans with lower APRs.
However, the Bureau's analysis found that early delinquency rates
for 2018 loans are somewhat higher for smaller loans with higher APRs
than larger loans with lower APRs. More specifically, NMDB data from
2018 on first-lien conventional purchase loans show that loans below
$65,939 that were priced between 1.5 and 6.5 percentage points above
APOR had an early delinquency rate of 3.4 percent. Loans equal to or
greater than $65,939 but less than $109,898 that were priced between
1.5 and 3.5 percentage points above APOR had an early delinquency rate
of 4.3 percent. Loans equal to or greater than $109,898 that were
priced between 1.5 and 2 percentage points above APOR had an early
delinquency rate of 2.5 percent.
Although the current data do not appear to indicate a particular
threshold at which the credit characteristics or loan performance for
smaller loans with higher APRs decline significantly, the Bureau
preliminarily concludes that the proposed thresholds in Sec.
1026.43(e)(2)(vi)(B) and (C) for smaller, first-lien covered
transactions would strike the right balance in delineating which loans
should be eligible for a rebuttable presumption of compliance with the
ATR requirements. The Bureau believes the proposed thresholds may help
ensure that responsible, affordable credit remains available to
consumers taking out smaller loans, in particular loans for
manufactured housing and loans to minority consumers, while also
helping to ensure that the risks are limited so
[[Page 41760]]
that it would be appropriate for those loans to receive a rebuttable
presumption of compliance with the ATR requirements.
The Bureau is proposing higher thresholds in Sec.
1026.43(e)(2)(vi)(D) and (E) for subordinate-lien transactions because
it is concerned that subordinate-lien transactions may be priced higher
than comparable first-lien transactions for reasons other than
consumers' ability to repay. In general, the creditor of a subordinate
lien will recover its principal, in the event of default and
foreclosure, only to the extent funds remain after the first-lien
creditor recovers its principal. Thus, to compensate for this risk,
creditors typically price subordinate-lien transactions higher than
first-lien transactions, even though the consumer in the subordinate-
lien transaction may have similar credit characteristics and ability to
repay. In addition, subordinate-lien transactions are often for smaller
loan amounts, so the pricing factors discussed above for smaller loan
amounts may further increase the price of subordinate-lien transaction,
regardless of the consumer's ability to repay. The Bureau is concerned
that, to the extent the higher pricing for subordinate-lien transaction
is not related to consumers' ability to repay, subordinate-lien
transactions may be inappropriately excluded from QM status under Sec.
1026.43(e)(2) if the pricing thresholds for subordinate-lien
transactions are not increased.
In the January 2013 Final Rule, the Bureau adopted higher
thresholds for determining when subordinate-lien QMs received a
rebuttable presumption or a conclusive presumption of compliance with
the ATR requirements. For subordinate-lien transactions, the definition
of ``higher-priced covered transaction'' in Sec. 1026.43(b)(4) is used
in Sec. 1026.43(e)(1) to set a threshold of 3.5 percentage points
above APOR to determine which subordinate-lien QMs receive a safe
harbor and which receive a rebuttable presumption of compliance. As
discussed above in part V, the Bureau is not proposing to alter the
threshold for subordinate-lien transactions in Sec. 1026.43(b)(4). To
avoid the odd result that a subordinate-lien transaction would
otherwise be eligible to receive a safe harbor under Sec.
1026.43(b)(4) and (e)(1) but would not be eligible for QM status under
Sec. 1026.43(e)(2)(vi), the Bureau considered which threshold or
thresholds at or above 3.5 percentage points above APOR may be
appropriate to propose for subordinate-lien transactions in Sec.
1026.43(e)(2)(vi).
To develop the proposed thresholds for subordinate-lien
transactions in Sec. 1026.43(e)(2)(vi)(D) and (E), the Bureau
considered evidence related to credit characteristics and loan
performance for subordinate-lien transactions at various rate spreads
and loan amounts (adjusted for inflation) using HMDA and Y-14M data, as
shown in Table 10.
Table 10--Loan Characteristics and Performance for Different Sizes of Subordinate-Lien Transactions at Various
Rate Spreads
----------------------------------------------------------------------------------------------------------------
Percent
observed 90+
Rate spread days
range Mean credit delinquent
Loan size group (percentage Mean CLTV, Mean DTI, 2018 score, 2018 within first
points over 2018 HMDA HMDA HMDA 2 years, 2013-
APOR) 2016 Y-14M
data (subset)
----------------------------------------------------------------------------------------------------------------
Under $65,939................. 2.0-2.5......... 76.9 36.1 728 2.1%
Under $65,939................. 2.0-3.0......... 78.4 36.5 724 1.6%
Under $65,939................. 2.0-3.5......... 79.7 36.8 721 1.4%
Under $65,939................. 2.0-4.0......... 80.1 36.9 720 1.4%
Under $65,939................. 2.0-4.5......... 80.2 36.9 719 1.3%
Under $65,939................. 2.0-5.0......... 80.3 37.0 718 1.3%
Under $65,939................. 2.0-5.5......... 80.3 37.1 718 1.3%
Under $65,939................. 2.0-6.0......... 80.3 37.1 717 1.3%
Under $65,939................. 2.0-6.5......... 80.4 37.2 717 1.3%
Under $65,939................. 2.0 and above... 80.7 37.3 715 1.4%
$65,939 and above............. 2.0-2.5......... 79.5 37.2 738 1.9%
$65,939 and above............. 2.0-3.0......... 80.5 37.3 735 1.7%
$65,939 and above............. 2.0-3.5......... 81.0 37.4 732 1.6%
$65,939 and above............. 2.0-4.0......... 81.3 37.5 732 1.7%
$65,939 and above............. 2.0-4.5......... 81.3 37.6 731 1.7%
$65,939 and above............. 2.0-5.0......... 81.5 37.7 731 1.8%
$65,939 and above............. 2.0-5.5......... 81.6 37.7 730 1.8%
$65,939 and above............. 2.0-6.0......... 81.6 37.8 729 1.8%
$65,939 and above............. 2.0-6.5......... 81.7 37.9 729 1.8%
$65,939 and above............. 2.0 and above... 81.8 37.9 728 1.9%
----------------------------------------------------------------------------------------------------------------
In general, the Bureau's analysis found strong credit
characteristics and loan performance for subordinate-lien loans at
various thresholds above two percentage points above APOR. The current
data do not appear to indicate a particular threshold at which the
credit characteristics or loan performance decline significantly.
With respect to larger subordinate-lien transactions, the Bureau's
analysis of 2018 HMDA data on subordinate-lien conventional loans found
that, for consumers with subordinate-lien transactions greater than or
equal to $65,939 that were priced 2 to 3.5 percentage points above
APOR, the mean DTI ratio was 37.4 percent, the mean combined LTV was 81
percent, and the mean credit score was 732. The Bureau also analyzed Y-
14M loan data for 2013 to 2016 and estimated that subordinate-lien
transactions greater than or equal to $65,939 that were priced 2 to 3.5
percentage points above APOR had an early delinquency rate of
[[Page 41761]]
approximately 1.6 percent.\273\ These factors appear to provide a
strong indication of ability to repay, so the Bureau preliminarily
concludes that it may be appropriate to set the threshold at 3.5
percentage points above APOR for subordinate-lien transactions to be
eligible for QM status under Sec. 1026.43(e)(2). The Bureau recognizes
that, because the proposed price-based approach would leave the
threshold in Sec. 1026.43(b)(4) for higher-priced QMs at 3.5
percentage points above APOR for subordinate-lien transactions (and
that such transactions that are not higher priced would, therefore,
receive a safe harbor under Sec. 1026.43(e)(1)(i)), this approach, if
adopted, would result in subordinate-lien transactions for amounts over
$65,939 either being a safe harbor QM or not being eligible for QM
status under Sec. 1026.43(e)(2). No such loans would be eligible to be
a rebuttable presumption QM. Nevertheless, the Bureau believes that the
proposed threshold may appropriately balance the relatively strong
credit characteristics and loan performance of these transactions
historically, which is indicative of ability to repay, against the
concern that the supporting data are limited to recent years with
strong economic performance and conservative underwriting.
---------------------------------------------------------------------------
\273\ The loan data were a subset of the supervisory loan-level
data collected as part of the Board's Comprehensive Capital Analysis
and Review, known as Y-14M data. The early delinquency rate measured
the percentage of loans that were 90 or more days late in the first
two years. The Bureau used loans with payments that were 90 or more
days late to measure delinquency, rather than the 60 or more days
used with the data discussed above for first-lien transactions,
because the Y-14M data do not include a measure for payments 60 or
more days late. Data from a small number of creditors were not
included due to incompatible formatting.
---------------------------------------------------------------------------
For smaller subordinate-lien transactions, the Bureau's analysis of
2018 HMDA data on subordinate-lien conventional loans found that for
consumers with subordinate-lien transactions less than $65,939 with
that were priced between 2 and 6.5 percentage points above APOR, the
mean DTI ratio was 37.2 percent, the mean combined LTV was 80.4
percent, and the mean credit score was 717. The Bureau also analyzed Y-
14M loan data for 2013 to 2016 and estimated that subordinate-lien
transactions less than $65,939 that were priced between 2 and 6.5
percentage points above APOR, the early delinquency rate was
approximately 1.3 percent. Based on these relatively strong credit
characteristics and low delinquency rates, the Bureau preliminarily
concludes that it may be appropriate to set the threshold at 6.5
percentage points above APOR for subordinate-lien transactions less
than $65,939 to be eligible for QM status under Sec. 1026.43(e)(2).
The Bureau notes that under this proposal, subordinate-lien
transactions less than $65,939 priced greater than or equal to 3.5 but
less than 6.5 percentage points above APOR would be eligible only for a
rebuttable presumption of compliance under Sec. 1026.43(e)(1)(ii) and
that consumers, therefore, would have the opportunity to rebut the
presumption under Sec. 1026.43(e)(1)(ii)(B).
The Bureau requests comment, including data or other analysis, on
whether the final rule in Sec. 1026.43(e)(2)(vi)(B) through (C) should
include different rate spread thresholds at which smaller loans would
be considered General QM loans, and, if so, what those thresholds
should be. Specifically, the Bureau requests comment on whether the
General QM rate spread threshold for first-lien loans should be higher
or lower than the rate spread ranges set forth in Table 9 for such
loans with loan amounts less than $109,987 and greater than or equal to
$65,939 and for such loans with loan amounts less than $65,939. For
example, the Bureau solicits comments on whether a rate spread
threshold of less than 6.5 percentage points above APOR for loan
amounts less than $65,939 would strike a better balance between ability
to repay and access to credit, in particular with respect to loans for
manufactured housing and loans to minority borrowers. For commenters
suggesting a different rate spread threshold, the Bureau requests
commenters provide data or other analysis that would support providing
General QM status to such loans taking into account concerns regarding
the consumer's ability to repay and adverse effects on access to
credit.
The Bureau also requests comment, including data or other analysis,
on whether the final rule in Sec. 1026.43(e)(2)(vi)(D) through (E)
should include different rate spread thresholds at which subordinate-
lien loans would be considered General QM loans, and, if so, what those
thresholds should be. Specifically, the Bureau requests comment on
whether the General QM rate spread threshold for subordinate-lien loans
should be higher or lower than the rate spread ranges set forth in
Table 10 for such loans with loan amounts greater than or equal to
$65,939 and for such loans with loan amounts less than $65,939. For
example, the Bureau solicits comments on whether a rate spread
threshold of less than 6.5 percentage points above APOR for
subordinate-lien loans with loan amounts less than $65,939 would strike
a better balance between ability to repay and access to credit. For
commenters suggesting a different rate spread threshold, the Bureau
requests commenters provide data or other analysis that would support
providing General QM status to such loans taking into account concerns
regarding the consumer's ability to repay and adverse effects on access
to credit.
The Bureau also requests comment, including data and other
analysis, on whether the rule should include a DTI limit for smaller
loans and subordinate-lien loans; for example, a DTI limit between 45
and 48 percent, instead of a pricing threshold or together with a
pricing threshold, and, if so, what those limits should be. This
includes comment on whether the approach to smaller loans and
subordinate-lien loans should differ from the approach to other loans
if the Bureau adopts one of the alternatives outlined in part V.E
above.
Determining the APR for Certain Loans for which the Interest Rate May
or Will Change
The Bureau is also proposing to revise Sec. 1026.43(e)(2)(vi) to
include a special rule for determining the APR for certain types of
loans for purposes of whether a loan meets the General QM loan
definition under Sec. 1026.43(e)(2). This special rule would apply to
loans for which the interest rate may or will change within the first
five years after the date on which the first regular periodic payment
will be due. For such loans, for purposes of determining whether the
loan is a General QM loan under Sec. 1026.43(e)(2)(vi), the creditor
would be required to determine the APR by treating the maximum interest
rate that may apply during that five-year period as the interest rate
for the full term of the loan.\274\ The special rule in the proposed
revisions to Sec. 1026.43(e)(2)(vi) would not modify other provisions
in Regulation Z for determining the APR for other purposes, such as the
disclosures addressed in or subject to the commentary to Sec.
1026.17(c)(1).
---------------------------------------------------------------------------
\274\ As discussed above in the section-by-section analysis of
proposed Sec. 1026.43(b)(4), an identical special rule for
determining the APR for certain loans for which the interest rate
may or will change also would apply under that paragraph for
purposes of determining whether a QM under Sec. 1026.43(e)(2) is a
higher-priced covered transaction.
---------------------------------------------------------------------------
The Bureau anticipates that the proposed price-based approach to
defining General QM loans would in general be effective in identifying
which loans consumers have the ability to repay and should therefore be
eligible for QM status under Sec. 1026.43(e)(2).
[[Page 41762]]
However, the Bureau is concerned that, absent the special rule, the
proposed price-based approach may less effectively capture specific
unaffordability risks of certain loans for which the interest rate may
or will change relatively soon after consummation. Therefore, for loans
for which the interest rate may or will change within the first five
years after the date on which the first regular periodic payment will
be due, a modified approach to determining the APR for purposes of the
rate-spread thresholds under proposed Sec. 1026.43(e)(2) may be
warranted.
Structure and pricing particular to ARMs. The special rule in
proposed Sec. 1026.43(e)(2)(vi) would apply principally to ARMs with
initial fixed-rate periods of five years or less (referred to herein as
``short-reset ARMs'').\275\ These loans may be affordable for the
initial fixed-rate period but may become unaffordable relatively soon
after consummation if the payments increase appreciably after reset,
causing payment shock. The APR for short-reset ARMs may be less
predictive of ability to repay than for fixed-rate mortgages because of
how ARMs are structured and priced and how the APR for ARMs is
determined under various provisions in Regulation Z. Several different
provisions in Regulation Z address the calculation of the APR for ARMs.
For disclosure purposes, if the initial interest rate is determined by
the index or formula to make later interest rate adjustments,
Regulation Z generally requires the creditor to base the APR disclosure
on the initial interest rate at consummation and to not assume that the
rate will increase during the remainder of the loan.\276\ In some
transactions, including many ARMs, the creditor may set an initial
interest rate that is lower (or less commonly, higher) than the rate
would be if it were determined by the index or formula used to make
later interest rate adjustments. For these ARMs, Regulation Z requires
the creditor to disclose a composite APR based on the initial rate for
as long as it is charged and, for the remainder of the term, on the
fully indexed rate.\277\ The fully indexed rate at consummation is the
sum of the value of the index at the time of consummation plus the
margin, based on the contract. The Dodd-Frank Act requires a different
APR calculation for ARMs for the purpose of determining whether ARMs
are subject to certain HOEPA requirements.\278\ As implemented in Sec.
1026.32(a)(3)(ii), the creditor is required to determine the APR for
HOEPA coverage for transactions in which the interest rate may vary
during the term of the loan in accordance with an index, such as with
an ARM, by using the fully indexed rate or the introductory rate,
whichever is greater.\279\
---------------------------------------------------------------------------
\275\ In addition to short-reset ARMs, the proposed special rule
would apply to step-rate mortgages that have an initial fixed-rate
period of five years or less. The Bureau recognizes that the
interest rates in step-rate mortgages are known at consummation.
However, unlike fixed-rate mortgages and akin to ARMs, the interest
rate of step-rate mortgages changes, thereby raising the concern
that interest-rate increases relatively soon after consummation may
present affordability risks due to higher loan payments. Moreover,
applying the proposed APR determination requirement to such loans is
consistent with the treatment of step-rate mortgages pursuant to the
requirement in the current General QM loan definition to underwrite
loans using the maximum interest rate during the first five years
after the date on which the first regular periodic payment will be
due. See comment 43(e)(2)(iv)-3.iii.
\276\ See comment 17(c)(1)-8.
\277\ See comment 17(c)(1)-10.
\278\ See TILA section 103(bb)(1)(B)(ii).
\279\ See comment 32(a)(3)-3.
---------------------------------------------------------------------------
The requirements in Regulation Z for determining the APR for
disclosure purposes and for HOEPA coverage purposes do not account for
any potential increase or decrease in interest rates based on changes
to the underlying index. If interest rates rise after consummation, and
therefore the value of the index rises to a higher level, the loan can
reset to a higher interest rate than the fully indexed rate at the time
of consummation. The result would be a higher payment than the one
implied by the rates used in determining the APR, and a higher
effective rate spread (and increased likelihood of delinquency) than
the spread that would be taken into account for determining General QM
status at consummation under the price-based approach in the absence of
a special rule.
ARMs may present more risk for consumers than fixed-rate mortgages,
depending on the direction and magnitude of changes in interest rates.
In the case of a 30-year fixed-rate loan, creditors or mortgage
investors assume both the credit risk and the interest-rate risk (i.e.,
the risk that interest rates rise above the fixed rate the consumer is
obligated to pay), and the price of the loan, which is fully captured
by the APR, reflects both risks. In the case of an ARM, the creditor or
investor is assuming the credit risk of the loan, but the consumer
assumes most of the interest-rate risk, as the interest rate will
adjust along with the market. The extent to which the consumer assumes
the interest-rate risk is established by caps in the note on how high
the interest rate charged to the consumer may rise. To compensate for
the added interest-rate risk assumed by the consumer (as opposed to the
investor), ARMs are generally priced lower--in absolute terms--than a
30-year fixed-rate mortgage with comparable credit risk.\280\ Yet with
rising interest rates, the risks that ARMs could become unaffordable,
and therefore lead to delinquency or default, are more pronounced. As
noted above, the requirements for determining the APR for ARMs in
Regulation Z do not reflect this risk because they do not take into
account potential increases in the interest rate over the term of the
loan based on changes to the underlying index. This APR may therefore
understate the risk that the loan may become unaffordable to the
consumer if interest rates increase.
---------------------------------------------------------------------------
\280\ The lower absolute pricing of ARMs with comparable credit
risk is reflected in the lower ARM APOR, which is typically 50 to
150 basis points lower than the fixed-rate APOR.
---------------------------------------------------------------------------
Unaffordability risk more acute for short-reset ARMs. While all
ARMs run the risk of increases in interest rates and payments over
time, longer-reset ARMs (i.e., ARMs with initial fixed-rate periods of
longer than five years) present a less acute risk of unaffordability
than short-reset ARMs. Longer-reset ARMs permit consumers to take
advantage of lower interest rates for more than five years and thus,
akin to fixed-rate mortgages, provide consumers significant time to pay
off or refinance, or to otherwise adjust to anticipated changes in
payment during that relatively long period while the interest rate is
fixed and before payments may increase.
Short-reset ARMs can also contribute to speculative lending because
they permit creditors to originate loans that could be affordable in
the short term, with the expectation that property values will increase
and thereby permit consumers to refinance before payments may become
unaffordable. Further, creditors can minimize their credit risk on such
ARMs by, for example, requiring lower LTV ratios, as was common in the
run-up to the 2008 financial crisis.\281\ Additionally, creditors may
be more willing to market these ARMs in areas of strong housing-price
appreciation, irrespective of a consumer's ability to absorb the
potentially higher payments after reset, because they may expect that
consumers will have the equity to refinance if necessary.
---------------------------------------------------------------------------
\281\ Bureau analysis of NMDB data shows crisis-era short-reset
ARMs had lower LTVs at consummation relative to comparably priced
fixed-rate loans.
---------------------------------------------------------------------------
[[Page 41763]]
In the Dodd-Frank Act, Congress addressed affordability concerns
specific to short-reset ARMs and their eligibility for QM status by
providing in TILA section 129C(b)(2)(A)(v) that, to receive QM status,
ARMs must be underwritten using the maximum interest rate that may
apply during the first five years.\282\ The ATR/QM Rule implemented
this requirement in Regulation Z at Sec. 1026.43(e)(2)(iv). For many
short-reset ARMs, this requirement resulted in a higher DTI that would
have to be compared to the Rule's 43 percent DTI limit to determine
whether the loans were eligible to receive General QM status.
Particularly in a higher-rate environment in which short-reset ARMs
could become more attractive, the five-year maximum interest-rate
requirement combined with the Rule's 43 percent DTI limit would have
likely prevented some of the riskiest short-reset ARMs (i.e., those
that adjust sharply upward in the first five years and cause payment
shock) from obtaining General QM status. As discussed above, the
proposed price-based approach would remove the DTI limit from the
General QM loan definition in Sec. 1026.43(e)(2)(vi). As a result, the
Bureau is concerned that, without the special rule, a price-based
approach may not adequately address the risk that consumers taking out
short-reset ARMs may not have the ability to repay those loans but that
such loans would nonetheless be eligible for General QM status under
Sec. 1026.43(e)(2).\283\
---------------------------------------------------------------------------
\282\ This approach for ARMs is different from the approach in
Sec. 1026.43(c)(5) for underwriting ARMs under the ATR
requirements, which, like the APR determination for HOEPA coverage
for ARMs under Sec. 1026.32(a)(3), is based on the greater of the
fully indexed rate or the initial rate.
\283\ As discussed, the Bureau proposes to exercise its
adjustment and revision authorities to amend Sec. 1026.43(e)(2)(vi)
to provide that, to determine the APR for short-reset ARMs for
purposes of General QM status, the creditor must treat the maximum
interest rate that may apply during that five-year period as the
interest rate for the full term of the loan. The Bureau observes
that the requirement in TILA section 129C(b)(2)(A)(v) to underwrite
ARMs for QM purposes using the maximum interest rate that may apply
during the first five years is at least ambiguous with respect to
whether it independently obligates the creditor to determine the APR
for short-reset ARMs in the same manner as the proposed special
rule, at least where the Bureau relies on pricing thresholds as the
primary indicator of likely repayment ability in the proposed
General QM loan definition. Furthermore, the Bureau tentatively
concludes that it would be reasonable, in light of the proposed
definition of a General QM loan and in light of the policy concerns
already described, to construe TILA section 129C(b)(2)(A)(v) as
imposing the same obligations as the proposed special rule in Sec.
1026.43(e)(2)(vi). Thus, in addition to relying on its adjustment
and revision authorities to amend Sec. 1026.43(e)(2)(vi), the
Bureau tentatively concludes that it may do so under its general
authority to interpret TILA in the course of prescribing regulations
under TILA section 105(a) to carry out the purposes of TILA.
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How the price-based approach would address affordability concerns.
Bureau analysis of historical ARM pricing and performance indicates
that the General QM product restrictions combined with the proposed
price-based approach would have effectively excluded many--but not
all--of the riskiest short-reset ARMs from obtaining General QM status.
As a result, the Bureau believes an additional mechanism may be merited
to exclude from the General QM loan definition any short-reset ARMs for
which the pricing and structure indicate a risk of delinquency that is
inconsistent with the presumption of compliance with ATR that comes
with QM status.
Bureau analysis of NMDB data shows that short-reset ARMs originated
from 2002 through 2008 had, on average, substantially higher early
delinquency rates (14.9 percent) than other ARMs (10.1 percent) or
fixed-rate mortgages (5.4 percent). Many of these short-reset ARMs were
also substantially higher-priced relative to APOR and more likely to
have product features that TILA and the Rule now prohibits for QMs,
such as interest-only payments or negative amortization. When
considering only loans without such restricted features and with rate
spreads within 2 percentage points of APOR, short-reset ARMs still have
the highest average early delinquency rate (5.5 percent), but the
difference relative to other ARMs (4.3 percent) and fixed-rate
mortgages (4.2 percent) is smaller. Many ARMs in the data during this
period do not report the time between consummation and the first
interest-rate reset, and so are excluded from this analysis.
While the data indicates that short-reset ARMs pose a greater risk
of early delinquency than other ARMs and fixed-rate mortgages, the
Bureau requests additional data or evidence comparing loan performance
of short-reset ARMs, other ARMs, and fixed-rate mortgages. Moreover, as
discussed above, the proposed special rule is designed to address the
risk that, for consumers with short-reset ARMs, a rising-rate
environment can lead to significantly higher payments and delinquencies
in the first five years of the loan term. Therefore, the Bureau also
requests data comparing the performance of such loans during periods of
rising interest rates. The Bureau recognizes that rising rates may pose
some risk of unaffordability for longer-reset ARMs later in the loan
term. However, as discussed above, the Bureau is proposing the special
rule to address the specific concern that short-reset ARMs pose a
higher risk vis-a-vis other ARMs of becoming unaffordable in the first
five years, before consumers have sufficient time to refinance or
adjust to the larger payments--a concern Congress also identified in
the Dodd-Frank Act.
During the peak of the mid-2000s housing boom, ARMs accounted for
as much as 52 percent of all new originations. In contrast, the current
market share of ARMs is relatively small. Post-crisis, the ARM share
had declined to 12 percent by December 2013 and to 2 percent by
November 2019, only slightly above the historical low of 1 percent in
2009.\284\ A number of factors contributed to the overall decline in
ARM volume, particularly the low-interest-rate environment since the
end of the financial crisis. Typically, ARMs are more popular when
conventional interest rates are high, since the rate (and monthly
payment) during the initial fixed period is typically lower than the
rate of a comparable conventional fixed-rate mortgage.
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\284\ Laurie Goodman et. al., Urban Inst., Housing Finance at a
Glance (Feb. 2020), at 9, https://www.urban.org/research/publication/housing-finance-glance-monthly-chartbook-february-2020/view/full_report.
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Consistent with TILA section 129C(b)(2)(A), the January 2013 Final
Rule prohibited ARMs with higher-risk features such as interest-only
payments or negative amortization from receiving General QM status.
According to the Assessment Report, short-reset ARMs comprised 17
percent of ARMs in 2012, prior to the January 2013 Final Rule, and fell
to 12.3 percent in 2015, after the effective date of the Rule.\285\ The
Assessment Report also found that short-reset ARMs originated after the
effective date of the Rule were restricted to highly creditworthy
borrowers.\286\
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\285\ Assessment Report, supra note 58, at 94 (fig. 25).
\286\ Id. at 93-95.
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This combination of factors post-crisis--the sharp drop in ARM
originations and the restriction of such originations to highly
creditworthy borrowers, as well as the prevalence of low interest
rates--likely has muted the overall risks of short-reset ARMs. For
example, the Assessment Report found that conventional, non-GSE short-
reset ARMs originated after the effective date of the Rule had early
delinquency rates of only 0.2 percent.\287\ Thus, these recent
originations may not accurately reflect the potential unaffordability
of short-reset ARMs under different market
[[Page 41764]]
conditions than those that currently prevail.
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\287\ Id. at 95 (fig. 26).
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Proposed special rule for APR determination for short-reset
ARMs.\288\ Given the potential that rising interest rates could cause
short-reset ARMs to become unaffordable for consumers following
consummation and the fact that the price-based approach may not account
for some of those risks because of how APRs are determined for ARMs,
the Bureau is proposing a special rule to determine the APR for short-
reset ARMs for purposes of defining General QM under Sec.
1026.43(e)(2). As noted above, in defining QM in TILA, Congress adopted
a special requirement to address affordability concerns for short-reset
ARMs. Specifically, the statute provides that, for an ARM to be a QM,
the underwriting must be based on the maximum interest rate permitted
under the terms of the loan during the first five years. With the 43
percent DTI limit in the current rule, implementing the five-year
underwriting requirement is straightforward: The rule requires a
creditor to calculate DTI using the mortgage payment that results from
the maximum possible interest rate that could apply during the first
five years.\289\ This ensures that the creditor calculates the DTI
using the highest interest rate that the consumer may experience in the
first five years, and the loan is not eligible for QM status under
Sec. 1026.43(e)(2) if the DTI calculated using that interest rate
exceeds 43 percent. The Bureau is concerned that using the fully
indexed rate to determine the APR for purposes of the rate spread
thresholds in proposed Sec. 1026.43(e)(2)(vi) would not provide a
sufficiently meaningful safeguard against the elevated likelihood of
delinquency for short-reset ARMs. For that reason, the Bureau is
proposing the special rule for determining the APR for such loans.
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\288\ As noted above, the proposed special rule would also apply
to step-rate mortgages in which the interest rate changes in the
first five years.
\289\ 12 CFR 1026.43(e)(2)(iv).
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The Bureau believes the statutory five-year underwriting
requirement provides a basis for the special rule for determining the
APR for short-reset ARMs for purposes of General QM rate-spread
thresholds under Sec. 1026.43(e)(2). Specifically, the Bureau is
proposing that the creditor must determine the APR by treating the
maximum interest rate that may apply during the first five years, as
described in proposed Sec. 1026.43(e)(2)(vi), as the interest rate for
the full term of the loan. That APR determination would then be
compared to the APOR \290\ to determine General QM status. This
approach would address in a targeted manner the primary concern about
short-reset ARMs--payment shock--by accounting for the risk of
delinquency and default associated with payment increases under these
loans. And it would do so in a manner that is consistent with the five-
year framework embedded in the statutory provision for such ARMs and
implemented in the current rule.
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\290\ This refers to the standard APOR for ARMs. The proposed
requirement would modify the determination for the APR of ARMs but
would not affect the determination of the APOR. The Bureau notes
that the APOR used for step-rate mortgages would be the ARM APOR
because, as with ARMs, the interest rate in step-rate mortgages
adjusts and is not fixed. Thus, the APOR for fixed-rate mortgages
would be inapt.
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In sum, the proposed special rule is consistent with both the
statutory mandate for short-reset ARMs and the proposed price-based
approach. As discussed above in part V, the rate spread of APR over
APOR is strongly correlated with early delinquency rates. As a result,
such rate spreads may generally serve as an effective proxy for a
consumer's ability to repay. However, the structure and pricing of ARMs
can result in early interest rate increases that are not fully
accounted for in Regulation Z provisions for determining the APR for
ARMs. Such increases would diminish the effectiveness of the rate
spread as a proxy, and lead to heightened risk of early delinquency for
short-reset ARMs relative to other loans with comparable APRs over APOR
rate spreads. The proposed special rule, by requiring creditors to more
fully incorporate this interest-rate risk in determining the APR for
short-reset ARMs, would help ensure that the resulting pricing would
account for that risk for such loans.
The proposed special rule would require that the maximum interest
rate in the first five years be treated as the interest rate for the
full term of the loan to determine the APR. The Bureau is concerned
that a composite APR determination based on the maximum interest rate
in the first five years and the fully indexed rate for the remaining
loan term could understate the APR for short-reset ARMs by failing to
sufficiently account for the risk that consumers with such loans could
face payment shock early in the loan term. Accordingly, to account for
that risk, and due to concerns about whether it would be appropriate to
presume ATR for short-reset ARMs without such a safeguard, the Bureau
is proposing that the APR for short-reset ARMs be based on the maximum
interest rate during the first five years.
The Bureau considered several alternatives to the proposed special
rule for certain loans for which the interest rate may or will change
within the first five years after the date on which the first regular
periodic payment will due. In response to the ANPR, several consumer
advocates submitted comments suggesting prohibiting altogether short-
reset ARMs from consideration as General QMs. These commenters pointed
to the high default and foreclosure rates of such ARMs, the complex
nature of the product, and consumers' insufficient comprehension of the
product as justification to deny General QM status for ARMs with a
fixed-rate period of less than five years. The Bureau believes the
risks associated with short-reset ARMs can be effectively managed
without prohibiting them from receiving General QM status, given that
the Dodd-Frank Act explicitly permits short-reset ARMs to be considered
as General QMs and includes a specific provision for addressing the
potential for payment shock from such loans.
One of the above-referenced commenters alternatively recommended
the Bureau impose specific limits on annual adjustments for short-reset
ARMs. The Bureau considered this and similar alternatives, including
applying a different rate spread over APOR for short-reset ARMs. The
Bureau anticipates that the proposed approach would address in a more
streamlined and targeted manner the core problem, i.e., that short-
reset ARMs could reset to significantly higher interest rates shortly
after consummation resulting in a risk of default from unaffordable
payments not adequately reflected under the standard determination of
APR for ARMs. Further, the Bureau believes that including different
rate spreads or similar schemes for short-reset ARMs and additional
subtypes of loans would impose unnecessary operational and compliance
complexity.
Proposed comment 43(e)(2)(vi)-4.i explains that provisions in
subpart C, including the existing commentary to Sec. 1026.17(c)(1),
address the determination of the APR disclosures for closed-end credit
transactions and that provisions in Sec. 1026.32(a)(3) address how to
determine the APR to determine coverage under Sec. 1026.32(a)(1)(i).
It further explains that proposed Sec. 1026.43(e)(2)(vi) requires, for
the purposes of that paragraph, a different determination of the APR
for a QM under proposed Sec. 1026.43(e)(2) for which the interest rate
may or will change within the first five years after the date on which
the first regular
[[Page 41765]]
periodic payment will be due. In addition, proposed comment
43(e)(2)(vi)-4.i explains that an identical special rule for
determining the APR for such a loan also applies for purposes of
proposed Sec. 1026.43(b)(4).
Proposed comment 43(e)(2)(vi)-4.ii explains the application of the
special rule in proposed Sec. 1026.43(e)(2)(vi) for determining the
APR for a loan for which the interest rate may or will change within
the first five years after the date on which the first regular periodic
payment will be due. Specifically, it explains that the special rule
applies to ARMs that have a fixed-rate period of five years or less and
to step-rate mortgages for which the interest rate changes within that
five-year period.
Proposed comment 43(e)(2)(vi)-4.iii explains that, to determine the
APR for purposes of proposed 43(e)(2)(vi), a creditor must treat the
maximum interest rate that could apply at any time during the five-year
period after the date on which the first regular periodic payment will
be due as the interest rate for the full term of the loan, regardless
of whether the maximum interest rate is reached at the first or
subsequent adjustment during the five-year period. Further, the
proposed comment cross-references existing comments 43(e)(2)(iv)-3 and
-4 for additional instruction on how to determine the maximum interest
rate during the first five years after the date on which the first
regular periodic payment will be due.
Proposed comment 43(e)(2)(vi)-4.iv explains how to use the maximum
interest rate to determine the APR for purposes of proposed Sec.
1026.43(e)(2)(vi). Specifically, the proposed comment explains that the
creditor must determine the APR by treating the maximum interest rate
described in proposed Sec. 1026.43(e)(2)(vi) as the interest rate for
the full term of the loan. It further provides an example of how to
determine the APR by treating the maximum interest rate as the interest
rate for the full term of the loan.
As discussed above in part IV, TILA section 105(a), directs the
Bureau to prescribe regulations to carry out the purposes of TILA, and
provides that such regulations may contain additional requirements,
classifications, differentiations, or other provisions, and may provide
for such adjustments and exceptions for all or any class of
transactions that the Bureau judges are necessary or proper to
effectuate the purposes of TILA, to prevent circumvention or evasion
thereof, or to facilitate compliance therewith. In particular, a
purpose of TILA section 129C, as amended by the Dodd-Frank Act, to
assure that consumers are offered and receive residential mortgage
loans on terms that reasonably reflect their ability to repay the
loans.
As also discussed above in part IV, TILA section 129C(b)(3)(B)(i)
authorizes the Bureau to prescribe regulations that revise, add to, or
subtract from the criteria that define a QM upon a finding that such
regulations are necessary or proper to ensure that responsible,
affordable mortgage credit remains available to consumers in a manner
consistent with the purposes of section 129C, necessary and appropriate
to effectuate the purposes of section 129C and section 129B, to prevent
circumvention or evasion thereof, or to facilitate compliance with such
section.
The Bureau is proposing the special rule in Sec. 1026.43(e)(2)(vi)
regarding the APR determination of certain loans for which the interest
rate may or will change pursuant to its authority under TILA section
105(a) to make such adjustments and exceptions as are necessary and
proper to effectuate the purposes of TILA, including that consumers are
offered and receive residential mortgage loans on terms that reasonably
reflect their ability to repay the loans. The Bureau believes that
these proposed provisions may ensure that General QM status would not
be accorded to short-reset ARMs and certain other loans that pose a
heightened risk of becoming unaffordable relatively soon after
consummation. The Bureau is also proposing these provisions pursuant to
its authority under TILA section 129C(b)(3)(B)(i) to revise and add to
the criteria that define a QM. The Bureau believes that the proposed
APR determination provisions in Sec. 1026.43(e)(2)(vi) may ensure that
responsible, affordable mortgage credit remains available to consumers
in a manner consistent with the purpose of TILA section 129C,
referenced above, as well as effectuate that purpose.
The Bureau requests comment on all aspects of the proposed special
rule in proposed Sec. 1026.43(e)(2)(vi). In particular, the Bureau
requests data regarding short-reset ARMs and those step-rate mortgages
that would be subject to the proposed special rule, including default
and delinquency rates and the relationship of those rates to price. The
Bureau also requests comment on alternative approaches for such loans,
including the ones discussed above, such as imposing specific limits on
annual rate adjustments for short-reset ARMs, applying a different rate
spread, and excluding such loans from General QM eligibility
altogether.
43(e)(4)
TILA section 129C(b)(3)(B)(ii) directs HUD, VA, USDA, and the Rural
Housing Service (RHS) to prescribe rules defining the types of loans
they insure, guarantee, or administer, as the case may be, that are
QMs. Pending the other agencies' implementation of this provision, the
Bureau included in the ATR/QM Rule a temporary category of QM loans in
the special rules in Sec. 1026.43(e)(4)(ii)(B) through (E) consisting
of mortgages eligible to be insured or guaranteed (as applicable) by
HUD, VA, USDA, and RHS. The Bureau also created the Temporary GSE QM
loan definition, in Sec. 1026.43(e)(4)(ii)(A).
Section 1026.43(e)(4)(i) states that, notwithstanding Sec.
1026.43(e)(2), a QM is a covered transaction that satisfies the
requirements of Sec. 1026.43(e)(2)(i) through (iii)--the General QM
loan-feature prohibitions and points-and-fees limits--as well as one or
more of the criteria in Sec. 1026.43(e)(4)(ii). Section
1026.43(e)(4)(ii) states that a QM under Sec. 1026.43(e)(4) must be a
loan that is eligible under enumerated ``special rules'' to be (A)
purchased or guaranteed by the GSEs while under the conservatorship of
the FHFA (the Temporary GSE QM loan definition), (B) insured by HUD
under the National Housing Act, (C) guaranteed by VA, (D) guaranteed by
USDA pursuant to 42 U.S.C. 1472(h), or (E) insured by RHS. Section
1026.43(e)(4)(iii)(A) states that Sec. 1026.43(e)(4)(ii)(B) through
(E) shall expire on the effective date of a rule issued by each
respective agency pursuant to its authority under TILA section
129C(b)(3)(ii) to define a QM. Section 1026.43(e)(4)(iii)(B) states
that, unless otherwise expired under Sec. 1026.43(e)(4)(iii)(A), the
special rules in Sec. 1026.43(e)(4) are available only for covered
transactions consummated on or before January 10, 2021.
The Bureau proposes to amend Sec. 1026.43(e)(4) to state that,
notwithstanding Sec. 1026.43(e)(2), a QM is a covered transaction that
is defined as a QM by HUD under 24 CFR 201.7 or 24 CFR 203.19, VA under
38 CFR 36.4300 or 38 CFR 36.4500, or USDA under 7 CFR 3555.109. There
are two reasons for this proposed amendment.
First, if the Bureau issues a final rule in connection with this
present proposal, the Bureau anticipates that the Temporary GSE QM loan
definition described in Sec. 1026.43(e)(4)(ii)(A) may expire upon the
effective date of such a final rule. This is because, in a separate
proposed rule released simultaneously with this proposal, the Bureau
proposes
[[Page 41766]]
to revise Sec. 1026.43(e)(4)(iii)(B) to state that, unless otherwise
expired under Sec. 1026.43(e)(4)(iii)(A), the special rules in Sec.
1026.43(e)(4) are available only for covered transactions consummated
on or before the effective date of a final rule issued by the Bureau
amending the General QM loan definition. The Bureau may issue a final
rule concerning its proposal to extend the sunset date in Sec.
1026.43(e)(4)(iii)(B) before it issues a final rule concerning this
present proposal (which would amend the General QM loan definition).
Thus, if the Bureau issues a final rule in connection with this present
proposal, such a final rule would remove the Temporary GSE QM loan
definition from Sec. 1026.43(e)(4)(ii)(A).
Second, after promulgation of the January 2013 Final Rule, each of
the agencies described in Sec. 1026.43(e)(4)(ii)(B) through (E)
adopted separate definitions of qualified mortgages.\291\ Under current
Sec. 1026.43(e)(4)(iii)(A), the special rules in Sec.
1026.43(e)(4)(ii)(B) through (E) are already superseded by the actions
of HUD, VA, and USDA. The Bureau proposes to amend Sec. 1026.43(e)(4)
to provide cross-references to each of these other agencies'
definitions so that creditors and practitioners have a single point of
reference for all QM definitions.
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\291\ 78 FR 75215 (Dec. 11, 2013) (HUD); 79 FR 26620 (May 9,
2014) and 83 FR 50506 (Oct. 9, 2018) (VA); and 81 FR 26461 (May 3,
2016) (USDA).
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The Bureau also proposes to amend comment 43(e)(4)-1 to reflect the
cross-references to the QM definitions of other agencies and to clarify
that a covered transaction that meets another agency's definition is a
QM for purposes of Sec. 1026.43(e). Comment 43(e)(4)-2 would be
amended to clarify that covered transactions that met the requirements
of Sec. 1026.43(e)(2)(i) through (iii), were eligible for purchase or
guarantee by Fannie Mae or Freddie Mac, and were consummated prior to
the effective date of any final rule promulgated as a result of the
proposal would still be considered a QM for purposes of Sec.
1026.43(e) after the adoption of such potential final rule. Comments
43(e)(4)-3, -4, and -5 would be amended to indicate that such comments
are reserved for future use. The Bureau requests comment on the
proposed amendments to Sec. 1026.43(e)(4) and related commentary.
Conforming Changes
As discussed above, the Bureau is proposing revisions to Sec.
1026.43(e)(2)(v) and (e)(2)(vi) that would, among other things, remove
references to appendix Q and remove the DTI ratio limit in Sec.
1026.43(e)(2)(vi). The Bureau is also proposing to remove appendix Q.
Accordingly, the Bureau is proposing nonsubstantive conforming changes
in certain provisions to reflect the proposed changes to Sec.
1026.43(e)(2)(v) and (e)(2)(vi) and the proposed removal of appendix Q.
Specifically, the Bureau proposes to update comment 43(c)(7)-1 by
removing the reference to the DTI limit in Sec. 1026.43(e). The Bureau
also proposes conforming changes to provisions related to small
creditor QMs in Sec. 1026.43(e)(5)(i) and to balloon-payment QMs in
Sec. 1026.43(f)(1). Both Sec. 1026.43(e)(5) and (f)(1) provide that
as part of the respective QM definitions, loans must comply with the
requirements to consider and verify debts and income in existing Sec.
1026.43(e)(2)(v). As discussed above, the Bureau is proposing to
reorganize and revise Sec. 1026.43(e)(2)(v) in order to provide that
creditors must consider DTI or residual income and to clarify the
requirements for creditors to consider and verify income, debt and
other information. The proposed conforming changes to Sec.
1026.43(e)(5) and (f)(1) would generally insert the substantive
requirements of existing Sec. 1026.43(e)(2)(v) into Sec.
1026.43(e)(5)(i) and (f)(1), respectively, and would provide that loans
under Sec. 1026.43(e)(5) and Sec. 1026.43(f) do not have to comply
with proposed Sec. 1026.43(e)(2)(v) or (e)(2)(vi). The proposed
conforming changes would not insert the requirement that lenders
consider and verify income, debt, and other information in accordance
with appendix Q because, as described elsewhere in this proposal, the
Bureau is proposing to remove appendix Q from Regulation Z. The Bureau
is also proposing conforming changes to the related commentary.
Appendix Q to Part 1026--Standards for Determining Monthly Debt and
Income
Appendix Q to part 1026 contains standards for calculating and
verifying debt and income for purposes of determining whether a
mortgage satisfies the 43 percent DTI limit for General QM loans. As
explained in the section-by-section analysis of Sec.
1026.43(e)(2)(v)(B) above, the Bureau proposes to remove appendix Q
entirely in light of concerns from creditors and investors that its
perceived rigidity, ambiguity, and static nature result in standards
that are both confusing and outdated. As noted above, the Bureau seeks
comment on its proposal to remove appendix Q entirely and not to retain
it as an option for creditors to verify the consumer's income, assets,
debt obligations, alimony, and child support.
VII. Dodd-Frank Act Section 1022(b) Analysis
A. Overview
As discussed above, this proposal would amend the General QM loan
definition to, among other things, remove the specific DTI limit and
add a pricing threshold. In developing this proposal, the Bureau has
considered the potential benefits, costs, and impacts as required by
section 1022(b)(2)(A) of the Dodd-Frank Act. Specifically, section
1022(b)(2)(A) of the Dodd-Frank Act requires the Bureau to consider the
potential benefits and costs of a regulation to consumers and covered
persons, including the potential reduction of access by consumers to
consumer financial products or services, the impact on depository
institutions and credit unions with $10 billion or less in total assets
as described in section 1026 of the Dodd-Frank Act, and the impact on
consumers in rural areas. The Bureau consulted with appropriate
prudential regulators and other Federal agencies regarding the
consistency of the proposed rule with prudential, market, or systemic
objectives administered by such agencies as required by section
1022(b)(2)(B) of the Dodd-Frank Act. The Bureau requests comment on the
preliminary analysis presented below as well as submissions of
additional data that could inform the Bureau's analysis of the
benefits, costs, and impacts.
1. Data and Evidence
The discussion in these impact analyses relies on data from a range
of sources. These include data collected or developed by the Bureau,
including HMDA \292\ and NMDB \293\ data, as well
[[Page 41767]]
as data obtained from industry, other regulatory agencies, and other
publicly available sources. The Bureau also conducted the Assessment
and issued the Assessment Report as required under section 1022(d) of
the Dodd-Frank Act. The Assessment Report provides quantitative and
qualitative information on questions relevant to the proposed rule,
including the extent to which DTI ratios are probative of a consumer's
ability to repay, the effect of rebuttable presumption status relative
to safe harbor status on access to credit, and the effect of QM status
relative to non-QM status on access to credit. Consultations with other
regulatory agencies, industry, and research organizations inform the
Bureau's impact analyses.
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\292\ HMDA requires many financial institutions to maintain,
report, and publicly disclose loan-level information about
mortgages. These data help show whether creditors are serving the
housing needs of their communities; they give public officials
information that helps them make decisions and policies; and they
shed light on lending patterns that could be discriminatory. HMDA
was originally enacted by Congress in 1975 and is implemented by
Regulation C. See Bureau of Consumer Fin. Prot., https://www.consumerfinance.gov/data-research/hmda/.
\293\ The NMDB, jointly developed by the FHFA and the Bureau,
provides de-identified loan characteristics and performance
information for a five percent sample of all mortgage originations
from 1998 to the present, supplemented by de-identified loan and
borrower characteristics from Federal administrative sources and
credit reporting data. See Bureau of Consumer Fin. Prot., Sources
and Uses of Data at the Bureau of Consumer Financial Protection, at
55-56 (Sept. 2018), https://www.consumerfinance.gov/documents/6850/bcfp_sources-uses-of-data.pdf. Differences in total market size
estimates between NMDB data and HMDA data are attributable to
differences in coverage and data construction methodology.
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The data the Bureau relied upon provide detailed information on the
number, characteristics, pricing, and performance of mortgage loans
originated in recent years. However, it would be useful to supplement
these data with more information relevant to pricing and APR
calculations (particularly PMI costs) for originations before 2018. PMI
costs are an important component of APRs, particularly for loans with
smaller down payments, and thus should be included or estimated in
calculations of rate spreads relative to APOR. The Bureau seeks
additional information or data which could inform quantitative
estimates of PMI costs or APRs for these loans.
The data also do not provide information on creditor costs. As a
result, analyses of any impacts of the proposal on creditor costs,
particularly realized costs of complying with underwriting criteria or
potential costs from legal liability, are based on more qualitative
information. Similarly, estimates of any changes in burden on consumers
resulting from increased or decreased verification requirements are
based on qualitative information.
The Bureau seeks additional information or data which could inform
quantitative estimates of the number of borrowers whose documentation
cannot satisfy appendix Q, or the costs to borrowers or covered persons
of complying with appendix Q verification requirements (or the
potential costs of complying with appendix Q for Temporary GSE QM
loans) or the proposed verification requirements. The Bureau also seeks
comment or additional information which could inform quantitative
estimates of the availability, underwriting, and pricing of non-QM
alternatives to loans made under the Temporary GSE QM loan definition.
2. Description of the Baseline
The Bureau considers the benefits, costs, and impacts of the
proposal against the baseline in which the Bureau takes no action and
the Temporary GSE QM loan definition expires on January 10, 2021, or
when the GSEs exit conservatorship, whichever occurs first. Under the
proposal, the amendments to the General QM loan definition would take
effect either at the time or after the Temporary GSE QM loan definition
expires, depending on whether the GSEs remain in conservatorship on the
effective date of a final rule issued by the Bureau amending the
General QM loan definition. As a result, the proposal's direct market
impacts are considered relative to a baseline in which the Temporary
GSE QM has expired and no changes have been made to the General QM loan
definition. Unless described otherwise, estimated loan counts under the
baseline, proposal, and alternatives are annual estimates.
Under the baseline, conventional loans could receive QM status
under the Bureau's rules only by underwriting according to the General
QM requirements, Small Creditor QM requirements, Balloon Payment QM
requirements, or the expanded portfolio QM amendments created by the
2018 Economic Growth, Regulatory Relief, and Consumer Protection Act.
The General QM loan definition, which would be the only type of QM
available to larger creditors for conventional loans, requires that
consumers' DTI ratio not exceed 43 percent and requires creditors to
determine debt and income in accordance with the standards in appendix
Q.
The Bureau anticipates that there are two main types of
conventional loans that would be affected by the expiration of the
Temporary GSE QM loan definition: High-DTI GSE loans (those with DTI
ratios above 43 percent) and GSE-eligible loans without appendix Q-
required documentation. These loans are currently originated as QM
loans due to the Temporary GSE QM loan definition but may not be
originated as General QM loans, or may not be originated at all,
without the proposed amendments to the General QM loan definition. This
section 1022 analysis refers to these loans as potentially displaced
loans.
High-DTI GSE Loans. The ANPR provided an estimate of the number of
loans potentially affected by the expiration of the Temporary GSE QM
loan definition.\294\ In providing the estimate, the ANPR focused on
loans that fall within the Temporary GSE QM loan definition but not the
General QM loan definition because they have a DTI ratio above 43
percent. This proposal refers to these loans as High-DTI GSE loans.
Based on NMDB data, the Bureau estimated that there were approximately
6.01 million closed-end first-lien residential mortgage originations in
the United States in 2018.\295\ Based on supplemental data provided by
the FHFA, the Bureau estimated that the GSEs purchased or guaranteed 52
percent--roughly 3.12 million--of those loans.\296\ Of those 3.12
million loans, the Bureau estimated that 31 percent--approximately
957,000 loans--had DTI ratios greater than 43 percent.\297\ Thus, the
Bureau estimated that, as a result of the General QM loan definition's
43 percent DTI limit, approximately 957,000 loans--16 percent of all
closed-end first-lien residential mortgage originations in 2018--were
High-DTI GSE loans.\298\ This estimate does not include Temporary GSE
QM loans that were eligible for purchase by the GSEs but were not sold
to the GSEs.
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\294\ 84 FR 37155, 37158-59 (July 31, 2019).
\295\ 84 FR at 37158-59.
\296\ Id. at 37159.
\297\ Id. The Bureau estimates that 616,000 of these loans were
for home purchases, and 341,000 were refinance loans. In addition,
the Bureau estimates that the share of these loans with DTI ratios
over 45 percent has varied over time due to changes in market
conditions and GSE underwriting standards, rising from 47 percent in
2016 to 56 percent in 2017, and further to 69 percent in 2018.
\298\ Id. at 37159.
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Loans Without Appendix Q-Required Documentation That Are Otherwise
GSE-Eligible. In addition to High-DTI GSE loans, the Bureau noted that
an additional, smaller number of Temporary GSE QM loans with DTI ratios
of 43 percent or less, when calculated using GSE underwriting guides,
may not fall within the General QM loan definition because their method
of verifying income or debt is incompatible with appendix Q.\299\ These
loans would also likely be affected when the Temporary GSE QM loan
definition expires. The Bureau understands, from extensive public
feedback and its own experience, that appendix Q does not specifically
address whether and how to verify certain forms of income. The Bureau
understands these concerns are particularly acute for self-employed
consumers, consumers with part-time employment, and consumers with
[[Page 41768]]
irregular or unusual income streams.\300\ As a result, these consumers'
access to credit may be affected if the Temporary GSE QM loan
definition were to expire without amendments to the General QM loan
definition.
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\299\ Id. at 37159 n.58. Where these types of loans have DTI
ratios above 43 percent, they would be captured in the estimate
above relating to High-DTI GSE loans.
\300\ For example, in qualitative responses to the Bureau's
Lender Survey conducted as part of the Assessment, underwriting for
self-employed borrowers was one of the most frequently reported
sources of difficulty in originating mortgages using appendix Q.
These concerns were also raised in comments submitted in response to
the Assessment RFI, noting that appendix Q is ambiguous with respect
to how to treat income for consumers who are self-employed, have
irregular income, or want to use asset depletion as income. See
Assessment Report, supra note 58, at 200.
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The Bureau's analysis of the market under the baseline focuses on
High-DTI GSE loans because the Bureau estimates that most potentially
displaced loans are High-DTI GSE loans. The Bureau also lacks the loan-
level documentation and underwriting data necessary to estimate with
precision the number of potentially displaced loans that do not fall
within the other General QM loan requirements and are not High-DTI GSE
loans. However, the Assessment did not find evidence of substantial
numbers of loans in the non-GSE-eligible jumbo market being displaced
when appendix Q verification requirements became effective in
2014.\301\ Further, the Assessment Report found evidence of only a
limited reduction in the approval rate of self-employed applicants for
non-GSE eligible mortgages.\302\ Based on this evidence, along with
qualitative comparisons of GSE and appendix Q verification requirements
and available data on the prevalence of borrowers with non-traditional
or difficult-to-document income (e.g., self-employed borrowers, retired
borrowers, those with irregular income streams), the Bureau estimates
this second category of potentially displaced loans is considerably
less numerous than the category of High-DTI GSE loans.
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\301\ Id. at 107 (``For context, total jumbo purchase
originations increased from an estimated 108,700 to 130,200 between
2013 and 2014, based on nationally representative NMDB data.'').
\302\ Id. at 118 (``The Application Data indicates that,
notwithstanding concerns that have been expressed about the
challenge of documenting and verifying income for self-employed
borrowers under the General QM standard and the documentation
requirements contained in appendix Q to the Rule, approval rates for
non-High DTI, non-GSE eligible self-employed borrowers have
decreased only slightly, by two percentage points . . . .'').
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Additional Effects on Loans Not Displaced. While the most
significant market effects under the baseline are displaced loans,
loans that continue to be originated as QM loans after the expiration
of the Temporary GSE QM loan definition would also be affected. After
the expiration date, all loans with DTI ratios at or below 43 percent
which are or would have been purchased and guaranteed as GSE loans
under the Temporary GSE QM loan definition--approximately 2.16 million
loans in 2018--and that continue to be originated as General QM loans
after the provision expires would be required to verify income and
debts according to appendix Q, rather than only according to GSE
guidelines. Given the concerns raised about appendix Q's ambiguity and
lack of flexibility, this would likely entail both increased
documentation burden for some consumers as well as increased costs or
time-to-origination for creditors on some loans.\303\
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\303\ See part V.B. for additional discussion of concerns raised
about appendix Q.
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B. Potential Benefits and Costs to Covered Persons and Consumers
1. Benefits to Consumers
The primary benefit to consumers of the proposal is increased
access to credit, largely through the expanded availability of High-DTI
conventional QM loans. Given the large number of consumers who obtain
High-DTI GSE loans rather than available alternatives, including loans
from the private non-QM market and FHA loans, such High-DTI
conventional QM loans may be preferred due to their pricing,
underwriting requirements, or other features. Based on HMDA data, the
Bureau estimates that 943,000 High-DTI conventional loans in 2018 would
fall outside the QM definitions under the baseline, but fall within the
proposal's amended General QM loan definition.\304\ In addition, some
consumers who would have been limited in the amount they could borrow
due to the DTI limit under the baseline would likely be able to obtain
larger mortgages at higher DTI levels.
---------------------------------------------------------------------------
\304\ This estimate includes only HMDA loans which have a
reported DTI and rate spread over APOR, and thus may underestimate
the true number of loans gaining QM status under the proposal.
---------------------------------------------------------------------------
Under the baseline, a sizeable share of potentially displaced High-
DTI GSE loans may instead be originated as FHA loans. Thus, under the
proposal, any price advantage of GSE or other conventional QM loans
over FHA loans would be a realized benefit to consumers. Based on the
Bureau's analysis of 2018 HMDA data, FHA loans comparable to the loans
received by High-DTI GSE borrowers, based on loan purpose, credit
score, and combined LTV ratio, on average have $3,000 to $5,000 higher
upfront total loan costs at origination. APRs provide an alternative,
annualized measure of costs over the life of a loan. FHA borrowers
typically pay different APRs, which can be higher or lower than APRs
for GSE loans depending on a borrower's credit score and LTV. Borrowers
with credit scores at or above 720 pay an APR 30 to 60 basis points
higher than borrowers of comparable GSE loans, leading to higher
monthly payments over the life of the loan. However, FHA borrowers with
credit scores below 680 and combined LTVs exceeding 85 percent pay an
APR 20 to 40 basis points lower than borrowers of comparable GSE loans,
leading to lower monthly payments over the life of the loan.\305\ For a
loan size of $250,000, these APR differences amount to $2,800 to $5,600
in additional total monthly payments over the first five years of
mortgage payments for borrowers with credit scores above 720, and
$1,900 to $3,800 in reduced total monthly payments over five years for
borrowers with credit scores below 680 and LTVs exceeding 85
percent.\306\ Thus, all FHA borrowers are likely to pay higher costs at
origination, while some pay higher monthly mortgage payments, and
others pay lower monthly mortgage payments. Assuming for comparison
that all 943,000 additional loans falling within the amended General QM
loan definition would be made as FHA loans in the absence of the
proposal, the average of the upfront pricing estimates implies total
savings for consumers of roughly $4 billion per year on upfront
costs.\307\ The total savings or costs over the life of the loan
implied by APR differences would vary substantially across borrowers
depending on credit scores, LTVs, and length of time holding the
mortgage. While this comparison assumed all potentially displaced loans
would be made as FHA loans, higher costs (either upfront or in monthly
payments) are likely to prevent some borrowers from obtaining loans at
all.
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\305\ The Bureau expects consumers could continue to obtain FHA
loans where such loans were cheaper or preferred for other reasons.
\306\ Based on NMDB data, the Bureau estimates that the average
loan amount among High-DTI GSE borrowers in 2018 was $250,000. While
the time to repayment for mortgages varies with economic conditions,
the Bureau estimates that half of mortgages are typically closed or
paid off five to seven years into repayment. Payment comparisons
based on typical 2018 HMDA APRs for GSE loans, 5 percent for
borrowers with credit scores over 720, and 6 percent for borrowers
with credit scores below 680 and LTVs exceeding 85.
\307\ This approximation assumes $4,000 in savings from total
loan costs for all 943,000 consumers. Actual expected savings would
vary substantially based on loan and credit characteristics,
consumer choices, and market conditions.
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In the absence of the proposed amendment to the regulation, some of
these potentially displaced consumers,
[[Page 41769]]
particularly those with higher credit scores and the resources to make
larger down payments, likely would be able to obtain credit in the non-
GSE private market at a cost comparable to or slightly higher than the
costs for GSE loans, but below the cost of an FHA loan. As a result,
the above cost comparisons between GSE and FHA loans provide an
estimated upper bound on pricing benefits to consumers of the proposal.
However, under the baseline, some potentially displaced consumers may
not obtain loans, and thus would experience benefits of credit access
under the proposal. As discussed above, the Assessment Report found
that the January 2013 Final Rule eliminated between 63 and 70 percent
of high-DTI home purchase loans that were not Temporary GSE QM
loans.\308\ The Bureau requests information or data which would inform
quantitative estimates of the number of consumers who may not obtain
loans and the costs to such consumers.
---------------------------------------------------------------------------
\308\ See Assessment Report supra note 58, at 10-11, 117, 131-
47.
---------------------------------------------------------------------------
The proposal would also benefit those consumers with incomes
difficult to verify using appendix Q to obtain General QM status, as
the proposed General QM amendments would no longer require the use of
appendix Q for verification of income. Under the proposal--as under the
current rule--creditors would be required to verify income and assets
in accordance with Sec. 1026.43(c)(4) and debt obligations, alimony,
and child support in accordance with Sec. 1026.43(c)(3). The proposal
would also state that a creditor complies with the General QM
requirement to verify income, assets, debt obligations, alimony, and
child support where it complies with verification requirements in
standards the Bureau specifies. The greater flexibility of verification
standards allowed under the proposal is likely to reduce effort and
costs for these consumers, and in the most difficult cases in which
consumers' documentation cannot satisfy appendix Q, the proposal may
allow consumers to obtain General QM loans rather than potential FHA or
non-QM alternatives. These consumers--likely including self-employed
borrowers and those with non-traditional forms of income--would likely
benefit from cost savings under the proposal, similar to those for
High-DTI consumers discussed above.
Finally, as noted below under ``Costs to consumers,'' the Bureau
estimates that 28,000 low-DTI conventional loans which are QM under the
baseline would fall outside the amended QM definition under the
proposal, due to exceeding the pricing thresholds in proposed Sec.
1026.43(e)(2)(vi). If consumers of such loans are able to obtain non-QM
loans with the amended General QM loan definition in place, they would
gain the benefit of the ability-to-repay causes of action and defenses
against foreclosure. However, some of these consumers may instead
obtain FHA loans with QM status.
2. Benefits to Covered Persons
The proposal's primary benefit to covered persons, specifically
mortgage creditors, is the expanded profits from originating High-DTI
conventional QM loans. Under the baseline, creditors would be unable to
originate such loans under the Temporary GSE QM loan definition and
would instead have to originate loans with comparable DTI ratios as
FHA, Small Creditor QM, or non-QM loans, or originate at lower DTI
ratios as conventional General QM loans. Creditors' current preference
for originating large numbers of High-DTI Temporary GSE QMs likely
reflects advantages in a combination of costs or guarantee fees
(particularly relative to FHA loans), liquidity (particularly relative
to Small Creditor QM), or litigation and credit risk (particularly
relative to non-QM). Moreover, QM loans--including Temporary GSE QMs--
are exempt from the Dodd-Frank Act risk retention requirement whereby
creditors that securitize mortgage loans are required to retain at
least five percent of the credit risk of the security, which adds
significant cost. As a result, the proposal conveys benefits to
mortgage creditors originating High-DTI conventional QMs on each of
these dimensions.
In addition, for those lower-DTI GSE loans which could satisfy
General QM requirements, creditors may realize cost savings from
underwriting loans using the more flexible verification standards
allowed under the proposal compared with using appendix Q. Under the
proposal, creditors would be required to consider DTI or residual
income in addition to income and debt but would not need to comply with
the appendix Q standards required for General QM loans under the
baseline. For conventional consumers unable to provide documentation
compatible with appendix Q, the proposal may allow such loans to
continue receiving QM status, providing comparable benefits to
creditors as described for High-DTI GSE loans above.
Finally, those creditors whose business models rely most heavily on
originating High-DTI GSE loans would likely see a competitive benefit
from the continued ability to originate such loans as General QMs. This
is effectively a transfer in market share to these creditors from those
who primarily originate FHA or private non-QM loans, who likely would
have gained market share under the baseline.
3. Costs to Consumers
As discussed above, relative to the baseline, the Bureau estimates
that 943,000 additional High-DTI loans could be originated as General
QM loans under the proposal. Some of these loans would have been non-QM
loans (if originated) under the baseline. As a result, the proposal is
likely to increase the number of consumers who become delinquent on QM
loans, meaning an increase in consumers with delinquent loans who do
not have the benefit of the ability-to-repay causes of action and
defenses against foreclosure.
Tables 5 and 6 in part V.C provide historical early delinquency
rates for loans under different combinations of DTI ratio and rate
spread. Under the proposal, conventional loans originated with rate
spreads below 2 percentage points and DTI above 43 percent would newly
fall within the amended General QM loan definition relative to the
baseline. Based on the number and characteristics of 2018 HMDA
originations, the Bureau estimates 8,000 to 59,000 additional General
QM loans annually could become delinquent within two years of
origination, based on the observed early delinquencies from Table 6
(2018) and Table 5 (2002-2008), respectively. Further, consumers who
would have been limited in the amount they could borrow due to the DTI
limit under the baseline may obtain larger mortgages at higher DTI
levels, further increasing the expected number of delinquencies.
However, given that many of these loans may have been originated as FHA
(or other non-General QM) loans under the baseline, the increase in
delinquent loans held by consumers without the ability-to-repay causes
of action and defenses against foreclosure is likely smaller than the
upper bound estimates cited above.
For the estimated 28,000 consumers obtaining low-DTI General QM or
Temporary GSE QM loans priced 2 percentage points or more above APOR
under the baseline, the amended General QM loan definition may restrict
access to conventional QM credit. There are several possible outcomes
for these consumers. Many may instead obtain FHA loans, likely paying
higher total loan costs as discussed in part VII.B.1. Others may be
able to obtain General QM loans priced below 2 percentage points over
APOR due to creditor
[[Page 41770]]
responses to the proposal or obtain loans under the Small Creditor QM
definition. However, some consumers may not be able to obtain a
mortgage at all. The Bureau requests data or evidence that could inform
estimates for the likelihood of these outcomes among consumers with
low-DTI General QM or Temporary GSE QM loans priced 2 percentage points
or more above APOR.
In addition, the proposal could slow the development of the non-QM
market, particularly new mortgage products which may have become
available under the baseline. To the extent that some consumers would
prefer some of these products to conventional QM loans due to pricing,
verification flexibility, or other advantages, the delay of their
development would be a cost to consumers of the proposal.
4. Costs to Covered Persons
For creditors retaining the credit risk of their General QM
mortgages (e.g., portfolio loans and private securitizations), an
increase in High-DTI General QM originations may lead to increased risk
of credit losses. There is reason to believe, however, that on average
the effects on portfolio lenders may be small. Creditors that hold
loans on portfolio have an incentive to verify ability to repay
regardless of liability under the ATR provisions, because they hold the
credit risk. While portfolio lenders (or those who manage the
portfolios) may recognize and respond to this incentive to different
degrees, the proposed rule is likely on average to cause a small
increase in the willingness of these creditors to originate loans with
a greater risk of default and credit losses, such as certain loans with
high DTI ratios. The credit losses to investors in private
securitizations are harder to predict. In general, these losses would
depend on the scrutiny that investors are willing and able to give to
the non-QM loans under the baseline that become QM loans (with high DTI
ratios) under the proposed rule. It is possible, however, that the
reduction in liability under the ATR provisions would lead to
securitizations with more loans that have a greater risk of default and
credit losses.
In addition, creditors would generally no longer be able to
originate low-DTI conventional loans priced 2 percentage points or
higher above APOR as General QMs under the proposal.\309\ Creditors may
be able to originate some of these loans at prices below 2 percentage
points above APOR or as non-QM or other types of QM loans, but in any
of these cases may pay higher costs or receive lower revenues relative
to under the baseline. If creditors are unable to originate such loans
at all, they would see a larger reduction in revenue.
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\309\ The comparable thresholds are 6.5 percentage points over
APOR for loans priced under $65,939 and 3.5 percentage points over
APOR for loans priced under $109,898 but at or above $65,939.
---------------------------------------------------------------------------
The proposal also generates what are effectively transfers between
creditors relative to the baseline, reflecting reduced loan origination
volume for creditors who primarily originate FHA or private non-QM
loans and increased origination volume for creditors who primarily
originate conventional QM loans. Business models vary substantially
within market segments, with portfolio lenders and lenders originating
non-QM loans most likely to forgo market share gains possible under the
baseline, while GSE-focused bank and non-bank creditors are likely to
maintain market share that might be lost in the absence of the
proposal.
5. Other Benefits and Costs
The proposal may limit the development of the secondary market for
non-QM mortgage loan securities. Under the baseline, those loans that
do not fit within General QM requirements represent a potential new
market for non-QM securitizations. Thus, the proposal would reduce the
scope of the potential non-QM market, likely lowering profits and
revenues for participants in the private secondary market. This would
effectively be a transfer from these non-QM secondary market
participants to participants in the agency or other QM loan secondary
markets.
6. Alternatives
A potential alternative to the proposed rule is maintaining the
General QM loan definition's DTI limit but at a higher level, for
example, 45 or 50 percent. The Bureau estimates the effects of such
alternatives relative to the proposed rule, assuming no change in
consumer or creditor behavior. For an alternative General QM loan
definition with a DTI limit of 45 percent, the Bureau estimates that
662,000 fewer loans would be General QM due to DTI ratios over 45
percent, while 32,000 additional loans with rate spreads above the
proposed rule's QM pricing thresholds would newly fit within the
General QM loan definition due to DTI ratios at or below 45 percent.
For an alternative DTI limit of 50 percent, the Bureau estimates 48,000
fewer loans would fit within the General QM loan definition due to DTI
ratios over 50 percent, while 41,000 additional loans with rate spreads
above the proposed rule's QM pricing thresholds would newly fit within
the General QM loan definition due to DTI ratios at or below 50
percent.
In addition to these effects on the composition of loans within the
General QM loan definition, the Bureau uses the historical delinquency
rates from Tables 5 and 6 in part V.C to estimate the number of loans
expected to become delinquent within the General QM loan definition
relative to the proposal. The Bureau estimates that under an
alternative DTI limit of 45 percent, 4,000 to 35,000 fewer General QM
loans would become delinquent relative to the proposal, based on
delinquency rates for 2018 and 2002-2008 originations respectively.
Under an alternative DTI limit of 50 percent, the Bureau estimates
approximately 1,000 additional General QM loans would become delinquent
relative to the proposal, due to loans priced 2 percentage points or
more above APOR gaining QM status.
For an alternative DTI limit of 45 percent, these estimates
collectively indicate that substantially fewer loans would fit within
the General QM loan definition relative to the proposal, which would
also reduce the number of General QM loans becoming delinquent. By
contrast, the estimates indicate that an alternative DTI limit of 50
percent would lead to a comparable number of General QM loans relative
to the proposal, both overall and among those that would become
delinquent. However, consumer and creditor responses to such
alternatives, such as reducing loan amounts to lower DTI ratios, could
increase the number of loans that fit within the General QM loan
definition relative to the proposal.
Other potential alternatives to the proposed rule could impose a
DTI limit only for loans above a certain pricing threshold, for example
a DTI limit of 50 percent for loans with rate spreads at or above 1
percentage point.\310\ Such an alternative would function as a hybrid
of the proposal and an alternative which maintains a DTI limit at a
higher level, 50 percent in the case of this example. As a result, the
number of loans fitting
[[Page 41771]]
within the General QM loan definition would generally be between the
Bureau's estimates for the proposal and its estimates for the
corresponding alternative which maintains the higher DTI limit. Thus,
this hybrid approach would bring fewer loans within the General QM loan
definition compared to the proposal but more loans within the General
QM loan definition compared to the alternative DTI limit of 50 percent,
both overall and among loans that would become delinquent.
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\310\ As discussed in part V.E, a similar approach could impose
a DTI limit above a certain pricing threshold and also tailor the
presumption of compliance with the ATR requirement based on DTI. For
example, the rule could provide that (1) for loans with rate spreads
under 1 percentage point, the loan is a safe harbor QM regardless of
the consumer's DTI ratio; (2) for loans with rate spreads at or
above 1 but less than 1.5 percentage points, a loan is a safe harbor
QM if the consumer's DTI ratio does not exceed 50 percent and a
rebuttable presumption QM if the consumer's DTI is above 50 percent;
and (3) if the rate spread is at or above 1.5 but less than 2
percentage points, loans would be rebuttable presumption QM if the
consumer's DTI ratio does not exceed 50 percent and non-QM if the
DTI ratio is above 50 percent.
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C. Potential Impact on Depository Institutions and Credit Unions With
$10 Billion or Less in Total Assets, as Described in Section 1026
The proposal's expected impact on depository institutions and
credit unions that are also creditors making covered loans (depository
creditors) with $10 billion or less in total assets is similar to the
expected impact on larger depository creditors and on non-depository
creditors. As discussed in part VII.B.4 (Costs to Covered Persons),
depository creditors originating portfolio loans may forgo potential
market share gains that would occur in the absence of the proposal. In
addition, depository creditors with $10 billion or less in total assets
that originate portfolio loans can originate High-DTI Small Creditor QM
loans under the rule. These depository creditors may currently rely
less on the Temporary GSE QM loan definition for originating High-DTI
loans. If the expiration of the Temporary GSE QM loan definition would
confer a competitive advantage to these small creditors in their
origination of High-DTI loans, the proposal would offset this outcome.
Conversely, those small depository creditors that primarily rely on
the GSEs as a secondary market outlet because they do not have the
capacity to hold numerous loans on portfolio or the infrastructure or
scale to securitize loans may continue to benefit from the ability to
make High-DTI GSE loans as QM loans. In the absence of the proposal,
these creditors would be limited to originating GSE loans as QMs only
with DTI at or below 43 percent under the current General QM loan
definition. These creditors may also originate FHA, VA, or USDA loans
or non-QM loans for private securitizations, likely at a higher cost
relative to originating Temporary GSE QM loans. The proposed rule would
allow these creditors to originate more GSE loans under the General QM
loan definition and have a lower cost of origination relative to the
baseline.\311\
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\311\ Alternative approaches, such as retaining a DTI limit of
45 or 50 percent, would have similar effects of allowing small
depository creditors originate more GSE loans under an expanded
General QM loan definition relative to the baseline, while
offsetting potential competitive advantages for small depository
creditors that originate Small Creditor QM loans.
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D. Potential Impact on Rural Areas
The proposal's expected impact on rural areas is similar to the
expected impact on non-rural areas. Based on 2018 HMDA data, the Bureau
estimates that High-DTI conventional purchase mortgages originated for
homes in rural areas are approximately as likely to be reported as
initially sold to the GSEs (52.5 percent) as loans in non-rural areas
(52 percent).\312\ In addition, the Bureau estimates that in 2018, 95.6
percent of conventional purchase loans originated for homes in rural
areas would have been QM loans under the proposal, similar to the
Bureau's estimate for all conventional purchase loans in rural and non-
rural areas (96.1 percent).\313\
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\312\ These statistics are estimated based on originations from
the first nine months of the year, to allow time for loans to be
sold before HMDA reporting deadlines. In addition, a higher share of
High-DTI conventional purchase non-rural loans (33.3 percent) report
being sold to other non-GSE purchasers compared to rural loans (22.3
percent).
\313\ For alternative approaches, the Bureau estimates 84.7
percent of conventional purchase loans for homes in rural areas
would have been QMs under a DTI limit of 45 percent, and 95.7
percent of conventional purchase loans for homes in rural areas
would have been QMs under a DTI limit of 50 percent.
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VIII. Regulatory Flexibility Act Analysis
The Regulatory Flexibility Act (RFA), as amended by the Small
Business Regulatory Enforcement Fairness Act of 1996, requires each
agency to consider the potential impact of its regulations on small
entities, including small businesses, small governmental units, and
small not-for-profit organizations. The RFA defines a ``small
business'' as a business that meets the size standard developed by the
Small Business Administration pursuant to the Small Business Act.\314\
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\314\ 5 U.S.C. 601(3) (the Bureau may establish an alternative
definition after consultation with the Small Business Administration
and an opportunity for public comment).
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The RFA generally requires an agency to conduct an initial
regulatory flexibility analysis (IRFA) and a final regulatory
flexibility analysis (FRFA) of any rule subject to notice-and-comment
rulemaking requirements, unless the agency certifies that the rule
would not have a significant economic impact on a substantial number of
small entities (SISNOSE).\315\ The Bureau also is subject to certain
additional procedures under the RFA involving the convening of a panel
to consult with small business representatives before proposing a rule
for which an IRFA is required.\316\
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\315\ 5 U.S.C. 603-605.
\316\ 5 U.S.C. 609.
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An IRFA is not required for this proposal because the proposal, if
adopted, would not have a SISNOSE. As the below analysis makes clear,
relative to the baseline, the proposed rule has only one sizeable
adverse effect. Certain loans with DTI ratios under 43 percent that
would otherwise be originated as rebuttable presumption QM loans under
the baseline would be non-QM loans under the proposal. The proposal
would also have a number of more minor effects on small entities which
are not quantified in this analysis, including adjustments to the APR
calculation used for certain ARMs when determining QM status;
amendments to the Rule's requirements to consider and verify income,
assets, debt obligations, alimony, and child support; and the addition
of DTI as a factor consumers may use to rebut the QM presumption of
compliance for loans priced 1.5 percentage points or more over APOR.
The Bureau expects only small increases or decreases in burden from
these more minor effects.
The analysis divides potential originations into different
categories and considers whether the proposed rule has any adverse
impact on originations relative to the baseline. Note that under the
baseline, the category of Temporary GSE QM loans no longer exists. The
Bureau has identified five categories of small entities that may be
subject to the proposed provisions: Commercial banks, savings
institutions and credit unions (NAICS 522110, 522120, and 522130) with
assets at or below $600 million; mortgage brokers (NAICS 522310) with
average annual receipts at or below $8 million; and mortgage companies
(NAICS 522292 and 522298) with average annual receipts at or below
$41.5 million. As discussed further below, the Bureau relies primarily
on 2018 HMDA data for the analysis.\317\
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\317\ Non-depositories are classified as small entities if they
had fewer than 5,188 total originations in 2018. The classification
for non-depositories is based on the SBA small entity definition for
mortgage companies (less than $41.5 million in annual revenues) and
an estimate of $8,000 for revenue-per-origination from the
Assessment Report, supra note 58, at 78. The HMDA data do not
directly distinguish mortgage brokers from mortgage companies, so
the more inclusive revenue threshold is used.
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Type I: First Liens That Are Not Small Loans, DTI Is Over 43 Percent
Under the baseline, small entities cannot originate Type I loans as
safe harbor or rebuttable presumption QM
[[Page 41772]]
loans unless they are also small creditors and comply with the
additional requirements of the small creditor QM category. Neither the
removal of DTI requirements nor the addition of the pricing conditions
have an adverse impact on the ability of small entities to originate
these loans.
Type II: First Liens That Are Not Small Loans, DTI Is 43 Percent or
Under
Under the baseline, small entities can originate these loans as
either safe harbor QM or rebuttable presumption QM, depending on
pricing. The removal of DTI requirements has no adverse impact on the
ability of small entities to originate these loans. The addition of the
pricing conditions has no adverse impact on the ability of small
creditors to originate these loans as safe harbor QM loans: A loan with
APR within 1.5 percentage points of APOR that can be originated as a
safe harbor QM loan under the baseline can be originated as a safe
harbor QM loan under the pricing conditions of the proposed rule.
Similarly, the addition of the pricing conditions has no adverse impact
on the ability of small creditors to originate rebuttable presumption
QM loans with APR between 1.5 percentage points and 2 percentage points
over APOR. The addition of the pricing conditions would, however,
prevent small creditors from originating rebuttable presumption QM
loans with APR 2 percentage points or more over APOR. In the SISNOSE
analysis below, the Bureau conservatively assumes that none of these
loans would be originated.
Type III: First-Liens That Are Small Loans
Under the baseline, small entities can originate these loans as
General QM loans if they have DTI ratios at or below the DTI limit of
43 percent. The proposal's amended General QM loan definition preserves
QM status for some smaller, low-DTI loans priced 2 percentage points or
more over APOR. Specifically, loans under $65,939 with APR less than
6.5 percentage points over APOR and loans under $109,898 with APR less
than 3.5 percentage points over APOR can be originated as General QM
loans, assuming they meet all other General QM requirements. The
proposal would prevent small creditors from originating smaller, low-
DTI loans with APR at or above these higher thresholds as General QM
loans. For the SISNOSE analysis below, the Bureau conservatively
assumes that none of these loans would be originated.
Type IV: Closed-End Subordinate-Liens
Under the baseline, small entities can originate these loans as
General QM loans if they have DTI ratios at or below the DTI limit of
43 percent. The proposal's amended General QM loan definition creates
new pricing thresholds for subordinate-lien originations. Subordinate-
lien loans under $65,939 with APR less than 6.5 percentage points over
APOR and larger subordinate-lien loans with APR less than 3.5
percentage points over APOR can be originated as General QM loans,
assuming they meet all other General QM requirements. The proposal
would prevent small creditors from originating low-DTI, subordinate-
lien loans with APR at or above these thresholds as General QM loans.
For the SISNOSE analysis below, the Bureau conservatively assumes that
none of these loans would be originated.
Analysis
For purposes of this analysis, the Bureau assumes that average
annual receipts for small entities is proportional to mortgage loan
origination volume. The Bureau further assumes that a small entity
experiences a significant negative effect from the proposed rule if the
proposed rule would cause a reduction in origination volume of over 2
percent. Using the 2018 HMDA data, the Bureau estimates that if none of
the Type II, III, or IV loans adversely affected were originated, 149
small entities would experience a loss of over 2 percent in mortgage
loan origination volume. Thus, there are at most 149 small entities
that experience a significant adverse economic impact. The Bureau
estimates that there are 2,027 small entities in the HMDA data. 149 is
not a substantial number relative to 2,027.
The Bureau recognizes that there are small entities that originate
mortgage credit that do not report HMDA data. The Bureau has no reason
to expect, however, that small entities that originate mortgage credit
that do not report HMDA data would be affected differently from small
HMDA reporters by the proposed rule. In other words, the Bureau expects
that including HMDA non-reporters in the analysis would increase the
number of small entities that would experience a loss of over 2 percent
in mortgage loan origination volume and the number of relevant small
entities by the same proportion. Thus, the overall number of small
entities that would experience a significant adverse economic impact
would not be a substantial number of the overall number of small
entities that originate mortgage credit.
Accordingly, the Director certifies that this proposal, if adopted,
would not have a significant economic impact on a substantial number of
small entities. The Bureau requests comment on its analysis of the
impact of the proposal on small entities and requests any relevant
data.
IX. Paperwork Reduction Act
Under the Paperwork Reduction Act of 1995 (PRA),\318\ Federal
agencies are generally required to seek, prior to implementation,
approval from the Office of Management and Budget (OMB) for information
collection requirements. Under the PRA, the Bureau may not conduct or
sponsor, and, notwithstanding any other provision of law, a person is
not required to respond to, an information collection unless the
information collection displays a valid control number assigned by OMB.
---------------------------------------------------------------------------
\318\ 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------
The Bureau has determined that this proposal does not contain any
new or substantively revised information collection requirements other
than those previously approved by OMB under OMB control number 3170-
0015. The proposal would amend 12 CFR part 1026 (Regulation Z), which
implements TILA. OMB control number 3170-0015 is the Bureau's OMB
control number for Regulation Z.
The Bureau welcomes comments on these determinations or any other
aspect of the proposal for purposes of the PRA.
X. Signing Authority
The Director of the Bureau, having reviewed and approved this
document, is delegating the authority to electronically sign this
document to Laura Galban, a Bureau Federal Register Liaison, for
purposes of publication in the Federal Register.
List of Subjects in 12 CFR Part 1026
Advertising, Banks, Banking, Consumer protection, Credit, Credit
unions, Mortgages, National banks, Reporting and recordkeeping
requirements, Savings associations, Truth-in-lending.
Authority and Issuance
For the reasons set forth above, the Bureau proposes to amend
Regulation Z, 12 CFR part 1026, as set forth below:
PART 1026--TRUTH IN LENDING (REGULATION Z)
0
1. The authority citation for part 1026 continues to read as follows:
[[Page 41773]]
Authority: 12 U.S.C. 2601, 2603-2605, 2607, 2609, 2617, 3353,
5511, 5512, 5532, 5581; 15 U.S.C. 1601 et seq.
Subpart E--Special Rules for Certain Home Mortgage Transactions
0
2. Amend Sec. 1026.43 by revising paragraphs (b)(4), (e)(2)(v) and
(vi), (e)(4), (e)(5)(i)(A) and (B), and (f)(1)(i) and (iii) to read as
follows:
Sec. 1026.43 Minimum standards for transactions secured by a
dwelling.
* * * * *
(b) * * *
(4) Higher-priced covered transaction means a covered transaction
with an annual percentage rate that exceeds the average prime offer
rate for a comparable transaction as of the date the interest rate is
set by 1.5 or more percentage points for a first-lien covered
transaction, other than a qualified mortgage under paragraph (e)(5),
(e)(6), or (f) of this section; by 3.5 or more percentage points for a
first-lien covered transaction that is a qualified mortgage under
paragraph (e)(5), (e)(6), or (f) of this section; or by 3.5 or more
percentage points for a subordinate-lien covered transaction. For
purposes of a qualified mortgage under paragraph (e)(2) of this
section, for a loan for which the interest rate may or will change
within the first five years after the date on which the first regular
periodic payment will be due, the creditor must determine the annual
percentage rate for purposes of this paragraph (b)(4) by treating the
maximum interest rate that may apply during that five-year period as
the interest rate for the full term of the loan.
* * * * *
(e) * * *
(2) * * *
(v) For which the creditor, at or before consummation:
(A) Considers the consumer's income or assets, debt obligations,
alimony, child support, and monthly debt-to-income ratio or residual
income, using the amounts determined from paragraph (e)(2)(v)(B) of
this section. For purposes of this paragraph (e)(2)(v)(A), the
consumer's monthly debt-to-income ratio or residual income is
determined in accordance with paragraph (c)(7) of this section, except
that the consumer's monthly payment on the covered transaction,
including the monthly payment for mortgage-related obligations, is
calculated in accordance with paragraph (e)(2)(iv) of this section.
(B)(1) Verifies the consumer's current or reasonably expected
income or assets other than the value of the dwelling (including any
real property attached to the dwelling) that secures the loan using
third-party records that provide reasonably reliable evidence of the
consumer's income or assets, in accordance with paragraph (c)(4) of
this section; and
(2) Verifies the consumer's current debt obligations, alimony, and
child support using reasonably reliable third-party records in
accordance with paragraph (c)(3) of this section.
(vi) For which the annual percentage rate does not exceed the
average prime offer rate for a comparable transaction as of the date
the interest rate is set by the amounts specified in paragraphs
(e)(2)(vi)(A) through (E) of this section. The amounts specified here
shall be adjusted annually on January 1 by the annual percentage change
in the Consumer Price Index for All Urban Consumers (CPI-U) that was
reported on the preceding June 1. For purposes of this paragraph
(e)(2)(vi), the creditor must determine the annual percentage rate for
a loan for which the interest rate may or will change within the first
five years after the date on which the first regular periodic payment
will be due by treating the maximum interest rate that may apply during
that five-year period as the interest rate for the full term of the
loan.
(A) For a first-lien covered transaction with a loan amount greater
than or equal to $109,898 (indexed for inflation), 2 or more percentage
points;
(B) For a first-lien covered transaction with a loan amount greater
than or equal to $65,939 (indexed for inflation) but less than $109,898
(indexed for inflation), 3.5 or more percentage points;
(C) For a first-lien covered transaction with a loan amount less
than $65,939 (indexed for inflation), 6.5 or more percentage points;
(D) For a subordinate-lien covered transaction with a loan amount
greater than or equal to $65,939 (indexed for inflation), 3.5 or more
percentage points;
(E) For a subordinate-lien covered transaction with a loan amount
less than $65,939 (indexed for inflation), 6.5 or more percentage
points.
* * * * *
(4) Qualified mortgage defined--other agencies. Notwithstanding
paragraph (e)(2) of this section, a qualified mortgage is a covered
transaction that is defined as a qualified mortgage by the U.S.
Department of Housing and Urban Development under 24 CFR 201.7 and 24
CFR 203.19, the U.S. Department of Veterans Affairs under 38 CFR
36.4300 and 38 CFR 36.4500, or the U.S. Department of Agriculture under
7 CFR 3555.109.
(5) * * *
(i) * * *
(A) That satisfies the requirements of paragraph (e)(2) of this
section other than the requirements of paragraphs (e)(2)(v) and (vi);
(B) For which the creditor:
(1) Considers and verifies at or before consummation the consumer's
current or reasonably expected income or assets other than the value of
the dwelling (including any real property attached to the dwelling)
that secures the loan, in accordance with paragraphs (c)(2)(i) and
(c)(4) of this section;
(2) Considers and verifies at or before consummation the consumer's
current debt obligations, alimony, and child support in accordance with
paragraphs (c)(2)(vi) and (c)(3) of this section;
(3) Considers at or before consummation the consumer's monthly
debt-to-income ratio or residual income and verifies the debt
obligations and income used to determine that ratio in accordance with
paragraph (c)(7) of this section, except that the calculation of the
payment on the covered transaction for purposes of determining the
consumer's total monthly debt obligations in paragraph (c)(7)(i)(A)
shall be determined in accordance with paragraph (e)(2)(iv) of this
section instead of paragraph (c)(5) of this section;
* * * * *
(f) * * *
(1) * * *
(i) The loan satisfies the requirements for a qualified mortgage in
paragraphs (e)(2)(i)(A) and (e)(2)(ii) and (iii) of this section;
* * * * *
(iii) The creditor:
(A) Considers and verifies at or before consummation the consumer's
current or reasonably expected income or assets other than the value of
the dwelling (including any real property attached to the dwelling)
that secures the loan, in accordance with paragraphs (c)(2)(i) and
(c)(4) of this section;
(B) Considers and verifies at or before consummation the consumer's
current debt obligations, alimony, and child support in accordance with
paragraphs (c)(2)(vi) and (c)(3) of this section;
(C) Considers at or before consummation the consumer's monthly
debt-to-income ratio or residual income and verifies the debt
obligations and income used to determine that ratio in accordance with
paragraph (c)(7) of this section, except that the calculation of the
payment on the covered transaction for purposes of determining the
consumer's total monthly debt obligations in (c)(7)(i)(A) shall be
[[Page 41774]]
determined in accordance with paragraph (f)(1)(iv)(A) of this section,
together with the consumer's monthly payments for all mortgage-related
obligations and excluding the balloon payment;
* * * * *
Appendix Q to Part 1026 [Removed]
0
3. Remove Appendix Q to Part 1026.
0
4. In Supplement I to Part 1026--Official Interpretations, under
Section 1026.43--Minimum Standards for Transactions Secured by a
Dwelling:
0
a. Revise 43(b)(4), 43(c)(4), and 43(c)(7);
0
b. Revise Paragraph 43(e)(2)(v);
0
c. Add Paragraphs 43(e)(2)(v)(A) and 43(e)(2)(v)(B) (after Paragraph
43(e)(2)(v));
0
d. Revise Paragraph 43(e)(2)(vi);
0
e. Revise 43(e)(4); and
0
f. Revise Paragraph 43(e)(5), Paragraph 43(f)(1)(i), and e Paragraph
43(f)(1)(iii).
The revisions and additions read as follows:
Supplement I to Part 1026--Official Interpretations
* * * * *
Section 1026.43--Minimum Standards for Transactions Secured by a
Dwelling
* * * * *
43(b)(4) Higher-Priced Covered Transaction
1. Average prime offer rate. The average prime offer rate is
defined in Sec. 1026.35(a)(2). For further explanation of the meaning
of ``average prime offer rate,'' and additional guidance on determining
the average prime offer rate, see comments 35(a)(2)-1 through -4.
2. Comparable transaction. A higher-priced covered transaction is a
consumer credit transaction that is secured by the consumer's dwelling
with an annual percentage rate that exceeds by the specified amount the
average prime offer rate for a comparable transaction as of the date
the interest rate is set. The published tables of average prime offer
rates indicate how to identify a comparable transaction. See comment
35(a)(2)-2.
3. Rate set. A transaction's annual percentage rate is compared to
the average prime offer rate as of the date the transaction's interest
rate is set (or ``locked'') before consummation. Sometimes a creditor
sets the interest rate initially and then re-sets it at a different
level before consummation. The creditor should use the last date the
interest rate is set before consummation.
4. Determining the annual percentage rate for certain loans for
which the interest rate may or will change. Provisions in subpart C of
this part, including the commentary to Sec. 1026.17(c)(1), address how
to determine the annual percentage rate disclosures for closed-end
credit transactions. Provisions in Sec. 1026.32(a)(3) address how to
determine the annual percentage rate to determine coverage under Sec.
1026.32(a)(1)(i). Section 1026.43(b)(4) requires, only for the purposes
of a qualified mortgage under Sec. 1026.43(e)(2), a different
determination of the annual percentage rate for purposes of Sec.
1026.43(b)(4) for a loan for which the interest rate may or will change
within the first five years after the date on which the first regular
periodic payment will be due. See comment 43(e)(2)(vi)-4 for how to
determine the annual percentage rate of such a loan.
* * * * *
43(c)(4) Verification of Income or Assets
1. Income or assets relied on. A creditor need consider, and
therefore need verify, only the income or assets the creditor relies on
to evaluate the consumer's repayment ability. See comment 43(c)(2)(i)-
2. For example, if a consumer's application states that the consumer
earns a salary and is paid an annual bonus and the creditor relies on
only the consumer's salary to evaluate the consumer's repayment
ability, the creditor need verify only the salary. See also comments
43(c)(3)-1 and -2.
2. Multiple applicants. If multiple consumers jointly apply for a
loan and each lists income or assets on the application, the creditor
need verify only the income or assets the creditor relies on in
determining repayment ability. See comment 43(c)(2)(i)-5.
3. Tax-return transcript. Under Sec. 1026.43(c)(4), a creditor may
verify a consumer's income using an Internal Revenue Service (IRS) tax-
return transcript, which summarizes the information in a consumer's
filed tax return, another record that provides reasonably reliable
evidence of the consumer's income, or both. A creditor may obtain a
copy of a tax-return transcript or a filed tax return directly from the
consumer or from a service provider. A creditor need not obtain the
copy directly from the IRS or other taxing authority. See comment
43(c)(3)-2.
4. Unidentified funds. A creditor does not meet the requirements of
Sec. 1026.43(c)(4) if it observes an inflow of funds into the
consumer's account without confirming that the funds are income. For
example, a creditor would not meet the requirements of Sec.
1026.43(c)(4) where it observes an unidentified $5,000 deposit in the
consumer's account but fails to take any measures to confirm or lacks
any basis to conclude that the deposit represents the consumer's
personal income and not, for example, proceeds from the disbursement of
a loan.
* * * * *
43(c)(7) Monthly Debt-to-Income Ratio or Residual Income
1. Monthly debt-to-income ratio or monthly residual income. Under
Sec. 1026.43(c)(2)(vii), the creditor must consider the consumer's
monthly debt-to-income ratio, or the consumer's monthly residual
income, in accordance with the requirements in Sec. 1026.43(c)(7).
Section 1026.43(c) does not prescribe a specific monthly debt-to-income
ratio with which creditors must comply. Instead, an appropriate
threshold for a consumer's monthly debt-to-income ratio or monthly
residual income is for the creditor to determine in making a reasonable
and good faith determination of a consumer's ability to repay.
2. Use of both monthly debt-to-income ratio and monthly residual
income. If a creditor considers the consumer's monthly debt-to-income
ratio, the creditor may also consider the consumer's residual income as
further validation of the assessment made using the consumer's monthly
debt-to-income ratio.
3. Compensating factors. The creditor may consider factors in
addition to the monthly debt-to-income ratio or residual income in
assessing a consumer's repayment ability. For example, the creditor may
reasonably and in good faith determine that a consumer has the ability
to repay despite a higher debt-to-income ratio or lower residual income
in light of the consumer's assets other than the dwelling, including
any real property attached to the dwelling, securing the covered
transaction, such as a savings account. The creditor may also
reasonably and in good faith determine that a consumer has the ability
to repay despite a higher debt-to-income ratio in light of the
consumer's residual income.
* * * * *
Paragraph 43(e)(2)(v)
1. General. For guidance on satisfying Sec. 1026.43(e)(2)(v), a
creditor may rely on commentary to Sec. 1026.43(c)(2)(i) and (vi),
(c)(3), and (c)(4).
Paragraph 43(e)(2)(v)(A)
1. Consider. In order to comply with the requirement to consider
income or assets, debt obligations, alimony, child
[[Page 41775]]
support, and monthly debt-to-income ratio or residual income under
Sec. 1026.43(e)(2)(v)(A), a creditor must take into account income or
assets, debt obligations, alimony, child support, and monthly debt-to-
income ratio or residual income in its ability-to-repay determination.
Under Sec. 1026.25(a), a creditor must retain documentation showing
how it took into account income or assets, debt obligations, alimony,
child support, and monthly debt-to-income ratio or residual income in
its ability-to-repay determination. Examples of such documentation may
include, for example, an underwriter worksheet or a final automated
underwriting system certification, alone or in combination with the
creditor's applicable underwriting standards, that shows how these
required factors were taken into account in the creditor's ability-to-
repay determination.
2. Requirement to consider monthly debt-to-income ratio or residual
income. Section 1026.43(e)(2)(v)(A) does not prescribe specifically how
a creditor must consider monthly debt-to-income ratio or residual
income. Section 1026.43(e)(2)(v)(A) also does not prescribe a
particular monthly debt-to-income ratio or residual income threshold
with which a creditor must comply. A creditor may, for example,
consider monthly debt-to-income ratio or residual income by
establishing monthly debt-to-income or residual income thresholds for
its own underwriting standards and documenting how it applied those
thresholds to determine the consumer's ability to repay. A creditor may
also consider these factors by establishing monthly debt-to-income or
residual income thresholds and exceptions to those thresholds based on
other compensating factors, and documenting application of the
thresholds along with any applicable exceptions.
3. Flexibility to consider additional factors related to a
consumer's ability to repay. The requirement to consider income or
assets, debt obligations, alimony, child support, and monthly debt-to-
income ratio or residual income does not preclude the creditor from
taking into account additional factors that are relevant in determining
a consumer's ability to repay the loan. For guidance on considering
additional factors in determining the consumer's ability to repay, see
comment 43(c)(7)-3.
Paragraph 43(e)(2)(v)(B)
1. Verification of income, assets, debt obligations, alimony, and
child support. Section 1026.43(e)(2)(v)(B) does not prescribe specific
methods of underwriting that creditors must use. Section
1026.43(e)(2)(v)(B)(1) requires a creditor to verify the consumer's
current or reasonably expected income or assets (including any real
property attached to the value of the dwelling) that secures the loan
in accordance with Sec. 1026.43(c)(4), which states that a creditor
must verify such amounts using third-party records that provide
reasonably reliable evidence of the consumer's income or assets.
Section 1026.43(e)(2)(v)(B)(2) requires a creditor to verify the
consumer's current debt obligations, alimony, and child support in
accordance with Sec. 1026.43(c)(3), which states that a creditor must
verify such amounts using reasonably reliable third-party records. So
long as a creditor complies with the provisions of Sec. 1026.43(c)(3)
with respect to debt obligations, alimony, and child support and Sec.
1026.43(c)(4) with respect to income and assets, the creditor is
permitted to use any reasonable verification methods and criteria.
2. Classifying and counting income, assets, debt obligations,
alimony, and child support. ``Current and reasonably expected income or
assets other than the value of the dwelling (including any real
property attached to the dwelling) that secures the loan'' is
determined in accordance with Sec. 1026.43(c)(2)(i) and its
commentary. ``Current debt obligations, alimony, and child support''
has the same meaning as under Sec. 1026.43(c)(2)(vi) and its
commentary. Section 1026.43(c)(2)(i) and (vi) and the associated
commentary apply to a creditor's determination with respect to what
inflows and property it may classify and count as income or assets and
what obligations it must classify and count as debt obligations,
alimony, and child support, pursuant to its compliance with Sec.
1026.43(e)(2)(v)(B).
3. Safe harbor for compliance with specified external standards.
i. Meeting the standards in the following documents for verifying
current or reasonably expected income or assets using third-party
records provides a creditor with reasonably reliable evidence of the
consumer's income or assets. Meeting the standards in the following
documents for verifying current debt obligations, alimony, and child
support obligation using third-party records provides a creditor with
reasonably reliable evidence of the consumer's debt obligations,
alimony, and child support obligations. Accordingly, a creditor
complies with Sec. 1026.43(e)(2)(v)(B) if it complies with
verification standards in one or more of the following documents: [List
to be Determined, as Discussed in Preamble].
ii. Applicable provisions in standards. A creditor complies with
Sec. 1026.43(e)(2)(v)(B) if it complies with requirements in the
standards listed in comment 43(e)(2)(v)(B)-3 for creditors to verify
income, assets, debt obligations, alimony and child support using
specified documents or to include or exclude particular inflows,
property, and obligations as income, assets, debt obligations, alimony,
and child support.
iii. Inapplicable provisions in standards. For purposes of
compliance with Sec. 1026.43(e)(2)(v)(B), a creditor need not comply
with requirements in the standards listed in comment 43(e)(2)(v)(B)-3
other than those that require lenders to verify income, assets, debt
obligations, alimony and child support using specified documents or to
classify and count particular inflows, property, and obligations as
income, assets, debt obligations, alimony, and child support.
iv. Revised versions of standards. A creditor also complies with
Sec. 1026.43(e)(2)(v)(B) where it complies with revised versions of
the standards listed in comment 43(e)(2)(v)(B)-3.i, provided that the
two versions are substantially similar.
v. Use of standards from more than one document. A creditor
complies with Sec. 1026.43(e)(2)(v)(B) if it complies with the
verification standards in one or more of the documents specified in
comment 43(e)(2)(v)(B)-3.i. Accordingly, a creditor may, but need not,
comply with Sec. 1026.43(e)(2)(v)(B) by complying with the
verification standards from more than one document (in other words, by
``mixing and matching'' verification standards).
Paragraph 43(e)(2)(vi)
1. Determining the average prime offer rate for a comparable
transaction as of the date the interest rate is set. For guidance on
determining the average prime offer rate for a comparable transaction
as of the date the interest rate is set, see comments 43(b)(4)-1
through -3.
2. Determination of applicable threshold. A creditor must determine
the applicable threshold by determining which category the loan falls
into based on the face amount of the note (the ``loan amount'' as
defined in Sec. 1026.43(b)(5)). For example, for a first-lien covered
transaction with a loan amount of $75,000, the loan would fall into the
tier for loans greater than or equal to $65,939 (indexed for inflation)
but less than $109,898 (indexed for inflation), for which the
applicable threshold is 3.5 or more percentage points.
[[Page 41776]]
3. Annual adjustment for inflation. The dollar amounts in Sec.
1026.43(e)(2)(vi) will be adjusted annually on January 1 by the annual
percentage change in the CPI-U that was in effect on the preceding June
1. The Bureau will publish adjustments after the June figures become
available each year.
4. Determining the annual percentage rate for certain loans for
which the interest rate may or will change.
i. In general. The commentary to Sec. 1026.17(c)(1) and other
provisions in subpart C address how to determine the annual percentage
rate disclosures for closed-end credit transactions. Provisions in
Sec. 1026.32(a)(3) address how to determine the annual percentage rate
to determine coverage under Sec. 1026.32(a)(1)(i). Section
1026.43(e)(2)(vi) requires, for the purposes of Sec.
1026.43(e)(2)(vi), a different determination of the annual percentage
rate for a qualified mortgage under Sec. 1026.43(e)(2) for which the
interest rate may or will change within the first five years after the
date on which the first regular periodic payment will be due. An
identical special rule for determining the annual percentage rate for
such a loan also applies for purposes of Sec. 1026.43(b)(4).
ii. Loans for which the interest rate may or will change. Section
1026.43(e)(2)(vi) includes a special rule for determining the annual
percentage rate for a loan for which the interest rate may or will
change within the first five years after the date on which the first
regular periodic payment will be due. This rule applies to adjustable-
rate mortgages that have a fixed-rate period of five years or less and
to step-rate mortgages for which the interest rate changes within that
five-year period.
iii. Maximum interest rate during the first five years. For a loan
for which the interest rate may or will change within the first five
years after the date on which the first regular periodic payment will
be due, a creditor must treat the maximum interest rate that could
apply at any time during that five-year period as the interest rate for
the full term of the loan to determine the annual percentage rate for
purposes of Sec. 1026.43(e)(2)(vi), regardless of whether the maximum
interest rate is reached at the first or subsequent adjustment during
the five-year period. For additional instruction on how to determine
the maximum interest rate during the first five years after the date on
which the first regular periodic payment will be due. See comments
43(e)(2)(iv)-3 and -4.
iv. Treatment of the maximum interest rate in determining the
annual percentage rate. For a loan for which the interest rate may or
will change within the first five years after the date on which the
first regular periodic payment will be due, the creditor must determine
the annual percentage rate for purposes of Sec. 1026.43(e)(2)(vi) by
treating the maximum interest rate that may apply within the first five
years as the interest rate for the full term of the loan. For example,
assume an adjustable-rate mortgage with a loan term of 30 years and an
initial discounted rate of 5.0 percent that is fixed for the first
three years. Assume that the maximum interest rate during the first
five years after the date on which the first regular periodic payment
will be due is 7.0 percent. Pursuant to Sec. 1026.43(e)(2)(vi), the
creditor must determine the annual percentage rate based on an interest
rate of 7.0 percent applied for the full 30-year loan term.
* * * * *
43(e)(4) Qualified Mortgage Defined--Other Agencies
1. General. The Department of Housing and Urban Development,
Department of Veterans Affairs, and the Department of Agriculture have
promulgated definitions for qualified mortgages under mortgage programs
they insure, guarantee, or provide under applicable law. Cross-
references to those definitions are listed in Sec. 1026.43(e)(4) to
acknowledge the covered transactions covered by those definitions are
qualified mortgages for purposes of this section.
2. Mortgages originated prior to [effective date of final rule].
Covered transactions that met the requirements of Sec.
1026.43(e)(2)(i) thorough (iii), were eligible for purchase or
guarantee by the Federal National Mortgage Association (Fannie Mae) or
the Federal Home Loan Mortgage Corporation (Freddie Mac) (or any
limited-life regulatory entity succeeding the charter of either)
operating under the conservatorship or receivership of the Federal
Housing Finance Agency pursuant to section 1367 of the Federal Housing
Enterprises Financial Safety and Soundness Act of 1992 (12 U.S.C.
4617), and were consummated prior to [effective date of final rule]
continue to be qualified mortgages for the purposes of this section.
3. [RESERVED].
4. [RESERVED].
5. [RESERVED].
Paragraph 43(e)(5)
1. Satisfaction of qualified mortgage requirements. For a covered
transaction to be a qualified mortgage under Sec. 1026.43(e)(5), the
mortgage must satisfy the requirements for a qualified mortgage under
Sec. 1026.43(e)(2), other than the requirements in Sec.
1026.43(e)(2)(v) and (vi). For example, a qualified mortgage under
Sec. 1026.43(e)(5) may not have a loan term in excess of 30 years
because longer terms are prohibited for qualified mortgages under Sec.
1026.43(e)(2)(ii). Similarly, a qualified mortgage under Sec.
1026.43(e)(5) may not result in a balloon payment because Sec.
1026.43(e)(2)(i)(C) provides that qualified mortgages may not have
balloon payments except as provided under Sec. 1026.43(f). However, a
covered transaction need not comply with Sec. 1026.43(e)(2)(v) and
(vi).
2. Debt-to-income ratio or residual income. Section 1026.43(e)(5)
does not prescribe a specific monthly debt-to-income ratio with which
creditors must comply. Instead, creditors must consider a consumer's
debt-to-income ratio or residual income calculated generally in
accordance with Sec. 1026.43(c)(7) and verify the information used to
calculate the debt-to-income ratio or residual income in accordance
with Sec. 1026.43(c)(3) and (4). However, Sec. 1026.43(c)(7) refers
creditors to Sec. 1026.43(c)(5) for instructions on calculating the
payment on the covered transaction. Section 1026.43(c)(5) requires
creditors to calculate the payment differently than Sec.
1026.43(e)(2)(iv). For purposes of the qualified mortgage definition in
Sec. 1026.43(e)(5), creditors must base their calculation of the
consumer's debt-to-income ratio or residual income on the payment on
the covered transaction calculated according to Sec. 1026.43(e)(2)(iv)
instead of according to Sec. 1026.43(c)(5).
3. Forward commitments. A creditor may make a mortgage loan that
will be transferred or sold to a purchaser pursuant to an agreement
that has been entered into at or before the time the transaction is
consummated. Such an agreement is sometimes known as a ``forward
commitment.'' A mortgage that will be acquired by a purchaser pursuant
to a forward commitment does not satisfy the requirements of Sec.
1026.43(e)(5), whether the forward commitment provides for the purchase
and sale of the specific transaction or for the purchase and sale of
transactions with certain prescribed criteria that the transaction
meets. However, a forward commitment to another person that also meets
the requirements of Sec. 1026.43(e)(5)(i)(D) is permitted. For
example, assume a creditor that is eligible to make qualified mortgages
under Sec. 1026.43(e)(5) makes a mortgage. If that mortgage meets the
purchase
[[Page 41777]]
criteria of an investor with which the creditor has an agreement to
sell loans after consummation, then the loan does not meet the
definition of a qualified mortgage under Sec. 1026.43(e)(5). However,
if the investor meets the requirements of Sec. 1026.43(e)(5)(i)(D),
the mortgage will be a qualified mortgage if all other applicable
criteria also are satisfied.
4. Creditor qualifications. To be eligible to make qualified
mortgages under Sec. 1026.43(e)(5), a creditor must satisfy the
requirements stated in Sec. 1026.35(b)(2)(iii)(B) and (C). Section
1026.35(b)(2)(iii)(B) requires that, during the preceding calendar
year, or, if the application for the transaction was received before
April 1 of the current calendar year, during either of the two
preceding calendar years, the creditor and its affiliates together
extended no more than 2,000 covered transactions, as defined by Sec.
1026.43(b)(1), secured by first liens, that were sold, assigned, or
otherwise transferred to another person, or that were subject at the
time of consummation to a commitment to be acquired by another person.
Section 1026.35(b)(2)(iii)(C) requires that, as of the preceding
December 31st, or, if the application for the transaction was received
before April 1 of the current calendar year, as of either of the two
preceding December 31sts, the creditor and its affiliates that
regularly extended, during the applicable period, covered transactions,
as defined by Sec. 1026.43(b)(1), secured by first liens, together,
had total assets of less than $2 billion, adjusted annually by the
Bureau for inflation.
5. Requirement to hold in portfolio. Creditors generally must hold
a loan in portfolio to maintain the transaction's status as a qualified
mortgage under Sec. 1026.43(e)(5), subject to four exceptions. Unless
one of these exceptions applies, a loan is no longer a qualified
mortgage under Sec. 1026.43(e)(5) once legal title to the debt
obligation is sold, assigned, or otherwise transferred to another
person. Accordingly, unless one of the exceptions applies, the
transferee could not benefit from the presumption of compliance for
qualified mortgages under Sec. 1026.43(e)(1) unless the loan also met
the requirements of another qualified mortgage definition.
6. Application to subsequent transferees. The exceptions contained
in Sec. 1026.43(e)(5)(ii) apply not only to an initial sale,
assignment, or other transfer by the originating creditor but to
subsequent sales, assignments, and other transfers as well. For
example, assume Creditor A originates a qualified mortgage under Sec.
1026.43(e)(5). Six months after consummation, Creditor A sells the
qualified mortgage to Creditor B pursuant to Sec. 1026.43(e)(5)(ii)(B)
and the loan retains its qualified mortgage status because Creditor B
complies with the limits on asset size and number of transactions. If
Creditor B sells the qualified mortgage, it will lose its qualified
mortgage status under Sec. 1026.43(e)(5) unless the sale qualifies for
one of the Sec. 1026.43(e)(5)(ii) exceptions for sales three or more
years after consummation, to another qualifying institution, as
required by supervisory action, or pursuant to a merger or acquisition.
7. Transfer three years after consummation. Under Sec.
1026.43(e)(5)(ii)(A), if a qualified mortgage under Sec. 1026.43(e)(5)
is sold, assigned, or otherwise transferred three years or more after
consummation, the loan retains its status as a qualified mortgage under
Sec. 1026.43(e)(5) following the transfer. The transferee need not be
eligible to originate qualified mortgages under Sec. 1026.43(e)(5).
The loan will continue to be a qualified mortgage throughout its life,
and the transferee, and any subsequent transferees, may invoke the
presumption of compliance for qualified mortgages under Sec.
1026.43(e)(1).
8. Transfer to another qualifying creditor. Under Sec.
1026.43(e)(5)(ii)(B), a qualified mortgage under Sec. 1026.43(e)(5)
may be sold, assigned, or otherwise transferred at any time to another
creditor that meets the requirements of Sec. 1026.43(e)(5)(i)(D). That
section requires that a creditor together with all its affiliates,
extended no more than 2,000 first-lien covered transactions that were
sold, assigned, or otherwise transferred by the creditor or its
affiliates to another person, or that were subject at the time of
consummation to a commitment to be acquired by another person; and
have, together with its affiliates that regularly extended covered
transactions secured by first liens, total assets less than $2 billion
(as adjusted for inflation). These tests are assessed based on
transactions and assets from the calendar year preceding the current
calendar year or from either of the two calendar years preceding the
current calendar year if the application for the transaction was
received before April 1 of the current calendar year. A qualified
mortgage under Sec. 1026.43(e)(5) transferred to a creditor that meets
these criteria would retain its qualified mortgage status even if it is
transferred less than three years after consummation.
9. Supervisory sales. Section 1026.43(e)(5)(ii)(C) facilitates
sales that are deemed necessary by supervisory agencies to revive
troubled creditors and resolve failed creditors. A qualified mortgage
under Sec. 1026.43(e)(5) retains its qualified mortgage status if it
is sold, assigned, or otherwise transferred to another person pursuant
to: A capital restoration plan or other action under 12 U.S.C. 1831o;
the actions or instructions of any person acting as conservator,
receiver or bankruptcy trustee; an order of a State or Federal
government agency with jurisdiction to examine the creditor pursuant to
State or Federal law; or an agreement between the creditor and such an
agency. A qualified mortgage under Sec. 1026.43(e)(5) that is sold,
assigned, or otherwise transferred under these circumstances retains
its qualified mortgage status regardless of how long after consummation
it is sold and regardless of the size or other characteristics of the
transferee. Section 1026.43(e)(5)(ii)(C) does not apply to transfers
done to comply with a generally applicable regulation with future
effect designed to implement, interpret, or prescribe law or policy in
the absence of a specific order by or a specific agreement with a
governmental agency described in Sec. 1026.43(e)(5)(ii)(C) directing
the sale of one or more qualified mortgages under Sec. 1026.43(e)(5)
held by the creditor or one of the other circumstances listed in Sec.
1026.43(e)(5)(ii)(C). For example, a qualified mortgage under Sec.
1026.43(e)(5) that is sold pursuant to a capital restoration plan under
12 U.S.C. 1831o would retain its status as a qualified mortgage
following the sale. However, if the creditor simply chose to sell the
same qualified mortgage as one way to comply with general regulatory
capital requirements in the absence of supervisory action or agreement
it would lose its status as a qualified mortgage following the sale
unless it qualifies under another definition of qualified mortgage.
10. Mergers and acquisitions. A qualified mortgage under Sec.
1026.43(e)(5) retains its qualified mortgage status if a creditor
merges with, is acquired by, or acquires another person regardless of
whether the creditor or its successor is eligible to originate new
qualified mortgages under Sec. 1026.43(e)(5) after the merger or
acquisition. However, the creditor or its successor can originate new
qualified mortgages under Sec. 1026.43(e)(5) only if it complies with
all of the requirements of Sec. 1026.43(e)(5) after the merger or
acquisition. For example, assume a creditor that originates 250 covered
transactions each year and originates qualified mortgages under Sec.
1026.43(e)(5) is acquired by a
[[Page 41778]]
larger creditor that originates 10,000 covered transactions each year.
Following the acquisition, the small creditor would no longer be able
to originate Sec. 1026.43(e)(5) qualified mortgages because, together
with its affiliates, it would originate more than 500 covered
transactions each year. However, the Sec. 1026.43(e)(5) qualified
mortgages originated by the small creditor before the acquisition would
retain their qualified mortgage status.
* * * * *
Paragraph 43(f)(1)(i)
1. Satisfaction of qualified mortgage requirements. Under Sec.
1026.43(f)(1)(i), for a mortgage that provides for a balloon payment to
be a qualified mortgage, the mortgage must satisfy the requirements for
a qualified mortgage in paragraphs (e)(2)(i)(A), (e)(2)(ii), and
(e)(2)(iii). Therefore, a covered transaction with balloon payment
terms must provide for regular periodic payments that do not result in
an increase of the principal balance, pursuant to Sec.
1026.43(e)(2)(i)(A); must have a loan term that does not exceed 30
years, pursuant to Sec. 1026.43(e)(2)(ii); and must have total points
and fees that do not exceed specified thresholds pursuant to Sec.
1026.43(e)(2)(iii).
* * * * *
Paragraph 43(f)(1)(iii)
1. Debt-to-income or residual income. A creditor must consider and
verify the consumer's monthly debt-to-income ratio or residual income
to meet the requirements of Sec. 1026.43(f)(1)(iii)(C). To calculate
the consumer's monthly debt-to-income or residual income for purposes
of Sec. 1026.43(f)(1)(iii)(C), the creditor may rely on the
definitions and calculation rules in Sec. 1026.43(c)(7) and its
accompanying commentary, except for the calculation rules for a
consumer's total monthly debt obligations (which is a component of
debt-to-income and residual income under Sec. 1026.43(c)(7)). For
purposes of calculating the consumer's total monthly debt obligations
under Sec. 1026.43(f)(1)(iii), the creditor must calculate the monthly
payment on the covered transaction using the payment calculation rules
in Sec. 1026.43(f)(1)(iv)(A), together with all mortgage-related
obligations and excluding the balloon payment.
* * * * *
Dated: June 22, 2020.
Laura Galban,
Federal Register Liaison, Bureau of Consumer Financial Protection.
[FR Doc. 2020-13739 Filed 7-9-20; 8:45 am]
BILLING CODE 4810-AM-P