Federal Register, Volume 85 Issue 249 (Tuesday, December 29, 2020)

[Federal Register Volume 85, Number 249 (Tuesday, December 29, 2020)]
[Rules and Regulations]
[Pages 86308-86400]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-27567]

[[Page 86307]]

Vol. 85

Tuesday,

No. 249

December 29, 2020

Part III

Bureau of Consumer Financial Protection

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12 CFR Part 1026

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Qualified Mortgage Definition Under the Truth in Lending Act
(Regulation Z): General QM Loan Definition; Final Rule

Federal Register / Vol. 85 , No. 249 / Tuesday, December 29, 2020 /
Rules and Regulations

[[Page 86308]]

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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: Final rule; official interpretation.

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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
category. For General QMs, the ratio of the consumer's total monthly
debt to total monthly income (DTI or DTI ratio) must not exceed 43
percent. This final rule amends the General QM loan definition in
Regulation Z. Among other things, the final rule removes the General QM
loan definition's 43 percent DTI limit and replaces it with price-based
thresholds. Another category of QMs consists of 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. In 2013, the Bureau established this category of QMs
(Temporary GSE QMs) as a temporary measure that would expire no later
than January 10, 2021 or when the GSEs cease to operate under
conservatorship. In a final rule released on October 20, 2020, the
Bureau extended the Temporary GSE QM loan definition to expire on the
mandatory compliance 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 final
rule, the Bureau adopts the amendments to the General QM loan
definition that are referenced in that separate final rule.

DATES: This final rule is effective on March 1, 2021. However, the
mandatory compliance date is July 1, 2021. For additional discussion of
these dates, see part VII of the Supplementary Information section
below.

FOR FURTHER INFORMATION CONTACT: Waeiz Syed, Counsel, or Ben Cady,
Pedro De Oliveira, Sarita Frattaroli, David Friend, Mark Morelli, Marta
Tanenhaus, Priscilla Walton-Fein, or Steve Wrone, Senior Counsels,
Office of Regulations, at 202-435-7700. If you require this document in
an alternative electronic format, please contact
CFPB_Accessibility@cfpb.gov.

SUPPLEMENTARY INFORMATION:

I. Summary of the Final Rule

The Ability-to-Repay/Qualified Mortgage Rule (ATR/QM 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 ATR/QM Rule's requirements for QMs
obtain certain protections from liability. The ATR/QM Rule defines
several categories of QMs.
One QM category defined in the ATR/QM Rule is the General QM
category. General QMs must comply with the ATR/QM Rule's prohibitions
on certain loan features, its points-and-fees limits, and its
underwriting requirements. For General QMs, the consumer's DTI ratio
must not exceed 43 percent. The ATR/QM 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 QMs defined in the ATR/QM Rule
consists of mortgages that (1) comply with the same loan-feature
prohibitions and points-and-fees limits as General QMs and (2) are
eligible to be purchased or guaranteed by the GSEs while under the
conservatorship of the FHFA. This final rule refers to these loans as
Temporary GSE QMs, and the provision that created this loan category is
commonly known as the GSE Patch. Unlike for General QMs, the ATR/QM
Rule does not prescribe a DTI limit for Temporary GSE QMs. Thus, a loan
can qualify as a Temporary GSE QM even if the consumer's DTI ratio
exceeds 43 percent, as long as the loan is eligible to be purchased or
guaranteed by either of the GSEs and satisfies the other Temporary GSE
QM requirements. In addition, for Temporary GSE QMs, the ATR/QM Rule
does not require creditors to use appendix Q to determine the
consumer's income, debt, or DTI ratio.
In 2013, the Bureau provided in the ATR/QM Rule that the Temporary
GSE QM loan definition would expire with respect to each GSE when that
GSE ceases to operate under Federal conservatorship or on January 10,
2021, whichever comes first. The GSEs are currently under Federal
conservatorship. Despite the Bureau's expectations when the ATR/QM Rule
was published in 2013, Temporary GSE QM originations continue to
represent a large and persistent share of the residential mortgage loan
market. Without changes to the General QM loan definition, a
significant number of Temporary GSE QMs would not be made or would be
made at higher prices when the Temporary GSE QM loan definition
expires. The affected loans would include loans for which the
consumer's DTI ratio is above 43 percent or the creditor's method of
documenting and verifying income or debt is incompatible with appendix
Q. Based on 2018 data, the Bureau 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. These loans are currently
originated as QMs due to the Temporary GSE QM loan definition but would
not be originated under the current General QM loan definition, and
might not be originated at all, if the Temporary GSE QM loan definition
were to expire.
On June 22, 2020, the Bureau released two proposed rules concerning
the ATR/QM Rule; these proposed rules were published in the Federal
Register on July 10, 2020. In one of the proposals--referred to in this
final rule as the Extension Proposal--the Bureau proposed to extend the
Temporary GSE QM loan definition until the effective date of a final
rule issued by the Bureau amending the General QM loan definition.\1\
The other proposal concerned the issues addressed in this final rule.
In that proposal--referred to in this final rule as the General QM
Proposal or as the proposal--the Bureau proposed amendments to the
General QM loan definition.\2\ In the General QM Proposal, the Bureau
proposed, among other things, to remove the General QM loan
definition's DTI limit and replace it with a limit based on the loan's
pricing. The Bureau stated that it expected such amendments would allow
most loans that currently could receive QM status under the Temporary
GSE QM loan definition to receive QM status under the General QM loan
definition if they are made after the

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Temporary GSE QM loan definition expires. Based on 2018 data, the
Bureau estimated in the General QM Proposal that 943,000 conventional
loans with DTI ratios above 43 percent would fall outside the QM
definitions if there are no changes to the General QM loan definition
before the expiration of the Temporary GSE QM loan definition but would
fall within the General QM loan definition if it were amended as the
Bureau proposed. The Bureau stated that, as a result, the General QM
Proposal would help to facilitate a smooth and orderly transition away
from the Temporary GSE QM loan definition.
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\1\ 85 FR 41448 (July 10, 2020).
\2\ 85 FR 41716 (July 10, 2020).
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On August 18, 2020, the Bureau issued a third proposal concerning
the ATR/QM Rule. In that proposal--referred to in this final rule as
the Seasoned QM Proposal--the Bureau proposed to create a new category
of QMs (Seasoned QMs) for first-lien, fixed-rate covered transactions
that meet certain performance requirements over a 36-month seasoning
period, are held in portfolio until the end of the seasoning period,
comply with general restrictions on product features and points and
fees, and meet certain underwriting requirements.\3\
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\3\ 85 FR 53568 (Aug. 28, 2020).
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In a final rule released on October 20, 2020 (the Extension Final
Rule), the Bureau amended Regulation Z to replace the January 10, 2021
sunset date of the Temporary GSE QM loan definition with a provision
stating that the Temporary GSE QM loan definition will be available
only for covered transactions for which the creditor receives the
consumer's application before the mandatory compliance date of final
amendments to the General QM loan definition in Regulation Z. The
Extension Final Rule did not amend the provision stating that the
Temporary GSE QM loan definition expires with respect to a GSE when
that GSE ceases to operate under conservatorship (the conservatorship
clause). The Extension Final Rule did not affect the QM definitions
that apply to Federal Housing Administration (FHA), U.S. Department of
Veterans Affairs (VA), U.S. Department of Agriculture (USDA), or Rural
Housing Service (RHS) loans.
In this final rule, the Bureau amends Regulation Z to replace the
existing General QM loan definition with its 43 percent DTI limit with
a price-based General QM loan definition. Under the final rule, a loan
meets the General QM loan definition in Sec. 1026.43(e)(2) only if the
annual percentage rate (APR) exceeds the average prime offer rate
(APOR) for a comparable transaction by less than 2.25 percentage points
as of the date the interest rate is set. The final rule provides higher
thresholds for loans with smaller loan amounts, for certain
manufactured housing loans, and for subordinate-lien transactions. The
final rule retains the existing product-feature and underwriting
requirements and limits on points and fees. Although the final rule
removes the 43 percent DTI limit from the General QM loan definition,
the final rule requires that the creditor consider 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, debt obligations, alimony, child support, 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 final rule removes appendix Q. To prevent
uncertainty that may result from appendix Q's removal, the final rule
clarifies the consider and verify requirements. The final rule
preserves the current threshold separating safe harbor from rebuttable
presumption QMs, under which a loan is a safe harbor QM if its APR does
not exceed APOR for a comparable transaction by 1.5 percentage points
or more as of the date the interest rate is set (or by 3.5 percentage
points or more for subordinate-lien transactions).
The effective date of this final rule is March 1, 2021, and the
mandatory compliance date is July 1, 2021. Creditors will have the
option of complying with the revised General QM loan definition for
covered transactions for which creditors receive an application on or
after March 1, 2021, and before July 1, 2021. The revised regulations
apply to covered transactions for which creditors receive an
application on or after July 1, 2021.

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) \4\ amended the Truth in Lending Act (TILA) \5\ to
establish, among other things, ability-to-repay (ATR) requirements in
connection with the origination of most residential mortgage loans.\6\
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.'' \7\ 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.\8\
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\4\ Dodd-Frank Wall Street Reform and Consumer Protection Act,
Public Law 111-203, 124 Stat. 1376 (2010).
\5\ 15 U.S.C. 1601 et seq.
\6\ Dodd-Frank Act sections 1411-12, 1414, 124 Stat. 2142-48,
2149; 15 U.S.C. 1639c.
\7\ 15 U.S.C. 1639b(a)(2).
\8\ 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 resources other than equity in the dwelling or real
property that secures repayment of the loan.\9\ A creditor, however,
may not be certain whether its ATR determination is reasonable in a
particular case.
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\9\ 15 U.S.C. 1639c(a)(3).
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TILA addresses this potential uncertainty by defining a category of
loans--called QMs--for which a creditor ``may presume that the loan has
met'' the ATR requirements.\10\ The statute generally defines a QM to
mean any residential mortgage loan for which:
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\10\ 15 U.S.C. 1639c(b)(1).
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The loan does not have 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

[[Page 86310]]

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.\11\
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\11\ 15 U.S.C. 1639c(b)(2)(A).
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B. The ATR/QM Rule

In January 2013, the Bureau issued a final rule amending Regulation
Z to implement TILA's ATR requirements (January 2013 Final Rule).\12\
The January 2013 Final Rule became effective on January 10, 2014, and
the Bureau has amended it several times since January 2013.\13\ This
final rule refers to the January 2013 Final Rule and later amendments
to it collectively as the ATR/QM Rule or the Rule. The ATR/QM Rule
implements the statutory ATR provisions discussed above and defines
several categories of QMs.\14\
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\12\ 78 FR 6408 (Jan. 30, 2013).
\13\ 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); 85 FR 67938 (Oct.
26, 2020).
\14\ 12 CFR 1026.43(c), (e).
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1. General QMs
One category of QMs defined by the ATR/QM Rule consists of General
QMs.\15\ A loan is a General QM if:
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\15\ 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 5 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). That 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.
That 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; \16\
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\16\ 12 CFR 1026.43(e)(2)(i) through (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; \17\
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\17\ 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; \18\ and
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\18\ 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.\19\
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\19\ 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 QMs. The standards in appendix Q were
adapted from guidelines maintained by FHA when the January 2013 Final
Rule was issued.\20\ 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.\21\
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\20\ 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).
\21\ 12 CFR 1026, appendix Q.
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2. Temporary GSE QMs
A second, temporary category of QMs defined by the ATR/QM Rule,
Temporary GSE QMs, consists of mortgages that (1) comply with the ATR/
QM Rule's prohibitions on certain loan features and its limitations on
points and fees \22\ and (2) are eligible to be purchased or guaranteed
by either GSE while under the conservatorship of the FHFA.\23\ Unlike
for General QMs, Regulation Z does not prescribe a DTI limit for
Temporary GSE QMs. Thus, a loan can qualify as a Temporary GSE QM 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, and
the loan satisfies the other Temporary GSE QM requirements. In
addition, income, debt, and DTI ratios for such loans generally are
verified and calculated using GSE standards, rather than appendix Q.
The January 2013 Final Rule provided that the Temporary GSE QM loan
definition--also known as the GSE Patch--would expire with respect to
each GSE when that GSE ceases to operate under conservatorship or on
January 10, 2021, whichever comes first.\24\
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\22\ 12 CFR 1026.43(e)(2)(i) through (iii).
\23\ 12 CFR 1026.43(e)(4).
\24\ 12 CFR 1026.43(e)(4)(iii)(B). The ATR/QM Rule created
several additional categories of QMs. 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) through (E). This temporary category of QMs 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 QMs 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 Apr. 1,
2016).
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In the January 2013 Final Rule, the Bureau explained why it created
the Temporary GSE QM loan definition. 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.\25\ However, the Bureau stated that, as DTI ratios increase,
the general ATR procedures, rather than the QM framework, are ``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.'' \26\
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\25\ 78 FR 6408, 6527 (Jan. 30, 2013).
\26\ 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.\27\ The Bureau believed that it was appropriate
to consider for a period of time, and while the GSEs were under Federal
conservatorship, that GSE-eligible loans

[[Page 86311]]

were originated with an appropriate assessment of the consumer's
ability to repay and therefore warranted being treated as QMs.\28\ The
Bureau believed in 2013 that this temporary category of QMs 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.\29\
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\27\ Id. at 6533-34.
\28\ Id. at 6534.
\29\ 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.'' \30\ 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.\31\ 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.\32\ 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 QMs
would decrease, and the market would shift toward General QMs and non-
QM loans above a 43 percent DTI ratio.\33\ 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 ATR/QM Rule's effective
date, and the assessment would provide an opportunity to analyze the
Temporary GSE QM loan definition.\34\
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\30\ Id. at 6534.
\31\ Id. at 6536.
\32\ Id. at 6534.
\33\ Id.
\34\ Id.
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3. Presumption of Compliance for QMs
In the January 2013 Final Rule, the Bureau considered whether QMs
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 receives a safe harbor or a rebuttable presumption
that it has complied with the ATR requirements.\35\ The Bureau noted
that its analysis of the statutory construction and policy implications
demonstrated that there are sound reasons for adopting either
interpretation.\36\ 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.\37\ 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.'' \38\
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\35\ Id. at 6511.
\36\ Id. at 6507.
\37\ Id. at 6511.
\38\ Id. at 6514.
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Under the ATR/QM Rule, a creditor that makes a QM is protected from
liability presumptively or conclusively, depending on whether the loan
is ``higher-priced.'' The ATR/QM 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.\39\ A
creditor that makes a QM that is not ``higher-priced'' is entitled to a
conclusive presumption that it has complied with the ATR/QM Rule--i.e.,
the creditor receives a safe harbor from liability.\40\ A creditor that
makes a loan that meets the standards for a QM but is ``higher-priced''
is entitled to a rebuttable presumption that it has complied with the
ATR/QM Rule.\41\
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\39\ 12 CFR 1026.43(b)(4).
\40\ 12 CFR 1026.43(e)(1)(i).
\41\ 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.\42\ 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.\43\ 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.\44\ 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.\45\ The
Bureau concluded that these factors warrant imposing heightened
standards for higher-priced loans.\46\ 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.\47\ The Bureau concluded that if a loan met the product
and underwriting requirements for QMs and was not a higher-priced loan,
there are sufficient grounds for concluding that the creditor satisfied
the ATR requirements.\48\ The Bureau noted that the conclusive
presumption may reduce uncertainty and litigation risk and may promote
enhanced competition in the prime market.\49\ 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.\50\
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\42\ 78 FR 6408 at 6506, 6510-14 (Jan. 30, 2013).
\43\ Id. at 6408.
\44\ Id. at 6511.
\45\ Id.
\46\ Id.
\47\ Id.
\48\ Id.
\49\ Id.
\50\ 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.\51\ 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.\52\ 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.\53\ The
statute applied generally to closed-end mortgage credit but excluded

[[Page 86312]]

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 8 percent of the total loan amount or a dollar threshold.\54\
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.\55\
The Board implemented the HOEPA amendments at Sec. Sec. 226.31,
226.32, and 226.33 \56\ of Regulation Z (12 CFR part 226).\57\
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\51\ Id. at 6413-14, 6510-11.
\52\ Riegle Community Development and Regulatory Improvement Act
of 1994, Public Law 103-325, 108 Stat. 2160 (1994).
\53\ 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.''
\54\ The Dodd-Frank Act adjusted the baseline for the APR
comparison, lowered the points-and-fees threshold, and added a
prepayment trigger.
\55\ 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.
\56\ Subsequently renumbered as sections 1026.31, 1026.32, and
1026.33 of Regulation Z.
\57\ 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 protections concerning a consumer's ability to repay and
prepayment penalties to a new category of ``higher-priced mortgage
loans'' (HPMLs) \58\ 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 its conclusion that the revisions were
necessary to prevent unfair and deceptive acts or practices in
connection with mortgage loans.\59\ The Board concluded that a
prohibition on making individual loans without regard to repayment
ability was necessary to ensure a remedy for consumers who are given
unaffordable loans and to deter irresponsible lending. 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.\60\ 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 to repay the loan.
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\58\ Under the Board's 2008 HOEPA Final Rule, an HPML 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 an HPML 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).
\59\ 73 FR 44522 (July 30, 2008).
\60\ See 12 CFR 1026.34(a)(4)(iii), (iv).
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C. The Bureau's Assessment of the ATR/QM 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.\61\ In June 2017, the Bureau published a request for information
in connection with its assessment of the ATR/QM Rule (Assessment
RFI).\62\ These comments are summarized in general terms in part III
below.
---------------------------------------------------------------------------

\61\ 12 U.S.C. 5512(d).
\62\ 82 FR 25246 (June 1, 2017).
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In January 2019, the Bureau published its ATR/QM Rule Assessment
Report.\63\ The Assessment 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 originations.
---------------------------------------------------------------------------

\63\ See generally Bureau of Consumer Fin. Prot., Ability to
Repay and Qualified Mortgage Assessment Report (Jan. 2019), https://files.consumerfinance.gov/f/documents/cfpb_ability-to-repay-qualified-mortgage_assessment-report.pdf (Assessment Report).
---------------------------------------------------------------------------

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 the Bureau used as
a proxy for measuring consumer repayment ability at consummation across
a wide pool of loans.\64\ The Assessment Report also found that the
ATR/QM Rule did not eliminate access to credit for consumers with DTI
ratios above 43 percent who qualify for Temporary GSE QMs.\65\ On the
other hand, based on application-level data obtained from nine large
lenders, the Assessment Report found that the ATR/QM Rule eliminated
between 63 and 70 percent of home purchase loans with DTI ratios above
43 percent that were not Temporary GSE QMs.\66\
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\64\ See, e.g., id. at 83-84, 100-05.
\65\ See, e.g., id. at 10, 194-96.
\66\ See, e.g., id. at 10-11, 117, 131-47.
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One main finding about Temporary GSE QMs was that such loans
continued to represent a ``large and persistent'' share of originations
in the conforming segment of the mortgage market.\67\ 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 ATR/QM Rule's effective date, reaching
71 percent in 2017.\68\ The Assessment Report noted that, at least for
loans intended for sale in the secondary market, creditors generally
offer a Temporary GSE QM even if a General QM could be originated.\69\
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\67\ 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.
\68\ Id. at 191.
\69\ Id. at 192.
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The continued prevalence of Temporary GSE QM originations is
contrary to the Bureau's expectation at the time it issued the ATR/QM
Rule in 2013.\70\ The Assessment Report discussed several possible
reasons for the continued prevalence of Temporary GSE QM originations.
The Assessment 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 QMs instead of originating
loans

[[Page 86313]]

under the General QM loan definition.\71\ 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.\72\
---------------------------------------------------------------------------

\70\ Id. at 13, 190, 238.
\71\ Id. at 193.
\72\ Id. at 193-94.
---------------------------------------------------------------------------

The Assessment Report noted that a second possible reason for the
continued prevalence of Temporary GSE QMs 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.\73\ 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.\74\ 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.\75\ The available data
suggest that the share of loans with DTI ratios above 43 percent has
declined in the non-GSE market relative to the GSE market.\76\ The non-
GSE market has constricted even with respect to highly qualified
consumers; those with higher incomes and higher credit scores represent
a greater share of denials.\77\
---------------------------------------------------------------------------

\73\ Id. at 194.
\74\ Id.
\75\ Id. at 194-95.
\76\ Id. at 119-20.
\77\ Id. at 153.
---------------------------------------------------------------------------

The Assessment Report found that a third possible reason for the
persistence of Temporary GSE QMs is the structure of the secondary
market.\78\ If creditors adhere to the GSEs' guidelines, they gain
access to a robust, highly liquid secondary market.\79\ In contrast,
the Assessment Report noted that while private market securitizations
had grown somewhat in recent years, their volume was still a fraction
of their pre-crisis levels.\80\ There were less than $20 billion in new
origination PLS issuances in 2017, compared with $1 trillion in
2005,\81\ and only 21 percent of new origination PLS issuances in 2017
were non-QM issuances.\82\ 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 include a small share of non-QM loans.\83\ The Assessment
Report noted that the Temporary GSE QM loan definition may itself be
inhibiting the growth of the non-QM market.\84\ However, the Assessment
Report also noted 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-QM loan (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.\85\
---------------------------------------------------------------------------

\78\ Id. at 196.
\79\ Id.
\80\ Id.
\81\ Id.
\82\ Id. at 197.
\83\ Id. at 196.
\84\ Id. at 205.
\85\ Id.
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D. Effects of the COVID-19 Pandemic on Mortgage Markets

The COVID-19 pandemic has had a significant effect on the U.S.
economy. In the early months of the pandemic, economic activity
contracted, millions of workers became unemployed, and mortgage markets
were affected. In recent months, the unemployment rate has declined and
there has been a significant rebound in mortgage-origination activity,
buoyed by historically low interest rates and by an increasingly large
share of government and GSE-backed loans. However, origination activity
outside the government and GSE-backed origination channels has
declined, and mortgage-credit availability for many consumers--
including those who would be dependent on the non-QM market for
financing--remains tight. The pandemic's impact on both the secondary
market for new originations and on the servicing of existing mortgages
is described below.
1. Secondary Market Impacts and Implications for Mortgage Origination
Markets
The early economic disruptions associated with the COVID-19
pandemic restricted the flow of credit in the U.S. economy,
particularly as uncertainty rose in mid-March 2020, and investors moved
rapidly towards cash and government securities.\86\ The lack of
investor demand to purchase mortgages, combined with a large supply of
agency mortgage-backed securities (MBS) entering the market,\87\
resulted in widening spreads between the rates on a 10-year Treasury
note and mortgage interest rates.\88\ This dynamic made it difficult
for creditors to originate loans, as many creditors rely on the ability
to profitably sell loans in 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.
After the actions taken by the Board in March 2020 to 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,'' \89\ market conditions have improved
substantially.\90\ This has helped to tighten interest rate spreads,
which stabilizes mortgage rates, resulting in a decline in mortgage
rates since the Board's intervention and in a significant increase in
refinance activity.
---------------------------------------------------------------------------

\86\ 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).
\87\ Agency MBS are backed by loans guaranteed by Fannie Mae,
Freddie Mac, and the Government National Mortgage Association
(Ginnie Mae).
\88\ Laurie Goodman et al., Urban Inst., Housing Finance at a
Glance, Monthly Chartbook (Mar. 26, 2020), https://www.urban.org/sites/default/files/publication/101926/housing-finance-at-a-glance-a-monthly-chartbook-march-2020.pdf.
\89\ 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.
\90\ 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).
---------------------------------------------------------------------------

However, non-agency MBS \91\ are generally perceived by investors
as riskier than agency MBS. As a result, private capital has remained
tight and non-agency mortgage credit, including non-QM lending, has
declined. 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.\92\ Nearly all major non-QM creditors ceased
making loans in March and April 2020. Beginning in May 2020, issuers of
non-agency MBS began to test the market with deals collateralized by
non-QM loans largely originated prior to the pandemic, and investor
demand for these securitizations has begun to recover. However, no
securitization has been completed that is predominantly collateralized
by non-QM loans

[[Page 86314]]

originated since the pandemic began.\93\ Many 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
tighter underwriting requirements.\94\ Prime jumbo financing also
dropped nearly 22 percent in the first quarter of 2020.\95\ Banks
increased interest rates and narrowed the product offerings such that
only consumers with pristine credit profiles were eligible, as these
loans must be held in portfolio when the secondary market for non-
agency MBS contracts, and volume remains flat.\96\
---------------------------------------------------------------------------

\91\ Non-agency MBS are not backed by loans guaranteed by Fannie
Mae, Freddie Mac or Ginnie Mae. This includes securities
collateralized by non-QM loans.
\92\ Brandon Ivey, Non-Agency MBS Issuance Slowed in First
Quarter, Inside Mortg. Fin. (Apr. 3, 2020), https://www.insidemortgagefinance.com/articles/217623-non-agency-mbs-issuance-slowed-in-first-quarter.
\93\ Brandon Ivey, Non-Agency MBS Issuance Slow in Mid-August,
Inside Mortg. Fin. (Aug. 21, 2020), https://www.insidemortgagefinance.com/articles/218973-non-agency-mbs-issuance-slow-in-mid-august.
\94\ Brandon Ivey, Expanded-Credit Lending Inches Up in Third
Quarter, Inside Mortg. Fin. (Nov. 25, 2020), https://www.insidemortgagefinance.com/articles/219861-expanded-credit-lending-ticks-up-in-3q-amid-slow-recovery.
\95\ Brandon Ivey, Jumbo Originations Drop Nearly 22% in First
Quarter, Inside Mortg. Fin. (May 15, 2020) https://www.insidemortgagefinance.com/articles/218028-jumbo-originations-drop-nearly-22-in-first-quarter.
\96\ Brandon Ivey, Jumbo Lending Flat in 3Q, Wide Variation
Among Lenders, Inside Mortg. Fin. (Nov. 13, 2020) https://www.insidemortgagefinance.com/articles/219738-jumbo-lending-level-in-3q-wide-variation-among-lenders.
---------------------------------------------------------------------------

Despite the recent gains in both the agency and the non-agency
mortgage sectors, the GSEs continue to play a dominant role in the
market recovery, with the GSE share of first-lien mortgage originations
at 61.9 percent in the third quarter of 2020, up from 45.3 percent in
the third quarter of 2019. The FHA and VA share declined slightly to
17.4 percent from 19.5 percent a year prior, according to an analysis
by the Urban Institute. Portfolio lending declined to 19.6 percent in
the third quarter of 2020, down from 33.3 percent in the third quarter
of 2019, and private label securitizations declined to 1 percent from
1.8 percent a year prior.\97\
---------------------------------------------------------------------------

\97\ Laurie Goodman et al., Urban Inst., Housing Finance at a
Glance, Monthly Chartbook, Inside Mortg. Fin. (Nov. 24, 2020),
https://www.urban.org/sites/default/files/publication/103273/housing-finance-at-a-glance-a-monthly-chartbook-november-2020_0.pdf.
---------------------------------------------------------------------------

2. Servicing Market Impacts and Implications for Origination Markets
In addition to the direct impact on origination volume and
composition, the pandemic's impact on the mortgage servicing market has
downstream effects on mortgage originations as many of the same
entities both originate and service mortgages. 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 into law the Coronavirus Aid, Relief, and Economic
Security Act (CARES Act) \98\ in March 2020. The CARES Act provides
additional protections for borrowers with federally backed mortgages,
such as those whose mortgages are purchased or securitized by a GSE or
insured or guaranteed by the FHA, VA or USDA. The CARES Act mandated a
60-day foreclosure moratorium for such mortgages, which has since been
extended by the agencies until the end of 2020 or January 31, 2021 in
the case of the GSEs.\99\ The CARES Act also allows borrowers with
federally backed mortgages 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.
---------------------------------------------------------------------------

\98\ Public Law 116-136, 134 Stat. 281 (2020) (includes loans
backed by HUD, USDA, VA, Fannie Mae, and Freddie Mac).
\99\ See, e.g., Fed. Hous. Fin. Agency, FHFA Extends Foreclosure
and REO Eviction Moratoriums (Dec. 2, 2020), https://www.fhfa.gov/Media/PublicAffairs/Pages/FHFA-Extends-Foreclosure-and-REO-Eviction-Moratoriums-12022020.aspx; Press Release, U.S. Dep't of Hous. &
Urban Dev., FHA Extends Foreclosure And Eviction Moratorium For
Homeowners Through Year End (Aug. 27, 2020), https://www.hud.gov/press/press_releases_media_advisories/HUD_No_20_134; Veterans
Benefits Admin., Extended Foreclosure Moratorium for Borrowers
Affected by COVID-19 (Aug. 24, 2020), https://www.benefits.va.gov/HOMELOANS/documents/circulars/26-20-30.pdf; Rural Dev., U.S. Dep't
of Agric., Extension of Foreclosure and Eviction Moratorium for
Single Family Housing Direct Loans (Aug. 28, 2020), https://content.govdelivery.com/accounts/USDARD/bulletins/29c3a9e.
---------------------------------------------------------------------------

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.\100\ Servicers also remain obligated to make escrowed
real estate tax and insurance payments to local taxing authorities and
insurance companies. While servicers are required to hold liquid
reserves to cover anticipated advances, early in the pandemic there
were significant concerns that higher-than-expected forbearance rates
over an extended period of time could lead to liquidity shortages,
particularly among many non-bank servicers. However, while forbearance
rates remain elevated at 5.54 percent for the week ending November 22,
2020, they have decreased since reaching their high of 8.55 percent on
June 7, 2020.\101\
---------------------------------------------------------------------------

\100\ 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. Fed. Hous. Fin. Agency,
FHFA Addresses Servicer Liquidity Concerns, Announces Four Month
Advance Obligation Limit for Loans in Forbearance (Apr. 21, 2020),
https://www.fhfa.gov/Media/PublicAffairs/Pages/FHFA-Addresses-Servicer-Liquidity-Concerns-Announces-Four-Month-Advance-Obligation-Limit-for-Loans-in-Forbearance.aspx.
\101\ Press Release, Mortg. Bankers Ass'n, Share of Mortgage
Loans in Forbearance Increases to 5.54% (Dec. 1, 2020), https://www.mba.org/2020-press-releases/december/share-of-mortgage-loans-in-forbearance-increases-to-554-percent.
---------------------------------------------------------------------------

Because many mortgage servicers also originate the loans they
service, many creditors, as well as several warehouse providers,\102\
initially responded to the risk of elevated forbearances and higher-
than-expected monthly advances by imposing credit overlays--i.e.,
additional underwriting standards--for new originations. These new
underwriting standards include more stringent requirements for non-QM,
jumbo, and government loans.\103\ An ``adverse market fee'' of 50 basis
points on most refinances became effective for new originations
delivered to the GSEs on or after December 1, 2020, to cover projected
losses due to forbearances, the foreclosure moratoriums, and other
default servicing expenses.\104\ However, due to refinance origination
profits resulting from historically low interest rates, the leveling
off in forbearance rates, and actions taken at the Federal level to
alleviate servicer liquidity pressure,\105\ concerns over non-bank
liquidity and related credit overlays have begun to ease, though
Federal

[[Page 86315]]

regulators continue to monitor the situation.\106\ While the non-QM
market has begun to recover, it is unclear how quickly non-banks that
originate non-QM loans will fully return to their pre-pandemic level of
operations and loan production.
---------------------------------------------------------------------------

\102\ Warehouse providers are creditors that provide financing
to mortgage originators and servicers to fund and service loans.
\103\ Maria Volkova, FHA/VA Lenders Raise Credit Score
Requirements, Inside Mortg. Fin. (Apr. 3, 2020), https://www.insidemortgagefinance.com/articles/217636-fhava-lenders-raise-fico-credit-score-requirements.
\104\ Press Release, Fed. Hous. Fin. Agency, Adverse Market
Refinance Fee Implementation now December 1 (Aug. 25, 2020), https://www.fhfa.gov/Media/PublicAffairs/Pages/Adverse-Market-Refinance-Fee-Implementation-Now-December-1.aspx.
\105\ 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. Ginnie Mae, All Participant
Memorandum (APM) 20-03: Availability of Pass-Through Assistance
Program for Participants in Ginnie Mae's Single-Family MBS Program
(Apr. 10, 2020), https://www.ginniemae.gov/issuers/program_guidelines/Pages/mbsguideapmslibdisppage.aspx?ParamID=105.
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. Press Release, Ginnie
Mae, Ginnie Mae approves private market servicer liquidity facility
(Apr. 7, 2020), https://www.ginniemae.gov/newsroom/Pages/PressReleaseDispPage.aspx?ParamID=194.
\106\ Brandon Ivey, Non-QM Lenders Regaining Footing, Inside
Mortg. Fin. (July 24, 2020), https://www.insidemortgagefinance.com/articles/218696-non-qm-lenders-regaining-footing-with-a-positive-outlook (on file).
---------------------------------------------------------------------------

III. Summary of the Rulemaking Process

The Bureau has solicited and received substantial public and
stakeholder input on issues related to this final rule. In addition to
the Bureau's discussions with and communications from industry
stakeholders, consumer advocates, other Federal agencies,\107\ 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 Bureau released the
Extension Proposal and the General QM Proposal on June 22, 2020, and
the Seasoned QM Proposal on August 18, 2020. The Bureau issued the
Extension Final Rule on October 20, 2020.
---------------------------------------------------------------------------

\107\ 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, HUD, and the Department of the
Treasury.
---------------------------------------------------------------------------

A. The Requests for Information

In June 2017, the Bureau published the Assessment RFI to gather
information for its assessment of the ATR/QM Rule.\108\ In response to
the Assessment RFI, the Bureau received approximately 480 comments from
creditors, industry groups, consumer advocates, and individuals.\109\
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. Some commenters
recommended making the definition permanent or extending it for various
periods of time. Other comments stated that the Temporary GSE QM loan
definition should be eliminated or permitted to expire.
---------------------------------------------------------------------------

\108\ 82 FR 25246 (June 1, 2017).
\109\ See Assessment Report, supra note 63, 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.\110\ As part of
the call for evidence, the Bureau published requests for information
relating to, among other things, the Bureau's rulemaking process,\111\
the Bureau's adopted regulations and new rulemaking authorities,\112\
and the Bureau's inherited regulations and inherited rulemaking
authorities.\113\ In response to the call for evidence, the Bureau
received comments on the ATR/QM Rule from stakeholders, including
consumer advocates 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.
---------------------------------------------------------------------------

\110\ 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).
\111\ 83 FR 10437 (Mar. 9, 2018).
\112\ 83 FR 12286 (Mar. 21, 2018).
\113\ 83 FR 12881 (Mar. 26, 2018).
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B. The ANPR

On July 25, 2019, the Bureau issued the 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, including whether and how the Bureau should revise the DTI
limit in the General QM loan definition; whether the Bureau should
supplement or replace the DTI limit with another method for directly
measuring a consumer's personal finances; whether the Bureau should
revise appendix Q or replace it with other standards for calculating
and verifying a consumer's debt and income; and whether, instead of a
DTI limit, the Bureau should adopt standards that do not directly
measure a consumer's personal finances.\114\ The Bureau requested
comment on how much time industry would need to change its practices in
response to any changes the Bureau might make to the General QM loan
definition.\115\ The Bureau received approximately 85 comments on the
ANPR from businesses in the mortgage industry (including creditors),
consumer advocates, elected officials, individuals, and research
centers. The General QM Proposal provided a summary of these comments,
and the Bureau considered these comments in developing the proposal.
---------------------------------------------------------------------------

\114\ 84 FR 37155, 37160-62 (July 31, 2019).
\115\ 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.
---------------------------------------------------------------------------

C. The Extension Proposal, General QM Proposal, and Seasoned QM
Proposal

The Bureau issued the Extension Proposal and the General QM
Proposal on June 22, 2020, and those proposals were published in the
Federal Register on July 10, 2020. In the Extension Proposal, the
Bureau proposed to replace the January 10, 2021 sunset date of the
Temporary GSE QM loan definition with a provision that extends the
Temporary GSE QM loan definition until the effective date of final
amendments to the General QM loan definition in Regulation Z (i.e., a
final rule relating to the General QM Proposal). The Bureau did not
propose to amend the conservatorship clause. The comment period for the
Extension Proposal ended on August 10, 2020.
In the General QM Proposal, the Bureau proposed, among other
things, to remove the General QM loan definition's DTI limit and
replace it with a limit based on the loan's pricing. Under the
proposal, a loan would have met the General QM loan definition in Sec.
1026.43(e)(2) only if the APR exceeds APOR for a comparable transaction
by less than 2 percentage points as of the date the interest rate is
set. The Bureau proposed higher thresholds for loans with smaller loan
amounts and subordinate-lien transactions. The Bureau also proposed to
retain the existing product-feature and underwriting requirements and
limits on points and fees. Although the Bureau proposed to remove the
43 percent DTI limit from the General QM loan definition, the General
QM Proposal would have required that the creditor consider the
consumer's DTI ratio or

[[Page 86316]]

residual income, income or assets other than the value of the dwelling,
and debts and verify the consumer's income or assets other than the
value of the dwelling and the consumer's debts. The Bureau proposed to
remove appendix Q. To mitigate the uncertainty that may result from
appendix Q's removal, the General QM Proposal would have clarified the
consider and verify requirements. The Bureau proposed to preserve the
current threshold separating safe harbor from rebuttable presumption
QMs, under which a loan is a safe harbor QM if its APR does not exceed
APOR for a comparable transaction by 1.5 percentage points or more as
of the date the interest rate is set (or by 3.5 percentage points or
more for subordinate-lien transactions).
Although the Bureau proposed to remove the 43 percent DTI limit and
adopt a price-based approach for the General QM loan definition, the
Bureau also requested comment on two alternative approaches: (1)
Retaining the DTI limit and increasing it to a Specific threshold
between 45 percent and 48 percent or (2) using a hybrid approach
involving both pricing and a DTI limit, such as applying a DTI limit to
loans that are above specified rate spreads. Under these alternative
approaches, creditors would not have been required to verify debt and
income using appendix Q.
The Bureau stated in the General QM Proposal that the proposed
amendments would allow most loans that currently could receive QM
status under the Temporary GSE QM loan definition to receive QM status
under the General QM loan definition.\116\ The Bureau stated that, as a
result, the General QM Proposal would help to facilitate a smooth and
orderly transition away from the Temporary GSE QM loan definition. The
Bureau proposed that the effective date of a final rule relating to the
General QM Proposal would be six months after publication of the final
rule in the Federal Register. The revised regulations would have
applied to covered transactions for which creditors receive an
application on or after this effective date. The comment period for the
General QM Proposal ended on September 8, 2020. The Bureau received
approximately 75 comments in response to the General QM Proposal from
industry, consumer advocates, and others. The Bureau summarizes and
responds to these comments in parts V through VIII below.
---------------------------------------------------------------------------

\116\ Based on 2018 data, the Bureau estimated in the General QM
Proposal that 943,000 High-DTI conventional loans would fall outside
the QM definitions if there are no changes to the General QM loan
definition prior to the expiration of the Temporary GSE QM loan
definition but would fall within the General QM loan definition if
amended as the Bureau proposed.
---------------------------------------------------------------------------

On August 18, 2020, the Bureau issued the Seasoned QM Proposal,
which was published in the Federal Register on August 28, 2020. The
Bureau proposed to create a new category of QMs for first-lien, fixed-
rate covered transactions that have met certain performance
requirements over a 36-month seasoning period, are held in portfolio
until the end of the seasoning period, comply with general restrictions
on product features and points and fees, and meet certain underwriting
requirements.\117\ The Bureau stated that the primary objective of the
Seasoned QM Proposal was to ensure access to responsible, affordable
mortgage credit by adding a Seasoned QM definition to the existing QM
definitions. The Bureau proposed that a final rule relating to the
Seasoned QM Proposal would take effect on the same date as a final rule
relating to the General QM Proposal. Under the Seasoned QM Proposal--as
under the General QM Proposal--the revised regulations would apply to
covered transactions for which creditors receive an application on or
after this effective date. Thus, due to the 36-month seasoning period,
no loan would be eligible to become a Seasoned QM until at least 36
months after the effective date of a final rule relating to the
Seasoned QM Proposal. The comment period for the Seasoned QM Proposal
ended on October 1, 2020.\118\ The Bureau is issuing the Seasoned QM
Final Rule concurrently with this final rule.
---------------------------------------------------------------------------

\117\ 85 FR 53568 (Aug. 28, 2020).
\118\ 85 FR 60096 (Sept. 24, 2020).
---------------------------------------------------------------------------

D. The Extension Final Rule

The Bureau issued the Extension Final Rule on October 20, 2020. It
was published in the Federal Register on October 26, 2020. The
Extension Final Rule amended Regulation Z to replace the January 10,
2021 sunset date of the Temporary GSE QM loan definition with a
provision stating that the Temporary GSE QM loan definition will be
available only for covered transactions for which the creditor receives
the consumer's application before the mandatory compliance date of
final amendments to the General QM loan definition in Regulation Z. The
Extension Final Rule did not amend the conservatorship clause.\119\
---------------------------------------------------------------------------

\119\ The Extension Final Rule also did not affect the QM
definitions that apply to FHA, VA, USDA, or RHS loans.
---------------------------------------------------------------------------

IV. Legal Authority

The Bureau is issuing this final rule 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.'' \120\ 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.\121\
---------------------------------------------------------------------------

\120\ 12 U.S.C. 5581(a)(1)(A).
\121\ 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.\122\ 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.'' \123\
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.\124\ As
discussed in the section-by-section analysis below, the Bureau is
issuing certain provisions of this final rule pursuant to its
rulemaking, adjustment,

[[Page 86317]]

and exception authority under TILA section 105(a).
---------------------------------------------------------------------------

\122\ 15 U.S.C. 1604(a).
\123\ 15 U.S.C. 1601(a).
\124\ 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).\125\ As discussed in the section-by-section analysis
below, the Bureau is issuing certain provisions of this final rule
pursuant to its authority under TILA section 129C(b)(2)(A)(vi).
---------------------------------------------------------------------------

\125\ 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 TILA sections 129B and 129C,
to prevent circumvention or evasion thereof, or to facilitate
compliance with such sections.\126\ In addition, TILA section
129C(b)(3)(A) directs the Bureau to prescribe regulations to carry out
the purposes of section 129C.\127\ As discussed in the section-by-
section analysis below, the Bureau is issuing certain provisions of
this final rule pursuant to its authority under TILA section
129C(b)(3)(B)(i).
---------------------------------------------------------------------------

\126\ 15 U.S.C. 1639c(b)(3)(B)(i).
\127\ 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.\128\ TILA and
title X of the Dodd-Frank Act are Federal consumer financial laws.
Accordingly, the Bureau is exercising 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.
---------------------------------------------------------------------------

\128\ 12 U.S.C. 5512(b)(1).
---------------------------------------------------------------------------

V. Why the Bureau Is Issuing This Final Rule

The Bureau concludes that this final rule's bright-line pricing
thresholds strike the best balance between ensuring consumers' ability
to repay and ensuring access to responsible, affordable mortgage
credit. The Bureau is amending the General QM loan definition because
retaining the existing 43 percent DTI limit would reduce the size of
the QM market and likely would lead to a significant reduction in
access to responsible, affordable credit when the Temporary GSE QM
definition expires. The Bureau continues to believe that General QM
status should be determined by a simple, bright-line rule to provide
certainty of QM status, and the Bureau concludes that pricing achieves
this objective. Furthermore, the Bureau concludes that pricing, rather
than a DTI limit, is a more appropriate standard for the General QM
loan definition. While not a direct measure of financial capacity, loan
pricing is strongly correlated with early delinquency rates, which the
Bureau uses as a proxy for repayment ability. The Bureau concludes that
conditioning QM status on a specific DTI limit would likely impair
access to credit for some consumers for whom it is appropriate to
presume their ability to repay their loans at consummation. Although a
pricing limit that is set too low could also have this effect, compared
to DTI, loan pricing is a more flexible metric because it can
incorporate other factors that may also be relevant to determining
ability to repay, including credit scores, cash reserves, or residual
income. The Bureau concludes that a price-based General QM loan
definition is better than the alternatives 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 loan's price is not a direct measure of ability to repay, but the
Bureau concludes that it is an effective indirect measure of ability to
repay. The final rule amends Regulation Z to provide that 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 2.25
percentage points as of the date the interest rate is set. The Bureau
is finalizing a threshold of 2.25 percentage points, an increase from
the proposed threshold of 2 percentage points. The Bureau concludes
that, for most first-lien covered transactions, a 2.25-percentage-point
pricing threshold strikes the best balance between ensuring consumers'
ability to repay and ensuring continued access to responsible,
affordable mortgage credit. The final rule provides higher thresholds
for loans with smaller loan amounts and for subordinate-lien
transactions. As described below, the final rule provides an increase
from the proposed thresholds for some small manufactured housing loans
to ensure consumers have continued access to responsible, affordable
credit.
Consistent with the proposal, the Bureau is not amending the
existing General QM loan product-feature and underwriting requirements
and limits on points and fees. Under the final rule, creditors are
required to consider the consumer's DTI ratio or residual income,
income or assets other than the value of the dwelling, and debts and
verify the consumer's income or assets other than the value of the
dwelling and the consumer's debts. The final rule removes the 43
percent DTI ratio limit and appendix Q and clarifies the consider and
verify requirements for purposes of the General QM loan definition.
The Bureau is preserving 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).

A. Overview of the Existing General QM Loan Definition and the DTI
Requirement

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

[[Page 86318]]

determines relevant and consistent with the purposes described in TILA
section 129C(b)(3)(B)(i).
In 2011, the Board proposed two alternative approaches to the
General QM loan definition to implement the statutory QM
requirements.\129\ Proposed Alternative 1 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.\130\ Proposed Alternative 2 would have included
the statutory QM requirements and additional factors from the general
ATR standard, including a requirement to consider and verify the
consumer's DTI ratio or residual income.\131\
---------------------------------------------------------------------------

\129\ 76 FR 27390, 27453 (May 11, 2011) (2011 ATR/QM Proposal).
\130\ Id. at 27453.
\131\ Id.
---------------------------------------------------------------------------

In the January 2013 Final Rule, the Bureau adopted the General QM
loan definition in Sec. 1026.43(e)(2). The existing General QM loan
definition includes the statutory QM factors and additional factors
from the general ATR standard. The existing General QM loan definition
also contains a DTI limit of 43 percent. In adopting this approach in
the January 2013 Final Rule, the Bureau explained that it believed the
General QM loan definition 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.\132\
---------------------------------------------------------------------------

\132\ 78 FR 6408, 6516 (Jan. 30, 2013).
---------------------------------------------------------------------------

With respect to DTI, the January 2013 Final Rule 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.\133\ 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.\134\
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 and under future changed circumstances, such as
increases in payments for adjustable-rate mortgages (ARMs), future
reductions in income, and unanticipated expenses and new debts.\135\
---------------------------------------------------------------------------

\133\ Id. at 6526-27.
\134\ Id. at 6526.
\135\ Id. at 6526-27.
---------------------------------------------------------------------------

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.\136\ The Bureau noted that numerous commenters had
highlighted the value of providing objective requirements determined
based on information contained in loan files.\137\ To address concerns
that creditors may not have adequate certainty about whether a
particular loan satisfies the requirements of the General QM loan
definition, the Bureau provided definitions of debt and income for
purposes of the General QM loan definition in appendix Q.\138\
---------------------------------------------------------------------------

\136\ Id.
\137\ Id.
\138\ Id.
---------------------------------------------------------------------------

The Bureau selected 43 percent as the DTI limit for the General QM
loan definition. 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.\139\ 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.\140\
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.\141\ 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.\142\ The Bureau was especially concerned about setting a DTI
limit higher than 43 percent in the context of QMs that receive a safe
harbor from the ATR requirements.\143\ 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.\144\ 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.\145\
---------------------------------------------------------------------------

\139\ Id.
\140\ Id.
\141\ Id.
\142\ Id. at 6528.
\143\ Id.
\144\ Id.
\145\ Id.
---------------------------------------------------------------------------

The January 2013 Final Rule also acknowledged concerns about
imposing a DTI limit. 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 loan-to-value (LTV) ratio are considered.\146\ 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 limit due to concerns about restricting
access to credit.\147\ 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
General QM loan definition would undermine the certainty for creditors
and the secondary market of whether loans were eligible for QM
status.\148\ 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.\149\ However, the Bureau noted that it lacked sufficient data
to mandate a bright-line rule based on residual income.\150\ The Bureau
anticipated further study of the issue as part of the five-year
assessment of the Rule.\151\
---------------------------------------------------------------------------

\146\ Id. at 6527.
\147\ Id.
\148\ Id.
\149\ Id. at 6528.
\150\ Id.
\151\ 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 based on market conditions. Among other things, the
Bureau expressed concern that, as the mortgage market recovered from
the financial crisis, there could be a limited non-QM market, which, in
conjunction with the 43 percent DTI limit, could impair access to
credit for consumers with DTI

[[Page 86319]]

ratios over 43 percent.\152\ 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.
---------------------------------------------------------------------------

\152\ Id. at 6533.
---------------------------------------------------------------------------

B. Why the Bureau Is Adopting a Price-Based QM Definition To Replace
the General QM Loan Definition's DTI Limit

The Bureau concludes that this final rule's price-based approach
best balances consumers' ability to repay with ensuring access to
responsible, affordable mortgage credit. The Bureau is amending the
General QM definition because retaining the existing 43 percent DTI
limit would reduce the size of the QM market and likely would lead to a
significant reduction in access to responsible, affordable credit when
the Temporary GSE QM definition expires. The Bureau continues to
believe that General QM status should be determined by a simple,
bright-line rule to provide certainty of QM status, and the Bureau
concludes that pricing achieves this objective. The Bureau concludes
that a price-based General QM loan definition is better than the
alternatives 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.
1. Considerations Related to the General QM Loan Definition's DTI Limit
The proposal described the Bureau's concerns about the 43 percent
DTI limit and its potentially negative effect on access to credit. In
particular, the Bureau is concerned that imposing a DTI limit under the
General QM loan definition would deny QM status for loans to some
consumers for whom it is appropriate to presume ability to repay at
consummation and that denying QM status to such loans risks denying
consumers access to responsible, affordable credit. The Bureau is
concerned that the current approach to DTI ratios as part of the
General QM loan definition is not the best approach because it would
likely impair some consumers' ability to access responsible and
affordable credit. These access-to-credit concerns are especially acute
for lower-income and minority consumers.
The proposal noted that a DTI limit 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 proposal noted that a consumer's DTI ratio is only
one way to measure financial capacity and is not necessarily a holistic
measure of the consumer's ability to repay. The proposal also noted
that 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.
As described in the proposal, the Bureau's 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.\153\
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.\154\ The Assessment
Report states that higher DTI ratios independently increase expected
early delinquency, regardless of other underwriting criteria.\155\
---------------------------------------------------------------------------

\153\ See Assessment Report, supra note 63, at 83-84, 100-05.
\154\ Id. at 104-05.
\155\ Id. at 105.
---------------------------------------------------------------------------

At the same time, findings from the Assessment Report indicate that
the specific 43 percent DTI limit in the current rule has restricted
access to credit, particularly in the absence of a robust non-QM
market. The report found that, for 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.\156\ 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
consumers with DTI ratios above 43 percent 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
home purchase loans with DTI ratios above 43 percent.\157\ The proposal
noted the Bureau's concern about a similar effect for loans with DTI
ratios above 43 percent when the Temporary GSE QM loan definition
expires. The proposal acknowledged 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 a consequence consistent with the
purposes 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 non-GSE eligible
loans with DTI ratios above 43 percent are being denied, even though
other compensating factors indicate that some of them may have the
ability to repay their loans.\158\
---------------------------------------------------------------------------

\156\ See, e.g., id. at 10, 194-96.
\157\ See, e.g., id. at 10-11, 117, 131-47.
\158\ See, e.g., Assessment Report supra note 63, at 150, 153,
Table 20. Table 20 illustrates how the pool of denied non-GSE
eligible applicants with DTI ratios above 43 percent 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 condition 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.\159\ 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

[[Page 86320]]

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.\160\ 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 the slow development of the non-
QM market since the January 2013 Final Rule took effect and further
acknowledges that the recent economic disruptions associated with the
COVID-19 pandemic may significantly hinder its development in the near
term.
---------------------------------------------------------------------------

\159\ 78 FR 6408, 6527 (Jan. 30, 2013).
\160\ Assessment Report, supra note 63, at 198.
---------------------------------------------------------------------------

At the time of the January 2013 Final Rule, the Bureau adopted the
Temporary GSE loan definition 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 space, and a
sizable market to support non-QM lending has not yet emerged.\161\ As
noted above, the Bureau acknowledges that the recent economic
disruptions associated with the COVID-19 pandemic may further hinder
the development of the non-QM market, at least in the near term. As
noted in the proposal, the Bureau expects that a significant number of
Temporary GSE QMs would not qualify as General QMs 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. Some alternative loan options would still be available to many
consumers after the expiration of the Temporary GSE QM loan definition.
The proposal, however, emphasized the Bureau's expectation that, with
respect to loans that are currently Temporary GSE QMs and would not
otherwise qualify as General QMs under the current definition, some
would cost materially more for consumers and some would not be made at
all.
---------------------------------------------------------------------------

\161\ Id. at 198.
---------------------------------------------------------------------------

Based on 2018 data, the Bureau estimated in the proposal 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.\162\ These loans
are currently originated as QMs due to the Temporary GSE QM loan
definition but would not be originated under the current General QM
loan definition, and might not be originated at all, if the Temporary
GSE QM loan definition were to expire. An additional, smaller number of
loans that currently qualify as Temporary GSE QMs may not fall within
the General QM loan definition after the expiration of the Temporary
GSE QM loan definition because the method used for verifying income or
debt would not comply with appendix Q.\163\ As explained in the
Extension Final Rule, the Temporary GSE QM loan definition will expire
on the mandatory compliance date of this final rule or when GSE
conservatorship ends.
---------------------------------------------------------------------------

\162\ Proposed Rule's Dodd-Frank Act section 1022(b) analysis
(citing the Bureau's prior estimate of affected loans in the ANPR);
see 84 FR 37155, 37159 (July 31, 2019).
\163\ Id. at 37159 n.58.
---------------------------------------------------------------------------

As explained in the proposal, the Bureau believes that many loans
currently originated under the Temporary GSE QM loan definition would
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 would instead
obtain FHA-insured loans since FHA currently insures loans with DTI
ratios up to 57 percent.\164\ 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 QMs with DTI ratios above 43 percent exceed FHA's loan-
amount limit.\165\ For example, the Bureau estimated in the proposal
that, in 2018, 11 percent of Temporary GSE QM loans with DTI ratios
above 43 percent exceeded FHA's loan-amount limit.\166\ Thus, the
Bureau considers that at most 89 percent of loans that would have been
Temporary GSE QMs with DTI ratios above 43 percent could move to
FHA.\167\ The Bureau expects that loans that would be originated as FHA
loans instead of under the Temporary GSE QM loan definition generally
would cost materially more for many consumers.\168\ The Bureau expects
that some consumers offered FHA loans might choose not to take out a
mortgage because of these higher costs.
---------------------------------------------------------------------------

\164\ 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 Tbl. B9) (Nov. 14, 2018),
https://www.hud.gov/sites/dfiles/Housing/documents/2019FHAAnnualReportMMIFund.pdf.
\165\ 84 FR 37155, 37159 (July 31, 2019).
\166\ 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 Dec. 8, 2020).
\167\ 84 FR 37155, 37159 (July 31, 2019).
\168\ 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
(Aug. 2019), https://files.consumerfinance.gov/f/documents/cfpb_new-revised-data-points-in-hmda_report.pdf.
---------------------------------------------------------------------------

The proposal explained that it is also possible that some consumers
with DTI ratios above 43 percent would be able to obtain loans in the
private market.\169\ The number of loans absorbed by the private market
would likely depend, in part, on whether actors in the private market
would be willing to assume the legal or credit risk associated with
funding loans--as non-QM loans or small-creditor portfolio QMs--that
would have been Temporary GSE QMs (with DTI ratios above 43 percent)
\170\ and, if so, whether actors in the private market would offer
lower prices or better terms.\171\ For example, the Bureau estimated
that 55 percent of loans that would have been Temporary GSE QMs (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.\172\ 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,\173\
particularly in the short term due to the economic effects of the
COVID-19 pandemic. Finally, the proposal noted that some consumers

[[Page 86321]]

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.\174\ However,
some consumers who would have sought Temporary GSE QMs (with DTI ratios
above 43 percent) may not obtain loans at all.\175\ 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 home purchase loans with
DTI ratios above 43 percent.\176\
---------------------------------------------------------------------------

\169\ 84 FR 37155, 37159 (July 31, 2019).
\170\ 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).
\171\ 84 FR 37155, 37159 (July 31, 2019).
\172\ Id.
\173\ Id.
\174\ Id.
\175\ Id.
\176\ See Assessment Report, supra note 63, at 10-11, 117, 131-
47.
---------------------------------------------------------------------------

As noted in the proposal, 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 the Bureau's own experience, the
proposal recognized 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 proposal
expressed concern that 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 QMs.\177\ Appendix Q, unlike other standards for
calculating and verifying debt and income, has not been revised since
2013.\178\ The current definitions of debt and income in appendix Q
have proven to be complex in practice. In the proposal, the Bureau
expressed concerns about other potential approaches to defining debt
and income in connection with conditioning QM status on a specific DTI
limit.
---------------------------------------------------------------------------

\177\ Id. at 193.
\178\ Id. at 193-94.
---------------------------------------------------------------------------

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 standards under
appendix Q, which may constrain new approaches to assessing repayment
ability. 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 sufficiency of a consumer's
residual income and could potentially satisfy a requirement to consider
either DTI or residual income. This innovation could potentially expand
access to responsible, affordable mortgage credit, particularly for
applicants with non-traditional income and limited credit history. The
proposal expressed concern that the potential negative effect of the
current General QM loan definition 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.
2. The Proposed Price-Based General QM Loan Definition
In light of these concerns, the Bureau proposed to remove the 43
percent DTI limit 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. In issuing the proposal, the Bureau acknowledged the
significant debate \179\ 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. In seeking
comments on the proposal, the Bureau noted that it was not making a
determination as to whether DTI ratios, a loan's price, or some other
measure is the best predictor of loan performance. Rather, the analyses
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.
The Bureau acknowledged 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. However, the Bureau weighed
several policy considerations in selecting an approach for the proposal
based on the purposes of the ATR/QM provisions of TILA.
---------------------------------------------------------------------------

\179\ 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 (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 proposing a price-based General QM loan definition, the Bureau
sought to balance considerations related to ensuring consumers' ability
to repay and maintaining access to credit. As noted in the proposal,
the Bureau views the relevant provisions of TILA as fundamentally about
assuring that consumers receive mortgage credit that they can repay.
However, the Bureau also stated its concern about maintaining access to
responsible, affordable mortgage credit. The proposal noted the
Bureau's concern that the current General QM loan definition, with a 43
percent DTI limit, would result in a significant reduction in the scope
of the QM market 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 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.
With respect to ability to repay, the proposal 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), is an appropriate measure of whether a loan should
be presumed to comply with the ATR provisions. The proposal noted that,
because the affordability of a given mortgage will vary from consumer
to

[[Page 86322]]

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. As
such, consistent with the Bureau's prior analyses in the Assessment
Report, the Bureau's analysis in the proposal used early distress as a
proxy for the lack of the consumer's ability to repay at consummation
across a wide pool of loans. Specifically, and consistent with the
Assessment Report,\180\ the proposal measured early distress as whether
a consumer was ever 60 or more days past due within the first two years
after origination (referred to herein as the early delinquency rate).
The Bureau's analysis focused on early delinquency rates to capture
consumers' difficulties in making payments soon after consummation of
the loan (i.e., within the first two 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 indicate a
higher likelihood that the consumer may have lacked ability to repay at
consummation. As in the Assessment Report, the Bureau assumed 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.
The Bureau acknowledged that alternative measures of delinquency,
including those used in analyses submitted as comments on the ANPR, may
also be probative of repayment ability.
---------------------------------------------------------------------------

\180\ See Assessment Report, supra note 63, at 83.
---------------------------------------------------------------------------

In issuing the proposal, the Bureau reviewed 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 comply
with the ATR requirements, from loans that are likely to have higher
rates of early delinquency, for which a presumption of compliance with
the ATR requirements would not be warranted. The proposal stated that
the Bureau's own analysis and 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 used data from the
National Mortgage Database (NMDB),\181\ including a matched sample of
NMDB and HMDA loans.\182\ As noted in the proposal, the analysis shows
that delinquency rates rise with rate spread. The Bureau's delinquency
analysis is described below. Table numbers in part V match those from
the Bureau's proposal, except that Tables 7A and 8A in part V.B.5,
below, did not appear in the proposal.
---------------------------------------------------------------------------

\181\ The NMDB, jointly developed by the FHFA and the Bureau,
provides de-identified loan characteristics and performance
information for a 5 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.
\182\ 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/ (last visited Dec. 8,
2020). 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.\183\ The
sample is restricted to loans without product features that would make
them non-QM loans 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.\184\ 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.
---------------------------------------------------------------------------

\183\ 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, 2018), 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/
(Mar. 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.
\184\ 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-PMMS delinquency rate
\185\) in percentage points (%)
------------------------------------------------------------------------
<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
------------------------------------------------------------------------

The proposal noted that 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.\186\ 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

[[Page 86323]]

enough loans per bin. As with Table 1, the proposal noted that 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.\187\
---------------------------------------------------------------------------

\185\ Freddie Mac's PMMS is the source of data underlying APOR
for most mortgages. See supra note 183 for additional details.
\186\ 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.
\187\ 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
Rate spread over APOR in percentage points (as of Dec. 2019)
(%)
------------------------------------------------------------------------
<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. As described in the
proposal, 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.\188\ 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.\189\ 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. The proposal explained that,
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.
---------------------------------------------------------------------------

\188\ 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 (including outliers which
may reflect reporting errors) and to ensure that all cells shown in
Table 5 contain at least 500 loans.
\189\ 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 (including outliers which
may reflect reporting errors) and to ensure that all cells shown in
Table 6 contain at least 500 loans.

Table 3--2002-2008 Originations, Early Delinquency Rate by DTI Ratio
------------------------------------------------------------------------
Early delinquency
DTI 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
DTI rate (as of Dec.
2019) (%)
------------------------------------------------------------------------
0-25................................................. 0.4
26-35................................................ 0.5
36-43................................................ 0.7
44-48................................................ 0.9
49-50................................................ 0.9
------------------------------------------------------------------------

The proposal further analyzed the strengths of DTI ratios and
pricing in predicting early delinquency rates in Tables 5 and 6, which
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
significantly above APOR had early delinquency rates 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 percentage 20 (%) 25 (%) 30 (%) 35 (%) 40 (%) 43 (%) 45 (%) 48 (%) 50 (%) 60 (%) 70 (%)
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
--------------------------------------------------------------------------------------------------------------------------------------------------------

[[Page 86324]]

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.\190\ 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 significantly above APOR also had early delinquency
rates much higher than loans priced below APOR.
---------------------------------------------------------------------------

\190\ 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
----------------------------------------------------------------------------------------------------------------
Rate spread over APOR in percentage points DTI 0-25 (%) DTI 26-35 (%) DTI 36-43 (%) DTI 44-50 (%)
----------------------------------------------------------------------------------------------------------------
<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 proposal noted 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. The proposal also highlighted that
analyses published in response to the Bureau's ANPR and RFIs are
consistent with the Bureau's analysis showing that early delinquency
rates rise consistently with rate spread. For example, CoreLogic
analyzed a set of 2018 HMDA conventional mortgage originations merged
to loan performance data collected from mortgage servicers.\191\ The
CoreLogic analysis found: (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 2 percentage points over APOR. In assessing the CoreLogic analysis,
the Bureau noted that loans priced at or above 2 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, the proposal noted that these loans also have
relatively high rates of delinquency.\192\ CoreLogic found 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.\193\ The
proposal also noted that analyses by the Urban Institute (using loan
performance data from Black Knight) show a comparable positive
relationship between rate spreads--measured there as the note rate over
PMMS--and delinquency.\194\ The analysis found 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.\195\
---------------------------------------------------------------------------

\191\ See Archana Pradhan & Pete Carroll, Expiration of the
CFPB's Qualified Mortgage (QM) GSE Patch--Part V, CoreLogic 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.
\192\ The Bureau analyzes the performance and pricing for
smaller loans in the section-by-section analysis for Sec.
1026.43(e)(2)(vi).
\193\ See Archana Pradhan & Pete Carroll, Expiration of the
CFPB's Qualified Mortgage (QM) GSE Patch--Part IV, CoreLogic
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.)
\194\ See Karan Kaul & Laurie Goodman, Urban Inst., Updated:
What, If Anything, Should Replace QM GSE Patch, at 9 (Oct. 2020),
https://www.urban.org/sites/default/files/publication/99268/2018_10_30_qualified_mortgage_rule_update_finalized_4.pdf.
\195\ See Karan Kaul et al., Urban Inst., Comment Letter to the
Consumer Financial Protection Bureau on the Qualified Mortgage Rule,
at 9-10 (Sept. 2019), https://www.urban.org/sites/default/files/publication/101048/comment_letter_to_the_consumer_financial_protection_bureau_0.pdf.
---------------------------------------------------------------------------

The proposal stated that, 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,
the proposal preliminarily concluded that rate spreads provide a strong
indicator of ability to repay.
The proposal acknowledged that a test that combines rate spread and
DTI may better predict early delinquency rates than either metric on
its own. However, the proposal also noted that 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, 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 proposal expressed concerns about whether other potential
approaches could define debt and income with sufficient clarity while
at the same time providing flexibility to accommodate new approaches to
verification and underwriting.
In addition to strongly correlating with loan performance, the
proposal tentatively concluded that a price-based General QM loan
definition is a more holistic and flexible measure of a consumer's
ability to repay than DTI alone. The proposal explained that mortgage
underwriting, and by extension, a loan's price, generally includes
consideration of a consumer's DTI. However, the proposal explained that
loan pricing also includes an assessment of additional factors 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

[[Page 86325]]

in assessing a consumer's finances and, as such, may unduly restrict
access to credit. Therefore, the proposal noted that a potential
benefit of a price-based General QM loan 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 General QM loan definition, which could facilitate
innovation in underwriting, including the use of emerging research into
alternative mechanisms to assess a consumer's ability to repay. 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.
The proposal also noted 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.\196\ 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, and escrow accounts for taxes and insurance for HPMLs, which
have APR spreads lower than those prescribed for high-cost mortgages
but that nevertheless exceed APOR by a specified threshold.\197\
Although the ATR/QM Rule replaced the ability-to-repay requirements
promulgated pursuant to HOEPA and the Board's 2008 rule,\198\ HPMLs
remain subject to additional requirements related to escrow accounts
for taxes and homeowners insurance and to appraisal requirements.\199\
The proposal also noted that 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.
---------------------------------------------------------------------------

\196\ 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).
\197\ See generally 73 FR 44522 (July 30, 2008).
\198\ 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 6408 (Jan. 30, 2013).
\199\ See Sec. 1026.35(b) and (c).
---------------------------------------------------------------------------

Finally, the proposal preliminarily concluded that a price-based
General QM loan definition would provide compliance certainty to
creditors because creditors would be able to readily determine whether
a loan is a General QM. 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
proposal stated that the approach should provide certainty to creditors
regarding a loan's status as a QM.\200\
---------------------------------------------------------------------------

\200\ 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 have required creditors to consider the
consumer's DTI ratio or residual income, income or assets other than
the value of the dwelling, and debts, the proposal would not have
mandated a specific DTI limit. The proposal would have removed appendix
Q and instead would have provided creditors additional flexibility for
defining income or assets other than the value of the dwelling and
debts. The Bureau did not propose a single, specific set of standards
equivalent to appendix Q for what must be counted as income or assets
and what may be counted as debts. For purposes of the proposed
requirement, income or assets and debts would be determined in
accordance with proposed Sec. 1026.43(e)(2)(v)(B), which would have
required 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 have provided a safe harbor to
creditors using verification standards the Bureau specifies. The
proposal noted that 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 USDA, current as of the
proposal's public release. However, under the proposal, creditors would
not have been required to verify income and debt according to the
standards the Bureau specifies. Rather, the proposal would have
provided creditors with the flexibility to develop other methods of
compliance with the verification requirements.

[[Page 86326]]

The proposal would have provided that a loan meets the General QM
loan definition in Sec. 1026.43(e)(2) only if the APR exceeds APOR for
a comparable transaction by less than 2 percentage points as of the
date the interest rate is set. In proposing this threshold, the Bureau
tentatively concluded that it 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 proposed higher thresholds for smaller loans
and subordinate-lien transactions, as the Bureau was concerned that
loans with lower loan amounts may be priced higher than larger loans,
even if the consumers have similar credit characteristics and a similar
ability to repay. For all loans, regardless of loan size, the Bureau
did not propose 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 (or 3.5 percentage points for subordinate-lien
transactions). As such, under the proposal, first-lien 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 have
received a rebuttable presumption of compliance with the ATR
provisions.
Finally, the proposal provided analysis of the potential effects on
access to credit of a price-based approach to defining a General QM. As
indicated by the various combinations in Table 7 below, the proposal
analyzed 2018 HMDA data and found 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 QMs and 95.8 percent were safe harbor
QMs or rebuttable presumption QMs. Under the proposed General QM loan
definition's rate-spread thresholds of 1.5 (safe harbor) and 2.0
(rebuttable presumption) percentage points over APOR, the proposal
stated that 91.6 percent of conventional purchase loans would have been
safe harbor QMs and 96.1 percent would have been safe harbor QM or
rebuttable presumption QMs.\201\ Based on these 2018 data, the proposal
stated that rate-spread thresholds of 1.0-2.0 percentage points over
APOR for safe harbor QMs would have covered 83.3 to 94.1 percent of the
conventional purchase market (as safe harbor QMs), while rate-spread
thresholds of 1.5-2.5 percentage points over APOR for rebuttable
presumption QMs would have covered 94.3 to 96.8 percent of the
conventional purchase market (as safe harbor and rebuttable presumption
QMs). As explained further in part V.B.5, the Bureau is providing in
Table 7A revised estimates for the size of the QM market based on the
higher thresholds for small loans and manufactured housing loans as
adopted by this final rule and also to reflect a revised methodology to
identify creditors eligible to originate loans as small creditors under
Sec. 1026.43(e)(5).
---------------------------------------------------------------------------

\201\ All estimates in Table 7 included 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 QMs if priced below
3.5 percentage points over APOR or are rebuttable presumption QMs if
priced 3.5 percentage points or more over APOR. The Bureau has
provided revised analysis in part V.B.5 to reflect a revised
methodology to identify creditors eligible to originate loans as
small creditors under Sec. 1026.43(e)(5).

Table 7--Proposal's Estimated 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 proposal noted concerns about the definition. In
particular, the Bureau acknowledged that 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 recognized 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. The Bureau also
acknowledged that factors unrelated to the individual loan (e.g.,
institutional factors such as the competing policy considerations
inherent in setting guarantee fees on GSE loans) can influence its
price and 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

[[Page 86327]]

of compliance that comes with QM status. The proposal also acknowledged
concerns about the sensitivity of a price-based General QM loan
definition to macroeconomic cycles and that a price-based approach
would likely 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 discusses these concerns below in part V.B.5.
As noted above, stakeholders providing feedback prior to the
General QM Proposal suggested a range of options the Bureau should
consider to replace the 43 percent DTI limit in the General QM loan
definition. These options are discussed at length in the proposal.\202\
The Bureau considered these options in developing the proposal, but
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. However, as explained in part V.B.3,
below, the Bureau requested 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 income or assets and debts, could provide a superior
alternative to the price-based approach.
---------------------------------------------------------------------------

\202\ 85 FR 41716, 41736-37 (July 10, 2020).
---------------------------------------------------------------------------

The proposal also acknowledged that some stakeholders requested
that the Bureau make the Temporary GSE QM loan definition permanent.
The Bureau did not propose this alternative because of its concern 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.\203\ The Bureau also
expressed concern that making the Temporary GSE QM loan definition
permanent could stifle innovation and competition in private-sector
approaches to underwriting. The Bureau also expressed concern 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
limited non-GSE private market. As explained above, the Extension Final
Rule extended the Temporary GSE QM loan definition to expire on the
mandatory compliance date of this final rule or when GSE
conservatorship ends.
---------------------------------------------------------------------------

\203\ Id. at 41737. See also 78 FR 6408, 6534 (Jan. 13, 2013)
(stating that the Bureau believed it was appropriate to presume that
loans that are eligible to be purchased or guaranteed by the GSEs
``while under conservatorship'' have been originated with
appropriate consideration of consumers' ability to repay ``in light
of this significant Federal role and the government's focus on
affordability in the wake of the mortgage crisis'').
---------------------------------------------------------------------------

3. Alternative to the Proposed Price-Based General QM Loan Definition:
Retaining a DTI Limit
Although the Bureau proposed to remove the 43 percent DTI limit and
adopt a price-based approach for the General QM loan definition, the
Bureau requested comment on an alternative approach that would retain a
DTI limit, but raise it above the current limit of 43 percent, and
provide a more flexible set of standards for verifying income or assets
and debts in place of appendix Q. The Bureau requested comment on this
alternative proposal because of concerns about the price-based
approach. In particular, the Bureau acknowledged 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 was especially
concerned about these potential effects given the recent economic
disruptions associated with the COVID-19 pandemic. The Bureau also
acknowledged 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 loans' rate spread exceeding the
applicable threshold. Further, and as described above, the Bureau
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. For these reasons, the Bureau
requested 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.\204\
---------------------------------------------------------------------------

\204\ The Bureau acknowledged that some loans currently
originated as Temporary GSE QMs have higher DTI ratios. However, the
proposal expressed concern about adopting a DTI limit above a range
of 45 to 48 percent without a requirement to consider compensating
factors.
---------------------------------------------------------------------------

The Bureau also analyzed the potential effects of a DTI-based
approach on the size of the QM market and on access to credit. As
indicated in the proposal's Table 8, the proposal found that 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 QMs and 95.8 percent were
safe harbor QM or rebuttable presumption QMs. 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 the proposal found that only 69.3 percent of loans would
have been safe harbor QMs and 73.6 percent of loans would have been
safe harbor QMs or rebuttable presumption QMs. The proposal also noted
that 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 proposal noted that the magnitude of the increase in the
size of the QM market and potential increase in access to credit would
depend 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 proposal noted the Bureau's expectation that consumers and
creditors would respond to changes in the General QM loan definition,
potentially allowing additional loans to be made as safe harbor QMs or
rebuttable presumption QMs. As explained further in part V.B.5, the
Bureau is providing in Table 8A revised analysis of the size of the QM
market to reflect a revised methodology to identify creditors eligible
to originate loans as small creditors under Sec. 1026.43(e)(5).

[[Page 86328]]

Table 8--Proposal's Estimated 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 specifically requested comment on a specific DTI limit
between 45 and 48 percent. The Bureau requested 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 requested
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 that should not
receive a presumption of compliance with TILA's ATR requirements. The
Bureau also requested 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 QM status is limited to loans for which it is appropriate to
presume that consumers have the ability to repay. The Bureau also
requested 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
requested 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 QMs from rebuttable presumption QMs for first-lien
transactions.
The Bureau also requested 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. The proposal
noted that one such approach could impose a DTI limit only for loans
above a certain pricing threshold. Such an approach would be intended
to reduce the likelihood that loans for which the consumer lacks
ability to repay would receive a presumption of compliance with the ATR
requirements, while avoiding the potential burden and complexity of a
DTI limit for many lower-priced loans. The proposal explained that a
similar approach might impose a DTI limit above a certain pricing
threshold and also tailor the presumption of compliance with the ATR
requirements based on DTI. For example, the proposal noted that 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,
the loan would be rebuttable presumption QM if the consumer's DTI ratio
does not exceed 50 percent and a non-QM loan if the DTI ratio is above
50 percent.
The proposal explained another hybrid approach that would impose a
DTI limit on all General QMs 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.
With respect to the Bureau's concerns about appendix Q, the Bureau
requested comment on an alternative method of defining debt and income
to replace appendix Q in conjunction with a specific DTI limit. The
Bureau expressed concern 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. The proposal further noted that, 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 requested 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 have
required creditors to consider the consumer's monthly DTI ratio or
residual income; 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 debt obligations, alimony, and
child support. Proposed Sec. 1026.43(e)(2)(v)(B) and the associated
commentary would have explained 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

[[Page 86329]]

requirements in Sec. 1026.43(c). Proposed Sec. 1026.43(e)(2)(v)(B)
would have further provided creditors a safe harbor with standards the
Bureau may specify for verifying debt and income, potentially including
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
the proposal's public release. The Bureau also requested comments on
potentially adding to the safe harbor other standards that external
stakeholders develop.
The Bureau requested 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 proposal expressed concern that this approach, which
combines a general standard with safe harbors, may not be appropriate
for a General QM loan definition with a specific DTI limit. The Bureau
requested 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 requested
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 ratio
to any DTI ratio threshold specified in the rule.
The Bureau also requested comment on what changes, if any, would
need to be made to proposed Sec. 1026.43(e)(2)(v)(B) to accommodate a
specific DTI limit. For example, the Bureau requested comment on
whether creditors that comply with manuals that have been revised but
are substantially similar to the manuals specified above should receive
a safe harbor, as the Bureau proposed. The Bureau also requested
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 requested 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 General QM loan definition.
4. Comments on the Price-Based General QM Loan Definition
Numerous commenters supported the Bureau's proposal to move from a
DTI-based General QM loan definition to one based on pricing.
Commenters that supported the proposal included industry commenters,
consumer advocate commenters, a research center commenter, joint
industry and consumer advocate commenters, and two GSE commenters.
Commenters who supported the proposed price-based approach generally
supported the Bureau's rationale for the proposal, described in part
V.B.2 above. With respect to measuring consumers' ability to repay,
commenters supporting the proposal generally agreed with the Bureau's
analysis showing that the price of a loan is strongly associated with
its performance, measured by whether a consumer was 60 days or more
past due during the first two years of the loan, and also agreed that
price is a strong indicator of consumers' ability to repay.
A joint consumer advocate and industry comment letter generally
supporting the proposal described its analysis of the relationship
between delinquency rates and rate spread. The commenter's analysis
used Fannie Mae Single-Family Loan Performance data and, like the
Bureau's 2002-2008 delinquency analysis, approximated rate spreads
using the sum of the mortgage interest rate and an estimated PMI
premium, minus APOR. Unlike the Bureau's analysis, however, the
commenter used a risk-based estimated PMI premium to approximate
current PMI pricing practices. The commenter noted that using risk-
based PMI pricing increases the variance of rate spread estimates for
loans with PMI, such that low-risk consumers have lower premiums and
high-risk borrowers have higher premiums. Like the Bureau's delinquency
analysis, the joint commenter defined early delinquency as whether the
consumer was ever 60 days delinquent during the first two years of the
loan. The joint commenter's analysis looks at loans by rate spread,
ranging from less than a 0.5 percentage point rate spread, up to 3.0 or
more percentage points, in increments of 0.5 percentage points. The
commenter provided results of this analysis for loans originated
between 1999-2019, and also provided results for loans originated
between 2013-2018. For both sets of loans, the analysis shows early
delinquency rates rising with rate spread. For the 1999-2019 dataset,
loans with rate spreads of less than 0.5 percentage points had an early
delinquency rate of 1.0 percent, rising to 14.3 percent for rate
spreads of 3 percentage points or more. For the 2013-2018 dataset,
loans with rate spreads of less than 0.5 percentage points had an early
delinquency rate of 0.5 percent, rising to 10.5 percent for rate
spreads of 3 percentage points or more.
Similarly, a research center commenter generally supporting the
proposal also provided analysis of loan performance by rate spread. The
commenter looked at Fannie Mae Single-Family Loan Performance data and
portfolio loans and loans in PLS channels in the Black Knight McDash
database. The commenter measured loan performance by whether the
consumer was ever 60 days or more delinquent, rather than by whether
the consumer was 60 days or more delinquent in the first two years of
the loan as in the Bureau's delinquency analysis. The commenter stated
that its measure is more conservative in that it produces higher
default rates. The commenter noted that its analysis found all measures
of default to be highly correlated with rate spreads but also noted
that defaults on loans originated after the financial crisis (defined
by the commenter as 2013 to 2018 originations) are lower than for any
other period in recent history. The commenter attributes this to
improvements in mortgage underwriting. This commenter's analysis is
discussed further below in the section-by-section analysis of Sec.
1026.43(e)(2)(vi).
Some commenters supporting the proposal, including a research
center and a joint consumer advocate and industry comment, argued that
pricing is a stronger predictor of default than DTI. The joint consumer
advocate and industry commenter noted that DTI is a particularly weak
predictor of loan performance for near-prime loans. In support of that
assertion, the commenter cited analysis finding that, for a thousand
consumers with DTI ratios between 45 and 50 percent, only two
additional consumers default compared to consumers with DTI ratios
between 40 and 45 percent. That commenter also cited analysis showing
that, for each year since 2011, the 90-day delinquency

[[Page 86330]]

rate for loans with DTI ratios over 45 percent is less than that for
loans with DTI ratios between 30 percent and 45 percent. The commenter
asserts that this is counterintuitive to the idea that higher DTI
ratios are a sound predictor of default.
Some commenters supporting the proposed price-based approach,
including several industry commenters, specifically agreed with the
Bureau's observation that pricing is a more holistic measure of a
consumer's financial capacity than DTI alone. Generally, these
commenters agreed with the Bureau's observation that pricing considers
a broader set of factors, which results in a strong measure of ability
to repay that is more complete than a DTI-based definition. A joint
consumer advocate and industry commenter asserted that a DTI limit
would curtail access to credit for creditworthy consumers, such as
those who have demonstrated the ability to handle debt by regularly
paying rent or who have compensating factors permitting them to exceed
a particular DTI cutoff. That commenter also asserted that there are
considerable challenges to the measurement of DTI, especially the
income component, which are accentuated for non-traditional and non-
salary employees, including many entrepreneurs and gig workers.
Commenters supporting the price-based approach, including a GSE
commenter, also agreed with the Bureau's assertion that the price-based
approach would maintain access to responsible, affordable mortgage
credit after the expiration of the Temporary GSE QM loan definition. A
research center commenter estimated the overall effect of the proposed
changes on QM lending volumes using 2019 HMDA data to determine the
number of loans that would not have been QMs in 2019 under the current
rule but would be QMs under the proposal (using the General QM pricing
thresholds in the proposal). The commenter found that there were
346,376 such loans that would have gained QM status under the proposal.
The commenter further found that 49,200 loans would have been QMs in
2019 under the current rule but would be non-QM loans under the
proposal (i.e., loans with DTI ratios of 43 percent or lower, but with
pricing that exceeded the proposed rate-spread thresholds), resulting
in a gain of approximately 297,000 QMs under the proposed thresholds.
The commenter asserted that, while the creditors of these loans gaining
QM status would receive legal protection due to the loans' QM status,
the reduction in litigation risk would translate into better pricing
for the consumer. A joint consumer advocate and industry commenter
expressed concern about access to credit under a DTI-based approach,
noting that ``higher DTI'' consumers above the threshold would likely
pay substantially higher interest rates on potentially riskier products
or may be unable to obtain financing. In support of that assertion, the
commenter cited the Assessment Report findings that applicants for
jumbo loans with DTI ratios above 43 percent (who were therefore
ineligible for QMs under the General QM loan definition or the
Temporary GSE QM loan definition) paid significantly higher interest
rates and had reduced access to credit. The commenter further expressed
concern that such effects would disproportionately affect low-income
and low-wealth families, including families of color.
As compared to a DTI-based approach, some commenters indicated that
the price-based approach would expand access to credit for certain
underserved market segments, such as low-income and minority consumers.
Conversely, some commenters, including a consumer advocate commenter,
expressed concern that a price-based General QM loan definition would
curtail access to credit to low-income and minority consumers. A
research center commenter that supported the price-based approach also
acknowledged that minority consumers are more likely to have higher
rate spreads. This commenter stated that, for GSE loans, 6.2 percent
and 5.0 percent of all purchase lending to Black and Hispanic
households, respectively, had rate spreads above 1.5 percentage points,
compared with 2 percent for non-Hispanic White households. The
commenter stated that the disparity was wider in the non-GSE
conventional channel, with 13.4 percent and 17.0 percent for Black and
Hispanic households, respectively, compared with 5 percent for non-
Hispanic White households. An industry commenter cited a 2019 study
that found that, compared to similar borrowers, Hispanic and African-
American borrowers are charged rates that are 7.9 basis points higher
for purchase transactions and 3.6 basis points higher for refinance
transactions by creditors using algorithmic-based pricing systems.\205\
However, this commenter suggested that the Bureau address this access-
to-credit concern by adjusting the rate-spread threshold. As discussed
below, many commenters supporting the proposed price-based approach
requested that the Bureau increase either the proposed safe harbor
threshold, the threshold separating QMs from non-QM loans, or both, to
further ensure continued access to credit, including for minority
consumers. A consumer advocate commenter also cited the 2019 study
referenced above.
---------------------------------------------------------------------------

\205\ Robert Bartlett et al., Haas School of Business UC
Berkeley, Consumer Lending Discrimination in the FinTech Era (2019),
https://faculty.haas.berkeley.edu/morse/research/papers/discrim.pdf.
---------------------------------------------------------------------------

Commenters supporting the proposed price-based approach also
generally supported removing the 43 percent DTI limit and appendix Q.
With respect to appendix Q, a consumer advocate commenter specifically
asserted that, even if the Bureau retained and revised appendix Q,
those revisions would quickly become antiquated. Consistent with the
Bureau's rationale for the proposal, some commenters also cited the
historical precedent for a price-based threshold in Regulation Z,
including the existing QM safe harbor threshold. Some commenters noted
that a price-based approach would be simple to implement because rate
spreads are already required to be calculated for other regulatory
purposes.
Although many commenters supported the overall shift from a DTI-
based General QM loan definition to one based on pricing, numerous
commenters opposed the price-based approach. These commenters include
individual commenters, an academic commenter, a research center
commenter, industry commenters, and some consumer advocate commenters.
Some commenters asserted that a loan's price is not an adequate
indicator of a consumer's ability to repay. For example, some
commenters that opposed the price-based approach argued that creditors
do not necessarily consider individual ability-to-repay factors in
deciding on the price of loans they offer to the consumer, that price
may vary across creditors for reasons unrelated to the consumer, and
that the price-based approach may favor some creditors or business
models over others. Some commenters critical of the proposal noted that
a loan's price is set by reference to factors that are not specific to
the consumer, in some instances including prohibited factors such as
race, and therefore is an inappropriate basis for the General QM loan
definition. Similarly, some commenters argued that price is an
inadequate indicator of a consumer's ability to repay because price is
based on credit risk (i.e., risk of loss to the creditor or investor)
rather than risk to the consumer. Some commenters

[[Page 86331]]

asserted that creditors do not price risk accurately, with some
commenters citing the experience of loans made prior to the financial
crisis as support for this concern. Some commenters, including a
research center commenter, asserted that creditors would use the price-
based approach to manipulate APOR or adjust their prices to fit just
under the rate-spread thresholds.
A consumer advocate commenter argued that LTV ratios, which may be
one component of pricing, cannot form the basis of the QM definition.
This commenter cited TILA section 129C(a)(3), which provides that the
consumer's equity in the dwelling or real property that secures
repayment of the loan cannot be considered as a financial resource of
the borrower in determining a consumer's ability to repay. The
commenter argued that, by extension, LTV ratios also cannot legally
form any part of the basis of the QM definition. That commenter further
asserted that creditors' reliance on LTV ratios in setting price does
not reflect consumers' ability to repay because (1) consumers with
substantial equity are likely to pay their mortgage regardless of the
impact it may have on their overall finances; (2) consumers with
substantial equity may have the option to refinance or sell their home
and are therefore unlikely to default and allow their home to go into
foreclosure; and (3) even if a consumer with substantial equity does go
into foreclosure, the lower the LTV ratio, the more likely the creditor
will be able to recover the unpaid principal balance from sale
proceeds. The commenter contends that because pricing a loan involves
consideration of the consumer's equity, a price-based approach to
defining QM is impermissible.
One research center commenter asserted that the price-based
approach does not capture risk accurately and criticized the Bureau's
delinquency analysis, which focuses on average early delinquency rates
by rate spread and DTI bins. That commenter analyzed 2018 HMDA data,
which is described in the Bureau's Tables 2 and 4 provided in the
proposal and above, and servicer data from CoreLogic's Loan Level
Markets Analytics dataset through 2019, using a risk assessment matrix
developed by the commenter that combines LTV ratios, DTI ratios, and
credit scores. The commenter's analysis replicated the Bureau's
definition of early delinquency of 60 days past due during the first
two years of the loan. The commenter found that, for loans with
identical rate spreads, early delinquency rates vary with other
characteristics like LTV ratios, DTI ratios, and credit scores.
Similarly, for loans with similar risk levels based on the commenters'
risk assessment matrix, the rate spreads vary greatly. The commenter
asserts that this is evidence that price does not capture risk
accurately. The commenter further argued that the price-based approach
is less accurate in predicting the likelihood of default for higher-
risk loans. The commenter asserted that some higher-risk loans may be
cross-subsidized, and further noted that pricing can be influenced by
whether the consumer shopped for a loan and by ``random luck.''
Analyzing Optimal Blue rate data from the 2013-2018 timeframe, the
research center commenter contended that the price-based approach would
have signaled that market-wide risk declined, whereas other measures,
including DTI and other industry risk metrics, would have signaled the
opposite.
A consumer advocate commenter asserted that the price-based
approach would grant QM status to loans where a sizeable percentage of
consumers lack ability to repay and would create heightened risk of
foreclosure. The commenter cited to the Bureau's delinquency analysis
in Table 1 (provided in the proposal and above) that looked at loans
originated between 2002 and 2008 and shows an early delinquency rate of
13 percent for loans priced between 1.75 and 1.99 percentage points
over APOR. The commenter also cited Urban Institute analysis of loans
from 2001 to 2004 and 2005 to 2008 and pointed to loans priced between
1.51 and 2.0 percentage points over APOR having 90-day delinquency
rates of 20.4 percent and 29.2 percent, respectively.\206\ The
commenter asserted that this undercuts the Bureau's theory that
creditors accurately assess and price for risk throughout the business
cycle and indicates that the proposal would extend a presumption of
compliance with the ATR provisions to loans that are not affordable.
---------------------------------------------------------------------------

\206\ See supra note 194.
---------------------------------------------------------------------------

That consumer advocate commenter disagreed with the Bureau's
analysis using 60-day delinquency rates during the first two years of
the loan as a measure of ability to repay because the commenter
asserted that consumers tend to forgo other expenses \207\ and take
extreme measures to make timely mortgage payments, even if the loan was
not affordable at consummation. This commenter argued that TILA
requires assessment of a consumer's ability to repay the mortgage and
still meet other obligations and cover basic living expenses. The
commenter argued that the fact that a consumer was not 60 days or more
past due on their mortgage does not answer the question of whether the
loan was affordable at consummation. The commenter requested that the
Bureau examine correlations between mortgage originations and
delinquencies on other types of credit obligations that are visible in
credit reporting data to assess the extent to which mortgages at
various price and DTI levels are consistent with an assessment of the
consumer's ability to repay. That commenter further asserted that
default has more to do with macroeconomic conditions than individual
ability to repay.
---------------------------------------------------------------------------

\207\ Among other things, the commenter cited a recent Experian
consumer ``payment hierarchy'' study, which used samples of
consumers at various points in time and with various combinations of
credit obligations and observed the relative performance of the
credit obligations for two years. The commenter pointed out that,
with respect to the consumers observed from February 2018 to
February 2020--the most recent cohort in the study--Experian found
that among those consumers with a mortgage, auto loan, retail card,
and general purpose credit card, 0.81 percent became 90 days
delinquent on their mortgage, whereas 4.26 percent became 90 days
delinquent on their bank card. The disparities were roughly the same
for consumers with a mortgage, bank card, and personal loan. See
Experian, Consumer payment hierarchy by trade type: Time-series
analysis (July 2020), http://images.go.experian.com/Web/ExperianInformationSolutionsInc/%7Ba6ad2c78-e1da-46eb-b97b-bf2d953ce38d%7D_Payment_Hierarchy_Report.pdf. The commenter stated
that this suggests that originating a mortgage where the consumer
lacks a reasonable ability to repay may manifest in delinquencies on
credit obligations other than the mortgage itself.
---------------------------------------------------------------------------

An industry commenter asserted that the Bureau failed to examine
the effect of a DTI limit on mortgage performance by property type. The
commenter asserted that community association housing \208\ is unique
from other housing models in that homeowners are required to pay
assessments for community operations and that consumers' DTI may
increase if community association costs increase. The commenter
provided analysis of the percentage of loans 180 days delinquent by DTI
bin, using Fannie Mae Condominium Unit Mortgages from 2002-2008 and
2015-2019. The commenter asserted that the analysis shows that, within
the sample, ``high DTI'' loans have higher 180-day delinquency rates
and the difference in delinquency rate is significant. The commenter
asserted that this is evidence that reasonable DTI requirements are
important for condominium unit mortgages and urged the Bureau to

[[Page 86332]]

study the relationship between high DTI ratios, property type, and
delinquency prior to issuing the final rule or to expand its analysis
to include property type as a variable in testing the effectiveness of
pricing as a measure of ability to repay.
---------------------------------------------------------------------------

\208\ The commenter collectively referred to homeowners
associations, condominium associations, and housing cooperatives as
``community associations.''
---------------------------------------------------------------------------

Some commenters, including a research center commenter, a consumer
advocate commenter, and two academic commenters, raised concerns that
the price-based approach would be pro-cyclical. Some commenters that
criticized the proposal as pro-cyclical expressed concern that the
price-based General QM loan definition could grant QM status to loans
exceeding consumers' ability to repay during periods of economic
expansion, lead to increased housing prices, and create systemic risk.
Similarly, some commenters that criticized the proposed approach
expressed concern that removing the DTI limit would remove a constraint
on housing prices. These commenters generally asserted that increased
housing prices could increase consumers' mortgage payments and thereby
increase the likelihood that consumers would be unable to afford their
loan. These commenters further asserted that increased housing prices
would prevent some consumers from obtaining loans altogether. For these
reasons, these commenters asserted that the price-based approach could
have a negative effect on access to credit for some consumers. These
commenters also asserted that the pro-cyclical nature of the price-
based approach could disproportionately affect underserved borrowers,
including minority consumers.
An academic commenter expressed concern that the Bureau's
delinquency analysis does not reflect the full extent of rate
compression. That commenter criticized the Bureau's delinquency
analysis of 2002-2008 first-lien purchase originations in the NMDB
(Tables 1, 3, and 5 in the proposal and above), asserting that the
analysis incorrectly assumes that rate spreads remained constant during
that seven year period. The commenter stated that the Bureau should
analyze rate spreads and associated default risk by vintage year,
citing analysis showing that rate spreads fell significantly between
2004 and 2006 and suggesting that the Bureau's analysis therefore
underestimates early delinquency rates at the height of the subprime
mortgage boom. The commenter also criticized the Bureau's delinquency
analysis of 2018 HMDA data (Tables 2, 4, and 6 in the proposal and
above) as not informative because they do not cover two full years and
are not indicative of bubble conditions. Another academic commenter
analyzed a dataset of primarily subprime loans that were securitized in
private-label securitizations during the housing bubble of the 2000s.
The commenter stated that, in that dataset, over half of the subprime
loans made between 2003 to 2005 had rate spreads that would satisfy the
proposed rate-spread test for QM status. The commenter asserts that the
data show that pricing as a measure of ability to repay fails when
there is a credit boom due to rate spread compression and urged the
Bureau to retain a DTI limit and consider an LTV ratio requirement as
well as part of the General QM loan definition.
Other commenters, including commenters that supported the proposed
price-based approach, expressed concerns about fluctuations in rate
spreads over time. An industry commenter and a research center
commenter suggested that the Bureau evaluate the rate-spread thresholds
periodically and on an as-needed basis to determine if adjustments to
the thresholds may be necessary to accommodate changing market and
economic conditions. These commenters cited the rapidly changing market
conditions at the beginning of the COVID-19 pandemic as an example of
why it may be necessary to periodically adjust rate spreads. A consumer
advocate commenter urged the Bureau not to adopt a mechanism that would
allow the Bureau to adjust the rate-spread thresholds in emergency
situations without notice and comment rulemaking.
Some commenters that did not support the price-based approach
argued that the approach would not achieve the Bureau's stated goals of
maintaining access to responsible, affordable mortgage credit. A
research center commenter cited the January 2013 Final Rule, including
the General and Temporary GSE QM loan definitions, as pro-cyclically
supporting the current home price boom by providing additional leverage
to consumers to bid up home prices. The commenter stated that this
disproportionately affects the housing markets for low-income
households and entry-level homes, where the supply is the tightest and
the increase in leverage has been the greatest. The commenter disagreed
with the Bureau's assertion that a DTI limit would unduly restrict
access to credit, as the commenter asserts that a DTI limit would
provide friction during a housing boom, which would reduce demand and
slow house price appreciation. The commenter stated that the proposed
price-based approach would not achieve the Bureau's goal of expanding
access to credit because it would be even more pro-cyclical, resulting
in higher house price appreciation. The commenter asserted that the
proposed price-based approach does not provide any friction to slow
house price appreciation and would boost demand more than the current
rule, including the Temporary GSE QM loan definition. The commenter
stated that the average rate spread for 2018 GSE purchase loans was
0.51 basis points, and asserted that creditors can therefore loosen
lending standards and increase rate spreads over the foreseeable future
with the resulting loans remaining below the 1.5 percentage point safe
harbor threshold. The commenter also noted concern that the proposal
would lower the QM standard and fuel higher risk leverage.
Some commenters specifically expressed concerns that the proposed
rule would disproportionately harm minority consumers. For example, one
commenter asserted that by replacing the DTI requirement with a pricing
threshold, the proposed rule would subject higher percentages of Black
or Hispanic borrowers to higher default rates. Another commenter stated
that the proposal would burden borrowers of color with higher mortgage
costs without underwriting and repayment ability assessment
protections. Some commenters suggested that the proposed rule is
fundamentally flawed because it may subject minority borrowers to
higher prices that are unrelated to their actual risk due to ongoing
discrimination in the market. Commenters urged the Bureau to assess and
empirically evaluate the extent to which there is fair lending risk
created by and embedded in its proposed pricing thresholds for QMs
before adopting any final rule. One commenter suggested the Bureau
disaggregate its analysis to assess the extent to which, at any given
price band (and especially at the margins), early delinquency rates are
consistent for non-Hispanic White, Black, and Hispanic consumers.
Some commenters (including industry commenters, consumer advocate
commenters, and two joint industry and consumer advocate commenters
that supported the proposed price-based approach) expressed concern
about the connection between the price-based General QM loan definition
and fair lending laws, including the Equal Credit Opportunity Act \209\
(ECOA) and the Fair Housing Act.\210\ These commenters stated that
pricing discrimination

[[Page 86333]]

contravenes the underlying tenet of the General QM Proposal that if a
consumer is purely priced on the true level of risk and ability to
repay, the rate charged to the consumer is an indicator of risk--in the
event of discriminatory pricing on a prohibited basis, the rate charged
to the consumer is not a true indicator of risk. The commenters urged
the Bureau to (1) make clear that it will not tolerate pricing
discrimination or other forms of bias in the lending process and (2)
limit the ability of a financial institution to receive the QM safe
harbor in instances where pricing discrimination has occurred. Some of
these commenters asked the Bureau to articulate explicitly that the
designation of a loan as a QM does not signify compliance with the Fair
Housing Act, ECOA, or any other anti-discrimination law pertaining to
mortgage lending. Other commenters further requested that the rule
specifically condition a General QM's safe harbor status on compliance
with ECOA. These commenters requested that the rule provide that a loan
loses its QM safe harbor status if there is a confirmed instance of
discriminatory pricing on a prohibited basis that is not self-reported
and remedied by the creditor.
---------------------------------------------------------------------------

\209\ 15 U.S.C. 1691 et seq.
\210\ 42 U.S.C. 3601 et seq.
---------------------------------------------------------------------------

A research center commenter, as well as an individual commenter,
argued that the proposed approach would disproportionately affect
minority consumers, which the commenters asserted would be a violation
of the Fair Housing Act. In particular, the commenters described
analysis indicating that increased housing prices that occur during
periods of economic expansion (which the commenters asserted would be
exacerbated as a result of the price-based General QM loan definition)
occur predominately in areas with lower-income consumers, with higher
concentrations of minority consumers. The commenters further asserted
that the price-based approach would stimulate greater availability of
credit which, combined with increased home prices, would expose low-
income households, especially minority consumers, to heightened risk of
default through higher mortgage payments. The commenters asked the
Bureau to implement a multi-factor approach that combines DTI ratio,
LTV ratio, and credit score as the key regulatory component of the
General QM loan definition. The commenters argued that this approach
would narrow the differential in delinquency rates between Black or
Hispanic consumers and non-Hispanic White consumers when compared to
delinquency rates under the proposed price-based approach.
Most commenters that did not support the proposed price-based
approach advocated for alternative approaches to the General QM loan
definition, such as retaining a DTI-based definition, a hybrid approach
based on DTI and pricing, or a multi-factor approach. Several
commenters supported a DTI-based approach rather than an approach based
on pricing. Some commenters, including an academic commenter, industry
commenters, and consumer advocate commenters, asserted that DTI is more
reflective of a consumer's ability to repay than a loan's price, which
includes factors that are not related to the specific consumer. For
example, an academic commenter argued that the rule should retain a DTI
limit because a DTI limit is effective in containing default risk. This
commenter asserted that the Bureau should increase the DTI limit above
43 percent, should further expand the DTI limit for GSE mortgage
programs that have an established track record of safe loans, and
should amend appendix Q to provide more flexible methods for
determining DTI. Other commenters advocating for a DTI-based approach
suggested that the Bureau raise the current 43 percent limit. An
industry commenter advocating for a DTI-based approach suggested
retaining the current 43 percent DTI limit. Another industry commenter
suggested that the Bureau retain a DTI limit for General QMs and raise
the threshold to 50 percent with compensating factors, such as
allowances for lower LTV ratios and for verified assets. That commenter
also suggested that residual income be permitted as a compensating
factor for a high DTI ratio but did not favor allowing residual income
as a substitute for a DTI determination. As described above, several
commenters advocating for the price-based General QM loan definition
criticized a DTI-based General QM loan definition.
Other commenters advocated for a hybrid approach to the General QM
loan definition. Some commenters, including a consumer advocate
commenter and industry commenters, advocated for an approach that would
raise the DTI ratio limit and also would expand the General QM loan
definition to include loans with higher DTI ratios if the loans are
below a set pricing threshold. For example, an industry commenter
suggested that the Bureau impose a DTI limit of 47 percent but allow a
General QM to have a DTI ratio of up to 50 percent if the rate spread
is less than 2 percentage points. Another industry commenter suggested
a hybrid approach that would retain the current DTI-based approach for
higher-priced loans. Commenters advocating for hybrid approaches
generally asserted that such approaches would better balance ensuring
consumers have the ability to repay with ensuring access to
responsible, affordable mortgage credit than a General QM loan
definition based on pricing alone. An industry commenter advocated for
an alternative method of defining General QMs that would use a DTI
limit of 45 to 48 percent, in addition to the price-based approach. As
noted above, a research center commenter suggested the Bureau define
General QMs by reference to a multi-factor approach that combines DTI
ratio, LTV ratio, and credit score. Other commenters argued against
hybrid approaches, including noting concerns about the complexity of
such approaches and concerns generally related to retaining a specific
DTI component to the rule.
Commenters also raised issues related to the timing of the
rulemaking and the issuance of the final rule. Some consumer advocate
commenters and an individual commenter requested that the Bureau pause
the rulemaking in light of the COVID-19 pandemic. Consumer advocate
commenters requesting the Bureau pause the rulemaking cited the turmoil
and economic fallout from the pandemic and the rising calls for racial
justice as reasons to pause the rulemaking. The individual commenter
and consumer advocate commenters raising this issue suggested that the
Bureau focus its efforts on assisting homeowners struggling due to the
pandemic. An industry commenter asserted that the Bureau should extend
the Temporary GSE QM loan definition while it undertakes a study of
alternative measures to evaluate consumers' ability to repay, such as
residual income or cash flow underwriting (e.g., using bank account
data that can identify the source and frequency of recurring deposits
and payments and identify remaining disposable income).
An academic commenter stated that the Bureau should not address the
Temporary GSE QM loan definition until the final resolution of the
GSEs' status. That commenter also expressed concerns that the
elimination of the Temporary GSE QM loan definition would set off a
housing crisis by making homeownership unattainable for some consumers
and risky for others if the GSEs respond to the elimination of the
Temporary GSE QM loan definition by retreating from a substantial
segment of the market. Another industry commenter expressed concern
about the provision of the Temporary GSE QM

[[Page 86334]]

loan definition that provides that the definition expires with respect
to a GSE when that GSE ceases to operate under conservatorship. The
commenter recommended that the Bureau remove this conservatorship
clause. The commenter noted that the status of the conservatorships is
outside of the Bureau's control and stated that, if one or both
conservatorships were to end on short notice, the sudden expiration of
the Temporary GSE QM loan definition would create uncertainty in the
market and reduce access to credit. The commenter stated that the
Bureau should clarify in advance of the end of conservatorship what
steps the Bureau would take with respect to the Temporary GSE QM loan
definition if the conservatorships were to end.
A research center commenter suggested that the Bureau consider the
proposed changes to the QM rule in conjunction with the more recent
Seasoned QM Proposal. The commenter suggested that the Bureau should
consider additional analysis to study the interplay between default
rates, rate-spread thresholds, loan products, and seasoning periods.
The commenter asserted that, to the extent the seasoning proposal has
implications for the General QM loan definition (or vice versa), a
combined evaluation of both proposals would be more accurate than
assessing the proposals separately.
The Final Rule
The Bureau concludes that this final rule's bright-line pricing
thresholds best balance consumers' ability to repay with ensuring
access to responsible, affordable mortgage credit. The Bureau is
amending the General QM loan definition because retaining the existing
43 percent DTI limit would reduce the size of the QM market and likely
would lead to a significant reduction in access to responsible,
affordable credit when the Temporary GSE QM definition expires. The
Bureau continues to believe that General QM status should be determined
by a simple, bright-line rule to provide certainty of QM status, and
the Bureau concludes that pricing achieves this objective. Furthermore,
the Bureau concludes that pricing, rather than a DTI limit, is a more
appropriate standard for the General QM loan definition. While not a
direct measure of financial capacity, loan pricing is strongly
correlated with early delinquency rates, which the Bureau uses as a
proxy for repayment ability. The Bureau concludes that conditioning QM
status on a specific DTI limit would likely impair access to credit for
some consumers for whom it is appropriate to presume their ability to
repay their loans at consummation. Although a pricing limit that is set
too low could also have this effect, compared to DTI, loan pricing is a
more flexible metric because it can incorporate other factors that may
also be relevant to determining ability to repay, including credit
scores, cash reserves, or residual income. The Bureau concludes that a
price-based General QM loan definition is better than the alternatives
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.
Specifically, the final rule amends Regulation Z to remove the
current 43 percent DTI limit and provides that 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 2.25 percentage
points as of the date the interest rate is set. As described further
below, the Bureau is finalizing a threshold of 2.25 percentage points,
an increase from the proposed threshold of 2 percentage points, because
the Bureau concludes that, for most first-lien covered transactions, a
2.25-percentage-point pricing threshold strikes the best balance
between ensuring consumers' ability to repay and ensuring access to
responsible, affordable mortgage credit. The final rule provides higher
thresholds for loans with smaller loan amounts and for subordinate-lien
transactions.\211\ The final rule provides an increase from the
proposed thresholds for some small manufactured housing loans to ensure
continued access to credit.\212\ The Bureau is preserving 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).
---------------------------------------------------------------------------

\211\ These thresholds are discussed below in the section-by-
section analysis of Sec. 1026.43(e)(2)(vi)(B)-(F). Final Sec.
1026.43(e)(2)(vi)(B) provides that, for first-lien covered
transactions with loan amounts greater than or equal to $66,156
(indexed for inflation) but less than $110,260 (indexed for
inflation), the APR may not exceed APOR for a comparable transaction
as of the date the interest rate is set by 3.5 or more percentage
points. Section 1026.43(e)(2)(vi)(C) provides that, for first-lien
covered transactions with loan amounts less than $66,156 (indexed
for inflation), the APR may not exceed APOR for a comparable
transaction as of the date the interest rate is set by 6.5 or more
percentage points. Section 1026.43(e)(2)(vi)(E) provides that, for
subordinate-lien covered transactions with loan amounts greater than
or equal to $66,156 (indexed for inflation), the APR may not exceed
APOR for a comparable transaction as of the date the interest rate
is set by 3.5 or more percentage points. Section
1026.43(e)(2)(vi)(F) provides that, for subordinate-lien covered
transactions with loan amounts less than $66,156 (indexed for
inflation), the APR may not exceed APOR for a comparable transaction
as of the date the interest rate is set by 6.5 or more percentage
points.
\212\ Final Sec. 1026.43(e)(2)(vi)(D) provides that, for first-
lien covered transactions secured by a manufactured home with loan
amounts less than $110,260 (indexed for inflation), the APR may not
exceed APOR for a comparable transaction as of the date the interest
rate is set by 6.5 or more percentage points.
---------------------------------------------------------------------------

The final rule requires the creditor to consider the consumer's
monthly DTI ratio or residual income. The final rule also requires the
creditor to consider 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 debt obligations, alimony, and child support, as described
in the section-by-section analysis of Sec. 1026.43(e)(2)(v)(A). The
final rule removes appendix Q and, as described further below in the
section-by-section analysis of Sec. 1026.43(e)(2)(v)(B), provides
creditors additional flexibility for defining the consumer's income or
assets and debts. As discussed below, these amounts must be determined
in accordance with 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
final rule provides a safe harbor to creditors using verification
standards the Bureau specifies. Under the final rule, this safe harbor
includes 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 USDA,
current as of the proposal's public release. However, creditors are not
required to verify income and debt according to the standards the
Bureau specifies. The final rule provides creditors with the
flexibility to develop other methods of compliance with the
verification requirements.
Consistent with the proposal, the Bureau is not amending the
existing product-feature and underwriting

[[Page 86335]]

requirements and limits on points and fees. The statutory QM
protections prohibit certain risky loan terms and features that could
increase the risk that loans would be unaffordable and also include
limited underwriting criteria that overlap with some elements of the
ATR requirements. However, the Bureau concludes, as it initially
concluded in the January 2013 Final Rule, that the General QM criteria
should include additional assurances of a consumer's ability to repay
to ensure that loans that obtain QM status warrant a presumption of
compliance with the ATR requirements. The Bureau also continues to
believe that creditors should be able to determine whether individual
mortgage transactions will be deemed QMs through a bright-line metric.
In the January 2013 Final Rule, the Bureau exercised its authority
under TILA section 129C(b)(2)(A)(vi) to impose a specific DTI limit as
part of the General QM loan definition. The Bureau concludes that
retaining the existing 43 percent DTI limit after the Temporary GSE QM
loan definition expires would significantly reduce the size of the QM
market and likely would reduce access to responsible, affordable
mortgage credit. For the reasons described in part V.B.1, the Bureau
believes that many loans currently originated under the Temporary GSE
QM loan definition would cost materially more or may not be made at
all, absent changes to the General QM loan definition. In particular,
based on 2018 data, the Bureau estimated in the proposal 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. These loans are
currently originated as QMs due to the Temporary GSE QM loan definition
but would not be originated under the current General QM loan
definition, and might not be originated at all, if the Temporary GSE QM
loan definition were to expire. An additional, smaller number of loans
that currently qualify as Temporary GSE QMs 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 appendix Q.
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 would instead obtain FHA-insured loans
if the 43 percent DTI limit remained in place. The Bureau estimated in
the proposal that, in 2018, 11 percent of Temporary GSE QMs with DTI
ratios above 43 percent exceeded FHA's loan-amount limit.\213\ Thus,
the Bureau considers that at most 89 percent of loans that would have
been Temporary GSE QMs with DTI ratios above 43 percent could move to
FHA.\214\ The Bureau expects that loans that would be originated as FHA
loans instead of under the Temporary GSE QM loan definition generally
would cost materially more for many consumers, and that some consumers
offered FHA loans might choose not to take out a mortgage because of
these higher costs. Some consumers with DTI ratios above 43 percent
would be able to obtain loans in the private market. The number of
loans absorbed by the private market would likely depend, in part, on
whether actors in the private market would be willing to assume the
legal or credit risk associated with funding loans--as non-QM loans or
small-creditor portfolio QMs--that would have been Temporary GSE QMs
(with DTI ratios above 43 percent) \215\ and, if so, whether actors in
the private market would offer more lower prices or better terms.\216\
Finally, some consumers with DTI ratios above 43 percent who would have
sought Temporary GSE QMs may make different choices, such as adjusting
their borrowing to result in a lower DTI ratio, if the 43 percent DTI
limit remained in place.\217\ However, some consumers who would have
sought Temporary GSE QMs (with DTI ratios above 43 percent) may not
obtain loans at all.\218\ 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 home purchase loans with DTI ratios above 43 percent.\219\
---------------------------------------------------------------------------

\213\ 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 Dec. 8, 2020).
\214\ 84 FR 37155, 37159 (July 31, 2019).
\215\ 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).
\216\ 84 FR 37155, 37159 (July 31, 2019).
\217\ Id.
\218\ Id.
\219\ See Assessment Report, supra note 63, at 10-11, 117, 131-
47.
---------------------------------------------------------------------------

As described in the proposal and above, the Bureau is now adopting
a price-based approach to replace the specific DTI limit in the General
QM loan definition because the Bureau 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. A
loan's price is not a direct measure of ability to repay, but the
Bureau concludes that it is an effective indirect indicator for ability
to repay. The Bureau's delinquency analysis, analysis provided by
commenters, and other analysis published in response to the Bureau's
requests for comment, provide strong evidence that rate spreads
distinguish loans that are likely to have low early delinquency rates,
and thus should receive a presumption of compliance with the ATR
requirements, from loans that are likely to have higher rates of
delinquency, which should not receive that presumption. The Bureau
finds this to be the case across a range of datasets, time periods,
loan types, measures of rate spread, and measures of delinquency.
The Bureau acknowledged in the proposal that there is significant
debate over whether a loan's price, 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. Some commenters argued that DTI
ratios are a better predictor of default than a loan's price and
therefore provide a better indicator of a consumer's ability to repay.
However, as noted in the proposal, the Bureau is not determining
whether DTI ratios, a loan's price, or some other measure is the best
predictor of loan performance. Rather, the Bureau sought to balance
considerations related to ensuring consumers' ability to repay and
maintaining access to responsible, affordable credit in selecting the
price-based approach, consistent with the purposes of the ATR/QM
provisions of TILA. As noted, the Bureau's delinquency analysis, along
with other available evidence, provide strong evidence that rate
spreads can distinguish loans that are likely to have low early
delinquency rates from loans that are likely to have higher rates of
early delinquency. Further, maintaining access to responsible,
affordable mortgage credit after the expiration of the Temporary GSE QM
loan definition is a critical policy goal, and the Bureau finds that
the price-based approach would also further this goal.
The Bureau further concludes that the price-based approach is a
more holistic and flexible measure of a consumer's ability to repay
than DTI alone, as

[[Page 86336]]

described above and in the proposal. Mortgage underwriting, and by
extension, a loan's price, generally includes an assessment of
additional factors, such as 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. In contrast, the Bureau finds that a DTI
limit may unduly restrict access to credit because it provides an
incomplete picture of the consumer's financial capacity. In particular,
and as described above, the Bureau concludes that conditioning QM
status on a specific DTI limit would likely impair access to credit for
some consumers for whom it is appropriate to presume ability to repay
their loans at consummation. Further, and as described above in part
V.B.2, there is inherent flexibility for creditors in a price-based QM
definition, which will facilitate innovation in underwriting, including
use of emerging research into alternative mechanisms to assess a
consumer's ability to repay, such as cash flow underwriting. The Bureau
concludes that the price-based approach best balances ability-to-repay
considerations with ensuring continued access to responsible,
affordable mortgage credit.
The Bureau is also concerned that including a specific DTI limit in
the General QM loan definition would be in tension with the changes to
the debt and income verification requirements in this final rule. As
described in the section-by-section analysis of Sec.
1026.43(e)(2)(v)(B) below, the Bureau is finalizing a revised approach
for verifying debt and income in Sec. 1026.43(e)(2)(v)(B) that
provides flexibility for creditors to adopt innovative verification
methods while also providing greater certainty that a loan has QM
status. The revised verification approach allows creditors flexibility
to use any reasonable verification method and criteria, provided that
the creditor verifies debt and income using reasonably reliable third-
party records. The final rule provides a safe harbor for creditors that
use specific versions of manuals listed in commentary and provides that
creditors also obtain a safe harbor if they ``mix and match'' the
verification standards in those manuals, or use revised versions of the
manuals that are ``substantially similar'' to the versions listed in
the commentary. The Bureau is concerned that this verification
approach, which provides flexibility to creditors in verifying debt and
income, could create uncertainty if it were used in conjunction with a
specific DTI limit. In particular, the Bureau is concerned that it
could lead to disagreement among market participants over whether the
DTI ratio for a given loan is above or below the limit and therefore
whether the loan is a QM, which could complicate the sale of loans into
the secondary market and disrupt access to credit. The Bureau has not
identified verification approaches that, 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 also provide
flexibility to creditors in order to preserve access to responsible,
affordable mortgage credit.
The Bureau also concludes that the price-based approach will ensure
continued access to responsible, affordable mortgage credit after the
expiration of the Temporary GSE QM loan definition. As described above,
the proposal provided analysis of the potential effects on access to
credit of a price-based approach to defining a General QM using 2018
HMDA data to estimate the percentage of conventional first-lien
purchase loans within various price-based safe harbor and General QM
thresholds. The Bureau has adjusted that analysis for the final rule to
account for the final rule's higher pricing threshold for some small
manufactured home loans, discussed below in the section-by-section
analysis of Sec. 1026.43(e)(2)(vi). The Bureau has also adjusted its
analysis to reflect a revised methodology to identify creditors
eligible to originate QMs as small creditors under Sec. 1026.43(e)(5).
Specifically, the Bureau lacks data on assets for certain non-
depository creditors. The revised methodology estimates that such
lenders have assets over $2 billion if their volume of 2018 HMDA
originations not reported as sold exceeds $400 million. This revised
methodology slightly reduces the estimated number of creditors eligible
to originate QMs as small creditors as compared to the proposal's
estimates. Specifically, a small number of non-depository creditors who
primarily report loans as not sold (e.g., several creditors that
specialize in manufactured home lending) are now estimated to be
ineligible to originate QMs as small creditors. These adjustments are
all reflected in Table 7A. Table 7A also provides an estimate of the
percentage of loans under the pricing thresholds of 1.5 percent above
APOR (safe harbor) and 2.25 above APOR (rebuttable presumption) adopted
in this final rule.

Table 7A--Final Rule's 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
(share of QM overall (share
Approach conventional of conventional
purchase market) purchase market)
------------------------------------------------------------------------
Temporary GSE QM + DTI 43......... 89.6 94.7
Final Rule (SH 1.50, RP 2.25)..... 91.3 96.3
SH 0.75, RP 1.50.................. 74.2 93.9
SH 1.00, RP 1.50.................. 83.1 93.9
SH 1.25, RP 1.75.................. 88.1 95.0
SH 1.35, RP 2.00.................. 89.6 95.8
SH 1.40, RP 2.00.................. 90.2 95.8
SH 1.50, RP 2.00.................. 91.3 95.8
SH 1.75, RP 2.25.................. 92.8 96.3
SH 2.00, RP 2.50.................. 93.9 96.6
------------------------------------------------------------------------

As discussed further below, the Bureau is maintaining the current
safe harbor threshold for QMs, such that a loan is a safe harbor QM if
its APR does not exceed APOR for a comparable transaction by 1.5
percentage points or more as of the date the interest rate is set (or
by 3.5 percentage points or more for subordinate-lien transactions). As

[[Page 86337]]

discussed in the section-by-section analysis of Sec.
1026.43(e)(2)(vi)(A), the Bureau is adopting a threshold of 2.25
percentage points over APOR for transactions with a loan amount greater
than or equal to $110,260 (indexed for inflation).\220\ As shown in
Table 7A, under these thresholds and using the 2018 HMDA data, 91.3
percent of conventional purchase loans would have been safe harbor QMs
and 96.3 percent would have been safe harbor QMs or rebuttable
presumption QMs.
---------------------------------------------------------------------------

\220\ As discussed in the section-by-section analysis of Sec.
1026.43(e)(2)(vi)(B)-(F), the Bureau proposed a loan amount
threshold of $109,898 to align with the threshold for the limits on
points and fees, as updated for inflation, in Sec. 1026.43(e)(3)(i)
and the associated commentary. On August 19, 2020, the Bureau issued
a final rule adjusting the loan amounts for the limits on points and
fees under Sec. 1026.43(e)(3)(i), based on the annual percentage
change reflected in the CPI-U in effect on June 1, 2020. 85 FR 50944
(Aug. 19, 2020). To ensure consistency, the Bureau is finalizing a
loan amount threshold of $110,260 rather than a threshold of
$109,898.
---------------------------------------------------------------------------

As discussed above in part V.B.3, the Bureau also analyzed the
potential effects of a DTI-based approach on the size of the QM market,
as reflected in Table 8 in the proposal and above. For comparison, the
Bureau has also adjusted that analysis to reflect the revised
methodology, discussed above, to identify creditors eligible to
originate QMs as small creditors under Sec. 1026.43(e)(5). These
adjustments are reflected in Table 8A.

Table 8A--Final Rule's Share of 2018 Conventional Purchase Loans Within
Various Safe Harbor QM and Rebuttable Presumption QM Definitions (HMDA
Data) Under the Final Rule
------------------------------------------------------------------------
Safe harbor QM
(share of QM overall (share
Approach conventional of conventional
market) market)
------------------------------------------------------------------------
Temporary GSE QM + DTI 43......... 89.6 94.7
Final Rule (Pricing at 2.25)...... 91.3 96.3
DTI limit 43...................... 68.9 73.1
DTI limit 45...................... 75.7 80.5
DTI limit 46...................... 78.5 83.5
DTI limit 47...................... 81.1 86.3
DTI limit 48...................... 83.8 89.1
DTI limit 49...................... 86.7 92.2
DTI limit 50...................... 90.5 96.3
------------------------------------------------------------------------

As noted above, some commenters stated that the proposed price-
based approach would expand access to credit for certain underserved
market segments, such as low-income and minority consumers. At the same
time, some commenters, including a consumer advocate commenter,
expressed concern that a price-based approach would curtail access to
credit for some low-income and minority consumers because these
consumers are more likely to have mortgages with higher rate spreads.
The Bureau concludes that the thresholds in the final rule best balance
considerations related to ability to repay while retaining access to
responsible, affordable mortgage credit, including for minority
consumers. In particular, using 2018 HMDA data that was used in the
proposal to estimate the size of the QM market under various pricing
thresholds, the Bureau estimates that 96.8 percent of conventional
purchase loans to minority consumers would receive QM status under the
final rule, compared to 94.9 percent under the current rule with the
Temporary GSE QM loan definition and the General QM loan definition
with a DTI limit of 43 percent, or 67.9 percent under only a General QM
loan definition with a DTI limit of 43 percent. Under the proposed
price-based thresholds, 95.5 percent of conventional purchase loans to
minority consumers would have received QM status.
Finally, the Bureau concludes that a price-based General QM loan
definition will provide compliance certainty to creditors because they
will be able to readily determine whether a loan is a General QM. As
described above, creditors have experience with APR calculations due to
the existing price-based regulatory requirements 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 concludes that the price-based
approach will provide certainty to creditors regarding a loan's status
as a QM.
The Bureau acknowledges that a small percentage of loans eligible
for General QM status under the current rule would be ineligible for
General QM status under the final rule. Specifically, those are loans
with DTI ratios below 43 percent and that otherwise satisfy the current
General QM loan definition that are priced above the rate-spread
thresholds established by the final rule (e.g., 2.25 percentage points
or higher for a first lien transaction with a loan amount greater than
or equal to $110,260 (indexed for inflation)). As described below in
the Dodd-Frank Act section 1022(b) analysis, the Bureau expects that
creditors may adjust the price of some of these loans to meet the
General QM pricing thresholds under the final rule. For other loans,
creditors may instead originate those loans as non-QM loans or under
other QM definitions, including as FHA loans, although the Bureau
acknowledges that consumers may pay higher costs for these loans. The
Bureau further acknowledges that some consumers who would be eligible
for a General QM under the current rule but not under the final rule's
pricing thresholds may be unable to obtain a mortgage, although the
Bureau expects that the number of such consumers will be small. As
shown in Table 8A and discussed further below in the section-by-section
analysis of Sec. 1026.43(e)(2)(vi), the final rule represents an
overall expansion of loans eligible for General QM status relative to
the current definition. Further, and as the Bureau observed in the
January 2013 rule, it is not possible to define by a bright-line rule a
class of mortgages for which each consumer will have ability to
repay.\221\ The Bureau's decision to adopt a price-based approach
reflects an appropriate balance of credit access and ability-to-repay
considerations, taking into account the most efficient and effective
means to ensure compliance.
---------------------------------------------------------------------------

\221\ See 78 FR 6408, 6511 (Jan. 30, 2013).

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[[Page 86338]]

The Bureau also acknowledges comments suggesting that a test that
combines rate spread and DTI may better predict early delinquency rates
than either metric on its own. However, the Bureau's concerns about a
DTI-based approach also apply to these hybrid approaches. The Bureau
agrees with commenters asserting that hybrid approaches would be unduly
complex and are not necessary given that price is also strongly
correlated with loan performance, as described above. The Bureau also
concludes that multi-factor approaches suggested by commenters are
complex and unnecessary given that price is strongly correlated with
loan performance.
One commenter criticized the price-based approach based on analysis
showing that for loans with identical rate spreads, default occurrences
vary, and for loans with similar default occurrences, the rate spreads
vary greatly. The Bureau disagrees that such a finding shows that price
is not an effective indicator of a consumer's ability to repay. The
commenter's analysis shows that pricing and the commenter's preferred
risk metric are both correlated with early delinquency, even when
holding the other metric fixed. This only demonstrates that neither
metric is perfectly correlated with early delinquency and that each
metric is predictive of early delinquency independently of the other.
The Bureau has concluded that pricing is an effective indicator of a
consumer's ability to repay in part because it is strongly correlated
with early delinquency, based on the Bureau's delinquency analysis and
external analysis described above, recognizing that there is not a
perfect correlation between price and early delinquency. However, there
also is not a perfect correlation between early delinquency and DTI,
nor between early delinquency and the alternative measures proposed by
commenters. Because many different factors are correlated with early
delinquency, the Bureau expects that, even at a fixed level of one
potential measure of a consumer's ability to repay, early delinquency
rates will still vary with other factors. While multi-factor approaches
that incorporate additional variables may achieve higher correlations
with early delinquency, such approaches are more complex and may
involve greater prescriptiveness.
As noted above, a consumer advocate commenter expressed concern
about the use of 60-day early delinquency rates in the first two years
of a mortgage to measure ability to repay. That commenter raised
concerns that mortgage payments may not be affordable but consumers may
forgo paying other expenses so that they are able to continue making
timely mortgage payments. The Bureau acknowledges that this may occur
for some consumers, consistent with the Experian analysis cited by the
consumer advocate commenter which showed that consumers with a mortgage
and other credit obligations were less likely to be delinquent on their
mortgage than on their other credit obligations.\222\ However, the
Bureau believes that, as a general matter, 60-day early delinquencies
in the first two years is an appropriate metric to measure ability to
repay. Moreover, the Bureau notes that an analysis provided by a
research center commenter, described above, measured loan performance
by whether the consumer was ever 60 days or more delinquent, rather
than by reference to the two-year period used in the Bureau's
delinquency analysis. The commenter noted that its analysis also found
delinquency to be highly correlated with rate spreads, when delinquency
is measured over the life of the loan.
---------------------------------------------------------------------------

\222\ See supra note 207.
---------------------------------------------------------------------------

As noted above, some comments asserted that pricing is not an
appropriate QM criterion because it reflects risk of loss to the
creditor and not the consumer's ability to repay the loan. The proposal
recognized that there is a distinction between credit risk, which
largely determines pricing relative to APOR, and a particular
consumer's ability to repay, which is one component of credit risk.
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. While the Bureau recognizes these
concerns about a price-based approach, the Bureau's delinquency
analysis and the analyses by external parties discussed above provide
evidence that rate spreads are correlated with delinquency. Further,
the Bureau notes that the final rule 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. These requirements are discussed further below
in the section-by-section analysis of Sec. 1026.43(e)(2)(v)(A) and are
included in the General QM loan definition to further ensure that,
consistent with the purposes of TILA, creditors appropriately consider
consumers' financial capacity and that consumers are thus offered and
receive residential mortgage loans on terms that reasonably reflect
their ability to repay the loan.
Similarly, some commenters raised concerns that factors unrelated
to the consumer, or the individual loan, can influence the price of a
loan and that a price-based approach may be more consistent with some
business models than others. Some commenters also raised concerns that
a price-based approach is variable and that whether a consumer receives
a General QM under the price-based approach may vary by creditor. While
the Bureau acknowledges these criticisms of a price-based approach, the
Bureau's delinquency analysis and the analyses by external parties
discussed above provide evidence that rate spreads are correlated with
delinquency, across a range of datasets, time periods, loan types,
measures of rate spread, and measures of delinquency.
The Bureau also recognizes concerns that a price-based approach may
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. The proposal acknowledged that creditors are likely to
react to the final rule by adjusting the price of some loans they offer
to fall just below the threshold separating QMs from non-QM loans. To
the extent creditors offer loans at lower prices to obtain QM status
under the final rule, consumers will pay less for those loans. Those
loans would also be subject to the QM product-feature restrictions and
limits on points and fees, which would provide a benefit to consumers
who might have otherwise received a non-QM loan that included a more
risky product feature or included points and fees above the QM limits.
The Bureau does not expect significant changes in loan pricing as a
result of the safe harbor threshold, which exists under the current
ATR/QM Rule. The Bureau points to research cited by some commenters,
which suggests that, while creditors reacted to the safe harbor pricing
threshold in the January 2013 Final Rule by reducing the share of
higher-priced mortgages that they originated, the economic significance
of the response was minor and did not materially affect the mortgage
market at the time the rule took effect.\223\
---------------------------------------------------------------------------

\223\ Neil Bhutta & Daniel Ringo, Effects of the Ability to
Repay and Qualified Mortgage Rules on the Mortgage Market, FEDS
Notes, Bd. of Governors of the Fed. Reserve Sys. (2015), https://www.federalreserve.gov/econresdata/notes/feds-notes/2015/effects-of-the-ability-to-repay-and-qualified-mortgage-rules-on-the-mortgage-market-20151229.html.
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The Bureau disagrees with the comment asserting that the price-
based

[[Page 86339]]

approach is inappropriate because LTV ratios are a component of
pricing. Nothing in the statutory text of TILA prohibits the Bureau
from adopting the price-based approach. Indeed, TILA provides the
Bureau with considerable flexibility to determine the appropriate
criteria to define QM and to adjust the statutory QM requirements as
necessary or proper to achieve Congress's objectives. The Bureau's
authority with respect to defining QMs is discussed above in part IV.
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). 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 TILA sections
129B and 129C, to prevent circumvention or evasion thereof, or to
facilitate compliance with such sections. In addition, TILA section
129C(b)(3)(A) directs the Bureau to prescribe regulations to carry out
the purposes of section 129C.
The Bureau finds that the price-based approach is consistent with
this authority and with the purposes of TILA and section 129C's
presumption of compliance with the ATR requirements for QMs. TILA
sections 129B and 129C do not suggest that, in prohibiting creditors
from considering the consumers' equity in the property securing the
transaction as a financial resource to repay the loan, Congress
intended to limit the Bureau's authority to impose loan pricing
restrictions that, if incorporated into the QM definition, would
provide sufficient assurance of the consumer's ability to repay. The
Dodd-Frank Act amendments to TILA rely on pricing thresholds to
distinguish between and among categories of QM and non-QM loans that
should receive heightened consumer protections.\224\ And, as described
above, Dodd-Frank amendments to TILA in part codify and expand a pre-
existing HOEPA regime that relied on pricing for similar purposes.
Further, the Bureau notes that under this final rule creditors must
consider the consumer's monthly DTI ratio or residual income; 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 debt obligations, alimony, and child support to
satisfy the General QM loan definition.\225\ In light of this
requirement, including the exclusion of the value of the dwelling that
secures the loan from the assets the creditor may consider for purposes
of this requirement,\226\ the Bureau concludes that the price-based
approach is consistent with TILA section 129C(a)(3). For these reasons,
and consistent with the statutory text, structure and purposes of the
TILA, the Bureau concludes that it is an appropriate use of its
authority to include a loan's price as one criterion to define General
QMs.
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\224\ See, e.g., TILA section 129C(b)(2)(C) (establishing
distinct points-and-fees thresholds for QMs based on loan pricing);
section 129C(c)(ii) (establishing price-based restrictions on QMs
permitted to impose prepayment penalties).
\225\ See section-by-section analysis of Sec.
1026.43(e)(2)(v)(A).
\226\ In the January 2013 Final Rule, the Bureau exercised its
authority under TILA section 105(a) to provide, in the context of
the ATR provisions in Sec. 1026.43(c)(2)(i), that a creditor may
not look to the value of the dwelling that secures the covered
transaction in assessing the consumer's repayment ability, instead
of providing that a creditor may not look to the consumer's equity
in the dwelling, as provided in TILA section 129C(a). The Bureau
adopted this approach to provide broader protections to consumers.
See 78 FR 6408, 6463-64 (Jan. 30, 2013).
---------------------------------------------------------------------------

With respect to commenters expressing concern about the sensitivity
of a price-based General QM loan definition to macroeconomic cycles,
the Bureau acknowledged this concern in the proposal. The proposal
noted that periods of economic expansion, increasing house prices, and
strong demand from consumers with weaker credit characteristics often
lead to greater availability of credit. This is because as house prices
increase, home equity also increases, and secondary market investors
expect fewer losses accordingly. Even if a consumer were to default,
increasing collateral values make it more likely that the investors
would still recover the full amount of their investment. This increased
likelihood of recovery may result in an underpricing of credit risk. To
the extent such underpricing occurs, rate spreads over APOR would
compress and additional higher-priced, higher-risk loans would fit
within the proposed General QM loan definition. Further, the proposal
recognized that, 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. The
proposal recognized that, 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
than a binding DTI limit in deterring risky loans during periods of
strong housing price growth or encouraging safe loans during periods of
weak housing price growth. As described above, some commenters to the
proposal highlighted these concerns and argued that the Bureau should
not finalize the price-based approach due to potential systemic risks.
However, the Bureau notes that a binding DTI limit risks restricting
access to affordable credit relative to this final rule. The Bureau
concludes that the advantages of the price-based approach in providing
a flexible and holistic indicator of ability to repay outweigh the
macroeconomic cycle concerns as considerations toward ensuring the
availability of responsible, affordable mortgage credit. In addition,
the Bureau believes that the QM product feature restrictions, the
consider and verify requirements, and the final rule's special rule for
ARMs mitigate some concerns regarding the pro-cyclical risks during
economic expansions.
As noted, a commenter expressed concern that the Bureau's
delinquency analysis does not reflect the full extent of rate
compression. That commenter argued that the Bureau should analyze rate
spreads and associated default risk by vintage year, citing analysis
showing that rate spreads fell significantly between 2004 and 2006 and
suggesting that the Bureau's analysis therefore may not capture
potential declines in the correlation between price and early
delinquency rates at the height of the subprime mortgage boom. With
respect to this comment, the Bureau recognizes, as stated above, that
there is not a

[[Page 86340]]

perfect correlation between pricing and early delinquency rates.
However, the Bureau has concluded that pricing is strongly correlated
with early delinquency, based on the Bureau's delinquency analysis,
external analysis described in the proposal, and analysis provided by
commenters, which cover a wide range of years and economic
conditions.\227\ With respect to other commenters that expressed
concerns about fluctuations in rate spreads over time, the Bureau
recognizes that overall market spreads expand and tighten over time, as
described above.\228\ The Bureau concludes the pricing thresholds in
the final rule provide the best balance between ability-to-repay
considerations and ensuring access to responsible, affordable mortgage
credit. The Bureau further notes that it monitors changing market and
economic conditions and it could consider changes to the thresholds if
circumstances warrant.
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\227\ While the Bureau's conclusion on the strong correlation
between pricing and early delinquency is based on its own
delinquency analysis in this final rule, an Urban Institute analysis
cited by a commenter also showed a positive correlation between
pricing and rate spread during the years 2005 to 2008, largely
covering the market conditions present during the subprime mortgage
boom. See supra note 194.
\228\ With respect to the commenter who presented analysis of
subprime loans from the 2000s housing boom and asserted that the
data show that pricing as a measure of ability to repay fails when
there is a credit boom due to rate spread compression, the Bureau
notes that it is unclear from the analysis whether these loans would
have also satisfied the QM product feature restrictions and limits
on points and fees, or how the performance of the loans varied with
rate spreads.
---------------------------------------------------------------------------

With respect to commenters that expressed concern about the
connection between the price-based General QM loan definition and fair
lending laws, including ECOA and the Fair Housing Act, the Bureau
recognizes that some creditors may violate Federal fair lending laws by
charging certain borrowers higher prices on the basis of race or
national origin compared to non-Hispanic White borrowers with similar
credit characteristics, and the Bureau reaffirms its commitment to
consistent, efficient, and effective enforcement of Federal fair
lending laws.\229\ The Bureau further emphasizes that the General QM
loan definition, as amended by this final rule, does not create an
inference or presumption that a loan satisfying the General QM loan
definition is compliant with any Federal, State, or local anti-
discrimination laws that pertain to lending. A creditor has an
independent obligation to comply with ECOA and Regulation B, and an
effective way for a creditor to minimize and evaluate fair lending
risks under these laws is by monitoring their policies and practices
and implementing effective compliance management systems. The Bureau
declines to amend the ATR/QM Rule to provide that a loan loses its QM
safe harbor status if there is a confirmed instance of discriminatory
pricing on a prohibited basis that is not self-reported and remedied by
the creditor.
---------------------------------------------------------------------------

\229\ See, e.g., Consent Order, U.S. v. Bancorpsouth Bank, No.
1:16-cv-00118, ECF No. 8 (N.D. Miss.) (July 25, 2016), https://files.consumerfinance.gov/f/documents/201606_cfpb_bancorpSouth-consent-order.pdf (joint action for discriminatory mortgage lending
practices including charging African-American customers for certain
mortgage loans more than non-Hispanic White borrowers with similar
loan qualifications).
---------------------------------------------------------------------------

The Bureau disagrees with commenters who assert that the price-
based General QM loan definition does not advance fair lending. As
noted above, the Bureau concludes 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 their loans at consummation. Specifically, using a bright-line
DTI ratio threshold may have an adverse impact on responsible access to
credit, including for low-to-moderate-income and minority homeowners.
As discussed above, a price-based General QM loan definition is better
than the alternatives 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 therefore expects that this final rule will improve access to
credit for low-to-moderate-income and minority homeowners, without the
unnecessary complexity of hybrid or multi-factor alternatives urged by
some commenters.
With respect to the comment that provided analysis of loan
performance for loans secured by condominiums and urged the Bureau to
study the relationship between high DTI ratios, property type, and
delinquency prior to issuing the final rule or expand its delinquency
analysis to include property type as a variable, the Bureau declines to
undertake that further analysis at this time. As described above, the
Bureau has concluded that pricing is strongly correlated with early
delinquency and is concerned that a DTI limit may have an adverse
impact on responsible access to credit. The Bureau also notes that fees
and special assessments imposed by a condominium, cooperative, or
homeowners association are mortgage-related obligations that must be
included in the calculation of the consumer's debt-to-income or
residual income for purposes of Sec. 1026.43(e)(2)(v)(A) and therefore
are incorporated into the General QM loan definition. Further, mortgage
creditors often account for the property type when pricing a mortgage,
and the rate-spread threshold would thus capture any differential risk
for such loans that is reflected in their price. However, the Bureau
will monitor the effects of the General QM final rule to determine if
future changes are necessary to ensure continued access to responsible,
affordable credit, including for particular property types such as
condominiums.
The Bureau also declines to eliminate the conservatorship clause of
the Temporary GSE QM loan definition. As explained in the Extension
Final Rule, when the Bureau adopted the January 2013 Final Rule, the
FHFA's conservatorship of the GSEs was central to its willingness to
presume that loans that are eligible for purchase, guarantee, or
insurance by the GSEs would be originated with appropriate
consideration of consumers' ability to repay.\230\ If the GSEs are not
under conservatorship, the Bureau is concerned about presuming that
loans eligible for purchase or guarantee by either of the GSEs have
been originated with appropriate consideration of the consumer's
ability to repay.
---------------------------------------------------------------------------

\230\ 78 FR 6408, 6534 (Jan. 13, 2013) (stating that the Bureau
believed it was appropriate to presume that loans that are eligible
to be purchased or guaranteed by the GSEs ``while under
conservatorship'' have been originated with appropriate
consideration of consumers' ability to repay ``in light of this
significant Federal role and the government's focus on affordability
in the wake of the mortgage crisis'').
---------------------------------------------------------------------------

With respect to the comment that expressed concern about the
expiration of the Temporary GSE QM loan definition in light of the
current GSE loan market, the Bureau anticipates that the final rule
will preserve access to credit relative to the status quo. In
particular, the Bureau concludes the General QM loan definition's
pricing thresholds included in this final rule, in conjunction with the
debt and income verification provisions in Sec. 1026.43(e)(2)(v)(B),
will ensure continued access to responsible, affordable mortgage
credit, including for loans that have historically been eligible for
purchase by the GSEs. With respect to the comment suggesting the Bureau
consider evaluating changes to the General QM loan definition and the
Seasoned QM Proposal at the same time, the Bureau has considered the
expected effects of both proposals and is issuing rules on both of
these topics at the same time.

[[Page 86341]]

C. The QM Presumption of Compliance Under a Price-Based General QM Loan
Definition

To address potential uncertainty regarding the reasonableness of
some ability-to-repay determinations, all QMs provide creditors with a
presumption of compliance with the ATR requirements. Lower-priced QMs
provide a conclusive presumption of compliance (i.e., a safe harbor)
whereas higher-priced QMs provide a rebuttable presumption of
compliance.\231\ The proposal would have preserved the current Sec.
1026.43(b)(4) pricing threshold that generally separates safe harbor
QMs from rebuttable presumption QMs, such that 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).\232\
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\231\ As discussed in the section-by-section analysis of Sec.
1026.43(e)(2)(vi) below, this final rule provides that loans with an
APR exceeding the APOR by 2.25 percentage points or more (or
exceeding higher thresholds for certain small or subordinate-lien
loans) are not eligible for General QM status under Sec.
1026.43(e)(2). Unless otherwise eligible for QM status (such as
under Sec. 1026.43(e)(5) or Sec. 1026.43(f)), for non-QM loans a
creditor must make a reasonable and good faith determination of the
consumer's ability to repay and does not receive a presumption of
compliance.
\232\ Subordinate-lien transactions are discussed below in the
section-by-section analysis of Sec. 1026.43(e)(2)(vi).
---------------------------------------------------------------------------

1. Considerations Related to the Safe Harbor Threshold
As stated in the proposal, 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 QMs receive a
conclusive or rebuttable presumption of compliance with the ATR
provisions. As discussed above in part II.A, 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.\233\ 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.\234\ 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.'' \235\
---------------------------------------------------------------------------

\233\ 78 FR 6408, 6507 (Jan. 30, 2013).
\234\ Id. at 6511.
\235\ 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.\236\ 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.\237\ 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.\238\ 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.\239\ 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.\240\
---------------------------------------------------------------------------

\236\ Id. at 6511.
\237\ Id.
\238\ Id.
\239\ Id.
\240\ 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 of some lenders 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.\241\ 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.\242\ 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.\243\ The Bureau noted that subprime loans
have performed considerably worse than prime loans.\244\ 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
increase by a modest amount 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.\245\
---------------------------------------------------------------------------

\241\ Id.
\242\ Id.
\243\ Id.
\244\ Id. at 6511.
\245\ Id. at 6511-13.
---------------------------------------------------------------------------

2. The Bureau's Proposal
The safe harbor threshold. The Bureau did not propose to alter the
approach in the current ATR/QM Rule, under current Sec. 1026.43(b)(4)
and (e)(1)(i), of providing a conclusive presumption of compliance with
the ATR requirements (i.e., a safe harbor) to loans that meet the
General QM requirements in Sec. 1026.43(e)(2) and for which the APR
exceeds the APOR by less than 1.5 percentage points (or by less than
3.5 percentage points for subordinate-lien loans).\246\ In the
proposal, when discussing the safe harbor threshold, the Bureau
restated its preliminary conclusion 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 also
preliminarily concluded 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 further noted that, under the proposed price-based approach,
creditors would be required to consider DTI or residual income for a
loan to satisfy the requirements of the General QM loan definition. The
Bureau also stated that a safe harbor for prime QMs appears to be
supported by the better performance of prime loans compared to subprime
loans, and by the potential benefits of greater competition and access
to credit from the greater certainty and reduced litigation risk
arising from a safe harbor.

[[Page 86342]]

The Bureau tentatively concluded that the current safe harbor threshold
of 1.5 percentage points for first liens restricts safe harbor QMs to
lower-priced, generally less risky, loans while ensuring that
responsible, affordable credit remains available to consumers. The
Bureau stated its general belief that 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). For the reasons discussed below, this final rule is
maintaining the current safe harbor thresholds in current Sec.
1026.43(b)(4) and (e)(1)(i).
---------------------------------------------------------------------------

\246\ Subordinate-lien transactions are discussed below in the
section-by-section analysis of Sec. 1026.43(e)(2)(vi).
---------------------------------------------------------------------------

Rebuttable Presumption QMs. The proposal generally would have
maintained the current ATR/QM Rule's rebuttable presumption of
compliance with the ATR requirements for loans that exceed the safe
harbor threshold but that otherwise meet the General QM requirements in
Sec. 1026.43(e)(2).\247\ The Bureau did not propose 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 rebutted in
cases in which creditors have met the QM requirements. The Bureau also
noted that the standard was consistent with the standard in the 2008
HOEPA Final Rule.\248\ 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.'' \249\ 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.'' As a result, the Bureau focused
on 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.\250\
---------------------------------------------------------------------------

\247\ However, as discussed in the section-by-section analysis
of Sec. 1026.43(e)(2)(vi) below, under the proposal a loan would
not have been eligible for QM status (i.e., would not receive any
presumption of compliance with the ATR requirements) under Sec.
1026.43(e)(2) if the loan exceeded the separate pricing thresholds
in proposed Sec. 1026.43(e)(2)(vi).
\248\ 78 FR 6408, 6512 (Jan. 30, 2013).
\249\ See Regulation Z comment 34(a)(4)(iii)-1.
\250\ 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 with the
ATR requirements, 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 did not propose to change the standard for rebutting the
presumption of compliance with the ATR requirements and stated its
belief that the existing standard continues to balance consumer
protection and access-to-credit considerations. For example, the Bureau
did not propose 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 determined 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 anticipated that
the addition of a 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 anticipated that the addition
of a 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 determined 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 QM standards. The Bureau did not receive comments regarding the
grounds on which the presumption of compliance can be rebutted.
3. Comments on the Safe Harbor Threshold
The Bureau received several comments concerning the proposed 1.5-
percentage-point safe harbor threshold. A joint comment from consumer
advocates stated that, if the Bureau finalizes a price-based approach,
the proposed threshold should not be increased. A GSE commenter
supported the 1.5-percentage-point threshold and stated it would be
equally supportive if the Bureau increases the threshold. Various
commenters, including a research center and several consumer advocate
and industry commenters, specifically recommended increasing the safe
harbor threshold to 2 percentage points. Commenters generally
acknowledged that delinquency rates for safe harbor QMs would increase
as the pricing threshold increases but expressed differing views on
whether the proposed threshold should nonetheless be increased to
expand access to credit.
A joint comment from consumer advocates generally objected to a
price-based approach but specifically stated that increasing the safe
harbor threshold would not significantly increase access to credit. The
joint comment stated that the ATR/QM Rule's 1.5-percentage-point
threshold is consistent with the Board's 2008 HOEPA Final Rule, which
offered only a rebuttable presumption--not a safe harbor--for loans
priced 1.5 percentage points or more above APOR. The joint comment
stated that in markets with less competition, including minority
communities, creditors routinely face no downward pressure on prices
and will charge consumers more than they would in a more competitive
market. The joint comment stated that, in less competitive markets, the
current 1.5-percentage-point safe harbor threshold has

[[Page 86343]]

benefited consumers by providing some downward pressure on prices.
Notwithstanding such creditor reticence to price loans beyond the safe
harbor threshold, the joint comment stated that there has not been an
actual difference in litigation risk (i.e., for rebuttable presumption
QMs versus safe harbor QMs) that would reasonably justify increasing
the threshold. The joint comment further stated that increasing the
safe harbor pricing threshold would not expand consumers' access to
credit but instead would facilitate creditors raising prices to take
advantage of less competitive markets and result in the same consumers
obtaining the same loans but at higher prices.
A research center generally objected to a price-based approach but
also stated that increasing the safe harbor threshold would not have a
significant impact on access to credit. Based on 2018 loan data, the
commenter stated that the current pricing threshold has relatively
little impact on originating rebuttable presumption QMs priced 1.5
percentage points or more above APOR. Moreover, the commenter stated
that even for rebuttable presumption QMs, litigation risk would be
significantly reduced by the proposed rule's income and debt
verification safe harbor, as discussed in the section-by-section
analysis of Sec. 1026.43(e)(2)(v)(B).
Various commenters, including a research center and multiple
consumer advocate and industry commenters, specifically recommended
increasing the safe harbor threshold to 2 percentage points, arguing
that it would achieve a better balance of ability to repay with access
to credit. Several of those commenters referenced the research center's
analysis of Fannie Mae and Black Knight McDash data and stated that a
2-percentage-point threshold would increase the delinquency rate for
safe harbor QMs. However, that subset of commenters argued that the
analysis showed that the increased delinquency rate would nonetheless
remain low relative to delinquency rates experienced in the past 20
years. Those commenters stated that addressing access-to-credit
concerns with a 2-percentage-point threshold would therefore strike an
appropriate balance with ability-to-repay concerns. One consumer
advocate commenter stated that delinquency rate improvement, relative
to the Great Recession, is largely due to the effects of the Dodd-Frank
Act, which has helped ensure stronger product protections, better
underwriting, and improved income, employment, and asset verification
and documentation. Citing an FHFA working paper that was also cited in
the General QM Proposal,\251\ a joint comment from consumer advocate
and industry groups stated that loans with non-QM features--including
interest-only loans, ARM loans that combined teaser rates with
subsequent large jumps in payments, negative amortization loans, and
loans made with limited or no documentation of the borrower's income or
assets--accounted for about half of the rise in risk leading up to the
2008 financial crisis and subsequent passage of the Dodd-Frank Act.
Given that the delinquency rate would be low on a relative basis, these
commenters stated that addressing access-to-credit concerns with a 2-
percentage-point threshold would strike an appropriate balance with
ability-to-repay concerns.
---------------------------------------------------------------------------

\251\ Davis et al., supra note 179.
---------------------------------------------------------------------------

Multiple consumer advocate and industry commenters stated that, in
contrast to safe harbor QMs, creditors generally are less willing to
make rebuttable presumption QMs. These commenters stated that their
unwillingness to make rebuttable presumption QMs is evidenced by 2019
HMDA data showing that less than 5 percent of conventional, first-lien
purchase loans were priced 1.5 percentage points or more above
APOR.\252\ Citing Board economists' analysis of 2014 HMDA data,\253\ a
joint comment from consumer advocate and industry groups stated that
creditors reduced the share of higher-priced mortgages that they
originated in response to the ATR/QM Rule. A research center stated
that, based on 2019 HMDA data, increasing the safe harbor threshold to
2 percentage points would have replaced 75,265 rebuttable presumption
QMs with safe harbor QMs instead. The research center stated that,
because safe harbor QMs would provide those loans' creditors with
greater protection from litigation than rebuttable presumption QMs, it
suspects that the reduction in litigation risk would result in better
pricing for consumers. The research center, as well as multiple
consumer advocate and industry commenters, stated that increasing the
safe harbor threshold to 2 percentage points would improve access to
credit by reducing racial and ethnic disparities while helping increase
lending volumes for every racial and ethnic group.
---------------------------------------------------------------------------

\252\ Bureau of Consumer Fin. Prot., Data Point: 2019 Mortgage
Market Activity and Trends (June 2020), https://files.consumerfinance.gov/f/documents/cfpb_2019-mortgage-market-activity-trends_report.pdf (4.6 percent of conventional, first-lien
loans for purchasing one-to-four-family, owner-occupied, site-built
homes). As explained in the Assessment Report, because of their
nearly identical definitions, HMDA data regarding higher-priced
mortgage loans (HPMLs) may serve as a proxy for higher-priced
covered transactions under the ATR/QM Rule.
\253\ See Bhutta & Ringo, supra note 223.
---------------------------------------------------------------------------

Several industry commenters elaborated on how rebuttable
presumption QMs present more litigation risk to creditors than safe
harbor QMs. One commenter stated that--even if a creditor has, in fact,
made a reasonable and good faith determination of a consumer's
repayment ability at the time of consummation--a creditor could still
find itself in court providing evidentiary proof should a consumer
challenge a rebuttable presumption QM. As a general matter, another
commenter stated that--even if a defendant ultimately prevails in
court--legal determinations regarding ``reasonableness'' are expensive
to defend as they often require time-consuming litigation, extensive
discovery, and possibly a trial. Another commenter stated that--even
among creditors that would ultimately prevail in court--some creditors
will choose the expense of settling with plaintiffs, rather than
incurring the greater expense of paying a legal team to continue
defending in court. The commenter stated that the safe harbor's
conclusive presumption of compliance is necessary to stop meritless
ability[hyphen]to[hyphen]repay litigation as early as possible in the
legal process and to eliminate the settlement value of such litigation.
These industry commenters each stated that increasing the safe harbor
threshold to 2 percentage points would help address the negative effect
that litigation risk has on access to credit.
Various commenters, including a research center and multiple
consumer advocate and industry commenters, stated that increasing the
safe harbor threshold in the Bureau's ATR/QM Rule to 2 percentage
points would create a more level playing field between conventional and
FHA lending. These commenters stated that FHA's own QM rule provides
creditors with a safe harbor if the loan's APR is no more than APOR
plus the FHA annual mortgage insurance premium plus 115 basis points.
These commenters further stated that the current FHA annual mortgage
insurance premium is 85 basis points, such that the FHA's QM rule
effectively has a 2-percentage-point-over-APOR threshold. Some
comments, including one from a consumer advocate commenter and a joint
comment from consumer advocate and industry groups, stated that the
Bureau's current 1.5-percentage-point safe harbor threshold has the
effect of steering consumers, including minority consumers, to FHA
loans rather than conventional loans

[[Page 86344]]

and thus limits consumer choice among lenders and product offerings.
Those comments further stated that a smaller pool of lenders originate
FHA loans and that in 2019 there were approximately 3,200 HMDA
reporting lenders for conventional purchase loans versus approximately
1,200 HMDA reporting lenders for FHA purchase loans.
Various commenters, including a research center and multiple
consumer advocate and industry commenters, also stated that rate
spreads fluctuate over time and recommended that this final rule
increase pricing thresholds as a buffer to absorb the pricing impact of
future market changes. In particular, regarding FHFA's GSE capital
rule,\254\ these commenters stated that it would require GSEs to
maintain more capital as a precaution against riskier loans in their
portfolio (i.e., risk-based capital requirements). These commenters
stated that they expect spreads over APOR will likely increase for
riskier borrowers as a result of the FHFA's rule. The research center
also stated that spreads for refinance loans could widen relative to
APOR in response to the additional loan-level price adjustment of 50
basis points on most Fannie Mae and Freddie Mac refinances, effective
December 1, 2020. However, an industry commenter stated that such
changes also affect APOR itself, which adds further uncertainty
regarding the actual magnitude of any future changes to spreads over
APOR.
---------------------------------------------------------------------------

\254\ Fed. Hous. Fin. Agency, Enterprise Regulatory Capital
Framework Final Rule (2020), https://www.fhfa.gov/SupervisionRegulation/Rules/Pages/Enterprise-Regulatory-Capital-Framework-Final-Rule.aspx (Final Rule currently available on the
FHFA website and awaiting Federal Register publication).
---------------------------------------------------------------------------

4. The Final Rule
For the reasons discussed below, as proposed, the Bureau is
maintaining the current safe harbor threshold in Sec. 1026.43(b)(4),
such that a loan is a safe harbor QM under Sec. 1026.43(e)(1) if its
APR does not exceed APOR for a comparable transaction by 1.5 percentage
points or more as of the date the interest rate is set (or by 3.5
percentage points or more for subordinate-lien transactions).\255\ The
Bureau concludes that maintaining the current 1.5-percentage-point
threshold, in conjunction with the revised General QM requirements in
proposed Sec. 1026.43(e)(2), addresses access-to-credit concerns while
striking an appropriate balance with ability-to-repay concerns.
---------------------------------------------------------------------------

\255\ Subordinate-lien transactions are discussed below in the
section-by-section analysis of Sec. 1026.43(e)(2)(vi).
---------------------------------------------------------------------------

The Bureau declines to extend the safe harbor to loans priced 1.5
percentage points or more above APOR given that such loans have higher
delinquency rates and have, since the January 2013 Final Rule took
effect, received a rebuttable presumption of compliance with the
Bureau's ATR/QM rule with no evidence to suggest that the 1.5-
percentage-point line has caused a significant disruption of access to
responsible, affordable mortgage credit. Further, since the Board's
2008 rule, loans priced above the current 1.5-percentage-point
threshold have been subject to an ability-to-repay requirement that is
substantially similar to the rebuttable presumption standard for QMs
under the Bureau's ATR/QM Rule. Consistent with one of the research
center comments discussed above, HMDA data analyzed by the Bureau in
the Assessment Report suggest that the safe harbor threshold of 1.5
percentage points has not constrained creditors, as the share of
originations above the safe harbor threshold remained steady after the
implementation of the ATR/QM Rule.\256\ In response to various
commenters above who stated that less than 5 percent of conventional,
first-lien purchase loans were priced 1.5 percentage points or more
above APOR, the Bureau is unaware of reliable data evidencing that the
low lending levels at higher rate spreads are caused by the 1.5
percentage point safe harbor threshold as opposed to other factors.
Regarding the Board economists' analysis of 2014 HMDA data cited by a
joint comment from consumer advocate and industry groups, the Bureau
notes that the researchers ``provide evidence in this note that lenders
responded to the ATR and QM rules, particularly by favoring loans
priced to obtain safe harbor protections,'' but ``the estimated
magnitudes indicate the rules did not materially affect the mortgage
market in 2014.'' \257\ In response to commenters recommending that the
Bureau increase the current 1.5-percentage-point safe harbor threshold
to create a more level playing field between conventional and FHA
lending, the Bureau reiterates that no evidence has been presented to
suggest that the existing safe harbor threshold under the Bureau's ATR/
QM Rule has caused any significant disruption of access to responsible,
affordable mortgage credit. Moreover, the Bureau is balancing access-
to-credit concerns with concerns about ability to repay as measured by
early delinquency rates.
---------------------------------------------------------------------------

\256\ Assessment Report, supra note 63, section 5.5, at 187.
\257\ See Bhutta & Ringo, supra note 223.
---------------------------------------------------------------------------

In declining to provide a conclusive (rather than a rebuttable) QM
presumption of compliance for loans priced above the current 1.5-
percentage-point threshold, the Bureau concludes that such loans have
higher delinquency rates and that access-to-credit concerns do not
outweigh those ability to repay concerns.\258\ For example, Table 1
shows for 2002-2008 loans a 12 percent early delinquency rate for loans
priced 1.50 to 1.74 percentage points above APOR, as compared to a 10
percent early delinquency rate for loans priced 1.25 to 1.49 percentage
points above APOR. The comparable early delinquency rates for 2018
loans from Table 2 also show a higher early delinquency rate for loans
priced 1.50 to 1.99 percentage points above APOR compared to loans
priced 1.00 to 1.49 percentage points above APOR: 2.7 percent versus
1.7 percent.
---------------------------------------------------------------------------

\258\ As discussed in the section-by-section analysis of Sec.
1026.43(e)(2)(vi)(A) below, this final rule generally provides that,
for transactions that are covered by Sec. 1026.43(e)(2)(vi)(A) and
priced greater than or equal to 1.5 but less than 2.25 percentage
points above APOR, the transaction receives a rebuttable QM (rather
than a conclusive QM) presumption of compliance with the ATR
requirements.
---------------------------------------------------------------------------

In response to comments recommending that the Bureau increase the
safe harbor threshold to account for possible future rate spread
widening in the market, including in response to FHFA's GSE capital
rule that was recently finalized and the additional loan-level price
adjustment of 50 basis points on most Fannie Mae and Freddie Mac
refinances, effective December 1, 2020, the Bureau concludes that it
would be premature to increase the safe harbor threshold based on
possible future spread widening in the market. For example, as
discussed by an industry commenter above, such changes may also affect
APOR itself, which would cause uncertainty regarding the actual
magnitude of any future changes to spreads over APOR. Moreover, while
it is possible that future spread widening could result in some safe
harbor QMs instead becoming rebuttable presumption QMs, the Bureau
concludes there is insufficient evidence to suggest that shifts in QMs'
status from safe harbor to rebuttable presumption due to future spread
widening would have a significant impact on access to responsible,
affordable mortgage credit.\259\ However,

[[Page 86345]]

the Bureau will monitor the market and take action as needed to
maintain the best balance between consumers' ability to repay and
access to responsible, affordable mortgage credit.
---------------------------------------------------------------------------

\259\ As discussed in the section-by-section analysis of Sec.
1026.43(e)(2)(vi)(A) below, this final rule generally provides that,
for transactions that are covered by Sec. 1026.43(e)(2)(vi)(A) and
priced greater than or equal to 1.5 but less than 2.25 percentage
points above APOR, the transaction receives a rebuttable QM (rather
than a conclusive QM) presumption of compliance with the ATR
requirements. The Bureau concludes that a General QM eligibility
threshold lower than 2.25 percentage points could unduly limit some
consumers to non-QM or FHA loans with materially higher costs, or no
responsible, affordable loan at all, given the current lack of a
robust non-QM market.
---------------------------------------------------------------------------

As discussed above in part V.B.4, several commenters generally
objected to a price-based approach, but the Bureau did not receive
comments requesting a lower safe harbor threshold if the Bureau
finalizes a price-based approach. In maintaining and not lowering the
current 1.5 percentage point safe harbor threshold, the Bureau
concludes that there is some uncertainty as to what the consequences
would be for the market and consumers with loans that would be safe
harbor QMs under the existing rule but rebuttable presumption QMs under
a lower safe harbor threshold. Since it took effect, the Bureau's ATR/
QM Rule has provided a safe harbor to loans priced below the 1.5-
percentage-point threshold--and such loans were never subject to the
ability-to-repay requirements in the Board's 2008 HOEPA Final Rule. The
1.5-percentage-point threshold in the Bureau's ATR/QM Rule is the same
as that used in the Board's 2008 HOEPA Final Rule. When the Bureau
established the safe harbor in the January 2013 Final Rule, the Bureau
stated that the ``line the Bureau is drawing is one that has long been
recognized as a rule of thumb to separate prime loans from subprime
loans'' and, ``under the existing regulations that were adopted by the
Board in 2008, only higher-priced mortgage loans are subject to an
ability-to-repay requirement. . . .'' \260\ Thus, the January 2013
Final Rule stated that ``investors will likely require creditors to
agree to . . . representations and warranties when assigning or selling
loans under the [Bureau's] new rule'' and, for loans with rate spreads
less than 1.5 percentage points, ``this may represent an incremental
risk of put-back to creditors, given that such loans are not subject to
the current [2008 HOEPA Final Rule] regime, but those loans are being
provided a safe harbor if they are qualified mortgages.'' \261\ In
contrast, for loans with rate spreads of 1.5 percentage points or more,
the Bureau stated that ``it is not clear that there is any incremental
risk beyond that which exists today under the Board's rule.'' \262\ The
Bureau's January 2013 Final Rule further stated that there is ``a
widespread fear about the litigation risks associated with the Dodd-
Frank Act ability-to-repay requirements,'' \263\ and that the safe
harbor for loans with rate spreads less than 1.5 percentage points
helps ensure that ``litigation and secondary market impacts do not
jeopardize access to credit.'' \264\ As discussed above, there is also
concern among some commenters on the General QM Proposal regarding
rebuttable presumption QMs presenting more litigation risk to creditors
than safe harbor QMs.
---------------------------------------------------------------------------

\260\ 78 FR 6408, 6513 (Jan. 30, 2013).
\261\ Id. at 6512-13.
\262\ Id. at 6513.
\263\ Id. at 6505.
\264\ Id. at 6513.
---------------------------------------------------------------------------

Based on the Bureau's analysis of the 2018 NMDB data, the Bureau
expects that the early delinquency rate of loans obtaining safe harbor
QM status under this final rule will be on par with loans obtaining
safe harbor QM status under the current rule, which includes the
Temporary GSE QM loan definition. Table 6 shows the early delinquency
rate for 2018 NMDB first-lien purchase originations by rate spread and
DTI ratio. For loans with rate spreads between 1 and 1.49 percentage
points and DTI ratios above 43 percent, the early delinquency rate is
2.3 percent. These are loans that would not meet the current General QM
loan definition due to the 43 percent DTI limit, but that would receive
safe harbor General QM status under this final rule. If the 2018 data
are restricted to only those loans purchased and guaranteed by the GSEs
(i.e., loans made under the Temporary GSE QM loan definition), loans
with DTI ratios above 43 percent and rate spreads between 1 and 1.49
percentage points had an early delinquency rate of 2.4 percent.
The Bureau acknowledges that removing the 43 percent DTI limit will
lead to somewhat higher-risk loans obtaining safe harbor QM status
relative to loans within the current General QM loan definition (not
including the Temporary GSE QM loan definition). In Table 5, the Bureau
compared projected early delinquency rates for 2002-2008 first-lien
purchase originations 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 QMs, Table 5 indicates that early delinquency
rates for loans with rate spreads just below 1.5 percentage points
increase with DTI ratio, 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). Therefore, the loans with DTI ratios above 43 percent that
would be granted safe harbor status under the 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 loans with rate spreads just
below 1.5 percentage points with DTI ratios above 43 percent compared
to loans with DTI ratios of 36 to 43 percent: 2.3 percent versus 1.5
percent. However, as noted above, if the 2018 data are restricted to
loans made under the Temporary GSE QM loan definition, such loans with
DTI ratios above 43 percent and rate spreads between 1 and 1.49
percentage points had an early delinquency rate of 2.4 percent. Thus,
the Bureau expects that the early delinquency rate of loans obtaining
safe harbor QM status under this final rule will be on par with loans
obtaining safe harbor QM status under the current rule, which includes
the Temporary GSE QM loan definition.
The Bureau concludes that the safe harbor threshold under this
final rule strikes the best balance between ability-to-repay risk and
the access-to-credit benefits discussed above and the overall safety of
the prime QM market relative to the subprime market. As discussed by
commenters above, loans that meet the General QM loan definition are
relatively low-risk compared to loans with non-QM features. In response
to commenters and based on findings in the Assessment Report, the
Bureau concludes that loans with non-QM features--including interest-
only loans, negative amortization loans, and loans made with limited or
no documentation of the borrower's income or assets--had a substantial
negative effect on consumers' ability to repay leading up to the 2008
financial crisis and subsequent passage of the Dodd-Frank Act.
In maintaining and not lowering the current 1.5-percentage-point
safe harbor threshold as part of this final rule, the Bureau also
acknowledges that the January 2013 Final Rule relied in part on the 43
percent DTI limit to support its conclusion that a 1.5 percentage-

[[Page 86346]]

point safe harbor threshold is appropriate. However, as discussed
above, the 43 percent DTI limit was only one of several supporting
factors listed in the January 2013 Final Rule.\265\ Moreover, the
January 2013 Final Rule did not include a DTI limit for Temporary GSE
QMs but nonetheless provided both those loans and General QMs with the
same 1.5-percentage-point safe harbor threshold. The January 2013 Final
Rule stated that, ``even in today's credit-constrained market,
approximately 22 percent of mortgage loans are made with a debt-to-
income ratio that exceeds 43 percent'' and ``many of those loans will
fall within the temporary exception that the Bureau is recognizing for
qualified mortgages.'' \266\ Further, as discussed in the section-by-
section-analysis of Sec. 1026.43(e)(2)(v)(A), this final rule imposes
requirements for the creditor to consider the consumer's DTI ratio or
residual income, income or assets other than the value of the dwelling,
and debts to satisfy the General QM loan definition, thus requiring
that the creditor consider key aspects of the consumer's financial
capacity.\267\
---------------------------------------------------------------------------

\265\ 78 FR 6408, 6511 (Jan. 30, 2013).
\266\ Id. at 6528. The January 2013 Final Rule also did not
include a DTI limit for balloon-payment QMs under Sec. 1026.43(f).
Id. at 6539.
\267\ See id. at 6511 (``Moreover, requiring creditors to prove
that they have satisfied the qualified mortgage requirements in
order to invoke the presumption of compliance will itself ensure
that the loans in question do not contain certain risky features and
are underwritten with careful attention to consumers' debt-to-income
ratios.'').
---------------------------------------------------------------------------

With respect to General QM prime first-lien loans (General QM
first-lien loans with an APR that does not exceed APOR by 1.5 or more
percentage points), the Bureau 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 concludes this
approach strikes the best balance between the competing consumer
protection and access-to-credit considerations described above. The
Bureau concludes 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.\268\ The Bureau
also concludes that providing a safe harbor for prime first-lien and
subordinate-lien 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.
---------------------------------------------------------------------------

\268\ Subordinate-lien transactions are discussed below in the
section-by-section analysis of Sec. 1026.43(e)(2)(vi).
---------------------------------------------------------------------------

In addition, the Bureau also is also relying on TILA section
129C(b)(3)(B)(i), which authorizes the Bureau to prescribe regulations
that revise, add to, or subtract from the criteria that define a QM, as
authority for retaining a conclusive presumption. For the same reasons
outlined above, the Bureau concludes that this conclusive presumption
is 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, as well as necessary and appropriate to
effectuate the purposes of TILA section 129C and facilitate compliance
with section 129C.
The final rule generally maintains the current ATR/QM Rule's
rebuttable presumption of compliance for loans that exceed the safe
harbor threshold but that otherwise meet the General QM requirements in
Sec. 1026.43(e)(2).\269\ The Bureau is not revising 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. The Bureau did not receive comments regarding the grounds on
which borrowers can rebut the presumption of compliance. The Bureau
concludes that existing Sec. 1026.43(e)(1)(ii)(B) continues to strike
the best balance between consumer protection and access to credit
considerations and is 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.
---------------------------------------------------------------------------

\269\ However, as discussed in the section-by-section analysis
of Sec. 1026.43(e)(2)(vi) below, under the final rule a loan is not
eligible for QM status (i.e., will not receive any presumption of
compliance with the ATR requirements) under Sec. 1026.43(e)(2) if
the loan exceeds the separate pricing thresholds in Sec.
1026.43(e)(2)(vi), as finalized.
---------------------------------------------------------------------------

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 ATR/QM Rule. For General QMs
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 QM
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 QM that is not a higher-priced covered transaction is
eligible for a conclusive presumption of compliance with the ATR
requirements.
The Bureau's Proposal
The Bureau proposed to revise Sec. 1026.43(b)(4) to create a
special rule for purposes of determining whether certain types of
General QMs under Sec. 1026.43(e)(2) are higher-priced covered
transactions. Under the proposal, this special rule would have applied
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 have been
required to determine the APR, for purposes of determining whether a
General 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.
Under the proposed rule, an identical special rule would have
applied to loans for which the interest rate may or will change under
proposed Sec. 1026.43(e)(2)(vi), which would have revised the
definition of a General QM under Sec. 1026.43(e)(2) to implement the
price-based approach described in part V of this final rule. The
proposed rule stated that the special rules in the proposed revisions
to Sec. 1026.43(b)(4) and 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 stated 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 provided
that proposed Sec. 1026.43(b)(4) required, only for purposes of a QM
under paragraph (e)(2), a different

[[Page 86347]]

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-referenced 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).
The Bureau sought comment on all aspects of the special rule it
proposed in Sec. 1026.43(b)(4).
The Final Rule
The Bureau is finalizing Sec. 1026.43(b)(4) and comment 43(b)(4)-4
as proposed. The section-by-section analysis of Sec.
1026.43(e)(2)(vi), which the Bureau also is finalizing as proposed,
explains the Bureau's reasoning for adopting these provisions as
proposed. That section-by-section analysis also summarizes comments
received in response to the proposed special rule and provides the
Bureau's response to those comments.
Legal authority. 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 finalizing 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 concludes that
these provisions will ensure that General QM status will 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 finalizing these provisions
pursuant to its authority under TILA section 129C(b)(3)(B)(i) to revise
and add to the statutory language. The Bureau concludes that the
special rule's APR determination provisions in Sec. 1026.43(b)(4) will
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.
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, current Sec. 1026.43(e)(2)(v)(A) provides that a General
QM 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 proposed to add comment 43(c)(4)-4 to 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 qualify as a consumer's personal income. The
proposed comment also stated 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. The Bureau did not propose to
change the text of Sec. 1026.43(c)(4).
Commenters to the proposal did not address proposed comment
43(c)(4)-4. Accordingly, the Bureau is adopting new comment 43(c)(4)-4
as proposed. The Bureau determines, based on outreach and on its
experience supervising creditors, that this clarification would be
useful to creditors because the ATR/QM 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 a 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 is the consumer's personal
income, such that a creditor's use of the data in an underwriting
process is distinguishable from the example in the proposed comment,
and, therefore, the creditor may use the data in verifying the
consumer's income. The Bureau also concludes that this clarification
would help creditors understand their verification requirements under
the General QM loan definition. Under this final rule, Sec.
1026.43(e)(2)(v)(B) provides that, to satisfy the General QM loan
definition, the creditor must verify the consumer's current or
reasonably expected income or assets using third-party records that
provide reasonably reliable evidence of the consumer's income or
assets, in accordance with Sec. 1026.43(c)(4).

[[Page 86348]]

The Bureau is adding comment 43(c)(4)-4 pursuant to TILA section
129C(a)(4), which 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.
43(e) Qualified Mortgages
43(e)(2) Qualified Mortgage Defined--General
43(e)(2)(v)
As discussed above in part V, this final rule removes the specific
DTI limit in Sec. 1026.43(e)(2)(vi). Furthermore, as discussed below
in this section-by-section analysis, this final rule requires that
creditors consider the consumer's DTI ratio or residual income and
removes the appendix Q requirements from Sec. 1026.43(e)(2)(v). The
Bureau concludes that these amendments necessitate additional revisions
to the General QM loan definition to clarify a creditor's obligation to
consider and verify certain information for purposes of the General QM
loan definition. Consequently, this final rule amends 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), (3), (4), and (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 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 and 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 proposed to revise Sec. 1026.43(e)(2)(v) to separate
and clarify the requirements to consider and verify certain information
for purposes of the General QM loan definition. Proposed Sec.
1026.43(e)(2)(v)(A) contained the ``consider'' requirements and
proposed Sec. 1026.43(e)(2)(v)(B) contained the ``verify''
requirements. Specifically, proposed Sec. 1026.43(e)(2)(v) stated that
a General QM is a covered 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). Proposed
Sec. 1026.43(e)(2)(v)(A) also stated 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). To further
clarify the requirements in Sec. 1026.43(e)(2)(v), the Bureau also
proposed to add comments 43(e)(2)(v)(A)-1 through -3 and comments
43(e)(2)(v)(B)-1 through -3.
As discussed below, this final rule adopts Sec.
1026.43(e)(2)(v)(A) largely as proposed--with minor technical additions
to the rule text--and adopts Sec. 1026.43(e)(2)(v)(B) as proposed. The
Bureau is also adopting the proposed commentary for Sec.
1026.43(e)(2)(v)(A) and Sec. 1026.43(e)(2)(v)(B) largely as proposed,
with two substantive changes from the proposal. First, the Bureau has
added language to comment

[[Page 86349]]

43(e)(2)(v)(A)-1 to clarify that, in order to meet the General QM
consider requirement, a creditor must maintain written policies and
procedures for how it takes into account income, debt, and DTI or
residual income and document how it took into account these factors.
Second, the Bureau has added a list of specific verification standards
to comment 43(e)(2)(v)(B)-3.i, which provides a safe harbor for
compliance with the verification requirement in Sec.
1026.43(e)(2)(v)(B). These verification standards include relevant
provisions in specified versions of the Fannie Mae Single Family
Selling Guide, the Freddie Mac Single-Family Seller/Servicer Guide, the
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 and Handbook for the Single Family Guaranteed Loan
Program, current as of the date of the proposal's public release.
The Bureau also proposed to remove comments 43(e)(2)(v)-2 and -3.
In general, these comments explain that a creditor must consider and
verify any income and debt specified in appendix Q, and that while a
creditor may consider and verify any other income and debt, such income
and debt would not be included in the DTI ratio determination required
by Sec. 1026.43(e)(2)(vi). This final rule removes these comments. The
Bureau concludes that these comments are no longer needed due to this
final rule's revisions to Sec. 1026.43(e)(2)(v). The first sentence of
each of these comments merely restates language in the regulatory text.
The second sentence of each of these comments is no longer needed
because this final rule removes references to appendix Q from Sec.
1026.43(e)(2)(v). And the third sentence of each of these comments is
no longer needed because this final rule removes the DTI limit in Sec.
1026.43(e)(2)(vi).
43(e)(2)(v)(A)
The Bureau's Proposal
Section 1026.43(e)(2)(v) currently provides that a General QM is a
covered transaction for which the creditor, at or before consummation,
considers and 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, debt
obligations, alimony, and child support. In the General QM Proposal,
the Bureau proposed 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 proposed to revise Sec.
1026.43(e)(2)(v)(A) to provide that a General QM 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). Proposed
Sec. 1026.43(e)(2)(v)(A) also stated 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).
To clarify the consider requirement in proposed Sec.
1026.43(e)(2)(v)(A), the Bureau proposed to add comments
43(e)(2)(v)(A)-1 to -3. Proposed comment 43(e)(2)(v)(A)-1 provided
that, in order to comply with the consider requirement, a creditor must
take into account income or assets, debt obligations, alimony, child
support, and monthly DTI ratio or residual income in its ability-to-
repay determination. The proposed comment further stated that, pursuant
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 the required factors. The proposed comment
provided examples of the types of documents that a creditor might use
to show that it took into account the required factors.
The Bureau proposed comment 43(e)(2)(v)(A)-2 to clarify that
creditors have flexibility in how they consider these factors and that
the proposed rule would not have prescribed a specific monthly DTI or
residual income threshold. The proposed comment also included two
examples of how a creditor may comply with the requirement to consider
DTI.
The Bureau proposed comment 43(e)(2)(v)(A)-3 to clarify 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 would not preclude the creditor from taking into account
additional factors that are relevant in making its ability-to-repay
determination.
This final rule adopts Sec. 1026.43(e)(2)(v)(A) largely as
proposed, with minor technical additions to the rule text. This final
rule also adopts comments 43(e)(2)(v)(A)-1 to -3 largely as proposed,
with some adjustments in comment 43(e)(2)(v)(A)-1 to clarify that
creditors must maintain certain policies and procedures and retain
certain documentation to satisfy Sec. 1026.43(e)(2)(v)(A).
Comments Received
The Bureau's general approach to the consider requirement. Both
industry and consumer advocate commenters supported the proposal to
retain a requirement to consider income or assets, debt obligations,
alimony, child support, and monthly DTI or residual income for General
QMs. Commenters generally stated that the consider requirement is an
important consumer protection for QMs and that such a requirement is
necessary to achieve the statutory intent of TILA. Both industry and
consumer advocate commenters generally supported the retention of a
requirement to consider a consumer's monthly DTI ratio and the option
of considering residual income in lieu of DTI. These commenters
explained that DTI is an important factor in assessing a consumer's
ability to repay and that the residual income option creates space for
flexibility and industry innovation. One industry commenter noted that
creditors use DTI as part of their underwriting processes and will
continue to do so even if the General QM loan definition no longer
includes a specific DTI limit. Another industry commenter explained
that it uses DTI as part of its underwriting process and makes
responsible loans with DTI ratios above 43 percent. Another industry
commenter stated that the VA loan program has successfully used
residual income for underwriting purposes.
One industry commenter expressed concerns about the requirement to
calculate DTI according to Sec. 1026.43(c)(7), arguing that this
cross-reference could be interpreted to import a requirement that
creditors adopt an ``appropriate'' DTI threshold. The commenter
suggested that the Bureau could avoid that interpretation by removing
any requirement to calculate a DTI ratio. As explained in the proposed
rule and below, the General QM Proposal incorporated the cross-
reference only for purposes of calculating monthly DTI, residual
income, and monthly payment on the covered loan.
Commentary provisions. Industry commenters generally supported the
inclusion of proposed comments 43(e)(2)(v)(A)-1 through -3. These
commenters generally stated that the proposed comments provide the
clarity needed to facilitate industry compliance and assurance of QM
status. Many industry commenters specifically

[[Page 86350]]

encouraged the Bureau to adopt the proposed comments because they would
provide creditors with flexibility in applying their own underwriting
methodologies. One industry commenter stated that the examples in the
proposed comments reflected the current underwriting practices of
community banks.
Many industry commenters supported the proposed documentation
approach to the consider requirement. One industry commenter explained
that the proposed documentation approach would be an effective means
for a creditor to meet the consider requirement and have assurance of
QM status. A comment letter signed by 12 civil rights and consumer
groups included a ``term sheet'' that provided a variety of suggested
changes to the consider requirement (``joint consumer advocate term
sheet'') and asked the Bureau to clearly state that in order to
maintain QM status, the creditor must retain documentation of how it
satisfied the consider requirement. A consumer advocate commenter that
also signed the term sheet explained that, without documentation,
examiners could not meaningfully assess whether the creditor had in
fact considered the consumer's debts and income. An industry commenter
asked the Bureau to adopt a cure provision for situations where a loan
file is incomplete due to an alleged oversight.
Several commenters recommended that the Bureau expressly require
creditors to develop and maintain procedures to consider debts and
income. In its support for the documentation examples in the first
proposed comment, one industry commenter suggested that the Bureau
require creditors to provide underwriter spreadsheets or other
documentation that showed the creditor followed procedures in its
consideration of the required factors. Another industry commenter
recommended that the Bureau require creditors to maintain an
independently developed credit policy setting forth the manner in which
they will consider and verify the required factors. The commenter
stated that such a requirement would facilitate investor and regulator
evaluation of a loan's QM status and would align with OCC guidance and
appraiser guidance under the Financial Institutions Reform, Recovery,
and Enforcement Act. Another industry commenter asked the Bureau to
develop specific operational guidelines for the calculation of DTI and
residual income, including minimum threshold values for residual
income. Another industry commenter stated that the Bureau should
require creditors to comply with a specific set of underwriting
criteria that includes compensating factors for consumers with high
DTI.
Similar to these industry commenters, consumer advocate commenters
asked the Bureau to require creditors to develop and maintain
procedures to consider debts and income. One consumer advocate
commenter that signed the joint consumer advocate term sheet explained
that, without a component requiring such procedures, the consider
requirement would exist in name only and individual loan officers could
make individual decisions about what meets the consider standard. This
commenter explained that without procedures, creditors under pressure
to make loans could use their discretion to make a pro forma note of
consideration.
Some industry commenters specifically encouraged the Bureau to
adopt the language in proposed comment 43(e)(2)(v)(A)-2 explaining that
the proposed rule would not prescribe a particular DTI or residual
income threshold. One industry commenter stated that it appreciated how
the proposed comments provided creditors with flexibility as to how
they considered monthly DTI and additional factors in their
underwriting processes. One industry commenter asked the Bureau to
refrain from enumerating appropriate compensating factors. In contrast,
some industry commenters stated that the proposed consider requirement
was still too vague and requested additional clarification. One of
these commenters warned that risk-averse lenders would not originate
loans under the proposed approach.
One industry commenter supported the consider requirement but
requested that the Bureau require a creditor to show that it took into
account the required factors, rather than how it took into account the
required factors.
Several industry and consumer advocate commenters supported the
Bureau's statement in the proposal that if creditors ignore income or
assets, debt obligations, alimony, child support, and DTI or residual
income, they do not consider these factors sufficiently for purposes of
the General QM loan definition.
Both industry and consumer advocate commenters raised concerns that
the proposed General QM consider standard, even with the proposed
clarifying commentary, would not prevent loans from obtaining QM status
if the consumer lacks the ability to repay. One consumer advocate
commenter stated that the proposed General QM consider standard needs
more specificity to ensure that creditors engage in a meaningful
ability-to-repay analysis. The joint consumer advocate term sheet
provided a variety of suggested changes to the consider requirement,
such as adding extreme examples of non-compliance (100 percent DTI or
zero or negative residual income loans); deeming LTV-based loans to be
a per se violation of the consider requirement; clarifying that not
retaining documentation of how the creditor considered the required
factors would result in loss of QM status; and expanding the
documentation requirement so that an examiner could confirm that a
creditor followed its procedures. Another consumer advocate commenter
that signed the joint consumer advocate term sheet stated that examples
of non-compliant underwriting practices would provide some clarity to
consumers and industry; establish an outer bound for responsible
mortgage lending; and ensure that lenders adopt systems that would
prevent behavior that falls outside the scope of a reasonable
consideration of the required factors. This consumer advocate commenter
stated that the joint consumer advocate term sheet's recommendation to
clearly exclude loans where the creditor relied on LTV ratio in lieu of
debt, income, and DTI or residual income would prevent loan flipping
practices, which rely on the consumer's existing equity in the home to
repeatedly refinance and strip equity in order to pay financed closing
costs immediately to the creditor or broker. In contrast, one industry
commenter stated that LTV-based lending should not be a concern given
the fixed cost of foreclosure and how a creditor determines loan
pricing. One industry commenter stated that a loan with 100 percent DTI
could meet the proposed General QM consider standard.
The Final Rule
This final rule adopts Sec. 1026.43(e)(2)(v)(A) and comments
43(e)(2)(v)(A)-1 to -3 largely as proposed, with minor technical
additions to the rule text and some adjustments in comment
43(e)(2)(v)(A)-1 to clarify that creditors must maintain certain
policies and procedures and retain certain documentation. As explained
above, the Bureau is separating 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. Final Sec. 1026.43(e)(2)(v)(A) provides that
a General QM is a covered transaction for which the creditor, at or
before consummation, considers the consumer's current or reasonably

[[Page 86351]]

expected income or assets other than the value of the dwelling
(including any real property attached to the dwelling) that secures the
loan, debt obligations, alimony, child support, and monthly DTI ratio
or residual income, using the amounts determined from Sec.
1026.43(e)(2)(v)(B). Although the proposed consider provision would
have required creditors to consider current or reasonably expected
income or assets other than the value of the dwelling through the
requirement to use amounts determined from the Sec.
1026.43(e)(2)(v)(B), the final rule makes this connection more clear by
including the clauses ``current or reasonably expected'' and ``other
than the value of the dwelling (including any real property attached to
the dwelling) that secures the loan'' in Sec. 1026.43(e)(2)(v)(A).
Final Sec. 1026.43(e)(2)(v)(A) also states 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).
The Bureau's general approach to the consider requirement. The
Bureau concludes that requiring creditors to consider DTI as part of
the General QM loan definition ensures that consumers are offered and
receive residential mortgage loans on terms that reasonably reflect
their ability to repay the loan. The Bureau determines that DTI
continues to be an important factor in assessing a consumer's ability
to repay. Comments on the General QM Proposal and on the 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 General QM loan definition no longer
includes a specific DTI limit--is consistent with current market
practices.
As discussed in the June 2013 Final Rule, the Bureau created an
exception from the DTI limit for certain small creditors that hold QMs
on portfolio.\270\ 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, as discussed below) was still
a fundamental part of the creditor's ability-to-repay
determination.\271\ The Bureau similarly concludes that DTI is a
fundamental part of the creditor's ability-to-repay determination for
General QMs.
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\270\ 78 FR 35430 (June 12, 2013).
\271\ 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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Section 1026.43(e)(2)(v)(A) provides creditors with the option to
consider either a consumer's monthly residual income or DTI. The Bureau
concludes that residual income is an appropriate alternative to monthly
DTI for creditors to consider under Sec. 1026.43(e)(2)(v). 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.\272\ In comparison,
consistent with TILA section 129C(a)(3), the January 2013 Final Rule
allows 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 QMs pursuant to
Sec. 1026.43(e)(5) to consider DTI or residual income. Given the
elimination of the bright-line DTI limit in Sec. 1026.43(e)(2)(vi),
comments on the proposed rule, comments from stakeholders in the
January 2013 Final Rule regarding the value of residual income in
determining ability to repay,\273\ 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 concludes that allowing creditors the
option to consider residual income in lieu of DTI would allow for
creditor flexibility and innovation and is necessary and proper to
preserve access to responsible, affordable mortgage credit.
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\272\ 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.'').
\273\ 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.'').
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The Bureau 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
seeks to comply with the consider requirement under Sec.
1026.43(e)(2)(v)(A) using the consumer's assets, the creditor could
consider assets other than the value of the dwelling (including any
real property attached to the dwelling) that secures the loan as those
assets are calculated under Sec. 1026.43(e)(2)(v)(B).
The final rule also adopts the proposed requirement in Sec.
1026.43(e)(2)(v)(A) to calculate monthly DTI, monthly residual income,
and monthly payment for mortgage-related obligations in a manner
consistent with the method used in current Sec. 1026.43(e)(2)(vi). As
explained in the proposed rule, this calculation method was previously
adopted in the January 2013 Final Rule and is being moved to the Sec.
1026.43(e)(2)(v)(A) consider requirement given the Bureau's removal of
the DTI limit in Sec. 1026.43(e)(2)(vi) and appendix Q. To preserve
the incorporation of alimony and child support that was previously
facilitated by appendix Q, the calculation method in Sec.
1026.43(e)(2)(v)(A) now cross-references Sec. 1026.43(c)(7) for
purposes of calculating monthly DTI or residual income. The Bureau
concludes that incorporating the pre-existing reference to simultaneous
loans is no longer necessary because the new cross-reference to Sec.
1026.43(c)(7) requires creditors to consider simultaneous loans.
Additionally, given that this final rule allows creditors to consider
residual income in lieu of monthly DTI, the Bureau is expanding the
calculation method requirement to include residual income. This
calculation method also incorporates the pre-existing cross-reference
to Sec. 1026.43(e)(2)(iv) to determine the monthly payments for the
covered loan.
As explained in the proposed rule, this calculation method was
previously adopted in the January 2013 Final Rule. This calculation
method does not appear to be unduly burdensome given that, as described
further below, only one commenter addressed the proposed calculation
provision, and the comment

[[Page 86352]]

related not to the calculation method itself but to the commenter's
concern that cross-referencing Sec. 1026.43(c)(7) could be interpreted
to import a requirement that creditors adopt an ``appropriate'' DTI
threshold. The Bureau also believes that providing a calculation method
will facilitate compliance and decrease creditor compliance costs by
reducing ambiguity as to how DTI must be calculated. Accordingly, the
Bureau concludes that the information in the rulemaking record does not
support amending the rule to delete or change the calculation method.
The Bureau also notes that the requirement merely provides the method
for calculating DTI, residual income, and monthly mortgage payments. As
detailed in comments 43(e)(2)(v)(A)-2 to -3, General QM creditors still
retain the flexibility to determine how the required factors are taken
into account in the consumer's ATR determination.
The Bureau declines to remove the requirement to calculate and
consider DTI (or residual income) according to Sec. 1026.43(c)(7) in
order to address the industry commenter's concern that this could be
interpreted to import a requirement that creditors adopt an
``appropriate'' DTI threshold. Instead, as explained in the proposed
rule and above, the Bureau emphasizes that this final rule incorporates
the cross-reference only for purposes of calculating monthly DTI,
residual income, and monthly payment on the covered loan. As comment
43(e)(2)(v)(A)-2 makes clear, creditors have flexibility in how they
consider income or assets, debt obligations, alimony, child support,
and monthly DTI ratio or residual income and the final rule does not
prescribe a specific monthly DTI or residual income threshold. More
generally, the Bureau emphasizes that Sec. 1026.43(e)(2)(v)(A)
requires only that the creditor ``consider'' the specified factors. It
does not permit a broader challenge that a loan is not a General QM
because the creditor failed to make a reasonable and good-faith
determination of the consumer's ability to repay under Sec.
1026.43(c)(1), as this would undermine the certainty of whether a loan
is a General QM.
Commentary provisions. For the reasons discussed below, the Bureau
is finalizing comments 43(e)(2)(v)(A)-1 to -3 largely as proposed, with
some adjustments in comment 43(e)(2)(v)(A)-1 to clarify that creditors
must maintain certain policies and procedures and must retain certain
documentation.
This final rule adds comments 43(e)(2)(v)(A)-1 to -3 because the
Bureau concludes they are appropriate to ensure that the Rule's
requirement to consider the consumer's income or assets, debt
obligations, alimony, child support, and DTI 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 final rule, the General QM loan definition no
longer includes a specific DTI limit in Sec. 1026.43(e)(2)(vi) and
instead requires in Sec. 1026.43(e)(2)(v)(A) that creditors consider
the consumer's income or assets, debt obligations, alimony, child
support, and DTI or residual income . By requiring creditors to
calculate DTI and compare that calculation to a DTI limit, the DTI
limit from the January 2013 Final Rule provided creditors with a
bright-line rule demonstrating how to consider the consumer's income or
assets and debts for purposes of determining whether the General QM
loan requirements are met. Without additional explanation of the
requirement to consider DTI or residual income, along with the
consumer's income or assets and debts, elimination of the DTI limit
could create compliance uncertainty that could leave some creditors
reluctant to originate QMs 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. Commentary
examples of compliance that reflect standard market practices also may
help ensure that the consider requirement is not unduly burdensome.
Many commenters supported the Bureau's proposal to maintain the
consider requirement in the General QM loan definition, while also
emphasizing the importance of clarity of QM safe harbor status and the
utility of compliance examples. While commenters generally supported
inclusion of the proposed comments, some commenters requested additions
such as clarification of the documentation requirement and examples of
non-compliance. Accordingly, the Bureau concludes that it is
appropriate to provide additional explanation for the Sec.
1026.43(e)(2)(v) consider requirement in comments 43(e)(2)(v)(A)-1 to -
3, as discussed below.
Comment 43(e)(2)(v)(A)-1. Consistent with the proposal, comment
43(e)(2)(v)(A)-1 explains that, in order to comply with the requirement
to consider, a creditor must take into account 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, debt obligations, alimony, child support, and monthly DTI ratio
or residual income in its ability-to-repay determination. As adopted by
this final rule, comment 43(e)(2)(v)(A)-1 also provides that a creditor
must maintain written policies and procedures for how it takes into
account, pursuant to its underwriting standards, income or assets, debt
obligations, alimony, child support, and monthly debt-to-income ratio
or residual income in its ability-to-repay determination. The Bureau is
also adding a clause to comment 43(e)(2)(v)(A)-1 to explain that the
creditor must document how it applied its policies and procedures. The
Bureau is also clarifying the documentation example to reflect how the
creditor may also comply by providing the required documents in
combination with any applicable exceptions used from the creditor's
policies and procedures. Bureau experience in market outreach and
regulation shows that it is standard practice for creditors to maintain
written policies and procedures, including underwriting standards, for
considering debt, income, and DTI or residual income, and commenters
representing creditors explained that their members already have
underwriting procedures to take into account DTI in the ability-to-
repay determination. The creditor's policies and procedures typically
refer to the creditor's underwriting standards and describe how to
address exceptions to the creditor's underwriting standards.
The Bureau concludes that this policies and procedures
clarification will facilitate confirmation by investors, auditors,
consumers, regulators, and other stakeholders that a creditor has, in
fact, taken into account the required factors. The Bureau determines
that, as some commenters noted, it would be difficult for these
stakeholders to identify how a creditor took into account the required
factors if the creditor does not have written policies and procedures
for how it takes them into account. Further, given the flexibility that
this final rule provides to creditors by removing the DTI limit, the
Bureau concludes that it is important for creditors to adopt and
memorialize their institutional policies and procedures (including
underwriting standards) for considering the consumer's income or
assets, debt obligations, alimony, child support, and DTI or residual
income, to help ensure that the consideration is sufficiently rigorous.
The Bureau also

[[Page 86353]]

concludes that this clarification will assist creditors in ensuring
compliance with the General QM requirements by helping to prevent
individual loan officers and underwriters from attempting to originate
General QMs without having met the consider requirement. The Bureau
additionally concludes that this clarification will impose a limited
burden given that standard market practice is to maintain underwriting
standards and policies and procedures.
Comment 43(e)(2)(v)(A)-1 also explains that to comply with Sec.
1026.43(e)(2)(v)(A)--and thereby to qualify for General QM status--a
creditor must retain documentation showing how it took into account the
required factors in its ability-to-repay determination, including how
it applied its policies and procedures. This reflects a modification
from the proposal, which would have cross-referenced the creditor's
obligation under Sec. 1026.25(a) to retain documentation. The
requirement continues to defer to creditors on how to consider the
required factors, allowing creditors the flexibility to use their own
underwriting standards as long as the loan file documents how the
required factors were taken into account in the creditor's ability-to-
repay determination.
The General QM loan definition currently contains a 43 percent DTI
limit, so any third party can compare the consumer's DTI (as reflected
in the loan file) to the limit to confirm that the requirement to
consider income or assets and debts was met. In contrast, under this
final rule, the General QM consider requirement allows the creditor to
determine how debt, alimony, child support, income or assets, and DTI
or residual income should be taken into account in its ability-to-repay
determination. Although there is a general record retention requirement
in the ATR/QM Rule, the Bureau agrees with the commenter that this
revised consider requirement should include a documentation component
because, absent a documentation requirement, only the creditor would
know how and whether it took into account the required factors in its
ability-to-repay determination. Documentation of how the creditor
considered the required factors is necessary for any third party, such
as consumers, investors, and regulators, to confirm that the creditor
did, in fact, consider the required factors.
Given statements from commenters about the interaction between the
documentation requirement and QM status, the Bureau concludes that
adding clarifying language to this documentation retention requirement
is necessary. The final rule's commentary explains that in order to
meet the consider requirement and thereby meet the requirements for a
QM under Sec. 1026.43(e)(2)--whether the loan is a safe harbor QM
under Sec. 1026.43(e)(1)(i) or a rebuttable presumption QM under Sec.
1026.43(e)(1)(ii)--a creditor must retain documentation showing how it
took into account these factors in its ability-to-repay determination,
including how it applied its policies and procedures. To clarify that a
lack of documentation showing how the creditor took into account the
required factors would result in loss of QM status, rather than
constituting a mere violation of the record retention requirement in
Sec. 1026.25(a), the Bureau is removing the proposed cross-reference
to the record retention requirement in Sec. 1026.25(a). The Bureau is
adopting the documentation examples in the last sentence, with new
language to clarify that a creditor can also comply by relying on any
applicable exceptions in the creditor's policies and procedures (in
combination with the example underwriting documents) to show how the
creditor took into account the required factors. As examples 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 comment cites an underwriter
worksheet or a final automated underwriting system certification, in
combination with the creditor's applicable underwriting standards and
any applicable exceptions described in its policies and procedures,
that shows how these required factors were taken into account in the
creditor's ability-to-repay determination.
In summary, comment 43(e)(2)(v)(A)-1 explains that the Sec.
1026.43(e)(2)(v)(A) consider requirement means to take into account
income or assets, debt obligations, alimony, child support, and monthly
debt-to-income ratio or residual income in the consumer's ability-to-
repay determination, including maintaining written policies and
procedures to take into account and retaining documentation of how the
creditor took into account. As detailed in comments 43(e)(2)(v)(A)-2
and 43(e)(2)(v)(A)-3, a creditor has flexibility in how it considers
income or assets, debt obligations, alimony, child support, and monthly
debt-to-income ratio or residual income, as long as the creditor
documents how it took into account these required factors in its
ability-to-repay determination. For example, a creditor might originate
a loan with a DTI that deviates from the standard DTI threshold in its
underwriting guidelines because the consumer's significant savings
meets an exception in those guidelines. Under this example, the
internal thresholds and exceptions qualify as procedures for taking
into account, and documentation of how the creditor applied this
exception to the loan file shows how the required factors were taken
into account under Sec. 1026.43(e)(2)(v)(A).
The creditor's maintenance of written policies and procedures
facilitates review of the loan file to confirm that the creditor did,
in fact, document how it took into account income or assets, debt,
alimony, child support, and DTI ratio or residual income. The
documentation provision requires a creditor to retain documentation to
show how it applied its written policies and procedures, and, to the
extent it deviated from them, to further retain documentation of how
the creditor nonetheless took into account the required factors. The
documentation examples listed in the comment (an underwriter worksheet
or a final automated underwriting system certification, in combination
with the creditor's applicable underwriting standards and any
applicable exceptions described in its policies and procedures, that
show how these required factors were taken into account in the
creditor's ability-to-repay determination) can be sufficient to show
how the creditor applied its written policies and procedures. For
example, a typical loan application may fall within the creditor's
underwriting standards, so an underwriter worksheet could contain
enough information to show how the creditor took into account the
required factors under the creditor's underwriting standards. Another
example is a loan application that triggers exceptions, where the
underwriter worksheet might state that certain exceptions were applied,
and referring to the creditor's policies and procedures would clarify
how those exceptions took into account the required factors. In
contrast to the discussion in the previous paragraph, a creditor would
not meet the Sec. 1026.43(e)(2)(v)(A) consider requirement if the
creditor deviated from its policies and procedures and its
documentation failed to show how the required factors were taken into
account. For example, a creditor would not meet the Sec.
1026.43(e)(2)(v)(A) consider requirement if the consumer did not meet
its own underwriting standards and the creditor merely made

[[Page 86354]]

a note that the loan was approved by management.
As the Bureau explained in the General QM Proposal, the Sec.
1026.43(e)(2)(v)(A) consider requirement means that 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 ability-to-repay
determination--the loan would not be eligible for QM status. Consumer
advocate commenters asked the Bureau to add examples of non-compliance,
such as loans with 100 percent DTI or zero residual income, and LTV-
based loans, arguing that these examples would help prevent loans from
receiving QM status when debts and income did not demonstrate a
consumer's ability to repay.
The Bureau declines to codify extreme examples of non-compliance in
the final rule. Although the Bureau concludes that loans for which a
consumer has 100 percent DTI or zero or negative residual income--and
no significant assets unrelated to the value of the dwelling that could
support the mortgage loan payments--would not meet the General QM
consider standard because the only reasonable conclusion would be that
the creditor did not consider DTI or residual income, putting such
extreme examples in the rule could be incorrectly interpreted to permit
any less extreme practices. For example, a creditor might originate a
loan to consumer in a family of four with $200 in monthly residual
income and no significant assets unrelated to the value of the
dwelling. Although the only reasonable conclusion is that the creditor
ignored the consumer's residual income and did not meet the General QM
consider requirement, creditors might perceive the extreme non-
compliance example to mean that only zero or negative residual income
loans could violate the rule.
The Bureau concludes that adding an LTV ratio or other home equity
discussion to the General QM consider requirement would introduce too
much confusion, thereby undermining the need for clarity of QM status,
and declines to adopt this recommendation. For example, some creditors
may determine that consumers with a higher DTI have an ability to repay
according to their underwriting policy, but due to market risk
tolerance will only originate that higher DTI loan if the consumer has
a relatively low LTV ratio. Although that loan may meet the consider
requirement because the creditor applied its underwriting guidelines
and showed how that DTI met its established DTI underwriting
thresholds, adding a discussion about LTV ratio to the General QM
consider requirement could be misconstrued to undermine the loan's
General QM status. In contrast, commenters raised concerns about
industry practices when a creditor ignores consumer debt, income, and
DTI or residual income and instead relies on LTV ratio, such as with
loan flipping. As discussed in the General QM Proposal and 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.\274\ The Bureau agrees that reliance on LTV ratio or another
measure of current or future home equity, in conjunction with a 100
percent DTI or no residual income and no other significant assets
unrelated to the value of the dwelling, support a conclusion that a
creditor did not meet the Sec. 1026.43(e)(2)(v)(A) requirement to
consider the consumer's current or reasonably expected income or assets
other than the value of the dwelling securing the mortgage, debt
obligations, alimony, child support, and monthly DTI ratio or residual
income.
---------------------------------------------------------------------------

\274\ 78 FR 6408, 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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The Bureau declines to change the General QM consider requirement
from a standard to show how the creditor took into account to a
standard to show that the creditor took into account. The suggested
language change would remove the requirement for creditors to connect
their consideration of the required factors to the ability-to-repay
determination, making the consider requirement a check-the-box exercise
under which a file could merely state that the factors were considered
even if the creditor ignored debts and income. Instead, the Bureau
concludes that creditors must show how it took into account the
required factors, including, for example, showing how it applied its
underwriting procedures to the consumer's loan application.
Comment 43(e)(2)(v)(A)-2. The Bureau is finalizing comment
43(e)(2)(v)(A)-2 as proposed. To reinforce that the General QM loan
definition no longer includes a specific DTI limit, comment
43(e)(2)(v)(A)-2 highlights that creditors have flexibility in how they
consider these factors. Comment 43(e)(2)(v)(A)-2 clarifies that Sec.
1026.43(e)(2)(v)(A) does not prescribe specifically how a creditor must
consider monthly debt-to-income ratio or residual income and also does
not prescribe a particular monthly debt-to-income ratio or residual
income threshold with which a creditor must comply. To assist creditors
in understanding their compliance obligations, the Bureau is finalizing
two examples of how to comply with the requirement to consider DTI or
residual income. Comment 43(e)(2)(v)(A)-2 provides an example in which
a creditor considers 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 finalizing a second example. The second example
provides 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 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.

[[Page 86355]]

Comment 43(e)(2)(v)(A)-3. The Bureau is finalizing comment
43(e)(2)(v)(A)-3 as proposed. 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. A net cash flow calculation
typically consists of residual income, further reduced by consumer
expenditures other than those already subtracted as part of the
residual income calculation. Accordingly, the result of a net cash flow
calculation may be useful in assessing the adequacy of a particular
consumer's residual income. Comment 43(e)(2)(v)(A)-3 clarifies 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 comment further provides that creditors may look to existing
comment 43(c)(7)-3 for guidance on considering additional factors in
determining the consumer's ability to repay. 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.
Legal Authority
The Bureau is finalizing the requirement that the creditor consider
the consumer's monthly DTI ratio or residual income, 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, debt obligations, alimony, and child support under
Sec. 1026.43(e)(2)(A) pursuant to its adjustment and exception
authority under TILA section 129C(b)(3)(B)(i). The Bureau finds that
this addition to the General QM 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 or 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 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 finds 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 DTI ratios or alternative
measures of ability to pay regular expenses after payment of total
monthly debt.
43(e)(2)(v)(B)
The Bureau's Proposal
The Bureau proposed to revise Sec. 1026.43(e)(2)(v)(B) to provide
that a General QM would be 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 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). The
proposal would have removed requirements that creditors verify this
information in accordance with appendix Q and would have removed
appendix Q from Regulation Z entirely.
To clarify the verification requirement in Sec.
1026.43(e)(2)(v)(B), the Bureau proposed to add comments
43(e)(2)(v)(B)-1 through -3. Proposed comment 43(e)(2)(v)(B)-1 stated
that Sec. 1026.43(e)(2)(v)(B) does not prescribe specific methods of
underwriting that creditors must use. This proposed comment further
provided that, as long as a creditor complies with the provisions of
Sec. 1026.43(c)(3) with respect to verification of debt obligations,
alimony, and child support and Sec. 1026.43(c)(4) with respect to
verification of income and assets, creditors would be permitted to use
any reasonable verification methods and criteria.
The Bureau proposed comment 43(e)(2)(v)(B)-2 to 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
further stated 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).
Proposed comment 43(e)(2)(v)(B)-3.i provided that a creditor also
complies with Sec. 1026.43(e)(2)(v)(B) if the creditor satisfies
specified verification standards (verification safe harbor). In the
section-by-section analysis of proposed Sec. 1026.43(e)(2)(v)(B), the
Bureau stated that these verification standards may include relevant
provisions in specified versions of the Fannie Mae Single Family
Selling Guide, the Freddie Mac Single-Family Seller/Servicer Guide, the
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 and the Handbook for the Single Family Guaranteed Loan
Program (``manuals''), as of the date of the proposal's public release.
The Bureau sought comment on whether these or other verification
standards should be incorporated into proposed comment 43(e)(2)(v)(B)-
3.i. In the section-by-section analysis of proposed Sec.
1026.43(e)(2)(v)(B), the Bureau also encouraged stakeholders to develop
additional verification standards and stated that it would review any
such standards for potential inclusion in the safe harbor.
Proposed comment 43(e)(2)(v)(B)-3.ii provided that a creditor
complies with Sec. 1026.43(e)(2)(v)(B) if it complies with
requirements in the verification 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 documents or to
include or exclude particular inflows, property, and obligations as
income, assets, debt obligations, alimony, and child support.

[[Page 86356]]

Proposed comment 43(e)(2)(v)(B)-3.iii stated that, for purposes of
compliance with Sec. 1026.43(e)(2)(v)(B), a creditor need not comply
with requirements in the verification 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 and count particular inflows,
property, and obligations as income, assets, debt obligations, alimony,
and child support.
Proposed comment 43(e)(2)(v)(B)-3.iv stated that a creditor also
complies with Sec. 1026.43(e)(2)(v)(B) where it complies with revised
versions of verification standards listed in comment 43(e)(2)(v)(B)-
3.i, provided that the two versions are substantially similar. Finally,
proposed comment 43(e)(2)(v)(B)-3.v provided 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 verification standards specified in
comment 43(e)(2)(v)(B)-3.i. The proposed comment stated that,
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 manual (in other words, by ``mixing and matching''
verification requirements).
For the reasons described below, the Bureau adopts Sec.
1026.43(e)(2)(v)(B) and comments 43(e)(2)(v)(B)-1 through -3 as
proposed, except that, in this final rule, Sec. 1026.43(e)(2)(v)(B)
lists the applicable verification standards for the verification safe
harbor in comment 43(e)(2)(v)(B)-3.i and includes minor edits to
provide clarity. The verification standards listed in comment
43(e)(2)(v)(B)-3.i are the same verification standards that the Bureau
listed in the proposal and stated that it may include in the
verification safe harbor.
Comments Received
Commenters generally supported the Bureau's overall approach of
replacing appendix Q with a requirement to use third-party records that
provide reasonably reliable evidence of the consumer's income, assets,
debt obligations, alimony, and child support. Several commenters
recommended modifications to the proposal, as described and organized
below based on the topic of concern.\275\
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\275\ The Bureau addresses comments on the Bureau's proposal
regarding appendix Q in the section-by-section analysis for appendix
Q, below.
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Verification safe harbor. Commenters generally supported including,
in the list of specified external verification standards, the portions
of the GSE, FHA, VA, and USDA manuals that the Bureau listed in the
proposal. Both GSEs supported the safe harbor for the verification
standards in their manuals resulting from proposed comment
43(e)(2)(v)(B)-3. Both GSEs stated that the commentary should reference
not only the verification standards in their manuals but should also
reference amendments, letters, and other creditor-specific waivers of
provisions that are not included in their manuals. One GSE stated that
the Bureau should require creditors to comply with its entire manual--
not just with its verification standards--to receive the verification
safe harbor. An industry commenter stated that automatic loan
origination system reports, specifically Fannie Mae's Desktop
Underwriter and Freddie Mac's Loan Prospector, should be conclusive
proof of compliance with the verification requirements of Sec.
1026.43(e)(2)(v)(B) and its related commentary. A research center
commenter stated that, for rebuttable presumption General QM loans,
income and debt verification is effectively the only issue a consumer
might challenge, and therefore the verification safe harbor would
result in creditors facing about the same legal exposure on a
rebuttable presumption QM as on a safe harbor QM. The commenter
asserted that this would provide less protection to consumers and more
leverage for increased home prices.
The Bureau declines to extend the verification safe harbor for
materials outside of the scope of the verification standards in the
specified manuals. The Bureau is concerned that the automatic inclusion
of any amendments or modifications to manuals could cause significant
changes in the creditor obligations and consumer protections without
review by the Bureau. The Bureau will monitor changes to the manuals
and incorporate updated versions if necessary. The Bureau is also
concerned about incorporating standards that are not publicly
available. The Bureau also declines to extend the safe harbor for
matters beyond the verification standards within the specified GSE
manuals. The Bureau is not aware of a reason why a creditor's
compliance with standards unrelated to verification should be required
for the creditor to obtain the benefit of the safe harbor for
compliance with the Bureau's verification requirement. In addition,
referencing the rest of the GSE manuals could lead to confusion among
creditors or secondary market participants, because those manuals also
contain requirements not related to verification standards--for
example, housing expense ratios, DTI limits, or LTV limits that may be
inconsistent with the provisions on related issues in the General QM
loan definition. The Bureau also declines to extend a verification safe
harbor merely for the inclusion of an approval acknowledgment generated
by an automated underwriting system maintained by the GSEs or other
institution, because modifications to the automated underwriting system
approval process may deviate from the specified manuals and the Bureau
would not be able to evaluate the nature and extent of such deviations
without prior review.
The Bureau additionally disagrees with the research center
commenter's assertion that the verification safe harbor would result in
creditors facing about the same legal exposure on a rebuttable
presumption QM as on a safe harbor QM. The Bureau notes that the
verification safe harbor provides creditors with a safe harbor only for
compliance with the verification requirement in Sec.
1026.43(e)(2)(v)(B). The verification safe harbor does not preclude
consumers from asserting that the creditor did not comply with Sec.
1026.43(e)(2)(v)(A), for example, by failing to take into account the
consumer's DTI ratio or residual income in the creditor's ability-to-
repay determination. Moreover, consumers could still rebut the
presumption by demonstrating that they had insufficient residual income
to cover their living expenses as explained in comment 43(e)(1)(ii)-1.
Use of revised manuals that are substantially similar. The Bureau
requested comment on whether creditors that comply with verification
standards in revised versions of the listed manuals that are
substantially similar to the listed versions should also receive a
verification safe harbor, as the Bureau proposed. The Bureau also
requested comment on whether the Rule should include illustrations of
revisions to the manuals that might qualify as substantially similar,
and if so, what types of illustrations would provide helpful
clarification to creditors and other stakeholders.
Commenters generally supported the inclusion of a verification safe
harbor for verification standards in the listed manuals that have been
revised but are substantially similar, but some commenters suggested
alternative approaches. A GSE supported the substantially similar
standard but requested that the Bureau clarify the meaning of
substantially similar. In contrast, some industry commenters

[[Page 86357]]

stated that creditors should receive a safe harbor for compliance with
the revised version of the manuals whether or not they are
substantially similar. Some industry commenters stated that the Bureau
should adjust the commentary to presume the revised versions of manuals
are valid unless they materially deviate from the prior version. Some
industry commenters stated that the Bureau should adopt a mechanism by
which the Bureau could review and determine if revised manuals are
substantially similar to the versions referenced in comment
43(e)(2)(v)(B)-3.i. Some industry commenters stated that the Bureau
should include a statement that affirms that verification standards
adopted by a creditor that are materially similar to those in the
manuals referenced in comment 43(e)(2)(v)(B)-3.i should also receive a
verification safe harbor.
The Bureau is adopting comment 43(e)(2)(v)(B)-3.i as proposed. The
Bureau determines that commenters' suggested clarifications of the
substantially similar standard in fact would not provide greater
clarity. For example, the Bureau determines that a standard providing
that the revised manual receives a verification safe harbor provided
that it does not ``materially deviate'' or is ``materially similar''
would not be appreciably clearer than a standard that the revised
manual be ``substantially similar.''
The Bureau additionally notes that, in proposing to extend the
verification safe harbor to substantially similar versions of the
verification standards in the manuals, the Bureau did not intend for
creditors to always be responsible for determining on their own whether
a revised version of a listed manual is substantially similar to a
version adopted in this final rule. Rather, the Bureau intends to
provide further clarity to creditors by releasing guidance, as
appropriate, regarding whether future revisions of manuals qualify as
``substantially similar'' for purposes of the verification safe harbor.
The following three illustrations show how the Bureau may evaluate
future changes to the manuals. The Bureau believes these illustrations
may help creditors anticipate if and when the Bureau may address
whether future revisions of manuals are eligible for a safe harbor.
First, revisions only to provisions within the manuals that are not
referenced in comment 43(e)(2)(v)(B)-3.i would result in a revised
version that is substantially similar. For example, a revised version
of the FHA's Single Family Housing Policy Handbook that makes changes
only to Section III, Servicing and Loss Mitigation, would be
substantially similar for purposes of comment 43(e)(2)(v)(B)-3.i
because there are no changes to the verification standards contained in
Sections II.A.1 and II.A.4-5 of that Handbook.
Second, the portions of the manuals referenced in comment
43(e)(2)(v)(B)-3.i contain not only verification standards, but also
additional provisions related to the underwriting of the mortgage.
Consistent with comment 43(e)(2)(v)(B)-3.iii, revisions only to these
unrelated underwriting provisions would produce a revised version that
would be substantially similar. As an illustration, the Freddie Mac
Single-Family Seller/Servicer Guide chapter 5401.1 requires a review of
the consumer's monthly housing expense-to-income ratio. Chapter 5401.1
is contained within the portions of the Freddie Mac Single-Family
Seller/Servicer Guide listed in comment 43(e)(2)(v)(B)-3.i. However,
revised versions of Chapter 5401.1 concerning a consumer's monthly
housing expense-to-income ratio would be substantially similar to the
manual in comment 43(e)(2)(v)(B)-3.i, since these provisions of chapter
5401.1 do not relate to the verification of income, assets, debt
obligations, alimony, or child support by use of reasonably reliable
third-party records.
Third, revisions to the manuals concerning verification standards
may or may not be substantially similar. The Bureau may evaluate such
revisions to determine if the revised manual is substantially similar
to the version referenced in comment 43(e)(2)(v)(B)-3.i. As an
illustration, Fannie Mae Selling Guide chapter B-3-3.2-01 generally
requires two years of individual and business tax returns to verify a
consumer's income. Business tax returns, however, are not required if
the consumer is using personal funds to pay for down payment, closing,
and escrow account amounts; the consumer has been in same business for
five years; and the consumer's individual tax returns show an increase
in self-employment income. A revised version of the Fannie Mae Selling
Guide that amends chapter B-3-3.2-01 to change any of these
requirements for verifying self-employed income may or may not make the
revised Selling Guide substantially similar to the Fannie Mae Selling
Guide issued on June 3, 2020. The Bureau may consider providing
additional guidance to address any such revisions.
``Mixing and matching'' of verification standards. The Bureau also
sought comment on its proposal to allow creditors to ``mix and match''
verification standards from different manuals, 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. Some industry commenters supported the ability of creditors to mix
and match the verification standards from the manuals because it would
provide flexibility and would not restrict creditors from adopting
wholesale verification standards from a single external party. Some
consumer advocate commenters opposed permitting creditors to mix and
match verification standards from the manuals because allowing mixing
and matching would introduce unnecessary subjectivity into the rule,
although the commenters did not explain how. These consumer advocate
commenters also stated that allowing mixing and matching could enable
creditors to exploit differences in approaches between manuals. These
commenters did not explain or provide examples of how creditors might
do so or of what harm could result.
The Bureau concludes that permitting creditors to mix and match
standards for verifying income, assets, debt obligations, alimony, and
child support from each of the manuals would provide creditors with
greater flexibility without undermining consumer protection. The GSEs
and Federal agencies that maintain the manuals have had considerable
historical experience in determining which records and supplemental
records are reasonably reliable third-party records for purposes of
verifying income, assets, debt obligations, alimony, and child support,
as well as determining the need for updated information over applicable
timeframes. Each of the manuals has also been historically relied upon
for those purposes by Congress, the Bureau, secondary market
participants, and creditors. Congress included separate QM definitions
for loans insured or guaranteed by FHA, VA, and USDA without
establishing separate third-party verification standards other than
those established by their respective agencies.\276\ The third-party
verification standards of the GSEs also served as a basis for
verification under the Temporary GSE QM loan definition under Sec.
1026.43(e)(4), and the Bureau is not aware of resulting instances of
harm caused by inadequately verified income or assets, debt
obligations, alimony and child support.
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\276\ TILA section 129C(b)(3)(ii); 15 U.S.C. 1639c(b)(3)(ii).
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The Bureau has analyzed the relevant provisions of the manuals and
has not identified ways that creditors may exploit differences between
them or

[[Page 86358]]

how mixing and matching would add subjectivity to the ATR/QM Rule's
verification requirements. As noted, commenters did not cite examples
of how this might occur. Permitting creditors to mix and match
verification standards may allow creditors to use different manuals,
but the Bureau has not identified evidence that combinations of
historically accepted third-party record verification standards will,
by virtue of their combination, result in insufficient verification of
income, assets, debt obligations, alimony, or child support because the
creditor uses different manuals for the verification of the information
provided. The Bureau also determines, based on its analysis of the
relevant provisions of the manuals, that permitting creditors to ``mix
and match'' would not add subjectivity to the Rule's verification
requirements.
Adding standards created by a self-regulatory organization (SRO).
In the General QM Proposal, the Bureau encouraged stakeholders to
develop additional verification standards that the Bureau could
incorporate into the verification safe harbor and stated that it would
review any such standards for potential inclusion in the safe harbor.
Commenters did not provide any stakeholder-developed verification
standards for review. However, several industry commenters stated that
the Bureau should use verification standards adopted by a self-
regulatory organization (SRO), in addition to or as a replacement for
the standards listed in the proposal. Commenters that suggested this
approach generally discussed such adoption as a future objective, as
such standards, or even such an SRO, do not appear to exist at this
time. One of these commenters recommended that the Bureau include in
the safe harbor the GSE and Federal agency manuals listed in the
proposal only until an industry-developed standard is established and
approved by the Bureau.
The Bureau notes that there is no evidence in the record that such
an SRO, much less verification standards created by such an entity or
other consortium of industry stakeholders, exists. Accordingly, the
Bureau determines that it would be premature to include such standards
in the verification safe harbor. However, the Bureau continues to
encourage stakeholders, including groups of stakeholders, to develop
verification standards.\277\ The Bureau is interested in reviewing any
such standards that stakeholders develop for potential inclusion in the
verification safe harbor. Stakeholder standards could incorporate, in
whole or in part, any standards that the Bureau specifies as providing
a verification safe harbor, including mixing and matching these
standards.
---------------------------------------------------------------------------

\277\ See, e.g., OMB Circular A-119: Federal Participation in
the Development and Use of Voluntary Consensus Standards and in
Conformity Assessment Activities (Jan. 27, 2016), https://www.whitehouse.gov/wp-content/uploads/2020/07/revised_circular_a-119_as_of_1_22.pdf.
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Preventing use of fraudulent documentation. The joint consumer
advocate term sheet requested that the Bureau affirm that documentation
that is falsified or the subject of fraud by or with the knowledge and
consent of the lender, broker, or their agents would not comply with
the verification requirement in Sec. 1026.43(e)(2)(v)(B). The Bureau
agrees that falsified or fraudulent documentation is, by definition,
not a ``reasonably reliable'' third party record. The Bureau further
notes that creditors have legal obligations to protect against such
instances of mortgage fraud.\278\ The Bureau also notes that the
manuals listed in the verification safe harbor have embedded
limitations and restrictions on what third-party documentation may be
used for verification that address similar sources of law. Accordingly,
the Bureau determines that the issues presented by commenters are
already adequately addressed by this final rule and by existing legal
requirements.
---------------------------------------------------------------------------

\278\ See, e.g., 18 U.S.C. 1001, 1010, 1014, 1028, 1341 through
1344.
---------------------------------------------------------------------------

The Final Rule
The Bureau is adopting Sec. 1026.43(e)(2)(v)(B) and comments
43(e)(2)(v)(B)-1 through -3 as proposed, except that, in this final
rule, Sec. 1026.43(e)(2)(v)(B) lists the applicable verification
standards for the verification safe harbor in comment 43(e)(2)(v)(B)-
3.i.\279\ These verification standards are: (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. These
verification standards are the same standards that the Bureau listed in
the proposal and requested comment on. Based on its review of the
standards and the comments received, Bureau concludes that each of the
verification standards listed in comment 43(e)(2)(v)(B)-3.i is
sufficient to satisfy the final rule's verification requirement.
---------------------------------------------------------------------------

\279\ The Bureau has also made some non-substantive changes to
terminology in final comments 43(e)(2)(v)(B)-1 through -3 to ensure
consistent usage of terms throughout the commentary.
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The Bureau concludes that these amendments to Sec.
1026.43(e)(2)(v)(B) will ensure that the ATR/QM 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. The Bureau concludes that, without such certainty,
creditors may be less likely to provide General QMs to consumers,
reducing the availability of responsible, affordable mortgage credit.
The Bureau also finds that these verification requirements are flexible
enough to adapt to emerging issues with respect to the treatment of
certain types of income, assets, debt obligations, alimony, and child
support, advancing the provision of responsible, affordable mortgage
credit to consumers. The Bureau 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, this final rule provides that creditors must
verify income, assets, debt obligations, alimony, and child support in
accordance with the general ATR verification provisions in Sec.
1026.43(c)(3) and (4). This final rule also provides a safe harbor for
compliance with Sec. 1026.43(e)(2)(v)(B) if a creditor complies with
verification standards in the manuals listed in comment 43(e)(2)(v)(B)-
3.i. These verification standards are available to the public for free
online.\280\
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\280\ The referenced versions of the guides, or relevant
sections thereof, are publicly available on the internet. The Fannie
Mae Single Family Selling Guide, published June 3, 2020 can be found
at http://www.allregs.com/tpl/public/fnma_freesiteconv_tll.aspx. The
Freddie Mac Single-Family Seller/Servicer Guide, published June 10,
2020 can be found at https://www.allregs.com/tpl/public/fhlmc_freesite_tll.aspx. The FHA's Single Family Housing Policy
Handbook, issued October 24, 2019 can be found at https://www.regulations.gov/document?D=CFPB-2020-0020-0002. The chapter 4 of
the VA's Lenders Handbook revised February 22, 2019 can be found at
https://www.regulations.gov/document?D=CFPB-2020-0020-0003. The
USDA's Field Office Handbook for the Direct Single Family Housing
Program, revised March 15, 2019 can be found at https://www.regulations.gov/document?D=CFPB-2020-0020-0005. The USDA's
Handbook for the Single Family Guaranteed Loan Program, revised
March 19, 2020 can be found at https://www.regulations.gov/document?D=CFPB-2020-0020-0004.

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[[Page 86359]]

The Bureau determines, based on extensive public feedback and its
own experience and review, that these external standards are 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 determines that these types of income would
be addressed more fully by these external standards than by appendix Q.
The Bureau determines that, as a result, final Sec.
1026.43(e)(2)(v)(B) 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 standards listed in comment
43(e)(2)(v)(B)-3.i in order to comply with Sec. 1026.43(e)(2)(v)(B).
Rather, under this final rule, compliance with the listed verification
standards constitutes compliance with the verification requirements of
Sec. 1026.43(c)(3) and (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 determines that this would help address the compliance concerns
of many creditors and commenters associated with appendix Q's lack of
clarity.
The Bureau also determines that this final rule 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 (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 comment 43(e)(2)(v)(B)-1, Sec. 1026.43(e)(2)(v)(B) does
not prescribe specific methods of underwriting, and as long as a
creditor complies with Sec. 1026.43(c)(3) and (4), the creditor is
permitted to use any reasonable verification methods and criteria.
Furthermore, as comment 43(e)(2)(v)(B)-3.v clarifies, creditors have
the flexibility to mix and match the verification requirements in the
standards specified 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.
Comment 43(e)(2)(v)(B)-3.iv explains that a creditor complies with
Sec. 1026.43(e)(2)(v)(B) if it complies with revised versions of the
verification standards specified in comment 43(e)(2)(v)(B)-3.i,
provided that the two versions are substantially similar. The GSE and
Federal agency standards listed in comment 43(e)(2)(V)(B)-3.i are
regularly updated in response to emerging issues with respect to the
treatment of certain types of debt or income. This comment explains
that the safe harbor described in comment 43(e)(2)(v)(B)-3.i applies
not only to verification standards in the specific listed versions, but
also to revised versions of these verification standards, as long as
the revised version is substantially similar.
As discussed above, the Bureau encourages stakeholders, including
groups of stakeholders, to develop verification standards. The Bureau
is interested in reviewing any such standards for potential inclusion
in the verification safe harbor. Stakeholder standards could
incorporate, in whole or in part, any standards that the Bureau
specifies as providing a safe harbor, including mixing and matching
these standards.
Legal Authority
The Bureau is incorporating the requirement that the creditor
verify the consumer's current or reasonably expected income, assets
other than the value of the dwelling (including any real property
attached to the dwelling), debt obligations, alimony, and child support
into the definition of a General QM in Sec. 1026.43(e)(2) and
revisions to its commentary pursuant to its authority under TILA
section 129C(b)(3)(B)(i). The Bureau finds that these provisions are
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 adopts these provisions 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 judgment are necessary or proper to effectuate the
purposes of TILA, which include the above purpose of section 129C,
among other things. The Bureau finds that these provisions are
necessary and proper to achieve this purpose. In particular, the Bureau
finds that incorporating the requirement that a creditor verify a
consumer's current debt obligations, alimony, and child support into
the General QM 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--ensures that creditors verify whether a consumer has the
ability to repay a General QM. 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.
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 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

[[Page 86360]]

determined in accordance with appendix Q.
For the reasons described in part V above, the Bureau proposed 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 have
required a creditor to consider the consumer's DTI ratio or residual
income, income or assets other than the value of the dwelling, and
debts and verify the consumer's income or assets other than the value
of the dwelling and the consumer's debts. Specifically, the Bureau
proposed to remove the text of current Sec. 1026.43(e)(2)(vi) and to
provide instead that, to be a General QM 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).\281\ Proposed Sec.
1026.43(e)(2)(vi)(A) through (E) provided 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) provided 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)
provided higher thresholds for smaller first-lien covered transactions.
Proposed Sec. 1026.43(e)(2)(vi)(D) and (E) provided higher thresholds
for subordinate-lien covered transactions. Under the proposal, loans
priced at or above the thresholds in proposed Sec.
1026.43(e)(2)(vi)(A) through (E) would not have been eligible for QM
status under Sec. 1026.43(e)(2). The proposal also provided that the
loan amounts specified in Sec. 1026.43(e)(2)(vi)(A) through (E) would
be adjusted annually for inflation based on changes in the Consumer
Price Index for All Urban Consumers (CPI-U).
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\281\ As explained above in the section-by-section discussion of
Sec. 1026.43(e)(2)(v)(A), the Bureau proposed 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.
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Proposed Sec. 1026.43(e)(2)(vi) also provided 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)
provided 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 proposed these revisions to Sec. 1026.43(e)(2)(vi) for
the reasons set forth above in part V.B. As explained above, the Bureau
proposed 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 Temporary GSE QM
loan definition expires would significantly reduce the size of the QM
market and could significantly reduce access to responsible, affordable
credit. The Bureau proposed 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. In the proposal, the Bureau
preliminarily concluded 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 proposed 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
did so because, under the proposal to move the text of current Sec.
1026.43(e)(2)(vi)(B) and revise it to remove the references to appendix
Q, current comment 43(e)(2)(vi)-1 would have been unnecessary. The
Bureau proposed 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 proposed new comment 43(e)(2)(vi)-2, which
provided 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), and provided an example of
a $75,000 loan amount that would fall into the proposed tier for loans
greater than or equal to $65,939 (indexed for inflation) but less than
$109,898 (indexed for inflation). In addition, the Bureau proposed
comment 43(e)(2)(vi)-3 in which it would have published the annually
adjusted loan amounts to reflect changes in the CPI-U. The Bureau also
proposed new comment 43(e)(2)(vi)-4 to explain 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 Bureau did not receive comments
regarding comments 43(e)(2)(vi)-1 through -3 and is adopting them as
proposed, except that the $65,939 and $109,898 loan amount thresholds
in comment 43(e)(2)(vi)-2 have been revised to $66,156 and $110,260,
respectively, for consistency with the Bureau's recently-issued final
rule that adjusted for inflation the related thresholds in comment
43(e)(3)(ii)-1.\282\ The Bureau is also adopting comment 43(e)(2)(vi)-4
as proposed and that comment is discussed further below.
---------------------------------------------------------------------------

\282\ 85 FR 50944, 50948 (Aug. 19, 2020).
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For the reasons discussed in part V and below, the Bureau is
adopting a price-based approach to defining General QMs in Sec.
1026.43(e)(2)(vi) pursuant to its authority under TILA section
129C(b)(3)(B)(i). The Bureau 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 in part V, the Bureau concludes that a price-based
General QM loan definition best balances consumers' ability to repay
with ensuring access to responsible, affordable mortgage credit. The
Bureau is amending the General QM loan definition because retaining the
existing 43 percent DTI limit would reduce the

[[Page 86361]]

size of the QM market and likely would lead to a significant reduction
in access to responsible, affordable credit when the Temporary GSE QM
definition expires. The Bureau continues to believe that General QM
status should be determined by a simple, bright-line rule to provide
certainty of QM status, and the Bureau concludes that pricing achieves
this objective. Furthermore, the Bureau concludes that pricing, rather
than a DTI limit, is a more appropriate standard for the General QM
loan definition. While not a direct measure of financial capacity, loan
pricing is strongly correlated with early delinquency rates, which the
Bureau uses as a proxy for repayment ability. The Bureau concludes that
conditioning QM status on a specific DTI limit would likely impair
access to credit for some consumers for whom it is appropriate to
presume their ability to repay their loans at consummation. Although a
pricing limit that is set too low could also have this effect, compared
to DTI, loan pricing is a more flexible metric because it can
incorporate other factors that may also be relevant to determining
ability to repay, including credit scores, cash reserves, or residual
income. The Bureau concludes that a price-based General QM loan
definition is better than the alternatives 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 concludes that a price-based approach to the General QM
loan definition will 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 is adopting 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 judgment are
necessary or proper to effectuate the purposes of TILA, which include
the above purpose of section 129C, among other things. The Bureau
concludes that the price-based addition to the General QM criteria is
necessary and proper to achieve this purpose, for the reasons described
above in part V. Finally, the Bureau 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.
43(e)(2)(vi)(A)
The Bureau's Proposal
Proposed Sec. 1026.43(e)(2)(vi)(A) provided 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 2 or
more percentage points. Thus, under the proposal, loans priced at or
above the proposed 2-percentage-point threshold would not have been
eligible for QM status under Sec. 1026.43(e)(2) (except that, as
discussed below, the proposal provided higher thresholds for loans with
smaller loan amounts and for subordinate-lien transactions).
In the proposal, the Bureau stated that the 2002-2008 time period
corresponds to a market environment that, in general, demonstrates
looser, higher-risk credit conditions and that ended with very high
unemployment and falling home prices. The Bureau's analysis set forth
in Table 5 found direct correlations between rate spreads and early
delinquency rates across all DTI ranges reviewed. The proposal stated
that loans with low rate spreads had relatively low early delinquency
rates even at high DTI levels and 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 2 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.
In the proposal, the Bureau stated that, in contrast to Table 5,
the 2018 time period in Table 6 corresponds to a market environment
that, in general, demonstrates tighter, lower-risk credit conditions
and that featured very low unemployment and rising home prices. The
proposal stated that 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. 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. The Bureau stated that the
apparent anomalies in the progression of the early delinquency rates
across DTI ratios at the higher rate spread categories in Table 6 are
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.
In the proposal, the Bureau stated that, although in Tables 5 and 6
delinquency rates rise with rate spread, there is no clear point at
which delinquency rates accelerate and 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.
The proposal referenced data and analyses provided by CoreLogic and
the Urban Institute, as discussed in part V.B.2 above, which the Bureau
stated also show a strong positive correlation of delinquency rates
with interest rate spreads. The Bureau stated that this evidence
collectively suggests that higher rate spreads--including the specific
measure of APR over APOR--

[[Page 86362]]

are strongly correlated with early delinquency rates. The proposal
stated the Bureau's expectation that, for loans just below the
respective thresholds, a pricing threshold of 2 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, the proposal stated that 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-HMDA matched first-lien
conventional purchase originations to only those purchased and
guaranteed by the GSEs, the proposal stated that 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). The proposal
explained that 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. The
proposal further explained that 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.
In the proposal, the Bureau 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 used 2018 HMDA data to project that the
proposed 2 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. The Bureau stated that creditors may also respond to
such a threshold by lowering pricing on some loans near the threshold,
further increasing the QM market share. The proposal stated that, using
the size of the QM market as an indicator of access to credit, the
Bureau expects that a pricing threshold of 2 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. The Bureau
also acknowledged, 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). Further, the Bureau stated
that 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.
In the proposal, the Bureau tentatively concluded that, in general,
a 2 percentage-point-over-APOR threshold would appropriately balance
ensuring consumers' ability to repay with maintaining access to
responsible, affordable mortgage credit. The Bureau requested comment
on the threshold amount, as well as comment on expected market changes
and the possibility of adjusting the threshold in emergency situations.
For the reasons discussed below, the Bureau is finalizing Sec.
1026.43(e)(2)(vi)(A) with a threshold of 2.25 percentage points over
APOR for transactions with a loan amount greater than or equal to
$110,260 (indexed for inflation).
Comments Received
The Bureau received several comments concerning the proposed 2-
percentage-point threshold for General QM eligibility under Sec.
1026.43(e)(2)(vi)(A).\283\ Various commenters supported finalizing the
proposed threshold or raising it by some unspecified amount. A GSE
supported the proposed 2-percentage-point threshold to both continue
access to affordable credit and ensure consumers' ability to repay.
Another GSE supported the 2-percentage-point threshold and stated it
was equally supportive of increasing the threshold by an unspecified
amount. Similarly, an industry commenter stated that it does not oppose
increasing the threshold by some unspecified amount.
---------------------------------------------------------------------------

\283\ As discussed above in part V.C, the Bureau also received
comments both for and against increasing the Sec. 1026.43(b)(4)
safe harbor threshold spread from 1.5 percentage points to 2
percentage points.
---------------------------------------------------------------------------

Some comments, including one from an academic commenter and a joint
comment from consumer advocates, generally opposed a price-based
approach but also stated concerns specifically regarding the proposed
2-percentage-point threshold for QM eligibility under Sec.
1026.43(e)(2)(vi)(A). Citing an Urban Institute analysis that was also
cited in the proposal,\284\ the comments stated that, among loans with
rate spreads of 1.51 to 2.00 percentage points originated from 1995
through 2008, even 30-year fixed-rate, fully documented and fully
amortizing loans had high delinquency rates--especially those
originated during periods of greater rate spread compression. Citing
General QM Proposal Tables 1 and 3 regarding 2002-2008 first-lien
purchase originations (i.e., reproduced as Tables 1 and 3 above), the
comments also stated that the 13 percent early delinquency rate for
loans priced 1.75 to 1.99 percentage points above APOR is more than
double the 6 percent early delinquency rate for loans with DTI ratios
of 41 to 43 percent--and is almost double the 7 percent early
delinquency rate for loans with DTI ratios of 46 to 48 percent.
---------------------------------------------------------------------------

\284\ See Kaul & Goodman, supra note 194.
---------------------------------------------------------------------------

A research center specifically recommended increasing the General
QM eligibility threshold to 2.5 percentage points to balance ability to
repay with access to credit. The commenter stated that, based on Fannie
Mae and Black Knight McDash data, a 2.5-percentage-point threshold
would increase the delinquency rate \285\ but nonetheless the
delinquency rate would remain low relative to delinquency rates
experienced in the past 20 years. The research center also stated that,
based on 2019 HMDA data, a 2.5-percentage-point threshold would cause
32,044 more loans to be QM-eligible than a 2-percentage-point
threshold. The commenter further stated that FHA's QM rule does not
limit pricing for rebuttable presumption QMs and thus increasing the
Bureau's threshold under Sec. 1026.43(e)(2)(vi)(A) would create a more
level playing field and increase consumer choice.
---------------------------------------------------------------------------

\285\ The analysis provided by the commenter looked at loans
that had ever been 60 days or more delinquent, rather than 60 or
more days delinquent during the first two years, which is the
standard used in the Bureau's analysis.
---------------------------------------------------------------------------

An individual commenter generally supported proposed Sec.
1026.43(e)(2)(vi)(A) but suggested incrementally increasing the General
QM eligibility threshold to as high as 2.75 percentage points for
transactions with lower points and fees. The commenter stated that the
approach would provide more flexibility and help consumers avoid paying
upfront points and fees.
Several commenters recommended increasing the General QM
eligibility threshold to 3 percentage points. A joint comment from
consumer advocate and

[[Page 86363]]

industry groups included some signatories recommending a 3-percentage-
point threshold and no signatories opposing it. Another joint comment
from consumer advocate and industry groups supported a 3-percentage-
point threshold to balance ability to repay with access to credit. The
latter joint comment stated that, based on Fannie Mae data and
accounting for current risk-based mortgage insurance premiums, a 3-
percentage-point threshold would increase the early delinquency rate
but nonetheless the delinquency rate would be low relative to the Great
Recession. Citing an FHFA working paper that was also cited by the
General QM Proposal,\286\ the joint comment further stated that loans
with non-QM features--including interest-only loans, ARM loans that
combined teaser rates with subsequent large jumps in payments, negative
amortization loans, and loans made with limited or no documentation of
the borrower's income or assets--accounted for about half of the rise
in risk leading up to the 2008 financial crisis and subsequent passage
of the Dodd-Frank Act. The joint comment stated that the Bureau should
promote more consumers receiving the important benefits of the Dodd-
Frank Act's QM product restrictions--including lower-income and
minority consumers that would otherwise be disproportionally excluded--
by increasing the threshold for QM eligibility under Sec.
1026.43(e)(2)(vi)(A).
---------------------------------------------------------------------------

\286\ Davis et al., supra note 179.
---------------------------------------------------------------------------

The Bureau also received comments--including one from a research
center and a joint comment from consumer advocate and industry groups--
recommending an increase in the General QM pricing threshold to account
for possible future rate spread widening in the market, as also
discussed above in part V.C with respect to the safe harbor threshold.
The Bureau also received a joint comment from consumer advocates that
generally opposed a price-based approach but also stated that the
Bureau should not increase the General QM pricing threshold in future
emergency situations without notice-and-comment rulemaking.
The Final Rule
For the reasons discussed below, the Bureau is adopting Sec.
1026.43(e)(2)(vi)(A) with a threshold of 2.25 percentage points over
APOR for transactions with a loan amount greater than or equal to
$110,260 (indexed for inflation). The Bureau concludes that, for most
first-lien covered transactions, a 2.25 percentage point pricing
threshold strikes the best balance between ensuring consumers' ability
to repay and ensuring access to responsible, affordable mortgage
credit. The Bureau is adopting Sec. 1026.43(e)(2)(vi)(A) with a
$110,260 loan amount threshold for consistency with the Bureau's
recently-issued final rule that adjusted for inflation the related
$109,898 threshold in comment 43(e)(3)(ii)-1.\287\ As discussed below,
the final rule provides higher thresholds for loans with smaller loan
amounts and for subordinate-lien transactions. The final rule provides
an increase from the proposed thresholds for some small manufactured
housing loans to ensure continued access to credit.
---------------------------------------------------------------------------

\287\ 85 FR 50944, 50948 (Aug. 19, 2020).
---------------------------------------------------------------------------

The Bureau concludes that a General QM eligibility threshold lower
than 2.25 percentage points would unduly limit some consumers to non-QM
or FHA loans, which generally have materially higher costs, or would
unduly result in some consumers not being able to obtain a loan at all
despite their ability to afford one, given the current lack of a robust
non-QM market.\288\ As discussed in part V.B.5 above, Table 7A shows
that 96.3 percent of 2018 conventional first-lien purchase originations
would have been QMs under this revised ATR/QM Rule, as compared to a
94.7 percent share under the existing ATR/QM Rule, including the
Temporary GSE QM loan definition. As discussed in the Bureau's Dodd-
Frank Act section 1022(b) analysis below, among loans that fall outside
the current General QM loan definition because they have a DTI ratio
above 43 percent, the Bureau estimates that 959,000 of these
conventional loans in 2018 would fall within this final rule's General
QM loan definition. The Bureau concludes that some consumers with those
conventional loans with DTI ratios above 43 percent could have instead
obtained non-QM or FHA loans, which generally have materially higher
costs, but others would not have obtained a loan at all. 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 home purchase loans with
DTI ratios above 43 percent.\289\ The Bureau concludes that a 2.25
percentage point General QM eligibility threshold helps address those
access-to-credit concerns--including concerns related to certain ARMs
and manufactured housing loans discussed below--while striking an
appropriate balance with ability-to-repay concerns.
---------------------------------------------------------------------------

\288\ The Bureau stated in the January 2013 Final Rule that it
believed a significant share of mortgages would be made under the
general ATR standard. 78 FR 6408, 6527 (Jan. 30, 2013). 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 and, 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. Assessment Report, supra note 63,
at 198. 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 may significantly hinder its development
in the near term.
\289\ Assessment Report, supra note 63, at 10-11, 117, 131-47.
---------------------------------------------------------------------------

A 2.25 percentage point pricing threshold for QM eligibility under
Sec. 1026.43(e)(2)(vi)(A) is also supported by the Bureau's conclusion
that the Dodd-Frank Act QM product restrictions contribute to ensuring
that consumers have the ability to repay their loans and are important
for maintaining and expanding access to responsible, affordable
mortgage credit. The Bureau concludes that loans with non-QM features--
including interest-only loans, negative amortization loans, and loans
made with limited or no documentation of the borrower's income or
assets--had a substantial negative effect on consumers' ability to
repay leading up to the 2008 financial crisis and subsequent passage of
the Dodd-Frank Act. The Bureau concludes that promoting access to more
QMs with the important benefits of the Act's QM product restrictions
will help ensure consumers' ability to repay. Furthermore, for General
QMs priced greater than or equal to 1.5 but less than 2.25 percentage
points above APOR, consumers would also be afforded the opportunity to
rebut the creditor's QM presumption of compliance.
In response to commenters who stated that the early delinquency
rate for the proposed 2-percentage-point threshold would be too high to
justify a QM presumption of compliance, the Bureau acknowledges that
Table 1 for 2002-2008 first-lien purchase originations shows a 14
percent early delinquency rate for loans priced 2.00 to 2.24 percentage
points above APOR, as compared to a 13 percent early delinquency rate
for loans priced 1.75 to 1.99 percentage points above APOR and a 12
percent early delinquency rate for loans priced 1.50 to 1.74 percentage
points above APOR.\290\ The comparable

[[Page 86364]]

early delinquency rates for 2018 loans from Table 2 also show a higher
early delinquency rate for loans priced 2.00 percentage points or more
above APOR compared to loans priced 1.50 to 1.99 percentage points
above APOR: 4.2 percent versus 2.7 percent.\291\ 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. Specifically, when restricting the sample of 2018
NMDB-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. As explained above, this comparison uses 2018 data because
such loans were originated while the Temporary GSE QM loan definition
was in effect and the GSEs were in conservatorship, whereas GSE loans
from the 2002 to 2008 period were originated under a different
regulatory regime and with different underwriting practices that may
not be directly comparable to loans made under the Temporary GSE QM
loan definition.
---------------------------------------------------------------------------

\290\ The Bureau also acknowledges that Table 5 shows that for
loans with DTI ratios of 61-70 in the 2002-2008 data, the early
delinquency rates were 26 percent for loans priced 2.00 to 2.24
percentage points above APOR, relative to 22 percent for loans
priced 1.75 to 2.00 percentage points above APOR.
\291\ Similarly, Table 6 shows that for the DTI ratios with the
highest early delinquency rates (DTI ratios of 26-35), the early
delinquency rates were 4.4 percent for loans priced 2.00 or more
percentage points over APOR, compared to 3.2 percent for loans
priced 1.50 to 1.99 percentage points over APOR.
---------------------------------------------------------------------------

In response to commenters, and as discussed above in part V.C.4,
the Bureau concludes that it would be premature at this point to
increase the QM safe harbor threshold based on possible future spread
widening both because of uncertainty regarding effects on APOR itself
as well as insufficient evidence of a significant access-to-credit
difference between safe harbor and rebuttable presumption QMs. But for
the General QM eligibility threshold under Sec. 1026.43(e)(2)(vi)(A),
notwithstanding the uncertainty regarding effects on APOR itself, the
Bureau concludes that a robust non-QM market has not yet emerged and,
thus, loans that exceed that threshold may not be available to some
consumers, even though they would have been within the consumer's
ability to repay. Thus, the Bureau concludes that (in addition to the
reasons above) future spread widening also supports the 2.25 percentage
point pricing threshold because future spread widening poses a greater
potential access-to-credit concern for the General QM eligibility
threshold under Sec. 1026.43(e)(2)(vi)(A) than for the safe harbor
threshold under Sec. 1026.43(b)(4), if levels of non-QM lending remain
low. This conclusion is consistent with the Bureau's findings in the
Assessment Report, which suggest that, while the safe harbor threshold
of 1.5 percentage points has not constrained lenders from originating
rebuttable presumption QMs, only a modest amount of non-QM lending has
occurred since the January 2013 Final Rule took effect.\292\ Moreover,
the Bureau will monitor the market and take action as needed to
maintain the best balance between consumers' ability to repay and
access to responsible, affordable mortgage credit.
---------------------------------------------------------------------------

\292\ Assessment Report, supra note 63, section 5.5, at 187.
---------------------------------------------------------------------------

The Bureau concludes that it has insufficient evidence as to
whether a threshold higher than 2.25 percentage points would strike the
best balance with ability-to-repay concerns, particularly given the
limited expected access to credit gains from increasing the threshold
higher than 2.25 percentage points.\293\ While the 14 percent early
delinquency rate in Table 1 for loans priced 2.00 to 2.24 percentage
points above APOR is the same early delinquency rate as for loans
priced 2.25 percentage points or more above APOR, all loans with rate
spreads of 2.25 percentage points or more needed to be grouped to
ensure sufficient sample size for reliable analysis of the 2002-2008
data.\294\
---------------------------------------------------------------------------

\293\ As discussed in part V.B.5 above, Table 7A shows that 96.3
percent of 2018 conventional first-lien purchase originations would
have been QMs under this revised ATR/QM Rule including Sec.
1026.43(e)(2)(vi)(A) with a threshold of 2.25 percentage points over
APOR. Table 7A shows a 96.6 percent share if the threshold were
instead increased to 2.5 percentage points over APOR.
\294\ 85 FR 41716, 41732 n.190 (July 10, 2020).
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43(e)(2)(vi)(B)-(F)
Thresholds for Smaller Loans and Subordinate-Lien Transactions
The Bureau proposed to establish higher pricing thresholds for
smaller loans. Under the proposal, smaller loans priced at or above the
proposed thresholds would not have been eligible for QM status under
Sec. 1026.43(e)(2). Specifically, proposed Sec. 1026.43(e)(2)(vi)(B)
provided that, for first-lien covered transactions with loan amounts
greater than or equal to $65,939 but less than $109,898, the APR may
not exceed APOR for a comparable transaction as of the date the
interest rate is set by 3.5 or more percentage points.\295\ Proposed
Sec. 1026.43(e)(2)(vi)(C) provided that, for first-lien covered
transactions with loan amounts less than $65,939, the APR may not
exceed the APOR for a comparable transaction as of the date the
interest rate is set by 6.5 or more percentage points.
---------------------------------------------------------------------------

\295\ On August 19, 2020, the Bureau issued a final rule
adjusting the loan amounts for the limits on points and fees under
Sec. 1026.43(e)(3)(i), based on the annual percentage change
reflected in the CPI-U in effect on June 1, 2020. 85 FR 50944 (Aug.
19, 2020). To ensure that the loan amounts for Sec. 1026.43(e)
remain synchronized, the Bureau is finalizing this rule with a
threshold of $66,156, rather than a threshold of $65,939, and
$110,260, rather than a threshold of $109,898.
---------------------------------------------------------------------------

The Bureau also proposed to establish higher thresholds for
subordinate-lien transactions. Under the proposal, subordinate-lien
transactions priced at or above the proposed thresholds would not have
been eligible for QM status under Sec. 1026.43(e)(2). Specifically,
proposed Sec. 1026.43(e)(2)(vi)(D) provided that, for subordinate-lien
covered transactions with loan amounts greater than or equal to
$65,939, the APR may not exceed the APOR for a comparable transaction
as of the date the interest rate is set by 3.5 or more percentage
points. Proposed Sec. 1026.43(e)(2)(vi)(E) provided that, for
subordinate-lien covered transactions with loan amounts less than
$65,939, the APR may not exceed the APOR for a comparable transaction
as of the date the interest rate is set by 6.5 or more percentage
points.
The proposal also provided that the loan amounts specified in Sec.
1026.43(e)(2)(vi)(A) through (E) would be adjusted annually for
inflation based on changes in CPI-U. Specifically, the Bureau proposed
adjusting 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 proposed publishing
adjustments in new comment 43(e)(2)(vi)-3 after the June figures became
available each year.
For the reasons discussed below, the Bureau is finalizing Sec.
1026.43(e)(2)(vi)(B) through (E) as proposed, except that proposed
Sec. 1026.43(e)(2)(vi)(D) has been redesignated as Sec.
1026.43(e)(2)(vi)(E) and proposed Sec. 1026.43(e)(2)(vi)(E) has been
redesignated as Sec. 1026.43(e)(2)(vi)(F) because the Bureau is
finalizing a threshold for smaller manufactured housing loans in Sec.
1026.43(e)(2)(vi)(D).\296\ The Bureau is also finalizing two additional
comments to clarify terms and phrases used in Sec.
1026.43(e)(2)(vi)(D). Specifically, comment 43(e)(2)(vi)-5 clarifies
that the term ``manufactured home,'' as used in

[[Page 86365]]

Sec. 1026.43(e)(2)(vi)(D), means any residential structure as defined
under HUD regulations establishing manufactured home construction and
safety standards (24 CFR 3280.2). The comment further clarifies that
modular or other factory-built homes that do not meet the HUD code
standards are not manufactured homes for purposes of Sec.
1026.43(e)(2)(vi)(D). Comment 43(e)(2)(vi)-6 provides that the
threshold in Sec. 1026.43(e)(2)(vi)(D) applies to first-lien covered
transactions less than $110,260 (indexed for inflation) that are
secured by a manufactured home and land, or by a manufactured home
only.
---------------------------------------------------------------------------

\296\ As noted above, and discussed in more detail below, the
Bureau is increasing the loan amounts specified in Sec.
1026.43(e)(2)(vi)(A) through (F) because the new adjustments for
2021 have been published. See 85 FR 50944 (Aug. 19, 2020).
---------------------------------------------------------------------------

Comments Received
The Bureau received several comments from consumer advocates, the
mortgage industry, research centers, and others in response to the
proposed pricing thresholds for smaller loans and subordinate-lien
transactions. While some commenters supported the Bureau's proposed
thresholds, others expressed various concerns, as described below.
Pricing thresholds for smaller loans. Consumer advocates and
industry commenters offered differing viewpoints on whether the Bureau
should consider the creditor's costs in developing the thresholds for
smaller loans. Consumer advocate commenters noted that the statute
requires the Bureau to consider the consumer's ability to repay when
defining General QM; thus, in developing thresholds, the Bureau should
not consider the creditor's costs or profit margins, which the
commenter perceived was the Bureau's basis for developing higher
thresholds for smaller loans, absent a showing that the available
credit is responsible and affordable. Conversely, industry commenters
suggested that the Bureau should consider the creditor's costs in
developing the thresholds for smaller loans, given the impact these
costs have on the price of these loans, specifically manufactured
housing loans. For example, these commenters noted that, despite having
smaller loan amounts, manufactured housing loans, including chattel
loans, tend to have the same or similar origination and servicing costs
as traditional mortgages. They also asserted that, unlike traditional
mortgages, manufactured housing loans, including chattel loans, lack
access to secondary market funding and to private mortgage insurance to
offset credit risk and protect against potential losses. Overall,
industry commenters stated that the thresholds for smaller loans should
provide creditors with the ability to recover their costs for
originating and servicing smaller loans, and still originate qualified
mortgages.
The Bureau also received comments about the impact of the proposed
thresholds on low- to moderate-income and minority consumers and on
land installment contracts. With respect to the former, one large
credit union expressed concern about the impact the proposed loan
amount thresholds for smaller loans would have on these consumers given
the rise in home prices. In addition, one State trade association
observed that some loans greater than $65,939 exceeded the proposed
pricing thresholds due to various risk factors, such as high LTV ratios
or negative credit history, and that it was unclear whether these risk
factors were more common among low- to moderate-income and minority
consumers. With respect to land installment contracts, consumer
advocate commenters asserted that under the Bureau's proposed
thresholds for smaller loans, land installment contracts would newly be
eligible for QM status, which would impede consumer lawsuits against
creditors.
Data to support the thresholds for smaller loans. Consumer advocate
commenters recommended that the Bureau further refine the data used to
support the thresholds for smaller loans. Specifically, they
recommended that the Bureau refine the data to include the volume of
loans in each rate-spread range, loan performance data using
incremental rate-spread ranges instead of cumulative rate-spread
ranges, and an analysis that separates chattel loans from real estate-
secured mortgages.
A few consumer advocate commenters underscored the need for
refining the data by analyzing the early delinquency rates shown in
General QM Proposal Table 5,\297\ which, according to these commenters,
indicate that the proposed thresholds for smaller loans would harm
vulnerable consumers. Specifically, these commenters noted that for
loans priced 2.25 or more percentage points above APOR and with a DTI
ratio greater than 26 percent, early delinquency rates were 10 percent
or higher; and for similarly priced loans with DTI ratios between 40
and 50 percent, early delinquency rates were between 16 to 19 percent.
These commenters also noted that General QM Proposal Table 5 did not
show the early delinquency rate for 2002-2008 first-lien purchase
originations in the NMDB at the proposed thresholds for smaller loans
(3.5 or 6.5 percentage points above APOR). These commenters recommended
that the Bureau make available for comment a revised version of General
QM Proposal Table 5 that shows the historical early delinquency rates
for first-lien purchase originations categorized by DTI and rate
spreads greater than 2.25 percentage points above APOR, before it
presumes ability to repay for consumers taking out loans with higher
rate spreads.
---------------------------------------------------------------------------

\297\ 85 FR 41716, 41733 (July 10, 2020) (showing early
delinquency rates for 2002-2008 first-lien purchase originations in
NMDB data categorized according to both their DTI ratios and their
approximate rate spreads).
---------------------------------------------------------------------------

Aside from noting issues with the Bureau's data, consumer advocate
commenters also noted that the limited public data appears to suggest
that smaller loans do not perform well, citing a newspaper article on
manufactured housing loans, which described features unique to
manufactured housing loans and reported that 28 percent of chattel
loans fail to perform, as an example.\298\
---------------------------------------------------------------------------

\298\ Mike Baker & Daniel Wagner, The mobile-home trap: How a
Warren Buffet empire preys on the poor, The Seattle Times (Apr. 2,
2015), https://www.seattletimes.com/business/real-estate/the-mobile-
home-trap-how-a-warren-buffett-empire-preys-on-the-poor/
#:~:text=Special%20Reports-
,The%20mobile%20home%20trap%3A%20How%20a%20Warren%20Buffett,empire%20
preys%20on%20the%20poor&text=Billionaire%20philanthropist%20Warren%20
Buffett%20controls,loans%20and%20rapidly%20depreciating%20homes.
---------------------------------------------------------------------------

QM share of manufactured housing loans. A few industry commenters
asserted that a substantial share of manufactured housing loans
qualifying as General QMs under the current definition would fail to
qualify as General QMs under the proposed thresholds. Some of these
commenters surveyed their members to obtain information to estimate the
decline in shares of manufactured housing loans that would meet the
standards to be General QMs. For example, members of a national
manufactured housing trade association stated that they expect up to 50
percent of their manufactured housing loans would lose General QM
status under the proposed thresholds for smaller loans. Members of a
trade group representing credit unions likewise stated that they expect
up to 90 percent of their manufactured housing loans would lose General
QM status. Other commenters used 2019 HMDA data to estimate the decline
in shares of manufactured housing loans that would be eligible for
General QM status. For instance, while comparing data from General QM
Proposal Table 7 with 2019 HMDA data, a non-depository manufactured
housing creditor asserted that, compared to first-lien manufactured
housing loans, the Bureau's proposed thresholds would

[[Page 86366]]

allow for far more first-lien conventional purchase loans for site-
built housing to be eligible for General QM status.\299\
---------------------------------------------------------------------------

\299\ 85 FR 41716, 41736 (July 10, 2020) (showing the share of
2018 first-lien conventional purchase loans under various General QM
loan definitions).
---------------------------------------------------------------------------

To prevent a decline in the share of manufactured housing loans
eligible for General QM status, commenters recommended the following
adjustments or alternatives to the Bureau's proposed thresholds for
smaller loans. One industry commenter recommended that the Bureau
increase the pricing threshold for smaller loans but did not provide
specific thresholds. Two other industry commenters recommended
increasing the loan amount thresholds instead, from $65,939 to $110,000
and from $109,898 to $210,000. One of these commenters added that the
Bureau should set these thresholds either for all loans or for only
manufactured housing loans, while the other added that 91 percent of
the first-lien manufactured housing loans originated in 2019 would have
been eligible for General QM status if these higher loan amount
thresholds were in place. One of these commenters also recommended a
complementary DTI approach for manufactured housing loans. Under this
approach, a manufactured housing loan would be eligible for General QM
status by either satisfying the pricing thresholds or having a DTI
ratio no higher than 45 percent, when determined in accordance with GSE
or Federal agency underwriting guidelines. Lastly, a manufacturing
housing creditor recommended incorporating HOEPA's APR thresholds for
high-cost mortgages into a definition of General QM for manufactured
housing loans. Specifically, the creditor recommended that a first-lien
covered transaction secured by a manufactured home would have a
conclusive presumption of compliance if the APR at consummation did not
exceed the APOR by more than 1.5 percentage points; a rebuttable
presumption of compliance if the APR at consummation did not exceed the
APOR by 6.5 percentage points; and a rebuttable presumption of
compliance if the transaction was a first-lien, personal property loan
under $50,000 and the APR at consummation did not exceed the APOR by
8.5 percentage points. To underscore the importance of preventing an
estimated decline in the share of manufactured housing loans that are
General QMs, these commenters asserted that, without General QM status,
creditors may either extend manufactured housing loans as more
expensive non-QMs, or not extend these loans at all.\300\
---------------------------------------------------------------------------

\300\ The non-depository manufactured housing creditor
specifically discussed the impact of a manufactured housing loan
being subject to TILA's appraisal requirements for higher-priced
mortgages because, without QM status, these loans would not be
eligible for the exemption from these requirements under 12 CFR
1026.35(c)(2)(i).
---------------------------------------------------------------------------

Consumer advocate commenters, however, asserted that creditors
offering manufactured housing loans could adjust the price of these
loans to fit within the Bureau's proposed thresholds, noting that
creditors were able to price manufactured housing loans below HOEPA's
APR thresholds for high-cost mortgages after those thresholds were
adopted. Consumer advocate commenters also added that a high threshold
would encourage exploitative lending right under the threshold.
QM share of subordinate-lien transactions. A few industry
commenters noted that a sizable share of subordinate-lien transactions
qualifying as General QMs under the current definition would fail to
qualify as General QMs under the proposed thresholds.
To prevent the estimated decline in the share of subordinate-lien
transactions that would obtain QM status under the proposed thresholds,
one industry commenter recommended that the Bureau retain the current
General QM loan definition for higher-priced mortgage loans, increase
the pricing threshold for subordinate-lien transactions while using the
same proposed loan amount thresholds used for first-lien transactions,
or both. Under the commenter's second recommendation, a subordinate-
lien transaction would qualify as a General QM if the APR at
consummation does not exceed the APOR by 5 percentage points for
transactions with a loan amount greater than or equal to $109,898; by
5.5 percentage points for transactions with a loan amount greater than
or equal to $65,939 but less than $109,898; and by 8.5 percentage
points for transactions with a loan amount less than $65,939. The
commenter pointed to General QM Proposal Table 10 to demonstrate that
delinquency rates did not materially differ under these recommended
thresholds.\301\
---------------------------------------------------------------------------

\301\ 85 FR 41716, 41760 (July 10, 2020) (analyzing 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).
---------------------------------------------------------------------------

The Final Rule
The Bureau is adopting the proposed pricing thresholds for smaller
loans and subordinate-lien transactions. However, as described below,
the Bureau is finalizing an additional, higher pricing threshold for
smaller loans secured by a manufactured home. In developing pricing
thresholds under the General QM loan definition for smaller loans,
smaller loans secured by a manufactured home, and subordinate-lien
transactions, the Bureau balanced considerations related to ensuring
consumers' ability to repay with maintaining access to responsible,
affordable mortgage credit.\302\
---------------------------------------------------------------------------

\302\ The Bureau's decisions to adopt basic pricing thresholds
of 1.5 and 2.25 percentage points above APOR and to supplement them
with higher pricing thresholds for smaller loans, for smaller loans
secured by a manufactured home, and for subordinate-lien
transactions are each independent of one another.
---------------------------------------------------------------------------

The final rule amends Sec. 1026.43 by revising Sec.
1026.43(e)(2)(vi) to provide higher pricing thresholds to define
General QM for smaller loans, smaller loans secured by a manufactured
home, and subordinate-lien transactions. The Bureau is also adjusting
the loan amounts specified in Sec. 1026.43(e)(2)(vi)(A) through (F).
As discussed in the proposal, the Bureau proposed loan amount
thresholds of $65,939 and $109,898, because those thresholds aligned
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.\303\ On August 19, 2020, the Bureau issued a final rule
adjusting the loan amounts for the limits on points and fees under
Sec. 1026.43(e)(3)(i), based on the annual percentage change reflected
in the CPI-U in effect on June 1, 2020.\304\ To ensure that the loan
amounts for Sec. 1026.43(e) remain synchronized, the Bureau is
finalizing the loan amount thresholds specified in Sec.
1026.43(e)(2)(vi)(A) through (F) with a threshold of $66,156, rather
than a threshold of $65,939, and $110,260, rather than a threshold of
$109,898. As clarified in comment 43(e)(2)(vi)-3, these amounts shall
be adjusted annually on January 1 by the annual percentage change in
the CPI-U that was reported on the preceding June 1.
---------------------------------------------------------------------------

\303\ Id. at 41757 n.270.
\304\ 85 FR 50944 (Aug. 19, 2020).
---------------------------------------------------------------------------

Final Sec. 1026.43(e)(2)(vi)(B) provides that, for first-lien
covered transactions with loan amounts greater than or equal to $66,156
(indexed for inflation) but less than $110,260 (indexed for inflation),
the APR may not exceed APOR for a comparable transaction as of the date
the interest rate is set by 3.5 or more percentage points. Section
1026.43(e)(2)(vi)(C) provides that, for first-lien covered transactions
with loan amounts less than $66,156 (indexed for

[[Page 86367]]

inflation), the APR may not exceed APOR for a comparable transaction as
of the date the interest rate is set by 6.5 or more percentage points.
Section 1026.43(e)(2)(vi)(D) provides that, for first-lien covered
transactions secured by a manufactured home with loan amounts less than
$110,260 (indexed for inflation), the APR may not exceed APOR for a
comparable transaction as of the date the interest rate is set by 6.5
or more percentage points. Section 1026.43(e)(2)(vi)(E) provides that,
for subordinate-lien covered transactions with loan amounts greater
than or equal to $66,156 (indexed for inflation), the APR may not
exceed APOR for a comparable transaction as of the date the interest
rate is set by 3.5 or more percentage points. Section
1026.43(e)(2)(vi)(F) provides that, for subordinate-lien covered
transactions with loan amounts less than $66,156 (indexed for
inflation), the APR may not exceed APOR for a comparable transaction as
of the date the interest rate is set by 6.5 or more percentage points.
The Bureau is also adding two comments to provide additional
clarification on terms and phrases used in Sec. 1026.43(e)(2)(vi)(D).
Comment 43(e)(2)(vi)-5 clarifies that the term ``manufactured home,''
as used in Sec. 1026.43(e)(2)(vi)(D), means any residential structure
as defined under HUD regulations establishing manufactured home
construction and safety standards (24 CFR 3280.2). Modular or other
factory-built homes that do not meet the HUD code standards are not
manufactured homes for purposes of Sec. 1026.43(e)(2)(vi)(D). The
Bureau is aligning the definition of ``manufactured home'' with the HUD
standards to maintain consistency with the definition the Bureau uses
elsewhere in Regulation Z.\305\ Comment 43(e)(2)(vi)-6 provides that
the threshold in Sec. 1026.43(e)(2)(vi)(D) applies to first-lien
covered transactions less than $110,260 (indexed for inflation) that
are secured by a manufactured home and land, or by a manufactured home
only.
---------------------------------------------------------------------------

\305\ See, e.g., 12 CFR 1026.35(c)(1)(iii).
---------------------------------------------------------------------------

Smaller loans. The Bureau is adopting 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 likelihood of early delinquency, which the Bureau
uses as a proxy for measuring whether a consumer had a reasonable
ability to repay at the time the loan was consummated. As discussed in
the General QM Proposal--and noted by commenters supporting the
proposed higher thresholds for smaller loans--many of the creditors'
costs for a transaction may be the same or similar between smaller
loans and larger loans. For creditors to recover their costs for
originating and servicing smaller loans, they may have to charge higher
interest rates or higher points and fees as a percentage of the loan
amount than they would for comparable larger loans. As a result,
smaller loans tend to have higher APRs than larger loans to consumers
with similar credit characteristics and who may have a similar ability
to repay. The Bureau concludes that its observation of the components
of creditors' costs, in this limited regard, is consistent with its
statutory obligations. As stated above, 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 those
regulations are necessary or proper to ensure that responsible,
affordable credit remains available to consumers in a manner consistent
with the purposes of TILA section 129C. Here, as further explained
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. Nevertheless, the
Bureau concludes that the finalized thresholds for smaller loans best
ensure that responsible, affordable credit remains available to
consumers taking out smaller loans, while also helping to ensure that
the risks are limited. The Bureau thus concludes that smaller loans
that are higher-priced loans under Sec. 1026.43(b)(4) but are priced
below the applicable thresholds in Sec. 1026.43(e)(2)(vi)(B) or (C)
will receive a rebuttable presumption of compliance with the ATR
requirements.
Moreover, adopting the same threshold of 2.25 percentage points
above APOR for all loans could disproportionately prevent smaller loans
with comparable levels of early delinquencies as larger loans,
potentially including a disproportionate number of loans to minority
consumers, from being originated as General QMs. The Bureau's analysis
of 2018 HMDA data found that 3.7 percent of site-built loans to
minority consumers are priced 2.25 percentage points or more over APOR,
but 2.7 percent of site-built loans to non-Hispanic White consumers are
priced 2.25 percentage points or more over APOR. While some loans may
be originated under other QM definitions or as non-QM loans, those
loans may cost materially more to consumers, 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.\306\ The Bureau's 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) are therefore warranted, is generally
consistent with the statutory directive to adopt higher points-and-fees
thresholds for smaller loans.
---------------------------------------------------------------------------

\306\ See 78 FR 6408, 6528 (Jan. 30, 2013).
---------------------------------------------------------------------------

To develop the 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.\307\ To
ensure a sufficient

[[Page 86368]]

sample size was available for a reliable analysis, the Bureau used
cumulative rate-spread ranges.
---------------------------------------------------------------------------

\307\ See Bureau of Labor and Statistics, Historical Consumer
Price Index for All Urban Consumers (CPI-U), (Apr. 2020), 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 2020 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. The set of
loans categorized within a given threshold remains the same as in
the proposal, in which nominal loan amounts were inflated to June
2019 dollars and compared against the corresponding threshold levels
of $65,939 and $109,898.)

Table 9--Loan Characteristics and Performance for Different Sizes of First-Lien Transactions at Various Rate Spreads
--------------------------------------------------------------------------------------------------------------------------------------------------------
Percent
observed 60+ Percent
days observed 60+
Rate spread range Mean CLTV, Mean DTI, 2018 Mean credit delinquent days
Loan size group (percentage points over 2018 HMDA HMDA score, 2018 within first 2 delinquent
APOR) HMDA years, 2002- within first 2
2008 NMDB (%) years, 2018
NMDB (%)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Under $66,156............................. 1.5-2.0..................... 81.9 32.3 717 6.1 2.8
Under $66,156............................. 1.5-2.5..................... 82.2 32.3 714 6.1 2.3
Under $66,156............................. 1.5-3.0..................... 82.1 32.2 714 6.2 2.3
Under $66,156............................. 1.5-3.5..................... 81.9 32.1 715 6.2 2.5
Under $66,156............................. 1.5-4.0..................... 81.7 32.3 714 6.3 2.5
Under $66,156............................. 1.5-4.5..................... 81.7 32.5 710 6.4 2.6
Under $66,156............................. 1.5-5.0..................... 81.7 32.6 706 6.4 2.5
Under $66,156............................. 1.5-5.5..................... 81.6 32.7 699 6.5 2.4
Under $66,156............................. 1.5-6.0..................... 81.7 32.9 694 6.5 2.5
Under $66,156............................. 1.5-6.5..................... 81.9 33.1 685 6.5 3.4
Under $66,156............................. 1.5 and above............... 82.0 33.3 676 6.6 4.1
$66,156 to $110,259....................... 1.5-2.0..................... 89.9 35.5 704 11.1 3.4
$66,156 to $110,259....................... 1.5-2.5..................... 90.1 35.4 702 12.2 4.2
$66,156 to $110,259....................... 1.5-3.0..................... 90.0 35.5 702 12.9 4.2
$66,156 to $110,259....................... 1.5-3.5..................... 89.7 35.5 703 13.0 4.3
$66,156 to $110,259....................... 1.5-4.0..................... 89.4 35.6 703 13.1 4.0
$66,156 to $110,259....................... 1.5-4.5..................... 89.3 35.7 701 13.2 4.2
$66,156 to $110,259....................... 1.5-5.0..................... 89.1 35.8 699 13.3 4.1
$66,156 to $110,259....................... 1.5-5.5..................... 89.1 35.9 696 13.4 4.0
$66,156 to $110,259....................... 1.5-6.0..................... 89.2 36.0 692 13.4 4.2
$66,156 to $110,259....................... 1.5-6.5..................... 89.3 36.1 684 13.4 4.5
$66,156 to $110,259....................... 1.5 and above............... 89.3 36.1 684 13.7 4.5
$110,260 and above, manufactured and site- 1.5-2.25 (for comparison)... 92.4 39.3 698 15.6 2.7
built housing.
--------------------------------------------------------------------------------------------------------------------------------------------------------

The Bureau's analysis indicates that consumers with smaller loans
with APRs within higher thresholds, such as 6.5 or 3.5 percentage
points above APOR, have similar credit characteristics as consumers
with larger loans with APRs between 1.5 and 2.25 percentage points
above APOR.\308\
---------------------------------------------------------------------------

\308\ 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.
---------------------------------------------------------------------------

More specifically, the Bureau analyzed 2018 HMDA data on first-lien
conventional purchase loans and found that loans less than $66,156 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 greater than or equal to $66,156
but less than $110,260 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
greater than or equal to $110,260 that are priced between 1.5 and 2.25
percentage points above APOR have a mean DTI ratio of 39.3 percent, a
mean combined LTV of 92.4 percent, and a mean credit score of 698.
These data comparisons 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.
With respect to early delinquencies, the evidence summarized in
Table 9 generally provides support for higher thresholds for smaller
loans. Loans less than $66,156 had lower delinquency rates than loans
greater than or equal to $66,156 but less than $110,260 across all rate
spread ranges and generally had delinquency rates lower than larger
loans (greater than or equal to $110,260) priced between 1.5 and 2.25
percentage points above APOR, except as described below. Loans greater
than or equal to $66,156 but less than $110,260 had lower delinquency
rates than larger loans between 2002 and 2008, but higher delinquency
rates in 2018.
More specifically, the Bureau analyzed NMDB data from 2002 through
2008 on first-lien conventional purchase loans and found that loans
less than $66,156 that were priced between 1.5 and 6.5 percentage
points above APOR had an early delinquency rate of 6.5 percent. Loans
greater than or equal to $66,156 but less than $110,260 that were
priced between 1.5 and 3.5 percentage points above APOR had an early
delinquency rate of 13 percent. Loans greater than or equal to $110,260

[[Page 86369]]

that were priced between 1.5 and 2.25 percentage points above APOR had
an early delinquency rate of 15.6 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 indicates that loans
less than $66,156 that were priced between 1.5 and 6.5 percentage
points above APOR had an early delinquency rate of 3.4 percent and
those that were priced 1.5 percentage points over APOR and above had an
early delinquency rate of 4.1 percent. Loans greater than or equal to
$66,156 but less than $110,260 that were priced between 1.5 and 3.5
percentage points above APOR had an early delinquency rate of 4.3
percent. Loans greater than or equal to $110,260 that were priced
between 1.5 and 2.25 percentage points above APOR had an early
delinquency rate of 2.7 percent.
Although the data in the rulemaking record 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 concludes that the thresholds in Sec.
1026.43(e)(2)(vi)(B) and (C) for smaller, first-lien covered
transactions strike the best balance between ensuring consumers'
ability to repay and ensuring access to responsible, affordable
mortgage credit.
As described in more detail above, consumer advocate commenters
recommended that the Bureau further refine the data before concluding
that smaller loans with APRs within higher thresholds have similar
credit characteristics and comparable levels of early delinquencies as
larger loans. The commenters based their recommendation on specific
concerns, including: (1) The absence of loan volume data and the use of
cumulative rate-spread ranges, instead of incremental rate-spread
ranges, in General QM Proposal Table 9; and (2) the absence of an
analysis of chattel loans, separate from that of real-estate secured
mortgages. The Bureau understands these concerns to suggest three
issues: (1) That without loan volume data, it was not clear if there
was a sufficient sample size for a reliable analysis; (2) that
cumulative rate-spread ranges resulted in a skewed analysis of the
early delinquency rates for smaller loans at or near the threshold; and
(3) that differences between chattel loans and real-estate secured
mortgages, with respect to pricing and performance, were not adequately
considered.
However, the Bureau took all these issues into account when using
HMDA and NMDB data to analyze the evidence related to the credit
characteristics and loan performance of first-lien purchase
transactions at various rate spread and loan amounts. As explained in
the General QM Proposal, the Bureau grouped loans at higher rate
spreads when a sufficient number of observations did not exist in the
data for a reliable analysis. For example, the Bureau grouped loans
with rate spreads of 2.25 percentage points or more to ensure a
sufficient sample size for a reliable analysis of the 2002-2008 data in
Tables 1 and 5 of the General QM Proposal.\309\ This grouping ensured
that all cells shown in these tables contained at least 500 loans. For
similar reasons, the Bureau grouped loans in General QM Proposal Table
9 (and Table 9 above).\310\ The Bureau determined that it was necessary
to use a cumulative rate-spread range to ensure a sufficient sample
size for a reliable analysis of 2018 NMDB data for higher-priced,
smaller loans. More specifically, by grouping first-lien loans less
than $65,939 ($66,156, when adjusted for inflation), priced between 1.5
and 6.5 percentage points above APOR, the Bureau was able to analyze
the performance of 677 loans from 2018 NMDB data compared to only 87
loans if the Bureau looked at first-lien loans less than $65,939 that
were priced between 6 and 6.5 percentage points above APOR.
---------------------------------------------------------------------------

\309\ 85 FR 41716, 41732 n.190 (July 10, 2020). The Bureau also
grouped loans with rate spreads of 2 percentage points or more to
ensure a sufficient sample size for a reliable analysis of 2018 data
in Tables 2 and 6 of the General QM Proposal. Id. at 41732 n.193.
\310\ The Bureau grouped loans in General QM Proposal Table 10
for the same reasons. This grouping ensured a sufficient sample size
for a reliable analysis of Y-14M data for subordinate-lien
transactions.
---------------------------------------------------------------------------

Moreover, an analysis using incremental rate-spread ranges would
have also supported higher thresholds for smaller loans. When using
only 2002-2008 NMDB data, because of limitations in 2018 NMDB data,
loans less than $66,156 and loans greater than or equal to $66,156 but
less than $110,260 that were priced at or a half percentage point below
the threshold had lower delinquency rates than larger loans (greater
than or equal to $110,260) priced between 1.5 and 2.25 percentage
points above APOR.
Specifically, loans less than $66,156 that were priced between 6
and 6.5 percentage points above APOR had an early delinquency rate of
7.7 percent. Loans greater than or equal to $66,156 but less than
$110,260 that were priced between 3 and 3.5 percentage points above
APOR had an early delinquency rate of 13.9 percent. Loans greater than
or equal to $110,260 that were priced between 1.5 and 2.25 percentage
points above APOR had an early delinquency rate of 15.6 percent. These
early delinquency rates suggest that even under an approach using
incremental rate-spread ranges, the historical performance of smaller
loans with higher APRs remained comparable, if not better, than larger
loans with lower APRs.
Some commenters recommended analyzing chattel loans separately from
real-estate secured mortgages because of potential differences between
the two with respect to pricing and performance. Consumer advocate
commenters cited a newspaper article suggesting that chattel loans may
not perform well. However, the Bureau is not aware of any data that
sufficiently address how pricing at various thresholds correlates with
performance or demonstrate how pricing varies with the performance of
chattel loans relative to real-estate secured mortgages. Further, the
Bureau's own data are not sufficient to separately analyze chattel
loans from real-estate secured mortgages at various pricing thresholds.
The Bureau's merged historical HMDA and NMDB data do not have reliable
indicators for chattel loans. And although 2018 HMDA and NMDB data do
have more reliable indicators, there are too few loans in 2018 data to
reliably distinguish performance across different rate spread or loan
size groupings. Accordingly, the Bureau lacks a reasoned basis for
setting a different pricing threshold for chattel loans relative to
real-estate secured mortgages, particularly given the access-to-credit
concerns and other concerns described below. The Bureau will, however,
continue to monitor the market and, if additional data become available
and indicate that an adjustment to the thresholds for smaller loans and
smaller manufactured housing loans is warranted, the Bureau will
consider making an adjustment.
Lastly, as described above, some consumer advocate commenters
suggested that land installment contracts would be newly eligible for
General QM status under this final rule. The commenters, however, did
not provide the Bureau with evidence or data indicating that land
installment

[[Page 86370]]

contracts that were previously ineligible for General QM status would
become eligible for General QM status under the amended General QM loan
definition in this final rule. As described above, the Bureau
anticipates the price-based approach in this final rule will change the
share of covered transactions that would be eligible for General QM
status. Specifically, loans with DTI ratios over 43 percent priced
under the thresholds will be eligible for General QM status, and loans
with DTI ratios under 43 percent but priced over the thresholds will
not be eligible for General QM status. However, the Bureau does not
have data or other evidence indicating that the final rule will change
the scope of transactions covered by the Rule so that certain land
installment contracts will now be eligible for General QM status.
Smaller manufactured housing loans. As discussed above, commenters
asserted that a substantial share of manufactured housing loans that
qualify as General QMs under the current definition would fail to
qualify under the proposed pricing thresholds. These commenters
confirmed the Bureau's concerns, as discussed in the General QM
Proposal, regarding the impact a price-based General QM definition,
without higher thresholds, would have on the availability of
responsible, affordable mortgage credit for manufactured homes.
Specifically, the commenters confirmed the Bureau's concern that
manufactured housing loans with smaller loan amounts are typically
priced higher than loans with larger loan amounts, even though a
consumer with a smaller manufactured housing loan may have similar
ability to repay; and that while some smaller manufactured housing
loans may be originated under other QM definitions or as non-QM loans,
those loans may cost materially more to consumers, and some may not be
originated at all. The Bureau also analyzed 2018 HMDA data to confirm
its concerns on the potential effects on access to credit of a price-
based approach to defining a General QM. The Bureau's analysis found
that 55 percent of manufactured housing loans are priced 2.25
percentage points or more above APOR. Moreover, as indicated by the
various combinations in Table 10 below,\311\ the Bureau estimates,
based on 2018 HMDA data, 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)--83.6 percent of first-lien covered transactions
secured by a manufactured home were General QMs. However, under the
proposed General QM thresholds for larger loans and smaller loans, the
Bureau estimates that 72.3 percent of first-lien covered transactions
secured by a manufactured home would have been General QMs.
---------------------------------------------------------------------------

\311\ All estimates in Table 10 includes loans that meet the
Small Creditor QM loan definition in Sec. 1026.43(e)(5).

Table 10--Share of 2018 Manufactured Housing Conventional First-Lien
Purchase Transactions Within Various QM Definitions
[HMDA data]
------------------------------------------------------------------------
QM (share of
Approach manufactured
housing loans)
------------------------------------------------------------------------
Temporary GSE QM + DTI 43............................ 83.6
Proposal............................................. 72.3
Final rule with small, manufactured housing loan 84.6
pricing at 6.5......................................
------------------------------------------------------------------------

In view of commenter confirmation of the Bureau's concerns
regarding the potential effects of the proposal on the availability of
responsible, affordable mortgage credit for manufactured homes, the
Bureau has reconsidered whether the proposed thresholds for smaller
loans strike the best balance between ensuring consumers' repayment
ability and maintaining access to responsible, affordable mortgage
credit for manufactured homes. Specifically, the Bureau concludes that
it achieves a better balance of these competing considerations by
expanding the proposed rebuttable presumption of compliance with the
ATR requirements to loans for manufactured housing less than $110,260
that are higher-priced loans under Sec. 1026.43(b)(4) but are priced
below the threshold in Sec. 1026.43(e)(2)(vi)(D). In so concluding,
the Bureau acknowledges that Table 9 suggests a higher risk of early
delinquency among first-lien covered transactions secured by a
manufactured home priced equal to or greater than $66,156. But the
Bureau concludes that the degree of risk is acceptable in view of a
potentially significant reduction of access to such mortgage credit and
the fact that consumers obtaining such loans will retain the
opportunity to rebut the presumption of compliance by showing that the
creditor in fact lacked a good faith and reasonable belief in the
consumer's reasonable ability to repay the loan.
Section 1026.43(e)(2)(vi)(D) as finalized thus provides that, for
first-lien covered transactions secured by a manufactured home with a
loan amount less than $110,260 (indexed for inflation), the APR may not
exceed APOR for a comparable transaction as of the date the interest
rate is set by 6.5 or more percentage points. Smaller loans secured by
a manufactured home and priced at or above the 6.5-percentage-point
threshold are not eligible for QM status under Sec.
1026.43(e)(2).\312\ Under the final rule with this threshold, the
Bureau estimates that, based on 2018 HMDA data, 84.6 percent of first-
lien covered transactions secured by a manufactured home would have
been General QMs. This is consistent with the share of first-lien
covered transactions secured by a manufactured home that were QMs under
the current rule, which includes 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).
---------------------------------------------------------------------------

\312\ The Bureau notes that one consequence of this 6.5 percent
threshold and the other pricing thresholds in the final rule, like
the pricing thresholds in the proposal, is that high-cost mortgages
under HOEPA cannot qualify for General QM status. See 12 CFR
1026.32(a), 1026.34(a)(4), 1026.43(e)(3), (g)(1). Thus, for the
reasons discussed in this final rule for adopting these pricing
thresholds, the Bureau is no longer exercising authority under HOEPA
to permit certain lower-DTI high-cost mortgages to qualify as
General QMs. Cf. 78 FR 6855, 6861-62, 6924-25 (Jan. 31, 2013).
---------------------------------------------------------------------------

The access-to-credit concerns described above are sufficient by
themselves to support the Bureau's

[[Page 86371]]

decision to adopt a higher pricing threshold for smaller manufactured
housing loans. This threshold also is independently supported by the
credit characteristics of consumers with these loans. Specifically, the
Bureau considered 2018 HMDA data to assess whether consumers who take
out smaller manufactured housing loans with higher APRs have similar
credit characteristics, and thus similar ability to repay, as consumers
who take out larger loans with lower APRs. The Bureau would have also
considered whether the consumer was ever 60 or more days past due
within the first 2 years after origination, i.e., the early delinquency
rate. However, as described above, the Bureau does not have sufficient
loan performance data on manufactured housing loans for a reliable
analysis of whether consumers who take out these smaller manufactured
housing loans had early difficulties in making payments. Accordingly,
the Bureau limited its ability-to-repay analysis to the credit
characteristics of consumers taking out smaller manufactured housing
loans with APRs within higher thresholds, as shown in Table 11.

Table 11--Loan Characteristics for Different Sizes of Manufactured Housing First-Lien Transactions at Various
Rate Spreads
----------------------------------------------------------------------------------------------------------------
Rate spread range Mean credit
Loan size group (percentage points over Mean CLTV, Mean DTI, 2018 score, 2018
APOR) 2018 HMDA HMDA HMDA
----------------------------------------------------------------------------------------------------------------
Under $66,156......................... 1.5-2.0................. 74.2 31.8 733
Under $66,156......................... 1.5-2.5................. 73.7 31.2 735
Under $66,156......................... 1.5-3.0................. 74.6 31.5 737
Under $66,156......................... 1.5-3.5................. 75.6 31.6 734
Under $66,156......................... 1.5-4.0................. 76.3 32.1 728
Under $66,156......................... 1.5-4.5................. 77.4 32.7 717
Under $66,156......................... 1.5-5.0................. 77.8 32.8 709
Under $66,156......................... 1.5-5.5................. 78.1 33.0 697
Under $66,156......................... 1.5-6.0................. 78.6 33.2 689
Under $66,156......................... 1.5-6.5................. 79.4 33.6 676
Under $66,156......................... 1.5 and above........... 80.1 33.6 665
$66,156 to $110,259................... 1.5-2.0................. 85.4 23.3 732
$66,156 to $110,259................... 1.5-2.5................. 85.2 34.2 735
$66,156 to $110,259................... 1.5-3.0................. 85.5 34.6 731
$66,156 to $110,259................... 1.5-3.5................. 85.8 35.0 728
$66,156 to $110,259................... 1.5-4.0................. 85.9 35.5 723
$66,156 to $110,259................... 1.5-4.5................. 86.1 35.9 715
$66,156 to $110,259................... 1.5-5.0................. 86.5 36.1 707
$66,156 to $110,259................... 1.5-5.5................. 86.8 36.3 699
$66,156 to $110,259................... 1.5-6.0................. 87.6 36.5 690
$66,156 to $110,259................... 1.5-6.5................. 88.2 36.6 677
$66,156 to $110,259................... 1.5 and above........... 88.2 36.7 676
$110,260 and above, manufactured and 1.5-2.25 (for 92.4 39.3 698
site-built housing. comparison).
----------------------------------------------------------------------------------------------------------------

The Bureau's analysis indicates that consumers with smaller
manufactured housing loans with APRs up to 6.5 percentage points above
APOR have credit characteristics that are comparable to, if not better
than, consumers with larger loans priced between 1.5 and 2.25
percentage points above APOR. More specifically, the Bureau found that
smaller manufactured housing loans less than $66,156 that are priced
between 1.5 and 6.5 percentage points above APOR have a mean DTI ratio
of 33.6 percent, a mean combined LTV ratio of 79.4 percent, and a mean
credit score of 676. Smaller manufactured housing loans greater than or
equal to $66,156 but less than $110,260 that are priced between 1.5 and
6.5 percentage points above APOR have a mean DTI ratio of 36.6 percent,
a mean combined LTV ratio of 88.2 percent, and a mean credit score of
677. Loans greater than or equal to $110,260 that are priced between
1.5 and 2.25 percentage points above APOR have a mean DTI ratio of 39.3
percent, a mean combined LTV ratio of 92.4 percent, and a mean credit
score of 698. These all suggest that the credit characteristics of
consumers taking out smaller manufactured housing loans with higher
APRs appear to be at least comparable to, if not better than, those of
consumers taking out larger loans with lower APRs. This suggests that
consumers taking out smaller manufactured housing loans with higher
APRs may have an ability to repay these loans at least comparable to
the consumers who take out larger loans with lower APRs.
Although the current data appear to indicate some thresholds at
which certain credit characteristics, in particular credit score,
decline for smaller manufactured housing loans with higher APRs, the
Bureau concludes that the adopted threshold in Sec.
1026.43(e)(2)(vi)(D) for smaller, first-lien covered transactions
secured by a manufactured home strikes the best balance between
ensuring consumers' ability to repay and ensuring access to
responsible, affordable mortgage credit for manufactured homes.
The Bureau is also adding two comments to provide additional
clarification on the pricing threshold for smaller loans secured by a
manufactured home. Comment 43(e)(2)(vi)-5 clarifies that the term
``manufactured home,'' as used in Sec. 1026.43(e)(2)(vi)(D), means any
residential structure as defined under HUD regulations establishing
manufactured home construction and safety standards (24 CFR 3280.2).
Modular or other factory-built homes that do not meet the HUD code
standards are not manufactured homes for purposes of Sec.
1026.43(e)(2)(vi)(D). Comment 43(e)(2)(vi)-6 provides that the
threshold in Sec. 1026.43(e)(2)(vi)(D) applies to first-lien covered
transactions less than $110,260 (indexed for inflation) that are
secured by a manufactured home and land, or by a manufactured home
only.

[[Page 86372]]

The Bureau is aware that whether a manufactured home is titled as
personal property or as real property factors into the cost of the loan
and that the price may be relatively higher for a loan in which the
manufactured home is titled as personal property (i.e., a chattel
loan).\313\ However, the Bureau is not adopting a higher threshold for
only smaller chattel loans. Doing so would incentivize manufactured
home creditors to encourage consumers to title their manufactured homes
as personal property to originate a QM-eligible loan. Generally,
titling manufactured homes as personal property may have disadvantages
for consumers because chattel loans tend to be more expensive,\314\ and
have fewer consumer protections.\315\ Moreover, as explained above, the
Bureau does not have sufficient performance data to analyze how chattel
loans perform relative to real estate-secured mortgages at various
pricing thresholds. Without this data and given the risks for
consumers' titling their manufactured homes as personal property, the
Bureau has decided to adopt a higher pricing threshold for smaller
loans secured by either a manufactured home and land, or by a
manufactured home only.
---------------------------------------------------------------------------

\313\ Bureau of Consumer Fin. Prot., Introducing New and Revised
Data Points in HMDA, at 207 (Aug. 2019), https://files.consumerfinance.gov/f/documents/cfpb_new-revised-data-points-in-hmda_report.pdf.
\314\ Id.
\315\ For example, chattel loans are not subject to the TILA-
RESPA Integrated Disclosure Rule. See 12 CFR 1026.19(e) and (f).
---------------------------------------------------------------------------

Moreover, the Bureau understands that creditors may either increase
or decrease the price of these loans to just below the adopted
threshold. To the extent creditors reduce the price of the loan, this
would result in more affordable prices; for example, some consumers
whose loans would have otherwise been priced above the threshold may
now be eligible for loans below the threshold. These loans would also
be subject to the QM prohibitions on certain loan features and limits
on points and fees, which would provide protections for consumers.
However, this development could also lead to an increase in the number
of consumers with delinquent loans who would have to rebut the
creditor's presumption of compliance to benefit from an ability-to-
repay cause of action or defense against foreclosure. Regardless, the
Bureau does not have sufficient data to determine whether these
developments would occur and the impact these developments would have
on the benefits and costs to consumers. However, as described above,
the Bureau intends to monitor the market for additional data that might
indicate the need for the Bureau to consider a future adjustment.
A few commenters recommended alternatives other than the one
adopted here to address the access-to-credit concern for manufactured
homes. However, the Bureau concludes that adopting a higher pricing
threshold for smaller loans secured by a manufactured home addresses
the access-to-credit concerns better than the recommended alternatives.
The first recommendation to increase the dollar thresholds defining
``smaller loans,'' would result in a definition that is inconsistent
with the meaning of ``smaller loans'' in the small loan exception to
the QM points and fees cap, which could potentially lead to certain
compliance challenges. The other recommendation to incorporate HOEPA's
APR thresholds into the General QM loan definition does not properly
acknowledge HOEPA's statutory objective, which was to identify
transactions requiring creditors to provide additional disclosures and
prohibiting creditors from engaging in certain practices. The Bureau
does not believe that it should implement thresholds designed for those
discrete uses here, in determining whether the transaction should be
eligible for a rebuttable presumption of compliance with the ATR
requirements. Lastly, the Bureau declines to adopt a complementary DTI
alternative for manufactured housing loans. A complementary DTI
alternative would be unduly complex and not necessary given that the
Bureau expects the final pricing threshold to improve access to credit
for manufactured homes. Moreover, the Bureau believes 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. For these reasons, the Bureau concludes that
adopting a higher pricing threshold for smaller loans secured by a
manufactured home strikes a better balance between ensuring consumers'
ability to repay and ensuring access to responsible, affordable
mortgage credit for manufactured homes.
Subordinate-lien transactions. The Bureau is adopting higher
thresholds in Sec. 1026.43(e)(2)(vi)(E) and (F) for subordinate-lien
transactions because 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
transactions, regardless of the consumer's ability to repay. To the
extent the higher pricing for a subordinate-lien transaction is not
related to consumers' ability to repay, applying the same pricing to
them as first-lien transactions results in them being excluded from QM
status under Sec. 1026.43(e)(2).
In the January 2013 Final Rule, the Bureau adopted higher
thresholds for determining if subordinate-lien QMs received a
rebuttable presumption or a conclusive presumption of compliance with
the ATR requirements.\316\ 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 to propose for
subordinate-lien transactions in Sec. 1026.43(e)(2)(vi).
---------------------------------------------------------------------------

\316\ 78 FR 6408, 6506 (Jan. 30, 2013).

---------------------------------------------------------------------------

[[Page 86373]]

To develop the thresholds for subordinate-lien transactions in
Sec. 1026.43(e)(2)(vi)(E) and (F), 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 12.\317\ To
ensure a sufficient sample size was available for a reliable analysis,
the Bureau used cumulative rate-spread ranges.\318\
---------------------------------------------------------------------------

\317\ See Bureau of Labor and Statistics, Historical Consumer
Price Index for All Urban Consumers (CPI-U), (Apr. 2020), 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 2020 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. The set of
loans categorized within a given threshold remains the same as in
the proposal, in which nominal loan amounts were inflated to June
2019 dollars and compared against the corresponding threshold levels
of $65,939 and $109,898.)
\318\ As with its analysis of higher-priced, smaller loans
above, the Bureau determined that it was necessary to use cumulative
rate-spread ranges to ensure sufficient sample sizes for a reliable
analysis of Y-14M data for subordinate lien loans. Without this
cumulative grouping, the sample sizes for some rate-spread ranges
would be insufficient for reliable analysis.

Table 12--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 2
points over 2018 HMDA HMDA HMDA years, 2013-
APOR) 2016 Y-14M
data (subset)
(%)
----------------------------------------------------------------------------------------------------------------
Under $66,156................. 2.0-2.5......... 76.9 36.1 728 2.1
Under $66,156................. 2.0-3.0......... 78.4 36.5 724 1.6
Under $66,156................. 2.0-3.5......... 79.7 36.8 721 1.4
Under $66,156................. 2.0-4.0......... 80.1 36.9 720 1.4
Under $66,156................. 2.0-4.5......... 80.2 36.9 719 1.3
Under $66,156................. 2.0-5.0......... 80.3 37.0 718 1.3
Under $66,156................. 2.0-5.5......... 80.3 37.1 718 1.3
Under $66,156................. 2.0-6.0......... 80.3 37.1 717 1.3
Under $66,156................. 2.0-6.5......... 80.4 37.2 717 1.3
Under $66,156................. 2.0 and above... 80.7 37.3 715 1.4
$66,156 and above............. 2.0-2.5......... 79.5 37.2 738 1.9
$66,156 and above............. 2.0-3.0......... 80.5 37.3 735 1.7
$66,156 and above............. 2.0-3.5......... 81.0 37.4 732 1.6
$66,156 and above............. 2.0-4.0......... 81.3 37.5 732 1.7
$66,156 and above............. 2.0-4.5......... 81.3 37.6 731 1.7
$66,156 and above............. 2.0-5.0......... 81.5 37.7 731 1.8
$66,156 and above............. 2.0-5.5......... 81.6 37.7 730 1.8
$66,156 and above............. 2.0-6.0......... 81.6 37.8 729 1.8
$66,156 and above............. 2.0-6.5......... 81.7 37.9 729 1.8
$66,156 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 transactions
at various thresholds greater than 2 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 $66,156 that were priced up to 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 $66,156 that
were priced up to 2 to 3.5 percentage points above APOR had an early
delinquency rate of approximately 1.6 percent.\319\ These factors
appear to provide a strong indication of ability to repay, so the
Bureau has decided to set the threshold at 3.5 percentage points above
APOR for larger subordinate-lien transactions (greater than or equal to
$66,156) to be eligible for QM status under Sec. 1026.43(e)(2).
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\319\ The loan data were a subset of the supervisory loan-level
data collected as part of the Federal Reserve'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 lenders were not included due to incompatible formatting.
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The Bureau recognizes that, because the 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
would result in subordinate-lien transactions for amounts over $66,156
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 concludes that the threshold
best balances 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

[[Page 86374]]

limited to recent years with strong economic performance and
conservative underwriting.
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 $66,156 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 $66,156 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 has decided to set the threshold at 6.5 percentage
points above APOR for subordinate-lien transactions less than $66,156
to be eligible for QM status under Sec. 1026.43(e)(2). The Bureau
notes that under this approach, these transactions would be eligible
only for a rebuttable presumption of compliance under Sec.
1026.43(e)(1)(ii) when higher-priced under Sec. 1026.43(b)(4), and
that consumers, therefore, would have the opportunity to rebut the
presumption under Sec. 1026.43(e)(1)(ii)(B).
Some subordinate-lien transactions currently meeting the General QM
loan definition may fail to do so under the adopted thresholds.
However, based on 2018 HMDA data, the Bureau estimates that the adopted
thresholds will increase the overall share of subordinate-lien
transactions that are eligible for QM status. Accordingly, the Bureau
concludes that its approach strikes the best balance between ensuring
consumers' ability to repay and access to responsible, affordable
credit for subordinate-lien transactions.
Determining the APR for Certain Loans for Which the Interest Rate May
or Will Change
The Bureau's Proposal
The Bureau also proposed 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 proposed special rule would
have applied 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 under Sec.
1026.43(e)(2)(vi), the creditor would have been required under the
proposal 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.\320\ The proposed special rule would have
applied principally to ARMs with initial fixed-rate periods of five
years or less (referred to in the proposal as ``short-reset ARMs'') but
also would have applied to step-rate mortgages \321\ that have an
initial period of five years or less. The special rule in the proposed
revisions to Sec. 1026.43(e)(2)(vi) would not have modified 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).
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\320\ The Bureau also stated that, under 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
applies under that paragraph for purposes of determining whether a
QM under Sec. 1026.43(e)(2) is a higher-priced covered transaction
and whether it is therefore subject to a rebuttable presumption as
opposed to a conclusive presumption of compliance with the with the
ATR requirements.
\321\ A step-rate mortgage is a transaction secured by real
property or a dwelling for which the interest rate will change after
consummation and the rates that will apply and the periods for which
they will apply are known at consummation. See 12 CFR
1026.18(s)(7)(ii).
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In the proposed rule, the Bureau said that it anticipated that the
proposed price-based approach to defining General QMs 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). However, the Bureau recognized 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,
the Bureau stated that, 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.
Proposed comment 43(e)(2)(vi)-4.i stated 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 stated 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 periodic payment will be due. In addition, proposed
comment 43(e)(2)(vi)-4.i stated that an identical special rule for
determining the APR for such a loan also applies for purposes of
proposed Sec. 1026.43(b)(4).
The Bureau proposed comment 43(e)(2)(vi)-4.ii to explain 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 stated 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 provided that, to determine the
APR for purposes of proposed Sec. 1026.43(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-referenced 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.
The Bureau proposed comment 43(e)(2)(vi)-4.iv to explain 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 provided
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 provided 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.
The Bureau requested comment on all aspects of the proposed special
rule in proposed Sec. 1026.43(e)(2)(vi). In particular, the Bureau
requested data regarding short-reset ARMs and those step-rate mortgages
that would be subject to the proposed special rule,

[[Page 86375]]

including default and delinquency rates and the relationship of those
rates to price. The Bureau also requested comment on alternative
approaches for such loans, including the ones discussed in the proposed
rule, 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.
Comments Received
Of the approximately 75 comments the Bureau received in response to
its General QM Proposal, approximately 25 comments addressed the ARM
special rule proposed in Sec. 1026.43(b)(4) and (e)(2)(vi). Nearly all
of these ARM commenters represented industry entities--mostly trade
associations and a few individual companies. Two commenters represented
a coalition of industry and consumer advocates. One individual consumer
advocate submitted a comment.
Most ARM commenters acknowledged that short-reset ARMs pose a
heightened risk to consumers, with many commenters acknowledging the
risks of payment shock. Some commenters agreed that it is appropriate
for the Bureau to adopt more stringent requirements for these loans to
obtain QM status. Whether or not they acknowledged the need for more
stringent requirements, nearly all commenters urged the Bureau to adopt
some alternative instead of the proposed special rule.
Commenter criticism generally fell into two categories: (1) That
the special rule would be overly burdensome; and (2) that, because some
ARMs allow up to a 2 percentage point increase at the first reset,\322\
the special rule would limit or eliminate QM eligibility for some or
all short-reset ARMs as they are currently structured--with some
commenters predicting that, as a result, some or all short-reset ARMs
would cease to be offered in the marketplace. Based on one or both of
these criticisms, most ARM commenters recommended that the Bureau
either (1) narrow the scope of the special rule to exclude some subset
of short-reset ARMs from its coverage or (2) adopt an alternative
special rule. One commenter stated that ARMs should no longer be
eligible for the QM safe harbor at all, and should instead be
designated as rebuttable presumption loans if they are eligible under
the General QM loan definition, or non-QM loans if not.
---------------------------------------------------------------------------

\322\ For example, many GSE ARM products provide for a 2
percentage point cap on the first reset.
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Several commenters criticized the special rule as burdensome. These
commenters asserted that the new APR calculation required under the
special rule would be ``operationally difficult'' and would require
``significant systems adjustment.'' One commenter specifically stated
that the APR calculation would add compliance risk and uncertainty to
the mortgage market for creditors offering ARM products by adding to
the ``costs of system updates, staff training, and compliance
monitoring; costs that would likely be passed on in one form or another
to consumers.'' One commenter asserted the adjustments would be
``operationally difficult, if not impossible.'' Three commenters
(including two of the aforementioned commenters asserting burden)
requested a longer implementation period due to the added complications
of the COVID pandemic and the upcoming replacement of the London
InterBank Offered Rate (LIBOR) index with the Secured Overnight
Financing Rate (SOFR) index.
Several other commenters stated that the special rule would
adversely affect the market for GSE short-reset ARMs that have been
developed specifically for the new SOFR index and that such ARMs likely
would be unable to achieve QM status under the special rule.
In addition to these SOFR-related market concerns, many other
commenters more generally asserted that the special rule would limit or
eliminate QM eligibility for some or all short-reset ARMs. Of these
commenters, seven predicted that the special rule would eliminate or at
least reduce short-reset ARM originations. Three industry commenters
predicted that the special rule would result in total elimination of
short-reset ARM originations. Four other commenters predicted that the
special rule would prevent origination of at least some short-reset
ARMs, with two asserting that five-year ARMs would be eliminated and
one specifying that three-year ARMs would be eliminated.
Several commenters recommended that the Bureau restrict the scope
of the special rule--either to exclude five-year ARMs from coverage or
to restrict the scope to short-reset ARMs with an initial fixed-rate
period of less than five years, three years, or two years. Some of
these commenters urged the Bureau to exclude five-year ARMs from
coverage and others recommended narrowing the scope of the special rule
to three-year ARMs (or shorter). Some commenters recommended excluding
from coverage ARMs that reset after exactly five years or, in the
alternative, excluding from coverage ARMs with initial terms of three
years or less. One commenter recommended narrowing the special rule to
apply to ARMs with an initial period of two years or less.
Several commenters recommended that the Bureau adopt an alternative
to the proposed special rule. One industry commenter recommended
setting the QM rate-spread threshold for ARMs in a manner that
references the maximum interest rate possible in the first five years.
The commenter suggested, as an example, requiring that the maximum
interest rate possible in the first five years be within a given rate
spread of APOR. Similarly, another industry commenter recommended that
the Bureau adopt a separate qualification test that compares the
maximum interest rate possible in the first five years to the APOR plus
an appropriate threshold.
Three commenters, including a consumer advocate and a coalition of
industry and consumer advocates, recommended adopting a different
special rule that uses the Average Initial Interest Rate (AIIR) instead
of APOR as the comparison rate. The Bureau understands that commenters
are using AIIR to refer to the mean initial interest rate for a
particular ARM product, which is one input into the APOR calculation
for ARMs. Another commenter recommended removing QM eligibility for
most short-reset ARMs but, in the alternative, supported the special
rule using AIIR. These commenters generally maintained that a special
rule employing AIIR would ease implementation and preserve the
availability of short-reset ARMs for certain consumers while still
protecting them from payment shock. As described by commenters, the
AIIR special rule would be one part of a two-part test. First,
creditors would be required to compare the maximum interest rate in the
first five years with the AIIR for a comparable ARM product, plus 2.5
percent, regardless of loan size. If the maximum possible rate is less
than or equal to the AIIR plus 2.5 percent, the loan potentially would
be eligible for QM status. Second, loans satisfying the initial test
would then be subject to the same APR-to-APOR rate-spread tests as
other loans under the General QM rule for purposes of determining
whether the loans are safe harbor QMs, rebuttable presumption QMs, or
non-QM loans under the applicable thresholds.
Three industry commenters recommended a different special rule for
short-reset ARMs. They recommended that the Bureau establish
``reasonable secondary caps for rate

[[Page 86376]]

changes allowed within the short-reset period'' such that short-reset
ARMs meeting those caps would be eligible for QM status. These
commenters did not specify their views on what caps on interest rate
resets would be reasonable. In the alternative, these commenters, plus
a GSE, recommended that the Bureau require creditors to use the fully
indexed rate for the remaining loan term after the first five years
(rather than the highest possible interest rate in the first five
years) to calculate the APR for short-reset ARMs. Although these
commenters did not specify which interest rate to use for the first
five years, the Bureau understands this approach to be similar to the
APR calculation for ARMs in Sec. 1026.17(c)(1), which 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.\323\ In a variation of this approach, another GSE
recommended that the Bureau adopt that GSE's own requirements for
short-reset ARMs in lieu of the special rule. Specifically, the GSE
recommended that the Bureau require creditors to calculate the APR
using the greater of the fully indexed rate or 2 percent over the
initial note rate for the full term of the loan.
---------------------------------------------------------------------------

\323\ Regulation Z requirements for calculating the APR for ARMs
are summarized below in the discussion of the structure and pricing
particular to ARMs.
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The Final Rule
For the reasons set forth herein, the Bureau is finalizing as
proposed the revisions to Sec. 1026.43(e)(2)(vi) and comment
43(e)(2)(vi)-4 regarding the 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 applies
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 under Sec. 1026.43(e)(2)(vi), the
creditor is 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.\324\ The special rule
applies principally to ARMs with initial fixed-rate periods of five
years or less (referred to herein as ``short-reset ARMs'').\325\ The
Bureau concludes that the risks associated with short-reset ARMs can be
effectively addressed without prohibiting them from receiving General
QM status altogether. This conclusion is consistent with the fact that
the Dodd-Frank Act expressly states that short-reset ARMs are eligible
for General QM status and includes a specific provision for addressing
the potential for payment shock from such loans.
---------------------------------------------------------------------------

\324\ As discussed above, the Bureau is also finalizing 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, which
applies under that paragraph for purposes of determining whether a
QM under Sec. 1026.43(e)(2) is a higher-priced covered transaction.
\325\ In addition to short-reset ARMs, the special rule applies
to step-rate mortgages that have an initial fixed-rate period of
five years or less. The Bureau recognizes that the interest rates of
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 APR determination requirement to such loans is consistent with
the treatment of step-rate mortgages pursuant to the requirement in
the 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.
---------------------------------------------------------------------------

Careful consideration of its data and rationale, and of comments
received, leads the Bureau to conclude that while the price-based
approach to defining General QMs is generally 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), the special rule is
necessary to effectively capture specific unaffordability risks of
certain short-reset ARMs. The Bureau further concludes that the burden
of implementing the special rule is not unreasonable, as discussed
further below, given that all of the inputs needed to calculate the
special rule's APR--including the five year maximum interest rate--are
already required under existing provisions in Regulation Z and that
creditors can offer short-reset ARMs that satisfy the new General QM
pricing requirements under the special rule.
As a general matter, as discussed above, the Bureau is adopting in
this final rule a non-QM threshold for loans greater than or equal to
$110,260 that is higher than the threshold that it proposed.
Specifically, Sec. 1026.43(e)(2) provides that loans greater than or
equal to $110,260 may be eligible for QM status if the APR does not
exceed APOR 2.25 or more percentage points. The Bureau notes that this
change will increase the pool of loans that achieve QM status under the
ATR/QM Rule, including short-reset ARMs subject to the special rule.
Thus, the 2.25-percentage-point threshold under this final rule will
result in more short-reset ARMs achieving QM status than would have
under the 2-percentage-point threshold in the proposal. While short-
reset ARMs offer consumers who can afford them an important alternative
to fixed-rate mortgage loans, the Bureau estimates that the special
rule will apply to a relatively small percentage of the mortgage
market. Based on 2018 HMDA data, the Bureau estimates that
approximately 36,000 conventional purchase loans, or approximately 1.3
percent of conventional purchase loans in the U.S. mortgage market,
would have been subject to the special rule had it been in effect that
year.
Structure and pricing particular to ARMs. As explained in the
proposal, absent special treatment, short-reset ARMs may present
particular concerns under an approach that uses APR as an indicator of
ability to repay. Short-reset ARMs 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 is not as predictive of
ability to repay as 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.\326\ 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.\327\ 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.\328\ As implemented in Sec.
1026.32(a)(3)(ii), the creditor is required to determine the

[[Page 86377]]

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.\329\
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\326\ See 12 CFR 1026.17(c)(1) through (8).
\327\ See 12 CFR 1026.17(c)(1) through (10).
\328\ See TILA section 103(bb)(1)(B)(ii).
\329\ See 12 CFR 1026.32(a)(3)-3.
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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
calculated based on 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 can 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 assumes 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 creditor
or investor), ARMs are generally priced lower--in absolute terms--than
a 30-year fixed-rate mortgage with comparable credit risk.\330\ 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.
---------------------------------------------------------------------------

\330\ 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. As the Bureau
noted in the proposal, short-reset ARMs may present greater risks of
unaffordability than other 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 the
relatively long period during which 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.\331\ 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 creditors may expect
that consumers will have the equity in their homes to refinance if
necessary.
---------------------------------------------------------------------------

\331\ Bureau analysis of NMDB data shows crisis-era short-reset
ARMs had lower LTV ratios at consummation relative to comparably
priced fixed-rate loans.
---------------------------------------------------------------------------

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.\332\ 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 Bureau
is finalizing a price-based approach that removes the DTI limit from
the General QM loan definition in Sec. 1026.43(e)(2)(vi). As a result,
the Bureau finds that, without the special rule, a price-based approach
would 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).\333\
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\332\ 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.
\333\ As discussed below in the Legal Authority section, the
Bureau is exercising 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 special rule, at least when the Bureau relies
on pricing thresholds as the primary indicator of likely repayment
ability in the General QM loan definition. Furthermore, the Bureau
concludes that it would be reasonable, in light of the definition of
a General QM 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 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 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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The price-based approach to addressing affordability concerns. As
noted in the proposal, the Bureau's analysis of historical ARM pricing
and performance indicates that the General QM product restrictions
combined with the 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 concludes that an additional
mechanism is merited to exclude from the General QM loan definition
these short-reset ARMs for

[[Page 86378]]

which the pricing and structure indicate a risk of delinquency that is
inconsistent with the presumption of compliance with the ATR
requirements that comes with QM status.
The Bureau's 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 than 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 ATR/QM Rule now
prohibit for QMs, such as interest-only payments or negative
amortization. In considering only loans without such restricted
features and with rate spreads within 2 percentage points of APOR (the
proposed non-QM threshold), 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. While not a factor in the Bureau's decision to
finalize the special rule as proposed, the Bureau's analysis of early
delinquency rates of loans without restricted features and with rate
spreads within 2.25 percentage point of APOR (the non-QM threshold
under the Final Rule) yields similar results, though the delinquency
rates for short-reset ARMs as compared to all other loans are slightly
higher. Under that analysis, the early delinquency rate for short-reset
ARMs is 6.2 percent as compared to 4.4 percent for all other ARMs and
4.3 percent for fixed-rate mortgages.\334\
---------------------------------------------------------------------------

\334\ 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.
---------------------------------------------------------------------------

In the proposal, the Bureau requested additional data or evidence
comparing loan performance of short-reset ARMs, other ARMs, and fixed-
rate mortgages, as well as data comparing the performance of such loans
during periods of rising interest rates. In response, a few commenters
stated that their internal data for loans originated post-crisis--in an
environment of relatively low interest rates--showed generally
comparable delinquency rates between certain ARMs and fixed-rate
mortgages. Those delinquency rates are generally consistent with those
reflected in the data on which the Bureau relied, in part, to propose
the special rule. No commenters, however, provided data on comparative
loan performance during periods of rising interest rates--which, as
discussed herein, is the interest-rate environment for which the
special rule's additional safeguards are primarily designed. The Bureau
recognizes that rising interest rates may also pose some risk of
unaffordability for longer-reset ARMs later in the loan term. However,
as also discussed herein, the Bureau is finalizing the special rule to
address the specific concern that short-reset ARMs pose a higher risk
than 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. Short-reset ARMs have the potential for a significant interest
rate increase early in the loan term and present concerns that the
payments may therefore become unaffordable. Commenters did not present
evidence controverting that short-reset ARMs may present particular
risks. Indeed, most commenters acknowledged that short-reset ARMs do in
fact present additional concerns about affordability.
A combination of factors post-financial crisis--including a 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.
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 1.4 percent by July
2020, only slightly above the historical low of 1 percent in 2009.\335\
One major factor contributing to the overall decline in ARM volume is
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.
---------------------------------------------------------------------------

\335\ Laurie Goodman et al., Urban Inst., Housing Finance at a
Glance, at 9 (Sept. 2020), https://www.urban.org/sites/default/files/publication/102979/september-chartbook-2020.pdf.
---------------------------------------------------------------------------

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.\336\ The
Assessment Report also found that short-reset ARMs originated after the
effective date of the Rule were restricted to highly creditworthy
borrowers.\337\ The Assessment Report further 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.\338\ Due to the
post-crisis low interest rate environment and restriction of ARM
originations to highly creditworthy borrowers, these recent
originations may not accurately reflect the potential unaffordability
of short-reset ARMs under different market conditions than those that
currently prevail.
---------------------------------------------------------------------------

\336\ Assessment Report, supra note 63, at 94 (fig. 25).
\337\ Id. at 93-95.
\338\ Id. at 95 (fig. 26).
---------------------------------------------------------------------------

Special rule for APR determination for short-reset ARMs.\339\ 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 does not account for some of those
risks because of how APRs are determined for ARMs, the Bureau is
finalizing the proposed 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, TILA 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 ATR/QM 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.\340\ This ensured 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 concludes that using the fully indexed
rate to determine the APR for purposes of the rate-spread thresholds in
Sec. 1026.43(e)(2)(vi) as finalized would

[[Page 86379]]

not provide a sufficiently meaningful safeguard against the elevated
likelihood of delinquency for short-reset ARMs. For that reason, the
Bureau is finalizing the proposed special rule for determining the APR
for such loans.
---------------------------------------------------------------------------

\339\ As noted above, the special rule also applies to step-rate
mortgages for which the interest rate changes in the first five
years.
\340\ 12 CFR 1026.43(e)(2)(iv).
---------------------------------------------------------------------------

The Bureau concludes 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, under the special
rule, the creditor must determine the APR by treating the maximum
interest rate that may apply during the first five years, as described
in Sec. 1026.43(e)(2)(vi), as the interest rate for the full term of
the loan. That APR determination is then compared to the APOR \341\ to
determine General QM status. This approach addresses 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 TILA for
such ARMs and implemented in the current ATR/QM Rule.
---------------------------------------------------------------------------

\341\ This refers to the standard APOR for ARMs. The requirement
modifies the determination for the APR of ARMs but does not affect
the determination of the APOR. The Bureau notes that the APOR used
for step-rate mortgages is 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.
---------------------------------------------------------------------------

In sum, the Bureau finds that the special rule is consistent with
both TILA's 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 indicator
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 could diminish the effectiveness of the rate
spread as an indicator and lead to heightened risk of early delinquency
for short-reset ARMs relative to other loans with comparable APR over
APOR rate spreads. The special rule, by requiring creditors to more
fully incorporate this interest-rate risk in determining the APR for
short-reset ARMs, will more fully ensure that the resulting pricing
accounts for that risk for such loans.
The special rule requires 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 concludes 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 to ensure that the QM presumption of compliance is accorded to
short-reset ARMs for which the consumer has the ability to repay, the
Bureau is requiring that the APR for short-reset ARMs be based on the
maximum interest rate during the first five years.
Commenter criticism of the special rule: Burden and market effects.
As noted above, commenter criticism of the proposed special rule
generally fell into two categories: (1) The special rule would be
overly burdensome; and (2) because some ARMs allow up to a 2 percentage
point increase at the first reset, the special rule would limit or
eliminate QM eligibility for some or all short-reset ARMs--with some
commenters predicting that, as a result, some or all short-reset ARMs
would cease to be offered in the marketplace.
With regard to the first criticism, some commenters asserted that
the special rule would increase burden by adding operational complexity
and compliance uncertainty. These commenters provided no further
explanation or data to justify their claims. The Bureau recognizes that
the special rule's APR calculation is a new regulatory requirement.
However, the Bureau concludes that its special rule addresses the risk
posed by short-reset ARMs without adding unreasonable burden. Cognizant
of reducing burden resulting from calculating a new APR, the Bureau
proposed the special rule, in part, because it parallels the
underwriting requirement in existing Sec. 1026.43(e)(2)(iv), which
already requires creditors to calculate the five-year maximum interest
rate for short-reset ARMs. As such, the special rule's APR calculation
is based on an input already required for short-reset ARMs under the
underwriting calculation. Moreover, creditors already have all of the
other inputs required for the special rule's APR calculation from
existing APR regulatory requirements. The Bureau expects that these
factors will mitigate the burden of implementing systems changes to
comply with the special rule. The Bureau also notes that the different
APR calculation required under Sec. 1026.32(a)(3)(ii) for purposes of
determining whether ARMs are subject to certain HOEPA requirements has
not resulted in compliance uncertainty.
Three commenters raised concerns that adapting to the special rule
would be burdensome because it would overlap with the transition from
the LIBOR index to the SOFR index (and because of the pandemic) and
therefore requested a longer implementation period. The implementation
period of the Final Rule is addressed in part VII below.
A few other commenters stated that the special rule would adversely
affect the market for GSE short-reset ARMs that have been developed
specifically for the new SOFR index, and that such ARMs likely would be
unable to obtain QM status under the special rule. The Bureau notes
that the special rule does not depend on which index a creditor uses to
determine the interest rate of a short-reset ARM. Thus, the transfer
from LIBOR ARMs to SOFR ARMs has no effect on the application of the
special rule, as it is the structure of the rate resets permitted under
the contract within the first five years that will determine the
maximum interest rate for the purposes of calculating the APR under the
special rule. Creditors offering ARM products, including short-reset
ARMs, will have to complete the work to transition from LIBOR to SOFR
regardless of the parameters of the Bureau's special rule. Moreover,
the Bureau understands that the 2 percentage point cap on the initial
reset of most GSE short-reset ARMs is the same for both GSE LIBOR ARMs
and GSE SOFR ARMs. While the current ATR/QM Rule's GSE Patch granted QM
status to all GSE-eligible ARMs, under this final rule, GSE ARMs will
require similar adjustments due to their rate reset caps in order to
qualify for QM status--regardless of which index is used. Further, the
Bureau notes that only approximately 5 percent of 2018 conventional
purchase ARMs that would have been subject to the special rule were GSE
loans. In sum, the Bureau recognizes the operational challenges posed
by the transition from LIBOR to SOFR, but the Bureau finds that the
special rule would not exacerbate these challenges and that these
challenges are unrelated to the types of ARMs that qualify for a QM
presumption of compliance under the special rule.
With respect to the remaining criticisms of the special rule's
projected market effects, commenters claimed that, because some short-
reset ARMs allow up to a 2 percentage point increase at the first
reset, the special rule would limit or eliminate QM eligibility for
some or all short-reset ARMs. A few of these commenters

[[Page 86380]]

further predicted that, as a result, some or all short-reset ARMs would
cease to be offered in the marketplace. These commenters did not
provide additional data or evidence to support their projections. As
discussed above, the Bureau is increasing the rate-spread threshold for
eligibility under the General QM loan definition from the proposed 2-
percentage-point threshold to 2.25 percentage points for loans less
than or equal to $110,260. As a result of this increased threshold,
more short-reset ARMs will achieve QM status than would have under the
proposal. This is especially true for many five-year ARMs, including
existing GSE five-year ARMs, which under the proposed special rule
might have required modifications to the current interest rate cap to
obtain QM status. Under the 2.25-percentage-point threshold, many of
these loans may qualify as QMs as currently structured. Because most
GSE five-year ARMs (both LIBOR and SOFR) provide for a 2 percentage
point cap on the first reset, many of these short-reset ARMs will fall
within the new QM threshold. Due to this increased threshold, any five-
year ARM with an initial APR within 0.25 percentage points of the APOR
at origination can have an initial adjustment of up to 2 percent and
still qualify as a QM under the special rule.
The Bureau recognizes that, because the QM safe harbor threshold
remains unchanged, many of the short-reset ARMs that achieve QM status
under the Final Rule's expanded spread will receive a rebuttable
presumption of compliance rather than a conclusive presumption. Due to
the risk that these short-reset ARMs (i.e., those with relatively high
interest rate caps) may become unaffordable after early resets, the
Bureau concludes that rebuttable presumption status, as opposed to safe
harbor status, is appropriate for such loans. Furthermore, according to
the Bureau's evidence, as discussed in the proposal and above, the fact
that many of these loans may qualify only for a rebuttable presumption
and not a safe harbor is not likely to have a significant impact on
access to responsible, affordable mortgage credit. As discussed in more
detail above, creditors readily make rebuttable presumption QMs, thus
indicating that the non-QM threshold is the more relevant threshold in
determining access to responsible, affordable mortgage credit under the
General QM amendments.
The Bureau is aware that the increase in the rate-spread threshold
will have a greater impact on QM eligibility of five-year ARMs as
compared to three-year ARMs. For example, GSE three-year ARMs permit
interest rate increases as high as 6 percentage points in the first
five years and as such likely will not qualify for General QM status.
The Bureau notes that the purpose of the special rule is to ensure that
General QM status will not be accorded to certain loans for which the
interest rate may sharply increase in the first five years, resulting
in pricing that exceeds the non-QM threshold in this final rule and in
potentially unaffordable payments. Consistent with this purpose, the
special rule would preclude such loans from obtaining General QM
status, including many three-year ARMs with interest rates that may
increase by as much as 6 percentage points in the first five years.
Loans for which the interest rate may increase so sharply early in the
term of the loan do not warrant the General QM presumption of
compliance with the ATR requirements.
To the extent the increased rate-spread threshold does not address
commenter concerns with regard to access to credit, the Bureau notes
that creditors can and do market QM-eligible ARMs that either satisfy
the requirements of the special rule by not permitting resets above
2.25 percentage points within the first five years or that fall outside
the purview of the special rule by resetting later than five years (60
months) after the first payment is due. Market participants currently
originate some five-year ARMs with sufficiently low initial reset caps
or with an initial reset that occurs shortly after 60 months. For
example, the definition of a GSE five-year ARM allows an initial fixed-
rate period of up to 66 months.\342\ Thus, GSEs and creditors can offer
ARMs that satisfy the General QM pricing requirements under the special
rule or that fall outside the scope of the special rule. Also, while
interest rate reset data for privately-held non-agency loans is not
reliably available, the Bureau notes that both FHA and VA ARMs,
although subject to their own agency QM rules, contain interest rate
reset caps that would fall within the parameters of the special rule as
finalized.\343\
---------------------------------------------------------------------------

\342\ Fannie Mae, Standard ARM Plan Matrix for 2020 (Apr. 2020),
https://singlefamily.fanniemae.com/media/6951/display.
\343\ VA caps all interest rate increases at 1 percent a year
for all VA ARMS. FHA caps interest rate increases at 1 percent for
one-year and three-year ARMs. FHA caps annual interest rate
increases at 1 percent for a lifetime cap of 5 percent or 2 percent
increases for a lifetime cap of 6 percent.
---------------------------------------------------------------------------

A few commenters asked for clarification of certain aspects of the
special rule. One commenter requested that the Bureau clarify whether
the special rule applies to five-year ARMs. Specifically, the commenter
asked for clarification as to whether the first interest rate reset of
a five-year ARM is included in the special rule's APR calculation,
given the special rule's applicability 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. To the extent
that the first interest rate reset of a five-year ARM occurs on the
five-year anniversary of the due date of the first periodic payment,
such ARMs are subject to the special rule. As noted in the proposal,
the special rule is identical in this regard to the existing
underwriting requirement for short-reset ARMs in Sec.
1026.43(e)(2)(iv). Also, comment 43(e)(2)(vi)-4.ii, which the Bureau is
finalizing as proposed, clarifies that the special rule applies to
five-year ARMs.
One commenter posed several questions concerning how the special
rule applies to certain loan products or in various factual scenarios.
To the extent that the commenter's questions are not addressed in the
final rule, the Bureau notes that it has a variety of tools for
answering such questions once a final rule is issued, including
external guidance materials and an informal guidance function.
Commenter recommendations. Commenters that criticized the special
rule generally recommended one of two ways to address their criticisms:
Narrow the scope of the special rule or substitute an alternative
special rule.
Some commenters recommended narrowing the scope of the special rule
to expand the number of short-reset ARMs that obtain QM status--either
to exclude five-year ARMs from coverage or to restrict the scope to
short-reset ARMs with an initial fixed-rate period of less than five
years, three years, or two years. The Bureau declines to adopt these
recommendations and is finalizing the special rule as proposed to cover
short-reset ARMs with initial fixed-rate periods of five years or less,
for the following reasons and those discussed above.
The majority of these commenters specifically recommended excluding
five-year ARMs from coverage. The Bureau notes that coverage of the
special rule is already relatively narrow. Including five-year ARMs,
the Bureau estimates that the special rule would apply to 36,000
conventional purchase loans annually, according to 2018 HMDA data.
Excluding five-year ARMs from the scope of the special rule would
reduce that number to 3,500 loans. Further, as discussed above, because
the Bureau is increasing the rate-spread threshold from 2 percentage
points to

[[Page 86381]]

2.25 percentage points for loans greater than or equal to $110,260,
more five-year ARMs will obtain QM status under the special rule as
finalized.
The Bureau reiterates that the purpose of the special rule is to
prevent certain short-reset ARMs from obtaining QM status if there may
be a sharp rise in interest rates soon after origination. This rise may
occur with three-year ARMs, which may have contracts that permit the
interest rate to increase by as much as 6 percentage points in the
first five years. Because consumers may lack sufficient time to adjust
to larger payments early in the loan term or to build enough equity to
refinance, such ARMs pose a higher risk of early delinquency. For these
additional reasons, the Bureau declines to narrow coverage to short-
reset ARMs with initial fixed-rate periods of three years or less.
Some commenters recommended the Bureau implement alternative
special rules to address the risks presented by short-reset ARMs. The
Bureau declines to adopt the alternative special rules recommended by
these commenters. To the extent that commenters are advocating for
alternative special rules to increase the number of short-reset ARMs
that could obtain QM status, the Bureau notes that the increase of the
rate-spread threshold in the Final Rule will expand the pool of QM-
eligible short-reset ARMs compared to the proposal.
As noted above, a few commenters recommended adopting a special
rule that uses the maximum interest rate in the first five years of the
loan (as opposed to using the APR required by the special rule) to
compare with the AIIR (instead of APOR), plus the additional cushion of
2.5 percentage points (``AIIR special rule''). As the Bureau
understands this recommendation, short-reset ARMs satisfying the
initial test would then be subject to the same APR-to-APOR rate-spread
tests as other loans under the General QM loan definition for purposes
of determining whether the loans receive a safe harbor or a rebuttable
presumption or are non-QM under the applicable thresholds.
The Bureau recognizes that adopting this AIIR special rule would
expand the number of short-reset ARMs that would achieve QM status, as
interest rate increases of up to 2.5 percentage points early in the
life of the loan would meet that special rule's pricing threshold. The
Bureau also recognizes that using the five-year maximum interest rate
in this special rule could be a burden-reduction measure, since
creditors will already have calculated that input, as it is currently
required for underwriting loans pursuant to Sec. 1026.43(e)(2)(iv).
The AIIR special rule would expand the pool of QM-eligible short-
reset ARMs to those whose interest rates increase by as much as 2.5
percentage points. However, commenters provided no evidence that this
threshold would appropriately identify which loans are likely
affordable and should receive a presumption of compliance. Moreover,
the Bureau concludes that any potential burden-reduction benefits are
outweighed by the complexity of introducing into the General QM loan
definition a new measure--the AIIR--and a new formula that requires, as
the first step in a two-step process, comparing the maximum five-year
interest rate to the AIIR and then adding 2.5 percentage points. (Then,
if the short-reset ARM meets the threshold of the first test, it is
still subject to the price-based APR-APOR rate-spread test.) In
addition, because ``AIIR'' is not a commonly used term, the Bureau is
concerned that creditors may not understand AIIR to mean what the
Bureau believes the commenters intended, i.e., the mean initial
interest rate for a particular ARM product. As such, a requirement to
use the AIIR could necessitate significant regulatory explanation,
likely adding implementation and compliance burden. Additionally, the
AIIR special rule would deviate from the final rule's straight-forward
APR-to-APOR comparison, requiring an additional comparison of interest
rates. For these reasons, the Bureau declines to adopt the AIIR special
rule.
Two commenters recommended a special rule using the maximum
interest rate in the first five years for short-reset ARMs instead of
the APR calculation required by the special rule (``five-year maximum
interest rate special rule''). These commenters advocated this
alternative special rule as way to expand QM eligibility for short-
reset ARMs and to ease burden, as this calculation of the five-year
maximum interest rate is already required for underwriting short-reset
ARMs in the current ATR/QM Rule \344\ and therefore would not require
an additional calculation. One commenter recommended setting the
General QM rate-spread threshold for short-reset ARMs in a manner that
compares the maximum interest rate possible in the first five years
with a given rate spread of APOR. The other commenter similarly
recommended adopting a separate qualification test that compares the
highest interest rate within five years to the APOR plus an appropriate
threshold.
---------------------------------------------------------------------------

\344\ 12 CFR 1026.43(e)(2)(iv).
---------------------------------------------------------------------------

The Bureau recognizes that the five-year maximum interest rate
special rule suggested by the commenter would expand the pool of QM-
eligible short-reset ARMs. However, this would be accomplished in part
by excluding from the APR calculation non-interest finance charges,
which are included for other types of loans subject to the Rule. Such
finance charges are key components of a loan's pricing and therefore
contribute to making pricing an effective indicator of a consumer's
ability to repay. As such, the Bureau declines to exclude non-interest
finance charges from the APR calculation for short-reset ARMs.
The Bureau further notes that the interest-rate-to-APOR comparison
would allow riskier loans--that is, loans that may reset to a
significantly higher interest rate in the first five years--to obtain
QM status. As discussed above, the intended effect of the Bureau's
special rule is to guard against certain short-reset ARMs with early,
potentially unaffordable, sharp increases in interest rates from
obtaining QM status. For these reasons, the Bureau declines to adopt
the five-year maximum interest rate special rule.
As noted above, a few commenters recommended replacing the special
rule with reasonable secondary interest rate caps during the first five
years for short-reset ARMs (``rate cap special rule''). While this
alternative special rule would directly address the threat of payment
shock, these commenters did not specify what rate caps would be
reasonable or how such caps would operate in relation to the
contractual rate caps under the ARM note. In the proposed rule, for
these same reasons, the Bureau considered and declined to propose
interest rate caps that commenters had suggested in response to the
ANPR and noted that the special rule would address the problem in a
more streamlined manner. Additionally, the rate cap special rule would
deviate from the pricing approach that would apply to other ARMs and
fixed-rate mortgages subject to this final rule. Moreover, commenters
provided no evidence indicating that rate caps in general or that
specific rate caps would identify more accurately than the Bureau's
special rule those short-reset ARMs likely to be affordable and thus
meriting a presumption of compliance.
The commenters that recommended secondary rate caps alternatively
recommended that the Bureau require creditors to use the fully indexed
rate for the remaining loan term after the first five years to
calculate the APR for short-reset ARMs (without specifying

[[Page 86382]]

which interest rate to use for the first five years). The Bureau
understands this approach to be similar to the general APR requirements
for ARMs in Sec. 1026.17(c)(1), which require 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. Absent
the Bureau's special rule, this would be the applicable APR formula for
short-reset ARMs under the price-based approach. Another GSE
recommended the Bureau adopt that GSE's own requirements for short-
reset ARMs, which the GSE described as using the greater of the fully
indexed rate or 2 percent over the initial note rate for the full term
of the loan.
The Bureau declines to adopt either of these approaches. Using the
fully indexed rate to calculate the APR for short-reset ARMs--for some
or all of the loan term--would not adequately address the risk that
such ARMs can become unaffordable. As noted above, 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 that would be calculated based on the rates
used in determining the APR. Requiring the use of 2 percent over the
initial note rate (if greater than the fully indexed rate) also would
not adequately address this risk. As noted above, many short-reset ARMs
are permitted to adjust substantially more than 2 percent early in the
life of the loan, particularly those structured to have multiple
adjustments within the first five years. The interest rate of such ARMs
can adjust upward 6 percentage points in the first five years of the
loan. By requiring that the APR for short-reset ARMs be determined by
treating the maximum interest rate during the first five years as the
interest rate for the full term of the loan, the Bureau's special rule
is designed to account for that risk, and to ensure that General QM
status is accorded to short-reset ARMs that merit a presumption of
compliance.
Legal authority. 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, is 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 finalizing 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 concludes that these provisions will 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 finalizing 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
special rule's APR determination provisions in Sec. 1026.43(e)(2)(vi)
will 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.
43(e)(4)
TILA section 129C(b)(3)(B)(ii) directs HUD, VA, USDA, and 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 QMs 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) currently 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) currently 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) currently 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) currently 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.
In the General QM Proposal, the Bureau proposed to replace current
Sec. 1026.43(e)(4) with a provision stating 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. The Bureau proposed
these amendments because, in the Extension Proposal, the Bureau
proposed 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) would be 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.\345\ In the General
QM Proposal, the Bureau also noted that, after the 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.\346\ The Bureau noted that, as a result, the
special rules in Sec. 1026.43(e)(4)(ii)(B) through (E) are

[[Page 86383]]

already superseded by the actions of HUD, VA, and USDA. The Bureau's
proposed amendments to Sec. 1026.43(e)(4) provided cross-references to
each of these other agencies' definitions so that creditors and
practitioners have a single point of reference for all QM definitions.
---------------------------------------------------------------------------

\345\ 85 FR 41448 (July 10, 2020).
\346\ 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 proposed 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). The Bureau proposed to amend
Comment 43(e)(4)-2 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 have been removed. The Bureau
requested comment on the proposed amendments to Sec. 1026.43(e)(4) and
related commentary. Comments on the proposal did not discuss the
proposed amendments to Sec. 1026.43(e)(4) and its related commentary.
In this final rule, the Bureau amends Sec. 1026.43(e)(4) as
proposed, with modifications to the commentary to clarify the
application of this final rule's effective date to the availability of
the Temporary GSE QM loan definition.
As noted above, on October 20, 2020, the Bureau issued the
Extension Final Rule to replace the January 10, 2021 sunset date of the
Temporary GSE QM loan definition with a provision stating that the
Temporary GSE QM loan definition will be available only for covered
transactions for which the creditor receives the consumer's application
before the mandatory compliance date of this final rule.\347\ As noted
in part VII below, this final rule will have an effective date of March
1, 2021, and a mandatory compliance date of July 1, 2021. As a result,
the Temporary GSE QM loan definition will still be used by creditors
after the effective date of March 1, 2021 and will not expire until
July 1, 2021. In this final rule, the Bureau is making changes to
proposed comment 43(e)(4)-2 to reflect this final rule's effective date
and mandatory compliance date.
---------------------------------------------------------------------------

\347\ 85 FR 67938 (Oct. 26, 2020).
---------------------------------------------------------------------------

As noted above, the Bureau proposed to remove 43(e)(4)-3. In this
final rule, the Bureau is instead revising comment 43(e)(4)-3 to cross-
reference new comment 43-2. As discussed further in part VII below, new
comment 43-2 clarifies that, for transactions for which a creditor
received an application on or after March 1, 2021, but prior to July 1,
2021, a creditor has the option of complying either with 12 CFR part
1026 as it is in effect or with 12 CFR part 1026 as it was in effect on
February 26, 2021. The Bureau believes this comment will assist
creditors and secondary market participants with compliance with the
final rule because it will clarify that, even though the Temporary GSE
QM loan definition will not appear in Sec. 1026.43(e)(4) after this
final rule's effective date of March 1, 2021, creditors may continue to
use it for transactions for which they received the consumer's
application prior to July 1, 2021.
The Bureau is amending Sec. 1026.43(e)(4) and related commentary
pursuant to TILA section 129C(b)(3)(B)(ii), since the respective
agencies directed to create their own definitions of qualified
mortgages have done so and the Temporary GSE patch provisions will
cease to be applicable on July 1, 2021.
Conforming Changes
As discussed above, the Bureau proposed, among other things, to
revise the requirements in Sec. 1026.43(e)(2)(v) that creditors
consider and verify certain information; to remove the DTI limit in
Sec. 1026.43(e)(2)(vi); to remove references to appendix Q from Sec.
1026.43; and to remove appendix Q from Regulation Z entirely.
Accordingly, the Bureau proposed non-substantive conforming changes in
certain provisions to reflect these proposed changes.
Specifically, the Bureau proposed to update comment 43(c)(7)-1 by
removing the reference to the DTI limit in Sec. 1026.43(e). The Bureau
also proposed 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) currently
provide that as part of the respective QM definitions, loans must
comply with the requirements in existing Sec. 1026.43(e)(2)(v) to
consider and verify certain information. As discussed above, the Bureau
proposed 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 or
assets, debts, and other information. The proposed conforming changes
to Sec. 1026.43(e)(5) and (f)(1) would generally have inserted the
substantive requirements of existing Sec. 1026.43(e)(2)(v) into Sec.
1026.43(e)(5)(i) and (f)(1), respectively, and would have provided that
loans under Sec. 1026.43(e)(5) and (f) do not have to comply with
revised Sec. 1026.43(e)(2)(v) or (vi). However, the proposed
conforming changes would not have inserted the requirement that
creditors consider and verify income or assets, debts, and other
information in accordance with appendix Q because the Bureau proposed
to remove appendix Q from Regulation Z. The Bureau also proposed
conforming changes to the related commentary.
The Bureau did not receive any comments on the proposed conforming
changes. While the Bureau, in this final rule, is making some
modifications to the proposal, none of these modifications affects the
proposed conforming changes. Therefore, this final rule adopts the
conforming changes to comment 43(c)(7)-1 and to the provisions related
to small creditor QMs in Sec. 1026.43(e)(5)(i) and balloon-payment QMs
in Sec. 1026.43(f)(1) as proposed.

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 QMs. As
explained in the section-by-section analysis of Sec.
1026.43(e)(2)(v)(B) above, the Bureau proposed to remove appendix Q
from Regulation Z entirely in light of concerns from creditors and
investors that its rigidity, ambiguity, and static nature result in
standards that are both confusing and outdated. The Bureau sought
comment on whether, instead of removing appendix Q entirely, it should
retain appendix Q as an option for complying with the ATR/QM Rule's
verification requirements.
Commenters generally supported removing appendix Q. Commenters
stated that appendix Q's requirements to consider and verify income and
debt are outdated, ambiguous, and inflexible. Commenters also stated
that appendix Q is difficult for creditors to use for self-employed and
gig economy consumers and in some cases has resulted in reduced access
to credit. A consumer advocate, for example, stated that appendix Q
consisted of ``ossified and complex detail'' and supported the Bureau's
proposal to amend Sec. 1026.43(e)(2)(v). These commenters generally
supported replacing appendix Q with the provisions of Sec.
1026.43(e)(2)(v) discussed above. In

[[Page 86384]]

contrast, two industry commenters supported retaining appendix Q and
suggested detailed edits to its provisions. However, both comment
letters discussed such edits to appendix Q in the context of retaining
a DTI limit within the General QM loan definition, which is not being
adopted for the reasons discussed in part V above.
This final rule removes the appendix Q requirements from Sec.
1026.43(e)(2)(v) and removes appendix Q from Regulation Z entirely, as
the Bureau proposed. The Bureau determines that, due to the well-
founded and consistent concerns articulated by stakeholders and
described in detail in the General QM Proposal,\348\ 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
does not anticipate that removing appendix Q and using the new
requirements of 1026.43(e)(2)(v) to consider and verify income, assets,
debts, alimony, and child support will lead to higher risk loans
obtaining QM status beyond loans that will receive such status from the
removal of DTI limits as discussed in part C.4 above.
---------------------------------------------------------------------------

\348\ 85 FR 41448, 41752 (July 10, 2020).
---------------------------------------------------------------------------

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 2 percentage points since the
January 2013 Final Rule became effective.\349\ The Bureau 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 if the borrower
cannot provide documentation required by appendix Q. The Bureau
concluded in the Assessment Report that these results left open the
possibility that appendix Q requirements may have had an impact on
access to credit.\350\
---------------------------------------------------------------------------

\349\ See Assessment Report, supra note 63, at 11.
\350\ See id. at 155.
---------------------------------------------------------------------------

The Bureau declines to retain and revise appendix Q. As noted
above, the Bureau concludes that appendix Q is inflexible, ambiguous
and static, which results in standards that are both confusing and
outdated. The Bureau concludes that it would be time- and resource-
intensive to revise appendix Q in a manner to try to resolve these
concerns. The Bureau therefore concludes that removing appendix Q
entirely would be more efficient and practicable than retaining and
revising it. The Bureau also does not anticipate a decrease in consumer
protection as a result of removing appendix Q and adopting the
provisions of 1026.43(e)(2)(v).

VII. Effective Date

A. The Bureau's Proposal

The Bureau proposed an effective date for a revised General QM loan
definition of six months after publication in the Federal Register of a
final rule. The Bureau further proposed that the revised regulations
would apply to covered transactions for which creditors receive an
application on or after that effective date. In the proposal, the
Bureau tentatively determined 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 also stated it did
not intend to issue a final rule amending the General QM loan
definition early enough for it to take effect before April 1, 2021.
For the reasons described below, this final rule adopts an
effective date of March 1, 2021, and a mandatory compliance date of
July 1, 2021, resulting in an optional early compliance period between
March 1, 2021 and July 1, 2021.\351\ This final rule adds new comment
43-2, which explains that, for transactions for which a creditor
received the consumer's application on or after March 1, 2021 and prior
to July 1, 2021, creditors have the option of using either the current
General QM loan definition (i.e., the version in effect on February 26,
2021) or the revised General QM loan definition. Comment 43-2 also
explains that, for transactions for which a creditor received the
consumer's application on or after July 1, 2021, creditors seeking to
originate General QMs are required to use the revised General QM loan
definition. Comment 43-2 also specifies the meaning of ``application''
for these purposes.
---------------------------------------------------------------------------

\351\ The Bureau's use of the term ``mandatory compliance date''
does not imply that creditors are required to use the General QM
loan definition to comply with the ATR/QM Rule's ability-to-repay
requirements. Unless a loan is eligible for QM status--such as under
Sec. 1026.43(e)(2), Sec. 1026.43(e)(5), or Sec. 1026.43(f)--a
creditor must make a reasonable and good faith determination of the
consumer's ability to repay and does not receive a presumption of
compliance.
---------------------------------------------------------------------------

B. Comments Received

The Bureau received several comments concerning the effective date
and implementation period.\352\ Several industry commenters supported
the proposal to link the effective date to the date the creditor
received the consumer's application. One of these commenters stated
that using the application date is preferable to using the consummation
date because, while a loan is being processed and underwritten, the
consummation date remains unknown, making it difficult for the creditor
to anticipate which General QM loan definition to apply. Another
commenter recommended clarifying that ``application'' has the same
definition as under the Bureau's TILA-RESPA Integrated Disclosure Rule
(TRID) because that definition is commonly used by the secondary
market.
---------------------------------------------------------------------------

\352\ This final rule uses the term ``implementation period'' to
refer to the period between the date the Bureau issues this final
rule and the date that creditors seeking to originate General QMs
must comply with the General QM loan definition as amended by this
final rule. Under the General QM Proposal, this implementation
period would have ended on the effective date, while under this
final rule the implementation period will end on the mandatory
compliance date.
---------------------------------------------------------------------------

As discussed below, this final rule adds new comment 43-2 to
clarify the operation of the final rule's effective date and mandatory
compliance date, including clarifying that the effective date and
mandatory compliance date are linked to the date the creditor received
the consumer's application. Comment 43-2 also clarifies that, for
transactions subject to TRID, creditors determine the date the creditor
received the consumer's application, for purposes of this final rule's
effective date and mandatory compliance date, in accordance with the
TRID definition of application in Sec. 1026.2(a)(3)(ii). This new
comment also clarifies that, for transactions that are not subject to
TRID, creditors can determine the date the creditor received the
consumer's application, for purposes of this final rule's effective
date and mandatory compliance date, in accordance with either Sec.
1026.2(a)(3)(i) or (ii). The Bureau concludes that the clarifications

[[Page 86385]]

provided in comment 43-2 will reduce uncertainty throughout the
origination process.
Several industry commenters addressed the length of the
implementation period. One industry commenter supported the Bureau's
proposed effective date of six months after the final rule's
publication in the Federal Register. Another industry commenter
requested an implementation period extending to June 2021 and a 90-day
grace period during which loans would still be reviewed for compliance
with the revised definition but the Bureau would take no action to
penalize simple mistakes and interpretation differences. The commenter
stated that it took many months for small-to-mid-size creditors and
investor channels to adjust to TRID.
Several industry commenters stated that an implementation period
longer than six months is needed for creditors to work with vendors to
develop and install software updates, conduct testing, update training
policies, complete staff training, and educate consumers on product
offerings. These commenters' recommendations for the length of the
implementation period ranged from 12 months to 24 months. One of these
industry commenters did not recommend a specific timeframe but stated
that implementation would, on average, take from six months to 12
months depending on the size and complexity of both the vendor and
creditor--or even up to 18 months depending on the overall complexity
of the final rule, the timing of its effective date, and its impact on
key operations such as underwriting. Another of these industry
commenters requested at least one year for implementation while also
stating that: Many creditors needed more than a year to implement the
January 2013 Final Rule; a longer implementation period might avoid
wasted time and expense if the regulation is changed again as a result
of the 2020 elections; and small-to-mid-size creditors need more
implementation time than larger creditors. Several industry
commenters--including the commenter that generally supported the
proposed effective date--stated that, in particular, the APR
calculation for certain ARMs under proposed Sec. 1026.43(e)(2)(vi)
would require a significant (but unspecified) amount of implementation
time.
As noted above, this final rule adopts a mandatory compliance date
of July 1, 2021. This date is approximately six months after the date
the Bureau expects this final rule to be published in the Federal
Register. Therefore, this final rule adopts an implementation period
similar to the six-month implementation period the Bureau proposed. The
Bureau declines to adopt a longer implementation period because the
Bureau concludes that a six-month period gives creditors and the
secondary market enough time to prepare to comply with the amendments
in this final rule. For example, with respect to the price-based
thresholds in revised Sec. 1026.43(e)(2)(vi), the Bureau understands
that creditors currently calculate the APR and APOR for mortgage loans.
With respect to the consider and verify requirements in revised Sec.
1026.43(e)(2)(v), the Bureau understands that the revised consider
requirements generally reflect existing market practices and that
creditors currently use and are familiar with the verification
standards in the verification safe harbor. The Bureau also concludes
that this final rule is less complex to implement relative to other
rules the Bureau has issued, such as the January 2013 Final Rule or
TRID. The Bureau further concludes that it would be imprudent to
provide a longer than necessary implementation period based on mere
speculation that the Bureau might propose additional changes in the
future. The Bureau declines to adopt a 90-day grace period or allow
more implementation time for small-to-mid-size creditors because the
Bureau concludes, for the reasons described above, that a six-month
period gives all creditors and secondary market participants enough
time to prepare to comply with the amendments in this final rule. The
Bureau also concludes that establishing an optional early compliance
period will facilitate implementation for all creditors, including
small-to-mid-size creditors, for the reasons described below in the
discussion of the final rule.
Several industry commenters also stated that this final rule's
implementation period should generally account for other simultaneous
challenges for creditors, including responding to the COVID-19 pandemic
and its economic effects; transitioning indices away from LIBOR; \353\
and implementing the GSEs' redesigned Uniform Residential Loan
Application (URLA).\354\ One of those commenters specified that this
final rule's implementation period should extend at least six months
after the URLA's March 2021 mandatory compliance date. The Bureau
concludes that a six-month implementation period gives creditors and
secondary market participants enough time to prepare for the amendments
in this final rule, even in light of these other commitments. As stated
above, the Bureau concludes that this final rule is less complex to
implement relative to other rules, such as the January 2013 Final Rule
or TRID, and will not require significant changes to creditors'
existing practices. Moreover, the Bureau concludes that current market
conditions do not require a longer implementation period.
---------------------------------------------------------------------------

\353\ The Bureau has separately proposed to amend Regulation Z
to facilitate creditors' transition away from using LIBOR as an
index for variable-rate consumer credit products. 85 FR 36938 (June
18, 2020).
\354\ See Fannie Mae & Freddie Mac, Extended URLA Implementation
Timeline (Apr. 14, 2020), https://singlefamily.fanniemae.com/media/22661/display.
---------------------------------------------------------------------------

Several industry commenters responded to the General QM Proposal by
requesting that the Bureau establish a period during which the
Temporary GSE QM loan definition would remain in effect after the date
creditors are required to transition from the current General QM loan
definition to the revised General QM loan definition (Overlap Period).
With respect to the length of the Overlap Period, commenters suggested
periods between six months and one year. The Bureau also received
several requests for an Overlap Period in response to the Extension
Proposal, with commenters suggesting that the period last between four
months and one year. The Bureau declines to adopt an Overlap Period in
this final rule for the same reasons it declined to adopt an Overlap
Period in the Extension Final Rule. In that final rule, the Bureau
concluded that establishing an Overlap Period would keep the Temporary
GSE QM loan definition in place longer than necessary to facilitate a
smooth and orderly transition to a revised General QM loan definition
and would prolong the negative effects of the Temporary GSE QM loan
definition on the mortgage market.\355\
---------------------------------------------------------------------------

\355\ 85 FR 67938, 67951 (Oct. 26, 2020).
---------------------------------------------------------------------------

In contrast with an Overlap Period, one group of industry
commenters requested an optional early compliance period during which
the revised General QM loan definition would become available, on an
optional basis, before the date creditors are required to transition
from the current General QM loan definition to the revised General QM
loan definition. The group did not specify how much earlier, in its
view, the Bureau should make the revised General QM loan definition
available. As discussed below, the Bureau concludes that establishing
an optional early compliance period will facilitate a smooth and
orderly transition to a

[[Page 86386]]

revised General QM loan definition without prolonging the negative
effects of the Temporary GSE QM loan definition.

C. The Final Rule

For the reasons discussed below (and above in response to
commenters), this final rule adopts an effective date of March 1, 2021,
and a mandatory compliance date of July 1, 2021, resulting in an
optional early compliance period between March 1, 2021 and July 1,
2021.\356\ This final rule adds new comment 43-2, which explains that,
for transactions for which a creditor received the consumer's
application on or after March 1, 2021, and prior to July 1, 2021,
creditors seeking to originate General QMs have the option of complying
with either the current General QM loan definition (i.e., the version
in effect on February 26, 2021) or the revised General QM loan
definition. This comment also explains that, for transactions for which
a creditor received the consumer's application on or after July 1,
2021, creditors seeking to originate General QMs must use the revised
General QM loan definition. Comment 43-2 also specifies the meaning of
``application'' for these purposes.
---------------------------------------------------------------------------

\356\ The Bureau's use of the term ``mandatory compliance date''
does not imply that creditors are required to use the General QM
loan definition to comply with the ATR/QM Rule's ability-to-repay
requirements. Unless a loan is eligible for QM status--such as under
Sec. 1026.43(e)(2), Sec. 1026.43(e)(5) or Sec. 1026.43(f)--a
creditor must make a reasonable and good faith determination of the
consumer's ability to repay and does not receive a presumption of
compliance.
---------------------------------------------------------------------------

The Bureau also notes that the Temporary GSE QM loan definition
will be available for transactions for which the creditor receives the
consumer's application before July 1, 2021, unless the applicable GSEs
ceases to operate under conservatorship before July 1, 2021.\357\ As
noted above, the Extension Final Rule amended Regulation Z to replace
the January 10, 2021 sunset date of the Temporary GSE QM loan
definition with a provision stating that the Temporary GSE QM loan
definition will be available only for covered transactions for which
the creditor receives the consumer's application before the mandatory
compliance date of final amendments to the General QM loan definition
in Regulation Z. Under this final rule, which amends the General QM
loan definition, that mandatory compliance date is July 1, 2021. The
Extension Final Rule did not amend the conservatorship clause in Sec.
1026.43(e)(4)(ii)(A). As a result, the Temporary GSE QM loan definition
will be available for transactions for which the creditor receives the
consumer's application before July 1, 2021, unless the applicable GSE
ceases to operate under conservatorship before July 1, 2021.
---------------------------------------------------------------------------

\357\ In that case, pursuant to the conservatorship clause, the
Temporary GSE QM loan definition would expire with respect to that
GSE on the date that GSE ceases to operate under conservatorship.
---------------------------------------------------------------------------

Consistent with the practice of other agencies in similar contexts,
the revised General QM loan definition will be incorporated into the
Code of Federal Regulations on the March 1, 2021 effective date.
Comment 43-2 clarifies that for transactions for which the creditor
receives the application on or after March 1, 2021, but prior to July
1, 2021, the creditor has the option of complying either with
Regulation Z (as interpreted by the commentary) as it is in effect
(including the amendments set forth in this final rule) or as it was in
effect on February 26, 2021, together with any amendments that become
effective other than the amendments set forth in this final rule.\358\
The Bureau concludes that this final rule will reduce uncertainty
throughout the origination process by linking the effective date and
mandatory compliance date to the date the creditor received the
consumer's application.
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\358\ The Seasoned QM Final Rule, which the Bureau is releasing
simultaneously with this final rule, has an effective date of 60
days after publication of the final rule in the Federal Register.
Unlike this final rule, there is no optional early compliance period
for the Seasoned QM Final Rule.
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The applicability of this final rule's effective date and mandatory
compliance date, as well as compliance with this final rule's revisions
to Regulation Z, is determined on a loan-by-loan basis. For example, if
a creditor receives an application for a given loan on March 1, 2021
March 1, 2021, and that loan satisfies the current General QM loan
definition (including satisfying the 43 percent DTI limit), then the
loan is eligible for General QM status--even if the loan does not
satisfy the revised General QM loan definition (e.g., exceeds the
applicable Sec. 1026.43(e)(2)(vi) pricing threshold). Similarly, if a
creditor receives an application for a different loan on March 1, 2021,
and that loan satisfies the revised General QM loan definition
(including satisfying the applicable Sec. 1026.43(e)(2)(vi) pricing
threshold), then the loan is eligible for General QM status--even if
the loan does not satisfy the current General QM loan definition (e.g.,
exceeds the 43 percent DTI limit).
As discussed above, the Bureau concludes that a mandatory
compliance date of July 1, 2021, will provide stakeholders with a
sufficient amount of time--approximately six months--to prepare to
implement the revised General QM loan definition. While the Bureau
proposed an effective date that would vary based on the date of
publication in the Federal Register, the Bureau concludes that using a
date certain for the mandatory compliance date (July 1, 2021) will
facilitate implementation of this final rule by allowing stakeholders
to begin preparing to implement by a particular date (i.e., no later
than July 1, 2021) as soon as the Bureau issues this final rule, rather
than when the Federal Register publishes the final rule some days
later.
The Bureau has decided to adopt an optional early compliance period
starting on March 1, 2021 (i.e., to allow creditors to begin using the
revised General QM loan definition for applications received on or
after the March 1, 2021 effective date). In the General QM Proposal,
the Bureau stated that it did not intend to issue a final rule early
enough for it to take effect before April 1, 2021. With this statement,
the Bureau sought to reassure creditors and other market participants
that creditors seeking to originate General QMs would not be required
to discontinue using the existing General QM loan definition or to
implement the revised General QM loan definition before April 1,
2021.\359\ In the proposal, the Bureau expected that this would occur
on the final rule's effective date, because the proposal did not
provide for an optional early compliance period with a separate
mandatory compliance date. In contrast, under this final rule,
creditors may continue using the existing General QM loan definition or
wait to implement the revised General QM loan definition, should they
wish to do so, until the rule's mandatory compliance date, which is
July 1, 2021. This mandatory compliance date of July 1, 2021 is
consistent with the Bureau's expectation, at the proposal stage, that

[[Page 86387]]

creditors seeking to originate General QMs would not be required to
implement the revised General QM loan definition before April 1, 2021
(as creditors have the option of waiting until July 1, 2021).
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\359\ In the Extension Proposal, which the Bureau released
concurrently with the General QM Proposal, the Bureau proposed to
extend the Temporary GSE QM loan definition until the effective date
of a final rule amending the General QM loan definition. See supra
part III.C. Thus, when the Bureau issued the General QM Proposal, it
expected that the Temporary GSE QM loan definition would expire on
the effective date of this final rule, along with the current
General QM loan definition (unless one or both of the GSEs were to
cease to operate under conservatorship prior to the effective date).
However, the Extension Final Rule extended the Temporary GSE QM loan
definition until the mandatory compliance date, not the effective
date, of a final rule amending the General QM loan definition. As a
result, the Temporary GSE QM loan definition will be available until
the mandatory compliance date of this final rule (July 1, 2021),
unless one or both of the GSEs cease to operate under
conservatorship prior to July 1, 2021. See supra part III.D.
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The Bureau further concludes that the flexibility afforded under
the optional early compliance period may help creditors implement the
provisions of the final rule more quickly and easily. To the extent
that large creditors are more likely to avail themselves of optional
early compliance, the Bureau notes that small-to-mid-size correspondent
lenders will also benefit, as they often wait for larger wholesale
creditors to implement a rule before finalizing their own
implementation strategy to ensure their systems are compatible with the
wholesale creditors.
New comment 43-2 clarifies that, for transactions subject to TRID,
creditors determine the date the creditor received the consumer's
application, for purposes of this comment, in accordance with the TRID
definition of application in Sec. 1026.2(a)(3)(ii). This new comment
also clarifies that, for transactions that are not subject to TRID,
creditors can determine the date the creditor received the consumer's
application, for purposes of this comment, in accordance with either
Sec. 1026.2(a)(3)(i) or (ii).
As discussed in the Extension Final Rule,\360\ Regulation Z
contains two definitions of ``application.'' Section 1026.2(a)(3)(i)
defines ``application'' as the submission of a consumer's financial
information for the purposes of obtaining an extension of credit. This
definition applies to all transactions covered by Regulation Z. Section
1026.2(a)(3)(ii) also contains a more specific definition of
``application.'' Under this definition, for transactions subject to
Sec. 1026.19(e), (f), or (g)--i.e., transactions subject to TRID--an
application consists of the submission of the consumer's name, the
consumer's income, the consumer's social security number to obtain a
credit report, the property address, an estimate of the value of the
property, and the mortgage loan amount sought. The more specific
definition of application in Sec. 1026.2(a)(3)(ii) applies not just
for purposes of TRID, but extends to all transactions subject to TRID.
Therefore, for transactions that are subject to the ATR/QM Rule and
that are also subject to TRID, the Bureau concludes that the more
specific definition applies for purposes of the ATR/QM Rule as well.
However, for transactions that are subject to the ATR/QM Rule but that
are not subject to TRID, the Bureau finds that there may be ambiguity
as to when the creditor received the consumer's application for
purposes of the effective date of the revised General QM loan
definition, optional compliance provision, and mandatory compliance
date.\361\ This potential ambiguity arises because the general
definition of application in Sec. 1026.2(a)(3)(i) is less precise than
the TRID definition.
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\360\ 85 FR 67938, 67952 (Oct. 26, 2020).
\361\ The ATR/QM Rule generally applies to closed-end consumer
credit transactions that are secured by a dwelling, as defined in 12
CFR 1026.2(a)(19), including any real property attached to a
dwelling. 12 CFR 1026.43(a). Therefore, the Rule applies to a
dwelling, as defined in Sec. 1026.19(a), whether or not it is
attached to real property. In contrast, TRID generally applies to
closed-end consumer credit transactions secured by real property or
a cooperative unit. 12 CFR 1026.19(e)(1)(i). Therefore, some
transactions that are a secured by a dwelling that is not considered
real property under State or other applicable law will be subject to
the ATR/QM Rule but not TRID.
---------------------------------------------------------------------------

To address this potential ambiguity, new comment 43-2 clarifies
that, for transactions that are not subject to TRID, creditors can
determine the date the creditor received the consumer's application,
for purposes of this comment, in accordance with either Sec.
1026.2(a)(3)(i) or (ii). The Bureau concludes that this clarification
is appropriate because it will facilitate compliance with this final
rule by reducing uncertainty throughout the origination process.

VIII. Dodd-Frank Act Section 1022(b) Analysis

A. Overview

As discussed above, this final rule amends the General QM loan
definition to, among other things, remove the specific DTI limit and
add pricing thresholds. In developing this final rule, 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 this final rule with prudential, market, or systemic
objectives administered by such agencies as required by section
1022(b)(2)(B) of the Dodd-Frank Act.
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 \362\ and NMDB \363\ data, as well 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 this final 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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\362\ 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., Mortgage data
(HMDA), https://www.consumerfinance.gov/data-research/hmda/.
\363\ The NMDB, jointly developed by the FHFA and the Bureau,
provides de-identified loan characteristics and performance
information for a 5 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.)
---------------------------------------------------------------------------

The data the Bureau relied upon provided detailed information on
the number, characteristics, pricing, and performance of mortgage loans
originated in recent years. As discussed above, commenters provided
some supplemental data and estimates 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 data
provided by commenters show a strong positive

[[Page 86388]]

relationship between rate spread over APOR and delinquency rates,
similar to the relationship shown in the Bureau's analyses of 2002-2008
data and 2018 data.
The data do not provide information on creditor costs. As a result,
analyses of any impacts of this final rule on creditor costs,
particularly realized costs of implementing 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.
Finally, a group of consumer advocate commenters submitted a joint
letter arguing that because the mortgage finance market is in flux, any
assumptions made regarding the impact of pricing as an adequate
substitute for more direct measures of ability to repay are rendered
uncertain by the current economic conditions, and thus the Bureau
should refrain from revising the General QM definition. In the
proposal, the Bureau acknowledged the importance of economic
disruptions and mortgage market changes due to the COVID-19 pandemic.
However, the Bureau did not receive data or evidence from commenters
that would lead it to anticipate that market changes or other
circumstances will significantly alter its estimates of the benefits
and costs of this final rule. These commenters also stated that the
Bureau must fulfill its statutory obligation ``to study ability-to-
repay'' before amending the General QM definition. However, the Bureau
has already done so by completing the Assessment Report and through its
monitoring of the performance of mortgage loans and the availability of
mortgage credit.
Description of the Baseline
The Bureau considers the benefits, costs, and impacts of this final
rule against the baseline in which the Bureau takes no action and the
Temporary GSE QM loan definition expires when the GSEs cease to operate
under conservatorship. Under this final rule, creditors that wish to
originate General QMs will be required to comply with the amended
General QM loan definition either at the time or after the Temporary
GSE QM loan definition expires, depending on whether the GSEs remain in
conservatorship on the mandatory compliance date of this final rule. As
a result, this final rule'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. While there
is not a fixed date on which the Temporary GSE QM loan definition will
expire in the absence of this final rule, the Bureau anticipates that
the GSEs will cease to operate under conservatorship in the foreseeable
future and the baseline will occur at that time. Unless described
otherwise, estimated loan counts under the baseline, final rule, 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, under the baseline in which the
Temporary GSE QM loan definition expires, there are two main types of
conventional loans that would be affected: Over-43-Percent-DTI \364\
GSE loans and GSE-eligible loans without appendix Q-required
documentation. These loans are currently originated as QMs due to the
Temporary GSE QM loan definition but would not be originated as General
QMs, and may not be originated at all, if the Temporary GSE QM loan
definition were to expire without this final rule's amendments to the
General QM loan definition. This section 1022 analysis refers to these
loans as potentially displaced loans.
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\364\ The Assessment Report, the ANPR, the Extension Proposal,
the General QM Proposal, and the Extension Final Rule used the term
``High-DTI loans'' to refer to loans with DTI ratios over 43
percent. For greater precision and because this final rule is
eliminating the 43 percent DTI limit, this final rule instead uses
the term ``Over-43-Percent-DTI loans'' to refer to such loans.
---------------------------------------------------------------------------

The proposal's analysis of the potential market impact of the
Temporary GSE QM loan definition's expiration cited data and analysis
from the Bureau's ANPR, as described below. None of the comments on the
proposal challenged the data or analysis from the ANPR or the proposal
related to the potential market impacts of the Temporary GSE QM loan
definition's expiration. The Bureau concludes that the data and
analysis in the proposal and ANPR provide a well-supported estimate of
the potential impact of the Temporary GSE QM loan definition's
expiration for this final rule.
Over-43-Percent-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.\365\ 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 DTI ratios
above 43 percent. This final rule refers to these loans as Over-43-
Percent-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.\366\ 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.\367\ Of those 3.12 million loans, the Bureau estimated that 31
percent--approximately 957,000 loans--had DTI ratios greater than 43
percent.\368\ 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 Over-43-Percent-DTI GSE loans.\369\
This estimate does not include Temporary GSE QMs that were eligible for
purchase by the GSEs but were not sold to the GSEs.
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\365\ 84 FR 37155, 37158-59 (July 31, 2019).
\366\ Id. at 37158-59.
\367\ Id. at 37159.
\368\ 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.
\369\ Id. at 37159.
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Loans Without Appendix Q-Required Documentation That Are Otherwise
GSE-Eligible. In addition to Over-43-Percent-DTI GSE loans, the Bureau
noted that an additional, smaller number of Temporary GSE QMs 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.\370\ These loans would also likely be affected once the Temporary
GSE QM loan definition expires. The Bureau understands, from extensive
public feedback and its own experience, that appendix Q does not

[[Page 86389]]

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 irregular or unusual income streams.\371\ 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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\370\ 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 Over-43-Percent-DTI GSE loans.
\371\ 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 63, at 200.
---------------------------------------------------------------------------

The Bureau's analysis of the market under the baseline focuses on
Over-43-Percent-DTI GSE loans because the Bureau estimates that most
potentially displaced loans are Over-43-Percent-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
requirements and are not Over-43-Percent-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.\372\ Further, the
Assessment Report found evidence of only a limited reduction in the
approval rate of self-employed applicants for non-GSE eligible
mortgages.\373\ 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 Over-43-Percent-DTI GSE loans.
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\372\ 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.'').
\373\ 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 2 percentage points . . . .'').
---------------------------------------------------------------------------

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 QMs 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 QMs 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.\374\
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\374\ See part V.B for additional discussion of concerns raised
about appendix Q.
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B. Benefits and Costs to Covered Persons and Consumers

1. Benefits to Consumers
The primary benefit to consumers of this final rule is increased
access to credit, largely through the expanded availability of Over-43-
Percent-DTI conventional QMs. Given the large number of consumers who
obtain Over-43-Percent-DTI GSE loans rather than available
alternatives, including loans from the private non-QM market and FHA
loans, such Over-43-Percent-DTI conventional QMs may be preferred due
to their pricing, underwriting requirements, or other features. Based
on HMDA data, the Bureau estimates that 959,000 Over-43-Percent-DTI
conventional loans in 2018 would fall outside the QM definitions under
the baseline, but fall within this final rule's amended General QM loan
definition.\375\ In addition, some consumers who would have been
limited in the amount they could borrow due to the DTI limit under the
baseline will likely be able to obtain larger mortgages at higher DTI
levels.
---------------------------------------------------------------------------

\375\ 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 Over-
43-Percent-DTI GSE loans may instead be originated as FHA loans. Thus,
under this final rule, any price advantage of GSE or other conventional
QMs over FHA loans will be a realized benefit to consumers. Based on
the Bureau's analysis of 2018 HMDA data, FHA loans comparable to the
loans received by Over-43-Percent-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 ratio. 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 LTV ratios
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.\376\ 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 LTV ratios exceeding 85 percent.\377\ 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 959,000 additional loans
falling within the amended General QM loan definition would be made as
FHA loans in the absence of this final rule, the average of the upfront
pricing estimates results in total savings for consumers of roughly $4
billion per year on upfront costs.\378\ The total savings or costs over
the life of the loan based on APR differences

[[Page 86390]]

would vary substantially across borrowers depending on credit scores,
LTV ratios, 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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\376\ The Bureau expects consumers could continue to obtain FHA
loans where such loans were cheaper or preferred for other reasons.
\377\ 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 percent.
\378\ This approximation assumes $4,000 in savings from total
loan costs for all 959,000 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 this final rule, some of these potentially
displaced consumers, 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 this final rule. However, under the baseline, some potentially
displaced consumers may not obtain loans, and thus will experience
benefits of credit access under this final rule. As discussed above,
the Assessment Report found that the January 2013 Final Rule eliminated
between 63 and 70 percent of home purchase loans with DTI ratios above
43 percent that were not Temporary GSE QMs.\379\
---------------------------------------------------------------------------

\379\ See Assessment Report supra note 63, at 10-11, 117, 131-
47.
---------------------------------------------------------------------------

This final rule will also benefit those consumers with incomes
difficult to verify using appendix Q to obtain General QM status, as
this final rule's General QM amendments will no longer require the use
of appendix Q for verification of income. Under this final rule--as
under the current rule--creditors will 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). This
final rule also states that a creditor complies with the General QM
requirement to verify income, assets, debt obligations, alimony, and
child support if it complies with verification requirements in
standards the Bureau specifies. The greater flexibility of verification
standards allowed under this final rule is likely to reduce effort and
costs for these consumers, and in the most difficult cases in which
consumers' documentation cannot satisfy appendix Q, this final rule
will allow consumers to obtain General QMs rather than potential FHA or
non-QM alternatives. These consumers--likely including self-employed
borrowers and those with non-traditional forms of income--will likely
benefit from cost savings under this final rule, similar to those for
High-DTI consumers discussed above.
Finally, as noted below under ``Costs to consumers,'' the Bureau
estimates that 25,000 low-DTI conventional loans which are QM under the
baseline will fall outside the amended QM definition under this final
rule, due to exceeding the pricing thresholds in 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 will
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
This final rule's primary benefit to covered persons, specifically
mortgage creditors, is the expanded profits from originating Over-43-
Percent DTI conventional QMs. 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 QMs. Creditors' current
preference for originating large numbers of Over-43-Percent-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 loans). Moreover, QMs--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 5 percent of the credit risk of the
security, which adds significant cost. As a result, this final rule
conveys benefits to mortgage creditors originating Over-43-Percent-DTI
conventional QMs on each of these dimensions.
In addition, for those lower-DTI GSE loans that could satisfy
General QM requirements, creditors may realize cost savings from
underwriting loans using the more flexible verification standards
allowed under this final rule compared with using appendix Q. Under
this final rule, creditors will be required to consider DTI or residual
income in addition to income or assets other than the value of the
dwelling and debts but will not need to comply with the appendix Q
standards required for General QMs under the baseline. For conventional
consumers unable to provide documentation compatible with appendix Q,
this final rule allows such loans to continue receiving QM status,
providing comparable benefits to creditors as described for Over-43-
Percent-DTI GSE loans above.
Finally, creditors with business models that rely most heavily on
originating Over-43-Percent-DTI GSE loans will likely see a competitive
benefit from the continued ability to originate such loans as General
QMs. Under the baseline, creditors that primarily originate FHA or
private non-QM loans likely would have gained market share at the
expense of creditors originating many Over-43-Percent-DTI GSE loans.
The final rule will prevent this shift from occurring, which is
effectively a transfer in market share to the creditors originating
many Over-43-Percent-DTI GSE loans.
3. Costs to Consumers
As discussed above, relative to the baseline, the Bureau estimates
that 959,000 additional Over-43-Percent-DTI loans could be originated
as General QMs under this final rule. Some of these loans would have
been non-QM loans (if originated) under the baseline. As a result, this
final rule is likely to increase the number of consumers who become
delinquent on QMs, 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 provide historical early delinquency rates
for loans under different combinations of DTI ratio and rate spread.
Under this final rule, conventional loans originated with rate spreads
below 2.25 percentage points and DTI above 43 percent will 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 that between 8,000 and 58,000 additional General QMs
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.\380\ 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

[[Page 86391]]

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.
---------------------------------------------------------------------------

\380\ In the proposal, the Bureau stated that 8,000 to 59,000
additional loans annually would become delinquent within two years
of origination under the proposal. The Bureau's has revised its
range of estimates under the proposal to 8,000 to 56,000.
---------------------------------------------------------------------------

For the estimated 25,000 consumers obtaining low-DTI General QM or
Temporary GSE QMs priced 2.25 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 above. Others may be able to
obtain General QMs priced below 2.25 percentage points over APOR due to
creditor responses to this final rule or obtain loans under the Small
Creditor QM definition. However, some consumers may not be able to
obtain a mortgage at all.
In addition, this final rule reduces the scope of the non-QM market
relative to the baseline, which could slow the development of new non-
QM loan products which may have become available under the baseline. To
the extent that some consumers would prefer some of these products to
conventional QMs due to pricing, verification flexibility, or other
advantages, the delay of their development will be a cost to consumers
of this final rule.
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 Over-43-Percent-DTI General QM originations may lead to
increased risk of credit losses. However, some of this increased risk
may be offset by lender pricing responses. Further, 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 that manage the portfolios) may
recognize and respond to this incentive to different degrees, this
final 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 will depend on the scrutiny
that investors are willing and able to give to the non-QM loans under
the baseline that become QMs (with high DTI ratios) under this final
rule. It is possible, however, that the reduction in liability under
the ATR provisions will lead to securitizations with more loans that
have a greater risk of default and credit losses.
In addition, creditors will generally no longer be able to
originate low-DTI conventional loans priced 2.25 percentage points or
higher above APOR as General QMs under this final rule.\381\ Creditors
may be able to originate some of these loans at prices below 2.25
percentage points above APOR or as non-QM loans or other types of QMs,
but in 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 will see a larger reduction in revenue.
---------------------------------------------------------------------------

\381\ The comparable thresholds are 6.5 percentage points over
APOR for loans priced under $66,156, 3.5 percentage points over APOR
for loans priced under $110,260 but at or above $66,156, and 6.5
percentage points over APOR for loans for manufactured housing
priced under $110,260.
---------------------------------------------------------------------------

This final rule also generates what are effectively transfers
between creditors relative to the baseline, reflecting reduced loan
origination volume for creditors that primarily originate FHA or
private non-QM loans and increased origination volume for creditors
that primarily originate conventional QMs. 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 this final rule.
5. Other Benefits and Costs
This final rule may limit the development of the secondary market
for non-QM mortgage loan securities. Under the baseline, loans that do
not fit within General QM requirements represent a potential new market
for non-QM loan securitizations. Thus, this final rule will reduce the
scope of the potential non-QM loan market, likely lowering total
profits and revenues for participants in the private secondary market.
This will effectively be a transfer from these non-QM loan secondary
market participants to participants in the agency or other QM secondary
markets.
6. Consideration of Alternatives
The Bureau considered potential alternatives to this final rule,
including 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 this final 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 673,000 fewer loans would have been General QM due to DTI ratios
over 45 percent, while 28,000 additional loans with rate spreads above
the final rule's QM pricing thresholds would have 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 51,000
fewer loans would have fit within the General QM loan definition due to
DTI ratios over 50 percent, while 35,000 additional loans with rate
spreads above the final rule's QM pricing thresholds would have 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 to estimate the number of loans
that would have been expected to become delinquent within the General
QM loan definition relative to this final rule. The Bureau estimates
that under an alternative DTI limit of 45 percent, 4,000 to 37,000
fewer General QMs would have become delinquent relative to this final
rule, 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 QMs would have become
delinquent relative to this final rule, due to loans priced 2.25
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 have fit
within the General QM loan definition relative to this final rule,
which would also have reduced the number of General QMs becoming
delinquent. By contrast, the estimates indicate that an alternative DTI
limit of 50 percent would have led to a comparable number of General
QMs relative to this final rule, both overall and among those that
would have become delinquent. However, consumer and creditor responses
to such alternatives, such as reducing loan amounts to lower DTI
ratios, could have increased the number of loans that would have fit
within the alternative General QM loan definitions relative to this
final rule.
The Bureau considered other potential alternatives to the proposed
rule, including imposing a DTI limit only for loans above a certain
pricing

[[Page 86392]]

threshold, for example a DTI limit of 50 percent for loans with rate
spreads at or above 1 percentage point. Such an alternative would have
functioned as a hybrid of this final rule 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 within the General QM
loan definition would have generally been between the Bureau's
estimates for this final rule and its estimates for the corresponding
alternative which would have maintained the higher DTI limit. Thus,
this hybrid approach would have brought fewer loans within the General
QM loan definition compared to this final rule 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 have become
delinquent.

C. Potential Impact on Depository Institutions and Credit Unions With
$10 Billion or Less in Total Assets, as Described in Section 1026

This final rule'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 VIII.B.4 (Costs to Covered Persons),
depository creditors originating portfolio loans may forgo potential
market share gains that would occur under the baseline. In addition,
depository creditors with $10 billion or less in total assets that
originate portfolio loans can originate Over-43-Percent-DTI Small
Creditor QMs under the rule. These depository creditors may currently
rely less on the Temporary GSE QM loan definition for originating Over-
43-Percent-DTI loans. If the expiration of the Temporary GSE QM loan
definition in the absence of this final rule would confer a competitive
advantage to these small creditors in their origination of Over-43-
Percent-DTI loans, this final rule will 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 Over-43-Percent-DTI GSE loans as QMs. Under the baseline, these
creditors would be limited to originating GSE loans as QMs only with
DTI ratios 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 QMs. This final rule will 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.\382\
---------------------------------------------------------------------------

\382\ Alternative approaches, such as retaining a DTI limit of
45 or 50 percent, would have had similar effects of allowing small
depository creditors to 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 QMs.
---------------------------------------------------------------------------

D. Potential Impact on Rural Areas

This final rule'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 Over-43-Percent-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).\383\ In addition, the Bureau estimates that
in 2018, 94.6 percent of conventional purchase loans originated for
homes in rural areas would have been QMs under this final rule, similar
to the Bureau's estimate for all conventional purchase loans in rural
and non-rural areas (96.3 percent).\384\
---------------------------------------------------------------------------

\383\ 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
Over-43-Percent-DTI conventional purchase non-rural loans (33.3
percent) report being sold to other non-GSE purchasers compared to
rural loans (22.3 percent).
\384\ For alternative approaches, the Bureau estimates 83.3
percent of conventional purchase loans for homes in rural areas
would have been QMs under a DTI limit of 45 percent, and 95.1
percent of conventional purchase loans for homes in rural areas
would have been QMs under a DTI limit of 50 percent.
---------------------------------------------------------------------------

IX. 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.\385\
---------------------------------------------------------------------------

\385\ 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).
---------------------------------------------------------------------------

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).\386\ 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.\387\
---------------------------------------------------------------------------

\386\ 5 U.S.C. 603 through 605.
\387\ 5 U.S.C. 609.
---------------------------------------------------------------------------

In the proposal, the Bureau certified that an IRFA was not required
because the proposal, if adopted, would not have a SISNOSE. The Bureau
did not receive comments on its analysis of the impact of the proposal
on small entities. As the below analysis makes clear, relative to the
baseline, this final rule has only one sizeable adverse effect. Certain
loans with DTI ratios under 43 percent that would otherwise be
originated as rebuttable presumption QMs under the baseline will be
non-QM loans under this final rule. This final rule will 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 and amendments to the Rule's
requirements to consider and verify income, assets, debt obligations,
alimony, and child support. 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 this final rule has any adverse impact
on originations relative to the baseline. Note that under the baseline,
the category of Temporary GSE QMs no longer exists. The Bureau has
identified five categories of small entities that may be subject to
this final rule: 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.\388\
---------------------------------------------------------------------------

\388\ 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 63, at 78. The HMDA data do not
directly distinguish mortgage brokers from mortgage companies, so
the more inclusive revenue threshold is used.

---------------------------------------------------------------------------

[[Page 86393]]

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 QMs 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 has 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 QMs or rebuttable presumption QMs, 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 QMs: A loan with APR
within 1.5 percentage points of APOR that can be originated as a safe
harbor QM under the baseline can be originated as a safe harbor QM
under the pricing conditions of this final rule. Similarly, the
addition of the pricing conditions has no adverse impact on the ability
of small creditors to originate rebuttable presumption QMs with APR
between 1.5 percentage points and 2.25 percentage points over APOR. The
addition of the pricing conditions will, however, prevent small
creditors from originating rebuttable presumption QMs with APR 2.25
percentage points or more over APOR. In the SISNOSE analysis below, the
Bureau conservatively assumes that none of these loans will be
originated.

Type III: First-Liens That Are Small Loans

Under the baseline, small entities can originate these loans as
General QMs if they have DTI ratios at or below the DTI limit of 43
percent. This final rule's amended General QM loan definition preserves
QM status for some smaller, low-DTI loans priced 2.25 percentage points
or more over APOR. Specifically, loans under $66,156 with APR less than
6.5 percentage points over APOR and loans under $110,260 with APR less
than 3.5 percentage points over APOR can be originated as General QMs,
assuming they meet all other General QM requirements.\389\ This final
rule will prevent small creditors from originating smaller, low-DTI
loans with APR at or above these higher thresholds as General QMs. For
the SISNOSE analysis below, the Bureau conservatively assumes that none
of these loans will be originated.
---------------------------------------------------------------------------

\389\ In addition, all loans for manufactured housing under
$110,260 with APR less than 6.5 percentage points over APOR can be
originated as General QMs, assuming they meet all other General QM
requirements.
---------------------------------------------------------------------------

Type IV: Closed-End Subordinate-Liens

Under the baseline, small entities can originate these loans as
General QMs if they have DTI ratios at or below the DTI limit of 43
percent. This final rule's amended General QM loan definition creates
new pricing thresholds for subordinate-lien originations. Subordinate-
lien loans under $66,156 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 QMs, assuming
they meet all other General QM requirements. The final rule will
prevent small creditors from originating low-DTI, subordinate-lien
loans with APR at or above these thresholds as General QMs. For the
SISNOSE analysis below, the Bureau conservatively assumes that none of
these loans will 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 this final rule if it
will 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, 97 small entities
would experience a loss of over 2 percent in mortgage loan origination
volume. Thus, there are at most 97 small entities that experience a
significant adverse economic impact. The Bureau estimates that there
are 2,027 small entities in the HMDA data. Ninety-seven 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 than small
HMDA reporters by the final rule. In other words, the Bureau expects
that including HMDA non-reporters in the analysis would increase the
number of small entities that will 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 will experience a significant adverse economic impact
will not be a substantial number of the overall number of small
entities that originate mortgage credit.
Accordingly, the Director certifies that this final rule will not
have a significant economic impact on a substantial number of small
entities.

X. Paperwork Reduction Act

Under the Paperwork Reduction Act of 1995 (PRA),\390\ 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.
---------------------------------------------------------------------------

\390\ 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------

The Bureau has determined that this final rule does not contain any
new or substantively revised information collection requirements other
than those previously approved by OMB under OMB control number 3170-
0015. This final rule amends 12 CFR part 1026 (Regulation Z), which
implements TILA. OMB control number 3170-0015 is the Bureau's OMB
control number for Regulation Z.

XI. Congressional Review Act

Pursuant to the Congressional Review Act,\391\ the Bureau will
submit a report containing this rule and other required information to
the U.S. Senate, the U.S. House of Representatives, and the Comptroller
General of the United States at least 60 days prior to the rule's
published effective date. The Office of Information and Regulatory
Affairs has designated this rule as a ``major rule'' as defined by 5
U.S.C. 804(2).
---------------------------------------------------------------------------

\391\ 5 U.S.C. 801 et seq.
---------------------------------------------------------------------------

XII. Signing Authority

The Director of the Bureau, Kathleen L. Kraninger, having reviewed
and approved this document, is delegating the authority to
electronically sign this document to Grace Feola, a Bureau Federal
Register Liaison, for purposes of publication in the Federal Register.

[[Page 86394]]

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 amends 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:

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 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, 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 (F) 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 $110,260 (indexed for inflation), 2.25 or more
percentage points;
(B) For a first-lien covered transaction with a loan amount greater
than or equal to $66,156 (indexed for inflation) but less than $110,260
(indexed for inflation), 3.5 or more percentage points;
(C) For a first-lien covered transaction with a loan amount less
than $66,156 (indexed for inflation), 6.5 or more percentage points;
(D) For a first-lien covered transaction secured by a manufactured
home with a loan amount less than $110,260 (indexed for inflation), 6.5
or more percentage points;
(E) For a subordinate-lien covered transaction with a loan amount
greater than or equal to $66,156 (indexed for inflation), 3.5 or more
percentage points;
(F) For a subordinate-lien covered transaction with a loan amount
less than $66,156 (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) of
this section;
(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

[[Page 86395]]

(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
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, under Section 1026.43--Minimum
Standards for Transactions Secured by a Dwelling:
0
a. Under introductory paragraph 1, add introductory paragraph 2;
0
b. Revise sections 43(b)(4) Higher-priced covered transaction, 43(c)(4)
Verification of income or assets, and 43(c)(7) Monthly debt-to-income
ratio or residual income;
0
c. Revise Paragraph 43(e)(2)(v);
0
d. Add Paragraphs 43(e)(2)(v)(A) and 43(e)(2)(v)(B) after Paragraph
43(e)(2)(v);
0
e. Revise Paragraph 43(e)(2)(vi);
0
f. Revise section 43(e)(4); and
0
g. Revise Paragraph 43(e)(5) and Paragraphs 43(f)(1)(i), 43(f)(1)(ii),
43(f)(1)(iii), 43(f)(1)(iv), 43(f)(1)(v), and 43(f)(1)(vi),.
The additions and revisions read as follows:

Supplement I to Part 1026--Official Interpretations

* * * * *

Section 1026.43--Minimum Standards for Transactions Secured by a
Dwelling

* * * * *
2. General QM Amendments Effective on March 1, 2021. The
Bureau's revisions to Regulation Z contained in Qualified Mortgage
Definition Under the Truth in Lending Act (Regulation Z): General QM
Loan Definition published on December 29, 2020 (2021 General QM
Amendments) apply with respect to transactions for which a creditor
received an application on or after March 1, 2021 (effective date).
Compliance with the 2021 General QM Amendments is mandatory with
respect to transactions for which a creditor received an application
on or after July 1, 2021 (mandatory compliance date). For a given
transaction for which a creditor received an application on or after
March 1, 2021 but prior to July 1, 2021, a person has the option of
complying either: With 12 CFR part 1026 as it is in effect; or with
12 CFR part 1026 as it was in effect on February 26, 2021, together
with any amendments to 12 CFR part 1026 that become effective after
February 26, 2021, other than the 2021 General QM Amendments. For
transactions subject to Sec. 1026.19(e), (f), or (g), creditors
determine the date the creditor received the consumer's application,
for purposes of this comment, in accordance with Sec.
1026.2(a)(3)(ii). For transactions that are not subject to Sec.
1026.19(e), (f), or (g), creditors can determine the date the
creditor received the consumer's application, for purposes of this
comment, in accordance with either Sec. 1026.2(a)(3)(i) or (ii).
* * * * *

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

[[Page 86396]]

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)

Consider. In order to comply with the requirement to consider
under Sec. 1026.43(e)(2)(v)(A), a creditor must take into account
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, debt obligations, alimony, child
support, and monthly debt-to-income ratio or residual income in its
ability-to-repay determination. A creditor must maintain written
policies and procedures for how it takes into account, pursuant to
its underwriting standards, income or assets, debt obligations,
alimony, child support, and monthly debt-to-income ratio or residual
income in its ability-to-repay determination. A creditor must also
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, including how it applied its policies and procedures,
in order to meet this requirement to consider and thereby meet the
requirements for a qualified mortgage under Sec. 1026.43(e)(2).
This documentation may include, for example, an underwriter
worksheet or a final automated underwriting system certification, in
combination with the creditor's applicable underwriting standards
and any applicable exceptions described in its policies and
procedures, 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 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), 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 manuals 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
manuals for verifying current debt obligations, alimony, and child
support 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 manuals:
A. Chapters B3-3 through B3-6 of the Fannie Mae Single Family
Selling Guide, published June 3, 2020;
B. Sections 5102 through 5500 of the Freddie Mac Single-Family
Seller/Servicer Guide, published June 10, 2020;
C. Sections II.A.1 and II.A.4-5 of the Federal Housing
Administration's Single Family Housing Policy Handbook, issued
October 24, 2019;
D. Chapter 4 of the U.S. Department of Veterans Affairs' Lenders
Handbook, revised February 22, 2019;
E. Chapter 4 of the U.S. Department of Agriculture's Field
Office Handbook for the Direct Single Family Housing Program,
revised March 15, 2019; and
F. Chapters 9 through 11 of the U.S. Department of Agriculture's
Handbook for the Single Family Guaranteed Loan Program, revised
March 19, 2020.
ii. Applicable provisions in manuals. A creditor complies with
Sec. 1026.43(e)(2)(v)(B) if it complies with requirements in the
manuals listed in comment 43(e)(2)(v)(B)-3 for creditors to verify
income, assets, debt obligations, alimony and child support using
specified reasonably reliable third-party documents or to include or
exclude particular inflows, property, and obligations as income,
assets, debt obligations, alimony, and child support.
iii. Inapplicable provisions in manuals. For purposes of
compliance with Sec. 1026.43(e)(2)(v)(B), a creditor need not
comply with requirements in the manuals listed in comment
43(e)(2)(v)(B)-3 other than those that require creditors 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 manuals. A creditor also complies with
Sec. 1026.43(e)(2)(v)(B) where it complies with revised versions of
the manuals 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 manual. A creditor
complies with Sec. 1026.43(e)(2)(v)(B) if it complies with the
verification standards in one or more of the manuals specified in
comment 43(e)(2)(v)(B)-3.i. Accordingly, a creditor may, but need

[[Page 86397]]

not, comply with Sec. 1026.43(e)(2)(v)(B) by complying with the
verification standards from more than one manual (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
$66,156 (indexed for inflation) but less than $110,260 (indexed for
inflation), for which the applicable threshold is 3.5 or more
percentage points.
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.
5. Meaning of a manufactured home. For purposes of Sec.
1026.43(e)(2)(vi)(D), manufactured home means any residential
structure as defined under regulations of the U.S. Department of
Housing and Urban Development (HUD) establishing manufactured home
construction and safety standards (24 CFR 3280.2). Modular or other
factory-built homes that do not meet the HUD code standards are not
manufactured homes for purposes of Sec. 1026.43(e)(2)(vi)(D).
6. Scope of threshold for transactions secured by a manufactured
home. The threshold in Sec. 1026.43(e)(2)(vi)(D) applies to first-
lien covered transactions less than $110,260 (indexed for inflation)
that are secured by a manufactured home and land, or by a
manufactured home only.
* * * * *

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 for which the creditor received the consumer's
application prior to July 1, 2021. 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 for
which the creditor received the consumer's application prior to the
mandatory compliance date of July 1, 2021 continue to be qualified
mortgages for the purposes of this section, including those covered
transactions that were consummated on or after July 1, 2021.
3. Mortgages for which the creditor received the consumer's
application on or after March 1, 2021 and prior to July 1, 2021. For
a discussion of the optional early compliance period for the 2021
General QM Amendments, please see comment 43-2.
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

[[Page 86398]]

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
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
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.
* * * * *

43(f)(1) Exemption

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)(ii)

1. Example. Under Sec. 1026.43(f)(1)(ii), if a qualified
mortgage provides for a balloon payment, the creditor must determine
that the consumer is able to make all scheduled payments under the
legal obligation other

[[Page 86399]]

than the balloon payment. For example, assume a loan in an amount of
$200,000 that has a five-year loan term, but is amortized over 30
years. The loan agreement provides for a fixed interest rate of 6
percent. The loan consummates on March 3, 2014, and the monthly
payment of principal and interest scheduled for the first five years
is $1,199, with the first monthly payment due on April 1, 2014. The
balloon payment of $187,308 is required on the due date of the 60th
monthly payment, which is April 1, 2019. The loan can be a qualified
mortgage if the creditor underwrites the loan using the scheduled
principal and interest payment of $1,199, plus the consumer's
monthly payment for all mortgage-related obligations, and satisfies
the other criteria set forth in Sec. 1026.43(f).
2. Creditor's determination. A creditor must determine that the
consumer is able to make all scheduled payments other than the
balloon payment to satisfy Sec. 1026.43(f)(1)(ii), in accordance
with the legal obligation, together with the consumer's monthly
payments for all mortgage-related obligations and excluding the
balloon payment, to meet the repayment ability requirements of Sec.
1026.43(f)(1)(ii). A creditor satisfies Sec. 1026.43(f)(1)(ii) if
it uses the maximum payment in the payment schedule, excluding any
balloon payment, to determine if the consumer has the ability to
make the scheduled payments.

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.

Paragraph 43(f)(1)(iv)

1. Scheduled payments. Under Sec. 1026.43(f)(1)(iv)(A), the
legal obligation must provide that scheduled payments must be
substantially equal and determined using an amortization period that
does not exceed 30 years. Balloon payments often result when the
periodic payment would fully repay the loan amount only if made over
some period that is longer than the loan term. For example, a loan
term of 10 years with periodic payments based on an amortization
period of 20 years would result in a balloon payment being due at
the end of the loan term. Whatever the loan term, the amortization
period used to determine the scheduled periodic payments that the
consumer must pay under the terms of the legal obligation may not
exceed 30 years.
2. Substantially equal. The calculation of payments scheduled by
the legal obligation under Sec. 1026.43(f)(1)(iv)(A) are required
to result in substantially equal amounts. This means that the
scheduled payments need to be similar, but need not be equal. For
further guidance on substantially equal payments, see comment
43(c)(5)(i)-4.
3. Interest-only payments. A mortgage that only requires the
payment of accrued interest each month does not meet the
requirements of Sec. 1026.43(f)(1)(iv)(A).

Paragraph 43(f)(1)(v)

1. 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 balloon-payment mortgage that will be acquired by a
purchaser pursuant to a forward commitment does not satisfy the
requirements of Sec. 1026.43(f)(1)(v), 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
purchase and sale of a balloon-payment qualified mortgage to another
person that separately meets the requirements of Sec.
1026.43(f)(1)(vi) is permitted. For example: Assume a creditor that
meets the requirements of Sec. 1026.43(f)(1)(vi) makes a balloon-
payment mortgage that meets the requirements of Sec.
1026.43(f)(1)(i) through (iv); if the balloon-payment mortgage meets
the purchase criteria of an investor with which the creditor has an
agreement to sell such loans after consummation, then the balloon-
payment mortgage does not meet the definition of a qualified
mortgage in accordance with Sec. 1026.43(f)(1)(v). However, if the
investor meets the requirement of Sec. 1026.43(f)(1)(vi), the
balloon-payment qualified mortgage retains its qualified mortgage
status.

Paragraph 43(f)(1)(vi)

1. Creditor qualifications. Under Sec. 1026.43(f)(1)(vi), to
make a qualified mortgage that provides for a balloon payment, the
creditor must satisfy three criteria that are also required under
Sec. 1026.35(b)(2)(iii)(A), (B) and (C), which require:
i. During the preceding calendar year or during either of the
two preceding calendar years if the application for the transaction
was received before April 1 of the current calendar year, the
creditor extended a first-lien covered transaction, as defined in
Sec. 1026.43(b)(1), on a property that is located in an area that
is designated either ``rural'' or ``underserved,'' as defined in
Sec. 1026.35(b)(2)(iv), to satisfy the requirement of Sec.
1026.35(b)(2)(iii)(A) (the rural-or-underserved test). Pursuant to
Sec. 1026.35(b)(2)(iv), an area is considered to be rural if it is:
A county that is neither in a metropolitan statistical area, nor a
micropolitan statistical area adjacent to a metropolitan statistical
area, as those terms are defined by the U.S. Office of Management
and Budget; a census block that is not in an urban area, as defined
by the U.S. Census Bureau using the latest decennial census of the
United States; or a county or a census block that has been
designated as ``rural'' by the Bureau pursuant to the application
process established in 2016. See Application Process for Designation
of Rural Area under Federal Consumer Financial Law; Procedural Rule,
81 FR 11099 (Mar. 3, 2016). An area is considered to be underserved
during a calendar year if, according to HMDA data for the preceding
calendar year, it is a county in which no more than two creditors
extended covered transactions secured by first liens on properties
in the county five or more times.
A. The Bureau determines annually which counties in the United
States are rural or underserved as defined by Sec.
1026.35(b)(2)(iv)(A)(1) or Sec. 1026.35(b)(2)(iv)(B) and publishes
on its public website lists of those counties to assist creditors in
determining whether they meet the criterion at Sec.
1026.35(b)(2)(iii)(A). Creditors may also use an automated tool
provided on the Bureau's public website to determine whether
specific properties are located in areas that qualify as ``rural''
or ``underserved'' according to the definitions in Sec.
1026.35(b)(2)(iv) for a particular calendar year. In addition, the
U.S. Census Bureau may also provide on its public website an
automated address search tool that specifically indicates if a
property address is located in an urban area for purposes of the
Census Bureau's most recent delineation of urban areas. For any
calendar year that begins after the date on which the Census Bureau
announced its most recent delineation of urban areas, a property is
located in an area that qualifies as ``rural'' according to the
definitions in Sec. 1026.35(b)(2)(iv) if the search results
provided for the property by any such automated address search tool
available on the Census Bureau's public website do not identify the
property as being in an urban area. A property is also located in an
area that qualifies as ``rural,'' if the Bureau has designated that
area as rural under Sec. 1026.35(b)(2)(iv)(A)(3) and published that
determination in the Federal Register. See Application Process for
Designation of Rural Area under Federal Consumer Financial Law;
Procedural Rule, 81 FR 11099 (Mar. 3, 2016).
B. For example, if a creditor extended during 2017 a first-lien
covered transaction that is secured by a property that is located in
an area that meets the definition of rural or underserved under
Sec. 1026.35(b)(2)(iv), the creditor meets this element of the
exception for any transaction consummated during 2018.
C. Alternatively, if the creditor did not extend in 2017 a
transaction that meets the definition of rural or underserved test
under Sec. 1026.35(b)(2)(iv), the creditor satisfies this criterion
for any transaction consummated during 2018 for which it received
the application before April 1, 2018, if it extended during 2016 a
first-lien covered transaction that is secured by a property that is
located in an area that meets the definition of rural or underserved
under Sec. 1026.35(b)(2)(iv).
ii. During the preceding calendar year, or, if the application
for the transaction was

[[Page 86400]]

received before April 1 of the current calendar year, during either
of the two preceding calendar years, the creditor together with its
affiliates 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, to satisfy the requirement of Sec.
1026.35(b)(2)(iii)(B).
iii. 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 covered
transactions secured by first liens, together, had total assets that
do not exceed the applicable asset threshold established by the
Bureau, to satisfy the requirement of Sec. 1026.35(b)(2)(iii)(C).
The Bureau publishes notice of the asset threshold each year by
amending comment 35(b)(2)(iii)-1.iii.

Dated: December 10, 2020.
Grace Feola,
Federal Register Liaison, Bureau of Consumer Financial Protection.
[FR Doc. 2020-27567 Filed 12-21-20; 4:15 pm]
BILLING CODE 4810-AM-P