[Federal Register Volume 85, Number 168 (Friday, August 28, 2020)]
[Proposed Rules]
[Pages 53568-53604]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-18490]
[[Page 53567]]
Vol. 85
Friday,
No. 168
August 28, 2020
Part V
Bureau of Consumer Financial Protection
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12 CFR Part 1026
Qualified Mortgage Definition Under the Truth in Lending Act
(Regulation Z): Seasoned QM Loan Definition; Proposed Rule
Federal Register / Vol. 85, No. 168 / Friday, August 28, 2020 /
Proposed Rules
[[Page 53568]]
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BUREAU OF CONSUMER FINANCIAL PROTECTION
12 CFR Part 1026
[Docket No. CFPB-2020-0028]
RIN 3170-AA98
Qualified Mortgage Definition Under the Truth in Lending Act
(Regulation Z): Seasoned QM Loan Definition
AGENCY: Bureau of Consumer Financial Protection.
ACTION: Proposed rule with request for public comment.
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SUMMARY: With certain exceptions, Regulation Z requires creditors to
make a reasonable, good faith determination of a consumer's ability to
repay any residential mortgage loan, and loans that meet Regulation Z's
requirements for ``qualified mortgages'' (QMs) obtain certain
protections from liability. Regulation Z contains several categories of
QMs, including the General QM category and a temporary category
(Temporary GSE QM loans) of loans that are eligible for purchase or
guarantee by government-sponsored enterprises (GSEs) while they are
operating under the conservatorship or receivership of the Federal
Housing Finance Agency (FHFA). The Bureau of Consumer Financial
Protection (Bureau) is issuing this proposal to create a new category
of QMs (Seasoned 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. The Bureau's
primary objective with this proposal is to ensure access to
responsible, affordable mortgage credit by adding a Seasoned QM
definition to the existing QM definitions.
DATES: Comments must be received on or before September 28, 2020.
ADDRESSES: You may submit comments, identified by Docket No. CFPB-2020-
0028 or RIN 3170-AA98, by any of the following methods:
Federal eRulemaking Portal: https://www.regulations.gov.
Follow the instructions for submitting comments.
Email: 2020-NPRM-SeasonedQM@cfpb.gov. Include Docket No.
CFPB-2020-0028 or RIN 3170-AA98 in the subject line of the message.
Mail/Hand Delivery/Courier: Comment Intake--Seasoned QM,
Bureau of Consumer Financial Protection, 1700 G Street NW, Washington,
DC 20552. Please note that due to circumstances associated with the
COVID-19 pandemic, the Bureau discourages the submission of comments by
mail, hand delivery, or courier.
Instructions: The Bureau encourages the early submission of
comments. All submissions should include the agency name and docket
number or Regulatory Information Number (RIN) for this rulemaking.
Because paper mail in the Washington, DC area and at the Bureau is
subject to delay, and in light of difficulties associated with mail and
hand deliveries during the COVID-19 pandemic, commenters are encouraged
to submit comments electronically. In general, all comments received
will be posted without change to https://www.regulations.gov. In
addition, once the Bureau's headquarters reopens, comments will be
available for public inspection and copying at 1700 G Street NW,
Washington, DC 20552, on official business days between the hours of 10
a.m. and 5 p.m. Eastern Time. At that time, you can make an appointment
to inspect the documents by telephoning 202-435-9169.
All comments, including attachments and other supporting materials,
will become part of the public record and subject to public disclosure.
Proprietary information or sensitive personal information, such as
account numbers or Social Security numbers, or names of other
individuals, should not be included. Comments will not be edited to
remove any identifying or contact information.
FOR FURTHER INFORMATION CONTACT: Eliott C. Ponte or Ruth Van
Veldhuizen, Counsels, or Joan Kayagil, Amanda Quester, Jane Raso, 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 Proposed Rule
The Ability-to-Repay/Qualified Mortgage Rule (ATR/QM Rule or Rule)
requires a creditor to make a reasonable, good faith determination of a
consumer's ability to repay a residential mortgage loan according to
its terms. Loans that meet the Rule's requirements for qualified
mortgages (QMs) obtain certain protections from liability. The Bureau
is issuing this proposal to create a new category of QMs (Seasoned 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.
The Bureau believes that a Seasoned QM definition could complement
existing QM definitions and help ensure access to responsible,
affordable mortgage credit upon the expiration of one of the existing
QM definitions. One QM category defined in the Rule is the General QM
loan category. General QM loans must comply with the Rule's
prohibitions on certain loan features, its points-and-fees limits, and
its underwriting requirements. Under the definition for General QM
loans currently in effect, the ratio of the consumer's total monthly
debt to total monthly income (DTI) ratio must not exceed 43 percent. A
second, temporary category of QM loans defined in the Rule consists of
mortgages that (1) comply with the same loan-feature restrictions and
points-and-fees limits as General QM loans and (2) are eligible to be
purchased or guaranteed by the GSEs while under the conservatorship of
the FHFA (Temporary GSE QM loans). Under the Rule, the Temporary GSE QM
loan definition expires with respect to each GSE when that GSE exits
conservatorship or on January 10, 2021, whichever comes first.
In a separate proposal (Extension Proposal) released in June
2020,\1\ the Bureau proposed to extend the Temporary GSE QM loan
definition to expire upon the effective date of final amendments to the
General QM loan definition or when the GSEs exit conservatorship,
whichever comes first. In another proposal (General QM Proposal) \2\
released simultaneously with the Extension Proposal, the Bureau
proposed the amendments to the General QM loan definition that are
referenced in the Extension Proposal.
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\1\ 85 FR 41448 (July 10, 2020).
\2\ 85 FR 41716 (July 10, 2020).
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The Bureau is issuing this proposal to create a new category of QMs
because it seeks to encourage safe and responsible innovation in the
mortgage origination market, including for certain loans that are not
QMs or are only rebuttable presumption QMs under the existing QM
categories. The Bureau preliminarily concludes that it is appropriate
to presume compliance with the ability-to-repay (ATR) requirements when
such loans season in the manner set forth in the proposal. Under the
proposal, a covered transaction would receive a safe harbor from ATR
liability at the end of a 36-month seasoning period as a Seasoned QM if
it satisfies certain product
[[Page 53569]]
restrictions, points-and-fees limits, and underwriting requirements,
and it meets performance and portfolio requirements during the
seasoning period. Specifically, a covered transaction would have to
meet the following product restrictions to be eligible to become a
Seasoned QM:
1. The loan is secured by a first lien;
2. The loan has a fixed rate, with fully amortizing payments and no
balloon payment;
3. The loan term does not exceed 30 years; and
4. The total points and fees do not exceed specified limits.
For a loan to be eligible to become a Seasoned QM, the proposal
would require that the creditor consider the consumer's DTI ratio or
residual income and verify the consumer's debt obligations and income.
Similar to provisions in the Rule that create a QM category for certain
portfolio loans originated by certain small creditors (Small Creditor
QM definition), the proposal would not specify a DTI limit, nor would
it require the creditor to use appendix Q to Regulation Z in
calculating and verifying debt and income.
Under the proposal, a loan generally would only be eligible to
season if the creditor holds it in portfolio until the end of the
seasoning period. The proposed portfolio requirements are similar to
those that apply to Small Creditor QMs under the Rule.
In order to become Seasoned QMs, loans would have to meet certain
performance requirements at the end of the seasoning period.
Specifically, seasoning would be available only for covered
transactions that have no more than two delinquencies of 30 or more
days and no delinquencies of 60 or more days at the end of the
seasoning period. Funds taken from escrow in connection with the
covered transaction and funds paid on behalf of the consumer by the
creditor, servicer, or assignee of the covered transaction (or any
other person acting on their behalf) would not be considered in
assessing whether a periodic payment has been made or is delinquent for
purposes of the proposal. Creditors could, however, generally accept
deficient payments within a payment tolerance of $50 on up to three
occasions during the seasoning period without triggering a delinquency
for purposes of the proposal.
The proposal generally defines the seasoning period as a period of
36 months beginning on the date on which the first periodic payment is
due after consummation.\3\ Failure to make full contractual payments
would not disqualify a loan from eligibility to become a Seasoned QM if
the consumer is in a temporary payment accommodation extended in
connection with a disaster or pandemic-related national emergency, as
long as certain conditions are met. However, time spent in such a
temporary accommodation would not count towards the 36-month seasoning
period, and the seasoning period could only resume after the temporary
accommodation if any delinquency is cured either pursuant to the loan's
original terms or through a qualifying change as defined in the
proposal.\4\
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\3\ However, if there is a delinquency of 30 days or more at the
end of the final month of the seasoning period, the seasoning period
would be extended until there is no delinquency.
\4\ The proposal defines a qualifying change as an agreement
entered into during or after a temporary payment accommodation
extended in connection with a disaster or pandemic-related national
emergency that ends any preexisting delinquency and meets certain
other conditions to ensure the loan remains affordable.
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The Bureau proposes that a final rule relating to this proposal
would take effect on the same date as a final rule amending the General
QM definition. In the General QM Proposal, the Bureau proposed that the
effective date of a final rule relating to the General QM Proposal
would be six months after publication in the Federal Register. The
revised regulations would apply to covered transactions for which
creditors receive an application on or after the effective date, which
aligns with the approach the Bureau proposed to take in the General QM
Proposal. The Bureau requests comment on this proposed effective date
for a final rule relating to this proposal.
Comments on the General QM Proposal should be filed on the docket
for that proposal, which closes on September 8, 2020, including
comments on the specific subject of whether anything in this proposal
affects how the Bureau should finalize the General QM Proposal.
Comments on that specific subject may also be submitted to this docket,
but any other comments concerning the General QM Proposal will be
considered outside of the scope of and will not be considered in this
rulemaking.
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) \5\ amended the Truth in Lending Act (TILA) \6\ to
establish, among other things, ATR requirements in connection with the
origination of most residential mortgage loans.\7\ 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.'' \8\ 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.\9\
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\5\ Public Law 111-203, 124 Stat. 1376 (2010).
\6\ 15 U.S.C. 1601 et seq.
\7\ Dodd-Frank Act sections 1411-12, 1414, 124 Stat. 2142-49; 15
U.S.C. 1639c.
\8\ 15 U.S.C. 1639b(a)(2).
\9\ 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.\10\ A creditor, however,
may not be certain whether its ATR determination is reasonable in a
particular case, and it risks liability if a court or an agency,
including the Bureau, later concludes that the ATR determination was
not reasonable.\11\
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\10\ 15 U.S.C. 1639c(a)(3).
\11\ A creditor that violates this ATR requirement may be
subject to government enforcement and private actions. Generally,
the statute of limitations for a private action for damages for a
violation of the ATR requirement is three years from the date of the
occurrence of the violation. 15 U.S.C. 1640(e). TILA also provides
that if a creditor, an assignee, other holder or their agent
initiates a foreclosure action, a consumer may assert a violation by
the creditor of the ATR requirement as a matter of defense by
recoupment or set off without regard for the time limit on a private
action for damages. 15 U.S.C. 1640(k).
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TILA addresses this uncertainty by defining a category of loans--
called QMs--for which a creditor ``may presume that the loan has met''
the ATR requirements.\12\ The statute generally
[[Page 53570]]
defines a QM to mean any residential mortgage loan for which:
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\12\ 15 U.S.C. 1639c(b)(1).
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There is no negative amortization, interest-only payments,
or balloon payments;
The loan term does not exceed 30 years;
The total points and fees generally do not exceed 3
percent of the loan amount;
The income and assets relied upon for repayment are
verified and documented;
The underwriting uses a monthly payment based on the
maximum rate during the first five years, uses a payment schedule that
fully amortizes the loan over the loan term, and takes into account all
mortgage-related obligations; and
The loan complies with any guidelines or regulations
established by the Bureau relating to the ratio of total monthly debt
to monthly income or alternative measures of ability to pay regular
expenses after payment of total monthly debt.\13\
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\13\ 15 U.S.C. 1639c(b)(2)(A).
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B. The Ability-to-Repay/Qualified Mortgage Rule
In January 2013, the Bureau issued the ATR/QM Rule, which amended
Regulation Z to implement TILA's ATR requirements (January 2013 Final
Rule).\14\ The Rule became effective on January 10, 2014, and the
Bureau amended it several times through 2016.\15\ The ATR/QM Rule
implements the statutory ATR provisions discussed above and defines
several categories of QM loans.\16\
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\14\ 78 FR 6408 (Jan. 30, 2013).
\15\ 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).
\16\ 12 CFR 1026.43(c), (e).
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1. General QM Loans
One category of QM loans defined by the Rule consists of ``General
QM loans.'' A loan is a General QM loan if:
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; \17\
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\17\ 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; \18\
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\18\ 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; \19\ and
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\19\ 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.\20\
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\20\ 12 CFR 1026.43(e)(2)(vi).
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Appendix Q contains standards for calculating and verifying debt
and income for purposes of determining whether a mortgage satisfies the
43 percent DTI limit for General QM loans. 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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\21\ 12 CFR 1026, appendix Q.
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On June 22, 2020, the Bureau proposed amendments to the General QM
definition, which would, among other things, replace the General QM
loan definition's 43 percent DTI limit with a price-based threshold and
remove appendix Q.\22\ In addition to soliciting comment on the
Bureau's proposed price-based approach, the Bureau requested comment on
certain alternative approaches that would retain a DTI limit but would
raise it above the current limit of 43 percent and provide a more
flexible set of standards for verifying debt and income in place of
appendix Q.
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\22\ 85 FR 41716 (July 10, 2020).
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2. Temporary GSE QM Loans
A second, temporary category of QM loans defined by the Rule,
Temporary GSE QM loans, consists of mortgages that (1) comply with the
Rule's prohibitions on certain loan features and its limitations on
points and fees; \23\ and (2) are eligible to be purchased or
guaranteed by either GSE while under the conservatorship of the
FHFA.\24\ Unlike for General QM loans, Regulation Z does not prescribe
a DTI limit for Temporary GSE QM loans. Thus, a loan can qualify as a
Temporary GSE QM loan even if the DTI ratio exceeds 43 percent, as long
as the DTI ratio meets the applicable GSE's DTI requirements and other
underwriting criteria. In addition, income and debt for such loans, and
DTI ratios, generally are verified and calculated using GSE standards,
rather than appendix Q. The Temporary GSE QM loan category--also known
as the GSE Patch--is scheduled to expire with respect to each GSE when
that GSE exits conservatorship or on January 10, 2021, whichever comes
first.\25\ On June 22, 2020, the Bureau proposed to extend the
Temporary GSE QM category to expire upon the effective date of final
amendments to the General QM definition or when the GSEs exit
conservatorship or receivership, whichever comes first.\26\
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\23\ 12 CFR 1026.43(e)(2)(i) through (iii).
\24\ 12 CFR 1026.43(e)(4).
\25\ 12 CFR 1026.43(e)(4)(iii)(B). The ATR/QM Rule created
several additional categories of QM loans. The first additional
category consisted of mortgages eligible to be insured or guaranteed
(as applicable) by the U.S. Department of Housing and Urban
Development, the U.S. Department of Veterans Affairs, the U.S.
Department of Agriculture, and the Rural Housing Service. 12 CFR
1026.43(e)(4)(ii)(B) through (E). This temporary category of QM
loans no longer exists because the relevant Federal agencies have
since issued their own QM rules. See, e.g., 24 CFR 203.19. Other
categories of QM loans provide more flexible standards for certain
loans originated by certain small creditors. 12 CFR 1026.43(e)(5),
(f); cf. 12 CFR 1026.43(e)(6) (applicable only to covered
transactions for which the application was received before April 1,
2016).
\26\ 85 FR 41448 (July 10, 2020).
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3. Small Creditor QM Loans
In a May 2013 final rule, the Bureau amended the ATR/QM Rule to
add, among other things, a new QM category--the Small Creditor QM--for
covered transactions that are originated by creditors that meet certain
size criteria and that satisfy certain other requirements.\27\ Those
requirements include many that apply to General QM loans, with some
exceptions. Specifically, the threshold for determining whether Small
Creditor QM loans are higher-priced covered transactions, and thus
qualify for the QM safe harbor or rebuttable presumption, is higher
than the threshold for General QM loans.\28\ Small Creditor QM loans
also are not subject to the General QM definition's 43 percent DTI
limit, and the creditor is not required to use appendix Q to calculate
debt and income.\29\ In addition, Small Creditor QM loans must be held
in portfolio for three years (a requirement that does not apply to
apply to General QM loans).\30\ The Bureau made several amendments to
the Small Creditor QM
[[Page 53571]]
provisions in 2015.\31\ These included: Amending the small creditor
definition to increase the number of loans a small creditor can
originate each year to 2,000; exempting from the 2,000-loan limit any
loans held in the creditor's portfolio; and revising the small creditor
definition's asset threshold to include the assets of any of the
creditor's affiliates.\32\
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\27\ 78 FR 35430 (June 12, 2013).
\28\ QMs are generally considered to be higher priced if they
have an annual percentage rate (APR) that exceeds the applicable
average prime offer rate (APOR) by at least 1.5 percentage points
for first-lien loans and at least 3.5 percentage points for
subordinate-lien loans. In contrast, Small Creditor QM loans are
only considered higher priced if the APR exceeds APOR by at least
3.5 percentage points for either a first- or subordinate-lien loan.
12 CFR 1026.43(b)(4). The same is true for another QM definition
that permits certain creditors operating in rural or underserved
areas to originate QMs with a balloon payment provided that the
loans meet certain other criteria (Balloon Payment QM loans). QMs
that are higher priced enjoy only a rebuttable presumption of
compliance with the ATR requirements, whereas QMs that are not
higher priced enjoy a safe harbor.
\29\ 12 CFR 1026.43(e)(5)(i)(A).
\30\ 12 CFR 1026.43(e)(5)(ii), (f)(2).
\31\ 80 FR 59944 (Oct. 2, 2015).
\32\ As with Small Creditor QM loans, Balloon Payment QM loans
must be held in portfolio for three years. In addition, Balloon
Payment QM loans may not have negative-amortization or interest-only
features and must comply with the points and fees limits that apply
to other QM loans. Also, Balloon Payment QM loans must carry a fixed
interest rate, payments other than the balloon must fully amortize
the loan over 30 years or less, and the loan term must be at least
five years. The creditor must also determine the consumer's ability
to make periodic payments other than the balloon and verify income
and assets. See 12 CFR 1026.43(f).
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The Bureau created the Small Creditor QM category based on its
determination that the characteristics of a small creditor--its small
size, community-based focus, and commitment to relationship lending--
and the inherent incentives associated with portfolio lending together
justify extending QM status to loans that do not meet all of the
ordinary QM criteria.\33\ With respect to the role of portfolio
lending, the Bureau stated that the discipline imposed when small
creditors make loans that they will hold in portfolio is important to
protect consumers' interests and to prevent evasion.\34\ The Bureau
noted that by retaining mortgage loans in portfolio, creditors retain
the risk of delinquency or default on those loans, and as such the
presence of portfolio lending within the small creditor market is an
important influence on such creditors' underwriting practices.\35\
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\33\ 78 FR 35430, 35485 (June 12, 2013) (``The Bureau believes
that Sec. 1026.43(e)(5) will preserve consumers' access to credit
and, because of the characteristics of small creditors and portfolio
lending described above, the credit provided generally will be
responsible and affordable.'').
\34\ Id. at 35486.
\35\ Id. at 35430.
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C. Economic Growth, Regulatory Relief, and Consumer Protection Act
The Economic Growth, Regulatory Relief, and Consumer Protection Act
(EGRRCPA) was signed into law on May 24, 2018.\36\ Section 101 of the
EGRRCPA amended TILA to provide protection from liability for insured
depository institutions and insured credit unions with assets below $10
billion with respect to certain ATR requirements regarding residential
mortgage loans.\37\ Specifically, the protection from liability is
available if a loan: (1) Is originated by and retained in portfolio by
the institution,\38\ (2) complies with requirements regarding
prepayment penalties and points and fees, and (3) does not have any
negative amortization or interest-only features. Further, for the
protection from liability to apply, the institution must consider and
document the debt, income, and financial resources of the consumer.
Section 101 of the EGRRCPA also provides that the safe harbor is not
available in the event of legal transfer except for transfers (1) to
another person by reason of bankruptcy or failure of a covered
institution; (2) to a covered institution that retains the loan in
portfolio; (3) in the event of a merger or acquisition as long as the
loan is still retained in portfolio by the person to whom the loan is
sold, assigned or transferred; or (4) to a wholly owned subsidiary of a
covered institution, provided that, after the sale, assignment, or
transfer, the loan is considered to be an asset of the covered
institution for regulatory accounting purposes.
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\36\ Public Law 115-174, 132 Stat. 1296 (2018).
\37\ EGRRCPA section 101 (15 U.S.C. 1639c(b)(2)(F)).
\38\ EGRRCPA's legislative history contains the following
testimony from Senator Pat Toomey with respect to the portfolio
requirement: ``[I]f the bank is keeping the loan on its own books,
then it should be obvious to everyone that the bank has every
incentive to make sure the loan is made to someone who can repay
it.'' 164 Cong. Rec. S1719-20 (daily ed. Mar. 14, 2018).
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D. General QM Proposal
On June 22, 2020, the Bureau proposed to amend the General QM loan
definition because it was concerned that retaining the existing General
QM loan definition with the 43 percent DTI limit after the Temporary
GSE QM loan definition expired would significantly reduce the size of
the QM market and could significantly reduce access to responsible,
affordable credit.\39\ Readers should refer to that proposed rule for a
full discussion of the proposed amendments and the Bureau's rationale
for them. In summary, in that proposed rule, the Bureau proposed a
price-based General QM loan definition to replace the DTI-based
approach because it preliminarily concluded that a loan's price, as
measured by comparing a loan's annual percentage rate (APR) to the
average prime offer rate (APOR) for a comparable transaction, is a
strong indicator of a consumer's ability to repay and is a more
holistic and flexible measure of a consumer's ability to repay than DTI
alone.
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\39\ 85 FR 41716 (July 10, 2020).
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Under the General QM Proposal, a loan would meet the General QM
loan definition in Sec. 1026.43(e)(2) only if the APR exceeds APOR for
a comparable transaction by less than 2 percentage points as of the
date the interest rate is set. The proposal would provide higher
thresholds for loans with smaller loan amounts and for subordinate-lien
transactions. The proposal would retain the existing product-feature
and underwriting requirements and limits on points and fees. Although
the General QM Proposal would remove the 43 percent DTI limit from the
General QM loan definition, the proposal would require that the
creditor consider and verify the consumer's income or assets, debt
obligations, alimony, child support, and monthly DTI ratio or residual
income. The proposal would remove appendix Q. To mitigate the
uncertainty that may result from appendix Q's removal, the proposal
would clarify the requirements to consider and verify a consumer's
income, assets, debt obligations, alimony, and child support. The
proposal would preserve the current threshold separating safe harbor
from rebuttable presumption QMs, under which a loan is a safe harbor QM
if its APR exceeds APOR for a comparable transaction by less than 1.5
percentage points as of the date the interest rate is set (or by less
than 3.5 percentage points for subordinate-lien transactions).
The Bureau proposed a price-based approach to replace the specific
DTI limit because it was concerned that imposing a DTI limit as a
condition for QM status under the General QM loan definition may be
overly burdensome and complex in practice and may unduly restrict
access to credit because it provides an incomplete picture of the
consumer's financial capacity. In particular, the Bureau was concerned
that conditioning QM status on a specific DTI limit may impair access
to responsible, affordable credit for some consumers for whom it might
be appropriate to presume ability to repay their loans at consummation.
For the reasons set forth in the General QM 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.
In addition, the Bureau requested comment on certain alternative
approaches that would retain a DTI limit but would raise it above the
current limit of 43 percent and provide a more flexible set of
standards for verifying debt and income in place of appendix Q.
[[Page 53572]]
E. Presumption of Compliance for Existing Categories of QM Loans Under
the Rule
In the January 2013 Final Rule, the Bureau considered whether QM
loans should receive a conclusive presumption (i.e., a safe harbor) or
a rebuttable presumption of compliance with the ATR requirements.\40\
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.\41\ 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.\42\ The Bureau 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.'' \43\
---------------------------------------------------------------------------
\40\ 78 FR 6408, 6511 (Jan. 30, 2013).
\41\ Id. at 6507.
\42\ Id. at 6511.
\43\ Id. at 6514.
---------------------------------------------------------------------------
Under the Rule, a creditor that makes a QM loan is protected from
liability presumptively or conclusively, depending on whether the loan
is ``higher priced.'' The Rule generally defines a ``higher-priced''
loan to mean a first-lien mortgage with an APR that exceeded APOR for a
comparable transaction as of the date the interest rate was set by 1.5
or more percentage points; or a subordinate-lien mortgage with an APR
that exceeded APOR for a comparable transaction as of the date the
interest rate was set by 3.5 or more percentage points.\44\ A creditor
that makes a QM loan that is not ``higher priced'' is entitled to a
conclusive presumption that it has complied with the Rule--i.e., the
creditor receives a safe harbor from liability.\45\ A creditor that
makes a loan that meets the standards for a QM loan but is ``higher
priced'' is entitled to a rebuttable presumption that it has complied
with the Rule.\46\
---------------------------------------------------------------------------
\44\ 12 CFR 1026.43(b)(4).
\45\ 12 CFR 1026.43(e)(1)(i).
\46\ 12 CFR 1026.43(e)(1)(ii).
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F. The Bureau's Assessment of the Ability-to-Repay/Qualified Mortgage
Rule
Section 1022(d) of the Dodd-Frank Act requires the Bureau to assess
each of its significant rules and orders and to publish a report of
each assessment within five years of the effective date of the rule or
order.\47\ In June 2017, the Bureau published a request for information
in connection with its assessment of the ATR/QM Rule (Assessment
RFI).\48\ These comments are summarized in general terms in part III
below.
---------------------------------------------------------------------------
\47\ 12 U.S.C. 5512(d).
\48\ 82 FR 25246 (June 1, 2017).
---------------------------------------------------------------------------
In January 2019, the Bureau published its ATR/QM Rule Assessment
Report (Assessment Report).\49\ 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 loan originations.
---------------------------------------------------------------------------
\49\ Bureau of Consumer Fin. Prot., Ability to Repay and
Qualified Mortgage Assessment Report (Jan. 2019) (Assessment
Report), https://files.consumerfinance.gov/f/documents/cfpb_ability-to-repay-qualified-mortgage_assessment-report.pdf.
---------------------------------------------------------------------------
The Assessment Report found that the Rule did not eliminate access
to credit for high-DTI consumers--i.e., consumers with DTI ratios above
43 percent--who qualify for loans eligible for purchase or guarantee by
either of the GSEs, that is, Temporary GSE QM loans.\50\ On the other
hand, based on application-level data obtained from nine large
creditors, the Assessment Report found that the Rule eliminated between
63 and 70 percent of high-DTI home purchase loans that were not
Temporary GSE QM loans.\51\
---------------------------------------------------------------------------
\50\ See, e.g., id. at 10, 194-96.
\51\ See, e.g., id. at 10-11, 117, 131-47.
---------------------------------------------------------------------------
One main finding about Temporary GSE QM loans was that such loans
continued to represent a ``large and persistent'' share of originations
in the conforming segment of the mortgage market.\52\ As discussed, the
GSEs' share of the conventional, conforming purchase-mortgage market
was large before the ATR/QM Rule, and the Assessment Report found a
small increase in that share since the Rule's effective date, reaching
71 percent in 2017.\53\ The Assessment Report noted that, at least for
loans intended for sale in the secondary market, creditors generally
offer a Temporary GSE QM loan even when a General QM loan could be
originated.\54\
---------------------------------------------------------------------------
\52\ 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.
\53\ Id. at 191.
\54\ Id. at 192.
---------------------------------------------------------------------------
The continued prevalence of Temporary GSE QM loan originations is
contrary to the Bureau's expectation at the time it issued the ATR/QM
Rule in 2013.\55\ The Assessment Report discussed several possible
reasons for the continued prevalence of Temporary GSE QM loan
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 QM loans
instead of originating loans under the General QM loan definition.\56\
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.\57\ ANPR commenters also expressed concern
with appendix Q and stated that the Temporary GSE QM loan definition
has benefited creditors and consumers by enabling creditors to
originate QMs without having to use appendix Q.
---------------------------------------------------------------------------
\55\ Id. at 13, 190, 238.
\56\ Id. at 193.
\57\ Id. at 193-94.
---------------------------------------------------------------------------
The Assessment Report noted that a second possible reason for the
continued prevalence of Temporary GSE QM loans is that the GSEs were
able to accommodate the demand for mortgages above the General QM loan
definition's DTI limit of 43 percent as the DTI ratio distribution in
the market shifted upward.\58\ 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.\59\ 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.\60\ The available data
suggest that such high-DTI lending has declined in the non-GSE market
relative to the GSE market.\61\ The non-GSE market has constricted even
with respect to highly qualified consumers; those with higher incomes
and higher credit scores are representing a greater share of
denials.\62\
---------------------------------------------------------------------------
\58\ Id. at 194.
\59\ Id.
\60\ Id. at 194-95.
\61\ Id. at 119-20.
\62\ Id. at 153.
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[[Page 53573]]
The Assessment Report found that a third possible reason for the
persistence of Temporary GSE QM loans is the structure of the secondary
market.\63\ If creditors adhere to the GSEs' guidelines, they gain
access to a robust, highly liquid secondary market.\64\ In contrast,
while private market securitizations have grown somewhat in recent
years, their volume is still a fraction of their pre-crisis levels.\65\
There were less than $20 billion in new origination private-label
securities (PLS) issuances in 2017, compared with $1 trillion in
2005,\66\ and only 21 percent of new origination PLS issuances in 2017
were non-QM issuances.\67\ To the extent that private securitizations
have occurred since the ATR/QM Rule took effect in 2014, the majority
of new origination PLS issuances have consisted of prime jumbo loans
made to consumers with strong credit characteristics, and these
securities have a low share of non-QM loans.\68\ The Assessment Report
noted that the Temporary GSE QM loan definition may itself be
inhibiting the growth of the non-QM market.\69\ 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-QMs, which do not have a
presumption of compliance with the ATR requirements, or if creditors
were unwilling or lack the funding to make the loans.\70\
---------------------------------------------------------------------------
\63\ Id. at 196.
\64\ Id.
\65\ Id.
\66\ Id.
\67\ Id. at 197.
\68\ Id. at 196.
\69\ Id. at 205.
\70\ Id.
---------------------------------------------------------------------------
The Bureau expects that each of these features of the mortgage
market that concentrate lending within the Temporary GSE QM loan
definition will largely persist through the current January 10, 2021
sunset date.
G. Effects of the COVID-19 Pandemic on Access to Mortgage Credit
The COVID-19 pandemic has had a significant effect on the U.S.
economy. Economic activity has contracted, some businesses have
partially or completely closed, and millions of workers have become
unemployed. The pandemic has also affected mortgage markets and has
resulted in a contraction of mortgage credit availability for many
consumers, including those that would be dependent on the non-QM market
for financing. While nearly all major non-QM creditors ceased making
loans in March and April, beginning in May, issuers of non-agency MBS
began to test the market with deals collateralized by non-QM loans
largely originated prior to the crisis. Moreover, several non-QM
creditors--which largely depend on the ability to sell loans in the
secondary market to fund new loans--have begun to resume originations,
albeit with a tighter credit box.\71\ For further discussion of the
effect of the COVID-19 pandemic on mortgage origination markets, see
part II.D of the General QM Proposal.\72\
---------------------------------------------------------------------------
\71\ Brandon Ivey, Citadel, Verus Resume Originating Non-QMs
(Aug. 7, 2020), https://www.insidemortgagefinance.com/articles/218819-citadel-verus-resume-originating-non-qms (on file).
\72\ 85 FR 41716, 41721-23 (July 10, 2020).
---------------------------------------------------------------------------
III. The Rulemaking Process
The Bureau has solicited and received substantial public and
stakeholder input on issues related to the ATR/QM Rule generally and
seasoning of loans specifically in connection with that rule. In
addition to the Bureau's discussions with and communications from
industry stakeholders, consumer advocates, other Federal agencies,\73\
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).\74\ The input
from these RFIs and from the ANPR is briefly summarized in the General
QM Proposal and Extension Proposal and below.
---------------------------------------------------------------------------
\73\ The Bureau has consulted with agencies including the FHFA,
the Board of Governors of the Federal Reserve System, the Federal
Housing Administration, the Federal Deposit Insurance Corporation
(FDIC), the Office of the Comptroller of the Currency (OCC), the
Federal Trade Commission, the National Credit Union Administration,
and the U.S. Department of the Treasury.
\74\ 84 FR 37155 (July 31, 2019).
---------------------------------------------------------------------------
A. The Requests for Information (RFIs)
In June 2017, the Bureau published an RFI in connection with the
Assessment Report (Assessment RFI).\75\ In response to the Assessment
RFI, the Bureau received approximately 480 comments from creditors,
industry groups, consumer advocacy groups, and individuals.\76\ The
comments addressed a variety of topics, including the General QM loan
definition and the 43 percent DTI limit; perceived problems with, and
potential changes and alternatives to, appendix Q; and how the Bureau
should address the expiration of the Temporary GSE QM loan definition.
The comments expressed a range of ideas for addressing the expiration
of the Temporary GSE QM loan definition, from making the definition
permanent, to applying the definition to other mortgage products, to
extending it for various periods of time, or some combination of those
suggestions. Other comments stated that the Temporary GSE QM loan
definition should be eliminated or permitted to expire.
---------------------------------------------------------------------------
\75\ 82 FR 25246 (June 1, 2017).
\76\ See Assessment Report, supra note 49, 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.\77\ As part of
the call for evidence, the Bureau published RFIs relating to, among
other things, the Bureau's rulemaking process,\78\ the Bureau's adopted
regulations and new rulemaking authorities,\79\ and the Bureau's
inherited regulations and inherited rulemaking authorities.\80\ In
response to the call for evidence, the Bureau received comments on the
ATR/QM Rule from stakeholders, including consumer advocacy groups and
industry groups. The comments addressed a variety of topics, including
the General QM loan definition, appendix Q, and the Temporary GSE QM
loan definition. The comments also raised concerns about, among other
things, the risks of allowing the Temporary GSE QM loan definition to
expire without any changes to the General QM loan definition or
appendix Q. The concerns raised in these comments were similar to those
raised in response to the Assessment RFI.
---------------------------------------------------------------------------
\77\ 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).
\78\ 83 FR 10437 (Mar. 9, 2018).
\79\ 83 FR 12286 (Mar. 21, 2018).
\80\ 83 FR 12881 (Mar. 26, 2018).
---------------------------------------------------------------------------
B. The Advance Notice of Proposed Rulemaking
As noted above, on July 25, 2019, the Bureau issued an ANPR. The
ANPR stated the Bureau's tentative plans to allow the Temporary GSE QM
loan definition to expire in January 2021 or after a short extension,
if necessary, to facilitate a smooth and orderly transition away from
the Temporary GSE QM loan definition. The Bureau also stated that it
was considering whether to propose revisions to the General QM loan
definition in light of the potential expiration of the Temporary GSE QM
loan definition and requested comments on several topics related to the
General QM loan definition. These topics included: (1) Whether and how
the Bureau should
[[Page 53574]]
revise the DTI limit in the General QM loan definition; (2) whether the
Bureau should supplement or replace the DTI limit with another method
for directly measuring a consumer's personal finances; (3) whether the
Bureau should revise appendix Q or replace it with other standards for
calculating and verifying a consumer's debt and income; and (4)
whether, instead of a DTI limit, the Bureau should adopt standards that
do not directly measure a consumer's personal finances.\81\ Of
relevance to this proposal, the ANPR noted that some stakeholders had
suggested that the Bureau amend the ATR/QM Rule so that a performing
loan, whether or not it qualified as a QM at consummation, would
convert to, or season into, a QM if it performed for some period of
time. The Bureau also requested comment on how much time industry would
need to change its practices in response to any changes the Bureau
makes to the General QM loan definition.
---------------------------------------------------------------------------
\81\ 84 FR 37155, 37155, 37160-62 (July 31, 2019).
---------------------------------------------------------------------------
The Bureau received 85 comments on the ANPR from businesses in the
mortgage industry (including creditors and their trade associations),
consumer advocacy groups, elected officials, individuals, and research
centers. The General QM Proposal contains an overview of these
comments.\82\ Of the 85 comments received, approximately 20 comments
discussed whether the Bureau should permit a mortgage that was not a QM
at consummation to season into a QM on the ground that a loan's
performance over an extended period should be considered sufficient or
conclusive evidence that the creditor adequately assessed a consumer's
ability to repay at consummation. The discussion below provides a more
detailed overview of comment letters that supported a seasoning
approach to QM status and those that opposed such an approach.
---------------------------------------------------------------------------
\82\ 85 FR 41716 (July 10, 2020).
---------------------------------------------------------------------------
1. Comments Supporting Seasoning
As discussed in the General QM Proposal, commenters from the
mortgage industry and its trade associations, as well as several
research centers, recommended that a mortgage that is originated as a
non-QM or rebuttable presumption QM should be eligible to season into a
QM safe harbor loan if a consumer makes timely payments for a
predetermined length of time. According to these commenters, when a
loan defaults after performing for some period of time, such as three
or five years, it is reasonable to conclude that the default was not
caused by the creditor's failure to reasonably determine the consumer
had the ability to repay at the time of origination. Rather, these
commenters maintained that defaults in those cases are more likely to
be caused by unexpected life events or other factors, such as general
economic trends, rather than a creditor's poor underwriting or failure
to make an ATR determination at consummation.
A few commenters pointed to the GSEs' representation and warranty
framework,\83\ which after a loan meets certain payment requirements
provides the creditor relief from the enforcement of representations
and warranties it must make to a GSE regarding its underwriting, as
precedent for seasoning. These commenters indicated that a creditor's
legal exposure to the ATR requirements should sunset in a similar way.
In addition, several commenters noted that the 2019 U.S. Department of
the Treasury Housing Reform Plan report also suggested consideration of
a seasoning approach to QM safe harbor loan status.\84\ A few
commenters asserted that allowing mortgages to season into QM loans is
consistent with comment 43(c)(1)-1.ii.A.1 in the current ATR/QM
Rule.\85\ A comment letter jointly submitted by two research centers
suggested that a seasoning approach to portfolio-held mortgages build
on the EGRRCPA's portfolio loan QM category.
---------------------------------------------------------------------------
\83\ The GSEs' representation and warranty framework is
discussed in greater detail in part V below.
\84\ U.S. Department of the Treasury, Housing Reform Plan 38
(Sept. 2019), https://home.treasury.gov/system/files/136/Treasury-Housing-Finance-Reform-Plan.pdf?mod=article_inline.
\85\ Comment 43(c)(1)-1.ii.A (``The following may be evidence
that a creditor's ability-to-repay determination was reasonable and
in good faith: 1. The consumer demonstrated actual ability to repay
the loan by making timely payments, without modification or
accommodation, for a significant period of time after consummation
or, for an adjustable-rate, interest-only, or negative-amortization
mortgage, for a significant period of time after recast . . . .'').
---------------------------------------------------------------------------
Further, a number of commenters stated their belief that a
seasoning approach to QM status would benefit the mortgage market.
Among other things, they stated that it could reduce compliance burden.
Additionally, commenters in support of seasoning suggested that
seasoning could improve investor confidence by addressing the issue of
assignee liability and litigation risk with non-QMs and rebuttable
presumption QMs. These commenters stated that this, in turn, could
enhance capital liquidity in the market, which could expand access to
credit. Several commenters suggested that a seasoning rule should apply
to loans even if they were originated before the adoption of the rule.
Commenters supporting a seasoning approach offered differing views
on the appropriate length of the seasoning period, varying from as
brief as 12 months following consummation to as long as five years
following consummation. Some opposed any restrictions on loan features,
while others supported some restrictions, such as limiting the
seasoning approach to mortgages that follow the statutory QM product
prohibitions or to fixed-rate mortgage products. Several commenters
supporting a seasoning approach also supported or did not oppose a
requirement for creditors to hold loans in portfolio until the
conclusion of the seasoning period. For example, some research center
commenters noted that keeping loans in portfolio demonstrates
creditors' acceptance of the default risk associated with the loan.
Some research center commenters suggested graduated or step
approaches. Under one such approach, for example, a non-QM loan would
first have to season into a rebuttable presumption QM loan and then
either stay in that category or be allowed to season into a QM safe
harbor loan if it meets certain conditions. Commenters supporting
seasoning generally acknowledged that delinquencies during the
seasoning period should disqualify a loan from seasoning into a QM, but
most did not offer specific suggestions regarding what it means for a
loan to be performing. A comment letter from a research center
suggested the Bureau use the Mortgage Bankers Association's method for
determining timely payments.
Several commenters supporting a seasoning approach also addressed
the possibility of creditors engaging in gaming to minimize defaults
during the seasoning period. Two commenters asserted that the Bureau
could require consumers to use their own funds to make monthly payments
but did not provide any suggestions on how to determine what
constitutes such funds. A research center commenter suggested that a
competitive guarantor market such as the one the U.S. Department of the
Treasury envisions in the long term would serve as a check on gaming by
creditors. The same commenter also argued that it would be hard for
creditors to game a seasoning approach because they would not be able
to easily time harmful mortgages to go delinquent only after a given
period following consummation.
2. Comments Opposing Seasoning
Two coalitions of consumer advocacy groups submitted separate
comment
[[Page 53575]]
letters opposing a seasoning approach to QM status. The General QM
Proposal described some of their concerns, including the following: (1)
A period of successful repayment is insufficient to presume
conclusively that the creditor reasonably determined ability to repay
at consummation; (2) creditors would engage in gaming to minimize
defaults during the seasoning period; and (3) seasoning would
inappropriately prevent consumers from raising lack of ability to repay
as a defense to foreclosure. In addition, the consumer advocacy groups
asserted that, depending on the length of the seasoning period,
seasoning could inappropriately prevent consumers from bringing
affirmative claims against creditors for allegedly violating the ATR
requirements. One coalition of consumer advocacy groups stated that in
providing a three-year statute of limitations for consumers to bring
such claims, Congress had indicated that the seasoning period could not
be less than three years for rebuttable presumption or non-QM loans.
Another coalition of consumer advocacy groups stated that the three-
year statute of limitations may be extended if equitable tolling
applies and, as such, consumers may pursue affirmative claims for
alleged violations of the ATR requirements beyond the three-year
period. Both coalitions of consumer advocacy groups stated that non-QMs
and QMs that only receive a rebuttable presumption of compliance with
the ATR requirements at consummation should not be allowed to season
into QM safe harbor loans because the right a consumer has to raise the
lack of ability to repay as a defense to foreclosure is not subject to
the three-year statute of limitations.
The consumer advocacy groups also stated that certain types of
mortgages should never be allowed to season into QMs, including
adjustable-rate mortgages and mortgages with product features that
disqualify them from being a QM loan currently (e.g., interest-only and
negative-amortization mortgages). With respect to adjustable-rate
mortgages, the consumer advocacy groups expressed concern that the fact
that a consumer can remain current during an initial teaser-rate period
or during a low-interest rate environment does not mean that the
consumer has the ability to repay the loan when the interest rate
rises. One coalition of consumer advocacy groups noted that consumers
may not have the ability to repay interest-only or negative-
amortization mortgages after the teaser rate payment period ends and
stated that payment shock from higher future payments is inherent in
the structure of these mortgage products.
In contrast to industry commenters who argued that allowing loans
to season into QMs would promote access to credit and improve market
liquidity, consumer advocacy groups suggested that providing a QM
seasoning definition would not benefit market liquidity and could hurt
underserved communities. They asserted that a seasoning rule would
prevent creditors from originating loans with certainty about who
ultimately bears the credit and liquidity risk and what their
litigation risk will eventually be. They further asserted that the
uncertainty created by such risks has a greater, negative impact on
independent mortgage bankers without large balance sheets that are an
important source of credit for underserved communities. One coalition
of consumer advocacy groups also asserted that a heightened risk of
material put-backs with mortgages not originated as QMs would create
significant liquidity and credit risks for creditors, particularly non-
depository creditors important to fully serving the market.
Lastly, the consumer advocacy groups challenged the Bureau's
authority to amend the definition of QM to provide seasoning as a
pathway to QM status, asserting that seasoning would facilitate, not
prevent, circumvention or evasion of the statute's ATR requirements.
They stated that consumers can resort to extraordinary measures to stay
current on mortgage payments to stay in their homes, such as foregoing
spending on necessities; drawing down retirement accounts; borrowing
money from family and friends; going without food, medicine, or
utilities; or taking on other types of debt (such as credit card debt).
These commenters stated that, as a result, even mortgages that were not
affordable at consummation can perform for a long period of time. The
consumer advocacy groups further cited examples to show that mortgages
can default due to unforeseen events. One coalition of consumer
advocacy groups noted that the timing of default often reflects broader
economic conditions, given the procyclical nature of the mortgage
market.
C. June 2020 Proposals
On June 22, 2020, the Bureau issued the Extension Proposal, which
would extend the Temporary GSE QM loan definition to expire upon the
effective date of final amendments to the General QM loan definition or
when the GSEs exit conservatorship, whichever comes first.\86\ On the
same date, the Bureau also separately proposed amendments to the
General QM loan definition in the General QM Proposal.\87\ Those
proposed amendments are discussed in part II.D above.
---------------------------------------------------------------------------
\86\ 85 FR 41448 (July 10, 2020).
\87\ 85 FR 41716 (July 10, 2020).
---------------------------------------------------------------------------
IV. Legal Authority
The Bureau is proposing to amend Regulation Z pursuant to its
authority under TILA and the Dodd-Frank Act. Section 1061 of the Dodd-
Frank Act transferred to the Bureau the ``consumer financial protection
functions'' previously vested in certain other Federal agencies,
including the Board of Governors of the Federal Reserve System (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.'' \88\ 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.\89\
---------------------------------------------------------------------------
\88\ 12 U.S.C. 5581(a)(1)(A).
\89\ 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.\90\ 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.'' \91\
Additionally, a purpose of TILA sections 129B and 129C is to assure
that consumers are offered and receive residential mortgage loans on
terms that
[[Page 53576]]
reasonably reflect their ability to repay the loans and that are
understandable and not unfair, deceptive, or abusive.\92\ As discussed
in the section-by-section analysis below, the Bureau is proposing to
issue certain provisions of this proposed rule pursuant to its
rulemaking, adjustment, and exception authority under TILA section
105(a).
---------------------------------------------------------------------------
\90\ 15 U.S.C. 1604(a).
\91\ 15 U.S.C. 1601(a).
\92\ 15 U.S.C. 1639b(a)(2).
---------------------------------------------------------------------------
TILA section 129C(b)(2)(A)(vi). 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).\93\ As discussed in the section-by-section analysis
below, the Bureau is proposing to issue certain provisions of this
proposed rule pursuant to its authority under TILA section
129C(b)(2)(A)(vi).
---------------------------------------------------------------------------
\93\ 15 U.S.C. 1639c(b)(2)(A).
---------------------------------------------------------------------------
TILA section 129C(b)(3)(A) and (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.\94\ In addition, TILA section
129C(b)(3)(A) directs the Bureau to prescribe regulations to carry out
the purposes of TILA section 129C(b).\95\ As discussed in the section-
by-section analysis below, the Bureau is proposing to issue certain
provisions of this proposed rule pursuant to its authority under TILA
section 129C(b)(3)(B)(i).
---------------------------------------------------------------------------
\94\ 15 U.S.C. 1639c(b)(3)(B)(i).
\95\ 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.\96\ TILA and
title X of the Dodd-Frank Act are Federal consumer financial laws.
Accordingly, the Bureau is proposing to exercise its authority under
Dodd-Frank Act section 1022(b) to prescribe rules that carry out the
purposes and objectives of TILA and title X and prevent evasion of
those laws.
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\96\ 12 U.S.C. 5512(b)(1).
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V. Why the Bureau Is Issuing This Proposal
The Bureau is issuing this proposal to introduce an alternative
pathway to a QM safe harbor because it seeks to encourage safe and
responsible innovation in the mortgage origination market, including
for loans that may be originated as non-QM loans but meet certain
underwriting conditions, product restrictions, and performance
requirements. The Bureau is proposing this alternative definition
because it preliminarily concludes that many loans made to creditworthy
consumers that do not fall within the existing safe harbor QM loan
definitions at consummation may be able to demonstrate through
sustained loan performance compliance with the ATR requirements.
Under this proposal, certain transactions could become Seasoned QMs
and obtain safe harbor status if, among other criteria, they meet
certain performance requirements over a 36-month seasoning period.
Providing creditors with this proposed alternative pathway to a QM safe
harbor for these types of loans seems likely to improve access to
responsible and affordable mortgage credit by increasing creditors'
willingness to make loans that are considered as non-QM at
consummation, but for which consumers have demonstrated an ability to
repay. Additionally, if a loan has performed for a long enough period
of time and meets certain underwriting conditions and product
restrictions, it appears warranted to conclusively presume that the
creditor's determination of a consumer's ability to repay at
consummation was reasonable and to designate the loan as a safe harbor
QM, even if the loan did not necessarily meet the criteria of one of
the other QM definitions at the time of consummation. As discussed in
part VI, the Bureau tentatively determines that the proposed 36-month
seasoning period may provide a sufficient length of time to demonstrate
that a creditor reasonably determined a consumer's ability to repay at
the time of consummation, while incentivizing creditors to make certain
loans that may not otherwise have been made in the absence of
potentially greater ATR compliance certainty.
A. Considerations Related to Access to Responsible, Affordable Credit
A primary objective of the proposed alternative pathway to a QM
safe harbor is to ensure the availability of responsible and affordable
credit by incentivizing the origination of non-QM loans that otherwise
may not be made (or may be made at a significantly higher price) due to
perceived litigation or other risks, even where a creditor has
confidence that the consumer would repay the loan. The Bureau is
concerned that, as discussed in the Assessment Report analyzing the
impact of the January 2013 Final Rule on access to credit, the
perceived risks associated with non-QM status at consummation may
inhibit creditors' willingness to make such loans and thus could limit
access to responsible, affordable credit for certain creditworthy
consumers.\97\ Indeed, an analysis of rejected applications in the
Assessment Report suggested that the January 2013 Final Rule's impact
on access to credit among particular categories of consumers did not
correlate with traditional indicators of creditworthiness, such as
credit score, income, and down payment amount. Moreover, the Assessment
Report also found that there was significant variation in the extent to
which creditors have tightened credit for non-GSE eligible high DTI
loans following the publication of the January 2013 Final Rule. This
variation and its persistence in the years following the Rule's
publication suggest that creditors have not developed a common approach
to measuring and predicting risk of noncompliance with the Rule, as
they have accomplished for other types of risks, such as prepayment and
default.\98\ For instance, cross-creditor differences in both the level
and the change in approval rates of high DTI applications are much
larger than, for example, differences in approval rates by FICO
category.\99\ The lack of uniformity is likely due in part to the
difficulties associated with measuring and quantifying the litigation
and compliance risk associated with originating non-QM loans. Thus, the
Assessment Report concluded that some of the observed effect of the
Rule on access to credit was likely driven by creditors' interest in
avoiding litigation or other risks associated with non-QM status,
rather than by rejections of consumers who were unlikely to repay
[[Page 53577]]
the loan based on traditional indicators of creditworthiness.\100\
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\97\ See Assessment Report, supra note 49, at 11, 118, 150.
\98\ Id. at 118, 147, 150.
\99\ Id. at 147.
\100\ Id. at 118, 150.
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Although the Assessment Report analyzed the impact of the January
2013 Final Rule and its 43 percent DTI limit on access to credit, the
specific findings related to the uncertainty of compliance and
litigation risk for non-QM loans--and the resulting impact on
consumers' access to credit--remain relevant regardless of whether and
how the Bureau may amend the General QM loan definition.\101\ Indeed,
while the Bureau anticipates that its General QM Proposal to replace
the current 43 percent DTI limit with a price-based approach would
increase access to responsible and affordable mortgage credit among
high-DTI consumers, compliance uncertainty and litigation risk would
still persist for the remaining population of loans originated as non-
QMs at consummation. Furthermore, the composition of the non-QM market
has continued to grow and evolve since the period covered by the
Assessment Report. In recent years, the share of non-QM securitizations
comprised of loans with a DTI in excess of 43 percent has fallen, while
alternative income documentation has grown to become the largest non-QM
subsector, comprising approximately 50 percent of securitized pools in
the first half of 2019.\102\ As a result, the Bureau preliminarily
concludes that providing a QM safe harbor to non-QM loans that have
demonstrated sustained and timely mortgage payment histories could have
a meaningful impact on improving access to credit for creditworthy
consumers whose loans fall outside the other QM definitions.
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\101\ See 85 FR 41716 (July 10, 2020).
\102\ S&P Global Ratings, Non-QM's Meteoric Rise is Leading the
Private-Label RMBS Comeback (Sept. 20, 2019), https://www.spglobal.com/ratings/en/research/articles/190920-non-qm-s-meteoric-rise-is-leading-the-private-label-rmbs-comeback-11159125.
Alternative income documentation includes alternate sources of
income verification (e.g., bank statements), which vary from
traditional income underwriting forms/documents such as W-2s,
paystubs and tax returns. The variation is due to the use of non-
traditional sources of documentation, such as for self-employed
consumers.
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The Bureau is proposing to adopt a Seasoned QM definition primarily
to encourage creditors to originate more responsible, affordable loans
that are not QMs at consummation, and to ensure that responsible,
affordable credit is not lost because of legal uncertainty in non-QM
status. The Bureau also believes that a Seasoned QM definition may
provide incentives for making additional rebuttable presumption loans.
While the GSEs purchase rebuttable presumption QM loans, and nearly
half of manufactured housing originations are rebuttable presumption
QMs, large banks tend to originate only safe harbor QM loans that are
held in portfolio. A Seasoned QM definition may provide an additional
incentive for large banks to originate rebuttable presumption loans
that may not be eligible for sale to the GSEs and therefore may not
otherwise have been made.
In addition, the Bureau preliminarily concludes that, along with a
possible increase in non-QM originations, the proposal may also
encourage meaningful innovation and lending to broader groups of
creditworthy consumers, especially those with less traditional credit
profiles. The Bureau anticipates that innovations in technology and
diversification of the overall economy will lead to changes in the
composition of the job market and labor force, and it intends for the
Rule to remain sufficiently flexible to accommodate and encourage
developments in mortgage underwriting to reflect these changes. For
example, new technology allows creditors to assess financial
information that may not be readily apparent through a traditional
credit report, such as a consumer's ability to consistently make on-
time rent payments. The use of new tools could broaden homeownership to
consumers who may have lacked credit histories with major credit
reporting bureaus and so may have been less likely to obtain mortgages
at an affordable price or obtain a mortgage at all. Additionally,
technology platforms have led to rapid growth in the ``gig economy,''
through which workers earn income by providing services such as ride-
sharing and home delivery and through the ability to earn income on
assets such as a home. Some workers participate in the gig economy for
their sole source of income, while others may do so to supplement their
income from more traditional employment. Creditors' methods of
assessing consumers' income and their ability to repay mortgages evolve
to accommodate these changes, but creditors may be left with some
uncertainty as to whether these methods constitute, or can be part of,
a reasonable determination of a consumer's ability to repay under the
ATR/QM Rule. Accordingly, the Bureau preliminarily concludes that
allowing an alternative pathway to a QM safe harbor may encourage
creditors to lend to consumers with less traditional credit profiles
and income sources at an affordable price based on an individualized
determination of a consumer's ability to repay.
Further, the Bureau preliminarily concludes that another benefit of
this proposal would be to provide additional legal certainty for loans
that are made in accordance with other QM definitions. The Bureau
recognizes that creditors may be uncertain about whether certain loans
fall within the existing QM definitions for different reasons. For
example, the U.S. Department of Housing and Urban Development (HUD),
the U.S. Department of Veterans Affairs, and the U.S. Department of
Agriculture (USDA) have each promulgated QM definitions pursuant to
their authority under TILA section 129C(b)(3)(B)(ii), and they have
largely set their QM criteria based on eligibility criteria they apply
in their respective mortgage insurance or guarantee programs. A
creditor may have uncertainty about whether a State court would
interpret and apply those criteria to a particular loan in a consumer's
TILA section 130(k) foreclosure defense, if the loan's QM status were
ever challenged, in the same way the agency would in administering its
mortgage insurance or guarantee program.
As discussed in part III.B above, research centers and industry
commenters that commented on the ANPR expressed concern about
litigation risk and potential liability and suggested that a seasoning
approach could limit liability and provide legal certainty. Several
research institutions suggested that a rule allowing performing loans
to season into QM status would provide creditors with clarity and
certainty by ensuring that creditors would not have to litigate their
ATR compliance long after consummation when an extensive record of on-
time payments demonstrates that compliance and the default is more
likely due to a change in consumer circumstances. A secondary market
trade association commented that a rule allowing performing loans to
season into QM status could clarify a creditor's litigation risk and
suggested this could also help to bring certainty to secondary market
participants that might otherwise be unable or unwilling to accept the
litigation risk associated with assignee liability under both
rebuttable presumption QM and non-QM loans. To the extent that there is
ambiguity as to whether a given loan is eligible for a QM safe harbor
through other QM definitions, a Seasoned QM definition would provide
additional legal certainty by providing an alternative basis for a
conclusive presumption of ATR compliance after the required seasoning
period. It would also extend a
[[Page 53578]]
conclusive presumption of compliance to the subset of the higher-priced
covered transactions that are afforded only a rebuttable presumption of
ATR compliance at consummation through other QM definitions.
To the extent that additional legal certainty provided by this
proposal makes creditors more comfortable extending these types of
loans in the future, such an effect would not only promote continued
access to responsible and affordable credit, but could result in
increased access to such credit. While this proposal is focused on the
non-agency and non-QM markets, the agency (i.e., GSE and government-
insured) mortgage markets in the wake of the 2008 recession can serve
as a useful illustration of the chilling effect legal risk and
compliance uncertainty can have on origination markets. Access to
responsible mortgage credit remained tight for years after the crisis,
even in the agency mortgage market where creditors typically do not
bear the credit risk of default.\103\ While there is no doubt that the
size and scale of the 2008 crisis impacted creditors' willingness to
take on credit risk, creditors also imposed additional, more stringent
borrowing requirements due to their concerns that they could be forced
to repurchase loans as a result of subsequent assertions of non-
compliance. This occurred even though creditors believed the loans
complied with Federal Housing Administration (FHA) requirements for
mortgage insurance and GSE standards for sale into the secondary
markets without the more stringent borrowing requirements. Following
GSE and FHA reforms, access to responsible mortgage credit for GSE and
government-insured loans has begun to rebound, with some of the biggest
banks considering a return to FHA lending.\104\ Similarly, the Bureau
anticipates that creditors may originate loans they believe to be QMs
at origination, but to the extent any lingering ambiguity remains, the
added compliance certainty provided by an additional Seasoned QM
definition could further incentivize creditors to originate these loans
at scale.
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\103\ Jim Parrot & Mark Zandi, Opening the Credit Box, Moody's
Analytics and the Urban Inst. (Sept. 30, 2013), https://www.urban.org/sites/default/files/publication/24001/412910-Opening-the-Credit-Box.PDF. As an illustration of the tight credit box, in
2013, the average credit score in the agency market was over 750.
This is 50 points higher than the average credit score across all
loans at the time, and 50 points higher than the average score among
those who purchased homes a decade prior, implying that mortgage
origination markets may have over-corrected relative to the economic
fundamentals at the time.
\104\ JPMorgan mulls return to FHA-backed mortgages after era of
fines, Am. Banker (Feb. 5, 2020), https://www.americanbanker.com/articles/jpmorgan-mulls-return-to-fha-backed-mortgages-after-era-of-fines.
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The Bureau anticipates that the extent to which the proposal may
increase access to credit would be a function of the size of the
eligible loan population that could benefit from the seasoning
proposal: the more loans that would be eligible to become Seasoned QMs,
the more loans might be made that would not otherwise be made. In
determining the length of time that is the appropriate seasoning
period, the Bureau has therefore also considered the rate at which
loans terminate, either through prepayment or foreclosure, to assess
the potential population of loans that would be eligible to benefit
from this proposal and thus potentially affect access to credit. Figure
1 in part VII below illustrates the percentage of loans that remain
active 36 months after consummation, the length of the proposed
seasoning period. Based on the data and analysis presented in part VII,
the Bureau preliminarily concludes that the majority of eligible non-QM
and rebuttable presumption mortgage loans would remain active and thus
be eligible to benefit from the proposed seasoning period, across the
economic cycle.
B. Considerations Related to Ability To Repay
The Bureau is also proposing to introduce an alternative pathway to
a QM safe harbor for a new category of Seasoned QMs because it
preliminarily concludes that, when coupled with certain other factors,
successful loan performance over a number of years appears to indicate
with sufficient certainty creditor compliance with the ATR requirements
at consummation.
First, the current ATR/QM Rule explains that loan performance can
be a factor in evaluating a creditor's ATR determination. Comment
43(c)(1)-1.ii.A.1 provides that evidence that a creditor's ATR
determination was reasonable and in good faith may include the fact
that the consumer demonstrated actual ability to repay the loan by
making timely payments, without modification or accommodation, for a
significant period of time after consummation. The comment explains
further that the longer a consumer successfully makes timely payments
after consummation or recast, the less likely it is that the creditor's
determination of ability to repay was unreasonable or not in good
faith. The current ATR/QM Rule also distinguishes between a failure to
repay that can be evidence that a consumer lacked the ability to repay
at loan consummation, versus a failure to repay due to a subsequent
change in the consumer's circumstances. Comment 43(c)(1)-2 states that
a change in the consumer's circumstances after consummation (for
example, a significant reduction in income due to a job loss or a
significant obligation arising from a major medical expense) that
cannot be reasonably anticipated from the consumer's application or the
records used to determine repayment ability is not relevant to
determining a creditor's compliance with the ATR/QM Rule. Thus, the
existing regulatory framework supports the relevance of loan
performance, particularly during the initial period following
consummation, in evaluating a creditor's ATR determination at
consummation.
Second, an approach that takes loan performance into consideration
in evaluating ATR compliance is consistent with the Bureau's prior
analyses of repayment ability. Because the affordability of a given
mortgage will vary from consumer to consumer based upon a range of
factors, there is no single recognized metric, or set of metrics, that
can directly measure whether the terms of mortgage loans are within
consumers' ability to repay.\105\ The Bureau's Assessment Report
concluded that early borrower distress was an appropriate proxy for the
lack of the consumer's ability to repay at consummation across a wide
pool of loans. Likewise, in its June 2020 General QM Proposal, the
Bureau focused on an analysis of delinquency rates in the first few
years to evaluate whether a loan's price, as measured by the spread of
APR over APOR (herein referred to as the loan's rate spread), may be an
appropriate measure of whether a loan should be presumed to comply with
the ATR provisions. The incorporation of loan performance requirements
in this proposal in turn reflects the Bureau's view that across a wide
pool of loans early distress is an appropriate proxy for the lack of
the consumer's ability to repay at consummation.
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\105\ Assessment Report, supra note 49, at 83.
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In general, the earlier a delinquency occurs, the more likely it is
due to a lack of ability to repay at consummation than a change in
circumstance after consummation. However, there is neither an exact
period of time after which all delinquencies can be attributed to a
lack of ability to repay at consummation, nor an exact period after
which no delinquencies can be attributed to a lack of ability to repay
at consummation. The Bureau reached its proposed seasoning period of 36
months
[[Page 53579]]
based on a range of policy considerations, rather than any singular
measure of delinquency, as discussed in the section-by-section analysis
of Sec. 1026.43(e)(7)(iv)(C).\106\ The Bureau has preliminarily
concluded that granting a safe harbor to these loans is appropriate
because three years of loan performance combined with the product
restrictions and underwriting requirements as defined in this proposal
appear to indicate with sufficient certainty creditor compliance with
the ATR requirements at origination. The Bureau acknowledges that some
meaningful percentage of non-QM loans may end up delinquent in later
years. But, given the increasing likelihood that intervening events
meaningfully contributed to such delinquencies, the Bureau does not
view delinquency at that point in the lifecycle of a loan product as
undermining the presumption of creditor compliance with the ATR
requirements at consummation.
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\106\ The proposal, like the Assessment Report and the June 2020
General QM Proposal, reflects a shared underlying rationale that
early payment difficulties indicate higher likelihood that the
consumer may have lacked ability to repay at origination, and that
delinquencies occurring soon after consummation are more likely
indicative of a consumer's lack of ability to repay than later-in-
time delinquencies. The Assessment Report and the June 2020 General
QM Proposal measure early distress as whether a consumer was ever 60
days or more past due within the first two years after origination.
The proposed performance requirements for Seasoned QM loans reflect
the Bureau's consideration of this measure of early distress, but
also its preliminary view of what requirements strike the
appropriate balance between facilitating responsible access to the
credit in question while assuring protection of the consumer
interests covered by ATR requirements. Similarly, the Bureau
recognizes that the definition of delinquency and performance
requirements in proposed Sec. 1026.43(e)(7) differ in some respects
from the measure of early distress used in the Assessment Report,
but preliminarily concludes that the proposed definition and
performance requirements are appropriate for the specific purposes
of this proposal for the reasons explained in the section-by-section
analyses of proposed Sec. 1026.43(e)(7)(ii) and (v)(A) below.
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As mentioned in the prior section, the current practices of market
participants with respect to remedies for deficiencies in underwriting
practices also support the Bureau's proposed adoption of a seasoning
period to evaluate a creditor's ATR determination. Each GSE generally
provides creditors relief from its enforcement with respect to
representations and warranties a creditor must make to the GSE
regarding its underwriting of a loan. The GSEs generally provide
creditors that relief after the first 36 monthly payments if the
consumer had no more than two 30-day delinquencies.\107\ Similarly, the
master policies of mortgage insurers generally provide that the
mortgage insurer will not issue a rescission with respect to certain
representations and warranties made by the originating lender if the
consumer had no more than two 30-day delinquencies in the 36 months
following the consumer's first payment, among other requirements.\108\
These practices, which extend to a significant portion of covered
transactions, suggest that the GSEs and mortgage insurers have
concluded based on their experience that after 36 months of loan
performance, a default should fairly be attributed to a change in the
consumer's circumstances or other cause besides that of the
underwriting.
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\107\ Fed. Hous. Fin. Agency, Representation and Warranty
Framework, https://www.fhfa.gov/PolicyProgramsResearch/Policy/Pages/Representation-and-Warranty-Framework.aspx. (last visited Aug. 14,
2020).
\108\ Fannie Mae, Amended and Restated GSE Rescission Relief
Principles for Implementation of Master Policy Requirement #28
(Rescission Relief/Incontestability) (Sept. 10, 2018), https://singlefamily.fanniemae.com/media/16331/display.
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Based on these considerations, and as discussed in more detail in
parts VI and VII, the Bureau preliminarily concludes that a consumer's
timely payments for 36 months, in combination with provisions to assure
the consumer's own ability to make the payments due and the loan's
compliance with other proposed provisions, indicate that the consumer
had the ability to repay the loan at consummation, such that granting
of safe harbor QM status to the loan is warranted subject to certain
limitations. In making this preliminary determination, the Bureau
focused on loans that would be eligible to be Seasoned QMs based on the
proposal as described in part VI. Of these loans, the Bureau focused on
loans with an interest rate spread in excess of 150 basis points, and
therefore outside the proposed safe harbor threshold in the General QM
proposal. These non-QMs and rebuttable presumption QMs are the
population whose ATR compliance presumption status would be affected by
becoming Seasoned QMs. As illustrated in Figure 2 of part VII, nearly
two-thirds (66 percent) of loans that experience a disqualifying event
as explained in part VI (i.e., an event that would prevent a loan from
becoming a Seasoned QM under the proposed criteria described in the
section-by-section analyses of Sec. 1026.43(e)(7)) do so within 36
months, and the rate at which loans disqualify diminishes beyond 36
months. This may suggest that a failure to repay that occurs more than
three years after consummation can generally be attributable to causes
other than the consumer's ability to repay at loan consummation, such
as a subsequent job loss or other change in the consumer's
circumstances that could not reasonably be anticipated from the records
used to determine repayment ability. Furthermore, although it is
possible that a consumer could continue making on-time payments for
some period of time despite lacking the ability to repay, such as by
forgoing payments on other obligations, the Bureau believes it is
unlikely that a consumer could continue doing so for more than three
years following consummation, especially in the absence of
circumstances that would be disqualifying under this proposal, as
explained below in part VI.
Notwithstanding this evidence and these considerations, the Bureau
recognizes a consumer might lack an ability to repay at loan
consummation and yet still make timely payments for three years. For
example, a consumer could at consummation lack the ability to make a
fully amortizing mortgage payment but manage to make interest-only
payments in the first three years. The Bureau expects the prospect that
at consummation a consumer may lack an ability to repay a loan yet
still make timely payments for three years, as well as the potential
benefits that a Seasoned QM definition might offer in terms of
fostering access to responsible, affordable mortgage credit, would tend
to vary depending on the loan characteristics. As discussed in part VI,
the Bureau is therefore proposing to limit the Seasoned QM definition
to first-lien, fixed-rate covered transactions that are held in the
originating creditor's portfolio, satisfy the existing product-feature
requirements and limits on points and fees under the General QM
definition, and meet the underwriting requirements applicable to Small
Creditor QMs.
VI. Section-by-Section Analysis
1026.43 Minimum Standards for Transactions Secured by a Dwelling
43(e) Qualified Mortgages
43(e)(1) Safe Harbor and Presumption of Compliance
Section 1026.43(e)(1) provides that a creditor that makes a QM loan
receives either a conclusive or rebuttable presumption of compliance
with the repayment ability requirements of Sec. 1026.43(c), depending
on whether the loan is a higher-priced covered transaction. Higher-
priced covered transaction is defined in Sec. 1026.43(b)(4) to mean a
first-lien mortgage with an APR that exceeds APOR for a comparable
transaction as of the date the interest rate is set by a specified
[[Page 53580]]
number of percentage points.\109\ The ATR/QM Rule provides in Sec.
1026.43(e)(1)(i) that a creditor that makes a QM loan that is not a
higher-priced covered transaction is entitled to a safe harbor from
liability under the ATR provisions. Under Sec. 1026.43(e)(1)(ii), a
creditor that makes a QM loan that is a higher-priced covered
transaction is entitled to a rebuttable presumption that the creditor
has complied with the ATR provisions.
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\109\ For purposes of General QM loans under Sec.
1026.43(e)(2), a first-lien covered transaction generally is
``higher priced'' if its APR exceeds APOR by 1.5 or more percentage
points. Section 1026.43(b)(4) also provides that a first-lien
covered transaction that is a QM under Sec. 1026.43(e)(5), (e)(6),
or (f) is ``higher priced'' if its APR is 3.5 percentage points or
more above APOR.
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As discussed above, the Bureau is proposing to allow first-lien
covered transactions that meet certain conditions to become QMs that
receive a conclusive presumption of compliance after meeting
established performance standards for a specified length of time. In
other words, such transactions would become QM safe harbor loans. The
Bureau is proposing to revise Sec. 1026.43(e)(1)(i) to add Sec.
1026.43(e)(1)(i)(B), identifying such seasoned loans as a separate
category of QMs for which creditors receive a conclusive presumption of
compliance with ATR requirements, regardless of whether the loan is a
higher-priced covered transaction. Under this proposal, current Sec.
1026.43(e)(1)(i) would be redesignated as Sec. 1026.43(e)(1)(i)(A) and
would continue to provide a conclusive presumption of compliance with
ATR requirements for QM loans that are not higher-priced covered
transactions. To conform with these changes, the Bureau is proposing to
revise comment 43(e)(1)-1 to add a reference to proposed Sec.
1026.43(e)(7). The Bureau also proposes to make a technical correction
to comment 43(e)(1)-1 to add references to Sec. 1026.43(e)(5) and (6).
The Bureau further proposes to remove the first sentence of comment
43(e)(1)(i)-1, which would be duplicative of regulatory text, and to
redesignate that comment as comment 43(e)(1)(i)(A)-1.
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. As
discussed above, 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 concluded in the January 2013 Final Rule 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.\110\ In the January 2013 Final Rule, 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.'' \111\
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\110\ 78 FR 6408, 6511 (Jan. 30, 2013).
\111\ Id. at 6514.
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In the January 2013 Final Rule, the Bureau identified several
reasons relating to the performance of QM loans that are not higher-
priced loans for why such loans could be suggestive of the consumer's
ability to repay and should receive a safe harbor.\112\ 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.\113\ 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.\114\ The Bureau noted that it is not possible
to define by a bright-line rule a class of mortgages for which each
consumer will have the ability to repay.\115\
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\112\ Id. at 6511.
\113\ Id.
\114\ Id.
\115\ Id.
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The Bureau preliminarily concludes that, in conjunction with the QM
statutory and other requirements in proposed Sec. 1026.43(e)(7), a
loan's satisfaction of portfolio and seasoning requirements provides
sufficient grounds for supporting a conclusive presumption that the
creditor made a reasonable determination that the consumer had the
ability to repay, in compliance with the ATR requirements. As discussed
above, the Bureau preliminarily concludes that meeting these criteria--
in particular, the fact that a consumer has made timely payments for
the duration of the seasoning period--indicates that the consumer was
offered and received a loan on terms that the creditor reasonably
determined reflected the consumer's ability to repay the loan. As
discussed below in the section-by-section analyses of proposed Sec.
1026.43(e)(7), creditors would be required to comply with statutory
requirements applicable to QMs and minimum underwriting requirements.
The proposed requirements would ensure that the loans do not contain
risky product features identified in TILA section 129C(b)(2) and that
they are underwritten with appropriate attention to consumers'
resources and obligations. In addition, the conclusive presumption
proposed to be added in Sec. 1026.43(e)(1)(i)(B) would be available to
creditors only after the loans have performed for a substantial period
of time.
Providing creditors with an alternative pathway to greater ATR
compliance certainty for loans that satisfy the criteria set forth in
proposed Sec. 1026.43(e)(7) also may result in greater access to
responsible, affordable mortgage credit. For example, creditors may be
more willing to maintain or expand access to credit to consumers with
non-traditional income or a limited credit history, or to employ
innovative methods of assessing financial information, as these loans
could convert to safe harbor QMs with satisfactory performance.
Further, similar to the Small Creditor QM definition and the pathway to
QM status provided in EGRRCPA section 101, the Seasoned QM definition
would not be subject to any DTI limits or the limitations on pricing in
the General QM Proposal but would instead include a requirement for the
creditor to hold the loan in portfolio. As discussed in greater detail
below, the Bureau preliminarily concludes that, in combination with the
other Seasoned QM requirements in proposed Sec. 1026.43(e)(7), the
proposed portfolio requirement would provide an added layer of
assurance that the Seasoned QM definition would encourage responsible
non-QM lending and unaffordable loans would not be made.
As it did in the January 2013 Final Rule, the Bureau proposes to
use its adjustment authority under TILA section 105(a) to establish a
conclusive presumption of compliance for loans that meet the criteria
in proposed Sec. 1026.43(e)(7). The Bureau preliminarily concludes
that providing a safe harbor for seasoned 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. The Bureau also preliminarily
concludes that providing such a safe harbor is consistent with the
Bureau's authority under TILA section 129C(b)(3)(B)(i) to prescribe
regulations that revise, add to, or subtract from the criteria that
define a QM upon a finding that such
[[Page 53581]]
regulations are necessary or proper to ensure that responsible,
affordable mortgage credit remains available to consumers in a manner
consistent with the purposes of this section, 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.
The Bureau requests comment on all aspects of the proposed rule
that would be applicable to determining whether, by meeting the
requirements of Sec. 1026.43(e)(7) for a particular loan, a creditor
has demonstrated that the consumer had a reasonable ability to repay
the loan according to its terms and the loan should be accorded safe
harbor QM status. The Bureau also requests comment on whether there are
other approaches to providing QM status to seasoned loans that would
accomplish the Bureau's objectives, such as providing a rebuttable
presumption to non-QM loans that meet the requirements after a
seasoning period, perhaps with a further seasoning period to gain safe
harbor status.
43(e)(2) Qualified Mortgage Defined--General
Section 1026.43(e)(2) sets out the general criteria for meeting the
definition of a QM and provides exceptions for QMs covered by
requirements set out in other specific paragraphs in Sec. 1026.43(e).
The Bureau is proposing a conforming amendment to Sec. 1026.43(e)(2)
to include a reference to Sec. 1026.43(e)(7), which would set out the
requirements applicable to Seasoned QMs.
43(e)(7) Qualified Mortgage Defined--Seasoned Loans
43(e)(7)(i) General
Proposed Sec. 1026.43(e)(7) would define a new category of QMs for
covered transactions that meet certain criteria. As discussed above,
under proposed Sec. 1026.43(e)(7)(i) only first-lien covered
transactions could qualify as Seasoned QMs. Similar to Small Creditor
QMs, Seasoned QMs would include certain loans held in portfolio by
creditors for a prescribed period of time, but unlike Small Creditor
QMs, Seasoned QMs would not be limited to small creditors. Additional
criteria proposed for Seasoned QMs are set out generally in Sec.
1026.43(7)(i)(A) through (D). The additional criteria for Seasoned QMs
include restrictions on product features and points and fees, as well
as certain underwriting and performance requirements.
Providing creditors with an alternative path to a QM safe harbor
for these types of loans may increase creditors' willingness to make
these loans despite their ineligibility for a QM safe harbor at
consummation. The Bureau recognizes that there is some risk that a
consumer lacked an ability to repay at loan consummation yet managed to
make timely payments for the seasoning period defined in proposed Sec.
1026.43(e)(7)(iv)(C). The Bureau tentatively concludes that such risk,
as well as the potential benefits that a Seasoned QM might offer in
terms of fostering access to responsible, affordable mortgage credit,
would tend to vary depending on the loan characteristics. The Bureau is
therefore proposing to limit Seasoned QMs to first-lien covered
transactions that satisfy the other requirements in proposed Sec.
1026.43(e)(7).
The Bureau preliminarily concludes that tailoring Seasoned QMs to
only first-lien covered transactions, as well as establishing the other
requirements for Seasoned QMs in Sec. 1026.43(e)(7) discussed below,
is consistent with Bureau's authority under TILA section
129C(b)(3)(B)(i) to prescribe regulations that revise, add to, or
subtract from the criteria that define a qualified mortgage 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(b),
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) provides the Bureau with
authority to prescribe regulations to carry out the purposes of the
qualified mortgage provisions--to ensure that responsible, affordable
mortgage credit remains available to consumers in a manner consistent
with the purposes of TILA section 129C. TILA section 105(a) also
provides authority to the Bureau to prescribe regulations to carry out
the purposes of TILA, including the purposes of the qualified mortgage
provisions, 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. TILA section 129C(b)(2)(A)(vi) provides authority to the
Bureau specifically 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 are relevant and consistent with
the purposes described in TILA section 129C(b)(3)(B)(i). Accordingly,
the Bureau is proposing to exercise its authority under TILA sections
105(a), 129C(b)(2)(A)(vi), (3)(A), and (3)(B)(i) to adopt proposed
Sec. 1026.43(e)(7) for the reasons summarized below and discussed in
more detail above.
The Bureau notes that loans that satisfy another QM definition at
consummation also could be Seasoned QM loans, as long as the
requirements of proposed Sec. 1026.43(e)(7) are met. For example, a
Seasoned QM might also have been eligible as a QM at consummation under
the General QM, Small Creditor QM, or EGRRCPA QM definitions. Although
the various QM categories may overlap, each QM category is based on a
particular set of factors that support a presumption that the creditor
at consummation complied with the ATR requirements. Each QM category
imposes requirements of varying degrees of restrictiveness relative to
others. Section 101 of the EGRRCPA, for example, provides a presumption
of compliance starting at consummation, and is available only to
insured depository institutions and insured credit unions with assets
below $10 billion who hold those loans in portfolio, except that
transfer of the loans is permitted in certain limited circumstances. QM
status under EGRRCPA section 101 is available to both fixed and
variable rate mortgages, as well as subordinate-lien loans, and section
101 also does not impose any requirements on post-consummation loan
performance. The proposed Seasoned QM category, by contrast, would not
be limited by creditor size, and would be available only for fixed-
rate, first-lien loans held in portfolio, and only after a seasoning
period during which the loans must meet performance requirements. The
Bureau tentatively concludes that the proposed Seasoned QM category and
the EGRRCPA QM category, therefore, identify unique and discrete
factors that, for different reasons, would support a presumption of
creditor compliance with the ATR requirements. The Bureau preliminarily
concludes that, similarly, because each QM category is based on a
distinct set
[[Page 53582]]
of factors that support a presumption of compliance with ATR
requirements, it is possible for some transactions to fall within the
scope of multiple QM categories. Accordingly, the Bureau tentatively
determines that it is appropriate to exercise its authorities under
TILA sections 105(a), 129C(b)(2)(A)(vi), (3)(A), and (3)(B)(i) to make
the proposed Seasoned QM definition available to any first-lien covered
transaction that meets the requirements in proposed Sec.
1026.43(e)(7), including transactions that might be eligible at
consummation for the General QM definition, the Small Creditor QM
definition, or the EGRRCPA QM definition. The Bureau further notes that
some consumer advocacy groups responding to the ANPR commented that the
Bureau could not define a QM in a manner that would permit a non-QM
loan at consummation to later season into a QM loan because TILA
section 130(k) \116\ provides a right of recoupment permitting a
consumer to bring at any time an ATR claim as a defense against
foreclosure. These commenters suggested this right of recoupment
indicates that Congress contemplated that consumers would default later
than the ability-to-repay three-year statute of limitations period, and
intended for consumers who defaulted at any point to be able to raise
the creditor's failure to reasonably determine ability to repay as a
defense against foreclosure. The Bureau disagrees with this
understanding of TILA section 130(k) and its implications regarding the
scope of the Bureau's authority to define QM.
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\116\ 15 U.S.C. 1640(k).
---------------------------------------------------------------------------
TILA section 130(k) authorizes a consumer to assert a violation of
the ATR requirements in section 129C(a) as a defense in the event of
judicial or nonjudicial foreclosure, without regard for the time limit
on a private action for damages for such a violation. TILA section
129C(b)(1) provides that a creditor may presume a loan has met the ATR
requirements in section 129C(a) if a residential mortgage loan is a QM.
As described above, TILA section 129C(b)(2) and (3) grants the Bureau
authority to determine the precise contours of the QM definition. Since
the effective date of the ATR/QM Rule, creditors properly originating
QMs have been able to rely on the loan's QM status in responding to a
defense against foreclosure under TILA section 130(k). The proposed
Seasoned QM definition is consistent with the structure of that
statutory regime. The Bureau thus preliminarily concludes that
proposing a new category of QMs for seasoned loans that meet the
statutory QM requirements and other appropriate criteria is consistent
with the Bureau's authority under and the purposes of TILA sections
129B and 129C.
Proposed Sec. 1026.43(e)(7) would not apply to loans in existence
prior to the effective date. Instead, as stated in part I above, the
revised regulations would apply to covered transactions for which
creditors receive an application on or after the effective date. This
would align with the proposed application of the General QM Proposal
because the Bureau also proposed that the regulations revised by the
General QM Proposal would apply to covered transactions for which
creditors receive an application on or after the effective date.\117\
This proposed approach would ensure that the proposed rule applies only
to transactions begun after the proposed rule takes effect.
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\117\ 85 FR 41716, 41717 July 10, 2020).
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The Bureau does not believe that there is any reason to conclude
that the inference to be drawn as to ability to repay is any different
depending on whether the three-year successful payment history occurs
before or after the effective date. The Bureau believes that parties to
existing loans at the time of the effective date may have significant
reliance interests related to the QM status of those loans. In light of
these possible reliance interests, the Bureau has opted not to apply
the proposal to loans in existence prior to the effective date.\118\
The Bureau requests data on the nature and extent of any such reliance
interests. The Bureau also requests data on the number of loans that
would be in existence as of the proposed effective date and would meet
the specifications of the proposal but for the effective date, as well
as comment on any legal or policy considerations that the Bureau should
take into account relating to those loans.
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\118\ The Bureau also recognizes that there could be legal
issues related to the application of rules governing mortgage
origination to loans existing prior to the effective date. See,
e.g., Landgraf v. USI Film Prods., 511 U.S. 244, 269 (1994) (holding
that a rule is impermissibly retroactive when it ``takes away or
impairs vested rights acquired under existing laws, or creates a new
obligation, imposes a new duty, or attaches a new disability, in
respect to transactions or considerations already past'') (citation
omitted); Bowen v. Georgetown Univ. Hosp., 488 U.S. 204, 208 (1988)
(holding that an agency cannot ``promulgate retroactive rules unless
that power is conveyed by Congress in express terms'').
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The Bureau requests comment on whether the proposed Seasoned QM
definition should exclude other subsets of covered transactions that
might pose heightened consumer protection risks, or should be extended
beyond first-lien mortgages in a manner that improves access to credit
without introducing undue complexity in application. The Bureau also
requests comment on whether and to what extent it should allow covered
transactions that qualify as QMs under existing QM categories,
including the EGRRCPA QM loan definition, to qualify for QM status
under the proposed Seasoned QM category.
43(e)(7)(i)(A)
Proposed Sec. 1026.43(e)(7)(i)(A) would limit the Seasoned QM
definition to fixed-rate mortgages with fully amortizing payments.
Proposed Sec. 1026.43(e)(7)(i)(A) would apply the definition of fixed-
rate mortgage set out in Sec. 1026.18(s)(7)(iii). Section
1026.18(s)(7)(iii) defines fixed-rate mortgage as a transaction secured
by real property or a dwelling that is not an adjustable-rate mortgage
or a step-rate mortgage.\119\
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\119\ As applicable to the definition of fixed-rate mortgage,
Sec. 1026.18(s)(7)(i) defines adjustable-rate mortgage as a
transaction for which the APR may increase after consummation, and
Sec. 1026.18(s)(7)(ii) defines step-rate mortgage as a transaction
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.
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Proposed Sec. 1026.43(e)(7)(i)(A) would apply the definition of
fully amortizing payments set out in Sec. 1026.43(b)(2). Section
1026.43(b)(2) defines fully amortizing payments as a periodic payment
of principal and interest that will fully repay the loan amount over
the loan term. Therefore, under proposed Sec. 1026.43(e)(7)(i)(A),
only loans for which the scheduled periodic payments do not require a
balloon payment to fully amortize the loan within the loan term could
become Seasoned QMs.
As stated above, the Bureau proposes limiting Seasoned QMs to
fixed-rate mortgages, excluding ARMs. ARMs typically have an
introductory interest rate that is applicable for several years. The
introductory interest rate would be in place for some or all of the
proposed seasoning period and could extend beyond the seasoning period.
After the introductory interest rate expires, the rate adjusts
periodically and can increase through the life of the loan.
Consequently, the performance of an ARM during the proposed seasoning
period would not be reliable as an indicator that a consumer, at
consummation, had the ability to repay the loan. Similarly, the Bureau
also recognizes that the ability of a consumer to stay current on
mortgage payments during the seasoning period would not be reliable as
an indicator that at
[[Page 53583]]
consummation a consumer had the ability to meet balloon payment
obligations beyond the seasoning period.
Proposed comment 43(e)(7)(i)(A)-1 would clarify that covered
transactions that are adjustable-rate or step-rate mortgages would not
be eligible to become Seasoned QMs. Proposed comment 43(e)(7)(i)(A)-2
would clarify that loans that require balloon payments would not be
eligible to become Seasoned QMs. Proposed comment 43(e)(7)(i)(A)-2
would also clarify, however, that proposed Sec. 1026.43(e)(7)(i)(A)
does not prohibit a qualifying change, as defined in proposed Sec.
1026.43(e)(7)(iv)(B), that is entered into during or after a temporary
payment accommodation in connection with a disaster or pandemic-related
national emergency. Qualifying changes are discussed more fully below
in the section-by-section analysis of proposed Sec. 1026.43(e)(7)(iv).
The Bureau invites comment on whether allowing other types of loans
and payment schedules would facilitate appropriate access to credit
while assuring protection of consumers' interests covered by ATR
requirements. Commenters who recommend alternative approaches are
encouraged to submit data and analyses to support their
recommendations.
43(e)(7)(i)(B)
Proposed Sec. 1026.43(e)(7)(i)(B) would require that Seasoned QMs
comply with general restrictions on product features and points and
fees and meet certain underwriting requirements. The requirements
proposed for Seasoned QMs would be similar in several respects to the
requirements established for Small Creditor QMs in Sec. 1026.43(e)(5).
Proposed Sec. 1026.43(e)(7)(i)(B) makes this clear by incorporating
directly the QM requirements set out for Small Creditor QMs in Sec.
1026.43(e)(5)(i)(A) and (B).\120\
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\120\ The Bureau proposed certain conforming changes to Sec.
1026.43(e)(5)(i)(A) and (B) in the General QM Proposal, which would
be incorporated by reference into Sec. 1026.43(e)(7)(i)(B) if both
this proposal and the General QM Proposal are finalized as proposed.
85 FR 41716, 41773, 41766 (July 10, 2020). However, the proposed
conforming changes to Sec. 1026.43(e)(5)(i)(A) and (B) in the
General QM Proposal would not change the substantive requirements in
Sec. 1026.43(e)(5)(i)(A) and (B).
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Currently, and as applicable to the proposed Seasoned QM
definition, Sec. 1026.43(e)(5)(i)(A) and (B) provide generally that a
covered transaction can qualify as a Small Creditor QM only if:
1. The covered transaction provides for regular periodic payments
that are substantially equal;
2. There is no negative amortization and no interest-only or
balloon payments;
3. The loan term does not exceed 30 years;
4. The total points and fees generally do not exceed 3 percent of
the loan amount;
5. The underwriting uses a payment schedule that fully amortizes
the loan over the loan term and takes into account mortgage-related
obligations; and
6. The loan complies with certain requirements relating to
consideration and verification of the consumer's monthly income and
debt.\121\
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\121\ See Sec. 1026.43(e)(5) (incorporating in part Sec.
1026.43(e)(2)).
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The Seasoned QM proposal, by incorporating the requirements of
Sec. 1026.43(e)(5)(1)(A) and (B), would implement the QM definition
requirements in TILA section 129C(b)(2)(A)(iii) and (iv). TILA section
129C(b)(2)(A)(iii) includes a requirement for verifying and documenting
the income and financial resources relied upon to qualify the obligors
on the loan. For a fixed-rate QM, TILA section 129C(b)(2)(A)(iv)
requires in part that the underwriting process take into account all
applicable taxes, insurance, and assessments.
Notably, Small Creditor QMs are not subject to any specific QM DTI
ratio or alternative pricing, or similar, threshold for QMs that is
currently in the General QM definition in Sec. 1026.43(e)(2)(vi).
Small Creditor QMs also are not currently required to use appendix Q to
calculate the consumer's debt and income. The Bureau's recent proposal
to revise the General QM definition, including by revising Sec.
1026.43(e)(2)(vi), did not propose to introduce requirements for Small
Creditor QMs for specific DTI or pricing thresholds or the use of
appendix Q. Similarly, the Bureau is not proposing to require loans to
meet specific DTI ratios or pricing thresholds, or to use appendix Q,
to be eligible to obtain Seasoned QM safe harbor status. For a loan to
be eligible to become a Seasoned QM, however, the proposal would
require that the creditor consider the consumer's DTI ratio or residual
income and verify the debt obligations and income in the same way as is
required under the Small Creditor QM provisions in Sec.
1026.43(e)(5)(i)(A) and (B).
The Bureau notes that TILA's QM definition does not require that QM
loans meet specific DTI ratios or pricing thresholds. 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 repay. In its recent proposal to revise the
General QM definition, the Bureau explained that it is concerned that
conditioning General QM loan status on a specific DTI limit may be
overly burdensome and complex in practice and may unduly restrict
access to credit because it provides an incomplete picture of a
consumer's financial capacity.\122\ In particular, the Bureau explained
that it is concerned that 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.\123\ While the Bureau's recent proposal would replace a
specific DTI threshold with certain pricing thresholds, the Bureau
preliminarily concludes that the proposed product restrictions,
performance requirements, and requirements to consider DTI ratio or
residual income and verify income and debts suffice to presume ATR
compliance for Seasoned QMs. Unlike other QM definitions that confer QM
status upon consummation, the proposed Seasoned QM definition would
confer safe harbor QM status only after the consumer makes on-time
payments, with limited exceptions, for 36 months. The proposal also
includes additional provisions intended to assure that a consumer's
record of sustained, on-time payments during a seasoning period in fact
evidences the consumer's own ability to make the payments due both
during and after the seasoning period. These additional provisions
include requirements intended to eliminate creditor attempts to evade
the seasoning period requirement and a further requirement that loans
season in a creditor's portfolio until the end of the seasoning period.
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\122\ See, e.g., 85 FR 41716, 41717 (July 10, 2020).
\123\ Id.
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The Bureau preliminarily concludes that a consumer's record of
sustained, on-time payments that meet the proposed requirements, taken
together with the loan's compliance with other proposed provisions,
indicates that the creditor made a reasonable determination at
consummation of the consumer's ability to repay the loan. The Bureau's
primary objective in providing the proposed new Seasoned QM definition
is to increase access to responsible and affordable credit by
incentivizing the origination of non-QM loans for which creditworthy
consumers have an ability to repay, but that may not otherwise be
eligible for QM status for various reasons. The Bureau
[[Page 53584]]
preliminarily concludes that it is unnecessary, and would be
inconsistent with the purposes of the proposal, to impose specific DTI
ratios, pricing thresholds, or similar criteria in addition to the
other conditions for Seasoned QM status.
The Bureau also preliminarily concludes that, in the absence of
proposed requirements that would establish specific DTI ratios, pricing
thresholds, or similar criteria, it is not necessary to propose a
precise methodology for calculating or verifying their components. As
such, for the Seasoned QM definition, the Bureau is proposing to
include consider and verify requirements that allow some latitude in
application. In its recent General QM Proposal, the Bureau acknowledged
the difficulties in using the rigid definitions in appendix Q, and,
therefore, the Bureau has proposed that creditors be able to use a more
flexible approach than appendix Q for the General QM definition. The
Bureau preliminarily concludes here for similar reasons that the
purposes of the Seasoned QM proposal would be better met by allowing
more flexibility in how creditors consider and verify information
relating to the consumer's ability to repay. As discussed above, the
Bureau anticipates that innovations in technology and diversification
of the economy will facilitate and encourage creditors to assess
consumers' financial information and repayment ability in new ways.
Further, the Bureau preliminarily concludes that the consider and
verify requirements included in the Small Creditor QM definition are
suitable for purposes of the Seasoned QM definition. The Small Creditor
QM requirements are more flexible than the General QM requirements
because they allow additional latitude in calculating the payment on
the covered transaction. The Bureau proposes to adopt for the Seasoning
QM definition the same consider and verify requirements as are set out
in the Small Creditor QM definition but notes that the General QM
Proposal includes minor proposed conforming changes to the Small
Creditor QM consider and verify requirements. The Bureau also proposes
to provide in proposed comment 43(e)(7)(i)(B)-1 that a loan that
complies with the consider and verify requirements of any other QM
definition will also comply with the consider and verify requirements
in the Seasoned QM definition, so that creditors will be required to
comply with only one applicable set of consider and verify requirements
to achieve Seasoned QM status. The Bureau requests comment on whether
the final rule, in addition to or instead of this approach, should
cross-reference the consider and verify requirements for General QMs,
such as those in any final rule stemming from the General QM Proposal.
The Bureau preliminarily concludes that the requirements to
consider the consumer's DTI ratio or residual income and verify the
debt obligations and income remain important to making a reasonable and
good faith determination that the consumer will have a reasonable
ability to repay the loan according to its terms. Although the proposed
Seasoned QM definition would not require loans to meet a specific DTI
ratio or pricing threshold, the Bureau tentatively concludes that the
consider and verify requirements are sufficiently consumer-protective
especially when coupled with the proposed performance and portfolio
requirements. As discussed in greater detail below, the proposed
performance and portfolio requirements would provide an added incentive
for creditors to originate affordable loans and practice responsible
lending.
The Bureau preliminarily concludes that defining Seasoned QMs to
include the same requirements as those established in Sec.
1026.43(e)(5)(i)(A) and (B) for Small Creditor QMs would be consistent
with Bureau's authority under TILA sections 129C(b)(2)(A)(vi), (3)(A),
and (3)(B)(i) and TILA section 105(a), as discussed above. The Bureau's
objective with this proposal is to ensure continued and improved access
to responsible, affordable mortgage credit, including through
innovation in the mortgage origination market. The Bureau preliminarily
concludes that compliance with the general requirements proposed to be
adopted for Seasoned QMs based on the statutory QM definition, in
combination with the proposed performance and portfolio requirements
discussed below, indicates with sufficient certainty that a creditor
complied with the ATR requirements at origination. The Bureau
tentatively finds that these provisions would be necessary and proper
to ensure that responsible, affordable mortgage credit remains
available to consumers in a manner that is consistent with the purposes
of TILA section 129C and are 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.
In addition to requesting comment on the general requirements that
would be established for Seasoned QMs under this proposal, the Bureau
requests commenters to suggest any areas in which commentary may
further clarify the proposed general requirements.
43(e)(7)(i)(C)
Proposed Sec. 1026.43(e)(7)(i)(C) would require that Seasoned QMs
meet certain performance requirements. These proposed performance
requirements are discussed more fully in the section-by-section
analysis of proposed Sec. 1026.43(e)(7)(ii) below.
43(e)(7)(i)(D)
Proposed Sec. 1026.43(e)(7)(i)(D) would require that Seasoned QMs
meet certain portfolio requirements. These proposed portfolio
requirements are discussed more fully in the section-by-section
analysis of proposed Sec. 1026.43(e)(7)(iii) below.
43(e)(7)(ii) Performance Requirements
As discussed in the section-by-section analysis of proposed Sec.
1026.43(e)(7)(i) above, a covered transaction must meet, among other
things, the conditions set forth in proposed Sec. 1026.43(e)(7)(ii) to
be a QM under proposed Sec. 1026.43(e)(7). Proposed Sec.
1026.43(e)(7)(ii), which would be based on the legal authorities
discussed in the section-by-section analysis of proposed Sec.
1026.43(e)(7)(i) above, establishes performance requirements relating
to the number and duration of delinquencies that a covered transaction
may have at the end of the seasoning period. Specifically, it provides
that to be a QM under proposed Sec. 1026.43(e)(7), the covered
transaction must have no more than two delinquencies of 30 or more days
and no delinquencies of 60 or more days at the end of the seasoning
period.
Several ANPR commenters identified the GSEs' framework for
representations and warranties as well as mortgage insurers' rescission
relief principles as possible models that the Bureau might consider in
establishing performance standards for a seasoning approach to QM
status for non-QMs and rebuttable presumption QMs. One noted, for
example, that the structure used by the GSEs has been tested and proven
to demonstrate that loans with the type of payment history specified by
the GSEs demonstrate the ability to repay that the ATR/QM Rule requires
a creditor to determine at consummation.
Consistent with these comments, the Bureau considered the existing
practices of the GSEs and mortgage insurers in developing the time
period for successful payment history to include in this proposal. As
described in part V, each GSE generally provides creditors relief from
its enforcement with respect to certain representations and
[[Page 53585]]
warranties a creditor must make to the GSE regarding its underwriting
of a loan. The GSEs generally provide creditors that relief after the
first 36 monthly payments if the borrower had no more than two 30-day
delinquencies and no delinquencies of 60 days or more. Similarly, the
master policies of mortgage insurers generally provide that the
mortgage insurer will not issue a rescission with respect to certain
representations and warranties made by the originating lender if the
borrower had no more than two 30-day delinquencies in the 36 months
following the borrower's first payment, among other requirements.\124\
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\124\ Fannie Mae, Amended and Restated GSE Rescission Relief
Principles for Implementation of Master Policy Requirement #28
(Rescission Relief/Incontestability) (Sept. 10, 2018), https://singlefamily.fanniemae.com/media/16331/display.
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The Bureau recognizes that the payment history conditions laid out
in the GSEs' frameworks and the mortgage insurers' master policies
reflect market experience. Consistent with the GSEs' representation and
warranty framework and the master policies of mortgage insurers, the
Bureau is proposing that more than two delinquencies of 30 days or more
during the seasoning period or any delinquency of 60 days or more would
disqualify a covered transaction from being a QM under proposed Sec.
1026.43(e)(7).\125\ The Bureau tentatively concludes that the proposed
standard for the number and duration of delinquencies would strike the
appropriate balance of allowing flexibility for issues unrelated to a
consumer's repayment ability (e.g., a missed payment due to vacation or
to a mix-up over automatic withdrawals) while treating payment
histories that more clearly signal potential issues with ability to
repay as disqualifying.\126\ The Bureau requests comment on whether no
more than two 30-day delinquencies and no 60-day delinquency is the
appropriate standard for the number and duration of delinquencies that
a covered transaction may have at the end of the seasoning period for
purposes of proposed Sec. 1026.43(e)(7).
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\125\ As discussed in greater detail in part VII below, the
Bureau considered alternative seasoning periods to the proposal and
alternative performance requirements of allowable 30-day
delinquencies. Each of the alternatives permits no 60-day
delinquencies. The analysis of alternatives found that varying the
number of allowable 30-day delinquencies could have some impact on
foreclosure risk, even though the Bureau also found that varying the
length of the seasoning period may have a greater impact.
\126\ As noted above in part V, the current ATR/QM Rule already
demonstrates that the Bureau recognizes that a consumer making
timely payments, without modification or accommodation, for a
significant period of time may be evidence that a creditor's ATR
determination was reasonable and in good faith. See comment
43(c)(1)-1.ii.A.1.
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43(e)(7)(iii) Portfolio Requirements
As discussed above, the Bureau preliminarily concludes that if a
loan performs for a certain period of time and meets certain other
requirements, it may be reasonable to presume conclusively that the
creditor made a reasonable and good faith ATR determination at
consummation, and that a future default may be attributed to factors
that the creditor could not have reasonably anticipated at
consummation. The Bureau anticipates that many borrowers who have the
ability to repay, such as those with non-traditional credit profiles or
income sources, may fall outside existing QM definitions. With a
Seasoned QM definition, the Bureau seeks to encourage innovation and
the growth of a responsible and affordable non-QM market. However,
additional protections may be helpful to ensure that creditors who seek
to use the flexibility that would be provided under this proposal have
an additional incentive to engage in responsible lending and make
affordable loans. Accordingly, for reasons discussed below, proposed
Sec. 1026.43(e)(7)(iii) would impose certain portfolio requirements
for a covered transaction to be a Seasoned QM. Proposed Sec.
1026.43(e)(7)(iii) would be based on the legal authorities that are
discussed in the section-by-section analysis of proposed Sec.
1026.43(e)(7)(i) above.
To be a QM under proposed Sec. 1026.43(e)(7), the covered
transaction must satisfy the following requirements. First, at
consummation, the covered transaction must not be subject to a
commitment to be acquired by another person. Second, legal title to the
covered transaction cannot be sold, assigned, or otherwise transferred
to another person before the end of the seasoning period, except in
circumstances specified in proposed Sec. 1026.43(e)(7)(iii)(B)(1) and
(2). Proposed Sec. 1026.43(e)(7)(iii)(B)(1) states that the covered
transaction may be sold, assigned, or otherwise transferred to another
person pursuant to a capital restoration plan or other action under 12
U.S.C. 1831o, 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. Proposed Sec. 1026.43(e)(7)(iii)(B)(2) provides
that the covered transaction may be sold, assigned, or otherwise
transferred pursuant to a merger of the creditor with another person or
acquisition of the creditor by another person or of another person by
the creditor.
The Bureau is proposing a portfolio requirement that would last
until the end of the seasoning period for the following reasons. As
discussed in greater detail in the section-by-section analysis of Sec.
1026.43(e)(7)(i) above, the proposal would not impose a DTI limit or a
pricing limit on loans that would be eligible to become Seasoned QMs.
In this respect, the proposed Seasoned QM definition is similar to some
other QM definitions such as the Small Creditor QM definition.\127\
While covered transactions would be subject to certain product
restrictions, limitations on points and fees, and underwriting
requirements, in the absence of a specific DTI or pricing limit
applicable at consummation, the Bureau believes it may be appropriate
to impose a portfolio requirement to help ensure the creditor makes a
reasonable determination that the loan is within the consumer's ability
to repay, as the Small Creditor QM definition does. As discussed above,
it is conceivable that under certain circumstances, the record of a
consumer's payments could make it appear that the consumer had the
ability to repay at consummation even when that is not in fact the
case. Other provisions of this proposal would attempt to reduce that
possibility (such as by providing that payments made by a servicer or
from a consumer's escrowed funds would not be considered as on-time
payments), but the Bureau preliminarily concludes that it may be
appropriate to provide further assurance that the creditor's ATR
determination at consummation was a diligent and reasonable one by
including a portfolio requirement. The Bureau believes that requiring
creditors who seek to use the Seasoned QM definition to hold their
loans in portfolio would give such creditors a greater incentive to
make responsible and affordable loans at consummation. By ensuring that
such creditors bear the risk if the loan defaults while the loan is in
portfolio, the proposed requirement would align the creditor's interest
with the statutory goal of ensuring the affordability of the loan.
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\127\ The proposed Seasoned QM definition is also similar to the
Balloon Payment QM definition in this respect. See 12 CFR
1026.43(f).
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The Bureau is concerned that, in the absence of a portfolio
requirement, creditors may have a reduced incentive to make diligent
ATR determinations, thereby increasing the likelihood that some loans
will lack ATR, and that some of the loans lacking ATR would
[[Page 53586]]
nonetheless result in records of on-time payment that would otherwise
appear to meet the criteria of a Seasoned QM definition. This is
because, once a loan is sold in the secondary markets, the creditor
does not have the same financial stake in the cost of subsequent
default. As such, a creditor that plans to sell a loan may lack some of
the incentives that a portfolio lender would have to make loans that
perform for a significant amount of time.
The Dodd-Frank Act sought to address these deficiencies in the
mortgage origination markets by requiring the Bureau to promulgate the
ATR/QM Rule and requiring six financial regulators to promulgate a
credit risk retention rule that would require securitizers of asset-
backed securities (ABS) to retain not less than 5 percent of the credit
risk of the assets collateralizing the ABS to address the originate-to-
distribute models that contributed to the deterioration in underwriting
quality during the housing bubble.\128\ A ``Qualified Residential
Mortgage'' (QRM) is exempt from the credit risk retention requirement.
The Bureau recognizes that the risk retention requirements that were
finalized in 2014 provide creditors with an indirect incentive to
originate responsible and affordable loans for sale and securitization
in the secondary markets, and criteria defining QRMs also help increase
the likelihood that loans will reflect a consumer's ability to repay at
consummation. Nonetheless, the Bureau preliminarily concludes that it
may be important for the Seasoned QM definition to be limited to loans
that are held in a creditor's portfolio. This would ensure that
creditors that seek to use the Seasoned QM definition have greater
incentives to ensure that the loans they make are responsible and
affordable, which the Bureau preliminarily believes is appropriate for
the reasons stated above and below.
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\128\ 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 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, the OCC, the FDIC, the Securities and Exchange Commission,
the FHFA, and HUD (collectively, the QRM agencies). Section 15G of
the Securities Exchange Act of 1934 provides that the credit risk
retention requirements shall not apply to an issuance of ABS if all
of the assets that collateralize the ABS are QRMs. See 15 U.S.C.
78o-11(c)(1)(C)(iii), (4)(A) and (B). Section 15G requires the QRM
agencies to jointly define what constitutes a QRM, taking into
consideration underwriting and product features that historical loan
performance data indicate result in a lower risk of default. See 15
U.S.C. 78o-11(e)(4). Section 15G also provides that the definition
of a QRM shall be ``no broader than'' the definition of a
``qualified mortgage,'' as the term is defined under TILA section
129C(b)(2), as amended by the Dodd-Frank Act, and regulations
adopted thereunder. 15 U.S.C. 78o-11(e)(4)(C). In 2014, the QRM
agencies issued a final rule adopting the risk retention
requirements. 79 FR 77601 (Dec. 24, 2014). The final rule aligns the
QRM definition with the QM definition defined by the Bureau in the
ATR/QM Rule, effectively exempting securities comprised of loans
that meet the QM definition from the risk retention requirement. The
final rule also requires the agencies to review the definition of
QRM no later than four years after the effective date of the final
risk retention rules. In 2019, the QRM agencies initiated a review
of certain provisions of the risk retention rule, including the QRM
definition, and have extended the review period until June 20, 2021.
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 Bureau is proposing that the portfolio requirement would remain
in place until the end of the seasoning period. As discussed elsewhere
in this proposal, in general, the earlier a delinquency occurs, the
more likely it is due to a lack of ability to repay at consummation
than a change in circumstance after consummation. As illustrated in
Figure 2 in part VII, nearly two-thirds of loans that experience
delinquencies that would prevent a loan from becoming a Seasoned QM
under the proposal do so within 36 months, and the rate at which loans
disqualify diminishes beyond 36 months. To encourage creditors that
seek to use the Seasoned QM definition to exercise discipline in
considering consumers' ability to repay at origination, the Bureau
believes that it may be appropriate for such creditors to bear the risk
of the consequences of their ATR decision-making by requiring them to
hold the loan in portfolio until the end of the seasoning period. Doing
so ensures that they are incentivized to minimize deficient ATR
determinations, whereas a shorter portfolio requirement could shield
them from the consequences of some deficient ATR determinations and
therefore weaken the intended incentive. The Bureau is not proposing to
require creditors that seek to use the Seasoned QM definition to
continue to hold loans in portfolio after the seasoning period ends
because, as explained in part V above, it appears more likely that a
failure to repay that occurs more than three years after consummation
would be attributable to causes other than the consumer's ability to
repay at loan consummation, such as a subsequent job loss. Moreover, a
loan that seasons from non-QM to safe harbor QM status may increase in
value and may be easier or more profitable to sell, thereby potentially
encouraging the origination of new loans that would not have otherwise
been made. The Bureau notes that the proposed length of the portfolio
requirement under Sec. 1026.43(e)(7)(iii) aligns with the duration of
the portfolio requirement in the Small Creditor QM, which is also
designed to ensure that lenders retain litigation risk.\129\
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\129\ The proposed Seasoned QM definition is also similar to the
Balloon Payment QM definition in this respect. See 12 CFR
1026.43(f).
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Therefore, for all the reasons discussed above, the Bureau proposes
that to the extent creditors would like to use the flexibility afforded
by the seasoning approach to achieve safe harbor QM status for the
loans they originate, the loans must be held in portfolio until the end
of the seasoning period except in specific circumstances. As noted, the
portfolio requirement for the Seasoned QM definition is similar to the
portfolio requirements in the current ATR/QM Rule for Small Creditor
QMs, and the Bureau has modeled proposed Sec. 1026.43(e)(7)(iii) on
those provisions.\130\
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\130\ See 12 CFR 1026.43(e)(5) and (f).
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The Bureau requests comment on whether it is appropriate to impose
a portfolio requirement on creditors in light of the other proposed
consumer protections in the proposal and the existing risk retention
requirements for asset-backed securities. As discussed above, the
Bureau's reason for proposing a portfolio requirement is to provide
creditors an additional incentive to originate loans that are
affordable for consumers and provide consumers with an additional layer
of protection. But the Bureau requests comment on whether the proposed
requirements regarding consideration of the consumer's DTI ratio or
residual income and verification of the consumer's debt obligations and
income would be sufficient to ensure a similar outcome. The Bureau is
interested in specific reasons for and against imposing a portfolio
requirement and how a portfolio requirement would affect the magnitude
of the expansion of QM safe harbor loans associated with the Seasoned
QM definition. The Bureau is especially interested in the potential
impact of a portfolio requirement on access to credit, specifically
whether the potential requirement would augment or diminish the
potential of a Seasoned QM definition to expand access to credit by
encouraging creditors to make affordable non-QMs in a responsible
manner, which is a fundamental goal behind the proposal. The Bureau
additionally seeks comment on the duration of the portfolio requirement
and arguments for and against the proposed requirement that creditors
[[Page 53587]]
hold loans in portfolio until the end of the seasoning period in order
for such loans to be eligible to become Seasoned QMs.
The Bureau also proposes to add comments 43(e)(7)(iii)-1 through -3
to clarify the proposed portfolio requirement. Proposed comment
43(e)(7)(iii)-1 would explain that a covered transaction is not
eligible to season into a qualified mortgage under proposed Sec.
1026.43(e)(7) if legal title to the debt obligation is sold, assigned,
or otherwise transferred to another person before the end of the
seasoning period, unless one of the exceptions in proposed Sec.
1026.43(e)(7)(iii)(B) applies. Proposed comment 43(e)(7)(iii)-2 would
clarify the application of proposed Sec. 1026.43(e)(7)(iii) to
subsequent transferees. Proposed comment 43(e)(7)(iii)-3 would explain
the impact of supervisory sales. Similar commentary exists for the
Small Creditor QM regulatory provisions to facilitate compliance, and
the Bureau preliminarily determines that proposed comments
43(e)(7)(iii)-1 through -3 would facilitate compliance with proposed
Sec. 1026.43(e)(7)(iii).
43(e)(7)(iv) Definitions
Section 1026.43(e)(7)(iv) provides several definitions for purposes
of proposed Sec. 1026.43(e)(7). These proposed definitions are
discussed below. The Bureau solicits comment on all of the definitions
it proposes in Sec. 1026.43(e)(7)(iv).
Paragraph 43(e)(7)(iv)(A)
Under proposed Sec. 1026.43(e)(7)(i)(C) and (ii), status as a
Seasoned QM would depend on the extent to which a covered transaction
has a delinquency. Only covered transactions that have no more than two
delinquencies of 30 or more days and no delinquencies of 60 or more
days at the end of the seasoning period could become Seasoned QMs. The
Bureau proposes to define delinquency in Sec. 1026.43(e)(7)(iv)(A) as
the failure to make a periodic payment (in one full payment or in two
or more partial payments) sufficient to cover principal, interest, and,
if applicable, escrow by the date the periodic payment is due under the
terms of the legal obligation. The proposed definition in Sec.
1026.43(e)(7)(iv)(A) would exclude other amounts, such as late fees,
from the definition. Proposed Sec. 1026.43(e)(7)(iv)(A)(1) through (5)
would address additional, specific aspects of the definition of
delinquency, which are discussed in turn in the section-by-section
analyses that follow. Proposed comment 43(e)(7)(iv)(A)-1 would clarify
that, in determining whether a scheduled periodic payment is delinquent
for purposes of proposed Sec. 1026.43(e)(7), the due date is the date
the payment is due under the terms of the legal obligation, without
regard to whether the consumer is afforded a period after the due date
to pay before the servicer assesses a late fee.
The Bureau believes that the proposed definition of delinquency in
Sec. 1026.43(e)(7)(iv)(A) would provide a clear and appropriate method
of assessing delinquency for purposes of Sec. 1026.43(e)(7) and that
many elements of the proposed definition are already familiar to the
mortgage industry from other Bureau regulations. For example, similar
to the proposed definition in Sec. 1026.43(e)(7)(iv)(A), the
definition of delinquency in Regulation X Sec. 1024.31 considers
whether a periodic payment sufficient to cover principal, interest,
and, if applicable, escrow is unpaid as of the due date and does so
without regard to whether the consumer is afforded a period after the
due date to pay before the servicer assesses a late fee.
Paragraphs 43(e)(7)(iv)(A)(1) and 43(e)(7)(iv)(A)(2)
Proposed Sec. 1026.43(e)(7)(iv)(A)(1) and (2) would provide when
periodic payments are 30 days delinquent and 60 days delinquent,
respectively, for purposes of proposed Sec. 1026.43(e)(7)(iv).
Proposed Sec. 1026.43(e)(7)(iv)(A)(1) would provide that a periodic
payment would be 30 days delinquent when it is not paid before the due
date of the following scheduled periodic payment. Proposed Sec.
1026.43(e)(7)(iv)(A)(2) would provide that a periodic payment would be
60 days delinquent if the consumer is more than 30 days delinquent on
the first of two sequential scheduled periodic payments and does not
make both sequential scheduled periodic payments before the due date of
the next scheduled periodic payment after the two sequential scheduled
periodic payments. Proposed comment 43(e)(7)(iv)(A)(2)-1 would provide
an illustrative example of the meaning of 60 days delinquent for
purposes of proposed Sec. 1026.43(e)(7). The Bureau believes that the
approach set forth in proposed Sec. 1026.43(e)(7)(iv)(A)(1) and (2)
and comment 43(e)(7)(iv)(A)(2)-1 would provide clear standards for
determining whether a periodic payment is 30 or 60 days delinquent that
would be relatively easy to apply.
Paragraph 43(e)(7)(iv)(A)(3)
The Bureau is aware that some servicers elect or may be required to
treat consumers as having made a timely payment even if the payment is
less than the full periodic payment due by a small amount. For purposes
of proposed Sec. 1026.43(e)(7), proposed Sec. 1026.43(e)(7)(iv)(A)(3)
would provide that for any given billing cycle for which a consumer's
payment is less than the periodic payment due, a consumer is not
delinquent if: (1) The servicer chooses not to treat the payment as
delinquent for purposes of any section of subpart C of Regulation X, 12
CFR part 1024, if applicable, (2) the payment is deficient by $50 or
less, and (3) there are no more than three such deficient payments
treated as not delinquent during the seasoning period.
The Bureau believes that this proposed approach to small periodic
payment deficiencies would result in less burden for financial
institutions seeking to avail themselves of the Seasoned QM definition,
in the event that their servicing systems and practices already make
allowances for treating a payment as not delinquent when the payment is
deficient by a small amount. For example, a servicer may have systems
in place to accept minimally deficient payments and not count them as
delinquent for purposes of calculating delinquency under subpart C of
Regulation X, 12 CFR part 1024. Further, the Bureau is concerned that,
absent proposed Sec. 1026.43(e)(7)(iv)(A)(3), creditors might find it
very unlikely that many of their loans would fully meet the
requirements to be a Seasoned QM, undermining the rule's objectives.
Even though only fixed-rate covered transactions could become
Seasoned QMs pursuant to proposed Sec. 1026.43(e)(7)(i), the required
periodic payments for such transactions could vary over time as tax and
insurance amounts change. For example, a consumer could overlook an
annual escrow statement reflecting an escrow payment increase and pay
the previously required amount instead of the new amount. The Bureau
believes that small deficiencies in a limited amount of periodic
payments would not necessarily mean that the consumer was unable to
repay the loan at the time of consummation.
The Bureau is concerned, however, that unless limits are imposed,
servicers and creditors could use payment tolerances to mask
unaffordability in a way that might undermine the purposes of this
proposal. The Bureau understands that Fannie Mae and Freddie Mac
servicing guidance allows servicers to apply periodic payments
[[Page 53588]]
that are short by $50 or less.\131\ Fannie Mae limits the usage of the
payment tolerance to three monthly payments during a 12-month
period,\132\ while the National Mortgage Settlement generally required
acceptance of at least two periodic payments that were short by $50 or
less.\133\ In light of these practices and the considerations discussed
above, the Bureau is proposing a cap of no more than three periodic
payment deficiencies of $50 or less during the seasoning period to
ensure that use of payment tolerances does not mask unaffordability.
The Bureau believes that allowing up to three deficient payments over
the course of the seasoning period may provide appropriate flexibility
for small deficiencies such as those related to variations in tax and
insurance amounts.\134\
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\131\ Fannie Mae, Servicing Guide 218-19 (July 15, 2020),
https://singlefamily.fanniemae.com/media/23346/display (July 2020
Servicing Guide); Freddie Mac, Seller/Servicer Guide 8103-3 (Aug. 5,
2020), https://guide.freddiemac.com/ci/okcsFattach/get/1002095_2.
\132\ July 2020 Servicing Guide, supra note 131, at 218-19.
\133\ See, e.g., United States v. Bank of Am. Corp., No. 1:12-
cv-00361-RMC, 2012 U.S. Dist. LEXIS 188892, at *32 (D.D.C. Apr. 4,
2012).
\134\ The Bureau also notes that a deficient periodic payment
would not trigger a delinquency of 30 days or more under proposed
Sec. 1026.43(e)(7)(iv)(A)(1) if the consumer pays the deficient
amount before the next periodic payment comes due.
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Paragraph 43(e)(7)(iv)(A)(4)
Proposed Sec. 1026.43(e)(7)(iv)(A)(4) would provide that unless a
qualifying change is made to the loan obligation, the principal and
interest used in determining the date a periodic payment sufficient to
cover principal, interest, and, if applicable, escrow becomes due and
unpaid are the principal and interest payment amounts established by
the terms and payment schedule of the loan obligation at consummation.
Proposed Sec. 1026.43(e)(7)(iv)(A)(4) focuses on the principal and
interest payment amounts established by the terms and payment schedule
of the loan obligation at consummation because the performance
requirements in proposed Sec. 1026.43(e)(7)(ii) are designed to assess
whether the creditor made a reasonable and good faith determination of
the consumer's ability to repay at the time of consummation.\135\ The
Bureau is concerned that using a principal and interest amount that has
been modified or adjusted after consummation would not provide a basis
for presuming that the creditor made such a determination. For example,
if a consumer has a modified payment that is much lower than the
original contractual payment amount, the consumer might be able to make
the modified payments even though the contractual terms at consummation
were not affordable.
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\135\ The Bureau is not proposing to require that the escrow
amount (if applicable) considered in determining whether a
delinquency exists for purposes of proposed Sec. 1026.43(e)(7) be
the amount disclosed to the consumer at origination, because escrow
payments are subject to changes over time.
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As explained in the section-by-section analysis of proposed Sec.
1026.43(e)(7)(iv)(B), the Bureau preliminarily concludes that certain
unusual circumstances involving disasters or pandemic-related
emergencies warrant using a principal and interest amount that has been
modified or adjusted after consummation. Accordingly, the Bureau
proposes that if a qualifying change as defined in proposed Sec.
1026.43(e)(7)(iv)(B) is made to the loan obligation, the principal and
interest used in determining the date a periodic payment sufficient to
cover principal, interest, and, if applicable, escrow becomes due and
unpaid are the principal and interest payment amounts established by
the terms and payment schedule of the loan obligation at consummation
as modified by the qualifying change.
Paragraph 43(e)(7)(iv)(A)(5)
Proposed Sec. 1026.43(e)(7)(iv)(A)(5) addresses how to handle
payments made from certain third-party sources in assessing delinquency
for purposes of proposed Sec. 1026.43(e)(7). Specifically, proposed
Sec. 1026.43(e)(7)(iv)(A)(5) provides that, except for making up the
deficiency amount set forth in proposed Sec.
1026.43(e)(7)(iv)(A)(3)(ii), payments from the following sources are
not considered in assessing delinquency under proposed Sec.
1026.43(e)(7)(iv)(A): (1) Funds in escrow in connection with the
covered transaction, or (2) funds paid on behalf of the consumer by the
creditor, servicer, assignee of the covered transaction, or any other
person acting on behalf of such creditor, servicer, or assignee.
Because a seasoning approach would condition protection from
liability on performance, some commenters that responded to the ANPR
expressed concern that creditors might take steps to make it appear
that consumers were making payments on their mortgage loans during the
seasoning period to ensure those loans season even in situations where
consumers were in fact struggling. As discussed in part III above,
several consumer advocacy groups suggested that creditors might engage
in gaming to minimize defaults during the seasoning period. They noted,
as an example, that creditors might place some portion of the loan's
proceeds in escrow to be used to fund monthly loan payments. Similarly,
two industry commenters that supported a seasoning approach suggested
the Bureau could require consumers to use their own funds to make
monthly payments.
The Bureau is aware that the GSEs have specific requirements to
address these types of concerns in their representation and warranty
frameworks. For example, in addition to imposing conditions around the
number and duration of delinquencies, Fannie Mae's lender selling
representation and warranty framework provides that:
With the exception of mortgage loans with temporary buydowns,
neither the lender nor a third party with a financial interest in
the performance of the loan . . . can escrow or advance funds on
behalf of the borrower to be used for payment of any principal or
interest payable under the terms of the mortgage loan for the
purpose of satisfying the payment history requirement.\136\
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\136\ Fannie Mae, Selling Guide 56 (Aug. 5, 2020), https://singlefamily.fanniemae.com/media/23641/display.
The Bureau tentatively concludes that proposed Sec.
1026.43(e)(7)(iv)(A)(5) is an appropriate step to ensure that the
performance history considered in assessing delinquency for purposes of
proposed Sec. 1026.43(e)(7) reflects the consumer's ability to repay
rather than payments made by the creditor, assignee or servicer or
persons acting on their behalf, potentially masking a consumer's
inability to repay. Similar to the GSEs' representation and warranty
framework, the Bureau believes that payments made from escrow accounts
established in connection with the loan should not be considered in
assessing performance for seasoning purposes because a creditor could
escrow funds from the loan proceeds to cover payments during the
seasoning period even if the loan payments were not actually affordable
for the consumer on an ongoing basis.
Pursuant to proposed Sec. 1026.43(e)(7)(iv)(A)(5), any payment
received from one of the identified sources would not be considered in
assessing delinquency, except for making up the deficiency amount set
forth in proposed Sec. 1026.43(e)(7)(iv)(A)(3)(ii). Thus, for example,
if a creditor or servicer advances $800 to cover a specific periodic
payment on the consumer's behalf, it would be as if the advanced $800
were not paid for purposes of assessing whether that periodic payment
is delinquent under proposed Sec. 1026.43(e)(7). However, proposed
[[Page 53589]]
Sec. 1026.43(e)(7)(iv)(A)(5) would not prohibit creditors from making
up a deficiency amount as part of a payment tolerance of $50 or less
under the circumstances set forth in proposed Sec.
1026.43(e)(7)(iv)(A)(3)(ii).
The Bureau seeks comment on whether it should include other sources
of funds in proposed Sec. 1026.43(e)(7)(iv)(A)(5) as an additional
measure to ensure payments in fact reflect ability to repay.
Specifically, the Bureau is interested in whether it should include
funds from subordinate-lien credit transactions made to the consumer by
the creditor, servicer, or assignee of the covered transaction, or a
person acting on such creditor, servicer, or assignee's behalf; the
reasons for or against treating such funds in the same way as proposed
Sec. 1026.43(e)(7)(iv)(A)(5) would treat funds paid on behalf of a
consumer by such persons; and how such a provision could be structured
so as not to impact negatively consumers' ability to access credit.
Paragraph 43(e)(7)(iv)(B)
Proposed Sec. 1026.43(e)(7)(iv)(C)(2) would provide that the
seasoning period does not include certain periods during which the
consumer is in a temporary payment accommodation extended in connection
with a disaster or pandemic-related national emergency, provided that
during or at the end of the temporary payment accommodation there is a
qualifying change or the consumer cures the loan's delinquency under
its original terms. Proposed Sec. 1026.43(e)(7)(iv)(C)(2) would
provide that, under those circumstances, the seasoning period consists
of the period before the accommodation begins and an additional period
immediately after the accommodation ends, which together must equal at
least 36 months. For the reasons discussed below, proposed Sec.
1026.43(e)(7)(iv)(B) defines a qualifying change as an agreement that
meets the following conditions: (1) The agreement is entered into
during or after a temporary payment accommodation in connection with a
disaster or pandemic-related national emergency as defined in proposed
Sec. 1026.43(e)(7)(iv)(D), and must end any pre-existing delinquency
on the loan obligation when the agreement takes effect; (2) the amount
of interest charged over the full term of the loan does not increase as
a result of the agreement; (3) the servicer does not charge any fee in
connection with the agreement; and (4) the servicer waives all existing
late charges, penalties, stop payment fees, or similar charges promptly
upon the consumer's acceptance of the agreement.
The Bureau understands that a variety of options may be available
to bring current a loan that is subject to a temporary payment
accommodation extended in connection with a disaster or pandemic-
related national emergency, which include, but are not limited to,
curing the delinquency according to the terms of the original
obligation, entering into a repayment plan, or entering into a
permanent modification. In determining how to define a qualifying
change, the Bureau sought to propose standards that would reasonably
ensure that any changes in the terms of a loan re-entering the
seasoning period after a temporary payment accommodation extended in
connection with a disaster or pandemic-related national emergency would
not significantly change the affordability of the loan as compared to
the loan terms at consummation. As such, the Bureau preliminarily
concludes that such a qualifying change should end any pre-existing
delinquency, not add to the amount of interest charged over the full
term of the loan, not involve an additional fee charged to the consumer
in connection with the change, and generally provide a waiver of
accumulated fees upon the consumer's acceptance of the change. The
Bureau preliminarily determines that these standards would help to
ensure that, consistent with the underlying purposes of the ATR and QM
requirements, loans that ultimately become Seasoned QMs after a
temporary payment accommodation extended in connection with a disaster
or pandemic-related national emergency are affordable.
Paragraph 43(e)(7)(iv)(C)
Proposed Sec. 1026.43(e)(7) would require that, to become a
Seasoned QM, a covered transaction must meet certain requirements
during and at the end of the seasoning period. Proposed Sec.
1026.43(e)(7)(iv)(C) would define the seasoning period as a period of
36 months beginning on the date on which the first periodic payment is
due after consummation of the covered transaction, except that: (1) If
there is a delinquency of 30 days or more at the end of the 36th month
of the seasoning period, the seasoning period does not end until there
is no delinquency; (2) the seasoning period does not include any period
during which the consumer is in a temporary payment accommodation in
connection with a disaster or pandemic-related national emergency,
provided that during or at the end of the temporary payment
accommodation there is a qualifying change or the consumer cures the
loan's delinquency under its original terms. These exceptions are
further discussed in the section-by-section analysis of proposed Sec.
1026.43(e)(7)(iv)(C)(1) and (2) below.
In defining the length of the proposed seasoning period, the Bureau
seeks to balance two objectives. First, it seeks to ensure that safe
harbor QM status accrues to loans for which the history of sustained,
timely payments is long enough to conclusively presume that the
consumer had the ability to repay at consummation. Second, in
accomplishing its first objective, the Bureau seeks to avoid making the
seasoning period so long that the Seasoned QM definition fails to
incentivize increased access to credit, especially through increased
originations of non-QM loans to consumers with the ability to repay
them.
As explained in part V above, in evaluating the length of a
seasoning period that is long enough to demonstrate a consumer's
ability to repay, the Bureau considered the practices of market
participants with respect to penalties and other remedies for
deficiencies in underwriting practices. The Bureau also focused on the
timing of the first disqualifying event from the proposed Seasoned QM
definition as well as the rate at which loans terminate, either through
prepayment or foreclosure, to assess the potential population of loans
that would be eligible to benefit from this proposal, as discussed in
part V above and illustrated in Figures 1 and 2 of part VII below.
Based on these considerations and for the reasons discussed in part V
above, the Bureau is proposing to define the seasoning period generally
as a period of 36 months beginning on the date on which the first
periodic payment is due after consummation.
The Bureau solicits comment on its proposal to define the seasoning
period generally as a period of 36 months beginning on the date on
which the first periodic payment is due after consummation. The Bureau
also requests comment on alternative lengths that the Bureau should
consider for the seasoning period; considerations and data that the
Bureau should consider in determining the length of the seasoning
period; and whether the length of the seasoning period should depend on
the type of loan or QM status at origination (for example, whether the
Bureau should provide a longer seasoning period for loans that are non-
QM at origination than for loans that are rebuttable presumption loans
at origination).
[[Page 53590]]
Paragraph 43(e)(7)(iv)(C)(1)
As explained in the section-by-section analysis of proposed Sec.
1026.43(e)(7)(iv)(C) above, the Bureau is proposing a seasoning period
of 36 months beginning on the date on which the first periodic payment
is due after consummation, unless one of two exceptions applies. The
first proposed exception would extend the seasoning period if the loan
is 30 days or more delinquent at the point when the seasoning period
would otherwise end. Specifically, proposed Sec.
1026.43(e)(7)(iv)(C)(1) provides that if there is a delinquency of 30
days or more at the end of the 36th month of the seasoning period, the
seasoning period does not end until there is no delinquency.
When a delinquency of 30 days or more exists in the 36th month of
the seasoning period, it is possible that the delinquency will be
resolved quickly after the seasoning period ends or that the
delinquency will continue for an extended period. In situations where
the delinquency is not resolved quickly, the Bureau believes that it
may not be appropriate for the loan to become a Seasoned QM, as the
extended delinquency, when considered with the consumer's prior payment
history, could suggest that the creditor failed to make a reasonable,
good faith determination of ability to repay at consummation. The
Bureau is, therefore, proposing to extend the seasoning period under
these circumstances until the loan is no longer delinquent. The loan
would then have to meet the performance requirements under proposed
Sec. 1026.43(e)(7)(ii) at the conclusion of the extended seasoning
period based on performance over the entire, extended seasoning period.
The Bureau believes that extending the seasoning period until any
delinquency of 30 days or more is resolved would help to ensure that
loans for which a creditor failed to make a reasonable, good faith
determination of ability to repay at consummation do not season into
QMs under the proposal.
Paragraph 43(e)(7)(iv)(C)(2)
Proposed Sec. 1026.43(e)(7)(iv)(C)(2) addresses how the time
during which a loan is subject to a temporary payment accommodation
extended in connection with a disaster or pandemic-related national
emergency \137\ affects the seasoning period. For the reasons set forth
below, proposed Sec. 1026.43(e)(7)(iv)(C)(2) provides that any period
during which the consumer is in a temporary payment accommodation
extended in connection with a disaster or pandemic-related national
emergency would not be counted as part of the seasoning period.
Proposed Sec. 1026.43(e)(7)(iv)(C)(2) also states that, if the
seasoning period is paused due to a temporary payment accommodation
defined in proposed Sec. 1026.43(e)(7)(iv)(D), a loan must undergo a
qualifying change \138\ or the consumer must cure the delinquency under
the loan's original terms before the seasoning period can resume.
Section 1026.43(e)(7)(iv)(C)(2) further explains that, under these
circumstances, the seasoning period consists of the period from the
date on which the first periodic payment was due after consummation of
the covered transaction to the beginning of the temporary payment
accommodation and an additional period immediately after the temporary
payment accommodation ends, which together must equal at least 36
months.
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\137\ As further discussed in the section-by-section analysis of
Sec. 1026.43(e)(7)(iv)(D) below, the Bureau is proposing to define
a temporary payment accommodation extended in connection with a
disaster or pandemic-related national emergency as temporary payment
relief granted to a consumer due to financial hardship caused
directly or indirectly by a presidentially declared emergency or
major disaster under the Robert T. Stafford Disaster Relief and
Emergency Assistance Act (Stafford Act), Public Law 93-288, 88 Stat.
143 (1974), or a presidentially declared pandemic-related national
emergency under the National Emergencies Act, Public Law 94-412, 90
Stat. 1255 (1976).
\138\ As further discussed in the section-by-section analysis of
Sec. 1026.43(e)(7)(iv)(C) above, the Bureau is proposing specific
requirements for the type of qualifying change that can restart the
seasoning period.
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The Bureau is proposing to exempt the period of time during which a
loan is subject to certain temporary payment accommodations from the
seasoning period for three primary reasons, which are further discussed
below. First, the Bureau believes that financial hardship experienced
as a result of a disaster or pandemic-related national emergency is not
likely to be indicative of a consumer's inability to afford a loan at
consummation. Second, the Bureau preliminarily believes that the
assessment of an entire 36-month seasoning period during which the
consumer is obligated to make full periodic payments (whether based on
the terms of the original obligation or a qualifying change) is
necessary to demonstrate that the consumer was able to afford the loan
at consummation. The Bureau believes that a loan's performance during
time spent in a temporary payment accommodation due to a disaster or
pandemic-related national emergency should be excluded from this period
because such accommodations typically involve reduced payments or no
payment and are therefore not likely to assist in determining whether
the creditor made a reasonable assessment of the consumer's ability to
repay at consummation. Third, absent the exclusion of periods of such
temporary payment accommodations from the seasoning period definition,
financial institutions may be disincentivized from offering these types
of accommodations to consumers in a prompt manner.
The Bureau believes that financial hardship experienced as a result
of a disaster or pandemic-related national emergency is not likely to
be indicative of the consumer's inability to afford the loan at
consummation, since it constitutes a change in the consumer's
circumstances after consummation. This determination is consistent with
the ATR/QM Rule's distinction between failure to repay due to a
consumer's inability to repay at the loan's consummation, versus a
consumer's subsequent inability to repay due to a change in the
consumer's circumstances. Comment 43(c)(1)-2 states that ``[a] change
in the consumer's circumstances after consummation . . . that cannot be
reasonably anticipated from the consumer's application or the records
used to determine repayment ability is not relevant to determining a
creditor's compliance with the rule.'' As such, the Bureau tentatively
determines that periods of temporary payment accommodation attributable
to financial hardship related to a disaster or pandemic-related
national emergency should not jeopardize the possibility of the loan
seasoning into a QM if the consumer brings the loan current or enters
into a qualifying change. Absent an exclusion from the seasoning period
for these types of loans, loans that do not meet the proposed
performance requirements in proposed Sec. 1026.43(e)(7)(ii) due to a
disaster or pandemic-related national emergency would lose their
seasoning eligibility even if a temporary payment accommodation could
have assisted in resolving the loan's delinquency.
In evaluating how it would propose to treat periods of temporary
payment accommodation for purposes of the seasoning period, the Bureau
also considered how market participants address temporary payment
accommodations with respect to penalties and other remedies for
deficiencies in underwriting practices. The GSEs generally treat
temporary and permanent payment accommodations as disqualifying for
purposes of representation and warranty
[[Page 53591]]
enforcement relief, but they make certain exceptions for accommodations
related to disasters.\139\ Similarly, the master policies of mortgage
insurers generally provide rescission relief after 36 months of
satisfactory payment performance, but a loan that has been subject to a
temporary or permanent payment accommodation is typically not eligible
for 36-month rescission relief, unless the accommodation was the result
of a disaster. These practices, which extend to a significant portion
of covered transactions, suggest that the GSEs and mortgage insurers
have concluded based on their experience that payment accommodations
resulting from disasters are not likely to be attributed to
underwriting.\140\
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\139\ Fannie Mae's Selling Guide states that loans subject to
non-disaster related payment accommodations ``may be eligible [for
representation and warranty enforcement relief] on the basis of a
quality control review of the loan file'' if certain other
requirements are met. See Fannie Mae, Selling Guide 56 (Aug. 5,
2020), https://singlefamily.fanniemae.com/media/23641/display. For
purposes of representation and warranty enforcement relief, the GSEs
allow disaster-related forbearance plans to count as part of
seasoning periods, but only if the subject loan is brought current
(via reinstatement, a repayment plan, or a permanent modification)
after the forbearance plan ends. See id. at 57; Freddie Mac, Seller/
Servicer Guide 1301-19 (Aug. 5, 2020), https://guide.freddiemac.com/ci/okcsFattach/get/1002095_2.
\140\ Although both the GSEs and mortgage insurers appear to
count time spent in a disaster-related forbearance plan towards the
36-month time period, the Bureau believes that excluding temporary
payment accommodations related to a disaster or pandemic-related
national emergency from the seasoning period may best advance its
goal of ensuring that the seasoning period allows enough time to
assess whether the creditor made a reasonable assessment of the
consumer's ability to repay at origination.
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The Bureau is concerned that temporary payment accommodations
entered into for reasons other than disasters or emergencies meeting
the definition in proposed Sec. 1026.43(e)(7)(iv)(D) may be a sign of
ongoing consumer financial distress that could indicate that the
creditor did not make a reasonable assessment of the consumer's ability
to repay at origination. As such, the Bureau believes it may be
appropriate to treat periods of temporary payment accommodation for
reasons other than disasters or pandemic-related emergencies as part of
the seasoning period.
In defining limits for the types of temporary payment
accommodations that qualify to be excluded from the seasoning period,
the Bureau is also mindful of its goal of ensuring access to
responsible, affordable mortgage credit by proposing requirements which
enable a financial institution to obtain a reasonable degree of
certainty as to whether a loan has met the definition of a Seasoned QM
at the end of the seasoning period. The Bureau is concerned that
proposing a broader exclusion from the seasoning period, such as, for
example, excluding a period of temporary payment accommodation entered
into as the result of financial hardship arising from circumstances not
foreseeable at origination, could lead to an uncertain standard whereby
financial hardships resulting in temporary payment accommodations would
need to be evaluated on a case-by-case basis to determine whether a
loan subject to such accommodations could season into a QM. Therefore,
the Bureau proposes to exclude from the seasoning period temporary
payment accommodations only for disasters and pandemic-related national
emergencies meeting the definition in proposed Sec.
1026.43(e)(7)(iv)(D).
The Bureau is also concerned that, absent the exclusion of periods
of temporary payment accommodations extended in connection with a
disaster or pandemic-related national emergency from the seasoning
period definition, financial institutions may be disincentivized from
offering these types of accommodations to consumers in a prompt manner.
Specifically, the Bureau is concerned that financial institutions may
delay the provision of such payment accommodations until and unless
affected loans are disqualified from seasoning into QM status due to
accumulating two delinquencies of 30 or more days or one delinquency of
60 or more days. The proposed rule's exclusion of temporary payment
accommodations related to a disaster or pandemic-related national
emergency from the proposed seasoning period is consistent with the
Bureau's prior statements and actions encouraging financial
institutions to move quickly to assist consumers affected by the urgent
circumstances surrounding these types of events.\141\
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\141\ See, e.g., Bureau of Consumer Fin. Prot., Statement on
Bureau Supervisory and Enforcement Response to COVID-19 Pandemic
(Mar. 26, 2020), https://files.consumerfinance.gov/f/documents/cfpb_supervisory-enforcement-statement_covid-19_2020-03.pdf; Press
Release, Bureau of Consumer Fin. Prot., Agencies Provide Additional
Information to Encourage Financial Institutions to Work with
Borrowers Affected by COVID-19 (Mar. 22, 2020), https://www.consumerfinance.gov/about-us/newsroom/agencies-provide-additional-information-encourage-financial-institutions-work-borrowers-affected-covid-19/; see also 85 FR 39055 (June 30, 2020)
(the Bureau's June 2020 interim final rule amending Regulation X to
allow mortgage servicers to finalize loss mitigation options without
collecting a complete application).
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At the same time, the Bureau recognizes that the QM status is
typically reserved for loans that meet various requirements designed to
ensure affordability and wants to ensure that loans that season into
QMs have affordable terms. For that reason, the Bureau is proposing to
allow loans to re-enter the seasoning period after a temporary payment
accommodation ends only when the consumer cures the loan's delinquency
under its original terms or specific qualifying changes are made to the
loan obligation. As discussed further in the section-by-section
analysis of proposed Sec. 1026.43(e)(7)(iv)(C), the proposed
limitation to qualifying changes is meant to ensure that any changes
made to the loan terms after a temporary payment accommodation related
to a disaster or pandemic-related national emergency do not undermine
the affordability that the QM statutory requirements are designed to
ensure. The Bureau is also proposing to require a total cumulative
seasoning period of 36 months, excluding the period of temporary
payment accommodation, to ensure that there is sufficient information
to evaluate the consumer's performance history using the performance
requirements in proposed Sec. 1026.43(e)(7)(ii).
Proposed comment 43(e)(7)(iv)(C)(2)-1 provides an example
illustrating when the seasoning period begins, pauses, resumes, and
ends for a loan that enters a temporary payment accommodation extended
in connection with a disaster or pandemic-related national emergency.
The example uses a three-month temporary payment accommodation and
subsequent qualifying change to illustrate that, in such circumstances,
the seasoning period would end at least three months later than
originally anticipated at the loan's consummation.
The Bureau invites comment on the proposal to exclude from the
seasoning period the period of time during which a loan is subject to a
temporary payment accommodation extended in connection with a disaster
or pandemic-related national emergency.
Paragraph 43(e)(7)(iv)(D)
Proposed Sec. 1026.43(e)(7)(iv)(D) addresses how a temporary
payment accommodation made in connection with a disaster or pandemic-
related national emergency is defined. The definition of the seasoning
period in proposed Sec. 1026.43(e)(7)(iv)(C)(2), would not include the
period of time during which a consumer has been granted temporary
payment relief due to a temporary payment accommodation made in
connection with a disaster or a pandemic-related national emergency.
[[Page 53592]]
For the reasons set forth below, proposed Sec. 1026.43(e)(7)(iv)(D)
would define a temporary payment accommodation in connection with a
disaster or pandemic-related national emergency to mean temporary
payment relief granted to a consumer due to financial hardship caused
directly or indirectly by a presidentially declared emergency or major
disaster under the Robert T. Stafford Disaster Relief and Emergency
Assistance Act (Stafford Act) or a presidentially declared pandemic-
related national emergency under the National Emergencies Act.
The Bureau is proposing to reference in Sec. 1026.43(e)(7)(iv)(D)
presidentially declared emergencies or major disasters under the
Stafford Act or presidentially declared pandemic-related national
emergencies under the National Emergencies Act to provide financial
institutions with a reasonable degree of certainty regarding what types
of financial hardships lead to temporary payment accommodations that
qualify to be excluded from the seasoning period. The Stafford Act,
which has been used for over 30 years to facilitate Federal disaster
response, contains detailed definitions of what are considered to be
emergencies or major disasters under that statute.\142\ The National
Emergencies Act, which has been in place for more than 40 years, was
invoked to declare a national emergency due to the COVID-19
pandemic.\143\ The Bureau preliminarily determines that referring to
these two statutes will provide sufficient certainty for financial
institutions to ascertain what events can lead to financial hardships
that result in temporary payment accommodations qualifying to be
excluded from the seasoning period.
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\142\ Stafford Act section 102(1) and (2), 88 Stat. 144.
\143\ Proclamation No. 9994, 85 FR 15337 (Mar. 13, 2020). The
Stafford Act was also invoked to declare an emergency due to the
COVID-19 pandemic. See Press Release, The White House, Letter from
President Donald J. Trump on Emergency Determination Under the
Stafford Act (Mar. 13, 2020), https://www.whitehouse.gov/briefings-statements/letter-president-donald-j-trump-emergency-determination-stafford-act/.
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The Bureau also preliminary concludes that a presidentially
declared emergency or major disaster under the Stafford Act, or a
pandemic-related national emergency under the National Emergencies Act,
are likely to be events of a scale that warrant the timely provision of
temporary payment accommodations for consumers experiencing financial
hardship because of them.
The Bureau is aware that various types of temporary payment
accommodations may be offered to consumers during a disaster or
pandemic-related national emergency. Proposed comment 43(e)(7)(iv)(D)-1
provides a non-exclusive list of examples of the types of temporary
payment accommodations in connection with a disaster or pandemic-
related national emergency that can be excluded from the seasoning
period if they meet the definition in proposed Sec.
1026.43(e)(7)(iv)(D) and the requirements of proposed Sec.
1026.43(e)(7)(iv)(C)(2).
The Bureau invites comment generally on the proposed definition of
a temporary payment accommodation in connection with a disaster or
pandemic related national emergency.
VII. Dodd-Frank Act Section 1022(b) Analysis
A. Overview
In developing this proposal, the Bureau has considered the
potential benefits, costs, and impacts as required by section
1022(b)(2)(A) of the Dodd-Frank Act. Specifically, section
1022(b)(2)(A) of the Dodd-Frank Act requires the Bureau to consider the
potential benefits and costs of a regulation to consumers and covered
persons, including the potential reduction of access by consumers to
consumer financial products or services, the impact on depository
institutions and credit unions with $10 billion or less in total assets
as described in section 1026 of the Dodd-Frank Act, and the impact on
consumers in rural areas. The Bureau consulted with appropriate
prudential regulators and other Federal agencies regarding the
consistency of the proposed rule with prudential, market, or systemic
objectives administered by such agencies as required by section
1022(b)(2)(B) of the Dodd-Frank Act. The Bureau requests comment on the
preliminary analysis presented below as well as submissions of
additional data that could inform the Bureau's analysis of the
benefits, costs, and impacts.
The proposal defines a new category of QMs for first-lien, fixed-
rate, covered transactions that have fully amortizing payments and do
not have loan features proscribed by the statutory QM requirements,
such as balloon-payments, interest-only features, terms longer than 30
years, or points and fees above prescribed amounts. Creditors would
have to satisfy consider and verify requirements and keep the loans in
portfolio until the end of the seasoning period. The loans also would
have to meet certain performance requirements. Specifically, loans
could have no more than two delinquencies of 30 or more days and no
delinquencies of 60 or more days at the end of the seasoning period.
Covered transactions that satisfy the proposed Seasoned QM requirements
would receive a safe harbor from ATR liability at the end of the
seasoning period.
As discussed above, a goal of the proposal is to enhance access to
responsible, affordable mortgage credit. The proposal incentivizes the
origination of non-QM and rebuttable presumption QM loans that a lender
expects to demonstrate a sustained and timely mortgage payment history,
by providing a separate path to safe harbor QM status for these loans
if lenders' expectations are fulfilled. The proposal therefore may
encourage meaningful innovation and lending to broader groups of
creditworthy consumers that would otherwise not occur.
1. Data and Evidence
The impact analyses rely on data from a range of sources. These
include data collected or developed by the Bureau, including the Home
Mortgage Disclosure Act of 1975 (HMDA) \144\ and National Mortgage
Database (NMDB) \145\ 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 the analysis that follows, including the share of lenders
that originate non-QM loans. Consultations with other regulatory
agencies, industry,
[[Page 53593]]
and research organizations inform the Bureau's impact analyses.
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\144\ Public Law 94-200, tit. III, 89 Stat. 1125. HMDA requires
many financial institutions to maintain, report, and publicly
disclose loan-level information about mortgages. These data help
show whether creditors are serving the housing needs of their
communities; they give public officials information that helps them
make decisions and policies; and they shed light on lending patterns
that could be discriminatory. HMDA was originally enacted by
Congress in 1975 and is implemented by Regulation C. See Bureau of
Consumer Fin. Prot., https://www.consumerfinance.gov/data-research/hmda/.
\145\ 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 55-56 (Sept.
2018), https://www.consumerfinance.gov/documents/6850/bcfp_sources-uses-of-data.pdf. Differences in total market size estimates between
NMDB data and HMDA data are attributable to differences in coverage
and data construction methodology.
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The data the Bureau relied upon provide detailed information on the
number, characteristics, pricing, and performance of mortgage loans
originated in recent years. However, it would be useful to supplement
these data with more information relevant to pricing and APR
calculations, particularly private mortgage insurance (PMI) costs, for
originations before 2018. PMI costs are an important component of APRs,
particularly for loans with smaller down payments, and thus should be
included or estimated in calculations of rate spreads relative to APOR.
The Bureau seeks additional information or data that could inform
quantitative estimates of PMI costs or APRs for these loans.
The data provide only limited information on the costs to creditors
of uncertainty related to legal liability that the proposal may
mitigate. As a result, the analysis of impacts of the proposal on
creditor costs from reduced uncertainty related to legal liability
relies on simplifying assumptions and qualitative information as well
as the limited data that are available. This analysis indicates the
relative magnitude of the potential effects of the proposal on these
costs.
Finally, as discussed further below, the analysis of the impacts of
the proposal requires the Bureau to use current data to predict the
number of originations of certain types of non-QM loans and the
performance of these loans. It is possible, however, that the market
for mortgage originations may shift in unanticipated ways given the
potential changes considered below. The Bureau seeks additional
information or data which could inform its quantitative estimates of
the effects of the proposal.
2. Description of the Baseline
The Bureau considers the benefits, costs, and impacts of the
proposal against two baselines. The first baseline (Baseline 1) assumes
that the Bureau's recent proposals to extend the expiration date of the
Temporary GSE QM loan definition and to amend the General QM definition
are both adopted as proposed. The second baseline (Baseline 2) assumes
that neither proposal is adopted, so the Temporary GSE QM loan
definition expires on January 10, 2021 or when the GSEs exit
conservatorship, whichever occurs first, and the current General QM
definition persists.
Under each baseline, there are different numbers of loans that
would be originated, and which would meet all of the requirements for a
Seasoned QM loan except for the performance and portfolio requirements
of the seasoning period. These are the loans under each baseline that
are first-lien, fixed-rate covered transactions that comply, as
described above, with certain general restrictions on product features,
points and fees limits, and underwriting requirements. Further, only
some of these loans would benefit if they met the performance and
portfolio requirements for a Seasoned QM loan, meaning that as a result
of meeting those requirements, they would obtain QM status, a stronger
presumption of compliance, or would not need to satisfy the portfolio
retention requirements that would be necessary to obtain safe harbor QM
status under the EGRRCPA. The analysis below predicts the annual number
of loan originations under each baseline, in years similar to 2018,
that meet all of the requirements of a Seasoned QM loan and would
benefit if they met the performance and portfolio requirements of the
seasoning period. Upon satisfying all the requirements of the Seasoned
QM definition, these loans would obtain QM status or a stronger
presumption of compliance, or would not need to satisfy the portfolio
retention requirements of the EGRRCPA.\146\
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\146\ Thus, the analysis estimates the maximum number of loans
under each baseline that would become Seasoned QM loans if the loans
met the performance and portfolio requirements. The Bureau has
discretion in any rulemaking to choose an appropriate scope of
analysis with respect to benefits, costs, and impacts, as well as an
appropriate baseline or baselines.
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As stated above, under Baseline 1, both the proposal to extend the
expiration date of the Temporary GSE QM loan definition and the
proposal to amend the General QM definition are adopted as proposed.
Consider first all of the non-QM loans under Baseline 1 that meet all
of the requirements at consummation for a Seasoned QM loan and would
benefit if they met the performance and portfolio requirements of the
seasoning period.\147\ To count these loans, the Bureau has used 2018
HMDA data to identify all residential first-lien, fixed-rate
conventional loans for 1-4 unit housing that do not have prohibited
features or other disqualifying characteristics; are not Small Creditor
QM loans or entitled to a presumption of compliance under the EGRRCPA
QM definition; \148\ and for which the APR exceeds APOR by the amounts
specified in the General QM Proposal's proposed amendments to Sec.
1026.43(e)(2)(vi)(A) through (E). The Bureau estimates that there are
22,816 of these loans. These loans would benefit from the proposal by
obtaining safe harbor QM status if they meet the performance and
portfolio requirements of the seasoning period, and not otherwise.\149\
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\147\ Analysis of HMDA data for Baseline 1 excludes loans where
rate spread is not observed.
\148\ EGRRCPA section 101 provides that loans must be originated
and retained in portfolio by a covered institution, except for
limited permissible transfers. Although EGRRCPA section 101 took
effect upon enactment, the Bureau has not undertaken rulemaking to
address any statutory ambiguities in Regulation Z.
\149\ Note that the analysis uses 2018 data, but the proposal
(if adopted) would not apply to these loans since the proposal would
apply to covered transactions for which creditors receive an
application on or after the effective date.
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Consider next all of the rebuttable presumption QM loans under
Baseline 1 that meet all of the requirements at consummation for a
Seasoned QM loan and would benefit if they met the performance and
portfolio requirements of the seasoning period. To count these loans,
the Bureau has used 2018 HMDA data to identify two groups of loans. The
first group is all fixed-rate higher-priced covered transactions that
meet the proposed General QM definition but are not Small Creditor QM
loans or loans entitled to a presumption of compliance under the
EGRRCPA QM definition. The Bureau estimates that there are 73,590 of
these loans. The second group is all fixed-rate rebuttable presumption
Small Creditor QM loans. The Bureau estimates that there are 30,183 of
these loans. Thus, the Bureau estimates that 103,773 loans would
benefit from the proposal by obtaining safe harbor QM status instead of
rebuttable presumption QM status if they meet the performance and
portfolio requirements of the seasoning period, and not otherwise.\150\
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\150\ The Bureau assumes solely for purposes of this section
1022(b) analysis that all loans originated under the EGRRCPA QM
definition will obtain a safe harbor in the form of a conclusive
presumption of compliance with the ATR requirements. To the extent
some subset of such loans should qualify for a lesser presumption,
however, these loans would comprise a third group for consideration
here, since these loans would benefit if they met the performance
and portfolio requirements of the seasoning period.
---------------------------------------------------------------------------
Finally, consider all of the loans under Baseline 1 that are
entitled to a presumption of compliance under the EGRRCPA QM definition
and that (1) meet all of the requirements at consummation for a
Seasoned QM loan and (2) do not otherwise satisfy the criteria to
qualify for a safe harbor under the proposed General QM definition or
the Small Creditor QM definition. The Bureau estimates that there would
be 24,039 loans in 2018 that would fall into this category. This set of
loans could obtain a safe harbor as Seasoned QMs without satisfying the
portfolio
[[Page 53594]]
retention requirements that would be necessary to obtain protection
from liability under the EGRRCPA, provided they meet the performance
and portfolio requirements of the seasoning period, and not otherwise.
Thus, under Baseline 1, approximately 150,628 loans originated in
2018 would meet all of the requirements at consummation for Seasoned QM
loans and would obtain QM status, a stronger presumption of compliance,
or would not need to satisfy the portfolio retention requirements of
the EGRRCPA, if they subsequently meet the performance and portfolio
requirements of the seasoning period. This is the expected annual
number of loan originations under the baseline in years similar to
2018, that meet all of the requirements of a Seasoned QM loan and would
benefit if they met the performance and portfolio requirements of the
seasoning period. Some of these loans will meet those performance and
portfolio requirements, and some will not.\151\
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\151\ The Bureau cannot reliably measure the full expansionary
effect of the proposal on loan originations. One effect might be
that the proposal would cause the share of loan applications that
lead to originations of non-QM loans under the baseline (90 percent)
to match the overall share (97 percent for loan applications for
which Bureau data include the rate spread). This would lead to an
additional 1700 non-QM originations not accounted for above.
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Now consider Baseline 2. As stated above, under Baseline 2, neither
the proposal to extend the expiration date of the Temporary GSE QM loan
definition nor the proposal to amend the General QM definition is
adopted, and the Temporary GSE QM loan definition expires on January
10, 2021, or when the GSEs exit conservatorship, whichever occurs
first. Consider first all of the non-QM loans under Baseline 2 that
meet all of the requirements at consummation for a Seasoned QM loan and
would benefit if they met the performance and portfolio requirements of
the seasoning period.\152\ To count these loans, the Bureau has used
2018 HMDA data to identify all residential first-lien, fixed-rate
conventional loans for 1-4 unit housing that do not have prohibited
features or other disqualifying characteristics; are not Small Creditor
QM loans or originated under the EGRRCPA QM definition; and do not
satisfy the DTI requirement specified in Sec. 1026.43(e)(4)(vi) of the
current General QM definition. The Bureau estimates that there are
705,915 of these loans. These loans would benefit from the proposal by
obtaining safe harbor QM status if they meet the performance and
portfolio requirements of the seasoning period, and not otherwise.
---------------------------------------------------------------------------
\152\ Analysis of HMDA data for Baseline 2 excludes loans where
rate spread or DTI are not observed.
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Consider next all of the rebuttable presumption QM loans under
Baseline 2 that meet all of the requirements at consummation for a
Seasoned QM loan and would benefit if they met the performance and
portfolio requirements of the seasoning period. To count these loans,
the Bureau has used 2018 HMDA data to identify two groups of loans. The
first group is all first-lien, fixed-rate higher-priced covered
transactions that meet the current General QM definition, but which are
not Small Creditor QM loans or loans entitled to a presumption of
compliance under the EGRRCPA QM definition. The Bureau estimates that
there are 63,646 of these loans. The second group is all first-lien,
fixed-rate rebuttable presumption Small Creditor QM loans. The Bureau
estimates that there are 30,183 of these loans. Thus, the Bureau
estimates that 93,829 loans would obtain safe harbor QM status instead
of rebuttable presumption QM status if they meet the performance and
portfolio requirements of the seasoning period, and not otherwise.\153\
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\153\ The same caveat with respect to EGRRCPA section 101
discussed for Baseline 1 applies here as well.
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Finally, consider all of the loans under Baseline 2 that are
entitled to a presumption of compliance under the EGRRCPA QM definition
and that (1) meet all of the requirements at consummation for a
Seasoned QM loan and (2) do not otherwise satisfy the criteria to
qualify for a safe harbor under the proposed General QM definition or
the Small Creditor QM definition. The Bureau estimates that there would
be 127,887 loans in 2018 that would fall into this category. This set
of loans could obtain a safe harbor as Seasoned QMs without satisfying
the portfolio retention requirements that would be necessary to obtain
protection from liability under the EGRRCPA, provided they meet the
performance and portfolio requirements of the seasoning period, and not
otherwise.
Thus, under Baseline 2, approximately 927,631 loans originated in
2018 would meet all of the requirements at consummation for Seasoned QM
loans and would obtain QM status, a stronger presumption of compliance,
or relief from portfolio retention requirements, if they subsequently
meet the performance and portfolio requirements of the seasoning
period. This is the expected annual number of loan originations under
the baseline in years similar to 2018 that meet all of the requirements
of a Seasoned QM loan and would benefit if they met the performance and
portfolio requirements of the seasoning period. Some of these loans
will meet those performance and portfolio requirements, and some will
not.
B. Potential Benefits and Costs to Covered Persons and Consumers
The proposal reduces the chance a consumer will assert or succeed
when asserting violations of ATR requirements in a defense to
foreclosure. This section considers the potential benefits and costs of
the proposal on creditors first and then consumers. The analysis begins
by assessing how the proposal may potentially affect creditors'
litigation risk, cost of origination, and the price of borrowing,
holding originations constant. The analysis then considers the
potential impacts of the proposal on originations and the benefits and
costs of this effect. The Bureau cannot reliably quantify this effect,
so the analysis considers qualitatively the potential benefits to both
creditors and consumers of market expansion.
1. Benefits and Costs to Covered Persons
Benefits From Reduced Litigation Risk
Covered persons, specifically mortgage lenders, primarily benefit
from decreased litigation risk under the proposal. Generally, the
statute of limitations for a private action for damages for a violation
of the ATR requirement is three years after the date on which the
violation occurs. As such, the Bureau anticipates that the proposal
would not curtail the ability of consumers to bring affirmative claims
seeking damages for alleged violations of the ATR requirements.
However, TILA also accords consumers the right to assert violations of
the ATR requirements as defenses against foreclosure by recoupment or
setoff, subject to no statute of limitations. For Seasoned QM loans
that are non-QM loans or rebuttable presumption QM loans at
consummation, the proposal would effectively limit these rights to
approximately three years as a general matter.
The creditors' economic value of the reduction of litigation risk
is related to how each of three factors changes with the proposal
relative to the baseline: (1) The fraction of consumers that enter
foreclosure, (2) the likelihood that ATR defenses are successful in
foreclosure lawsuits, and (3) the costs associated with the lawsuits.
The Bureau analyzed NMDB data to assess the first factor and seeks
pertinent information related to
[[Page 53595]]
ATR defenses in foreclosure proceedings and related costs.
The full NMDB data are a nationally representative sample of
mortgages from 1998 to 2020, covering periods with differing economic
and interest rate environments. Of these mortgages, the analysis
focuses on conventional, fixed-rate purchase and refinance loans with
no prohibited features that were privately held at consummation. Due to
data limitations in the NMDB, the analysis of loan performance makes
three assumptions. First, loans would continue to be originated under
each baseline with the same characteristics regardless of QM status.
Second, potentially seasonable loans are ineligible for the portfolio
requirements of the EGRRCPA and thus can only achieve safe harbor
status via the proposal. Finally, loans held in portfolio at
consummation would not later be sold on the secondary market.
The likely quantitative impact of the proposal depends in part on
the rate of attrition for loans during the first three years, as well
as on the performance of the loans that are active for at least three
years. Figure 1 plots the fraction of loans open after three years
between 2004 and 2013 in order to provide context for the quantitative
foreclosure analysis that follows.
BILLING CODE 4810-AM-P
[GRAPHIC] [TIFF OMITTED] TP28AU20.000
Figure 1 serves as a reminder that, over time, the effects of the
proposal would depend on trends in interest rates. Loans originated
between 2004 and 2009 were typically originated at higher interest
rates and therefore would receive a significant benefit from
refinancing when interest rates declined during and after the 2008
financial crisis. Loans originated in these same years also experienced
elevated foreclosure rates during the 2008 financial crisis. As a
result, a lower share of loans remained active beyond three years, and
so the potential effects of the proposal would be smaller. This
contrasts to post-crisis origination years where initial mortgage rates
and foreclosure rates remained low and a larger share of loans remained
active beyond three years.
[[Page 53596]]
[GRAPHIC] [TIFF OMITTED] TP28AU20.001
Figure 2 provides additional context for the quantitative
foreclosure analysis. The figure considers higher-priced loans
originated between 1998 to 2008, all of which incur sufficient late
payments or delinquencies to disqualify them from seasoning depending
on the specified length of the seasoning period. Figure 2 shows, for
example, that 53 percent of loans with these performance problems would
be disqualified from seasoning if the seasoning period were 24 months,
76 percent would be disqualified if the seasoning period were 48
months, and 66 percent would be disqualified from seasoning under the
seasoning period of the proposal of 36 months.
Foreclosure Risk of Loans That Meet Seasoned QM's Proposed Performance
Requirements in Baseline 1
To assess the proposal's potential effect on foreclosure risk, the
Bureau analyzed data from the NMDB on the 1,275,480 conventional fixed-
rate, first-lien loans that were originated between 2012 and 2013
without prohibited features.\154\ The loans potentially would have met
the Seasoned QM proposal's performance criteria in 2015 and 2016.
---------------------------------------------------------------------------
\154\ The Bureau analyzed loans originated in 2012 and 2013
instead of other periods for several reasons. This period likely
predicts the benefits and costs of the proposal during a period of
normal economic expansion. The Bureau excluded later vintages
because the analysis requires both a minimum three-year look-forward
period to assess Seasoned QM's performance requirements plus some
time to see whether foreclosures eventually emerge. The Bureau
excluded earlier vintages whose loan performance may have been
affected by the financial crisis. This period was somewhat unusual
in the number of homes with negative equity and the slowness of the
subsequent economic recovery. Thus, the number of loans that would
have disqualifying events would be overstated compared to those in a
typical business cycle. Using data from an even earlier cycle of
expansion and contraction might be more informative about average
benefits and costs over the long term, but older data would also
reflect the features of the housing and mortgage markets of an
earlier time. The analysis below should be understood with this
background in mind, and the Bureau welcomes comment on the choice of
time frame for the analysis.
---------------------------------------------------------------------------
The analyses first classify loans by whether they would satisfy the
General QM requirements for safe harbor and rebuttable presumption in
Baseline 1 at consummation.\155\ Four percent of loans would be either
rebuttable presumption or non-QM loans and would potentially benefit
from the Seasoned QM definition's pathway to safe harbor if they
performed.
---------------------------------------------------------------------------
\155\ The NMDB data do not enable the Bureau to ascertain
whether loans were originated by lenders that meet the size criteria
for originating QM loans under the Small Creditor QM or EGRRCPA QM
definitions.
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[[Page 53597]]
[GRAPHIC] [TIFF OMITTED] TP28AU20.002
Seventy-eight percent of loans that would have been originated as
either rebuttable presumption QM loans or non-QM loans were still open
after three years, and of those, 92 percent satisfied the performance
criteria to qualify for Seasoned QM status under the proposal. By way
of comparison, the corresponding fractions for loans originated as safe
harbor were 78 percent and 99 percent, respectively. Altogether, 77
percent of the loans that would be rebuttable presumption QM loans and
non-QM loans under Baseline 1 would perform well enough to gain safe
harbor via Seasoned QM under the proposal.
The relief from litigation risk depends in part on the fraction of
these loans that would eventually enter foreclosure proceedings. Table
1 reports the share of loans that enter foreclosure between origination
and the first quarter of 2020 among all loans consummated between 2012
and 2013, those that were still open three years after origination, and
those that met the performance criteria of the proposal. 0.2 percent of
loans open for at least three years enter foreclosure proceedings
before March 2020. Among the loans that satisfy the proposed Seasoned
QM definition's performance requirements, foreclosure proceedings begin
for 1.4 percent of loans that would be non-QM loans in Baseline 1 and
for 0.5 percent of loans that would be rebuttable presumption loans
under Baseline 1. Combined, 0.8 percent of loans that met the
performance requirements and were potentially seasonable at
consummation would foreclose. By comparison, for loans that were still
open after three years and originated as safe harbor under Baseline 1,
only 0.1 percent of loans enter foreclosure after year three. Thus, the
average foreclosure rate among open loans with safe harbor status after
three years--either from General QM status at consummation or from
Seasoned QM status--would be higher than under Baseline 1, reflecting
the inclusion of Seasoned QM loans.
[GRAPHIC] [TIFF OMITTED] TP28AU20.003
In the January 2013 Final Rule, the Bureau estimated litigation
costs under the ability-to-repay standards for non-QMs. The Bureau
concluded that to reflect the expected value of these litigation costs,
the costs of non-QMs would increase by 10 basis points or $212 for a
$210,000 loan.\156\ This model does not predict changes in costs from
this baseline on non-QM loans that obtain QM status or on the remaining
non-QM loans. The Bureau seeks comments on methods and data that would
allow the Bureau to do so.
---------------------------------------------------------------------------
\156\ 78 FR 6408, 6569 (Jan. 30, 2013).
---------------------------------------------------------------------------
Foreclosure Risk of Loans That Meet Seasoned QM's Proposed Performance
Requirements in Baseline 2
Paralleling the analyses of the proposal relative to Baseline 1,
the analyses here classify loans by whether they would satisfy the
General QM requirements for safe harbor and rebuttable presumption QM
loans in Baseline 2 and whether they would satisfy the performance
requirements of the proposal. Eight percent of analyzed loans would be
non-QM loans or rebuttable presumption QM loans at consummation in
Baseline 2 and potentially could gain safe harbor status via the
proposed Seasoned QM performance criteria. Most of these loans (92
percent) would be non-QM at consummation. These estimates likely
overestimate the fraction of non-QM loans that would be originated
under Baseline 2.
[[Page 53598]]
[GRAPHIC] [TIFF OMITTED] TP28AU20.004
Eighty-six percent of the loans that would be potentially
seasonable at consummation under Baseline 2 are still open after three
years, of which 98 percent would satisfy the proposed performance
requirements of Seasoned QM.
Among the loans that satisfy the proposed Seasoned QM definition's
performance requirements, foreclosure proceedings begin for 0.2 percent
of loans that would be potentially seasonable at consummation under
Baseline 2. By comparison, 0.1 percent of loans that would have already
met General QM's safe harbor requirements enter foreclosure after year
three.
[GRAPHIC] [TIFF OMITTED] TP28AU20.005
The analysis suggests that the foreclosure rate for open loans with
safe harbor status after three years--either from General QM at
consummation or from Seasoned QM--would not be appreciably different
than under Baseline 2.
Benefits to Covered Persons From Market Expansion
The Bureau's analysis of the NMDB holds constant the quantity and
composition of loans. However, creditors could potentially gain from
originating loans that would not be profitable without the proposal.
Such loans potentially have not only the decreased litigation risk
discussed in the previous section, but loans that achieve safe harbor
status via the proposal are likely more easily sold on the secondary
market, freeing liquidity for creditors. This includes both non-QM
loans that achieve safe harbor status and loans that achieved safe
harbor status through the portfolio requirements of the EGRRCPA. The
Assessment Report found that while non-depository institutions sold
non-QM loans on the secondary market, almost all surveyed depository
institutions kept non-QM loans in their portfolio. The Bureau seeks
further information about whether litigation risk from non-QM status
impedes depositories' sale of non-QM loans to the secondary market.
Altogether, the Bureau cannot reliably predict how many additional
loans would be originated under the proposal's additional incentives
and subsequently how much potential profits creditors would accrue
relative to either baseline.\157\ The Bureau seeks comment as to
whether these effects can be ascertained.
---------------------------------------------------------------------------
\157\ Assessment Report, supra note 49, at 117. In the
Assessment Report, the Bureau estimated that the ATR/QM Rule
eliminated between 63 and 70 percent of non-GSE eligible, high DTI
loans for home purchase over the period of 2014 to 2016, accounting
for 9,000 to 12,000 loans. The Bureau does not believe it can
reliably estimate whether the number of additional loans would be
less than, the same as, or more than those that the Assessment
Report found were lost as a result of the ATR/QM Rule. The pool of
loans analyzed in the Assessment Report is somewhat different from
the 150,628 loans in Baseline 1 that would meet all of the
requirements at consummation for Seasoned QM loans derived above,
and the benefit of seasoning would vary across these loans.
---------------------------------------------------------------------------
Other Costs to Covered Persons
The Bureau preliminarily concludes that the proposal would not
directly impose additional costs to mortgage creditors relative to the
baseline. The proposal offers a pathway for performing mortgages to
gain a safe harbor presumption. Loans meeting the proposed Seasoned QM
definition would have at least as much of a presumption of compliance
as under the baseline. However, if the proposal succeeds in expanding
the market for non-QM loans, certain lenders' profits may be eroded by
competitive pressures.
2. Benefits and Costs to Consumers
Consumers primarily benefit from the proposal indirectly via the
potential expansion of rebuttable presumption and non-QM loans from
decreased
[[Page 53599]]
litigation risk to creditors. For consumers that choose to pursue high
APR loans without safe harbor QM status, borrowing may be cheaper or
more widely available relative to the baseline. However, the Bureau
cannot ascertain the additional number of consumers who would choose
loans without safe harbor QM status under the proposal relative to the
baselines as stated in the previous section.
Consumers who would select loans without safe harbor QM status
under both the baseline and the proposal may or may not benefit from
the proposal. On the one hand, decreased litigation risk may translate
into lower costs in competitive mortgage markets.\158\ However,
decreased litigation risk for creditors would come from limiting the
ability of consumers who make payments throughout the seasoning period
to raise violations of ATR requirements as defenses, should they enter
foreclosure after the third year. The Bureau neither has the data to
estimate consumers' value of using such violations in foreclosure
defense nor to estimate the proposal's potential decreases in price.
3. Consideration of Alternatives
The Bureau considered alternative seasoning periods to the one
proposed and alternative performance requirements of allowable 30-day
delinquencies. Each of the alternatives permits no 60-day
delinquencies. The Bureau assesses each alternative along two different
measures: (1) The estimated fraction of loans that would be originated
as non-QM or rebuttable presumption QM loans in each baseline that
would satisfy the performance requirements; and (2) the differences in
foreclosure rates between those loans that would gain safe harbor
status and those that were safe harbor at consummation.
Mirroring the approach of the foreclosure analysis in section
VII.B.1 above, the Bureau analyzes the same data on conventional,
fixed-rate, first-lien purchase and refinance mortgage loans without
prohibited features that were originated in 2012 and 2013 and held
privately in portfolio at consummation. The analyses of alternatives
also make the same assumptions on how loans with certain
characteristics can obtain safe harbor status and hold constant the
quantity and composition of the loans. Specifically, the consideration
of alternatives is similar to the analysis of the proposal in that the
Bureau cannot reliably predict how many additional loans would be
originated under its alternatives.
[GRAPHIC] [TIFF OMITTED] TP28AU20.006
Table 5 reports the fraction of loans originated as either non-QM
or rebuttable presumption QM loans under the General QM standards of
Baseline 1 that would have met the seasoning requirements under various
alternatives. Allowing for different 30-day delinquencies has modest
effects on the fraction of loans that would season. In contrast,
varying the seasoning period from 12 months to 60 months captures
vastly different numbers of loans that would still be open.
---------------------------------------------------------------------------
\158\ David S. Scharfstein & Adi Sunderam, Market Power in
Mortgage Lending and the Transmission of Monetary Policy, Mimeo
(Aug. 2016) (study how passthrough of lower secondary market costs
of funding are passed through to consumers), https://www.hbs.edu/faculty/Publication%20Files/Market%20Power%20in%20Mortgage%20Lending%20and%20the%20Transmission%20of%20Monetary%20Policy_8d6596e6-e073-4d11-83da-3ae1c6db6c28.pdf.
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[[Page 53600]]
[GRAPHIC] [TIFF OMITTED] TP28AU20.007
Varying the number of allowable 30-day delinquencies does have some
impact on foreclosure risk. Table 6 reports the difference in the share
of foreclosures among loans that would have qualified for Seasoned QM
status under the proposal with the share of foreclosures among loans
that would have been originated as safe harbor QM loans under Baseline
1. For example, under the proposal, among loans that were open for at
least three years, the Bureau estimates that with a performance
standard of no more than two 30-day delinquencies, 0.47 of a percentage
point more Seasoned QM loans would enter foreclosure proceedings than
would loans that had safe harbor status from consummation.
Holding constant the seasoning period, decreasing the number of
allowable 30-day delinquencies by one decreases the differences in
foreclosure share between loans that would have seasoned and loans that
were safe harbor QM loans from origination by approximately 4 percent.
Similarly, increasing the number of allowed 30-day delinquencies by one
increases the difference by approximately 4 percent. Changing the
length of the seasoning period generally has a larger effect on the
relative foreclosure rate than does changing the number of allowable
30-day delinquencies.
[GRAPHIC] [TIFF OMITTED] TP28AU20.008
Table 7 repeats the analysis of Table 5 using Baseline 2. A larger
fraction of loans--about 13 percentage points--originated as either
non-QM or rebuttable presumption QM loans under the General QM
standards would meet the seasoning requirements under the proposed
rule. This reflects the fact that not only are there significantly more
non-QM loans under Baseline 2 than under Baseline 1 but also that the
additional non-QM loans have relatively stronger credit characteristics
at consummation. The proposed amendments to the General QM definition
would provide many of these loans with a pathway to QM status.
[[Page 53601]]
[GRAPHIC] [TIFF OMITTED] TP28AU20.009
BILLING CODE 4810-AM-C
Table 8 shows that under Baseline 2, non-QM and rebuttable
presumption QM loans that would achieve safe harbor status through the
proposal or alternatives with a seasoning period of at least three
years have a 0.13 percentage point higher foreclosure rate than open
loans that were safe harbor QM loans at consummation. The difference in
the foreclosure rates does not dramatically vary with different numbers
of allowable 30-day delinquencies.
C. Potential Impact on Depository Institutions and Credit Unions With
$10 Billion or Less in Total Assets, as Described in Section 1026
Depository institutions and credit unions that are also creditors
making covered loans (depository creditors) with $10 billion or less in
total assets would be expected to benefit from the proposal. As stated
above, under each baseline, smaller institutions can originate Small
Creditor QM loans or QM loans under the requirements of the EGRRCPA.
Thus, they would likely not benefit from the proposal's providing a
pathway to safe harbor status for non-QM loans. However, the proposal
would allow loans to obtain safe harbor status without having to
satisfy the portfolio retention requirements of the EGRRCPA.
D. Potential Impact on Rural Areas
As with the analysis of the proposal's benefits and costs overall,
the Bureau can generally not predict how much or how little the
proposal would cause the market to expand under either baseline. The
Bureau analyzed HMDA data mirroring the analysis discussed above,
continuing to assume that loans continue to be originated under each
baseline with the same characteristics. Under Baseline 1, relatively
more loans in rural areas than in urban areas would achieve only a
stronger presumption of compliance or relief from portfolio retention
requirements by meeting the performance criteria of the proposal. This
share of loans is 20 percent for rural markets relative to 16 percent
of the market overall. This includes relatively more loans that do not
meet the portfolio requirements under the EGRRCPA that would be either
rebuttable presumption under the General QM loan definition's
requirements or non-QM (2.9 percent vs. 2.7 percent) and loans that
would meet the portfolio and other requirements under the EGRRCPA (16.7
percent vs. 13.3 percent).
However, the overall relative differences under Baseline 2 are
modest (34 percent vs. 35 percent). If they met the performance
requirements of the proposal, relatively fewer loans would gain a
stronger presumption of compliance from the proposal than under
Baseline 2 alone (21.7 percent vs. 17.1 percent), and relatively more
would gain relief from the portfolio requirements under the EGRRCPA
(16.7 percent vs. 13.4 percent).
VIII. Regulatory Flexibility Act Analysis
The Regulatory Flexibility Act (RFA),\159\ as amended by the Small
Business Regulatory Enforcement Fairness Act of 1996,\160\ 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.\161\
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\159\ 5 U.S.C. 601 et seq.
\160\ Public Law 104-121, tit. II, 110 Stat. 857 (1996).
\161\ 5 U.S.C. 601(3) (stating also that 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).\162\ 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.\163\
---------------------------------------------------------------------------
\162\ 5 U.S.C. 603 through 605.
\163\ 5 U.S.C. 609.
---------------------------------------------------------------------------
An IRFA is not required for this proposal because the proposal, if
adopted, would not have a SISNOSE. The Bureau does not expect that the
proposed rule would impose costs on small entities relative to any of
the baselines. The proposed rule defines a new category of QMs. All
methods of compliance with the ATR requirements under a particular
baseline would remain available to small entities if the proposal is
adopted. Thus, a small entity that is in compliance with the rules
under a given baseline would not need to take any different or
additional action if the proposal is adopted.
Accordingly, the Director certifies that this proposal, if adopted,
would not have a SISNOSE. The Bureau requests comment on its analysis
of the impact of the proposal on small entities and requests any
relevant data.
IX. Paperwork Reduction Act
Under the Paperwork Reduction Act of 1995 (PRA),\164\ Federal
agencies are generally required to seek, prior to implementation,
approval from the
[[Page 53602]]
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.
---------------------------------------------------------------------------
\164\ 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------
The Bureau has determined that this proposal does not contain any
new or substantively revised information collection requirements other
than those previously approved by OMB under OMB control number 3170-
0015. The proposal would amend 12 CFR part 1026 (Regulation Z), which
implements TILA. OMB control number 3170-0015 is the Bureau's OMB
control number for Regulation Z.
The Bureau welcomes comments on these determinations or any other
aspect of the proposal for purposes of the PRA.
X. Signing Authority
The Director of the Bureau, having reviewed and approved this
document, is delegating the authority to electronically sign this
document to Laura Galban, a Bureau Federal Register Liaison, for
purposes of publication in the Federal Register.
List of Subjects in 12 CFR Part 1026
Advertising, Banking, Banks, Consumer protection, Credit, Credit
unions, Mortgages, National banks, Reporting and recordkeeping
requirements, Savings associations, Truth-in-lending.
Authority and Issuance
For the reasons set forth above, the Bureau proposes to amend
Regulation Z, 12 CFR part 1026, as set forth below:
PART 1026--TRUTH IN LENDING (REGULATION Z)
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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
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2. Amend Sec. 1026.43 by revising paragraphs (e)(1) and the
introductory text of (e)(2) and adding paragraph (e)(7) to read as
follows:
Sec. 1026.43 Minimum standards for transactions secured by a
dwelling.
* * * * *
(e) Qualified mortgages--(1) Safe harbor and presumption of
compliance--(i) Safe harbor for loans that are not higher-priced
covered transactions and for seasoned loans. A creditor or assignee of
a qualified mortgage complies with the repayment ability requirements
of paragraph (c) of this section if:
(A) The loan is a qualified mortgage as defined in paragraphs
(e)(2), (4), (5), (6), or (f) of this section that is not a higher-
priced covered transaction, as defined in paragraph (b)(4) of this
section; or
(B) The loan is a qualified mortgage as defined in paragraph (e)(7)
of this section, regardless of whether the loan is a higher-priced
covered transaction.
* * * * *
(2) Qualified mortgage defined--general. Except as provided in
paragraph (e)(4), (5), (6), (7), or (f) of this section, a qualified
mortgage is a covered transaction:
* * * * *
(7) Qualified mortgage defined--seasoned loans.
(i) General. Notwithstanding paragraph (e)(2) of this section, and
except as provided in paragraph (e)(7)(iv) of this section, a qualified
mortgage is a first-lien covered transaction that:
(A) Is a fixed-rate mortgage as defined in Sec. 1026.18(s)(7)(iii)
with fully amortizing payments as defined in paragraph (b)(2) of this
section;
(B) Satisfies the requirements in paragraphs (e)(5)(i)(A) and
(e)(5)(i)(B) of this section;
(C) Has met the requirements in paragraph (e)(7)(ii) of this
section at the end of the seasoning period as defined in paragraph
(e)(7)(iv)(C) of this section; and
(D) Satisfies the requirements in paragraph (e)(7)(iii) of this
section.
(ii) Performance requirements. To be a qualified mortgage under
this paragraph (e)(7) of this section, the covered transaction must
have no more than two delinquencies of 30 or more days and no
delinquencies of 60 or more days at the end of the seasoning period.
(iii) Portfolio requirements. To be a qualified mortgage under this
paragraph (e)(7) of this section, the covered transaction must satisfy
the following requirements:
(A) The covered transaction is not subject, at consummation, to a
commitment to be acquired by another person; and
(B) Legal title to the covered transaction is not sold, assigned,
or otherwise transferred to another person before the end of the
seasoning period, except that:
(1) The covered transaction may be sold, assigned, or otherwise
transferred to another person pursuant to a capital restoration plan or
other action under 12 U.S.C. 1831o, 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; or
(2) The covered transaction may be sold, assigned, or otherwise
transferred pursuant to a merger of the creditor with another person or
acquisition of the creditor by another person or of another person by
the creditor.
(iv) Definitions. For purposes of paragraph (e)(7) of this section:
(A) Delinquency means the failure to make a periodic payment (in
one full payment or in two or more partial payments) sufficient to
cover principal, interest, and, if applicable, escrow by the date the
periodic payment is due under the terms of the legal obligation. Other
amounts, such as any late fees, are not considered for this purpose.
(1) A periodic payment is 30 days delinquent when it is not paid
before the due date of the following scheduled periodic payment.
(2) A periodic payment is 60 days delinquent if the consumer is
more than 30 days delinquent on the first of two sequential scheduled
periodic payments and does not make both sequential scheduled periodic
payments before the due date of the next scheduled periodic payment
after the two sequential scheduled periodic payments.
(3) For any given billing cycle for which a consumer's payment is
less than the periodic payment due, a consumer is not delinquent as
defined in this paragraph (e)(7) if:
(i) The servicer chooses not to treat the payment as delinquent for
purposes of any section of subpart C of Regulation X, 12 CFR part 1024,
if applicable;
(ii) The payment is deficient by $50 or less; and
(iii) There are no more than three such deficient payments treated
as not delinquent during the seasoning period.
(4) The principal and interest used in determining the date a
periodic payment sufficient to cover principal, interest, and, if
applicable, escrow becomes due and unpaid are the principal and
interest payment amounts established by the terms and payment schedule
of the loan obligation at consummation. If a qualifying change as
defined in paragraph (e)(7)(iv)(B) of this section is made to the loan
obligation, the principal and interest used in determining the date a
periodic payment sufficient to cover principal, interest, and, if
applicable, escrow
[[Page 53603]]
becomes due and unpaid are the principal and interest payment amounts
established by the terms and payment schedule of the loan obligation at
consummation as modified by the qualifying change.
(5) Except for purposes of making up the deficiency amount set
forth in paragraph (e)(7)(iv)(A)(3)(ii) of this section, payments from
the following sources are not considered in assessing delinquency under
paragraph (e)(7)(iv)(A) of this section:
(i) Funds in escrow in connection with the covered transaction; or
(ii) Funds paid on behalf of the consumer by the creditor,
servicer, assignee of the covered transaction, or any other person
acting on behalf of such creditor, servicer, or assignee.
(B) Qualifying change means an agreement that meets the following
conditions:
(1) The agreement is entered into during or after a temporary
payment accommodation in connection with a disaster or pandemic-related
national emergency as defined in paragraph (e)(7)(iv)(D) of this
section, and must end any pre-existing delinquency on the loan
obligation when the agreement takes effect;
(2) The amount of interest charged over the full term of the loan
does not increase as a result of the agreement;
(3) The servicer does not charge any fee in connection with the
agreement; and
(4) The servicer waives all existing late charges, penalties, stop
payment fees, or similar charges promptly upon the consumer's
acceptance of the agreement.
(C) Seasoning period means a period of 36 months beginning on the
date on which the first periodic payment is due after consummation of
the covered transaction, except that:
(1) If there is a delinquency of 30 days or more at the end of the
36th month of the seasoning period, the seasoning period does not end
until there is no delinquency;
(2) The seasoning period does not include any period during which
the consumer is in a temporary payment accommodation extended in
connection with a disaster or pandemic-related national emergency,
provided that during or at the end of the temporary payment
accommodation there is a qualifying change as defined in paragraph
(e)(7)(iv)(B) of this section or the consumer cures the loan's
delinquency under its original terms. If during or at the end of the
temporary payment accommodation in connection with a disaster or
pandemic-related national emergency there is a qualifying change or the
consumer cures the loan's delinquency under its original terms, the
seasoning period consists of the period from the date on which the
first periodic payment was due after consummation of the covered
transaction to the beginning of the temporary payment accommodation and
an additional period immediately after the temporary payment
accommodation ends, which together must equal at least 36 months.
(D) Temporary payment accommodation in connection with a disaster
or pandemic-related national emergency means temporary payment relief
granted to a consumer due to financial hardship caused directly or
indirectly by a presidentially declared emergency or major disaster
under the Robert T. Stafford Disaster Relief and Emergency Assistance
Act (42 U.S.C. 5121 et seq.) or a presidentially declared pandemic-
related national emergency under the National Emergencies Act (50
U.S.C. 1601 et seq.).
* * * * *
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3. In Supplement I to Part 1026--Official Interpretations, under
Section 1026.43--Minimum Standards for Transactions Secured by a
Dwelling:
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a. Revise 43(e)(1) Safe harbor and presumption of compliance;
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b. Remove 43(e)(1)(i) Safe harbor for transactions that are not higher-
priced covered transactions;
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c. Add 43(e)(1)(i)(A) Safe harbor for transactions that are not higher-
priced covered transactions d. Add the heading 43(e)(7) Seasoned Loans
and add Paragraphs 43(e)(7)(i)(A), 43(e)(7)(i)(B), 43(e)(7)(iii),
43(e)(7)(iv)(A), 43(e)(7)(iv)(A)(2), 43(e)(7)(iv)(C)(2), and
43(e)(7)(iv)(D) after Paragraph 43(e)(5).
The revision and additions read as follows:
Supplement I to Part 1026--Official Interpretations
* * * * *
Section 1026.43--Minimum Standards for Transactions Secured by a
Dwelling
* * * * *
43(e)(1) Safe Harbor and Presumption of Compliance
1. General. Section 1026.43(c) requires a creditor to make a
reasonable and good faith determination at or before consummation
that a consumer will be able to repay a covered transaction. Section
1026.43(e)(1)(i) and (ii) provide a safe harbor and presumption of
compliance, respectively, with the repayment ability requirements of
Sec. 1026.43(c) for creditors and assignees of covered transactions
that satisfy the requirements of a qualified mortgage under Sec.
1026.43(e)(2), (4), (5), (6), (7), or (f). See Sec.
1026.43(e)(1)(i) and (ii) and associated commentary.
43(e)(1)(i)(A) Safe Harbor for Transactions That are not Higher-Priced
Covered Transactions
1. Higher-priced covered transactions. For guidance on
determining whether a loan is a higher-priced covered transaction,
see comment 43(b)(4)-1 through -3.
* * * * *
43(e)(7) Seasoned Loans
Paragraph 43(e)(7)(i)(A)
1. Fixed-rate mortgage. Section 1026.43(e)(7)(i)(A) provides
that, for a covered transaction to become a qualified mortgage under
Sec. 1026.43(e)(7), the covered transaction must be a fixed-rate
mortgage, as defined in Sec. 1026.18(s)(7)(iii). Under Sec.
1026.18(s)(7)(iii), the term ``fixed-rate mortgage'' means a
transaction secured by real property or a dwelling that is not an
adjustable-rate mortgage or a step-rate mortgage. Thus, a covered
transaction that is an adjustable-rate mortgage or step-rate
mortgage is not eligible to become a qualified mortgage under Sec.
1026.43(e)(7).
2. Fully amortizing payments. Section 1026.43(e)(7)(i)(A)
provides that for a covered transaction to become a qualified
mortgage as a seasoned loan under Sec. 1026.43(e)(7), a mortgage
must meet certain product requirements and be a fixed-rate mortgage
with fully amortizing payments. Only loans for which the scheduled
periodic payments do not require a balloon payment, as defined in
Sec. 1026.18(s), to fully amortize the loan within the loan term
can become seasoned loans for the purposes of Sec. 1026.43(e)(7).
Section 1026.43(e)(7)(i)(A) does not prohibit a qualifying change as
defined in Sec. 1026.43(e)(7)(iv)(B) that is entered into during or
after a temporary payment accommodation in connection with a
disaster or pandemic-related national emergency.
Paragraph 43(e)(7)(i)(B)
1. For purposes of Sec. 1026.43(e)(7)(i)(B), a loan that
complies with the consider and verify requirements of any other
qualified mortgage definition is deemed to comply with the consider
and verify requirements in Sec. 1026.43(e)(7)(i)(B).
Paragraph 43(e)(7)(iii)
1. Requirement to hold in portfolio. For a covered transaction
to become a qualified mortgage under Sec. 1026.43(e)(7), a creditor
generally must hold the transaction in portfolio until the end of
the seasoning period, subject to two exceptions set forth in Sec.
1026.43(e)(7)(iii)(B)(1) and (2). Unless one of these exceptions
applies, a covered transaction cannot become a qualified mortgage as
a seasoned loan under Sec. 1026.43(e)(7) if legal title to the debt
obligation is sold, assigned, or otherwise transferred to another
person before the end of the seasoning period.
2. Application to subsequent transferees. The exceptions
contained in Sec. 1026.43(e)(7)(iii)(B)(1) and (2) 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 covered
transaction that is not a qualified mortgage at origination.
[[Page 53604]]
Six months after consummation, the covered transaction is
transferred to Creditor B pursuant to Sec.
1026.43(e)(7)(iii)(B)(2). The transfer does not violate the
requirements in Sec. 1026.43(e)(7)(iii) because the transfer is
pursuant to a merger or acquisition. If Creditor B sells the covered
transaction before the end of the seasoning period, the covered
transaction is not eligible to season into a qualified mortgage
under Sec. 1026.43(e)(7) unless the sale falls within an exception
set forth in Sec. 1026.43(e)(7)(iii)(B)(1) or (2) (i.e., the
transfer is required by supervisory action or pursuant to a merger
or acquisition).
3. Supervisory sales. Section 1026.43(e)(7)(iii)(B)(1)
facilitates sales that are deemed necessary by supervisory agencies
to revive troubled creditors and resolve failed creditors. A covered
transaction does not violate the requirements in Sec.
1026.43(e)(7)(iii) if it is sold, assigned, or otherwise transferred
to another person before the end of the seasoning period 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. Section 1026.43(e)(7)(iii)(B)(1) 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)(7)(iii)(B)(1) directing the sale of one or more covered
transactions held by the creditor or one of the other circumstances
listed in Sec. 1026.43(e)(7)(iii)(B)(1). For example, a covered
transaction does not violate the requirements in Sec.
1026.43(e)(7)(iii) if the covered transaction is sold pursuant to a
capital restoration plan under 12 U.S.C. 1831o before the end of
seasoning period. However, if the creditor simply chose to sell the
same covered transaction as one way to comply with general
regulatory capital requirements in the absence of supervisory action
or agreement, then the covered transaction cannot become a qualified
mortgage as a seasoned loan under Sec. 1026.43(e)(7), though it
could qualify under another definition of qualified mortgage.
Paragraph 43(e)(7)(iv)(A)
1. Due date. In determining whether a scheduled periodic payment
is delinquent for purposes of Sec. 1026.43(e)(7), the due date is
the date the payment is due under the terms of the legal obligation,
without regard to whether the consumer is afforded a period after
the due date to pay before the servicer assesses a late fee.
Paragraph 43(e)(7)(iv)(A)(2)
1. 60 days delinquent. The following example illustrates the
meaning of 60 days delinquent for purposes of Sec. 1026.43(e)(7).
Assume a loan is consummated on October 15, 2022, that the
consumer's periodic payment is due on the 1st of each month, and
that the consumer timely made the first periodic payment due on
December 1, 2022. For purposes of Sec. 1026.43(e)(7), the consumer
is 30 days delinquent if the consumer fails to make a payment
(sufficient to cover the scheduled January 1, 2023 periodic payment
of principal, interest, and, if applicable, escrow) before February
1, 2023. For purposes of Sec. 1026.43(e)(7), the consumer is 60
days delinquent if the consumer then fails to make two payments
(sufficient to cover the scheduled January 1, 2023 and February 1,
2023 periodic payments of principal, interest, and, if applicable,
escrow) before March 1, 2023.
Paragraph 43(e)(7)(iv)(C)(2)
1. Suspension of seasoning period during certain temporary
payment accommodations. Section 1026.43(e)(7)(iv)(C)(2) provides
that the seasoning period does not include any period during which
the consumer is in a temporary payment accommodation extended in
connection with a disaster or pandemic-related emergency, provided
that during or at the end of the temporary payment accommodation
there is a qualifying change as defined in Sec.
1026.43(e)(7)(iv)(B) or the consumer cures the loan's delinquency
under its original terms. Section 1026.43(e)(7)(iv)(C)(2) further
explains that, under these circumstances, the seasoning period
consists of the period from the date on which the first periodic
payment was due after origination of the covered transaction to the
beginning of the temporary payment accommodation and an additional
period immediately after the temporary payment accommodation ends,
which together must equal at least 36 months. For example, assume
the consumer enters into a covered transaction for which the first
periodic payment is due on March 1, 2022, and the consumer enters a
three-month temporary payment accommodation in connection with a
disaster or pandemic-related national emergency, effective March 1,
2023. Assume further that the consumer misses the March 1, April 1,
and May 1, 2023 periodic payments during the forbearance period, but
enters into a qualifying change as defined in Sec.
1026.43(e)(7)(iv)(B) on June 1, 2023 and is not delinquent on June
1, 2023. Under these circumstances, the seasoning period consists of
the period from March 1, 2022 to February 28, 2023 and the period
from June 1, 2023 to May 31, 2025, assuming the consumer is not
delinquent on May 31, 2025.
Paragraph 43(e)(7)(iv)(D)
1. Temporary payment accommodation in connection with a disaster
or pandemic-related national emergency. For purposes of Sec.
1026.43(e)(7), examples of temporary payment accommodations in
connection with a disaster or pandemic-related national emergency
include, but are not limited to: A trial loan modification plan, a
temporary payment forbearance program, or a temporary repayment
plan.
* * * * *
Dated: August 18, 2020.
Laura Galban,
Federal Register Liaison, Bureau of Consumer Financial Protection.
[FR Doc. 2020-18490 Filed 8-27-20; 8:45 am]
BILLING CODE 4810-AM-P