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

[Federal Register Volume 85, Number 249 (Tuesday, December 29, 2020)]
[Rules and Regulations]
[Pages 86402-86455]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-27571]

[[Page 86401]]

Vol. 85

Tuesday,

No. 249

December 29, 2020

Part IV

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; Final Rule

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

[[Page 86402]]

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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: Final rule; official interpretation.

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SUMMARY: With certain exceptions, Regulation Z requires creditors to
make a reasonable, good faith determination of a consumer's ability to
repay any residential mortgage loan, and loans that meet Regulation Z's
requirements for ``qualified mortgages'' (QMs) obtain certain
protections from liability. Regulation Z contains several categories of
QMs, including the General QM category and a temporary category
(Temporary GSE QMs) 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 final rule to create a new category
of QMs (Seasoned QMs) for first-lien, fixed-rate covered transactions
that have met certain performance requirements, are held in portfolio
by the originating creditor or first purchaser for a 36-month period,
comply with general restrictions on product features and points and
fees, and meet certain underwriting requirements. The Bureau's primary
objective with this final rule is to ensure access to responsible,
affordable mortgage credit by adding a Seasoned QM definition to the
existing QM definitions.

DATES: This final rule is effective on March 1, 2021.

FOR FURTHER INFORMATION CONTACT: Eliott C. Ponte or Ruth Van
Veldhuizen, Counsels, or Joan Kayagil, Amanda Quester, or Jane Raso,
Senior Counsels, Office of Regulations, at 202-435-7700. If you require
this document in an alternative electronic format, please contact
CFPB_Accessibility@cfpb.gov.

SUPPLEMENTARY INFORMATION:

I. Summary of the Final Rule

The Ability-to-Repay/Qualified Mortgage Rule (ATR/QM Rule) requires
a creditor to make a reasonable, good faith determination of a
consumer's ability to repay a residential mortgage loan according to
its terms. Loans that meet the ATR/QM Rule's requirements for QMs
obtain certain protections from liability. The Bureau issued a proposal
in August 2020 to create a new category of QMs, Seasoned QMs. The
Bureau is now finalizing the proposal largely as proposed.\1\ The final
rule defines Seasoned QMs as first-lien, fixed-rate covered
transactions that have met certain performance requirements over a
seasoning period of at least 36 months, are held in portfolio until the
end of the seasoning period by the originating creditor or first
purchaser, comply with general restrictions on product features and
points and fees, and meet certain underwriting requirements.
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\1\ As explained in more detail in part VI below, the final rule
differs from the proposal in certain limited respects, including by
adding a new exception to the portfolio requirement that allows
loans to be transferred once during the seasoning period, excluding
high-cost mortgages as defined in 12 CFR 1026.32(a), and applying
the same consider and verify requirements that will apply to General
QM loans.
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The Bureau concludes that a Seasoned QM definition will complement
existing QM definitions and help ensure access to responsible,
affordable mortgage credit. One QM category defined in the ATR/QM Rule
is the General QM category. General QMs must comply with the ATR/QM
Rule's prohibitions on certain loan features, its points-and-fees
limits, and its underwriting requirements. Under the definition for
General QMs currently in effect, the ratio of the consumer's total
monthly debt to total monthly income (DTI) must not exceed 43 percent.
In a separate final rule released simultaneously with this final rule,
the Bureau is amending the General QM loan definition to, among other
things, replace the existing General QM loan definition that includes
the 43 percent DTI limit with a price-based General QM loan definition
(General QM Final Rule).
A second, temporary category of QMs defined in the ATR/QM Rule is
the Temporary GSE QM category, which consists of mortgages that (1)
comply with the same loan-feature prohibitions and points-and-fees
limits as General QMs and (2) are eligible to be purchased or
guaranteed by the GSEs while under the conservatorship of the FHFA. The
Temporary GSE QM loan definition was previously set to expire with
respect to each GSE when that GSE ceases to operate under
conservatorship or on January 10, 2021, whichever comes first. In a
final rule issued on October 20, 2020 and published in the Federal
Register on October 26, 2020, the Bureau extended the Temporary GSE QM
loan definition until the earlier of the mandatory compliance date of
final amendments to the General QM loan definition or the date the GSEs
cease to operate under conservatorship or receivership (Extension Final
Rule).\2\
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\2\ 85 FR 67938 (Oct. 26, 2020).
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The Bureau is issuing this final rule 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 rebuttable presumption QMs under the existing QM
categories. The Bureau presumes compliance with the ability-to-repay
(ATR) requirements if such loans season in the manner set forth in this
final rule. Under this final rule, a covered transaction receives a
safe harbor from ATR liability at the end of a seasoning period of at
least 36 months as a Seasoned QM if it satisfies certain product
restrictions, points-and-fees limits, and underwriting requirements,
and it meets performance and portfolio requirements during the
seasoning period. Specifically, a covered transaction has 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 regular, substantially equal
periodic payments that are fully amortizing and no balloon payments;
3. The loan term does not exceed 30 years; and
4. The loan is not a high-cost mortgage as defined in Sec.
1026.32(a).
In order to become a Seasoned QM, the loan's total points and fees
also must not exceed specified limits.
For a loan to be eligible to become a Seasoned QM, this final rule
requires that the creditor consider the consumer's DTI ratio or
residual income, income or assets other than the value of the dwelling,
and debts and verify the consumer's income or assets other than the
value of the dwelling and the consumer's debts, using the same consider
and verify requirements established for General QMs in the General QM
Final Rule.
Under this final rule, a loan generally is eligible to season only
if the creditor holds it in portfolio until the end of the seasoning
period. There are several exceptions to this portfolio requirement that
are similar to the exceptions to the Small Creditor QM portfolio
requirement under the ATR/QM Rule. This final rule also includes an
additional exception for a single transfer of a loan during the
seasoning period. In the event of such a transfer, the final rule
requires the purchaser to hold the

[[Page 86403]]

loan in portfolio after the transfer until the end of the seasoning
period.
In order to become a Seasoned QM, a loan must meet certain
performance requirements at the end of the seasoning period.
Specifically, seasoning is 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) are not considered in assessing whether a periodic
payment has been made or is delinquent for purposes of this final rule.
Creditors can, 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 this final
rule.
This final rule 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. Failure to make full contractual payments
does 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 does not count towards the 36-month seasoning
period, and the seasoning period can 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 this final
rule. This final rule 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 (such as a restriction
on increasing the amount of interest charged over the full term of the
loan as a result of the agreement).
This final rule will take effect 60 days after publication in the
Federal Register, which aligns with the effective date provided in the
General QM Final Rule. For this final rule, the revised regulations
apply to covered transactions for which creditors receive an
application on or after the effective date.

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) \3\ amended the Truth in Lending Act (TILA) \4\ to
establish, among other things, ATR requirements in connection with the
origination of most residential mortgage loans.\5\ 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.'' \6\ 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.\7\
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\3\ Public Law 111-203, 124 Stat. 1376 (2010).
\4\ 15 U.S.C. 1601 et seq.
\5\ Dodd-Frank Act sections 1411-12, 1414, 124 Stat. 2142-49; 15
U.S.C. 1639c.
\6\ 15 U.S.C. 1639b(a)(2).
\7\ 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 the repayment of the loan.\8\ A creditor,
however, may not be certain whether its ATR determination is reasonable
in a particular case.\9\
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\8\ 15 U.S.C. 1639c(a)(3).
\9\ 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 potential uncertainty by defining a category of
loans--called QMs--for which a creditor ``may presume that the loan has
met'' the ATR requirements.\10\ The statute generally defines a QM to
mean any residential mortgage loan for which:
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\10\ 15 U.S.C. 1639c(b)(1).
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The loan does not have negative amortization, interest-
only payments, or balloon payments;
The loan term does not exceed 30 years;
The total points and fees generally do not exceed 3
percent of the loan amount;
The income and assets relied upon for repayment are
verified and documented;
The underwriting uses a monthly payment based on the
maximum rate during the first five years, uses a payment schedule that
fully amortizes the loan over the loan term, and takes into account all
mortgage-related obligations; and
The loan complies with any guidelines or regulations
established by the Bureau relating to the ratio of total monthly debt
to monthly income or alternative measures of ability to pay regular
expenses after payment of total monthly debt.\11\
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\11\ 15 U.S.C. 1639c(b)(2)(A).
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The ATR/QM Rule

In January 2013, the Bureau issued a final rule amending Regulation
Z to implement TILA's ATR requirements (January 2013 Final Rule).\12\
The January 2013 Final Rule became effective on January 10, 2014, and
the Bureau has amended it several times since January 2013.\13\ This
final rule refers to the January 2013 Final Rule and later amendments
to it collectively as the ATR/QM Rule. The ATR/QM Rule implements the
statutory ATR provisions discussed above and defines several categories
of QMs.\14\
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\12\ 78 FR 6408 (Jan. 30, 2013).
\13\ See 78 FR 35429 (June 12, 2013); 78 FR 44686 (July 24,
2013); 78 FR 60382 (Oct. 1, 2013); 79 FR 65300 (Nov. 3, 2014); 80 FR
59944 (Oct. 2, 2015); 81 FR 16074 (Mar. 25, 2016); 85 FR 67938 (Oct.
26, 2020).
\14\ 12 CFR 1026.43(c), (e).
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1. General QMs
One category of QMs defined by the ATR/QM Rule consists of General
QMs. Under the definition for General QMs currently in effect, a loan
is a General QM 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; \15\
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\15\ 12 CFR 1026.43(e)(2)(i) through (iii).
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The creditor underwrites the loan based on a fully
amortizing schedule

[[Page 86404]]

using the maximum rate permitted during the first five years; \16\
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\16\ 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; \17\ and
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\17\ 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.\18\
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\18\ 12 CFR 1026.43(e)(2)(vi).
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Appendix Q contains standards for calculating and verifying debt
and income for purposes of determining whether a mortgage satisfies the
43 percent DTI limit for General QMs. 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.\19\
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\19\ 12 CFR 1026, appendix Q.
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On June 22, 2020, the Bureau proposed amendments to the General QM
loan definition, which would, among other things, replace the General
QM loan definition's 43 percent DTI limit with a price-based approach
and remove appendix Q.\20\ 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. Simultaneously with issuing this final rule, the Bureau is
issuing the General QM Final Rule, which is discussed in part II.D
below.
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\20\ 85 FR 41716 (July 10, 2020).
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2. Temporary GSE QMs
A second, temporary category of QMs defined by the ATR/QM Rule,
Temporary GSE QMs, consists of mortgages that (1) comply with the ATR/
QM Rule's prohibitions on certain loan features and its limitations on
points and fees; \21\ and (2) are eligible to be purchased or
guaranteed by either GSE while under the conservatorship of the
FHFA.\22\ Regulation Z does not prescribe a DTI limit for Temporary GSE
QMs. Thus, a loan can qualify as a Temporary GSE QM even if the DTI
ratio exceeds 43 percent, as long as the DTI ratio meets the applicable
GSE's DTI requirements and other underwriting criteria, and the loan
satisfies the other Temporary GSE QM requirements. In addition, income,
debt, and DTI ratios for such loans generally are verified and
calculated using GSE standards, rather than appendix Q. The January
2013 Final Rule provided that the Temporary GSE QM loan definition--
also known as the GSE Patch--would expire with respect to each GSE when
that GSE ceases to operate under conservatorship or on January 10,
2021, whichever comes first.\23\ On June 22, 2020, the Bureau proposed
to extend the Temporary GSE QM category until the effective date of
final amendments to the General QM loan definition or the date the GSEs
cease to operate under conservatorship or receivership, whichever comes
first.\24\ In a final rule issued on October 20, 2020, the Bureau
extended the Temporary GSE QM category until the earlier of the
mandatory compliance date of final amendments to the General QM loan
definition or the date the GSEs cease to operate under conservatorship
or receivership.\25\
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\21\ 12 CFR 1026.43(e)(2)(i) through (iii).
\22\ 12 CFR 1026.43(e)(4).
\23\ 12 CFR 1026.43(e)(4)(iii)(B). The ATR/QM Rule created
several additional categories of QMs. The first additional category
consisted of mortgages eligible to be insured or guaranteed (as
applicable) by 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 QMs 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 QMs provide more flexible standards for certain loans
originated by certain small creditors. 12 CFR 1026.43(e)(5), (f);
cf. 12 CFR 1026.43(e)(6) (applicable only to covered transactions
for which the application was received before April 1, 2016).
\24\ 85 FR 41448 (July 10, 2020).
\25\ 85 FR 67938 (Oct. 26, 2020).
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3. Small Creditor QMs
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.\26\ Those
requirements include many that apply to General QMs, with some
exceptions. Specifically, the threshold for determining whether Small
Creditor QMs are higher-priced covered transactions, and thus qualify
for the QM safe harbor or rebuttable presumption, is higher than the
threshold for General QMs.\27\ Small Creditor QMs also are not subject
to the General QM loan definition's 43 percent DTI limit, and the
creditor is not required to use appendix Q to calculate debt and
income.\28\ In addition, Small Creditor QMs must be held in portfolio
for three years (a requirement that does not apply to General QMs).\29\
The Bureau made several amendments to the Small Creditor QM provisions
in 2015.\30\ 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.\31\
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\26\ 78 FR 35430 (June 12, 2013).
\27\ 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 QMs 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.
\28\ 12 CFR 1026.43(e)(5)(i)(A).
\29\ 12 CFR 1026.43(e)(5)(ii), (f)(2).
\30\ 80 FR 59944 (Oct. 2, 2015).
\31\ As with Small Creditor QMs, Balloon Payment QMs must be
held in portfolio for three years. In addition, Balloon Payment QMs
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 QMs 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. 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.\32\ 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 of the ATR
requirements.\33\ The Bureau noted that by retaining mortgage loans in
portfolio, creditors retain the risk of delinquency

[[Page 86405]]

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.\34\
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\32\ 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.'').
\33\ Id. at 35486.
\34\ Id. at 35437.
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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.\35\ 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.\36\ Specifically, the protection from liability is
available if a loan: (1) Is originated by and retained in portfolio by
the institution, (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 protection from liability 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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\35\ Public Law 115-174, 132 Stat. 1296 (2018).
\36\ EGRRCPA section 101, 15 U.S.C. 1639c(b)(2)(F).
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D. General QM Final Rule

Simultaneously with this final rule, the Bureau is issuing a final
rule to amend the General QM loan definition because retaining the
existing General QM loan definition with the 43 percent DTI limit after
the Temporary GSE QM loan definition expires would significantly reduce
the size of the QM market and could significantly reduce access to
responsible, affordable credit.\37\ Readers should refer to the General
QM Final Rule for a full discussion of the amendments and the Bureau's
rationale for them.
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\37\ 85 FR 41716 (July 10, 2020).
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In the General QM Final Rule, the Bureau is establishing a price-
based General QM loan definition to replace the DTI-based approach.
Under the General QM Final Rule, a loan meets the General QM loan
definition in Sec. 1026.43(e)(2) only if the annual percentage rate
(APR) exceeds the average prime offer rate (APOR) for a comparable
transaction by less than 2.25 percentage points as of the date the
interest rate is set. The General QM Final Rule provides higher
thresholds for loans with smaller loan amounts, for certain
manufactured housing loans, and for subordinate-lien transactions. It
retains the existing product-feature and underwriting requirements and
limits on points and fees. Although the General QM Final Rule removes
the 43 percent DTI limit from the General QM loan definition, the
General QM Final Rule requires that the creditor consider the
consumer's monthly DTI ratio or residual income; current or reasonably
expected income or assets other than the value of the dwelling
(including any real property attached to the dwelling) that secures the
loan; and debt obligations, alimony, and child support, and verify the
consumer's current or reasonably expected income or assets other than
the value of the dwelling (including any real property attached to the
dwelling) that secures the loan and the consumer's current debt
obligations, alimony, and child support. The General QM Final Rule
removes appendix Q. To prevent uncertainty that may result from
appendix Q's removal, the General QM Final Rule clarifies the consider
and verify requirements. The General QM Final Rule preserves the
current threshold separating safe harbor from rebuttable presumption
QMs, under which a loan is a safe harbor QM if its APR does not exceed
APOR for a comparable transaction by 1.5 percentage points or more as
of the date the interest rate is set (or by 3.5 percentage points or
more for subordinate-lien transactions).

E. Presumption of Compliance for Existing Categories of QMs Under the
ATR/QM Rule

In the January 2013 Final Rule, the Bureau considered whether QMs
should receive a conclusive presumption (i.e., a safe harbor) or a
rebuttable presumption of compliance with the ATR requirements.\38\ 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
demonstrated that there are sound reasons for adopting either
interpretation.\39\ 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.\40\ The Bureau ultimately interpreted the statute to provide
for a rebuttable presumption of compliance with the ATR requirements
but used its adjustment authority to establish a conclusive presumption
of compliance for loans that are not ``higher priced.'' \41\
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\38\ 78 FR 6408, 6511 (Jan. 30, 2013).
\39\ Id. at 6507.
\40\ Id. at 6511.
\41\ Id. at 6514.
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Under the ATR/QM Rule, a creditor that makes a QM is protected from
liability presumptively or conclusively, depending on whether the loan
is ``higher priced.'' The ATR/QM Rule generally defines a ``higher-
priced'' loan to mean a first-lien mortgage with an APR that exceeded
APOR for a comparable transaction as of the date the interest rate was
set by 1.5 or more percentage points; or a subordinate-lien mortgage
with an APR that exceeded APOR for a comparable transaction as of the
date the interest rate was set by 3.5 or more percentage points.\42\ A
creditor that makes a QM that is not ``higher priced'' is entitled to a
conclusive presumption that it has complied with the ATR/QM Rule--i.e.,
the creditor receives a safe harbor from liability.\43\ A creditor that
makes a loan that meets the standards for a QM but is ``higher priced''
is entitled to a rebuttable presumption that it has complied with the
ATR/QM Rule.\44\
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\42\ 12 CFR 1026.43(b)(4).
\43\ 12 CFR 1026.43(e)(1)(i).
\44\ 12 CFR 1026.43(e)(1)(ii).
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F. The Bureau's Assessment of the ATR/QM Rule

Section 1022(d) of the Dodd-Frank Act requires the Bureau to assess
each of its significant rules and orders and to publish a report of
each assessment within five years of the effective date of the rule or
order.\45\ In June 2017, the Bureau published a request for information
in connection with its assessment of the ATR/QM Rule (Assessment
RFI).\46\ These comments are summarized in general terms in part III
below.
---------------------------------------------------------------------------

\45\ 12 U.S.C. 5512(d).
\46\ 82 FR 25246 (June 1, 2017).
---------------------------------------------------------------------------

In January 2019, the Bureau published its ATR/QM Rule Assessment
Report

[[Page 86406]]

(Assessment Report).\47\ The Assessment Report included findings about
the effects of the ATR/QM Rule on the mortgage market generally, as
well as specific findings about Temporary GSE QM originations.
---------------------------------------------------------------------------

\47\ Bureau of Consumer Fin. Prot., Ability to Repay and
Qualified Mortgage Assessment Report (Jan. 2019), https://files.consumerfinance.gov/f/documents/cfpb_ability-to-repay-qualified-mortgage_assessment-report.pdf (Assessment Report).
---------------------------------------------------------------------------

The Assessment Report found that the ATR/QM Rule did not eliminate
access to credit for 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 QMs.\48\ On the other hand, based on
application-level data obtained from nine large creditors, the
Assessment Report found that the ATR/QM Rule eliminated between 63 and
70 percent of home purchase loans with DTI ratios above 43 percent that
were not Temporary GSE QMs.\49\
---------------------------------------------------------------------------

\48\ See, e.g., id. at 10, 194-96.
\49\ See, e.g., id. at 10-11, 117, 131-47.
---------------------------------------------------------------------------

One main finding about Temporary GSE QMs was that such loans
continued to represent ``a large and persistent'' share of originations
in the conforming segment of the mortgage market, and a robust and
sizable market to support non-QM lending has not emerged.\50\ As
discussed, the GSEs' share of the conventional, conforming purchase-
mortgage market was 69 percent in 2013 before the ATR/QM Rule took
effect, and the Assessment Report found a small increase in that share
since the ATR/QM Rule's effective date, reaching 71 percent in
2017.\51\
---------------------------------------------------------------------------

\50\ Id. at 188, 198.
\51\ Id. at 191.
---------------------------------------------------------------------------

The Assessment Report discussed several possible reasons for the
continued prevalence of Temporary GSE QM originations, including the
structure of the secondary market.\52\ If creditors adhere to the GSEs'
guidelines, they gain access to a robust, highly liquid secondary
market.\53\ In contrast, while private-label securitizations have grown
somewhat in recent years, they are still a fraction of their pre-crisis
levels.\54\ There were less than $20 billion in new origination
private-label securities (PLS) issuances in 2017, compared with $1
trillion in 2005,\55\ and only 21 percent of new origination PLS
issuances in 2017 were non-QM issuances.\56\ To the extent that
private-label securitizations have occurred since the ATR/QM Rule took
effect in 2014, the majority of new origination PLS issuances have
consisted of prime jumbo loans made to consumers with strong credit
characteristics, and these securities include a small share of non-QM
loans.\57\ The Assessment Report noted that the Temporary GSE QM loan
definition may be inhibiting the growth of the non-QM market.\58\
However, the Assessment Report also noted that it is possible that this
market might not exist even with a narrower Temporary GSE QM loan
definition, if consumers were unwilling to pay the premium charged to
cover the potential litigation risk associated with non-QM loans (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 as a
result of the potential litigation risk.\59\
---------------------------------------------------------------------------

\52\ Id. at 196.
\53\ Id.
\54\ Id.
\55\ Id.
\56\ Id. at 197.
\57\ Id. at 196.
\58\ Id. at 205.
\59\ Id.
---------------------------------------------------------------------------

G. Effects of the COVID-19 Pandemic on Mortgage Markets

The COVID-19 pandemic has had a significant effect on the U.S.
economy. In the early months of the pandemic, economic activity
contracted, millions of workers became unemployed, and mortgage markets
were affected. In recent months, the unemployment rate has declined,
and there has been a significant rebound in mortgage origination
activity, buoyed by historically low interest rates and by an
increasingly large share of government and GSE-backed loans. However,
origination activity outside the government and GSE-backed origination
channels has declined, and mortgage-credit availability for many
consumers--including those who would be dependent on the non-QM market
for financing--remains tight relative to pre-pandemic levels. While
nearly all major non-QM creditors ceased making loans in March and
April 2020, the market has begun to recover and many 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 tighter underwriting requirements.\60\
---------------------------------------------------------------------------

\60\ Brandon Ivey, Expanded Credit Lending Inches Up in Third
Quarter, Inside Mortg. Fin. (Nov. 25, 2020), https://www.insidemortgagefinance.com/articles/219861-expanded-credit-lending-ticks-up-in-3q-amid-slow-recovery (on file).
---------------------------------------------------------------------------

In March 2020, Congress passed and the President signed into law
the Coronavirus Aid, Relief, and Economic Security Act (CARES Act).\61\
The CARES Act provides additional protections for borrowers with
federally backed mortgages, such as those whose mortgages are purchased
or securitized by a GSE or insured or guaranteed by the Federal Housing
Administration (FHA), U.S. Department of Veterans Affairs (VA), or U.S.
Department of Agriculture (USDA). The CARES Act mandated a 60-day
foreclosure moratorium for such mortgages, which has since been
extended by the agencies until the end of 2020 or January 31, 2021 in
the case of the GSEs.\62\ The CARES Act also allows borrowers with
federally backed mortgages to request up to 180 days of forbearance due
to a COVID-19-related financial hardship, with an option to extend the
forbearance period for an additional 180 days. While forbearance rates
remain elevated at 5.54 percent for the week ending November 22, 2020,
they have decreased since reaching their high of 8.55 percent on June
7, 2020.\63\
---------------------------------------------------------------------------

\61\ Public Law 116-136, 134 Stat. 281 (2020) (includes loans
backed by the U.S. Department of Housing and Urban Development, the
U.S. Department of Agriculture, the U.S. Department of Veterans
Affairs, Fannie Mae, and Freddie Mac).
\62\ See, e.g., Fed. Hous. Fin. Agency, FHFA Extends Foreclosure
and REO Eviction Moratoriums (Dec. 2, 2020), https://www.fhfa.gov/Media/PublicAffairs/Pages/FHFA-Extends-Foreclosure-and-REO-Eviction-Moratoriums-12022020.aspx; Press Release, U.S. Dep't of Hous. &
Urban Dev., FHA Extends Foreclosure And Eviction Moratorium For
Homeowners Through Year End (Aug. 27, 2020), https://www.hud.gov/press/press_releases_media_advisories/HUD_No_20_134; Veterans
Benefits Admin., Extended Foreclosure Moratorium for Borrowers
Affected by COVID-19 (Aug. 24, 2020), https://www.benefits.va.gov/HOMELOANS/documents/circulars/26-20-30.pdf; Rural Dev., U.S. Dep't
of Agric., Extension of Foreclosure and Eviction Moratorium for
Single Family Housing Direct Loans (Aug. 28, 2020), https://content.govdelivery.com/accounts/USDARD/bulletins/29c3a9e.
\63\ Press Release, Mortg. Bankers Ass'n, Share of Mortgage
Loans in Forbearance Increases to 5.54% (Dec. 1, 2020), https://www.mba.org/2020-press-releases/december/share-of-mortgage-loans-in-forbearance-increases-to-554-percent.
---------------------------------------------------------------------------

For further discussion of the effect of the COVID-19 pandemic on
mortgage origination and servicing markets, see part II.D of the
General QM Final Rule.

III. Summary of the Rulemaking Process

The Bureau has solicited and received substantial public and
stakeholder input on issues related to the ATR/QM Rule generally and
the substance of this final rule. In addition to the Bureau's
discussions with and communications from industry stakeholders,
consumer advocates, other Federal agencies,\64\ and members of
Congress, the Bureau issued requests for information (RFIs) in 2017

[[Page 86407]]

and 2018, and in July 2019, it issued an advance notice of proposed
rulemaking regarding the ATR/QM Rule (ANPR).\65\ The input from these
RFIs and from the ANPR is briefly summarized in the General QM Final
Rule and Extension Final Rule and below. The Bureau has also received
substantial additional input through three ATR/QM rulemakings this
year, as discussed below and in the General QM Final Rule and Extension
Final Rule.
---------------------------------------------------------------------------

\64\ 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.
\65\ 84 FR 37155 (July 31, 2019).
---------------------------------------------------------------------------

A. The Requests for Information

In June 2017, the Bureau published the Assessment RFI to gather
information for its assessment of the ATR/QM Rule.\66\ In response to
the Assessment RFI, the Bureau received approximately 480 comments from
creditors, industry groups, consumer advocate groups, and
individuals.\67\ The comments addressed a variety of topics, including
the General QM loan definition and the 43 percent DTI limit; perceived
problems with, and potential changes and alternatives to, appendix Q;
and how the Bureau should address the expiration of the Temporary GSE
QM loan definition. The comments expressed a range of ideas for
addressing the expiration of the Temporary GSE QM loan definition. Some
commenters recommended making the definition permanent or extending it
for various periods of time. Other comments stated that the Temporary
GSE QM loan definition should be eliminated or permitted to expire.
---------------------------------------------------------------------------

\66\ 82 FR 25246 (June 1, 2017).
\67\ See Assessment Report, supra note 47, 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.\68\ As part of
the call for evidence, the Bureau published RFIs relating to, among
other things, the Bureau's rulemaking process,\69\ the Bureau's adopted
regulations and new rulemaking authorities,\70\ and the Bureau's
inherited regulations and inherited rulemaking authorities.\71\ In
response to the call for evidence, the Bureau received comments on the
ATR/QM Rule from stakeholders, including consumer advocate 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.
---------------------------------------------------------------------------

\68\ 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).
\69\ 83 FR 10437 (Mar. 9, 2018).
\70\ 83 FR 12286 (Mar. 21, 2018).
\71\ 83 FR 12881 (Mar. 26, 2018).
---------------------------------------------------------------------------

The Advance Notice of Proposed Rulemaking

As noted above, on July 25, 2019, the Bureau issued an ANPR.\72\
The ANPR stated the Bureau's tentative plans to allow the Temporary GSE
QM loan definition to expire in January 2021 or after a short
extension, if necessary, to facilitate a smooth and orderly transition
away from the Temporary GSE QM loan definition. The Bureau also stated
that it was considering whether to propose revisions to the General QM
loan definition in light of the potential expiration of the Temporary
GSE QM loan definition and requested comments on several topics related
to the General QM loan definition, including: Whether and how the
Bureau should revise the DTI limit in the General QM loan definition;
whether the Bureau should supplement or replace the DTI limit with
another method for directly measuring a consumer's personal finances;
whether the Bureau should revise appendix Q or replace it with other
standards for calculating and verifying a consumer's debt and income;
and whether, instead of a DTI limit, the Bureau should adopt standards
that do not directly measure a consumer's personal finances.\73\ Of
relevance to this final rule, 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 revisions the Bureau
makes to the General QM loan definition.
---------------------------------------------------------------------------

\72\ 84 FR 37155 (July 31, 2019).
\73\ Id. at 37160-62.
---------------------------------------------------------------------------

The Bureau received 85 comments on the ANPR from businesses in the
mortgage industry (including creditors and their trade associations),
consumer advocate groups, elected officials, individuals, and research
centers. The General QM Proposal contains an overview of these
comments.\74\ 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.
---------------------------------------------------------------------------

\74\ 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, if 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 consummation. 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.\75\ Under this framework, after a loan meets certain payment
requirements, the creditor obtains relief from the enforcement of
representations and warranties it must make to a GSE regarding its
underwriting. 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.\76\ A few commenters

[[Page 86408]]

asserted that allowing mortgages to season into QMs is consistent with
comment 43(c)(1)-1.ii.A.1 in the current ATR/QM Rule.\77\ 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.
---------------------------------------------------------------------------

\75\ The GSEs' representation and warranty framework is
discussed in greater detail in part V below.
\76\ U.S. Dep't of the Treasury, Housing Reform Plan at 38
(Sept. 2019), https://home.treasury.gov/system/files/136/Treasury-Housing-Finance-Reform-Plan.pdf?mod=article_inline.
\77\ 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 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-QM loans and rebuttable presumption QM loans. 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 whether the
funds used are the consumer's funds rather than the funds of another. 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.
Comments Opposing Seasoning
Two coalitions of consumer advocate groups submitted separate
comment 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 advocate 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 advocate 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 advocate 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 advocate groups stated that non-QM
loans and QM loans 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 advocate groups also stated that certain types of
mortgages should never be allowed to season into QMs, including
adjustable-rate mortgages (ARMs) 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, consumer advocate groups expressed concern stating that
just because 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 advocate 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 advocate 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 advocate groups also asserted that a heightened risk of
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 advocate 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,

[[Page 86409]]

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 advocate groups further cited
examples to show that mortgages can default due to unforeseen events.
One coalition of consumer advocate groups noted that the timing of
default often reflects broader economic conditions, given the
procyclical nature of the mortgage market.

Extension Proposal, General QM Proposal, and Ensuing Final Rules

On June 22, 2020, the Bureau released the Extension Proposal, which
would have extended the Temporary GSE QM loan definition to expire on
the effective date of final amendments to the General QM loan
definition or the date the GSEs cease to operate under conservatorship,
whichever comes first.\78\ On the same date, the Bureau separately
released the General QM Proposal, which proposed amendments to the
General QM loan definition.\79\ In a final rule issued on October 20,
2020, the Bureau extended the Temporary GSE QM category until the
earlier of the mandatory compliance date of final amendments to the
General QM loan definition or the date the GSEs cease to operate under
conservatorship.\80\ In another final rule issued simultaneously with
this final rule, the Bureau is amending the General QM loan definition.
The General QM Final Rule is discussed in part II.D above.
---------------------------------------------------------------------------

\78\ 85 FR 41448 (July 10, 2020).
\79\ 85 FR 41716 (July 10, 2020).
\80\ 85 FR 67938 (Oct. 26, 2020).
---------------------------------------------------------------------------

Seasoned QM Proposal

On August 18, 2020, the Bureau issued a proposed rule 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
(Seasoned QM Proposal). The Seasoned QM Proposal was published in the
Federal Register on August 28, 2020, with a 30-day comment period.\81\
The comment period was later extended briefly and ended on October 1,
2020.\82\
---------------------------------------------------------------------------

\81\ 85 FR 53568 (Aug. 28, 2020).
\82\ 85 FR 60096 (Sept. 24, 2020).
---------------------------------------------------------------------------

Consumer advocate groups and an organization representing State
regulators further asked the Bureau to provide an extension to the
comment period of up to an additional 60 days. These commenters cited
the complexity of the rule, the concurrent QM rulemakings, and the
difficulties presented by the COVID-19 pandemic in support of their
request. The Bureau concludes that the comment period (including the
brief extension) provided interested stakeholders with sufficient
opportunity to comment on the proposal. The Bureau has previously
issued other rules of similar complexity pursuant to a 30-day comment
period and concludes that the data and analysis supporting the proposal
were relatively straightforward for commenters to understand and
comment on.
In response to the Seasoned QM Proposal, the Bureau received around
40 comments from consumer advocate groups, industry participants,
industry trade associations, other nonprofit organizations, a member of
Congress, and others. As discussed in more detail below, the Bureau has
considered these comments in adopting this final rule.\83\
---------------------------------------------------------------------------

\83\ The Bureau also received a number of comments in response
to the General QM Proposal that relate to the Seasoned QM Proposal.
The Bureau has considered those comments as well in adopting this
final rule.
---------------------------------------------------------------------------

IV. Legal Authority

The Bureau is issuing this final rule pursuant to its authority
under TILA and the Dodd-Frank Act. Section 1061 of the Dodd-Frank Act
transferred to the Bureau the ``consumer financial protection
functions'' previously vested in certain other Federal agencies,
including the Board 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.'' \84\ 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.\85\
---------------------------------------------------------------------------

\84\ 12 U.S.C. 5581(a)(1)(A).
\85\ 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.\86\ 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.'' \87\
Additionally, a purpose of TILA sections 129B and 129C is to assure
that consumers are offered and receive residential mortgage loans on
terms that reasonably reflect their ability to repay the loans and that
are understandable and not unfair, deceptive, or abusive.\88\ As
discussed in the section-by-section analysis below, the Bureau is
issuing certain provisions of this final rule pursuant to its
rulemaking, adjustment, and exception authority under TILA section
105(a).
---------------------------------------------------------------------------

\86\ 15 U.S.C. 1604(a).
\87\ 15 U.S.C. 1601(a).
\88\ 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).\89\ As discussed in the section-by-section analysis
below, the Bureau is issuing certain provisions of this final rule
pursuant to its authority under TILA section 129C(b)(2)(A)(vi).
---------------------------------------------------------------------------

\89\ 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

[[Page 86410]]

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.\90\ In
addition, TILA section 129C(b)(3)(A) directs the Bureau to prescribe
regulations to carry out the purposes of TILA section 129C(b).\91\ As
discussed in the section-by-section analysis below, the Bureau is
issuing certain provisions of this final rule pursuant to its authority
under TILA section 129C(b)(3)(B)(i).
---------------------------------------------------------------------------

\90\ 15 U.S.C. 1639c(b)(3)(B)(i).
\91\ 15 U.S.C. 1639c(b)(3)(A).
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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.\92\ TILA and
title X of the Dodd-Frank Act are Federal consumer financial laws.
Accordingly, in this final rule, the Bureau is exercising its authority
under Dodd-Frank Act section 1022(b) to prescribe rules that carry out
the purposes and objectives of TILA and title X and prevent evasion of
those laws.
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\92\ 12 U.S.C. 5512(b)(1).
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V. Why the Bureau Is Issuing This Final Rule

The Bureau is issuing this final rule to create an alternative
pathway to a QM safe harbor 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 establishing this alternative definition because it concludes
that many loans made to creditworthy consumers that do not fall within
the existing QM loan definitions at consummation may be able to
demonstrate through sustained loan performance compliance with the ATR
requirements.

A. Considerations Related to Access to Responsible, Affordable Credit
Discussed in the Proposal

As described in the proposal, a primary objective of the Seasoned
QM alternative pathway to a QM safe harbor is to ensure the
availability of responsible and affordable credit. 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 if a creditor has confidence that it can originate
the loan in compliance with the ATR requirements, furthers the
objective of ensuring the availability of responsible and affordable
credit. The Bureau is concerned that, as discussed in the Assessment
Report, 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.\93\ As noted in the proposal, 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 ATR/QM Rule's issuance suggest that creditors have
not developed a common approach to measuring and predicting risk of
noncompliance with the ATR/QM Rule, as they have accomplished for other
types of risks, such as prepayment and default.\94\ 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.\95\ 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 ATR/QM 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 the loan based on traditional
indicators of creditworthiness.\96\
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\93\ See Assessment Report, supra note 47, at 11, 118, 150.
\94\ Id. at 118, 147, 150.
\95\ Id. at 147.
\96\ Id. at 118, 150.
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While the proposal acknowledged that the Assessment Report analyzed
the impact of the January 2013 Final Rule and its 43 percent DTI limit
on access to credit, the proposal noted that 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 any amendments to the General QM loan
definition.\97\ Indeed, while the Bureau anticipated 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 consumers with DTI ratios above 43 percent, the
proposal expressed concern that compliance uncertainty and litigation
risk would still persist for the remaining population of loans
originated as non-QM loans at consummation. Furthermore, the proposal
noted that 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 loans based on
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.\98\ As a result, the Bureau preliminarily
concluded in the proposal 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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\97\ See 85 FR 41716 (July 10, 2020).
\98\ 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 alternative sources of
income verification (e.g., bank statements), which vary from
traditional income underwriting forms/documents such as W-2 forms,
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 proposed 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 stated that a Seasoned QM definition could
provide incentives for making additional rebuttable presumption QM
loans. As explained in the proposal, while the GSEs purchase rebuttable
presumption QM loans, and nearly half of manufactured housing
originations are rebuttable presumption QM loans, large

[[Page 86411]]

banks tend to originate only safe harbor QM loans. A Seasoned QM
definition may provide an additional incentive for large banks to
originate rebuttable presumption QM loans that may not be eligible for
sale to the GSEs and therefore may not otherwise have been made.
The proposal explained that based on feedback from external
stakeholders, the Bureau expected that a Seasoned QM definition may
encourage creditors to originate more responsible, affordable loans
that are not QMs at consummation, and ensure that creditors do not
decide not to make responsible, affordable loans because of legal
uncertainty in non-QM status. Comments on the ANPR suggested that
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 when default is more likely due to a change in the consumer's
circumstances. Not only would allowing performing loans to season into
QM status clarify a creditor's litigation risk, but external feedback
suggested this could help provide certainty for secondary market
participants that might otherwise be unable or unwilling to accept the
litigation risk associated with assignee liability for either
rebuttable presumption QM or non-QM loans.
The proposal acknowledged that creditors may be uncertain about
whether certain loans fall within the existing QM definitions. For
example, the U.S. Department of Housing and Urban Development (HUD),
the VA, and the 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. The
proposal noted that a creditor may be uncertain about whether a State
court would interpret and apply those criteria to a particular loan in
a consumer's TILA section 130(k) \99\ 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 the proposal, 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 will provide additional legal
certainty by providing an alternative basis for a conclusive
presumption of ATR compliance after the required seasoning period.
---------------------------------------------------------------------------

\99\ 15 U.S.C. 1640(k).
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As discussed in the proposal, to the extent that additional legal
certainty provided by a Seasoned QM definition 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 the rationale in the proposal was primarily focused on the non-
agency and non-QM markets, the proposal noted that 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 in which creditors
typically do not bear the credit risk of default.\100\ 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 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, the proposal noted that 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.\101\ Similarly,
the Bureau noted in the proposal 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 the
Seasoned QM definition could further incentivize creditors to originate
these loans at scale.
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\100\ Jim Parrot & Mark Zandi, Opening the Credit Box, Moody's
Analytics & 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 underwriting requirements,
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.
\101\ 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.
---------------------------------------------------------------------------

In addition, the Bureau preliminarily concluded in the proposal
that, along with a possible increase in non-QM originations, a Seasoned
QM definition might also encourage meaningful innovation and lending to
broader groups of creditworthy consumers, especially those with less
traditional credit profiles. As described in the proposal, 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 the Bureau intends for the ATR/QM Rule to
remain sufficiently flexible to accommodate and encourage developments
in mortgage underwriting to reflect these changes. 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' 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
concluded in the proposal that allowing an alternative pathway to a QM
safe harbor may encourage creditors to lend to consumers with less
traditional credit profiles at an affordable price based on an
individualized determination of a consumer's ability to repay.
The proposal acknowledged that the extent to which a Seasoned QM
definition may increase access to credit would be a function of the
size of the eligible loan population that could benefit: The more loans
that would be

[[Page 86412]]

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 considered the rate at
which loans terminate, to assess the potential population of loans that
would be eligible to benefit from a Seasoned QM definition and thus
potentially affect access to credit. Based on the data and analysis
presented in part VII of the proposal, the Bureau preliminarily
concluded that the majority of eligible non-QM and rebuttable
presumption mortgage loans would remain active and thus be eligible to
benefit from the seasoning period, across the economic cycle.

B. Considerations Related to Ability To Repay Discussed in the Proposal

The Bureau proposed to introduce an alternative pathway to a QM
safe harbor for a new category of Seasoned QMs because it preliminarily
concluded 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.
The proposal first noted that the current ATR/QM Rule provides that
loan performance can be a factor in evaluating a creditor's ATR
determination. Specifically, it 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.\102\ It explains further that the longer a consumer
successfully makes timely payments after consummation or recast,\103\
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 that the creditor could not have reasonably anticipated
at consummation. Specifically, it 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.\104\ 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.
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\102\ Comment 43(c)(1)-1.ii.A.1.
\103\ Section 1026.43(b)(11) provides a definition of recast.
\104\ Comment 43(c)(1)-2.
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Second, the proposal explained that 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 the General QM Proposal and General QM Final Rule,
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 a Seasoned QM definition in turn reflects the Bureau's view that
across a wide pool of loans, early distress supports an inference that
consumers lacked the ability to repay at consummation.
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\105\ Assessment Report, supra note 47, at 83.
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As discussed in the 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 circumstances after consummation that the
creditor could not have reasonably anticipated from the consumer's
application or the records used to determine repayment ability.
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
proposed a seasoning period of 36 months 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). The Bureau preliminarily decided in the proposal
to grant a safe harbor to these loans because 36 months of loan
performance, combined with the product restrictions and underwriting
requirements as defined in the proposal, appeared to indicate with
sufficient certainty creditor compliance with the ATR requirements at
consummation. The Bureau acknowledged 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 proposal noted 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.
The proposal also explained that the current practices of market
participants with respect to remedies for deficiencies in underwriting
practices also support the Bureau's 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.\106\ 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 the originating lender made if the consumer had no more than
two 30-day delinquencies in the 36 months following the consumer's
first payment, among other requirements.\107\ 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
not be attributed to underwriting, but rather a change in the
consumer's circumstances that the creditor could not have reasonably
anticipated from the consumer's application or the records.
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\106\ Fed. Hous. Fin. Agency, Representation and Warranty
Framework, https://www.fhfa.gov/PolicyProgramsResearch/Policy/Pages/Representation-and-Warranty-Framework.aspx (last visited Nov. 30,
2020).
\107\ 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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[[Page 86413]]

Based on these considerations, the Bureau preliminarily concluded
in the proposal that a consumer's timely payments for 36 months, in
combination with compliance with the product restrictions and
underwriting and portfolio requirements in the proposal, 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. As discussed in the proposal, the Bureau
focused on loans that would be eligible to be Seasoned QMs and that
have an interest rate spread in excess of 150 basis points, and
therefore would be outside the safe harbor threshold in the General QM
Proposal and General QM Final Rule. These non-QMs and rebuttable
presumption QMs are the population whose ATR compliance presumption
status would be affected by becoming Seasoned QMs. The proposal noted
that two-thirds (66 percent) of loans that experience a disqualifying
event (i.e., an event that would prevent a loan from becoming a
Seasoned QM under the proposed criteria described in the section-by-
section analysis of Sec. 1026.43(e)(7)) do so within 36 months, and
the rate at which loans disqualify diminishes beyond 36 months. The
proposal explained that this may suggest that a failure to repay that
occurs more than three years after consummation can generally be
attributed 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, while the
proposal acknowledged that 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 noted that it 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 the proposal (such as a 60-day delinquency), as
explained below in part VI.
Notwithstanding this evidence and these considerations, the
proposal acknowledged that 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 proposal noted that the prospect
that at consummation a consumer may lack the 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. To address this,
the proposal limited the Seasoned QM definition to first-lien, fixed-
rate covered transactions that are held in the originating creditor's
portfolio (with specified exceptions), satisfy the existing product-
feature requirements and limits on points and fees under the General QM
loan definition, and meet the underwriting requirements applicable to
Small Creditor QMs.

C. Comments in Support of a Seasoned QM Definition

Numerous industry commenters supported the Bureau's proposal to
create a pathway to a QM safe harbor for loans that demonstrate a
satisfactory performance history, subject to certain product feature
restrictions and underwriting requirements. Commenters who supported
the Seasoned QM definition generally supported the Bureau's rationale
for the proposal, which is described in parts V.A and V.B above. With
respect to encouraging responsible innovation and expansion in the non-
QM market, commenters supporting the proposal generally agreed that a
Seasoned QM definition would provide an important incentive for
industry to originate loans that are considered non-QMs at origination,
while appropriately balancing access to credit with meaningful consumer
protections. With respect to ability to repay, these commenters also
generally agreed that a borrower's demonstrated ability to make three
years of mortgage payments indicates that the creditor made a
reasonable, good faith determination of the borrower's ability to repay
at consummation and should therefore warrant a conclusive presumption
of compliance.
Individual financial institutions as well as industry trade
associations argued that a Seasoned QM definition would increase access
to credit without undermining protections for consumers. Some of these
commenters stated that a Seasoned QM definition would reduce non-QM
litigation exposure and reward responsible underwriting. While industry
commenters offered varying assessments of the extent to which this
reduction in compliance uncertainty and litigation exposure would
increase access to credit, many industry commenters indicated that the
proposal would encourage origination of more loans that may be
considered non-QM or rebuttable presumption QM at origination without
weakening the rule's ability to protect consumers from unaffordable
mortgage loans.
Several industry commenters agreed that the proposal would provide
a meaningful incentive for creditors to use innovative underwriting
techniques to increase access to credit and reduce the costs of credit
for the substantial share of the broader population who may lack
traditional credit profiles or income sources and therefore struggle to
qualify for mortgage credit through GSE and government mortgage
programs. These commenters also noted that because these borrowers are
more likely to fall outside the GSE and government underwriting
guidelines, their loans are also more likely to be higher priced and
therefore fall outside of the Bureau's price-based thresholds for
determining General QM status. An industry trade association noted that
market data show creditors have a lower willingness to originate non-QM
and rebuttable presumption QM loans. Examples provided by commenters of
these credit-worthy borrowers who have limited credit history include
younger consumers without a long credit history, elderly borrowers who
have paid down their debts and pay their expenses with cash, and other
consumers who may have used more informal means of borrowing in the
past. Examples provided of borrowers with non-traditional income
include those with income sources that are not reported on W-2 forms
who have difficulty qualifying under standard underwriting guidelines
due to variable amount and timing of their income, such as ``gig
economy'' workers, seasonal employees, and self-employed borrowers.
Three industry commenters supported the proposal but suggested that
its impact on access to credit may be marginal. One of these commenters
described the proposal as a ``modest, but useful step'' that would
bring incremental improvement. Generally, these commenters expressed
concern that the risk of litigation would remain because the Seasoned
QM definition would not confer safe harbor status at consummation.
These commenters indicated that some creditors would be less willing to
originate additional loans even if the proposal were finalized, and
even if the borrower has the requisite ability to repay based on
prudent underwriting practices, given that these loans would lack a QM
safe harbor at consummation.

[[Page 86414]]

Several commenters stated that access to credit would increase
because the proposal would increase marketability to the secondary
market of loans that are originated as non-QM or rebuttable presumption
QM loans but season into a QM safe harbor, thereby increasing the
ability of creditors to access secondary market liquidity to originate
new loans. These commenters noted that the secondary market for non-QM
loans is less liquid due to litigation and compliance risks as well as
the costs of additional due diligence that many secondary market
investors require prior to purchase. According to these commenters,
eliminating assignee liability and litigation risks related to the ATR/
QM Rule for Seasoned QMs that are sold in the secondary market would
improve the marketability of these loans and reduce the transaction
costs associated with buying and selling Seasoned QMs. These commenters
stated that this would have the effect of increasing the number of
market participants, in both the primary and secondary markets.
Commenters in support of the proposal also agreed with the Bureau's
rationale for proposing a conclusive presumption of compliance with the
ATR/QM Rule after three years of demonstrated loan performance. These
commenters stated that if a borrower makes timely payments for an
extended period of time, any subsequent default cannot reasonably be
attributed to a creditor's underwriting or ATR determination at
consummation. Some commenters noted that because the legal standard for
the ATR/QM Rule requires a creditor to make its ATR determination at
consummation, subsequent defaults due to economic disruptions or a
change in life circumstances that cannot be attributed to an
underwriting or ATR deficiency at the time of consummation.
While these commenters agreed that performance over time is
sufficient evidence of a creditor's ATR determination at consummation,
they had varying opinions on the necessity of some of the additional
consumer protections in the proposal, as discussed in greater detail in
part VI below. While industry commenters generally supported
maintaining the statutory product restrictions (such as the exclusion
for loans with interest-only or negative amortization features, balloon
payments, or terms that exceed 30 years), they expressed a range of
views on whether ARMs and subordinate-lien loans should be eligible to
season into QM status. They also expressed varying opinions on whether
the proposed portfolio requirement is a necessary consumer protection
or overly restrictive.

D. Comments in Opposition to a Seasoned QM Definition

A number of consumer advocates and other non-profit organizations
as well as an academic commenter opposed the Bureau's proposed Seasoned
QM definition. These commenters generally expressed concerns over the
evidentiary support for the proposed Seasoned QM definition, the
Bureau's legal authority, the concept that demonstrated loan
performance over an extended period of time can warrant a conclusive
presumption of compliance with the ATR/QM Rule, and the impact on
minority borrowers. Most of these commenters stated that if the Bureau
were to finalize a Seasoned QM definition, the Bureau should retain the
underwriting requirements, product restrictions, portfolio requirement,
and other consumer protections included in the proposal. A joint
comment from a number of non-profit organizations suggested that if the
Bureau were to finalize a Seasoned QM definition, the final rule should
incorporate a two-tiered approach, such that non-QM loans at
consummation could only season into rebuttable presumption QM loans and
only loans originated as rebuttable presumption QM loans could season
into safe harbor QM loans.
Nearly all commenters that opposed the Seasoned QM definition
questioned the Bureau's legal authority to issue a rule that would
limit a consumer's private right of action and foreclosure defense for
violations of the ATR/QM Rule after three years. Commenters asserted
that TILA's statutory requirements allow borrowers to raise a violation
of the ATR/QM rule as a defense at any time in response to a
foreclosure, and that Congress intended that these claims not be cut
off. In addition, they maintained that, by extending the general one-
year statute of limitations under TILA to three years for ability-to-
repay claims, Congress recognized that it could take consumers a
minimum of three years to recognize the right to bring an action
against a creditor. Finally, commenters asserted that the performance
requirements in the final rule are beyond the Bureau's authority to
define QMs because Congress intended to limit the definition of QM to
only those conditions that could be determined at or prior to the
consummation of a loan. These commenters suggested that the Bureau's
proposal is contrary to Congressional intent and exceeds the Bureau's
authority.
Many of these commenters also asserted that the Bureau did not
provide enough evidentiary support and data analysis demonstrating that
Seasoned QMs are the types of high-quality, low-cost loans for which
Congress intended the Bureau to exercise its exemption authority.
Commenters stated that the proposal could afford a QM safe harbor and a
release from risk retention requirements to loans that are higher cost,
have high DTIs, and have limited income documentation. These commenters
asserted that the analysis in part VII of the proposal demonstrated
that a meaningful percentage of loans suffer a disqualifying event
after three years and that the proposal's three-year seasoning period
is arbitrary. They also maintained that the Bureau's objective to
increase access to credit and innovation in the mortgage market is not
a sufficient justification absent a clearer explanation of how the
proposal advances the statutory objective of affordable and responsible
mortgage lending.
One consumer advocate commenter argued that the proposal could have
unanticipated disparate impacts on borrowers of color and would likely
burden these borrowers with higher mortgage costs without affording
them the underwriting and assessment protections that the Dodd-Frank
Act sought to provide. The commenter pointed to historical evidence
that minority borrowers have been steered into predatory, higher-priced
mortgage products, and that the foreclosure crisis preceding the Dodd-
Frank Act resulted in a significant loss in housing wealth among
minority homeowners. The commenter stated that the proposal would
target vulnerable consumers and remove their statutorily provided life-
of-loan defense to foreclosure.
Several consumer advocates also stated that the proposal could
restrict remedies for high cost loans under the Home Ownership and
Equity Protection Act of 1994 (HOEPA).\108\ They asserted that the
Bureau has not made the necessary case to restrict remedies under HOEPA
for violations of HOEPA's ability-to-repay requirements.
---------------------------------------------------------------------------

\108\ Public Law 103-325, tit. I, subtit. B, 108 Stat. 2190
(1994).
---------------------------------------------------------------------------

Commenters also argued that loan performance should not be equated
with ability to repay. They pointed to survey data and anecdotal
evidence that many consumers take extraordinary measures to pay an
unaffordable mortgage, such as drawing down retirement accounts,
foregoing food, medicine, and utilities, or borrowing from relatives
and friends. One consumer advocate commenter

[[Page 86415]]

cited its survey of housing counselors and attorneys, which showed that
70 percent of respondents reported that their clients had forgone or
decreased essential expenses in order to make payments for the first
three years. Several commenters also asserted that the proposal is
inconsistent with the statutory mandate that ability to repay is
determined at origination, and that a change in circumstance (e.g.,
winning the lottery) whereby a borrower is able to pay a loan that was
unaffordable at origination should not relieve creditors of their
obligation to conduct a prudent ability-to-repay evaluation at
origination. Several consumer advocates also expressed concern that the
Seasoned QM definition may restrict the ability of the Bureau and other
agencies to conduct supervisory examinations beyond the three-year
seasoning period when the loan obtains QM safe harbor status.
Several commenters also questioned the Bureau's use of the GSE
representation and warranty framework as a model for the proposal's
three-year seasoning period. They stated that the FHFA and GSE analysis
is based on an investor's view of the aggregate financial impact on the
GSEs' portfolios, as opposed to Congress's objective in enacting the
ATR mandate to protect individual consumers from harm. They also noted
that the GSE representation and warranty framework includes life-of-
loan exclusions for more material defects such as misstatements,
misrepresentations, and omissions. Lastly, the commenters pointed out
that the GSEs perform post-purchase quality control checks and audits
shortly after acquiring the loans and before loans have defaulted, to
ensure they are able to require creditors to repurchase defective loans
within the three-year sunset. These commenters asserted that the
proposal lacked similar quality control checks and exceptions for
misconduct and fraud.
Several commenters maintained that the proposal's assessment of the
litigation risks associated with originating non-QM loans and the
impact on cost of credit are unproven and inconsistent with the
Bureau's findings in the January 2013 Final Rule. They noted that
Congress has balanced the interest of consumers and creditors over the
years, as evidenced by the limitations that TILA's general rules of
liability place on possible litigation exposure. They also pointed out
that there are practical limitations on litigation exposure for non-
compliance with ability-to-repay violations, such as access to a
limited supply of legal services and public interest attorneys.

E. The Final Rule

The Bureau is creating a Seasoned QM definition in this final rule
because it concludes that providing a pathway to a QM safe harbor for
performing non-QM and rebuttable presumption QM loans at consummation
will maintain or expand access to responsible and affordable mortgage
credit for loans that were originated in compliance with the ATR/QM
Rule. The Bureau observed in the January 2013 Final Rule that increased
legal certainty may benefit consumers if, as a result, creditors are
encouraged to make loans that satisfy the statutory QM criteria, and
further, that increased legal certainty may result in loans with a
lower cost than would be charged in a context of legal
uncertainty.\109\ Consistent with that earlier finding, the Bureau
finds here that the increased compliance certainty and reduction in
litigation risk associated with providing a conclusive presumption of
compliance for Seasoned QMs will encourage creditors to lend to
consumers whose loans may fall outside of the QM safe harbor at
consummation but who nonetheless have the ability to repay. In
particular, the Bureau concludes that there are a significant number of
creditworthy consumers who are unable to readily obtain mortgage
financing because they fall outside of the GSE and government lending
guidelines, particularly those with non-traditional credit or income
sources and self-employed borrowers. The Bureau also concludes that if
combined with certain other factors, successful loan performance over a
number of years indicates sufficient certainty to presume that loans
were originated in compliance with the ATR/QM Rule.
---------------------------------------------------------------------------

\109\ 78 FR 6408, 6507 (Jan. 30, 2013).
---------------------------------------------------------------------------

This final rule provides a conclusive presumption of compliance for
loans that are originated as non-QM or rebuttable presumption QM loans,
that meet certain performance criteria and portfolio requirements over
the seasoning period of at least 36 months, and that satisfy certain
product restrictions, points-and-fees limits, and underwriting
requirements. Specifically, the Seasoned QM definition is limited to
fixed-rate, first-lien mortgages that also satisfy the product-feature
requirements and limits on points and fees under the General QM loan
definition. Under the final rule, creditors are required to consider
the consumer's DTI ratio or residual income, income or assets other
than the value of the dwelling, and debts and verify the consumer's
income or assets other than the value of the dwelling and the
consumer's debts, using the same consider and verify requirements
established for General QMs in the General QM Final Rule. The final
rule generally requires the original creditor or purchasing institution
to hold the loan in portfolio until the end of the seasoning period,
except that it permits a single whole-loan transfer, as further
described in the section-by-section analysis of Sec.
1026.43(e)(7)(iii) below.
The Bureau adopts a Seasoned QM definition because it concludes
that the definition strikes the best balance between the competing
consumer protection and access-to-credit considerations described
herein. Specifically, the Bureau concludes that, if coupled with other
consumer protections, a seasoning period of at least 36 months provides
a sufficient length of time to conclusively presume that a creditor
reasonably determined a consumer's ability to repay at the time of
consummation, while promoting continued access to credit and
incentivizing creditors to make certain loans that may not have
otherwise been made in the absence of potentially greater ability-to-
repay compliance certainty.\110\ As discussed in further detail in the
section-by-section analysis of Sec. 1026.43(e)(7)(ii), the Bureau
concludes that, for loans that meet the eligibility requirements to
season into a QM safe harbor, it is reasonable to attribute any
subsequent default after the 36-month seasoning period to a change in
economic conditions or consumer circumstances that a creditor could not
reasonably have anticipated from the consumer's application or the
records used to determine repayment ability rather than to a failure by
the creditor to make a reasonable

[[Page 86416]]

determination of ability to repay at consummation.
---------------------------------------------------------------------------

\110\ This final rule, like the Assessment Report and the
General QM Final Rule, 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 General QM Final
Rule measure early distress as whether a consumer was ever 60 days
or more past due within the first two years after origination. The
performance requirements for Seasoned QMs reflect the Bureau's
consideration of this measure of early distress, but also its view
of what requirements strike the best 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 Sec. 1026.43(e)(7) differ in some
respects from the measure of early distress used in the Assessment
Report, but concludes that this final rule's definition and
performance requirements further the specific purposes of this final
rule for the reasons explained in the section-by-section analyses of
Sec. 1026.43(e)(7)(ii) and (iv)(A) below.
---------------------------------------------------------------------------

The Bureau concludes that the Seasoned QM definition will maintain
or expand access to credit for non-QM and rebuttable presumption QM
loans that otherwise may not have been made due to perceived litigation
or compliance risks, even if the creditor has confidence that it could
originate the loan in compliance with the ATR requirements. Indeed,
many industry commenters specifically indicated in their comments that
they anticipated that the proposal would do so. The Bureau concludes
that the Seasoned QM definition will also facilitate innovation in
underwriting in the non-QM market to better serve consumers with non-
traditional credit profiles, allow for more flexibility to adapt to
future changes in the work force and technology, and better support
emerging research and technologies into alternative mechanisms to
assess a consumer's ability to repay, such as cash flow underwriting.
Several commenters noted that the impacts on access to credit are
uncertain or unproven given these loans would be consummated without a
conclusive presumption of compliance, and that therefore uncertainty
and legal risk will persist with respect to these loans. The Bureau
acknowledges that not every creditor may seek to expand their product
offerings as a result of this final rule, but the Bureau nonetheless
concludes the final rule will further its policy objectives, as many
industry commenters indicated in their comments.
Furthermore, the Bureau concludes that the objective of increasing
access to responsible non-QM lending is of particular importance in
light of recent contractions in that segment of the market. As
described in the proposal, the non-QM market has been further reduced
by the recent economic disruptions associated with the COVID-19
pandemic, with most mortgage credit now available in the form of loans
that obtain QM status at consummation. During periods of economic
stress, investors seek safer assets such as cash and government-backed
securities. Because non-QM loans are generally perceived as riskier by
investors in part for the reasons discussed in the proposal, the
decreases in originations related to the pandemic were particularly
acute in the non-QM sector of the mortgage market. While the non-QM
market has begun to recover, recent events have illustrated how
investors' perception of risk--including uncertainty over compliance
and litigation risk--can exacerbate the impacts on access to credit,
particularly during periods of economic distress. The Bureau concludes
that the Seasoned QM definition in this final rule should help
counteract these impacts.
The Bureau acknowledges the concerns expressed by some commenters
that the Seasoned QM definition will limit a consumer's foreclosure-
related defense by recoupment or set off for alleged violations of the
ATR requirements after three years under TILA section 130(k).\111\
These commenters suggested that availability of this defense 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.
---------------------------------------------------------------------------

\111\ One academic commenter indicated that under the proposal,
loans could season during pending litigation, cutting off
affirmative claims filed within the statute of limitations period.
Acknowledging this possibility, the Bureau nonetheless concludes
that the final rule should not be revised to prevent that
possibility in all cases. The reasoning underlying this final rule--
that satisfaction of the seasoning requirements for the duration of
the seasoning period demonstrates that the creditor made a
reasonable determination of the consumer's ability to repay at
consummation--is not any less applicable when litigation is
initiated during the seasoning period, but the consumer continues
making on-time payments for the remainder of the seasoning period.
The mere filing of the lawsuit itself does not indicate the creditor
failed to make a reasonable determination of ability to repay at
consummation. Accordingly, the Bureau does not believe there is a
good reason to create and administer potentially complex rules
managing the effects that various court or litigant actions should
have on the seasoning period.
---------------------------------------------------------------------------

The Bureau disagrees with this understanding of TILA section 130(k)
and its implications regarding the scope of the Bureau's authority to
define a QM. 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.
With TILA section 130(k), Congress provided consumers with a degree of
relief from the finality generally associated with a statute of
limitations period so that they may assert a violation of TILA section
129C(a) as a matter of defense by recoupment or set off in connection
with judicial or nonjudicial foreclosure. TILA section 130(k) thus
conditions a consumer's actual right to obtain recoupment or set off on
a finding that a creditor in fact violated TILA section 129C(a). But,
on this matter of substantive law, TILA section 129C(b)(1) expressly
provides that a creditor may presume its compliance with TILA section
129C(a) with respect to any mortgage that falls within the definition
of a QM. TILA section 129C(b)(2) and (3) grant the Bureau broad
authority to revise, add to, or subtract from the criteria defining a
QM for purposes of presuming compliance with TILA section 129C(a).
Consistent with that authority, the final rule concludes that--if
coupled with certain product restrictions and other factors--successful
loan performance over a number of years indicates with sufficient
certainty creditor compliance with TILA section 129C(a).
Consequently, creditors of loans satisfying the final rule's
requirements may lawfully invoke the loan's status to show that there
is no ``violation'' for the purposes of TILA section 130(k), just as
creditors properly originating loans under other QM categories have
been able to do since the effective date of the January 2013 Final
Rule. Consumers in turn may respond with evidence and argument
establishing that a loan in fact does not satisfy the final rule's
requirements to qualify as a Seasoned QM. But the Bureau does not read
TILA section 130(k) to preserve for consumers a right to assert a
violation of TILA section 129C(a) when the Bureau has determined as a
matter of substantive law to conclusively presume the loan's compliance
with TILA section 129C(a).\112\ This regulatory regime, under which QM
status may affect a consumer's ability to raise a defense to
foreclosure under TILA section130(k), is precisely what Congress
intended and the introduction of a Seasoned QM category in no way
alters that regime.
---------------------------------------------------------------------------

\112\ Likewise, the Bureau disagrees with commenters who suggest
that the final rule is a statute of limitations or statute of
repose. In contrast to statutes of limitations or repose--which
limit liability based solely on the passage of time measured after a
certain event occurs--the performance requirements in the final rule
are based on a series of events, periodic payments, that must occur
before a loan can season. Moreover, whereas a statute of limitations
or repose cuts off a consumer's right to raise a claim for reasons
unrelated to the merits of a claim, the performance requirements in
the final rule are probative of the merits of a section 129C(a)
violation.
---------------------------------------------------------------------------

The Bureau also disagrees with the concerns expressed by some
commenters that the performance requirements in the final rule are
beyond the Bureau's authority to define QMs because Congress intended
to limit the definition of QM to only those conditions that could be
determined before a loan is consummated. These commenters specifically
point to the statutory QM provisions, which they argue are conditions
directly related to underwriting that can be met prior to

[[Page 86417]]

consummation, unlike the performance requirements in the final rule.
The Bureau concludes that nothing in the text of TILA section
129C(b) prevents the Bureau from creating categories of QMs that are
based on conditions that can be observed after a loan is consummated.
The Bureau instead believes that QM conditions that are indicative of
creditor compliance with the ATR requirements at consummation,
regardless of when they are satisfied, are consistent with the text and
structure of TILA section 129C(b). Congress only required that
additional QM conditions be necessary or proper to ensure responsible,
affordable mortgage credit remains available to consumers in a manner
consistent with the purposes of TILA section 129C or necessary and
appropriate to effectuate the purposes of TILA sections 129B and 129C.
And although some of the statutory QM conditions focus on
underwriting,\113\ most of these statutory conditions instead focus on
prohibiting risky product features that may be probative of a
creditor's non-compliance with the ATR requirements, such as interest-
only loans, or loan terms that exceed 30 years.\114\ The final rule
goes beyond these statutory QM conditions with performance requirements
and restrictions on creditors that, like the statutory product
restrictions, are probative of whether a consumer was offered and
received a loan on terms that the creditor reasonably determined
reflected the consumer's ability to repay the loan. The Bureau does not
believe that Congress intended to allow certain QM conditions that
provide prospective evidence of creditor compliance with the ATR
requirements but prohibit conditions that instead provide retrospective
evidence of the same.\115\ Thus, while a creditor undoubtedly must
determine a consumer's ability to repay at consummation, there is no
indication that Congress intended to preclude or limit the Bureau's
authority to defer its decision on the merits of presuming such
compliance until the occurrence of later-in-time events.
---------------------------------------------------------------------------

\113\ 15 U.S.C. 1639c(b)(2)(A)(iii) through (v).
\114\ 15 U.S.C. 1639c(b)(2)(A)(i) through (ii), (vii) through
(viii); see 78 FR 6408, 6503-04 (Jan. 30, 2013).
\115\ See 78 FR 6408, 6462 (Jan. 30, 2013).
---------------------------------------------------------------------------

Commenters' insistence that QM status be determined at consummation
is an approach the Bureau could have taken in the final rule. But the
Bureau concludes that it has as much authority under TILA to grant QM
status at consummation and to later withdraw it based on later-in-time
events, on the one hand, as it does to condition the same presumption
on the occurrence of post-consummation events, so long as the later-in-
time event is probative of or related to creditor compliance with the
ATR requirements at consummation.\116\ The Bureau further concludes
that the wait-and-see approach adopted in this final rule is the most
reasonable approach in this context. As already noted above, consumer
distress during the first three years of a loan supports an inference
that consumers lacked the ability to repay at consummation. By
withholding the presumption during the first three years of a loan, the
final rule ensures that consumers are afforded greater consumer
protections by being able to assert their rights without being forced
to first default on their loan. The final rule also ensures that
creditors benefit from the presumption only once there is enough
evidence that the creditor made a reasonable ATR determination at
consummation. The Bureau thus concludes that creating 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.
---------------------------------------------------------------------------

\116\ For example, if justified by the merits, the final rule
could have mimicked the QM category adopted by Congress in EGRRCPA
and granted QM status to all covered loans at consummation with the
caveat that the loan could lose QM status if a borrower fails the
performance requirements. 15 U.S.C. 1639c(b)(2)(F)(ii)(I)(aa),
(iii).
---------------------------------------------------------------------------

The Bureau recognizes the concerns expressed by many consumer
advocate commenters that loan performance does not always equate to
ability to repay and that consumers may take extraordinary measures to
make payments on their mortgage. The Bureau acknowledged in the
proposal that it is possible that a consumer could continue making on-
time payments for some period of time despite lacking the ability to
repay by foregoing payments on other obligations, and that a meaningful
percentage of non-QM loans may end up delinquent in later years.
However, as discussed in part VIII below, in general, the later a
delinquency occurs, the less likely it is due to a lack of ability to
repay at consummation rather than a change in circumstance after
consummation that the creditor could not have reasonably anticipated
from the consumer's application or the records at consummation.\117\
---------------------------------------------------------------------------

\117\ As illustrated in Figure 3 in part VIII below, the Bureau
estimates that nearly two-thirds of loans that experience
delinquencies that would prevent a loan from becoming a Seasoned QM
under the final rule do so within 36 months, and the rate at which
loans disqualify diminishes beyond 36 months.
---------------------------------------------------------------------------

Furthermore, the Bureau finds that the final rule's inclusion of
additional consumer protections mitigates the risks cited by commenters
that a consumer lacks ability to repay but is nonetheless able to make
timely payments for at least 36 months. As discussed further in the
section-by-section analysis of Sec. 1026.43(e)(7)(i)(A) and (B), this
final rule's product restrictions prohibit loan features such as
adjustable rates, interest-only payments, and negative amortization
that can lead to sharp payment increases shortly after consummation,
and limits Seasoned QM status to first-lien loans. The final rule also
generally requires the creditor or first purchaser to hold the loan in
portfolio until the end of the seasoning period. As discussed in the
section-by-section analysis of Sec. 1026.43(e)(7)(iii), this
requirement gives creditors a greater incentive to make responsible and
affordable loans at consummation by ensuring that the creditor or first
purchaser of the loan bears the risk if the loan defaults during the
seasoning period.
Lastly, the final rule maintains the requirement that a creditor
consider the consumer's DTI ratio or residual income, income or assets
other than the value of the dwelling, and debts and verify the
consumer's income or assets other than the value of the dwelling and
the consumer's debts. As discussed in the section-by-section analysis
of Sec. 1026.43(e)(7)(i)(B), this final rule aligns the Seasoned QM
consider and verify requirements with that of the General QM Final
Rule, which will help to ensure that loans for which the creditor has
not made a good faith determination of the consumer's ability to repay
do not season into a QM safe harbor.
A number of commenters expressed concern that the Bureau lacks the
evidentiary support and data analysis to demonstrate that Seasoned QMs
are safe and high-quality loan products. These concerns are addressed
in greater detail in part VIII below. The Bureau concludes that the
delinquency and foreclosure analysis presented in part VIII, combined
with the consumer protections discussed above, provides sufficient
support to presume compliance with the ATR requirements when a loan
performs over a seasoning period of at least 36 months and meets the
other requirements in this final rule.
Some consumer advocate commenters expressed concern about the
potential effects of this final rule given that minority homeowners
historically have had higher-priced mortgage products relative to White
consumers with similar credit characteristics. These commenters stated
that this final rule could result in unanticipated disparate

[[Page 86418]]

impacts on borrowers of color if they lose their set off or recoupment
rights after three years. The Bureau recognizes that some creditors may
violate Federal fair lending laws by charging certain borrowers higher
prices on the basis of race or national origin compared to non-Hispanic
White borrowers with similar credit characteristics, and the Bureau
affirms its commitment to consistent, efficient, and effective
enforcement of Federal fair lending laws.\118\ The Bureau further
emphasizes that the QM criteria, including the Seasoned QM definition
added by this final rule, do not create an inference or presumption
that a loan satisfying the QM criteria is compliant with any Federal,
State, or local anti-discrimination laws that pertain to lending. A
creditor has an independent obligation to comply with the Equal Credit
Opportunity Act \119\ and Regulation B,\120\ and an effective way for a
creditor to minimize and evaluate fair lending risks under these laws
is by monitoring its policies and practices and implementing effective
compliance management systems.
---------------------------------------------------------------------------

\118\ See, e.g., Consent Order, U.S. v. Bancorpsouth Bank, No.
1:16-cv-00118, ECF No. 8 (N.D. Miss. July 25, 2016), https://files.consumerfinance.gov/f/documents/201606_cfpb_bancorpSouth-consent-order.pdf (joint action for discriminatory mortgage lending
practices including charging African-American customers more for
certain mortgage loans than non-Hispanic White borrowers with
similar loan qualifications).
\119\ 15 U.S.C. 1691 et seq.
\120\ 12 CFR part 1002.
---------------------------------------------------------------------------

This final rule's performance criteria, product restrictions,
underwriting criteria, and portfolio requirements are designed to
ensure that Seasoned QMs 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.
Moreover, as discussed in the section-by-section analysis of Sec.
1026.43(e)(7)(i)(E), this final rule also clarifies that the Seasoned
QM definition does not extend to high-cost mortgages covered by HOEPA,
thus excluding the highest cost loans on the market from eligibility
for Seasoned QM status.
As discussed above, commenters expressed differing views on the
utilization of the GSE representation and warranty framework as an
analog or model for the Seasoned QM definition. Many industry
commenters supported the Seasoned QM definition, citing consistency
with the industry standards set by the GSE representation and warranty
framework and the mortgage insurers' rescission relief policies. One
consumer advocate commenter, on the other hand, pointed out several
differences relative to the Seasoned QM definition and questioned the
utility of the GSE model as a precedent, as described above. The Bureau
acknowledges that the GSE framework may have been developed based on an
aggregate analysis of the GSE portfolio to provide certainty for
lenders by clarifying when a loan may be subject to repurchase.
However, the GSE framework nonetheless illustrates a recognition based
on experience by both GSEs and lenders that after 36 months of strong
loan performance, a default should fairly be attributed to a change in
consumer's circumstances that the creditor could not have reasonably
anticipated from the consumer's application or the records at
consummation or other cause besides that of the lender's underwriting.
The FHFA's stated purpose for the framework is to ``provide more
certainty for lenders, facilitate greater liquidity to the primary
market, and help increase access to credit without compromising safety
and soundness.'' \121\ Furthermore, although commenters are correct
that the GSE representation and warranty framework includes life-of-
loan exclusions for more material defects, this final rule includes
many important and consumer-protective loan-level requirements, some of
which are not required under the GSE framework, such as the portfolio
requirement and exclusion for adjustable-rate mortgages.
---------------------------------------------------------------------------

\121\ Fed. Hous. Fin. Agency, Representation and Warranty
Framework, https://www.fhfa.gov/PolicyProgramsResearch/Policy/Pages/Representation-and-Warranty-Framework.aspx (last visited Nov. 30,
2020).
---------------------------------------------------------------------------

The Bureau also acknowledges that the GSEs have developed a robust
post-purchase quality control and audit framework to identify loan
defects typically within a few months of consummation and well within
the 36-month representation and warranty relief sunset. However, the
Bureau concludes that this final rule's portfolio requirement provides
similar incentives for creditors to originate loans with ability to
repay. That is, if a financial institution purchases a loan from a
creditor that it is required to hold in portfolio for 36 months, that
purchaser has similar incentives to perform loan-level due diligence as
the GSEs given the purchaser, like the GSEs, bears the credit risk of
default. The prospect of being able to sell the loan only if it passes
that due diligence creates a strong incentive for the creditor to
employ rigorous underwriting at consummation akin to post-purchase
quality control and audit under the GSE representation and warranty
framework. In fact, given the size and scale of the GSEs' credit risk
transfer programs whereby much of the risk of default for a large
portion of the GSEs' guaranteed portfolio is syndicated to private
market participants,\122\ purchasers that are required to hold the loan
in portfolio for 36 months may have an even greater incentive to ensure
the loans they purchase will perform well than the GSEs do. Moreover,
like the GSEs, financial institutions have similar remedies to require
the originating creditor to repurchase loans that were consummated with
defects, including a lack of ability to repay. For these reasons, the
Bureau has decided to base its adoption of a 36-month seasoning period
in part on the 36-month representation and warranty sunset for GSE
loans.
---------------------------------------------------------------------------

\122\ Fed. Hous. Fin. Agency, Credit Risk Transfer, https://www.fhfa.gov/PolicyProgramsResearch/Policy/Pages/Credit-Risk-Transfer.aspx (last visited Nov. 30, 2020).
---------------------------------------------------------------------------

Some consumer groups suggested that the Bureau's concern regarding
potential and perceived litigation risks associated with originating
non-QM loans and their impact on access to credit is inconsistent with
the Bureau's findings in the January 2013 Final Rule and unproven.
However, as discussed in the proposal, the analysis that the Bureau
subsequently published in the Assessment Report found that some of the
observed effect of the January 2013 Final 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 creditors'
determinations that consumers were unlikely to repay the loan based on
traditional indicators of creditworthiness.\123\ Many industry
commenters also reaffirmed the impact of compliance uncertainty and
litigation risk on creditors' willingness to originate non-QM and
rebuttable presumption QM loans as well as the secondary market's
willingness to purchase them. They asserted that the conclusive
presumption of compliance for a Seasoned QM after 36 months would
result in higher secondary market liquidity for these loans as
investors are extended the liability protections that QM status
provides. Based on its Assessment Report, external feedback to the
Bureau, and the comments, the Bureau has concluded that many secondary
market investors are unable or unwilling to accept the litigation risk
associated with assignee liability particularly with respect to non-QM
loans, which has in turn contributed to the relative scarcity of non-QM
loans.
---------------------------------------------------------------------------

\123\ See Assessment Report, supra note 47, at 118, 147, 150.

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[[Page 86419]]

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) currently 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.
Section 1026.43(e)(1)(i) currently provides 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. The Bureau
proposed to add Sec. 1026.43(e)(1)(i)(B), identifying Seasoned QMs as
a separate category of QMs for which a creditor receives a conclusive
presumption of compliance with ATR requirements, regardless of whether
the loan is a higher-priced covered transaction. The proposal would
have redesignated current Sec. 1026.43(e)(1)(i) as Sec.
1026.43(e)(1)(i)(A). To conform with these changes, the Bureau proposed
to revise comment 43(e)(1)-1 to add a reference to proposed Sec.
1026.43(e)(7). The Bureau also proposed 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 proposed to remove the first sentence of comment
43(e)(1)(i)-1, which would have been duplicative of regulatory text,
and to redesignate that comment as comment 43(e)(1)(i)(A)-1. For the
reasons discussed below, the Bureau is finalizing the amendments to
Sec. 1026.43(e)(1) and related commentary as proposed, with minor
technical changes to the proposed commentary.

The Bureau's Proposal

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, TILA 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.\124\ In the January 2013 Final Rule, the Bureau
interpreted TILA to provide for a rebuttable presumption of compliance
with the ATR provisions but used its adjustment and exception authority
under TILA to establish a conclusive presumption of compliance for
loans that are not ``higher-priced covered transactions.'' \125\
---------------------------------------------------------------------------

\124\ 78 FR 6408, 6511 (Jan. 30, 2013).
\125\ Id. at 6514.
---------------------------------------------------------------------------

In the January 2013 Final Rule, the Bureau identified several
reasons why the performance of QMs that are not higher-priced loans
could suggest consumers have the ability to repay and should receive a
safe harbor.\126\ The Bureau noted that the QM requirements would
ensure that the loans do not contain certain risky product features and
are underwritten with careful attention to consumers' DTI ratios.\127\
The Bureau also noted that a safe harbor would provide greater legal
certainty for creditors and secondary market participants and might
promote enhanced competition and expand access to credit.\128\ The
Bureau noted that it was not possible to define by a bright-line rule a
class of mortgages for which each consumer would have the ability to
repay.\129\
---------------------------------------------------------------------------

\126\ Id. at 6511.
\127\ Id.
\128\ Id.
\129\ Id.
---------------------------------------------------------------------------

In the Seasoned QM Proposal, the Bureau preliminarily concluded
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. The Bureau also preliminarily concluded that
satisfaction of the seasoning requirements--in particular, the fact
that the consumer made timely payments for the duration of the
seasoning period--supports the inference 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. The Bureau noted
that proposed Sec. 1026.43(e)(7) would require creditors to comply
with TILA requirements applicable to QMs and minimum underwriting
requirements. The Bureau also noted that the proposed requirements
would ensure that the loans do not contain risky product features
identified in TILA section 129C(b)(2), the loans are underwritten with
attention to consumers' resources and obligations, and the conclusive
presumption would be available to creditors only after the loans have
performed for a substantial period of time.
In the proposal, the Bureau stated that 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) 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 season into safe harbor QMs with
satisfactory performance. In addition, the Bureau noted in the proposal
that, similar to the Small Creditor QM definition and the pathway to QM
status provided in EGRRCPA section 101, the Seasoned QM definition
would include a requirement for the creditor to hold the loan in
portfolio. Finally, in the proposal the Bureau preliminarily concluded
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 creditors would not make
unaffordable loans.
The Bureau sought comment on all aspects of the proposal 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. In
addition, the Bureau sought comment on whether there are other
approaches to providing QM status to seasoned loans that would better
accomplish the Bureau's objectives.

Comments Received

The Bureau received a number of comments relating to the proposed
amendments to Sec. 1026.43(e)(1). As discussed in greater detail in
part V above, industry commenters generally supported the proposed
amendments to Sec. 1026.43(e)(1), and consumer advocate commenters
generally opposed the proposed amendments to Sec. 1026.43(e)(1).
Industry commenters generally expressed support for the Bureau's
preliminary conclusion that a loan's satisfaction of the proposed
seasoning requirements provides sufficient

[[Page 86420]]

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. These commenters stated that
the proposed amendments to Sec. 1026.43(e)(1), and the proposal in
general, retain consumer safety considerations and legal protections
consistent with the existing ATR/QM Rule. Industry commenters agreed
that providing safe harbor QM status to loans that season would
incentivize responsible non-QM lending, while maintaining market
stability. Several of these commenters noted that safe harbor QM status
would provide legal certainty to loans that previously did not receive
safe harbor QM status at consummation, and thereby remove risk
associated with originating non-QM loans.
Consumer advocate commenters opposed the Bureau's proposal,
cautioning that a seasoning period is not an adequate basis for
determining compliance with the ATR requirements. They also suggested
that ATR determinations should remain a case-by-case determination,
because there may be situations in which borrowers remain current on
their loan for 36 months but did not have an ability to repay the loan
at consummation.
A joint comment from a number of consumer advocates and other non-
profit organizations suggested that the Bureau adopt a two-tiered
approach to seasoning instead of providing all loans that season with
safe harbor QM status. A two-tiered approach would allow non-QM loans
to season into rebuttable presumption QM loans, and loans that are
originated as QMs under other QM categories to season into safe harbor
QM loans, after meeting the requirements for seasoning.
Some commenters made suggestions to modify proposed Sec.
1026.43(e)(7), which are discussed and addressed in the section-by-
section analysis of Sec. 1026.43(e)(7) below.

The Final Rule

For the reasons discussed above and, pursuant to its authority
under TILA section 105(a) as discussed below, the Bureau is finalizing
Sec. 1026.43(e)(1) as proposed. As finalized, Sec. 1026.43(e)(1)
provides that loans meeting the Seasoned QM requirements in Sec.
1026.43(e)(7) obtain a conclusive presumption of compliance with the
repayment ability requirements of Sec. 1026.43(c).
Since the January 2013 Final Rule, the Bureau has 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. As discussed in part V above, the Bureau concludes
that a Seasoned QM definition will 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 declines to adopt the two-tiered approach that some
commenters suggested that would provide only rebuttable presumption
status to Seasoned QMs originated as non-QM loans. Adopting such a two-
tiered approach would lessen the prospect of legal certainty for loans
originated as non-QMs and could thereby undermine the final rule's
primary objective, which is to promote continued and potentially
increased access to responsible and affordable credit by incentivizing
the origination of non-QM loans that otherwise may not be made. The
Bureau recognizes that it has decided in the General QM Final Rule not
to provide a similar safe harbor at consummation to General QMs priced
1.5 percentage points or more above APOR. That decision reflects a
balancing of the relevant consumer protection and access-to-credit
considerations in view of the Bureau's findings that (i) such loans
have higher delinquency rates than lower-priced loans and (ii) it lacks
sufficient evidence to suggest that having provided those loans with
only a rebuttable presumption of ATR compliance since the January 2013
Final Rule took effect has resulted in a significant disruption of
access to responsible, affordable mortgage credit. A balance of the
same statutory considerations leads the Bureau to a different
conclusion with respect to Seasoned QMs. The final rule's performance
requirements will ensure that only loans with strong early performance
receive the Seasoned QM safe harbor. When coupled with the final rule's
other requirements, the Bureau concludes that loans meeting the
Seasoned QM definition will have demonstrated that the creditor made a
reasonable determination of the ability to repay, regardless of the
loan's QM or non-QM status at origination. The Bureau also recognizes
that the prospect of a safe harbor three years after origination will
provide a stronger incentive to originate loans that will be non-QM for
at least the first three years than the prospect of a rebuttable
presumption three years after origination. In light of these
considerations, the Bureau concludes that extending Seasoned QMs a safe
harbor strikes the best balance between consumer protection and
ensuring continued access to responsible, affordable credit. The Bureau
is therefore finalizing the amendments to Sec. 1026.43(e)(1) and
related commentary as proposed, with minor technical changes to the
proposed commentary.

Legal Authority

The Bureau is revising Sec. 1026.43(e)(1) pursuant to 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 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 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
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.

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 proposed a conforming amendment to Sec. 1026.43(e)(2) to
include a reference to Sec. 1026.43(e)(7), which sets out the
requirements applicable to Seasoned QMs and is described in the
section-by-section analysis below. The Bureau did not receive comments
specifically relating to proposed Sec. 1026.43(e)(2). To conform with
the other amendments in this final rule, the Bureau is adopting the
amendment to Sec. 1026.43(e)(2) as proposed.

43(e)(7) Qualified Mortgage Defined--Seasoned Loans

The Bureau is adding Sec. 1026.43(e)(7) to define a new category
of QMs, Seasoned QMs, for covered transactions

[[Page 86421]]

that meet certain criteria. The Bureau concludes that providing
creditors an alternative path to a QM safe harbor for these types of
loans is likely to 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 can lack an
ability to repay at loan consummation yet manage to make timely
payments for the seasoning period defined in Sec. 1026.43(e)(7)(iv)(C)
of this final rule. The Bureau 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 vary depending
on the loan characteristics. To mitigate this risk, the Bureau is
limiting Seasoned QMs to first-lien covered transactions that satisfy
the other requirements in Sec. 1026.43(e)(7), as explained below.
The Bureau concludes that adding a definition of Seasoned QM for
covered transactions, as well as establishing the requirements for
Seasoned QMs in Sec. 1026.43(e)(7) discussed below, 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 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, 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 finds that the provisions in Sec. 1026.43(e)(7) establishing
criteria to define a Seasoned QM are necessary or proper to ensure that
responsible, affordable mortgage credit remains available to consumers
in a manner consistent with and appropriate to the purposes of TILA
sections 129B and 129C, which include assuring that consumers are
offered and receive residential mortgage loans on terms that reasonably
reflect their ability to repay the loan and that responsible,
affordable mortgage credit remains available to consumers. In
particular, the Bureau has concluded that establishing a QM safe harbor
pathway for seasoned loans is likely to increase creditors' willingness
to make additional loans that do not qualify for a QM safe harbor at
origination, or to make such loans with better pricing. The Bureau
finds that limiting Seasoned QMs to covered transactions that meet the
requirements in Sec. 1026.43(e)(7) provides assurance that those loans
that may qualify for Seasoned QM status after the seasoning period are
made to creditworthy consumers.
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 exercises its authority under TILA sections 105(a),
129C(b)(2)(A)(vi), (3)(A), and (3)(B)(i) to adopt Sec. 1026.43(e)(7)
for the reasons discussed above and below.

43(e)(7)(i) General

The Bureau proposed adding Sec. 1026.43(e)(7) to define a new
category of QMs for covered transactions that meet certain criteria.
The Bureau proposed as initial criteria under Sec. 1026.43(e)(7)(i)
that Seasoned QM status would be available for first-lien covered
transactions that meet certain additional requirements. Additional
proposed requirements were set out generally in Sec.
1026.43(e)(7)(i)(A) through (D) and included restrictions on product
features and points and fees, as well as certain underwriting and
performance requirements. The proposed criteria and related public
comments are discussed below.
In its proposal the Bureau tentatively concluded that limiting
Seasoned QMs to first-lien covered transactions that satisfy the other
requirements in proposed Sec. 1026.43(e)(7) recognizes both the risk
of consumers lacking an ability to repay at consummation and the
potential benefits of fostering access to responsible, affordable
mortgage credit through a Seasoned QM category. This final rule adopts
in the introductory text for Sec. 1026.43(e)(7)(i) the requirement
that a Seasoned QM be a first-lien covered transaction as proposed.

Comments Received

A significant number of industry commenters and industry trade
associations requested that the Bureau extend Seasoned QM eligibility
to subordinate liens that otherwise meet the criteria. Several of these
commenters noted that closed-end subordinate liens are included within
the broader scope of requirements in Sec. 1026.43. One industry
commenter stated that its subordinate liens have better repayment and
lower delinquencies than the overall first-lien industry and noted that
the demand for cash-out subordinate-lien loans may grow as consumers
looking to equity as a source of funds in a future, higher-interest-
rate environment also want to retain the advantage of current,
historically low rates on the remaining balance of their first-lien
mortgages. Although two industry commenters suggested generally that
the Bureau could make extension of Seasoned QM eligibility to
subordinate liens more acceptable by tailoring the performance
requirements for subordinate liens, the commenters did not provide
specific suggestions. Commenters supporting extension of Seasoned QM
eligibility to subordinate liens stated that doing so would encourage
innovation, reduce litigation risk, and expand access to credit. An
industry commenter, without elaboration, expressly supported limiting
Seasoned QMs to first-lien loans, while a consumer advocate commenter
stated that, if a Seasoned QM definition is finalized, the loan
characteristics included in the proposal to limit the scope of the
definition should be retained, even though those characteristics would
not adequately protect consumers.

The Final Rule

For the reasons stated below, the Bureau adopts in Sec.
1026.43(e)(7)(i) the requirement that a Seasoned QM be a first-lien
covered transaction, as proposed. The Bureau continues to recognize, as
it did in the proposal, that the potential risks and benefits of a
Seasoned QM category will tend to vary depending on loan
characteristics. The Bureau is exercising its discretionary

[[Page 86422]]

authority to establish an additional way in which covered transactions
can achieve qualified mortgage status under the ATR requirements of
TILA and Regulation Z. However, it is not apparent that extending
Seasoned QM eligibility to subordinate lien loans can be done in a
manner that improves access to credit without introducing unnecessary
complexity in application.\130\ Subordinate-lien loans may be an
example of loans with an elevated risk of showing timely payments even
when a consumer lacks ability to repay. A consumer may make on-time
payments on the second-lien loan but fail to make payments on the
first-lien loan because the consumer is unable to afford the
combination of the two periodic payments and the second-lien payment is
often smaller than the first-lien payment.\131\ In light of the
significant changes being made in the General QM Final Rule, the Bureau
concludes that limiting Seasoned QM status to first-lien transactions
will provide an opportunity for the market to gain experience with how
access to credit and consumer ability-to-repay protections will be
affected by both the portfolio and performance criteria in the new
Seasoned QM definition and the revised underwriting requirements and
other criteria in the General QM Final Rule. This experience could help
inform any future changes to the Seasoned QM criteria that may be in
accordance with the purposes of TILA.
---------------------------------------------------------------------------

\130\ The Bureau currently has limited data to use in analyzing
the interaction of first- and subordinate-lien loans and how that
interaction affects the consumers' ability to repay those mortgages
over time. As discussed in part VIII below, the primary data source
relating to loan performance that the Bureau has relied upon in the
Seasoned QM Proposal and this final rule is the National Mortgage
Database (NMDB), which does not include subordinate-lien mortgages.
The NMDB data include de-identified performance information for a
nationally representative 5 percent sample of active first-lien
mortgages. See Bureau of Consumer Fin. Prot., Sources and Uses of
Data at the Bureau of Consumer Financial Protection at 55-56 (Sept.
2018), https://files.consumerfinance.gov/f/documents/bcfp_sources-uses-of-data.pdf; Robert B. Avery et al., National Mortgage Database
Technical Report 1.2, at 1 (Nat'l Mortg. Database, Bureau of
Consumer Fin. Prot., and Fed. Housing Fin. Agency, Technical Report
Series, 2017), https://www.fhfa.gov/PolicyProgramsResearch/Programs/Documents/NMDB-Technical-Report_1.2_10302017.pdf.
\131\ For example, a 2012 New York Federal Reserve Bank study
noted that among consumers who are seriously delinquent on their
first-lien loans for more than a year and have a second-lien loan,
about 20 to 30 percent of consumers are current on their second-lien
loans. The authors suggested possible explanations for why some
consumers remain current on their subordinate-lien loans even a year
beyond a continuing delinquency on their first-lien loan, including
that (1) consumers may choose to pay as many bills as possible each
month so will prioritize smaller bills over first-lien mortgages
with likely larger payments; and (2) consumers may strategically
default on first-lien loans in order to qualify for targeted
modification programs. Donghoon Lee et al., Fed. Reserve Bank of New
York, A New Look at Second Liens (Staff Report No. 569) (Aug. 2012),
https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr569.pdf.
---------------------------------------------------------------------------

The Bureau notes, as it did in the proposal, that loans that
satisfy another QM definition at consummation also could be Seasoned
QMs, as long as the requirements of Sec. 1026.43(e)(7) are met.\132\ A
loan that becomes a Seasoned QM after seasoning might 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, and each QM category imposes requirements of
varying degrees of restrictiveness relative to others. For example,
EGRRCPA section 101 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 Seasoned QM
category established in this final rule, by contrast, is not limited by
creditor size, and is available only for fixed-rate, first-lien loans
that meet a portfolio requirement, and only after a seasoning period
during which the loans must meet performance requirements. The Bureau
concludes that the Seasoned QM category and the EGRRCPA QM category,
therefore, identify unique and discrete factors that, for different
reasons, support a presumption of creditor compliance with the ATR
requirements. The Bureau similarly concludes that because each QM
category is based on a distinct set 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 determines that it is appropriate to exercise
its authority under TILA sections 105(a), 129C(b)(2)(A)(vi), (3)(A),
and (3)(B)(i) to make the Seasoned QM definition available to any
first-lien covered transaction that meets the requirements in Sec.
1026.43(e)(7), including transactions that might be eligible at
consummation for the General QM loan definition, the Small Creditor QM
definition, or the EGRRCPA QM definition.
---------------------------------------------------------------------------

\132\ 85 FR 53568, 53581-82 (Aug. 28, 2020).
---------------------------------------------------------------------------

43(e)(7)(i)(A)

The Bureau proposed to add Sec. 1026.43(e)(7)(i)(A) which would
limit the Seasoned QM definition to fixed-rate mortgages with fully
amortizing payments. Proposed Sec. 1026.43(e)(7)(i)(A) would have
applied 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.\133\ In
addition, proposed Sec. 1026.43(e)(7)(i)(A) would have applied 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.
---------------------------------------------------------------------------

\133\ 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.
---------------------------------------------------------------------------

Proposed comment 43(e)(7)(i)(A)-1 would have clarified that a
covered transaction that is an adjustable-rate mortgage or a step-rate
mortgage would not be eligible to become a Seasoned QM. Proposed
comment 43(e)(7)(i)(A)-2 would have clarified that loans could become
Seasoned QMs only if the scheduled periodic payments on them do not
require a balloon payment to fully amortize the loan within the loan
term. Proposed comment 43(e)(7)(i)(A)-2 also would have clarified that
the requirement that a Seasoned QM have fully amortizing payments does
not prohibit a qualifying change, as defined in the proposal, that is
entered into during or after a temporary payment accommodation in
connection with a disaster or pandemic-related national emergency.\134\
---------------------------------------------------------------------------

\134\ Qualifying changes are discussed more fully below in the
section-by-section analysis of Sec. 1026.43(e)(7)(iv).
---------------------------------------------------------------------------

The Bureau adopts Sec. 1026.43(e)(7)(i)(A) and comments
43(e)(7)(i)(A)-1 and -2 as proposed, except that comment
43(e)(7)(i)(A)-2 is revised to clarify that Sec. 1026.43(e)(7)(i)(A)
does not prohibit a qualifying change that is entered into during or
after a temporary payment

[[Page 86423]]

accommodation in connection with a disaster or pandemic-related
national emergency, even if the qualifying change involves a balloon
payment or lengthened loan term.

Comments Received

Some industry commenters recommended amending the proposed criteria
to permit ARMs to become Seasoned QMs, with a couple of these
commenters suggesting that the seasoning period begin from the date of
the new payment when the interest rate first adjusts. One industry
commenter suggested that the Bureau could draft the final rule in a way
that would extend eligibility to ARMs at least for purposes of
relieving securitizers of separate risk retention requirements on those
loans, so as to allow resultant cost savings to be passed on to
consumers at origination.\135\ Other industry commenters and a number
of consumer advocate commenters supported the proposal's limitation to
fixed-rate loans. Consumer advocate commenters that were not supportive
of adding a Seasoned QM definition generally nonetheless supported
excluding from any final rule adjustable-rate and balloon features,
which they described as exacerbating the risks of unaffordable and
irresponsible lending. One industry commenter supportive of the
limitation to fixed-rate loans stated that the General QM loan
definition should be applied to ARMs because payments can increase over
time beyond the proposed seasoning period.
---------------------------------------------------------------------------

\135\ The commenter noted that the definition of qualified
residential mortgage (QRM) used by other Federal regulatory agencies
to exempt securities from Dodd-Frank Act section 941 risk retention
requirements is limited by the Bureau's definition of QM. An
industry trade association also addressed the separate QRM
requirements but suggested only that the Bureau should work with
other regulators to reform assignee liability and develop a
mechanism that enables investors to put back loans with defects at
origination.
---------------------------------------------------------------------------

Commenters generally supported the Bureau's proposal to allow only
loans with fully amortizing payments to become Seasoned QMs. Several
industry and industry trade association commenters, however, requested
that the Bureau clarify that the restriction on balloon payments does
not affect a loan's eligibility for Seasoned QM status if the loan is
restructured to include a balloon payment as part of a qualifying
change that is entered into during or after a temporary payment
accommodation in connection with a disaster or pandemic-related
national emergency.

The Final Rule

For the reasons stated below, the Bureau adopts Sec.
1026.43(e)(7)(i)(A) as proposed. The final rule limits 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 for a typical ARM could be in place for some
or all of the seasoning period and could extend beyond the seasoning
period. After the introductory interest rate expires, the interest rate
adjusts periodically and could increase through the life of the loan.
The Bureau concludes that a consumer's payment history immediately
after consummation of an ARM would not be a reliable indicator of
whether at consummation the creditor reasonably determined the
consumer's continuing ability to repay the loan after any interest rate
adjustment, which could increase the consumer's periodic payment
amount. In addition, because an ARM may continue to reset periodically
after the first interest rate reset date, even a seasoning period that
begins on the first reset date would not necessarily be sufficient to
assure a consumer's ability to repay after the seasoning period. Given
this possibility for increases in payment amounts in later years,
therefore, timely payments during the seasoning period are not as
strong of an indicator on an ARM as they are on a fixed-rate mortgage
of the consumer's ability to repay at the time of consummation.
Although a few commenters provided suggestions concerning how the
Bureau might provide some Seasoned QM eligibility to ARMs, the
suggestions were only general in nature and did not include analyses
that would support modification of the proposal. The Bureau therefore
is not extending eligibility for the new Seasoned QM category to ARMs.
Similarly, the Bureau remains concerned that, as a general matter,
the ability of a consumer to stay current on mortgage payments during
the seasoning period would not be reliable as an indicator that at
consummation a consumer had the ability to meet balloon payment
obligations beyond the seasoning period. In this final rule, the Bureau
is not extending eligibility for the new Seasoned QM category to loans
that do not provide for fully amortizing payments. As highlighted by
several commenters, however, the Bureau understands that, in instances
of financial hardship, including during the current COVID-19 pandemic,
creditors and consumers often agree to restructure loans to defer
delinquent amounts and create a balance due at maturity or payoff of
the loan. As suggested by these commenters, the Bureau is revising
proposed comment 43(e)(7)(i)(A)-2 to clarify that the general Seasoned
QM criteria set out in Sec. 1026.43(e)(7)(i)(A) do not prohibit a
qualifying change that is entered into during or after a temporary
payment accommodation in connection with a disaster or pandemic-related
national emergency, even if the qualifying change involves a balloon
payment or lengthened loan term. Qualifying changes are discussed in
more detail in the section-by-section analysis of Sec.
1026.43(e)(7)(iv)(B), below.

43(e)(7)(i)(B)

TILA section 129C(b)(1) provides a presumption of compliance with
ATR requirements if a loan is a qualified mortgage. TILA section
129C(b)(2)(A) defines a qualified mortgage as a loan that includes
general restrictions on product features and points and fees and meets
certain underwriting requirements. Regulation Z Sec. 1026.43(e)(2)
codifies these criteria in the Bureau's definition of a General QM. In
the Seasoned QM Proposal, the Bureau proposed adding Sec.
1026.43(e)(7)(i)(B) to extend to Seasoned QMs the same general
restrictions on product features and points and fees that exist under
the General QM and Small Creditor QM definitions, and to impose the
same or similar requirements to consider and verify certain consumer
information as part of the underwriting process.\136\ Proposed comment
43(e)(7)(i)(B)-1 stated that a loan that complies with the consider and
verify requirements of any other qualified mortgage definition would be
deemed to comply with the consider and verify requirements applicable
to a Seasoned QM.
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\136\ Proposed Sec. 1026.43(e)(7)(i)(B) would have incorporated
by cross-reference the QM requirements set out for Small Creditor
QMs in Sec. 1026.43(e)(5)(i)(A) and (B). Those Small Creditor QM
requirements generally cross-referenced the existing General QM
requirements in Sec. 1026.43(e)(2), except for the requirements in
paragraph (e)(2)(vi) of that section, which established a DTI limit.
In the Seasoned QM Proposal, the Bureau noted that it had recently
proposed certain conforming changes to Sec. 1026.43(e)(5)(i)(A) and
(B) in the General QM proposal. 85 FR 53568, 53583 n.120 (Aug. 28,
2020). As discussed above, the Bureau is issuing this final rule
simultaneously with the General QM Final Rule.
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For the reasons described below, the Bureau adopts Sec.
1026.43(e)(7)(i)(B) as proposed, except that the criteria relating to
prohibited product features, points-and-fees cap, and requirements to
consider and verify certain consumer

[[Page 86424]]

information are established by direct cross-reference to the relevant
General QM requirements in Sec. 1026.43(e)(2), as amended by the
General QM Final Rule. The Bureau has decided not to adopt proposed
comment 43(e)(7)(i)(B)-1 because, with the revisions made to Sec.
1026.43(e) in the General QM Final Rule and this final rule, the
comment is unnecessary and could be confusing.

Comments Received

Additional Criteria, Generally. Commenters generally agreed that
only loans with QM product protections should be allowed to season.
Some of those commenters objected to the addition of a Seasoned QM
definition--with one consumer advocate commenter stating that the
additional loan features are not a bulwark against improvident
lending--but stated that if the rule is adopted, the additional
required characteristics in Sec. 1026.43(e)(7)(i)(A) through (D)
should be retained. An industry trade association stated that the
product restrictions and continuance of underwriting requirements,
along with performance requirements, provide sufficient assurance of
ATR compliance. Another industry trade association noted that aligning
the product features and underwriting requirements of different kinds
of QMs is appropriate and avoids inappropriately incentivizing any
particular category of QMs.
Product and Points-and-Fees Restrictions. A few commenters
addressed particular aspects of the Seasoned QM criteria that the
Bureau proposed to adopt by cross-reference to other QM requirements.
Several industry commenters requested that the Bureau clarify that
limiting the Seasoned QM definition to loans with terms not exceeding
30 years does not affect a loan's eligibility for Seasoned QM status
when the loan is restructured to include a longer repayment period as
part of a qualifying change that is entered into during or after a
temporary payment accommodation in connection with a disaster or
pandemic-related national emergency. One industry commenter recommended
that the limit on points and fees be eliminated, while another
supported including the limit in the proposal. One industry trade
association advocated generally to include only points and fees paid
directly by the consumer in the calculation of the 3 percent cap, and
another stated that the calculation should exclude fees paid to
affiliated service providers. An academic commenter expressed concern
that the proposal did not address separate Dodd-Frank Act prepayment
penalty restrictions and requested that the Bureau affirm the
applicability of those restrictions.
Underwriting Requirements. Several commenters referenced and
incorporated the comments they had submitted on the consider and verify
requirements in the General QM Proposal and indicated that the
requirements in the General QM and Seasoned QM rules should be aligned.
Comments on the underwriting requirements generally were consistent
between the General QM Proposal and the Seasoned QM Proposal.
Commenters widely recognized the importance of the consider and verify
requirements in underwriting a QM loan. An industry trade association
supported the proposal's avoidance of using the appendix Q methodology
for calculating consumer income and debts and commented that
underwriting requirements should provide flexibility to allow for
innovation. An industry trade association noted a concern that the
final language should not inadvertently introduce a reasonableness
standard for the DTI ratio through application of the Sec.
1026.43(c)(7) calculation requirement. Some consumer advocate
commenters cautioned that lax underwriting requirements, especially if
in combination with relaxed product features, would not comply with
TILA and would not be consistent with congressional intent. On the
other hand, commenters noted that alignment of underwriting
requirements and product features among different QM categories would
help ensure these requirements do not create an incentive to make one
type of QM loan rather than another.

The Final Rule

For the reasons stated below, the Bureau adopts in Sec.
1026.43(e)(7)(i)(B) the proposed prohibited product features and points
and fees and underwriting requirements as part of the Seasoned QM
definition. In this final rule, however, the Bureau is adopting those
additional criteria by direct cross-reference to the provisions in
Sec. 1026.43(e)(2)(i) through (v) of the General QM loan definition,
rather than by indirectly cross-referencing the same requirements as
adopted in Sec. 1026.43(e)(5)(i)(A) and (B) for Small Creditor QMs, as
the Bureau had proposed.\137\ The General QM Final Rule issued
simultaneously with this final rule revises the General QM loan
definition. As a result of these changes, the Bureau concludes that
referencing the General QM criteria directly in Sec.
1026.43(e)(7)(i)(B) is preferable. The General QM criteria will be
widely used by creditors in connection with General QMs, and creditors
will be able to apply those criteria consistently in connection with
Seasoned QMs.
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\137\ The Bureau did not propose to adopt in this final rule any
DTI limit, pricing threshold, or similar requirement applicable
under Sec. 1026.43(e)(2)(vi) to covered transactions in the General
QM loan definition. The Small Creditor QM definition also does not
include any such criteria.
---------------------------------------------------------------------------

In addition to applying the previously established criteria,
discussed above, that a Seasoned QM be a first-lien covered transaction
with a mortgage that has a fixed rate and fully amortizing payments,
applying the relevant criteria in Sec. 1026.43(e)(2)(i) through (v)
will mean that a covered transaction can qualify as a Seasoned 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 payment;
3. The loan term does not exceed 30years;
4. The total points and fees generally do not exceed 3 percent of
the loan amount; and
5. The creditor considers the consumer's DTI ratio or residual
income, income or assets other than the value of the dwelling, and
debts and verifies the consumer's income or assets other than the value
of the dwelling and the consumer's debts.\138\
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\138\ In addition, because Sec. 1026.43(e)(7)(i)(B)
incorporates the requirements of Sec. 1026.43(e)(2)(iv), the
underwriting for the loan must use a payment schedule that fully
amortizes the loan over the loan term and takes into account the
monthly payment for mortgage-related obligations.
---------------------------------------------------------------------------

The Bureau concludes that these additional criteria deriving from
the statutory definition of QM best assure that consumers have a
reasonable ability to repay their Seasoned QMs. With few exceptions,
commenters did not raise issues about whether these criteria should be
applied to Seasoned QMs and were supportive of their inclusion. As
discussed above, in response to commenter requests the Bureau is
revising and adopting comment 43(e)(7)(i)(A)-2 to clarify that Sec.
1026.43(e)(7)(i)(A) does not prohibit a qualifying change that is
entered into during or after a temporary payment accommodation in
connection with a disaster or pandemic-related national emergency, even
if the qualifying change involves a balloon payment or lengthened loan
term.
The Bureau declines to remove or adjust the requirement for
Seasoned QMs to meet the points-and-fees cap as set out in Sec.
1026.43(e)(2)(iii) of the General QM loan definition. Only one

[[Page 86425]]

commenter recommended that the points-and-fees cap be eliminated for
Seasoned QMs, and the commenter did not provide supporting rationale or
data. Changes recommended by a few commenters relate to a calculation
methodology for points and fees that is beyond the scope of this rule.
The Bureau also declines to revise the proposal to address the
statutory prepayment penalty restrictions added separately by the Dodd-
Frank Act and codified in Sec. 1026.43(g).\139\ Those restrictions
continue to apply in accordance with that section and are not affected
by the addition of a Seasoned QM definition that includes a requirement
for a seasoning period of at least 36 months.\140\
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\139\ Dodd-Frank Act section 1414, adding TILA section 129C(c),
15 U.S.C. 1639c(c).
\140\ Pursuant to Sec. 1026.43(g)(1), a covered transaction
must not include a prepayment penalty unless: (1) The prepayment
penalty is otherwise permitted by law; and (2) the transaction: (A)
has an annual percentage rate that cannot increase after
consummation; (B) is a qualified mortgage under Sec. 1026.43(e)(2),
(4), (5), (6), or (f); and (C) is not a higher-priced mortgage loan,
as defined in Sec. 1026.35(a).
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By incorporating the requirements of Sec. 1026.43(e)(2)(iv) and
(v), this final rule implements 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. The Bureau also finds that incorporation of
the requirements in Sec. 1026.43(e)(2)(v) is authorized by TILA
section 129C(b)(2)(A)(vi), which permits, but does not require, the
Bureau to adopt guidelines or regulations relating to DTIs or
alternative measures of ability to pay regular expenses after payment
of total monthly debt.
In the General QM Final Rule issued separately today, the Bureau
modifies the requirements for General QMs relating to consideration of
the consumer's DTI ratio or residual income, income or assets other
than the value of the dwelling, and debts and verification of the
consumer's income or assets other than the value of the dwelling and
the consumer's debts. The Bureau is adopting those same requirements
for Seasoned QMs in this final rule. As such, it should be clear that,
in defining Seasoned QMs as a new category of QMs, the Bureau is not
substituting performance requirements applicable during a seasoning
period for the underwriting requirements applicable at or before
consummation. Rather, the Bureau concludes that a sustained period of
successful payments, combined with underwriting requirements and
product restrictions, supports presuming that the creditor complied
with ATR requirements at consummation and made loans that warrant QM
status. Unlike other QM definitions that confer QM status upon
consummation, though, the Seasoned QM definition confers QM status only
after the consumer makes on-time payments, with limited exceptions, for
at least 36 months.
The Bureau continues to believe that sufficient consideration of a
consumer's DTI ratio or residual income, income or assets other than
the value of the dwelling, and debts is fundamental to any
determination of ability to repay. Neither the General QM Final Rule
nor this final rule requires that creditors apply specific DTI ratios
or pricing thresholds in their underwriting criteria in order for their
loans to be eligible for QM status. Stakeholders are encouraged to
review the section-by-section analyses of Sec. 1026.43(e)(2)(v) and
(v)(A) and (B) in the General QM Final Rule, as well as the regulatory
text and accompanying commentary for those sections, for a more
complete discussion of the consider and verify requirements as they are
being incorporated in this final rule.
The General QM Final Rule requires a creditor to consider the
consumer's DTI ratio or residual income and to consider and verify the
debt and income used to calculate DTI or residual income as part of the
General QM loan definition. When this final rule and the General QM
revisions take effect, creditors will no longer be required to consider
and verify this information in accordance with complex rules set out as
appendix Q to Regulation Z.\141\ Instead, to comply with the revised
General QM consider requirements, a creditor is required to take into
account income, assets, debt obligations, alimony, child support, and
monthly DTI ratio or residual income in its ATR determination.
---------------------------------------------------------------------------

\141\ See 12 CFR part 1026, appendix Q. The effective date of
the General QM Final Rule is 60 days after publication in the
Federal Register, although creditors will not have to comply with
the revised requirements until July 1, 2021. The effective date of
this final rule is discussed in part VII below.
---------------------------------------------------------------------------

The revised General QM requirements do not prescribe how a creditor
must take these factors into account, but a creditor must maintain
written policies and procedures for how it takes into account the
factors and retain documentation showing how it took into account the
factors for a given loan. The General QM Final Rule also does not
impose a particular standard or threshold applicable to the requirement
that a creditor calculate and consider DTI or residual income, and it
includes commentary to make clear that creditors have flexibility in
how they consider income or assets, debt obligations, alimony, child
support, and monthly DTI ratio or residual income.\142\ With the
revisions made by the General QM Final Rule to the General QM loan
definition, as adopted in the Seasoned QM definition, for purposes of
determining the consumer's monthly DTI or residual income, the
consumer's monthly payment on the covered transaction is calculated in
accordance with Sec. 1026.43(e)(2)(iv).
---------------------------------------------------------------------------

\142\ See comment 43(e)(2)(v)(A)-2 in the General QM Final Rule.
---------------------------------------------------------------------------

Creditors are also required to verify income and debt consistent
with the general ATR standard.\143\ Creditors will receive a safe
harbor for compliance with the verification requirements if they comply
with verification standards in manuals specified in the General QM
Final Rule, as well as with revised versions of those manuals that are
substantially similar.\144\ The General QM Final Rule also provides a
safe harbor for compliance with the verification standards to creditors
that ``mix and match'' the verification standards in the specified
manuals. The General QM Final Rule discusses that permitting creditors
to mix and match standards for verifying income, assets, debt
obligations, alimony, and child support from each of the manuals would
provide creditors with greater flexibility without undermining consumer
protection. Further, in the General QM Final Rule, the Bureau
encourages stakeholders, including groups of stakeholders, to develop
additional verification standards that it could review for inclusion in
the verification safe harbor.
---------------------------------------------------------------------------

\143\ I.e., consistent with Sec. 1026.43(c)(3) (debt, alimony,
and child support) and (4) (income and assets).
\144\ The General QM Final Rule provides the verification safe
harbor in connection with specified provisions of the GSE, FHA, VA,
and USDA underwriting manuals.
---------------------------------------------------------------------------

The Bureau's primary objective in providing the 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 notes that the
proposal included proposed

[[Page 86426]]

comment 43(e)(7)(i)(B)-1 as a possible clarification that a loan that
complies with the consider and verify requirements of any other QM
definition also would have complied with the consider and verify
requirements in the Seasoned QM definition. In the proposal the Bureau
also requested comment on whether the final rule should cross-reference
the consider and verify requirements for General QMs on which the
General QM Proposal had requested comment. For the reasons discussed
above, this final rule adopts the revised General QM consider and
verify requirements, which the Bureau expects will facilitate
consistent use in connection with Seasoned QMs, so the Bureau is not
finalizing proposed comment 43(e)(7)(i)(B)-1.

43(e)(7)(i)(C) and (D)

The Bureau proposed Sec. 1026.43(e)(7)(i)(C) to include in the
Seasoned QM criteria that covered transactions would have to meet
certain performance requirements set out in detail in Sec.
1026.43(e)(7)(ii). The Bureau proposed Sec. 1026.43(e)(7)(i)(D) to
include in the Seasoned QM criteria that covered transactions would
also have to meet certain portfolio requirements set out in detail in
Sec. 1026.43(e)(7)(iii).
The Bureau adopts Sec. 1026.43(e)(7)(i)(C) and (D) as proposed.
The Bureau discusses the final performance requirements and related
public comments more fully in the section-by-section analysis of Sec.
1026.43(e)(7)(ii) below. The Bureau discusses the final portfolio
requirements and related public comments more fully in the section-by-
section analysis of Sec. 1026.43(e)(7)(iii) below.

43(e)(7)(i)(E)

Prior to the enactment of the Dodd-Frank Act, HOEPA amended TILA to
add a prohibition against originating a high-cost mortgage without
regard to a consumer's repayment ability, as more specifically set out
in TILA section 129(h).\145\ The Dodd-Frank Act created a new ATR
requirement for mortgage loans within TILA, as discussed above, but did
not amend the HOEPA ability-to-repay provision relating specifically to
high-cost mortgages. Regulation Z currently defines high-cost mortgage
\146\ and implements the HOEPA ability-to-repay requirement for closed-
end high-cost mortgages by providing that a creditor must comply with
the ATR/QM Rule's repayment ability requirements set forth in Sec.
1026.43.\147\ The proposal did not explicitly address whether Seasoned
QM status would extend to high-cost mortgages subject to HOEPA, but the
Bureau is adding Sec. 1026.43(e)(7)(i)(E) to clarify that it does not.
---------------------------------------------------------------------------

\145\ 15 U.S.C. 1639(h).
\146\ Under 12 CFR 1026.32(a), there are several ways that a
loan secured by the consumer's principal dwelling can be a high-cost
mortgage subject to HOEPA. One is if the APR exceeds the relevant
APOR by a specific amount, which is 6.5 percentage points for most
first-lien mortgages. The other ways relate to points and fees and
prepayment penalties. 12 CFR 1026.32(a)(1).
\147\ 12 CFR 1026.34(a)(4) (exempting temporary or ``bridge''
loans with terms of twelve months or less from this requirement).
---------------------------------------------------------------------------

Three consumer advocate commenters noted that the proposal did not
explicitly address whether Seasoned QM status would extend to high-cost
mortgages subject to HOEPA. These commenters also asserted that the
Bureau had not made the necessary case to restrict remedies under HOEPA
for violations of HOEPA's ability-to-repay requirement.
The Bureau's purpose in this rulemaking is not to change the
ability-to-repay requirement under HOEPA, which governs high-cost
mortgages that constitute a very small percentage of the overall
mortgage market.\148\ Although HOEPA gives the Bureau the authority to
make certain exemptions from HOEPA's requirements,\149\ the Bureau has
not sought to use that authority in this rulemaking. To clarify the
scope of the final rule, the Bureau is adding Sec.
1026.43(e)(7)(i)(E), which excludes high-cost mortgages as defined in
Sec. 1026.32(a) from the Seasoned QM definition.
---------------------------------------------------------------------------

\148\ According to HMDA data, there were only 6,507 HOEPA loans
total originated in 2019, and many of those loans would be
ineligible for seasoning even if they were not subject to HOEPA due
to other features (for example, because they have an adjustable rate
or are secured by a subordinate lien). Bureau of Consumer Fin.
Prot., Data Point: 2019 Mortgage Market Activity and Trends at 55
(June 2020), https://files.consumerfinance.gov/f/documents/cfpb_2019-mortgage-market-activity-trends_report.pdf.
\149\ 15 U.S.C. 1639(p)(1) (authorizing the Bureau to make
certain exemptions from HOEPA's requirements, if the Bureau finds
that the exemption ``is in the interest of the borrowing public''
and ``will apply only to products that maintain and strengthen home
ownership and equity protection'').
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43(e)(7)(ii) Performance Requirements

Proposed Sec. 1026.43(e)(7)(ii) set forth the following proposed
performance criteria that a covered transaction must meet to be a
Seasoned 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. In
the proposal, the Bureau tentatively concluded 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 while treating payment histories that more
clearly signal potential issues with ability to repay as disqualifying.
It also noted that the proposed performance standards would be
consistent with the GSEs' representation and warranty framework and the
master policies of mortgage insurers, which reflect market experience.
For the reasons set forth below, the Bureau adopts in the final rule
these performance criteria as proposed.

Comments Received

The Bureau received a number of comments on the proposed
performance criteria, expressing a variety of views. Among the
commenters that supported the proposed performance criteria, several
industry commenters and consumer advocate commenters expressed support
for how the proposed criteria would be consistent with the GSEs'
representation and warranty framework. Another industry commenter
agreed with the Bureau's tentative conclusion that the proposed limits
on the number of delinquencies during the seasoning period
appropriately balanced the need to limit the Seasoned QM safe harbor to
loans with strong evidence of a consumers' ability to repay and the
practical reality that some brief delinquencies do not indicate the
consumer lacks the ability to repay. Additionally, some industry
commenters joined several consumer advocate groups to urge the Bureau
not to loosen the criteria in a final rule. Further, an industry
commenter expressed general support for limiting the seasoning pathway
to QM status to loans with three years of performance with minor
delinquencies.\150\
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\150\ This commenter asked the Bureau to clarify that certain
delinquencies during the seasoning period are not counted for
purposes of the performance criteria if they occur during or
immediately preceding periods of forbearance. Several other industry
commenters also suggested adjustments to the proposed definitions of
delinquency, qualifying change, and temporary payment accommodation
extended in connection with a disaster or pandemic-related national
emergency. These comments are addressed in the section-by-section
analysis of Sec. 1026.43(e)(7)(iv)(A), (B), and (D) below.
---------------------------------------------------------------------------

With respect to commenters that did not support the criteria as
proposed, several industry commenters asked the Bureau to increase the
number of permissible 30-day delinquencies. An industry commenter
suggested that the Bureau could increase the number of 30-day
delinquencies to three or four because the Bureau's own analysis in

[[Page 86427]]

the proposal showed that such an increase would have modest effects on
the number of loans that would season while providing for additional
flexibility during the seasoning period. Another industry commenter
asserted that increasing the number of permissible 30-day delinquencies
to three would benefit consumers whose jobs involve travel and who may
miss payments because they have limited access to technology on job-
rated travel. Several industry commenters urged the Bureau to increase
the number of permissible 30-day delinquencies to three or four,
asserting that such increase would accommodate consumers who need
additional flexibility due to the COVID-19 pandemic's negative economic
impacts. One industry commenter argued that there should be no
restriction on the number of delinquencies as long as a consumer cures
them before the end of the seasoning period.
On the other hand, two consumer advocate commenters expressed the
concern that the proposed performance criteria would not be restrictive
enough. They stated that the Bureau should clarify that rolling
delinquencies (i.e., certain delinquencies that continue month after
month) would not be permitted. They also suggested that the Bureau
revise the proposed performance standards to limit permissible late
payments to no more than two payments outside of a loan's grace period.
Lastly, an industry commenter suggested that the Bureau undertake
additional research to examine the risks of aligning the proposed
performance standards with the existing GSE representation and warranty
framework. It stated that it believes a careful market analysis must be
done to consider empirical evidence of minor and severe delinquencies
which later cure and that the Bureau and industry must understand the
unintended consequences of potentially altered borrower behavior with a
seasoning approach to QMs.

The Final Rule

The Bureau is adopting the performance standards as proposed. Final
Sec. 1026.43(e)(7)(ii) is adopted based on the legal authorities
discussed in the section-by-section analysis of Sec. 1026.43(e)(7)(i)
above.
As explained in the proposal, the Bureau considered the existing
practices of the GSEs and mortgage insurers in developing the 36-month
period for successful payment history. As described in part V, each GSE
generally provides creditors relief from its enforcement with respect
to certain 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
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.\151\
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\151\ 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.
---------------------------------------------------------------------------

The Bureau recognizes that the payment history conditions laid out
in the GSEs' representation and warranty framework 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 final rule provides that more than two
delinquencies of 30 days or more during the seasoning period or any
delinquency of 60 days or more disqualifies a covered transaction from
being a Seasoned QM under Sec. 1026.43(e)(7).\152\
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\152\ As discussed in the proposal and in part VIII below, the
Bureau considered alternative seasoning periods 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.
---------------------------------------------------------------------------

The Bureau concludes that the number and duration of delinquencies
set forth in the performance criteria requirement strike the best
balance between 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) and treating payment histories
that more clearly signal potential issues with ability to repay as
disqualifying. The Bureau disagrees with the industry commenter who
suggested that there should be no restrictions on the number of
delinquencies as long as a consumer cures them before the end of the
seasoning period. The Bureau concludes that the ability of consumers to
consistently make timely payments in accordance with a mortgage loan's
terms is an important indication of the consumer's ability to repay.
The Bureau also declines to increase the number of permissible 30-day
delinquencies, because it concludes that market experience, as
reflected through the GSEs' representation and warranty framework and
the master policies of mortgage insurers, strongly suggests that if a
loan has more than two 30-day delinquencies in a 36-month period, it
may indicate issues related to the underwriting of the loan. For the
same reason, the Bureau also declines to adopt delinquency and
performance standards that are based on a loan's grace period, as
suggested by some consumer advocate commenters. The Bureau has decided
to base the definition of delinquency for purposes of Sec.
1026.43(e)(7) on the date that payment becomes due, even if the
consumer is afforded a period after the due date to pay before the
servicer assesses a late fee.
The Bureau's adoption of the performance criteria as proposed is
also informed by its analysis of potential impacts if the number of
permissible 30-day delinquencies were increased from two to three or
four 30-day delinquencies. As discussed in more detail in part VIII
below, the Bureau concluded that in light of the General QM Final Rule,
there would be little benefit in terms of access to credit from
increasing the number of permissible 30-day delinquencies, while there
would be some negative impact in the form of increased foreclosure
risk. The Bureau noted that increasing the number of allowable 30-day
delinquencies by one increases the relative foreclosure start rate
\153\ between Seasoned QMs and loans that were safe harbor QM loans at
consummation by approximately 4 percent.
---------------------------------------------------------------------------

\153\ The term ``foreclosure start rate'' used in this final
rule refers to the rate at which mortgage loans first entered into
any one of the following: Foreclosure proceeding, deed in lieu of
foreclosure, foreclosure, voluntary surrender, or repossession, as
tracked by the NMDB.
---------------------------------------------------------------------------

Further, with respect to commenters who suggested that the Bureau
increase the number of permissible 30-day delinquencies to accommodate
consumers who need additional flexibility due to the COVID-19
pandemic's economic impacts, the Bureau concludes that the final rule's
exclusion of periods of temporary payment accommodation due to a
disaster or pandemic-related national emergency from the seasoning
period pursuant to Sec. 1026.43(e)(7)(iv)(C)(2) will

[[Page 86428]]

be sufficient in providing such requested flexibility.\154\
---------------------------------------------------------------------------

\154\ The exclusion of any period during which the consumer is
in a temporary payment accommodation extended in connection with a
disaster or pandemic-related national emergency from the seasoning
period is discussed more fully in the section-by-section analysis of
Sec. 1026.43(e)(7)(iv)(C)(2).
---------------------------------------------------------------------------

Lastly, the Bureau notes that the proposal would have not
permitted, and the final rule does not permit, rolling delinquencies of
30 days or more. As further discussed in the section-by-section
analysis of Sec. 1026.43(e)(7)(iv)(A) below, a periodic payment is 60
days delinquent under this final rule 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. Under the delinquency
definition in Sec. 1026.43(e)(7)(iv)(A) and the performance
requirements in Sec. 1026.43(e)(7)(ii), a loan could not season if,
for example, a consumer was 30 days or more delinquent on a monthly
periodic payment due on January 1 and subsequently failed to make both
the periodic payment due on January 1 and the periodic payment due on
February 1 before March 1. In this example, if the consumer made the
January 1 periodic payment on February 5, but did not make the payment
due on February 1 by March 1, the loan would be considered 60 days
delinquent as of March 1 and therefore would not be eligible to become
a Seasoned QM. Rolling delinquencies of 30 days or more are therefore
not permitted under this final rule due to a combination of the
definition of delinquency for purposes of the rule and the prohibition
on any delinquencies of 60 days or more.

43(e)(7)(iii) Portfolio Requirements

Proposed Sec. 1026.43(e)(7)(iii) set forth certain proposed
portfolio requirements for a covered transaction to be a Seasoned QM.
It provided that to be a Seasoned QM, the loan must satisfy the
following requirements. First, at consummation, the loan must not have
been subject to a commitment to be acquired by another person. Second,
legal title to the loan could not 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) provided that the loan 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) provided that the loan 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 also proposed to add comments 43(e)(7)(iii)-1 through -3
to clarify the proposed portfolio requirement. Proposed comment
43(e)(7)(iii)-1 would have explained that a loan is not eligible to
season into a QM 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 have clarified the application
of proposed Sec. 1026.43(e)(7)(iii) to subsequent transferees.
Proposed comment 43(e)(7)(iii)-3 would have explained the impact of
supervisory sales. For the reasons discussed below, the Bureau adopts
proposed Sec. 1026.43(e)(7)(iii) and comments 43(e)(7)(iii)-1 through
-3 with changes that allow a single transfer during the seasoning
period provided that certain requirements are met, as discussed below.

Comments Received

Consumer advocate commenters and some industry commenters supported
the proposed portfolio requirement and agreed with the Bureau's
rationale that the proposed requirement would provide an important
incentive for creditors to make diligent ATR determinations at
origination. Some consumer advocate commenters supported adopting the
proposed portfolio requirement as proposed to mitigate some of the
risks they anticipated in a Seasoned QM final rule.
However, various industry commenters and a United States senator
opposed the proposed portfolio requirement. They asserted that it would
reduce the number of loans eligible to season and, as such, diminish
the potential of the final rule to lower mortgage prices and increase
market liquidity. They also asserted that the requirement would create
an unfair playing field, disadvantaging non-bank lenders that rely on
warehouse lending and secondary market sales for liquidity. Several
commenters asserted that loan performance is sufficiently probative of
a consumer's ability to repay even without a portfolio requirement, and
some suggested that the Bureau has not shown why the fact that a loan
is held in portfolio is evidence that the consumer had the ability to
repay the loan at consummation. Commenters also asserted that other
factors would sufficiently ensure responsible lending by creditors,
including the following: the proposed product restrictions and
underwriting requirements for Seasoned QMs; the interagency credit risk
retention rule; due diligence performed by loan aggregators; and
originators' concerns about indemnification and reputational risks that
result if the loans they sell to third parties fail. One industry
commenter asserted that if the final rule is limited to portfolio
lenders, non-QM mortgage lending is likely to become dominated by
portfolio lenders, which would lead to a system that is less
diversified and in which risk is concentrated in certain market
segments.
An industry trade association and another industry commenter
proposed broadening the portfolio requirement to include a one-time
sale by the creditor to a third-party purchaser that then holds the
loan for the requisite 36-month seasoning period. They asserted that a
whole loan sale model as they described is considerably less risky than
a securitization model for several reasons. Specifically, they noted
that, as compared to investors in mortgage-backed securities, whole
loan purchasers have a more direct relationship with the originator,
are better positioned to understand and evaluate a loan's underlying
fundamentals, and have strong incentives to be prudent as they own all
of the credit risk. One industry commenter also sought to broaden the
list of proposed exceptions to the portfolio requirement to permit
transfers pursuant to a creditor's default or breach of loan covenants
in situations where the loan serves as collateral securing the
financing the creditor uses to fund the loan.
Meanwhile, an academic commenter asserted that the proposed
portfolio requirement would be substantially weaker than the EGRRCPA's
portfolio requirement because the proposal lacked the same resale
restrictions that Congress established in the EGRRCPA. Moreover, the
commenter asserted that the proposal did not contain evidence to

[[Page 86429]]

support the Bureau's assertion that the proposed requirement would make
creditors underwrite mortgages more carefully. An industry commenter
referenced a study by the Board in which researchers found that large
lenders were more apt to reduce quality and receive government bailouts
in the 2008 financial crisis. This commenter expressed concern that the
proposed portfolio requirement may not be sufficient to incentivize
large banks to engage in responsible lending because banks that are
deemed too-big-to-fail do not face sufficient negative consequences if
loans they hold in portfolio fail.
Lastly, several industry commenters expressed concern that mortgage
loans that bank creditors pledge as collateral to the Federal Home Loan
Banks or the Board may not meet the proposed portfolio requirement and
sought clarification or confirmation that such pledged loans are deemed
to be held in the bank creditors' portfolios.

The Final Rule

Under the proposal, for a covered transaction to become eligible
for Seasoned QM status, the creditor that originates the transaction
would have to hold the transaction in its portfolio, unless one of two
exceptions, set forth in proposed Sec. 1026.43(e)(7)(iii)(B)(1)
(transfers of ownership pursuant to certain supervisory sales) or Sec.
1026.43(e)(7)(iii)(B)(2) (transfers of ownership pursuant to certain
mergers or acquisitions), applied. Proposed Sec.
1026.43(e)(7)(iii)(B)(1) and (2) are adopted as proposed.
However, the Bureau is adopting in Sec. 1026.43(e)(7)(iii)(B)(3)
an additional exception, which provides that the covered transaction
may be sold, assigned, or otherwise transferred once before the end of
the seasoning period, so long as the covered transaction is not
securitized as part of the sale, assignment, or transfer or at any
other time before the end of the seasoning period. In light of this
change, this final rule makes a related change to proposed Sec.
1026.43(e)(7)(iii)(A) to provide that Sec. 1026.43(e)(7)(iii)(B)(3) is
an exception to the general prohibition against subjecting the covered
transaction, at consummation, to a commitment to be acquired by another
person to become a Seasoned QM under Sec. 1026.43(e)(7). Conforming
changes are also made to proposed comments 43(e)(7)(iii)-1 through -3
in light of the adoption of Sec. 1026.43(e)(7)(iii)(B)(3).
The exception in Sec. 1026.43(e)(7)(iii)(B)(3) may only be used
one time for a covered transaction during the seasoning period. This
means that until the end of the seasoning period, a purchaser that
acquires the covered transaction pursuant to Sec.
1026.43(e)(7)(iii)(B)(3) may not subsequently transfer the covered
transaction to any other entity and maintain the covered transaction's
eligibility to become a Seasoned QM, except that the purchaser may
transfer the covered transaction pursuant to Sec.
1026.43(e)(7)(iii)(B)(1) or (2). Section 1026.43(e)(7)(iii)(B)(3) also
provides that the covered transaction may not be securitized as part of
a transfer permitted under Sec. 1026.43(e)(7)(iii)(B)(3) or at any
other time before the end of the seasoning period. For an illustrative
example, a covered transaction is considered to be securitized under
this final rule if it is transferred to an entity such as a
securitization trust, and interests in the trust are held by investors,
even if legal title to the covered transaction is retained by the
securitization trust.
As noted in the discussion of comments received on the proposed
portfolio requirement, two industry commenters suggested the Bureau
permit a one-time sale of the covered transaction to another purchaser
as long as the owner or purchaser holds the covered transaction in its
portfolio for the requisite 36-month seasoning period and does not
securitize the covered transaction. The Bureau has concluded that a
one-time transfer of a whole loan should not preclude the loan from
becoming a Seasoned QM for the following reasons. First, a fundamental
goal of creating the Seasoned QM category is to encourage creditors to
increase the origination of non-QM loans in a responsible manner. Many
creditors, particularly non-banks, rely on borrowed funds to make loans
and then sell these loans in order to originate additional new loans.
Further, non-banks are particularly active in the non-QM market, with
only one depository institution included among the 10 largest non-QM
originators.\155\ Allowing a one-time transfer as permitted in this
final rule broadens the category of responsible, non-QM originations
that could benefit from this final rule to include loans made by such
creditors and thus furthers the Bureau's goal of increasing such
originations. Additionally, the Bureau notes that non-banks play a key
role in expanding access to credit as evidenced by the lower average
FICO scores and higher DTIs associated with their loans as compared to
depositories.\156\
---------------------------------------------------------------------------

\155\ Inside Mortg. Fin., Top Originators of Securitized
Expanded-Credit Mortgages: 2019-3Q20, https://www.insidemortgagefinance.com/products/300059-top-originators-of-securitized-expanded-credit-mortgages-2019-3q20-pdf (last visited
Nov. 19, 2020). The only depository institution included amongst the
10 largest non-QM originators is JPMorgan Chase.
\156\ Urban Inst., Housing Finance at a Glance, at 17-18, (Oct.
2020), https://www.urban.org/sites/default/files/publication/103123/october-chartbook-2020_2.pdf.
---------------------------------------------------------------------------

Second, while allowing a single transfer may mean that the
originating creditor has a somewhat weaker incentive to originate
affordable loans, relative to the proposal, the Bureau concludes that
requiring the purchaser of the covered transaction to hold the
transaction in its portfolio until the end of the seasoning period will
ensure that the originating creditor and the purchaser together have
sufficient incentive to ensure that the originating creditor makes a
diligent ATR determination. The whole-loan transfer puts the purchaser
in a similar position to the original creditor in the legal and credit
exposure the purchaser faces if a consumer defaults on the covered
transaction. As such, to the extent that all or part of the seasoning
period remains after the transfer, the purchaser will have an incentive
to ensure the loan is high quality, which in turn will incentivize the
creditor to make a diligent ATR determination at consummation.
One of the industry commenters that suggested the single transfer
exception indicated that, as part of the exception, the Bureau could
specifically require the purchaser to hold the loan for 36 months after
the date of transfer. The type of transfers that Sec.
1026.43(e)(7)(iii)(B)(3) permits commonly occur before or around the
due date for the first periodic payment. For such transactions, Sec.
1026.43(e)(7)(iii) as finalized requires the purchaser to hold the loan
in portfolio for approximately 36 months after the date of transfer,
because Sec. 1026.43(e)(7)(iv)(C) provides that the seasoning period
does not end until at least 36 months after the due date for the first
periodic payment. Additionally, as the proposal explained, given the
increasing likelihood that intervening events contribute to
delinquencies, the Bureau generally does not view delinquency after 36
months in the lifecycle of a loan product as undermining the
presumption of creditor compliance with the ATR requirements at
consummation. In light of these considerations, and the incentives
discussed above that the initial 36-month seasoning period creates for
the originating creditor and the purchaser, the Bureau has determined
it is unnecessary to extend

[[Page 86430]]

or reset the seasoning period for loans transferred after the first
payment date pursuant to Sec. 1026.43(e)(7)(iii)(B)(3) to include a
period of 36 months beginning on the date of the transfer.
The Bureau concludes that it is appropriate to exclude loans that
are securitized because it recognizes whole loan purchasers will likely
have a more direct relationship with the originator than investors in
mortgage-backed securities and may therefore have more visibility into
the seller's underwriting process and be better positioned to use
remedies to make the originating creditor buy back the loan if the loan
performs poorly or is otherwise defective. The Bureau believes that a
whole loan purchaser's incentive remains regardless of whether there is
a mandatory commitment between the seller and purchaser to deliver a
mortgage loan at a predetermined price by a specified date. Even in the
case of mandatory commitments, the seller has an obligation to deliver
the loan in accordance with the investor requirements and in compliance
with applicable State and Federal requirements. The Bureau acknowledges
that purchasers are often incentivized to preserve their business
relationship by attempting to cure loan defects without requiring the
seller to repurchase the loan. However, in the event of a material and
uncurable defect, purchasers can and do exercise remedies requiring the
seller to repurchase the loan, rather than assume the liability of a
non-compliant loan or retain a defective loan in portfolio that they
anticipate will perform worse than expected.
The Bureau declines to adopt a final rule without any portfolio
requirement, as a number of industry commenters urged the Bureau to do.
As discussed in greater detail in the section-by-section analysis of
Sec. 1026.43(e)(7)(i) above, the final rule does not impose a DTI
limit or a pricing limit on loans that are eligible to become Seasoned
QMs. In this respect, the Seasoned QM definition is similar to some
other QM definitions such as the Small Creditor QM definition. While
covered transactions are 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 has decided 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 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 final rule attempt to reduce that possibility (such as by
providing that payments made by a servicer or from a consumer's
escrowed funds are not considered as on-time payments), but the Bureau
has decided to provide further assurance that the creditor's ATR
determination at consummation was a diligent and reasonable one by
including a portfolio requirement.
Further, although the Bureau recognizes that the interagency credit
risk retention rule \157\ provides an indirect incentive to originate
responsible and affordable loans for sale and securitization in the
secondary markets, the Bureau concludes that limiting the Seasoned QM
definition to loans that are held in portfolio by the originating
creditor or first purchaser will provide stronger incentives to
originate responsible and affordable loans.
---------------------------------------------------------------------------

\157\ The QM definition is related to the definition of
qualified residential mortgage (QRM). Section 15G of the Securities
Exchange Act of 1934, added by section 941(b) of the Dodd-Frank Act,
generally requires the securitizer of asset-backed securities (ABS)
to retain not less than 5 percent of the credit risk of the assets
collateralizing the ABS. 15 U.S.C. 78o-11. Six Federal agencies (not
including the Bureau) are tasked with implementing this requirement.
Those agencies are the Board, 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.
---------------------------------------------------------------------------

Moreover, while not necessary for the Bureau's conclusion to retain
a portfolio requirement, that conclusion is consistent with the
Bureau's analysis of the foreclosure start rates of mortgage loans
originated between 2003 and 2015 that were designated to be held in
portfolio at origination and mortgage loans originated during the same
time period that were designated for private-label securitization. The
loans the Bureau evaluated had fixed interest rates, were first-lien
transactions, were not high-cost mortgages subject to HOEPA, and did
not have any features that disqualified them from being QMs. The
results are shown in Figure 1 below.

[[Page 86431]]

[GRAPHIC] [TIFF OMITTED] TR29DE20.400

Figure 1 shows that loans designated to be held in portfolio at
origination consistently foreclosed at lower rates for eight of the 13
years that made up the period of time that the Bureau evaluated, from
2003 through 2010. Although the foreclosure start rates in the years
2011 through 2015 of loans designated to be held in portfolio and loans
designated for private-label securitization appear to be similar, the
number of such securitized loans during those years is too small to be
informative.\158\ These data further support the Bureau's determination
that creditors are more likely to do diligent ATR determinations when
loans are held in portfolio rather than securitized.
---------------------------------------------------------------------------

\158\ The numbers of loans designated for private-label
securitization from 2011 through 2015 that met the criteria
described above (i.e., non-HOEPA, first-lien, fixed-rate loans that
did not have features that would make them ineligible to be QMs)
were as follows: 9,700, 17,500, 25,720, 22,900, and 16,800. In
contrast, the numbers of loans designated to be held in portfolio
during those years and that met the same criteria were between 1.4
and 2.2 million.
---------------------------------------------------------------------------

The Bureau also declines to create an additional exception in Sec.
1026.43(e)(7)(iii) to permit transfers pursuant to a creditor's default
or breach of loan covenants in situations in which the loan serves as
collateral securing the financing the creditor uses to fund the loan,
as one industry commenter requested. Such transfers may fall within the
single-transfer exception in Sec. 1026.43(e)(7)(iii)(B)(3) if the
requirements for that exception are met, and the Bureau concludes an
additional exception for circumstances involving default or breach of
loan covenants is not warranted.
Lastly, the Bureau has decided that no change to the proposal is
required to address whether loans pledged as collateral to the Federal
Home Loan Banks or the Board are deemed to be held in the bank
creditors' portfolios for purposes of the Seasoned QM portfolio
requirement. Whether a given covered transaction meets the portfolio
requirement depends generally on (1) whether the transaction is
subject, at consummation, to a commitment to be acquired by another
person and (2) whether legal title is sold, assigned, or otherwise
transferred to another person before the end of the seasoning period,
outside of the specified exceptions. This general test is modeled on
the test set forth in the Small Creditor QM and Balloon Payment QM
definitions, and, as explained above, the Bureau has also added a
single-transfer exception to the Seasoned QM portfolio requirement if
the standards articulated above are met. If loans pledged to the
Federal Home Loan Banks or the Board comply with the general test or
comply with any of the three specified exceptions set forth in Sec.
1026.43(e)(7)(iii)(B), then they are considered to be held in portfolio
until the end of the seasoning period pursuant to Sec.
1026.43(e)(7)(iii).

43(e)(7)(iv) Definitions

The Bureau proposed to adopt several definitions for purposes of
proposed Sec. 1026.43(e)(7). The Bureau solicited comments on all of
its proposed definitions. The Bureau addresses each of the proposed
definitions in turn below.

Paragraph 43(e)(7)(iv)(A)

As explained above, Sec. 1026.43(e)(7)(i)(C) and (ii) as finalized
provides that 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 can become Seasoned QMs.
Proposed Sec. 1026.43(e)(7)(iv)(A) would have defined delinquency as
the failure to

[[Page 86432]]

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 have excluded other amounts, such as late fees, from the
definition. Proposed Sec. 1026.43(e)(7)(iv)(A)(1) through (5) would
have addressed additional, specific aspects of the definition of
delinquency, which are discussed in the section-by-section analyses
that follow. Proposed comment 43(e)(7)(iv)(A)-1 would have clarified
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.
Industry commenters generally supported proposed Sec.
1026.43(e)(7)(iv)(A), while consumer advocate commenters opposed the
Seasoned QM Proposal as a whole. Both industry and consumer advocate
commenters raised concerns about specific aspects of the definition
that are discussed in the section-in-section analyses of Sec.
1026.43(e)(7)(iv)(A)(1), (2), and (4) below. The Bureau did not receive
comments on proposed comment 43(e)(7)(iv)(A)-1.
The Bureau concludes that the definition of delinquency in Sec.
1026.43(e)(7)(iv)(A) provides a clear method of assessing delinquency
for purposes of Sec. 1026.43(e)(7). Accordingly, the Bureau is
finalizing Sec. 1026.43(e)(7)(iv)(A) and comment 43(e)(7)(iv)(A)-1 as
proposed, with minor technical changes and one modification to Sec.
1026.43(e)(7)(iv)(A)(4) as discussed below.

Paragraphs 43(e)(7)(iv)(A)(1) and (2)

Proposed Sec. 1026.43(e)(7)(iv)(A)(1) and (2) specified 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) provided that a periodic payment
would be 30 days delinquent if it is not paid before the due date of
the following scheduled periodic payment. Proposed Sec.
1026.43(e)(7)(iv)(A)(2) provided 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 provided an
illustrative example of the meaning of 60 days delinquent for purposes
of proposed Sec. 1026.43(e)(7).
The Bureau received a few comments that related to proposed Sec.
1026.43(e)(7)(iv)(A)(1) and (2). An industry commenter noted that the
proposed definition of delinquency refers to 30 and 60-day delinquency
periods and asked the Bureau to modify proposed Sec.
1026.43(e)(7)(iv)(A) to account for non-monthly payments schedules
(e.g., bi-weekly or quarterly payment schedules). Two consumer advocate
commenters stated that the Bureau should provide clarifying commentary
to address rolling delinquencies. They explained that it is very common
for struggling homeowners to have rolling delinquencies, paying
somewhat late month after month, but never bringing the loan current.
These commenters indicated that borrowers who pay 29 or 30 days late
every month maintain a persistent delinquency, showing clear signs of
financial distress, and not demonstrating an ability to repay.
The Bureau concludes that the approach set forth in proposed Sec.
1026.43(e)(7)(iv)(A)(1) and (2) and proposed comment
43(e)(7)(iv)(A)(2)-1 provide appropriate standards for determining
whether a periodic payment is 30 or 60 days delinquent that would be
relatively easy to apply. The Bureau also finds that proposed Sec.
1026.43(e)(7)(iv)(A) is flexible enough to account for non-monthly
payment schedules and therefore declines to provide additional
flexibilities to account for non-monthly payment schedules. Proposed
Sec. 1026.43(e)(7)(iv)(A)(1) and (2) define 30 days delinquent and 60
days delinquent based on whether payments are made before the next
periodic payment due date. Thus, under the proposed Sec.
1026.43(e)(7)(iv)(A)(1), a bi-weekly or quarterly periodic payment
would be 30 days delinquent when the periodic payment is not paid
before the due date of the following bi-weekly or quarterly payment.
Similarly, under proposed Sec. 1026.43(e)(7)(iv)(A)(2), a bi-weekly or
quarterly periodic payment would be 60 days delinquent if the consumer
is more than 30 days delinquent, as defined under proposed Sec.
1026.43(e)(7)(iv)(A)(1), 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. The Bureau also
does not believe any change is necessary to address rolling
delinquencies because the performance standards in Sec.
1026.43(e)(7)(ii) and the definition of 60 days delinquent in Sec.
1026.43(e)(7)(iv)(A)(2) already capture rolling delinquencies, as
discussed in the section-by-section analysis of Sec. 1026.43(e)(7)(ii)
above. Comment 43(e)(7)(iv)(A)(2)-1 illustrates the meaning of 60 days
delinquent for purposes of Sec. 1026.43(e)(7) by providing an example.
The Bureau is adopting Sec. 1026.43(e)(7)(iv)(A)(1) and (2) and
comment 43(e)(7)(iv)(A)(2)-1 as proposed, with minor technical changes
in the comment.

Paragraph 43(e)(7)(iv)(A)(3)

As the Bureau noted in the proposal, some servicers elect or may be
required to treat consumers as having made a timely payment even if the
payment is a small amount less than the full periodic payment. For
purposes of proposed Sec. 1026.43(e)(7), proposed Sec.
1026.43(e)(7)(iv)(A)(3) provided 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 did not receive any comments on proposed Sec.
1026.43(e)(iv)(A)(3) and, for the reasons explained below, is now
finalizing Sec. 1026.43(e)(iv)(A)(3) as proposed.
The Bureau concludes that the approach to small periodic payment
deficiencies in Sec. 1026.43(e)(iv)(A)(3) will 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 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.

[[Page 86433]]

Required periodic payments for covered transactions can 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 often do not mean that the consumer was unable to
repay the loan at the time of consummation.
The Bureau has decided, 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
final rule. The Bureau understands that Fannie Mae and Freddie Mac
servicing guidance allows servicers to apply periodic payments that are
short by $50 or less.\159\ Fannie Mae limits the usage of the payment
tolerance to three monthly payments during a 12-month period,\160\
while the National Mortgage Settlement generally required acceptance of
at least two periodic payments that were short by $50 or less.\161\ In
light of these practices and the considerations discussed above, the
Bureau is adopting 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
concludes that allowing up to three payments deficient by $50 or less
over the course of the seasoning period provides appropriate
flexibility for small deficiencies such as those related to variations
in tax and insurance amounts.\162\
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\159\ 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 at 8103-3 (Aug.
5, 2020), https://guide.freddiemac.com/ci/okcsFattach/get/1002095_2.
\160\ July 2020 Servicing Guide, supra note 159, at 218-19.
\161\ 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).
\162\ The Bureau also notes that a deficient periodic payment
does not trigger a delinquency of 30 days or more under 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) provided 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) focused 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) were 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.\163\
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\163\ The Bureau is not requiring that the escrow amount (if
applicable) be considered in determining whether a delinquency
exists for purposes of Sec. 1026.43(e)(7) be the amount disclosed
to the consumer at consummation, because escrow payments are subject
to changes over time.
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The Bureau concludes 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.
The Bureau recognizes, however, that certain unusual circumstances
involving disasters or pandemic-related national emergencies warrant
using a principal and interest amount that has been modified or
adjusted after consummation. Accordingly, the Bureau proposed 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 would be
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. The Bureau is finalizing Sec.
1026.43(e)(7)(iv)(A)(4) with one modification as explained below and
minor technical changes.
Although the Bureau did not receive many comments relating to
proposed Sec. 1026.43(e)(7)(iv)(A)(4), one industry commenter
cautioned that proposed Sec. 1026.43(e)(7)(iv)(A)(4) was not flexible
enough to apply to a small subset of loans the Bureau intended to cover
within the scope of the proposal. Specifically, an industry trade
association pointed out that proposed Sec. 1026.43(e)(7)(iv)(A)(4),
which relies on the first payment due date in the legal obligation at
consummation to determine when a loan could be first delinquent, would
not account for changes in the first payment due date typically
associated with the delivery of new manufactured housing. This
commenter also noted that proposed Sec. 1026.43(e)(7)(iv)(A) would not
account for courtesy due date changes extended by creditors, such as
from the 1st to the 5th of the month for a borrower who receives Social
Security benefits on the 3rd of the month.
After considering the comments received, the Bureau is finalizing
Sec. 1026.43(e)(7)(iv)(A)(4) with minor technical changes and one
modification as described below to address the commenter's concern that
creditors making loans for the purchase of new manufactured homes often
estimate the first payment due date in the legal obligation signed at
consummation. These dates may be uncertain at consummation due to
potential delays involved with the delivery, set up, and availability
for occupancy of the dwelling that secures the loan. The Bureau
understands that, in these circumstances, creditors may modify the
first payment date after consummation when those dates become clear so
that the first payment date is not due until after the consumer
occupies the home. Proposed Sec. 1026.43(e)(7)(iv)(A)(4) required
delinquency to be calculated based on the first payment due date
established by the terms and payment schedule of the loan obligation at
consummation. Thus, a loan to purchase a new manufactured home might be
considered delinquent under proposed Sec. 1026.43(e)(7)(iv)(A)(4),
even though the consumer has not missed a payment under the terms of a
modified agreement.
A primary objective of the proposal was to ensure the availability
of responsible and affordable credit by incentivizing the origination
of non-QM loans that otherwise might not be made. In the proposal, the
Bureau noted that half of manufactured housing originations are
rebuttable presumption QM loans, and that large banks tend to originate
only safe harbor QM loans that are held in portfolio. The Bureau
concludes that modifying proposed Sec. 1026.43(e)(7)(iv)(A)(4) to
allow creditors to modify the first payment due date in certain limited
circumstances furthers the objective of the proposal. Accordingly, if,
due to reasons related to the timing of delivery, set up, or
availability for occupancy of the dwelling securing the obligation, the
creditor modifies the first payment due date before the first payment
due date under the legal obligation at consummation, the modified first

[[Page 86434]]

payment due date, rather than the first payment due date under the
legal obligation at consummation, is used in determining whether a
periodic payment is delinquent.
The Bureau declines to make any changes to proposed Sec.
1026.43(e)(7)(iv)(A)(4) to accommodate courtesy due date changes
extended by creditors. As stated in the section-by-section analysis of
Sec. 1026.43(e)(7)(ii), a loan that seasons into QM status may not
have more than two delinquencies of 30 or more days or any
delinquencies of 60 or more days at the end of the seasoning period.
The Bureau concludes that this performance standard already provides
sufficient flexibility to accommodate courtesy shifts to a different
date within a month (such as from the 1st to the 5th of the month),
because delinquencies of less than 30 days do not affect whether a loan
can season under Sec. 1026.43(e)(7)(ii).

Paragraph 43(e)(7)(iv)(A)(5)

Proposed Sec. 1026.43(e)(7)(iv)(A)(5) addressed 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) provided 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 would
not be 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, or assignee of the covered transaction, or any
other person acting on behalf of such creditor, servicer, or assignee.
In the proposal, the Bureau tentatively concluded that proposed
Sec. 1026.43(e)(7)(iv)(A)(5) would help to ensure that payments made
by consumers during the seasoning period actually reflect the
consumer's ability to repay. The Bureau further noted similarities
between the proposed provision and the GSEs' representation and
warranty framework. As discussed below, the Bureau is adopting Sec.
1026.43(e)(7)(iv)(A)(5) as proposed in this final rule.

Comments Received

The Bureau received two comments on this aspect of the proposal
from industry commenters. One commenter agreed with the Bureau's
rationale for the proposed requirement. The other commenter stated that
the proposed provision adequately addressed its suggestion in response
to the ANPR that the Bureau impose a requirement that mortgage payments
come from consumers' own funds.

The Final Rule

The Bureau is finalizing Sec. 1026.43(e)(7)(iv)(A)(5) as proposed
because it concludes that Sec. 1026.43(e)(7)(iv)(A)(5) helps to ensure
that the performance history considered in assessing delinquency for
purposes of Sec. 1026.43(e)(7) reflects the consumer's ability to
repay rather than payments made by the creditor, servicer, or assignee
or persons acting on their behalf that could mask a consumer's
inability to repay. As the Bureau explained in the proposal, the GSEs'
representation and warranty framework generally prohibits lenders and
third parties with a financial interest in the performance of a loan
escrowing or advancing funds on a borrower's behalf to be used to make
principal and interest payments to satisfy the framework's payment
history requirement.\164\ Similar to the GSEs' representation and
warranty framework, the Bureau concludes 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. If a creditor needs to
take funds from an escrow account to cover a periodic payment that is
due on the account, the Bureau does not believe that the payment from
escrow indicates the consumer is able to make the periodic payment.
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\164\ 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.
Fannie Mae, Selling Guide at 56 (Aug. 5, 2020), https://singlefamily.fanniemae.com/media/23641/display (Selling Guide).
---------------------------------------------------------------------------

Accordingly, pursuant to Sec. 1026.43(e)(7)(iv)(A)(5), any payment
received from one of the identified sources is not 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 is treated 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, Sec.
1026.43(e)(7)(iv)(A)(5) does 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 Sec. 1026.43(e)(7)(iv)(A)(3)(ii).

Paragraph 43(e)(7)(iv)(B)

Proposed Sec. 1026.43(e)(7)(iv)(C)(2) provided 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) provided
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. Proposed Sec. 1026.43(e)(7)(iv)(B) defined 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 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 is finalizing Sec.
1026.43(e)(7)(iv)(B) largely as proposed, with modifications to the
fees and charges that must be waived pursuant to Sec.
1026.43(e)(7)(iv)(B)(3) and additional commentary to clarify that an
agreement can be a qualifying change even if it is not in writing and
that the inclusion of a balloon payment or lengthened loan term as part
of a qualifying change does not disqualify a loan from seasoning. The
Bureau is also making minor technical revisions to Sec.
1026.43(e)(7)(iv)(B).
Many commenters supported the proposal's approach of restarting the
seasoning period if the loan undergoes a qualifying change. Some
industry

[[Page 86435]]

commenters suggested modifying proposed Sec. 1026.43(e)(7)(iv)(B)(4)
so that an agreement can meet the definition of a qualifying change
even if the servicer does not waive charges, penalties, and fees that
were incurred prior to a delinquency caused by a disaster or pandemic-
related national emergency. Some industry commenters asked that the
Bureau clarify whether an agreement needs to be in writing in order to
constitute a qualifying change. Some industry commenters also suggested
that the Bureau clarify whether the inclusion of a balloon payment or
an extension of the loan term beyond 30 years as part of a qualifying
change would disqualify the loan from seasoning. Lastly, one industry
commenter urged the Bureau to modify Sec. 1026.43(e)(7)(iv)(B)(2) to
allow for the amount of interest charged over the full term of the loan
to increase in certain circumstances, such as when certain amounts are
capitalized into a new loan balance.
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. These options 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 seeks to establish standards that will 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 will
not significantly change the affordability of the loan as compared to
the loan terms at consummation. Accordingly, the Bureau concludes that
such a qualifying change must end any pre-existing delinquency, must
not add to the amount of interest charged over the full term of the
loan, and must not involve an additional fee charged to the consumer in
connection with the change.
Section 1026.43(e)(7)(iv)(B) references an agreement that must meet
specific conditions in order to meet the definition of a qualifying
change. Some commenters expressed concern that the term agreement could
be interpreted to mean that a qualifying change is required to be in
writing. Section 1026.43(e)(7)(iv)(B) does not require that an
agreement be in writing in order for it to meet the definition of a
qualifying change. The Bureau is adding comment 43(e)(7)(iv)(B)-1 to
clarify that an agreement that meets the conditions specified in Sec.
1026.43(e)(7)(iv)(B) is a qualifying change even if it is not in
writing.
Some commenters expressed concern that the inclusion of a balloon
payment or lengthened loan term as part of a qualifying change may
disqualify a loan from seasoning due to the product restrictions listed
in proposed Sec. 1026.43(e)(7)(i)(A). Proposed comment 43(e)(7)(i)(A)-
2 explained that proposed Sec. 1026.43(e)(7)(i)(A) would not prohibit
a qualifying change as defined in Sec. 1026.43(e)(7)(iv)(B). In
response to commenter concerns, the Bureau is adding additional
language to comment 43(e)(7)(i)(A)-2 to clarify more specifically that
Sec. 1026.43(e)(7)(i)(A) does not disqualify a loan from seasoning
eligibility if the loan undergoes a qualifying change as defined in
Sec. 1026.43(e)(7)(iv)(B), even if such a qualifying change involves a
balloon payment or lengthened loan term. Although one commenter
suggested that the Bureau address the applicability of certain loss
mitigation protections under Regulation X in this final rule, the
Bureau concludes it is not necessary to do so. Section
1026.43(e)(7)(iv)(B) defines qualifying change solely for purposes of
the Seasoned QM definition in the ATR/QM Rule and does not affect other
requirements, such as those in Regulation X, that may affect the
servicing of a loan.
One commenter suggested that the Bureau should allow an agreement
to meet the definition of a qualifying change even if the agreement
allows for the capitalization of delinquent amounts and thereby causes
the amount of interest charged over the full loan term to increase. As
stated in the proposal, in establishing standards for a qualifying
change, the Bureau sought to reasonably ensure that any such change
would not significantly change the affordability of the loan as
compared to the loan terms at consummation. Proposed Sec.
1026.43(e)(7)(iv)(B)(2) would have required that, to meet the
definition of a qualifying change, the amount of interest charged over
the full term of the loan could not increase as a result of the
agreement. The Bureau concludes that capitalization which leads to an
increase in the total amount of interest charged as compared to the
loan terms at consummation would make loans less affordable, such that
the loans should not be eligible for seasoning. The Bureau is therefore
adopting Sec. 1026.43(e)(7)(iv)(B)(2) as proposed.
Proposed Sec. 1026.43(e)(7)(iv)(B)(4) would have required the
waiver of all existing late charges, penalties, stop payment fees, or
similar charges promptly upon the consumer's acceptance of the
agreement in order for the agreement to meet the definition of a
qualifying change. As with the other criteria outlined in Sec.
1026.43(e)(7)(iv)(B), the Bureau proposed this provision in the
definition of a qualifying change to ensure that loans that ultimately
become Seasoned QMs remain affordable after a temporary payment
accommodation extended in connection with a disaster or pandemic-
related national emergency.
The Bureau has decided to modify proposed Sec.
1026.43(e)(7)(iv)(B)(4) to allow an agreement to meet the definition of
a qualifying change even if servicers do not waive fees, penalties, and
charges incurred prior to a delinquency caused by a disaster or
pandemic-related national emergency. Adopting this change suggested by
commenters is unlikely to significantly impact the affordability of a
loan that enters into a qualifying change for two reasons.
First, loans with large balances for fees and charges related to
delinquency (such as foreclosure preparation expenses) will likely
already be disqualified from seasoning eligibility based on the
performance requirements in Sec. 1026.43(e)(7)(ii). Second, even if
such fees are capitalized, Sec. 1026.43(e)(7)(iv)(B)(2) will ensure
that the amount of interest charged over the full term of the loan
cannot increase as a result of the agreement. For these reasons, the
Bureau is finalizing Sec. 1026.43(e)(7)(iv)(B)(4) to provide that an
agreement can meet the definition of a qualifying change if, in
addition to the other requirements outlined in Sec.
1026.43(e)(7)(iv)(B), promptly upon the consumer's acceptance of the
agreement, the servicer waives a more limited set of charges than those
listed in proposed Sec. 1026.43(e)(7)(iv)(B)(4). Specifically, Sec.
1026.43(e)(7)(iv)(B)(4) as finalized lists the following charges: All
late charges, penalties, stop payment fees, or similar charges incurred
during a temporary payment accommodation in connection with a disaster
or pandemic-related national emergency, as well as all late charges,
penalties, stop payment fees, or similar charges incurred during the
delinquency that led to a temporary payment accommodation in connection
with a disaster or pandemic-related national emergency.

Paragraph 43(e)(7)(iv)(C)

Section 1026.43(e)(7) requires that, to become a Seasoned QM, a
covered transaction must meet certain

[[Page 86436]]

requirements during and at the end of the seasoning period. Proposed
Sec. 1026.43(e)(7)(iv)(C) defined 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; and (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. The Bureau is
adopting Sec. 1026.43(e)(7)(iv)(C) largely as proposed.
Many industry commenters expressed support for the proposed general
seasoning period of 36 months. These commenters agreed with the
Bureau's rationale relating to consistency with the GSEs'
representation and warranty framework, and expressed a belief,
consistent with the Bureau's proposal, that default after 36 months is
not likely to be related to underwriting deficiencies. Some industry
commenters joined several consumer advocate groups to express general
opposition to the adoption of a Seasoned QM rule, and these commenters
urged the Bureau not to adopt a shorter seasoning period if it
finalized such a rule. Some consumer advocate commenters generally
asserted that three years of performance history was not sufficient to
establish that a creditor had made a reasonable determination of
ability to repay at origination. These commenters pointed to anecdotal
and survey evidence of loans that were unaffordable at origination but
did not default until after three years. These commenters did not
suggest a longer seasoning period, but instead expressed opposition to
the adoption of any Seasoned QM rule. One industry commenter advocated
for a shorter seasoning period of two years, but only for Small
Creditor QMs.
As explained in the proposal, in defining the length of the
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. These market participants typically require loans to meet
certain requirements, such as a timely payment history, for a period of
at least three years before releasing the loans' creditors from
potential penalties and other remedies for deficiencies in underwriting
practices. The Bureau also focused on the timing of the first
disqualifying event from the 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 2 and 3 of part VIII below. Based on these
considerations and for the reasons discussed in part V above, the
Bureau has decided to define the seasoning period generally as a period
of at least 36 months, beginning on the date on which the first
periodic payment is due after consummation. The Bureau declines to
generally shorten or lengthen the proposed seasoning period. The Bureau
concludes that the practices of market participants and the available
loan performance data generally support a seasoning period of 36
months.

Paragraph 43(e)(7)(iv)(C)(1)

The Bureau proposed a seasoning period generally of 36 months
beginning on the date on which the first periodic payment is due after
consummation, unless an exception applies. The first proposed exception
extended 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) provided 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. The Bureau did not receive comments specifically
addressing proposed Sec. 1026.43(e)(7)(iv)(C)(1). For the reasons
explained below, the Bureau is adopting Sec. 1026.43(e)(7)(iv)(C)(1)
as proposed.
If a delinquency of 30 days or more exists in the last 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 in which the delinquency
is not resolved quickly, the Bureau concludes that the loan does not
become a Seasoned QM, because the extended delinquency, if considered
with the consumer's prior payment history, suggests that the creditor
failed to make a reasonable, good faith determination of ability to
repay at consummation. The Bureau is, therefore, extending the
seasoning period under these circumstances until the loan is no longer
delinquent. The loan would then have to meet the performance
requirements under Sec. 1026.43(e)(7)(ii) at the conclusion of the
extended seasoning period based on performance over the entire,
extended seasoning period.\165\ The Bureau believes that extending the
seasoning period until any delinquency of 30 days or more is resolved
will 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 this final rule. As
finalized, Sec. 1026.43(e)(7)(iv)(C)(1) provides that, notwithstanding
any other provision of Sec. 1026.43(e)(7), 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.
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\165\ A loan is eligible to season under the performance
requirements in Sec. 1026.43(e)(7)(ii) only if it has 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.
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Paragraph 43(e)(7)(iv)(C)(2)

The Bureau proposed Sec. 1026.43(e)(7)(iv)(C)(2) to address 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 \166\ affects the seasoning period. Proposed
Sec. 1026.43(e)(7)(iv)(C)(2) provided that any period during which the
consumer is in a temporary payment accommodation extended in connection

[[Page 86437]]

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 stated 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
\167\ or the consumer must cure the delinquency under the loan's
original terms before the seasoning period can resume. Proposed Sec.
1026.43(e)(7)(iv)(C)(2) further explained 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. For the reasons discussed below, the Bureau is finalizing Sec.
1026.43(e)(7)(iv)(C)(2) as proposed.
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\166\ As further discussed in the section-by-section analysis of
Sec. 1026.43(e)(7)(iv)(D) below, the Bureau is defining 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, 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).
\167\ As further discussed in the section-by-section analysis of
Sec. 1026.43(e)(7)(iv)(B) above, the Bureau is establishing
specific requirements for the type of qualifying change that can
restart the seasoning period.
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Many commenters were supportive of the Bureau's proposal to pause
the seasoning period during a temporary payment accommodation extended
in connection with a disaster or pandemic-related national emergency.
Some industry commenters suggested that the Bureau allow the seasoning
period to pause as soon as a delinquency occurs that is related to the
type of disaster or pandemic-related national emergency defined in
proposed Sec. 1026.43(e)(7)(iv)(D), regardless of whether the consumer
enters into a temporary payment accommodation. These commenters noted
that after a disaster or emergency, consumers may not immediately enter
a temporary payment accommodation, or they may not be placed in a
temporary payment accommodation prior to receiving a permanent
modification.
The Bureau has decided to exclude the period of time during which a
loan is subject to certain temporary payment accommodations from the
seasoning period for the three primary reasons stated in the proposal.
First, the Bureau concludes 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 concludes 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 concludes 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 might have an incentive to delay offering these types of
accommodations to consumers.
The Bureau concludes that not making payments because of 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. The consumer's failure to
make payments does not indicate that the creditor did not comply with
the ATR requirements at the time of consummation, because the disaster
or pandemic-related national emergency is a change in the consumer's
circumstances after consummation that the creditor could not have
reasonably anticipated at 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 unforeseeable
changes 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 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.
In evaluating how 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 enforcement relief, but they
make certain exceptions for accommodations related to disasters.\168\
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.\169\
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\168\ 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 Selling Guide, supra note 164, at 56. 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 at 1301-19 (Aug. 5, 2020), https://guide.freddiemac.com/ci/okcsFattach/get/1002095_2.
\169\ 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 will best advance its
goal of ensuring that the seasoning period allows enough time to
assess whether the creditor made a reasonable determination of the
consumer's ability to repay at consummation.
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Temporary payment accommodations entered into for reasons other
than disasters or emergencies meeting the definition in 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
consummation. As such, the Bureau has decided to treat periods of
temporary payment accommodation for reasons other than disasters or
pandemic-related national 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

[[Page 86438]]

by establishing 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 establishing 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 has
decided to exclude from the seasoning period temporary payment
accommodations only for disasters and pandemic-related national
emergencies meeting the definition in Sec. 1026.43(e)(7)(iv)(D). Some
commenters raised concerns related to how the Bureau proposed to define
the types of temporary payment accommodations that would be excluded
from the seasoning period. Those comments, as well as the Bureau's
responses to them, are addressed in the section-by-section analysis of
Sec. 1026.43(e)(7)(iv)(D).
The Bureau also emphasizes 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 promptly
offering these types of accommodations to consumers. Specifically,
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. This final rule's
exclusion of temporary payment accommodations related to a disaster or
pandemic-related national emergency from the 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.\170\
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\170\ 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 in certain circumstances).
---------------------------------------------------------------------------

At the same time, the Bureau recognizes that 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 are
affordable. For that reason, the Bureau is allowing 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 Sec.
1026.43(e)(7)(iv)(C), the 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 make loans unaffordable. The Bureau is also
requiring a seasoning period generally 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 Sec. 1026.43(e)(7)(ii).
As noted above, some commenters suggested that delinquencies
attributable to disasters or pandemic-related national emergencies
should pause the seasoning period regardless of whether the consumer
enters into a temporary payment accommodation. In developing the
proposal, the Bureau evaluated the practices of market participants,
such as mortgage insurers and the GSEs, with respect to penalties and
other remedies for deficiencies in underwriting practices. Though
mortgage insurers and the GSEs make allowances for temporary payment
accommodations related to certain disasters, they do not extend these
allowances to disaster-related delinquencies absent a temporary payment
accommodation.
Additionally, as previously noted, the Bureau wants to avoid
discouraging servicers from providing timely temporary payment
accommodations after disasters or emergencies. Allowing for the
seasoning period to pause for delinquencies related to disasters or
emergencies even if consumers are not in a temporary payment
accommodation may reduce the incentive of servicers to timely provide
temporary payment accommodations.
Finally, the Bureau reiterates its goal of establishing
requirements that enable financial institutions 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. Allowing an exclusion
from the seasoning period for delinquencies related to certain
disasters or emergencies without tying the exclusion to a temporary
payment accommodation may introduce uncertainty as to whether a loan
qualifies to season. Temporary payment accommodations are typically
documented (for example, in servicing notes). Absent a temporary
payment accommodation, it may be difficult for a creditor to
retroactively demonstrate when a particular delinquency that was
related to a disaster or pandemic-related national emergency began. For
these reasons, the Bureau declines to adopt commenters' suggestion that
delinquency relating to a disaster or pandemic-related national
emergency be excluded from the seasoning period even if the consumer
does not enter into a temporary payment accommodation.
Proposed comment 43(e)(7)(iv)(C)(2)-1 provided 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 used 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 did not
receive any substantive comments addressing proposed comment
43(e)(7)(iv)(C)(2)-1 and is finalizing comment 43(e)(7)(iv)(C)(2)-1 as
proposed, with minor changes to conform to Sec.
1026.43(e)(7)(iv)(C)(1).

Paragraph 43(e)(7)(iv)(D)

Proposed Sec. 1026.43(e)(7)(iv)(D) addressed 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) does 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 pandemic-related national emergency.
Proposed Sec. 1026.43(e)(7)(iv)(D) defined

[[Page 86439]]

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.
Several commenters stated that they supported the Bureau's proposed
approach of excluding from the seasoning period time spent in a
temporary payment accommodation made in connection with a disaster or
pandemic-related national emergency. Some industry commenters
recommended that the Bureau expand the definition of a temporary
payment accommodation to include accommodations related to disasters
and emergencies declared on the State and local level. Some industry
commenters requested that the Bureau expand the definition of a
temporary payment accommodation to include accommodations related to
more general financial emergencies, such as sudden job loss due to the
closure of a consumer's place of employment.
The Bureau is finalizing Sec. 1026.43(e)(7)(iv)(D) as proposed to
refer only to presidentially declared emergencies or major disasters
under the Stafford Act or presidentially declared pandemic-related
national emergencies under the National Emergencies Act. The Bureau
believes that defining a temporary payment accommodation in this way is
necessary to 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. The Stafford Act, which has been used for over 30
years to facilitate Federal disaster response, including disaster
response for emergencies and major disasters affecting only certain
States or localities, contains detailed definitions of what are
considered to be emergencies or major disasters under that
statute.\171\ 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.\172\ The Bureau has decided that referring to
these two statutes is necessary to 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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\171\ Stafford Act section 102(1) and (2), 88 Stat. 144.
\172\ 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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Furthermore, the Bureau's intent is that Seasoned QM eligibility
standards apply clearly and consistently on the national level. The
Bureau notes that the Stafford Act has frequently been invoked to
declare emergencies and major disasters that affect only certain States
or localities. The Bureau intends to include such federally declared
emergencies and major disasters in Sec. 1026.43(e)(7)(iv)(D)'s
definition, using the nationally applicable definitions outlined in the
Stafford Act. However, while the Stafford Act and National Emergencies
Act provide nationally applicable standards for emergency and disaster
declarations, State and local standards for emergency and disaster
declarations vary widely. Expanding the definition in Sec.
1026.43(e)(7)(iv)(D) to State and local emergency and disaster
declarations would therefore make Seasoned QM eligibility
inconsistently available based on the location of the consumer's
property. And as discussed above, expanding the definition to encompass
a more general financial emergency standard would lead to uncertainty
as to whether a loan qualifies to become a Seasoned QM. The Bureau
therefore declines to expand the definition in Sec.
1026.43(e)(7)(iv)(D) to include State and local emergency and disaster
declarations or a more general financial emergency standard and is
adopting Sec. 1026.43(e)(7)(iv)(D) as proposed.
Proposed comment 43(e)(7)(iv)(D)-1 provided 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 did not receive comments
addressing proposed comment 43(e)(7)(iv)(D)-1 and is finalizing comment
43(e)(7)(iv)(D)-1 as proposed.

VII. Effective Date

The Bureau proposed that a final rule relating to this proposal
would take effect on the same date as a final rule amending the General
QM loan 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 Bureau proposed that both the Seasoned QM Final Rule and the
General QM Final Rule would apply to covered transactions for which
creditors receive an application on or after the effective date.
Several commenters supported aligning this final rule's effective
date with that of the General QM Final Rule. An industry commenter
requested that the Bureau make this final rule immediately effective to
take advantage of the benefits as soon as possible, while another
industry commenter suggested that this final rule not take effect until
18 to 24 months after issuance to allow time for implementation.
Many industry commenters requested that the Bureau apply this final
rule to loans existing before the effective date. Such commenters
noted, for example, that the proposal included robust consumer
protections and suggested that such protections would apply equally
well to existing loans as they do to future loans. On the other hand,
consumer advocate commenters urged the Bureau not to apply the rule to
loans in existence before the effective date, suggesting that doing so
would likely violate the vested rights of non-QM borrowers.
This final rule will take effect 60 days after publication in the
Federal Register, which aligns with the effective date provided in the
General QM Final Rule. The Bureau declines to adopt a later effective
date because the Bureau concludes that 60 days will provide creditors
and the secondary market adequate implementation time for this final
rule, which adds a new QM definition but does not require creditors or
other stakeholders to take any action if they do not intend to rely
upon the new QM definition. The Bureau also declines to make the rule
effective earlier than 60 days after publication in the Federal
Register, because it wants to ensure that creditors and other
stakeholders have adequate time to become familiar with this final rule
before it takes effect.
Consistent with many of the industry comments received, 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

[[Page 86440]]

depending on whether a 36-month successful payment history begins
before or after the effective date. However, the Bureau continues to
believe that parties to loans existing at the time of the effective
date may have significant reliance interests related to the QM status
of those loans.\173\ In light of these potential reliance interests,
the Bureau has decided not to apply the final rule to loans in
existence prior to the effective date. Thus, this final rule applies to
covered transactions for which creditors receive an application on or
after the effective date.
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\173\ As indicated in the proposal, 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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An industry trade association also asked that the Bureau use the
definition found in the TILA-RESPA Integrated Disclosure Rule (TRID) to
provide clarification on the meaning of ``application date'' in this
final rule. The General QM Final Rule adds comment 43-2 to Regulation
Z, which clarifies that, for transactions subject to TRID, creditors
determine the date the creditor received the consumer's application,
for purposes of the General QM Final Rule's effective date and
mandatory compliance date, in accordance with Sec. 1026.2(a)(3)(ii),
which is the definition of application that applies to transactions
subject to TRID. Comment 43-2 also clarifies that, for transactions
that are not subject to TRID, creditors can determine the date the
creditor received the consumer's application, for purposes of the
General QM Final Rule's effective date and mandatory compliance date,
in accordance with either Sec. 1026.2(a)(3)(i) or (ii). The Extension
Final Rule added a similar comment (comment 43(e)(4)-4) for purposes of
Sec. 1026.43(e)(4)(iii)(B), as revised by the Extension Final Rule,
which takes effect on December 28, 2020. For purposes of the effective
date of this final rule, the Bureau is using ``application'' in a
manner consistent with new comments 43-2 and 43(e)(4)-4. Thus, for
transactions subject to Sec. 1026.19(e), (f), or (g), creditors
determine the date the creditor received the consumer's application for
purposes of the effective date of this final rule in accordance with
TRID's definition of application in Sec. 1026.2(a)(3)(ii). For
transactions that are not subject to TRID, creditors can determine the
date the creditor received the consumer's application for purposes of
the effective date of this final rule in accordance with either Sec.
1026.2(a)(3)(i) or (ii).

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

A. Overview

In developing this final rule, the Bureau has considered the
potential benefits, costs, and impacts as required by section
1022(b)(2)(A) of the Dodd-Frank Act. Specifically, section
1022(b)(2)(A) of the Dodd-Frank Act requires the Bureau to consider the
potential benefits and costs of a regulation to consumers and covered
persons, including the potential reduction of access by consumers to
consumer financial products or services, the impact on depository
institutions and credit unions with $10 billion or less in total assets
as described in section 1026 of the Dodd-Frank Act, and the impact on
consumers in rural areas. The Bureau consulted with appropriate
prudential regulators and other Federal agencies regarding the
consistency of this final rule with prudential, market, or systemic
objectives administered by such agencies as required by section
1022(b)(2)(B) of the Dodd-Frank Act.
This final rule 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.
High-cost mortgages subject to HOEPA are not eligible to season.
Creditors will have to satisfy consider and verify requirements and
keep the loans in portfolio until the end of the seasoning period,
excepting a single whole-loan transfer, transfers related to mergers
and acquisitions, and certain supervisory sales during the seasoning
period. The loans will also have to meet certain performance
requirements. Specifically, loans can 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 Seasoned QM requirements will receive a safe harbor from
ATR liability at the end of the seasoning period.
As discussed above, a goal of this final rule is to enhance access
to responsible, affordable mortgage credit. This final rule
incentivizes the origination of non-QM and rebuttable presumption QM
loans that a creditor expects to demonstrate a sustained and timely
mortgage payment history by providing a separate path to safe harbor QM
status for these loans if creditors' expectations are fulfilled. This
final rule 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) \174\ and National Mortgage
Database (NMDB) \175\ 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, and research organizations inform the Bureau's
impact analyses.
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\174\ Public Law 94-200, tit. III, 89 Stat. 1125 (1975). 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 (last visited Nov. 30, 2020).
\175\ The NMDB, jointly developed by the FHFA and the Bureau,
provides de-identified loan characteristics and performance
information for a 5 percent sample of all mortgage originations from
1998 to the present, supplemented by de-identified loan and borrower
characteristics from Federal administrative sources and credit
reporting data. See Bureau of Consumer Fin. Prot., Sources and Uses
of Data at the Bureau of Consumer Financial Protection at 55-56
(Sept. 2018), https://www.consumerfinance.gov/documents/6850/bcfp_sources-uses-of-data.pdf. Differences in total market size
estimates between NMDB data and HMDA data are attributable to
differences in coverage and data construction methodology.
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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. In response to the Seasoned QM Proposal,
the Bureau did not receive additional information or data that could
inform quantitative estimates such as APRs or other costs like those
associated with private mortgage insurance.

[[Page 86441]]

The data provide only limited information on the costs to creditors
of uncertainty related to legal liability that this final rule may
mitigate. As a result, the analysis of impacts of this final rule 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 this final rule on these
costs.
Finally, as discussed further below, the analysis of the impacts of
this final rule 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
changes considered below.
2. Description of the Baselines
The Bureau considers the benefits, costs, and impacts of the final
rule against two baselines. The first baseline (Baseline 1) takes into
account that the Bureau's final rule amending the General QM loan
definition is adopted. The second baseline (Baseline 2) assumes that
the Bureau does not amend the General QM loan definition and the
Temporary GSE QM loan definition expires when the GSEs cease to operate
under conservatorship.
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 at consummation except for the performance and portfolio
requirements of this final rule. 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,
meaning that as a result of meeting those requirements, they would
obtain QM status or a stronger presumption of compliance, or would not
need to satisfy the portfolio retention requirements that would be
necessary to maintain 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 would meet all of the
requirements of a Seasoned QM at consummation (except for the
performance and portfolio requirements) and would benefit if they met
the performance and portfolio requirements during 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.\176\ Relative to the proposal, the Bureau
has updated its methodology in two ways. First, the estimates for
Baseline 1 have been updated to reflect updates to the pricing
thresholds in the General QM Final Rule. Second, the Bureau has also
adjusted its analysis to reflect an improved methodology to identify
creditors eligible to originate loans as small creditors under Sec.
1026.43(e)(5), consistent with the section 1022(b) analysis
accompanying the General QM Final Rule.
---------------------------------------------------------------------------

\176\ Thus, the analysis estimates the maximum number of loans
under each baseline that would become Seasoned QMs 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.
---------------------------------------------------------------------------

As stated above, under Baseline 1, the General QM Final Rule is
adopted. Consider first all of the non-QM loans under Baseline 1 that
would meet all of the requirements at consummation for a Seasoned QM
and would benefit if they met the performance and portfolio
requirements of the seasoning period.\177\ To count these loans, the
Bureau used 2018 HMDA data to identify all residential first-lien,
fixed-rate conventional loans for one-to-four unit housing that do not
have prohibited features or other disqualifying characteristics; are
not Small Creditor QMs or entitled to a presumption of compliance under
the EGRRCPA QM definition; \178\ and for which the APR exceeds APOR by
the amounts specified in the General QM Final Rule's amendments to
Sec. 1026.43(e)(2)(vi)(A) through (F). The Bureau estimates that there
are 21,269 of these loans. These loans would benefit from this final
rule by obtaining safe harbor QM status if they meet the performance
and portfolio requirements of the seasoning period, and not
otherwise.\179\
---------------------------------------------------------------------------

\177\ Analysis of HMDA data for Baseline 1 excludes loans where
rate spread is not observed.
\178\ 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.
\179\ Note that the analysis uses 2018 data, but this final rule
does not apply to these loans since this final rule applies to
covered transactions for which creditors receive an application on
or after the effective date.
---------------------------------------------------------------------------

Consider next all of the rebuttable presumption QM loans under
Baseline 1 that would meet all of the requirements at consummation for
a Seasoned QM 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 loan 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 108,020 of
these loans. The second group is all fixed-rate rebuttable presumption
Small Creditor QMs. The Bureau estimates that there are 3,137 of these
loans. Thus, the Bureau estimates that 111,157 loans would benefit from
this final rule 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.\180\
---------------------------------------------------------------------------

\180\ 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 and (2) do not otherwise satisfy the criteria to qualify
for a safe harbor under the General QM Final Rule or the Small Creditor
QM definition. The Bureau estimates that there are 23,200 loans in 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 1, approximately 155,626 loans would meet all
of the requirements at consummation for Seasoned QMs and would obtain
QM status or 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

[[Page 86442]]

expected annual number of loan originations under Baseline 1 in years
similar to 2018 that meet all of the requirements of a Seasoned QM at
consummation and would benefit if they met the performance and
portfolio requirements of the seasoning period. Some of these loans
very likely will meet those performance and portfolio requirements, and
some very likely will not.\181\
---------------------------------------------------------------------------

\181\ The Bureau cannot reliably measure the full expansionary
effect of this final rule on loan originations. One effect might be
that this final rule would cause the share of loan applications that
lead to originations of non-QM loans under the baseline (88 percent)
to match the overall share (95 percent for loan applications for
which Bureau data include the rate spread). This would lead to an
additional 1,800 non-QM originations not accounted for above.
---------------------------------------------------------------------------

Now consider Baseline 2. As stated above, under Baseline 2, no
amendments to the General QM loan definition are adopted, and the
Temporary GSE QM loan definition expires when the GSEs cease to operate
under conservatorship. The Bureau estimates effects under Baseline 2
subsequent to the expiration of the Temporary GSE QM loan definition.
While there is not a fixed date on which the Temporary GSE QM loan
definition will expire in the absence of the final rule amending the
General QM requirements, the Bureau anticipates that the GSEs will
eventually cease to operate under conservatorship. Consider first all
of the non-QM loans under Baseline 2 that would meet all of the
requirements at consummation for a Seasoned QM and would benefit if
they met the performance and portfolio requirements of the seasoning
period.\182\ To count these loans, the Bureau has used 2018 HMDA data
to identify all residential first-lien, fixed-rate conventional loans
for one-to-four unit housing that do not have prohibited features or
other disqualifying characteristics; are not Small Creditor QMs or
originated under the EGRRCPA QM definition; and do not satisfy the DTI
requirement specified in Sec. 1026.43(e)(2)(vi) of the current General
QM loan definition. The Bureau estimates that there are 718,509 of
these loans. These loans would benefit from this final rule by
obtaining safe harbor QM status if they meet the performance and
portfolio requirements of the seasoning period, and not otherwise.
---------------------------------------------------------------------------

\182\ Analysis of HMDA data for Baseline 2 excludes loans where
rate spread or DTI are not observed.
---------------------------------------------------------------------------

Consider next all of the rebuttable presumption QM loans under
Baseline 2 that would meet all of the requirements at consummation for
a Seasoned QM 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 loan definition, but
which are not Small Creditor QMs or loans entitled to a presumption of
compliance under the EGRRCPA QM definition. The Bureau estimates that
there are 87,122 of these loans. The second group is all first-lien,
fixed-rate rebuttable presumption Small Creditor QMs. The Bureau
estimates that there are 3,137 of these loans. Thus, the Bureau
estimates that 90,259 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.\183\
---------------------------------------------------------------------------

\183\ The same caveat with respect to EGRRCPA section 101
discussed for Baseline 1 applies here as well.
---------------------------------------------------------------------------

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 and (2) do not otherwise satisfy the criteria to qualify
for a safe harbor under the General QM Final Rule or the Small Creditor
QM definition. The Bureau estimates that there are 123,875 loans 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 932,643 loans would meet all
of the requirements at consummation for Seasoned QMs 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 and would benefit if they met the performance and portfolio
requirements of the seasoning period. Some of these loans very likely
will meet those performance and portfolio requirements, and some very
likely will not.

B. Potential Benefits and Costs to Covered Persons and Consumers

This final rule 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
this final rule on creditors first and then consumers. The analysis
begins by assessing how this final rule could potentially affect
creditors' litigation risk, cost of origination, and the price of
borrowing, holding originations constant. The analysis then considers
the potential impacts of this final rule 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.
Several commenters noted that the proposal lacked an analysis that
quantified market expansion and subsequently weighed the consumer value
of those effects against the consumer value of changes to foreclosure
defense. The Bureau agrees that it would be valuable to conduct such an
analysis. However, the Bureau is not aware of data that would permit it
to reliably do so. One would first need to estimate how this final rule
will change creditors' cost savings by decreasing litigation risk.
Second, one needs to estimate how much of those cost savings will be
passed through to consumers, for which consumers, and via which
mortgage products. Third, one needs to estimate how many new consumers
would obtain mortgage loans and which loans they would obtain. Fourth,
one would need to estimate how much these new consumers value their
newfound access to credit. Fifth, an analysis needs two pieces of
information for two classes of borrowers: Those who would borrow
regardless of whether the Bureau promulgates this final rule and those
who are induced to borrow as a result of it. For each class, one would
need to estimate the rate at which such borrowers experience
foreclosure and the value to such borrowers of an ATR defense in
foreclosure. If the Bureau does not have the data that would be needed
to produce these estimates, the Bureau provides a qualitative
discussion below based on economic principles and the Bureau's
experience within and expertise in the mortgage markets.
1. Benefits and Costs to Covered Persons
Benefits From Reduced Litigation Risk
Covered persons, specifically mortgage creditors, primarily benefit

[[Page 86443]]

from decreased litigation risk under this final rule. 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. In the proposal, the Bureau anticipated that the
Seasoned QM definition would not curtail the ability of consumers to
bring affirmative claims seeking damages for alleged violations of the
ATR requirements because the proposed seasoning period would generally
coincide with the statute of limitations. One academic commenter
indicated that under the proposal, loans could season during pending
litigation, cutting off claims filed within the three-year statute of
limitations period. The Bureau acknowledges that because litigation
takes time, it is possible that some loans could season under Sec.
1026.43(e)(7) after an ATR/QM claim is timely filed, cutting off claims
filed prior to the statute of limitations. Nevertheless, the aggregate
effects of consumers' loans seasoning during litigation are likely to
be small under current levels of originations and rates of affirmative
claims. However, because the Bureau does not have either the data to
quantify the new loans that will be originated as a result of the final
rule nor the rate at which claims will be brought against creditors of
those loans, it also cannot reliably forecast these economic impacts on
consumers in the case of market expansion or changing market
conditions.
TILA also authorizes a consumer to assert a violation of the ATR
requirements as a defense in the event of a foreclosure without regard
for the time limit on a private action for damages for such a
violation. For Seasoned QMs that are non-QM loans or rebuttable
presumption QM loans at consummation, this final rule will effectively
limit the consumer's ability to establish non-compliance with the ATR
requirements after the seasoning period has run as a general matter.
The creditors' economic value of the reduction of litigation risk
is related to how each of three factors changes with this final rule
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, in the
Seasoned QM Proposal, sought pertinent information related to ATR
defenses in foreclosure proceedings and related costs. One consumer
advocate commenter argued that the value of ATR defense can be
ascertained from past experiences with ATR litigation. Noting only a
single case of ATR litigation since the ATR/QM Rule went into effect,
the commenter offered several case studies from prior to the January
2013 Final Rule. Given the differences in legal circumstances between
before and after the Dodd-Frank Act, it is not clear that ATR
litigation from prior to the Dodd-Frank Act provides a sound basis for
assessing changes in aggregate litigation risk from this final rule.
An academic commenter asserted that if the proposal were adopted,
the resulting new non-QM originations could reflect riskier features
and suggested that, as a result, those that would season would also
enter foreclosure at a rate higher than the Bureau's foreclosure
analysis suggests. The Bureau acknowledges that its foreclosure
analysis reflects characteristics of loans originated in the past and
not necessarily those that would be originated as a result of this
final rule. However, the Bureau does not agree with the commenter's
premise that if this final rule resulted in an expansion of credit, the
new loans would necessarily reflect riskier features, and default and
foreclosure start rates would increase. Accompanying the consider and
verify requirements, product restrictions (such as the limitation to
first-lien, fixed-rate loans), and points-and-fees restrictions of this
final rule, the portfolio and performance requirements incentivize
creditors to originate loans that will perform, since otherwise they
will not season and obtain a safe harbor. Nonetheless, the Bureau is
unaware of data that would allow it to forecast new originations'
characteristics or the fraction that would meet the performance
requirements to become Seasoned QMs. Correspondingly, the Bureau cannot
assess how the foreclosure start rate of the subsequent non-QM loans,
seasoned or otherwise, would differ from the foreclosure start rate of
loans originated in the past. Finally, the overall foreclosure start
rate reflects foreclosure starts of both loans that would be originated
as a result of this final rule's expansion of credit and those that
would be originated regardless. If this final rule results in an
expansion of credit of only a few loans, the foreclosure analysis would
be relatively unaffected regardless of the foreclosure risk of those
loans. Conversely, the Bureau's foreclosure analysis may be less
reliable if this final rule results in a major expansion of credit. As
stated previously, the Bureau is unaware of data that would allow it to
quantify the size of market expansion.
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 this final rule. The proposal would have required that loans
be held in portfolio unless transfers are related to mergers and
acquisitions and certain supervisory sales during the seasoning period.
This final rule additionally allows a single whole-loan transfer. The
change does not affect the analysis.\184\
---------------------------------------------------------------------------

\184\ NMDB data do not permit one to ascertain the number of
times ownership of privately held loans that were not securitized
was transferred between institutions. Whereas the analysis in the
proposal assumed that unsecuritized, privately held loans were held
in portfolio by a single party, this analysis assumes that the same
loans were not transferred more than once.
---------------------------------------------------------------------------

The likely quantitative impact of this final rule 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 2 plots the fraction of higher-priced loans, those
with an interest rate 150 basis points or more over the Primary
Mortgage Market Survey (PMMS), that were open after three years between
2004 and 2013 in order to provide context for the quantitative
foreclosure analysis that follows.

[[Page 86444]]

[GRAPHIC] [TIFF OMITTED] TR29DE20.401

Figure 2 serves as a reminder that, over time, the effects of this
final rule will 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 start 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 this final rule would be smaller. This
contrasts to post-crisis origination years where initial mortgage rates
and foreclosure start rates remained low and a larger share of loans
remained active beyond three years.

[[Page 86445]]

[GRAPHIC] [TIFF OMITTED] TR29DE20.402

Figure 3 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 3 shows, for
example, that 66 percent of loans with these performance problems would
have been disqualified from seasoning under this final rule's seasoning
period of 36 months. This compares to 53 percent of such loans if the
seasoning period were 24 months and 76 percent if the seasoning period
were 48 months.
Foreclosure Risk of Loans That Meet Seasoned QM's Performance
Requirements in Baseline 1
To assess this final rule'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. The loans potentially would have met this
final rule's Seasoned QM performance criteria in 2015 and 2016.
The analyses first classify loans by whether they would have
satisfied the General QM Final Rule's requirements for safe harbor and
rebuttable presumption in Baseline 1 at consummation.\185\ Ten percent
of loans would have been either rebuttable presumption or non-QM loans
and would have potentially benefited from the Seasoned QM definition's
pathway to safe harbor if they had met the final rule's performance
requirements.
---------------------------------------------------------------------------

\185\ The NMDB data do not enable the Bureau to ascertain
whether loans were originated by creditors that meet the size
criteria for originating QM loans under the Small Creditor QM or
EGRRCPA QM definitions.

Table 1--Share of Loans Under Baseline 1 That Were Open and Had Not
Entered Foreclosure After Three Years and Would Have Met Performance
Criteria
------------------------------------------------------------------------
Open and had Met
not entered performance
foreclosure criteria
Type of loan after three (cond. on
years open)
(percent) (percent)
------------------------------------------------------------------------
Safe Harbor............................. 78 99
Seasonable Loans........................ 78 92
Rebuttable Presumption.............. 81 94
Non-QM.............................. 73 86
Missing Rate Spread..................... 61 87

[[Page 86446]]

All Loans............................... 77 97
------------------------------------------------------------------------

Classifying loans according to their status under Baseline 1, Table
1 reports the fraction of loans that were open and had not entered
foreclosure after three years and of those open loans, the fraction
that would have met the performance criteria of this final rule.
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 this final rule. By
way of comparison, the corresponding fractions for loans originated as
safe harbor were 78 percent and 99 percent, respectively. Altogether,
71 percent of the loans that would have been rebuttable presumption QM
loans and non-QM loans under Baseline 1 would have performed well
enough to gain safe harbor status via Seasoned QM under this final
rule.
The relief from litigation risk depends in part on the fraction of
these loans that would eventually enter foreclosure proceedings. Table
2 reports the share of loans under Baseline 1 that entered foreclosure
between origination and the first quarter of 2020 among all loans
consummated between 2012 and 2013, those that were still open and had
not entered foreclosure three years after origination, and those that
met the performance criteria of this final rule. 0.2 percent of loans
open for at least three years enter foreclosure proceedings before
March 2020. Among the loans that would have satisfied this final rule's
Seasoned QM performance requirements, foreclosure proceedings began for
1.6 percent of loans that would be non-QM loans in Baseline 1 and for
0.5 percent of loans that would be rebuttable presumption QM loans
under Baseline 1. Combined, 0.8 percent of loans that met the
performance requirements and were potentially seasonable at
consummation would have started foreclosure proceedings. By comparison,
for loans that were still open, had not entered foreclosure after three
years, and would have been originated as safe harbor under Baseline 1,
only 0.1 percent of loans entered foreclosure after year three. Thus,
the average foreclosure start 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 QMs.

Table 2--Share of Loans That Entered Foreclosure Under Baseline 1
----------------------------------------------------------------------------------------------------------------
. . . open
and had not . . . and met
All loans entered performance
Type of loan (percent) foreclosure criteria
after 3 years (percent)
(percent)
----------------------------------------------------------------------------------------------------------------
Safe Harbor..................................................... 0.3 0.2 0.1
Seasonable Loans................................................ 2.3 2.3 0.8
Rebuttable Presumption...................................... 1.1 1.1 0.5
Non-QM...................................................... 4.5 4.7 1.6
Missing Rate Spread............................................. 3.8 1.8 0.4
All Loans....................................................... 0.7 0.5 0.2
----------------------------------------------------------------------------------------------------------------

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 this final rule 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 as well as additional
time to see whether foreclosures eventually emerge. As the Bureau
explained in the proposal,\186\ the Bureau excluded earlier vintages
whose loan performance may have been affected by the 2008 financial
crisis. The crisis years were somewhat unusual in the high number of
homes with negative equity and the slow pace 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 that may no longer
be relevant to current market conditions. The analysis below should be
understood with this background in mind.
---------------------------------------------------------------------------

\186\ 85 FR 53568, 53596 n.154 (Aug. 28, 2020).
---------------------------------------------------------------------------

Notwithstanding these considerations, one commenter asserted that
the narrow selection of vintages would lead one to overstate the
effectiveness of the proposed Seasoned QM performance criteria in
limiting foreclosure. Instead, the Bureau's analysis of loan vintages
from periods of economic distress such as the 2008 financial crisis
suggests that their exclusion had the opposite effect. Continuing to
limit the analysis to conventional, fixed-rate purchase and refinance
loans with no prohibited features that were privately held at
consummation, open, and had not

[[Page 86447]]

entered foreclosure after three years, Figure 4 plots the difference in
foreclosure start rates between loans that would have had a safe harbor
at origination under Baseline 1 with loans that would have met the
performance criteria of this final rule and obtained a safe harbor from
Seasoned QM status. Among loans that were originated between 2005 and
2009, those that would have obtained a safe harbor from seasoning
entered foreclosure at a lower rate than loans that would have obtained
a safe harbor from satisfying the General QM requirements at
origination. Loan vintages from the 2008 financial crisis overstate
rather than understate this final rule's effectiveness for two reasons.
First, a greater share of potentially seasonable loans became
delinquent within 36 months, and thus a smaller share of potentially
seasonable loans met the performance criteria of this final rule.
Second, while the remainder did enter foreclosure at a higher rate than
in other periods, lower priced loans that would have had a safe harbor
from origination became delinquent and entered foreclosure at an even
higher rate.
[GRAPHIC] [TIFF OMITTED] TR29DE20.403

Foreclosure Risk of Loans That Meet Seasoned QM's Performance
Requirements in Baseline 2
Paralleling the analyses of this final rule relative to Baseline 1,
the analyses here classify loans by whether they would have satisfied
the General QM requirements for safe harbor and rebuttable presumption
QM loans in Baseline 2 and whether they would have satisfied the
performance requirements of this final rule. Eight percent of analyzed
loans would have been non-QM loans or rebuttable presumption QM loans
at consummation under Baseline 2 and would have potentially gained safe
harbor status if they had met this final rule's 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 86448]]

Table 3--Share of Loans Under Baseline 2 That Were Open and Had Not
Entered Foreclosure After Three Years and Meet Performance Criteria
------------------------------------------------------------------------
Open and had Met
not entered performance
foreclosure criteria
Type of loan after three (cond. on
years open)
(percent) (percent)
------------------------------------------------------------------------
Safe harbor............................. 85 99
Seasonable loans........................ 86 98
Rebuttable presumption.............. 58 92
Non-QM.............................. 89 99
Missing rate spread..................... 76 97
All loans............................... 77 97
------------------------------------------------------------------------

Classifying loans according to their status under Baseline 2, Table
3 reports the fraction of loans that were open and had not entered
foreclosure after three years and of those open loans, the fraction
that would have met the performance criteria of this final rule.
Eighty-six percent of the loans that would have been potentially
seasonable at consummation under Baseline 2 were still open after three
years, of which 98 percent would have satisfied this final rule's
Seasoned QM performance requirements.
Table 4 reports the share of loans under Baseline 2 that entered
foreclosure between origination and the first quarter of 2020 among all
loans consummated between 2012 and 2013, those that were still open and
had not entered foreclosure three years after origination, and those
that met the performance criteria of this final rule. Among the loans
that satisfied this final rule's performance requirements, foreclosure
proceedings began for 0.2 percent of loans that would have been
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 entered foreclosure after year three.

Table 4--Share of Loans That Enter Foreclosure Under Baseline 2
----------------------------------------------------------------------------------------------------------------
. . . open and
had not . . . and met
entered performance
Type of loan All loans foreclosure criteria
after 3 years (percent)
(percent)
----------------------------------------------------------------------------------------------------------------
Safe Harbor..................................................... 0.2 0.2 0.1
Seasonable Loans................................................ 0.4 0.5 0.2
Rebuttable Presumption...................................... 2.3 4.0 0.0
Non-QM...................................................... 0.2 0.2 0.2
Missing Rate Spread............................................. 0.7 0.5 0.2
All Loans....................................................... 0.7 0.5 0.2
----------------------------------------------------------------------------------------------------------------

The analysis suggests that the foreclosure start 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.
As explained above, the Bureau cannot translate the reduction in
foreclosure start rates into dollar savings on litigation costs because
the Bureau lacks data on the likelihood each consumer would
successfully challenge foreclosure and on the cost of each subsequent
case of litigation. In the January 2013 Final Rule, the Bureau
estimated litigation costs under the ability-to-repay standards for
non-QM loans. The Bureau concluded that to reflect the expected value
of these litigation costs, the costs of non-QM loans would increase by
10 basis points or $212 for a $210,000 loan.\187\ However, the
estimates set forth in the January 2013 Final Rule do not predict
changes in costs from Baseline 1 on non-QM loans that obtain QM status
by seasoning or on the remaining non-QM loans. In response to the
Seasoned QM Proposal, the Bureau did not receive comments on methods or
data that would allow the Bureau to quantify potential changes in
costs.
---------------------------------------------------------------------------

\187\ One commenter contrasted the proposal's analysis with that
from the January 2013 Final Rule, 78 FR 6408, 6569 (Jan. 30, 2013).
The 2013 analysis's conclusion of a 10 basis point and $212 cost
associated with non-QM litigation risk came from three assumptions:
1.5 percent of loans would foreclose, 20 percent of consumers who
entered foreclosure would claim violations of ATR as a defense, and
consumers would succeed 20 percent of the time. As noted previously,
to the Bureau's knowledge there has been a single ATR claim made in
litigation, a rate of litigation far smaller than that implied by
the assumptions. The Bureau cannot reliably forecast the rate of ATR
defenses in foreclosure litigation under expanded non-QM lending
that would arise if litigation risk were curtailed.
---------------------------------------------------------------------------

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 this final rule.
Such loans may be directly more profitable because they are less costly
due to the decreased litigation risk discussed in the previous section.
Among these loans, loans that achieve a stronger presumption of
compliance via seasoning may also be indirectly more profitable because
they can more easily be sold on the secondary market, creating
liquidity for creditors. Increased liquidity may come from both

[[Page 86449]]

loans that were non-QM from origination and loans that achieved a safe
harbor by fulfilling 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.
Altogether, the Bureau cannot reliably predict how many additional
loans would be originated under this final rule's additional incentives
and subsequently how much potential profit creditors would accrue
relative to either baseline.\188\ In the Seasoned QM Proposal, the
Bureau sought comment as to whether these effects could be ascertained
but received no additional data to quantify the effects. One academic
commenter expressed skepticism that the proposal would provide enough
incentive to generate more non-QM lending because lenders would still
be potentially liable for ATR violations in the first three years.
However, several industry commenters indicated that they would increase
non-QM lending as a result of this final rule.
---------------------------------------------------------------------------

\188\ Assessment Report, supra note 47, 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 QMs derived above, and the
benefit of seasoning would vary across these loans.
---------------------------------------------------------------------------

Other Costs to Covered Persons
The Bureau concludes that this final rule will not directly impose
additional costs to creditors relative to the baseline. This final rule
offers a pathway for performing mortgages to gain a safe harbor
presumption. Loans meeting this final rule's Seasoned QM definition
will have at least as much of a presumption of compliance as under
either baseline. However, if this final rule succeeds in expanding non-
QM loans originations by causing new creditors to enter the market for
non-QM loans, existing creditors' profits may be eroded by competitive
pressures.
2. Benefits and Costs to Consumers
Consumers will primarily benefit from this final rule indirectly
via the potential expansion of rebuttable presumption and non-QM loans
originated due to decreased litigation risk to creditors. As noted in
the January 2013 Final Rule, increased legal certainty may benefit
consumers if it encourages creditors to make loans that satisfy the QM
criteria, as such loans cannot have certain risky features and have a
cap on upfront costs. Furthermore, increased certainty may result in
loans with a lower cost than would be charged in a context of legal
uncertainty. Thus, a safe harbor may also allow creditors to provide
consumers additional or more affordable access to credit by reducing
their expected total litigation costs. Applied here, for consumers that
choose to pursue high APR loans without safe harbor QM status at
origination, borrowing may be cheaper or more widely available relative
to either baseline. However, the Bureau cannot ascertain the additional
number of consumers who would choose loans without safe harbor QM
status under this final rule relative to the baselines as stated in the
previous section.
Consumers who would select loans without safe harbor QM status
under either baseline and this final rule may or may not benefit from
this final rule. On the one hand, decreased litigation risk may
translate into lower costs in competitive mortgage markets.\189\
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 this final rule's potential to
decrease loan prices.
---------------------------------------------------------------------------

\189\ One academic study examined how lower secondary market
costs passed through to consumers in markets with different amounts
of competition. David S. Scharfstein & Adi Sunderam, Market Power in
Mortgage Lending and the Transmission of Monetary Policy, Mimeo
(Aug. 2016), https://www.hbs.edu/faculty/Publication%20Files/Market%20Power%20in%20Mortgage%20Lending%20and%20the%20Transmission%20of%20Monetary%20Policy_8d6596e6-e073-4d11-83da-3ae1c6db6c28.pdf.
---------------------------------------------------------------------------

Several industry commenters suggested that workers who earn income
via sources not reportable on W-2 forms (e.g., self-employed or gig
economy workers) would potentially benefit from expanded access to
credit. Others argued that ATR arguments in foreclosure defense can be
pivotal to the outcome of individual cases, and thus very valuable to
individual consumers, but that in aggregate, there is not enough
foreclosure litigation to substantially lower costs that would be
passed on to consumers en masse. Even in markets where mortgage lending
is competitive and cost savings are passed to consumers, evaluating the
benefits to consumers in the form of increased access to credit against
the costs to consumers in terms of eliminating potentially winning
arguments in foreclosure defense requires information on how consumers
and creditors value litigation risk. The Bureau is not aware of data
that would allow it to quantify how consumers and creditors value
litigation risk, and the commenters did not offer supplementary
evidence to quantify those effects.
3. Consideration of Alternatives
The Bureau considered alternative seasoning periods of various
numbers of years and alternative performance requirements of various
numbers of allowable 30-day delinquencies. None of the alternatives
permits 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 start 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 part VIII.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 this final rule in that the Bureau cannot reliably
predict how many additional loans would have been originated under its
alternatives.

[[Page 86450]]

Table 5--Percentage of Potentially Seasonable Loans Under Baseline 1 That Would Have Satisfied This Final Rule's
Seasoned QM Performance Criteria Under Alternative Seasoning Periods and Allowable 30-Day Delinquencies
----------------------------------------------------------------------------------------------------------------
Allowable 30-day delinquencies
-----------------------------------------------------------------------------
Seasoning period (months) 0 1 2 3 4 5
(percent) (percent) (percent) (percent) (percent) (percent)
----------------------------------------------------------------------------------------------------------------
12................................ 91.7 93.1 93.9 94.3 94.4 94.5
24................................ 79.5 81.3 82.4 82.8 83.0 83.4
36................................ 68.1 70.4 71.3 71.7 72.2 72.5
48................................ 57.3 59.7 60.7 61.3 61.7 61.9
60................................ 47.7 49.7 50.7 51.4 51.8 52.1
----------------------------------------------------------------------------------------------------------------

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 have seasoned. In contrast,
varying the seasoning period from 12 months to 60 months captures
vastly different numbers of loans that would have seasoned.
Some industry commenters noted that similar analyses of
alternatives in the Seasoned QM Proposal showed only minor differences
in the estimated fraction of seasonable loans that meet the performance
criteria under two, three, or four 30-day delinquencies. Accordingly,
the commenters suggested increasing the number of allowable 30-day
delinquencies. The Bureau interprets the same data to suggest that
there also would be little benefit in terms of access to credit from
expanding the proposed performance criteria to allow more delinquencies
and encompass more loans. Instead, inconsistent repayment reflected in
more than two 30-day delinquencies could signal borrower distress or
difficulties with ability to repay that do not necessarily culminate in
foreclosure.

Table 6--Difference in Percentage Points of Loans Under Baseline 1 That Entered Foreclosure Between Potentially
Seasonable Loans That Meet This Final Rule's Seasoned QM Performance Criteria and Loans That Had Safe Harbor
From Consummation and Were Open and Had Not Entered Foreclosure After Three Years
----------------------------------------------------------------------------------------------------------------
Allowable 30-day delinquencies
Seasoning period (months) -----------------------------------------------------------------------------
0 1 2 3 4 5
----------------------------------------------------------------------------------------------------------------
12................................ 1.00 1.13 1.31 1.38 1.41 1.41
24................................ 0.56 0.61 0.74 0.78 0.82 0.90
36................................ 0.32 0.46 0.47 0.49 0.51 0.53
48................................ 0.10 0.20 0.23 0.25 0.25 0.27
60................................ -0.07 0.00 0.03 0.06 0.06 0.06
----------------------------------------------------------------------------------------------------------------

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 this final rule with the share of foreclosures among loans
that would have been originated as safe harbor QM loans under Baseline
1. For example, under this final rule, 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 QMs 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 start rate than does changing the number of
allowable 30-day delinquencies.

Table 7--Percentage of Potentially Seasonable Loans Under Baseline 2 That Would Have Satisfied This Final Rule's
Seasoned QM Performance Criteria Under Alternative Seasoning Periods and Allowable 30-Day Delinquencies
----------------------------------------------------------------------------------------------------------------
Allowable 30-day delinquencies--(percent)
Seasoning period (months) -----------------------------------------------------------------------------
0 1 2 3 4 5
----------------------------------------------------------------------------------------------------------------
12................................ 96.3 96.5 96.7 96.7 96.7 96.7
24................................ 91.1 91.6 91.8 92.2 92.2 92.2
36................................ 83.3 84.6 84.6 84.6 84.8 84.8
48................................ 76.1 77.6 77.6 77.6 77.8 77.8
60................................ 71.0 72.6 72.6 72.8 73.0 73.0
----------------------------------------------------------------------------------------------------------------

[[Page 86451]]

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 have met the seasoning requirements under this final
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 amendments to the General QM loan definition will
provide many of these loans with a pathway to QM status.

Table 8--Difference in Percentage Points of Loans Under Baseline 2 That Entered Foreclosure Between Potentially
Seasonable Loans That Meet This Final Rule's Seasoned QM Performance Criteria and Loans That Had Safe Harbor
From Consummation and Were Open and Had Not Entered Foreclosure After Three Years
----------------------------------------------------------------------------------------------------------------
Allowable 30-day delinquencies
Seasoning period (months) -----------------------------------------------------------------------------
0 1 2 3 4 5
----------------------------------------------------------------------------------------------------------------
12................................ 0.06 0.06 0.26 0.26 0.26 0.26
24................................ 0.08 0.08 0.08 0.08 0.08 0.08
36................................ 0.13 0.13 0.13 0.13 0.13 0.13
48................................ -0.09 -0.09 -0.09 -0.09 -0.09 -0.09
60................................ -0.09 -0.09 -0.09 -0.09 -0.09 -0.09
----------------------------------------------------------------------------------------------------------------

Table 8 shows that under Baseline 2, non-QM and rebuttable
presumption QM loans that would have achieved safe harbor status
through this final rule or alternatives with a seasoning period of at
least three years have a 0.13 percentage point higher foreclosure start
rate than open loans that were safe harbor QM loans at consummation.
The difference in the foreclosure start 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 are expected to benefit from this final rule. 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 will likely not benefit from this final rule's providing a
pathway to safe harbor status for non-QM loans, but they will benefit
from the pathway to safe harbor status for rebuttable presumption QM
loans. As a result of this final rule, certain loans that have a safe
harbor from origination from the EGRRCPA would not have to continue to
be held in portfolio after the seasoning period to maintain that safe
harbor status if they meet the requirements to be a Seasoned QM.

D. Potential Impact on Rural Areas

As with the analysis of this final rule's benefits and costs
overall, the Bureau can generally not predict how much or how little
this final rule will cause the market in rural areas to expand under
either Baseline 1 or Baseline 2. The Bureau analyzed HMDA data
mirroring the description of the baselines in part VIII.A.2, 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 will achieve only a stronger
presumption of compliance or relief from portfolio retention
requirements by meeting the performance criteria of this final rule.
This share of loans is 9 percent for rural markets relative to 5
percent of the market overall. The rural share includes relatively more
loans that do not meet the portfolio requirements under the EGRRCPA
that will be either rebuttable presumption QMs under the revised
General QM loan definition's requirements or non-QM (7.9 percent vs.
4.0 percent) and loans that will meet the portfolio and other
requirements under the EGRRCPA (1.5 percent vs. 0.7 percent).
However, under Baseline 2, the difference in the share of
potentially seasonable loans between rural areas (27.5 percent) and the
market as a whole (27.8 percent) is relatively modest. This reflects
relatively fewer loans being originated without QM status or with a
rebuttable presumption that would gain the stronger presumption of
compliance of safe harbor if they met the performance requirements of
this final rule than under Baseline 2 alone (22.8 percent vs. 24.2
percent) and relatively more that were originated under the EGRRCPA QM
definition and could potentially gain relief from the portfolio
requirements (4.7 percent vs. 3.7 percent).

IX. Regulatory Flexibility Act Analysis

The Regulatory Flexibility Act (RFA),\190\ as amended by the Small
Business Regulatory Enforcement Fairness Act of 1996,\191\ 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.\192\
---------------------------------------------------------------------------

\190\ 5 U.S.C. 601 et seq.
\191\ Public Law 104-121, tit. II, 110 Stat. 857 (1996).
\192\ 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).\193\ 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.\194\
---------------------------------------------------------------------------

\193\ 5 U.S.C. 603 through 605.
\194\ 5 U.S.C. 609.
---------------------------------------------------------------------------

Neither an IRFA nor a small business review panel was required for
the proposal, because the Director certified that the proposal, if
adopted, would not have a SISNOSE.
Similarly, a FRFA is not required for this final rule, because this
final rule will not have a SISNOSE. The Bureau

[[Page 86452]]

does not expect that this final rule will impose costs on small
entities relative to any of the baselines. This final rule defines a
new category of QMs. All methods of compliance with the ATR
requirements under a particular baseline will remain available to small
entities under this final rule. Thus, a small entity that is in
compliance with the rules under a given baseline will not need to take
any different or additional action under this final rule.
Accordingly, the Director certifies that this final rule will not
have a SISNOSE.

X. Paperwork Reduction Act

Under the Paperwork Reduction Act of 1995 (PRA),\195\ Federal
agencies are generally required to seek, prior to implementation,
approval from the Office of Management and Budget (OMB) for information
collection requirements. Under the PRA, the Bureau may not conduct or
sponsor, and, notwithstanding any other provision of law, a person is
not required to respond to, an information collection unless the
information collection displays a valid control number assigned by OMB.
---------------------------------------------------------------------------

\195\ 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------

The Bureau has determined that this final rule does not contain any
new or substantively revised information collection requirements other
than those previously approved by OMB under OMB control number 3170-
0015. This final rule will 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.

XI. Congressional Review Act

Pursuant to the Congressional Review Act,\196\ the Bureau will
submit a report containing this rule and other required information to
the U.S. Senate, the U.S. House of Representatives, and the Comptroller
General of the United States prior to the rule's published effective
date. The Office of Information and Regulatory Affairs has designated
this rule as not a ``major rule'' as defined by 5 U.S.C. 804(2).
---------------------------------------------------------------------------

\196\ 5 U.S.C. 801 et seq.
---------------------------------------------------------------------------

XII. Signing Authority

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

List of Subjects in 12 CFR Part 1026

Advertising, Banks, banking, Consumer protection, Credit, Credit
unions, Mortgages, National banks, Reporting and recordkeeping
requirements, Savings associations, Truth-in-lending.

Authority and Issuance

For the reasons set forth above, the Bureau amends Regulation Z, 12
CFR part 1026, as set forth below:

PART 1026--TRUTH IN LENDING (REGULATION Z)

0
1. The authority citation for part 1026 continues to read as follows:

Authority: 12 U.S.C. 2601, 2603-2605, 2607, 2609, 2617, 3353,
5511, 5512, 5532, 5581; 15 U.S.C. 1601 et seq.

Subpart E--Special Rules for Certain Home Mortgage Transactions

0
2. Amend Sec. 1026.43 by revising paragraphs (e)(1) and (e)(2)
introductory text 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 paragraph
(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)(2)(i) through (v)
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;
(D) Satisfies the requirements in paragraph (e)(7)(iii) of this
section; and
(E) Is not a high-cost mortgage as defined in Sec. 1026.32(a).
(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, except for a sale,
assignment, or transfer permitted by paragraph (e)(7)(iii)(B)(3) of
this section; 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;
(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; or
(3) The covered transaction may be sold, assigned, or otherwise
transferred once before the end of the seasoning period, provided that
the covered transaction is not securitized as part of the sale,
assignment, or transfer or at any other time before the end of the
seasoning period as defined in Sec. 1026.43(e)(7)(iv)(C).
(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,

[[Page 86453]]

interest, and escrow (if applicable) for a given billing cycle 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 escrow
(if applicable) for a given billing cycle becomes due and unpaid are
the principal and interest payment amounts established by the terms and
payment schedule of the loan obligation at consummation, except:
(i) 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 escrow (if applicable) for a given billing
cycle 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.
(ii) If, due to reasons related to the timing of delivery, set up,
or availability for occupancy of the dwelling securing the obligation,
the first payment due date is modified before the first payment due
date in the legal obligation at consummation, the modified first
payment due date shall be considered in lieu of the first payment due
date in the legal obligation at consummation in determining the date a
periodic payment sufficient to cover principal, interest, and escrow
(if applicable) for a given billing cycle becomes due and unpaid.
(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, or 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 ends any pre-existing delinquency on the loan obligation
upon taking 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) Promptly upon the consumer's acceptance of the agreement, the
servicer waives all late charges, penalties, stop payment fees, or
similar charges incurred during a temporary payment accommodation in
connection with a disaster or pandemic-related national emergency, as
well as all late charges, penalties, stop payment fees, or similar
charges incurred during the delinquency that led to a temporary payment
accommodation in connection with a disaster or pandemic-related
national emergency.
(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) Notwithstanding any other provision of this section, 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; and
(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.).
* * * * *

0
3. In supplement I to part 1026--Official Interpretations, under
Section 1026.43--Minimum Standards for Transactions Secured by a
Dwelling:
0
a. Revise 43(e)(1) Safe harbor and presumption of compliance;
0
b. Remove 43(e)(1)(i) Safe harbor for transactions that are not higher-
priced covered transactions;
0
c. Add 43(e)(1)(i)(A) Safe harbor for transactions that are not higher-
priced covered transactions;
0
d. Add the heading 43(e)(7) Seasoned Loans and add paragraphs
43(e)(7)(i)(A), 43(e)(7)(iii), 43(e)(7)(iv)(A), 43(e)(7)(iv)(A)(2),
43(e)(7)(iv)(B), 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

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(ii) provide a safe harbor or 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 comments
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). However, Sec. 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, even if such a qualifying change involves a balloon
payment or lengthened loan term.
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 the exceptions set forth in Sec.
1026.43(e)(7)(iii)(B)(1) through (3). 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 exception contained
in Sec. 1026.43(e)(7)(iii)(B)(3) may be used only one time for a
covered transaction. 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. Six months after consummation, the
covered transaction is transferred to Creditor B pursuant to Sec.
1026.43(e)(7)(iii)(B)(3). The transfer does not fail to comply with the
requirements in Sec. 1026.43(e)(7)(iii) because the loan is not
securitized as part of the transfer or at any other time before the end
of the seasoning period. 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), unless the sale met the
requirements of Sec. 1026.43(e)(7)(iii)(B)(3) or the covered
transaction qualifies 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 escrow (if
applicable)) 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 escrow (if applicable)) before March 1, 2023.
Paragraph 43(e)(7)(iv)(B)
1. Qualifying change. An agreement that meets the conditions
specified in Sec. 1026.43(e)(7)(iv)(B) is a qualifying change even if
it is not in writing.

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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 national 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 temporary payment accommodation 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 30 days or more 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: December 10, 2020.
Grace Feola,
Federal Register Liaison, Bureau of Consumer Financial Protection.
[FR Doc. 2020-27571 Filed 12-21-20; 4:15 pm]
BILLING CODE 4810-AM-P