CFPB Proposes New “Seasoned Qualified Mortgage”

On August 18, 2020, the CFPB issued a notice of proposed rulemaking that would establish a new category of “seasoned qualified mortgages” (Seasoned QMs) “to encourage innovation and help ensure access to responsible affordable mortgage credit.”  This new QM category would grant QM status to certain mortgage loans held in a lender’s portfolio during a “seasoning period” of at least three years.  Loans must meet certain performance requirements during that period, as well as restrictions on product features and underwriting requirements. 

According to the CFPB, it is creating this new category of QM loan because, in addition to meeting certain product criteria, “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 (ATR).”  Over the last several years, the CFPB’s rules and federal legislation have established new QM categories for loans held in smaller institutions’ portfolios that do not meet General QM requirements.  This proposal would extend this treatment to loans held in portfolio by other institutions.

Under the proposal, the “seasoning period” would be defined generally as “a period of 36 months beginning on the date which the first periodic payment is due after consummation[.]”  To satisfy the proposal’s performance requirements, the loan 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.  Further, a delinquency would be defined as “the failure to make a periodic payment (in one full payment or in two or more partial payments) sufficient to cover principal, interest, and, if applicable, escrow by the date the periodic payment is due under the terms of the legal obligation.”

The product features a loan would need to satisfy include: (1) the loan is secured by a first lien; (2) the loan has a fixed rate, with fully amortizing payments and no interest-only or balloon payment features or negative amortization; (3) the loan term does not exceed 30 years; and (4) the total points and fees do not exceed specified limits (i.e., generally three percent of the loan amount).

At underwriting, a creditor also would have to consider the consumer’s DTI ratio or residual income and verify the consumer’s debt obligations and income for a loan to be eligible.  However, the loan would not be subject to any specific QM DTI ratio limit (e.g., 43%) and the creditor would not be required to use Appendix Q to Regulation Z to calculate the consumer’s debt and income.

In addition, the loan must not be subject to a commitment to be acquired by another person at consummation, and legal title of the loan generally cannot be sold, assigned, or otherwise transferred to another person before the end of the seasoning period.

Notably, the proposal provides that a loan could gain Seasoned QM status even if it is a higher-priced covered transaction, which is a first-lien mortgage with an annual percentage rate that exceeds the average prime offer rate for a comparable transaction as of the date the interest rate is set by a specified number of percentage points.  Under the current ATR rule, higher-priced mortgage loans are only entitled to a rebuttable presumption of compliance with the rule even if it would otherwise qualify as a QM loan.

Also, failure to make full mortgage payments while under a temporary forbearance during a natural disaster or pandemic (like COVID-19) would not disqualify a loan from being conferred Seasoned QM status.  However, time spent in such a temporary accommodation would not count toward the 36-month seasoning period, and the seasoning period would only be able to resume after the temporary payment accommodation if the consumer cures the loan’s delinquency under its original terms or there is a qualifying change (e.g., entering a repayment plan).  For instance, the seasoning period would consist of the period before the accommodation begins and an additional period immediately after the accommodation ends, the total sum of which must equal at least 36-months.

The proposal states that a final Seasoned QM rule would take effect on the same day as a final rule amending the General QM definition, which is six months after the General QM definition is published in the federal register.  WBK previously reported on the proposed General QM definition here.  The new QM category would apply to covered transactions for which creditors receive an application on or after the effective date of the revised rule.  Therefore, no current non-QM loans that may otherwise meet the definition of a Seasoned QM would be eligible to become a Seasoned QM under the proposal.

Comments on the Seasoned QM proposal are due 30 days after the proposal is published in the Federal Register.  WBK looks forward to assisting commenters.