Overview of the General QM Final Rule
The original General QM (qualified mortgage) definition provided that a borrower’s debt-to-income (DTI) ratio could not exceed 43 percent. The revised General QM eliminates this restriction and replaces it with priced-based thresholds tiered to the loan amount and lien position.
The General QM Final Rule
The Final Rule replaces the January 10, 2021, sunset date of the Temporary GSE (government-sponsored enterprise) QM loan definition with a provision stating that the Temporary GSE QM loan definition which was to be available only for covered transactions for which the creditor receives the consumer’s application before the mandatory compliance date of final amendments to the General QM loan definition in Regulation Z. (Stay tuned though. Freddie and Fannie jumped the gun.)
The CFPB concluded that pricing, rather than a DTI limit, is a more appropriate standard for the General QM loan definition. The CFPB concludes that a price-based General QM loan definition is better than the alternatives because a loan’s price, as measured by comparing a loan’s APR to APOR for a comparable transaction, is a strong indicator of a consumer’s ability to repay and is a more holistic and flexible measure of a consumer’s ability to repay than DTI alone.
Why the need for this new Final Rule?
The Bureau adopted this change to address the January 2021 scheduled expiration of the GSE Patch QM, which provides QM status to mortgage loans eligible to be purchased or guaranteed by the government-sponsored enterprises. The Bureau expressed concern that the expiration of the GSE Patch QM, which permits mortgage loans to borrowers whose DTI exceeds 43 percent, would significantly reduce access to responsible, affordable credit for creditworthy borrowers whose DTI exceeds 43 percent.
The CFPB’s delinquency analysis using data from the National Mortgage Database (NMDB), including a matched sample of NMDB and HMDA loans shows that early delinquency rates rise with rate spread. The analysis provided strong evidence of increasing early delinquency rates with higher rate spreads across a range of datasets, time periods, loan types, measures of rate spread, and measures of delinquency. The Bureau went on to say that mortgage underwriting, and by extension, a loan’s price, generally includes consideration of a consumer’s DTI, so it’s still part of the equation under this new method.
Why are they changing to the rate spread method versus DTI limit?
The primary benefit to consumers of this final rule is increased access to credit, largely through the expanded availability of Over43-Percent-DTI conventional QMs. Given the large number of consumers who obtain Over-43-Percent-DTI GSE loans rather than available alternatives, including loans from the private non-QM market and FHA loans, such Over-43- Percent-DTI conventional QMs may be preferred due to their pricing, underwriting requirements, or other features.
Will this be a benefit to consumers?
In addition, the verification requirements under the new Final Rule for income, assets, debt obligations, alimony, and child support provide for greater flexibility, which is likely to reduce effort and costs for these consumers, and in the most difficult cases in which consumers’ documentation cannot satisfy appendix Q, this final rule will allow consumers to obtain General QMs rather than potential FHA or non-QM alternatives. These consumers—likely including self-employed borrowers and those with non-traditional forms of income—will likely benefit from cost savings under this final rule.
Learn more about the ATR/QM Rule, QM types plus the seven ability-to-repay options in Dawn Kincaid's webinar, Countdown to ATR/QM Changes Effective October 1, 2022: Preparing Policies & Processes. After the webinar you will be able to:
- Understand the newly issued QM final rules
- Determine which loans are affected by the ATR/QM rules
- Define the qualified mortgage options and requirements for each
- Use best practices and tools in determining a consumer’s ability to repay
- Distinguish which institutions qualify as “small creditors”
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